When U.S. authorities faced financial panic in 2008, their first response was to pump liquidity into the system. It was access to credit, not the quality of credit, that was the issue, they thought.<\/p>\n
It turned out they were wrong. U.S. banks were facing a full-fledged solvency crisis. They owned assets that weren\u2019t worth the paper their financial statements were printed on. Congress appropriated $700 billion to recapitalize the banks.<\/p>\n
Fast forward 19 months and travel east across the Atlantic where Europe\u2019s leaders confronted a home-grown sovereign debt crisis, a rout in financial markets and a loss of confidence in the euro. Their solution? Lend more money to already indebted countries.<\/p>\n
Europe\u2019s leaders must have been snoozing in the back row when the teacher conducted the TARP review class. (TARP stands for Troubled Asset Relief Program.) You can\u2019t recapitalize a sovereign nation by issuing more debt. In the same way that more lending couldn\u2019t enhance U.S. banks\u2019 capital adequacy, \u201cextending more credit to (European) nations that can\u2019t service their accumulated debt won\u2019t make them more creditworthy,\u201d\u009d says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.<\/p>\n