Bailout the First Step

DW-WORLD.DE: Are European banks going to be able to take advantage of the relief available from the US government?

Irwin Collier: The original terms of the bailout were to be limited to domestic US financial institutions. Of course when international financial institutions saw this language, they immediately, as one says, dialed 1-800-PAULSON, to let the treasury department know that to limit the bailout along national lines is absolutely impossible in a modern globalized economy.

And so the language was changed so that all foreign firms with significant US operations -- and there are a lot of them -- will be able to participate in the proposed purchase of mortgage-backed securities.

I suspect that might not be the most popular political decision to make in the United States. The money going toward these foreign financial institutions is US taxpayer money.

Looking at the proposed legislation, though, the secretary of the treasury will have enormous discretionary powers to decide which assets will be purchased from which institutions.

I think one has to remember that the balance of international financial institutions may be eligible, but depending on how many different banks want to feed at the trough at the same time, Paulson will have enormous discretion to decide which banks to service first.

German Chancellor Angela Merkel has criticized the bailout plan. She also said that she had long been trying to push for greater transparency, for tighter regulation in global finance, and that the US and Britain had blocked her. Has she been vindicated?

She certainly has a point, and she was not alone in making it. There have been many reasonable voices who have been pointing to the fact that financial market contracts and instruments have evolved enormously over the last fifty years, and that the regulatory framework has not kept pace.

But again, having said that, once you have a crisis, it really matters very little who identified the sore points first. If there's a financial crisis, in the sense that one bank or one financial institution's failing could cause another to fail, you have to prop up some of the dominoes so that the crisis doesn't get worse. Having principles against bailouts really doesn't help you in that situation.

But are the kinds of banking reforms she and others were calling for now going to help cure the situation, or is the sickness too far advanced, so to speak?

I think the one thing that we can hope for is to see major new kinds of regulation and oversight in the American capital market. I think what Merkel and other leaders have been pushing for is a greater harmonization of regulations, one that would make it more transparent as to what securities issued in one country would be worth in another country. I think that real harmonization, though, is music of the very far future.

The national response on the part of the US will have to come first, and it will certainly be a step in the right direction. Once they do that, we will have a starting point in international negotiations to harmonize regulations.

The financial markets of Europe are in a somewhat healthier position than those of the US, at least as yet. Does that mean that Europe will have an easier time getting its way in future conversations with US regulators over harmonization?

I would be very surprised if the relative weights in these sorts of negotiations were to change. Remember, we're going to see differences between the French, the Germans, the British, the Italians. These will come up in a variety of ways, and I just don't see the initiative passing from New York to a place to be determined in Europe.

But could the comparatively conservative practices of German financial institutions, say, be held up as an example of prudence, now that we see how reckless some investors in the US had become?

I think very much that the rules of prudential banking behavior, these rules that bankers have known and have developed over the years, will be rewarded. We'll also see that in the US, the banks that are going to survive this best will be the ones who didn't necessarily push the limits, but rather followed fairly standard procedure, having adequate capital reserves and the like. This is not rocket science by a long shot, but is part and parcel of working in markets where trust is absolutely essential.