Global crisis: how far to go? Part III

The major priority is to restore confidence, and this comes from creating a more uniform G7 plan. In a practical sense this means defining which banks are too big to fail, creating cross-border safety nets for those that might be too big to save, partially nationalising the banks where necessary and pumping capital directly into the interbank market to guarantee transactions between banks currently reluctant to lend to one another. This also means overcoming ideological stickiness over state intervention, fear of bailing out others or need to cast blame.

Over the weekend of October 11-12, EU leaders made another effort to stabilise markets, with three measures, which could be fine-tuned: Member states will guarantee new bank debt until the end of 2009; governments will shore up banks by buying preferred shares; and they announced a commitment to recapitalise any “systemically” critical banks in distress. There’s also an indication that measures would be further coordinated within the G7.

The current financial crisis is the most serious since the 1930s. Although many Europeans blame the US for the financial panic due to its almost blind faith in unfettered free markets, models and derivatives, globalisation has left them very interconnected to US markets. While the financial philosophy guiding the US and UK is very similar, continental Europe holds a view that this is a chance to reshape the financial sector for the "public good." This philosophy very much ties into the main battle over the commanding heights of the global economy that’s sure to begin as markets stabilise.

Now that the US model has had its comeuppance what type of capitalism should emerge? There is a smorgasbord - quasi-authoritarian capitalism (Russia), authoritarian capitalism (China) and within democratic capitalism, you have Anglo-American, Continental and Japanese-Asian versions.

Whatever model emerges as the winner, there can be no divorce between the US and Europe in this regard. The stakes are exceedingly high and further steps are required to restore confidence.