A year late the European leaders recognise that they, just like the Americans, have a serious Credit Crunch on their hands. As they meet they should avoid saying more things that can make things worse. The US politicians have just shown how easy it is for them to make things worse, by attempting action that does not have popular support, and then telling us all how bad things are to get through an amended package. It did not help restore confidence in markets to have so much bickering and black briefing from the top.
What could the meeting of European leaders usefully do? There are five main areas they could concentrate on.
Interest rates. They could tell the ECB and Gordon Brown could tell the Bank of England to get their rates down to around the 2% level chosen by the US. Concerted action to lead markets to lower rates might help. If we persist with high rates more borrowers will default, banks will be weakened further and confidence will continue to ebb away.The Central Banks have failed badly, keeping rates dangerously low in 2003-6 and keeping them dangerously high 2007-8. Market rates will remain much higher than recommended rates, but should reduce somewhat in response to such a lead. If my critics say we have now reached the point where MPC and ECB rates are completely irrelevant then they should recommend winding up the MPC who have got it so wrong for so long and save the money!Mr Brown could put more people onto the MPC who see the world as Mr Blanchflower does, to give him some support for cutting rates.
Liquidity. We have moved from a system where Central banks are rare lenders of last resort to banks, to a system where Central banks are the main source of short term lending to banks. When Central banks in recent weeks have tried to withdraw liquidity, commercial banks have got into financial trouble. Central banks should be told to keep the system as liquid as possible during this very stressful time, as we cannot afford Central bank actions to undermine any more institutions.
Capital and solvency. Regulators behind closed doors should be telling banks they must raise more equity and long term loan capital, whatever the price and whatever the dilution to existing shareholders. We must get away in due course from reliance on Central bank short term lending. Large sums are needed to buttress bank balance sheets.
Accounting. The Leaders should examine how we can get sensible views of the value of banks assets, adjusting mark to market where there is no effective market to value loan packages.
Government spending. Goverments must rein in their own excessive borrowing as their contribution to moving on from the credit bubble. The EU could take a lead by cutting its spending substantially, as much of its spending is the marginal spending on top of the essentials paid for by member state governments.
Mr Brown should remember we run our own monetary affairs and need to take actions that are right for the UK. They should all remember this is not an official EU meeting, and cannot bind the other EU members.