The debt crises in Europe and the US collided violently this past week, raising questions about whether political leaders are capable of stemming the trans-Atlantic panic.
The see-sawing stock markets, investor flight from Italian and Spanish bonds, the credit downgrade for the US government and fears of a similar downgrade for France and the UK - all were fueled by a lack of consensus by policy-makers about what steps to take.
The panic in 2008 represented a crisis in markets. What's happening now seems to be a crisis in government. In 2008, the world's richest countries embarked on a series of unprecedented interventions to stop financial markets from seizing. Today, the tables are reversed: financial markets have lost confidence in politicians' ability to master their problems. In 2008, countries united in response. This year has been marked by tensions and misunderstanding, including those between the US and Europe over the continent's response to its debt crisis.
"What we are seeing in the financial markets reflects to a large extent the inability of governments to put their fiscal house in order and even to cooperate among themselves", said Domenico Lombardi, a former executive board member at the World Bank and the International Monetary Fund.
On Thursday, following a wave of selling focused on European banks, in particular France's Société Générale SA, stock-market authorities in France, Belgium, Italy and Spain announced restrictions on short selling—a strategy in which investors bet on a stock's decline. The countries blamed market rumours and unscrupulous traders. That effort is likely to encounter a major obstacle: the unwillingness of UK authorities to follow suit. While Frankfurt, Paris, Milan and other European cities have major stock exchanges, London is by far the most important one. So banning short-selling in other exchanges is unlikely to have much effect as long London permits it.
Across Wall Street, from traders and strategists to economists and academicians, there was a nearly unanimous consensus, that the short-selling ban was a bad idea. "It may give a couple days of breathing room, maybe, but it doesn't fix anything", said Peter Tchir of TF Market Advisors, citing the experience of the US short-selling ban in September 2008. "What it ensures is that, once the shorts are taken out, there will be almost nothing to stop a decline."
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