Last week I discussed two key points in dealing with the U.S. financial crisis: The first was that U.S. Treasury Secretary Hank Paulson's plan to buy up bad assets is not the priority; a liquidity facility is. The second was that a "wolf-pack" psychology will prevail without a "pumping station" of liquidity to which troubled financial institutions can run and work out their assets and liabilities without fear of cash running out.
I said this pumping station must be on the order of $5 trillion for the United States alone and $10 trillion to include Europe and the rest of the world.
The U.S., nonetheless, passed the $700 billion buyout bill Oct. 4, only to find out from market reaction that the bill is not what is urgently called for. Worse, America is sending a wave of fear to the rest of the world. Now the Europeans have fallen into the wolf-pack syndrome. And this time it is not individual financial institutions at stake, but countries. Now that Ireland promises to guarantee all deposits, fear is spreading to other European countries that their own systems are not as generous.