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Creating the Next Crisis

WASHINGTON, DC -- Informed opinion is sharply divided about how the next 12 months will play out for the global economy. Those focused on emerging markets are emphasizing accelerating growth, with some forecasts projecting a 5% increase in world output. Others, concerned about problems in Europe and the United States, remain more pessimistic, with growth projections closer to 4% – and some are even inclined to see a possible “double dip” recession.

This is an interesting debate, but it misses the bigger picture. In response to the crisis of 2007-2009, governments in most industrialized countries put in place some of the most generous bailouts ever seen for large financial institutions. Of course, it is not politically correct to call them bailouts – the preferred language of policymakers is “liquidity support” or “systemic protection.” But it amounts to essentially the same thing: when the chips were down, the most powerful governments in the world (on paper, at least) deferred again and again to the needs and wishes of people who had lent money to big banks.

In each instance, the logic was impeccable. For example, if the US hadn’t provided essentially unconditional support to Citigroup in 2008 (under President George W. Bush) and again in 2009 (under President Barack Obama), the resulting financial collapse would have deepened the global recession and worsened job losses around the world. Similarly, if the eurozone had not stepped in – with the help of the International Monetary Fund – to protect Greece and its creditors in recent months, we would have faced further financial distress in Europe and perhaps more broadly.

In effect, there were repeated games of “chicken” between governments and major financial institutions in the US and Western Europe. The governments said: “No more bailouts.” The banks said: “If you don’t bail us out, there will most likely be a second Great Depression.” The governments thought briefly about that prospect and then, without exception, blinked.