Lee Sachs, chief executive of Alliance Partners, is former counselor to the secretary of the Treasury and was head of the financial crisis response team in the Obama administration.
The most recent commitments by European leaders to do “whatever it takes†to end Europe's financial crisis and preserve the euro are encouraging. Now, they must follow through on those words with specific actions.
The first rule of financial crisis management dictates that the earlier, more comprehensive and forceful a response is, the better the outcome is for the economy, households and taxpayers. As we learned in the United States, the necessary steps are often deeply painful and unpopular. But as we are learning in Europe, the consequences of a delayed or inadequate response are far worse.
In the United States, two administrations acted in concert with Congress and the Federal Reserve to quickly put out the financial fires in late 2008 and 2009. American political an d economic leaders moved swiftly and aggressively to stabilize the banking system, reopen frozen credit markets and offset the effects of enormous global deleveraging with a series of financial programs. Though these involved initial outlays, the investment proved to be worthwhile, and taxpayers have recouped most of their investment.
These financial stability programs were coupled with aggressive fiscal and monetary policy to support growth.
None of these measures would have worked in isolation. They reinforced each other. And together, they stemmed the crisis and helped avert a second Great Depression.
Policy makers here still have more work to do to strengthen the economy and promote job growth. But had we failed to act, or simply delayed the tough but inevitable choices we had to make during the crisis, it is likely that hundreds of thousands more businesses would have disappeared, millions more families would have lost their jobs and homes, and trillio ns more in savings would have been erased.
Even today, many of these programs remain deeply unpopular because of the misperception that stabilizing Wall Street was an end goal, rather than a means to protect Main Street.
In early 2009, the United States government put the nation's largest banks through rigorous stress tests to assess their health. With that transparency, and the confidence it engendered, private investors â€" not the taxpayers - recapitalized the banks so that they would have the capacity to make new loans. And with the Fed, we unclogged the pipes of our financial system so that credit could resume flowing.
The connections between these policies and the people they affect are not as well understood as the auto industry rescue, which saved over a million jobs, or mortgage refinancing and modification programs, which are helping to keep millions of families in their homes. However, they are no less consequential.
Today, parents prepari ng for back-to-school shopping can get a credit card. Families wanting to buy a car can obtain an auto loan. Prospective homeowners can secure a mortgage. And businesses looking to hire and expand can finance their payroll and investments. All of these sources of credit would have been substantially more difficult â€" and in many cases impossible â€" to access if our financial system had been allowed to collapse.
Had we simply hoped the financial fires would burn out on their own or taken incremental steps out of fear of the political backlash, we would have caused more damage to the families and businesses we were trying to support. Had we allowed public anger, however justified, to dictate public policy, it would not have helped us turn around our economy any faster.
Europe provides a good object lesson in the harm to ordinary citizens of a “kick the can†crisis response. Euro zone economies are stalled or shrinking, while the United States economy has been growing for three straight years. The euro zone has lost jobs since early 2010, while businesses in the United States have added more than 4.5 million workers over the last 29 months.
The contrast is even starker where the crisis has been most acute. Consider the effect of Europe's muddled response to Spain, a country whose troubles stem largely from the same type of collapse in its housing market that we experienced here. In Spain, lending to businesses has dropped 7 percent in the last two years and continues to fall, while lending to businesses in the United States is up 15 percent since then and continues to rise. Spanish auto sales were 13 percent lower in the second quarter compared with a year ago, while American auto sales were 16 percent higher. More than one in four Spaniards are out of work. The United States unemployment rate, while still high at 8.3 percent, has come down from 10 percent in late 2009.
European leaders are certainly facing economic a nd political challenges beyond those we faced in the United States, and their solutions require the consensus of multiple governments â€" not just one. Their choices are not easy. But they will not become simpler the longer they wait, and they will not resolve themselves.
The price of further delay will almost certainly be a continued rise in unemployment, a deeper recession and a greater cost to taxpayers. Eventually, worsening conditions will force European leaders to act. Or they can choose to act on their own terms by moving quickly, decisively and comprehensively to do whatever it takes.
