Four Things We Got Right and Europe Didn’t

You hear it a lot in some circles: The US is heading down the same road as Greece, a basket case of an economy with huge debt and no hope.

And if we don’t address entitlement spending—primarily Medicare and Medicaid—our debt will go much higher than its current 100% of GDP in the future.

But as the euro crisis has unfolded, it’s clear the US has handled the aftermath of the financial crisis much better than most of Europe has. Our banks are less exposed to risk, our economy is growing faster than Europe’s and the dollar has strengthened against the euro. All these are relative, of course, but in today’s environment, I’ll take it!

Clearly it’s a big advantage having one continent-wide country with a common currency, a bond market denominated in that currency, and a federal government that has made  decisions when it had to. Europe, with 17 nations in the euro zone and 27 in the European Union,  has suffered from political paralysis, especially when so many countries have different agendas.

So, here are four things the US got right:

TARP. There were many criticisms of it at the time, and the House of Representatives, in open revolt, voted down its first iteration in the fall of 2008. But when then-Treasury Secretary Henry Paulson came back with more details– and the markets had tanked in the interim—Congress took a deep breath and passed the $700-billion TARP bill, which recapitalized the banks. It didn’t always work, and taxpayers won’t get all their money back, but it helped restore confidence at just the right time.

Federal Reserve Chairman Ben Bernanke testifies before Congress. Photo: Shirley Li/Medill/Flickr Creative Commons.

The Fed did its job.   A favorite target of Ron Paul and libertarians, the Federal Reserve nonetheless did a fine job in the crisis and beyond. Working together with Treasury Secretaries Paulson and Tim Geithner, Fed chairman Ben Bernanke saved the banks that could be saved, administered credible stress tests, and most importantly provided ample liquidity when deflation threatened. Since then, its money “printing” hasn’t given us a strong recovery, but it did forestall the worst.

Banks are better capitalized. After getting billions of TARP dollars and the all-clear sign from the Fed’s stress tests, the biggest banks took advantage of the 2009 bull market to raise tens of billions in new capital through equity offerings. Most repaid their TARP money quickly and built up strong capital cushions as required by Dodd-Frank and the new Basel III international regulations. Spanish and Italian banks didn’t do this, and their window is now  shut tight.

The housing market took a big hit early. Lots of Americans are suffering through foreclosures, under water mortgages and the like, but at least our housing market got much of the damage out of the way quickly. Now, some of the hardest hit areas, like Phoenix and Miami, are coming back. Spain, which had a bigger housing bubble than we did, is at best halfway through the process. That’s why its banks will face  much bigger loan losses and Europe may have to keep propping them up—and the country as well.

Europe is now trying to decide whether to  move towards greater integration. That’s a lot tougher for countries with thousand-year-old histories and different languages, cuisines, etc. than it was for a brand new nation back in the late 1700s.

Our decision then—to abandon the looser Articles of Confederation for the much more integrated federal system envisioned by Hamilton and Madison—was a key reason for our long history of success, and it’s still paying dividends today.

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