That’s an interesting question.  Coordination would be the key.  And toward that end we would need a World Finance Organization, something akin to the World Trade Organization, which could make independent decisions its members had to honor. Presently, the IMF can only help at a country level.

The big problem is that the more parties that are involved, the more challenging are the negotiations.  Any one nation already has to balance a myriad of interests, such as investors, bondholders, and employees. Just imagine multiplying these concerns across various borders.

Look at the Lehman bankruptcy.  There was a wide perception in London that the UK operations were simply “screwed” by the firm’s US executives in the scramble to recoup what was left.  Every last dollar ended up in NY, leaving London denuded.

But in early December, we saw GM and Ford approach Sweden for aid for their Saab and Volvo divisions, respectively.  Perhaps corporations will start this globalized approach on their own.

Big picture: despite what may seem logical as a way to deal with global problems, the quickest actions for the time being will likely evolve from corporate home markets.

With respect to common currency, there are two issues here.  The first is the euro’s strength over the past five-plus years was largely a mirror image of the dollar’s weakness more than superior underlying fundamentals of the eurozone.  The dollar’s recent rally has been based on technical factors.  But the second factor driving the dollar is the belief that the US still retains its status as a safe haven during this crisis, ergo, the flight into Treasuries and surging demand for dollars to pay for them.

The euro’s failure to compete with the US as a safe haven currency during the crisis doesn’t really surprise me because there’s no European fiscal union or common treasury. National governments are coming up with their own stimulus packages. So it’s much harder for Europe [compared to the US] to coordinate a comprehensive response to problems caused by this crisis.

Regarding the outlook for Europe, I think early on Europeans were exaggerating how the crisis was primarily American.  Now they are seeing a wide range of really ugly problems coming their way, and not all are being imported.

Moreover, I think the banking crisis is actually worse in Europe than it is in the US.  It’s just not as widely recognized yet.  But it will be.  And Europeans don’t have the policy levers, like those that exist in the US, to respond as rapidly or as effectively.  Long term, Europe may indeed suffer worse than the US during this crisis.

The silver lining may be that we are given the opportunity to rethink the US monetary system—both monetary policy and bank supervision—along with the basis of growth.  The theory that the Fed exists purely to control consumer price inflation and to prevent the stock market from cratering, which I would call the Greenspan Doctrine, has shown its limitations. So has the belief that banks are best off if left alone to do what they like.

It’s also time to reconsider if the role of the patriotic American is first and foremost to shop.  I remember that was Bush’s message after 9/11, and I thought it was kind of kooky back then.

The ultimate soundness of any economy is rooted in the productivity of its human capital, not a function of citizens leveraging themselves to unsupportable levels of consumption.  The age of leverage is over.  The race will go to the productive, and investments in education, technology, and clean energy will pay more attractive returns than endless Wal-Marts.  Hopefully, the crisis will drive home this point to policy makers.

The banks, the Fed, and the Dollar. 

When the discussion in the US shifted to the automobile industry, I started laughing because it was such a distraction from the main issue.  We’ve got a financial crisis, and everything else that’s happening is a consequence of that. Every company in the country is going to have problems if our banking system collapses.  Until we fix the banking industry, anything else we focus on are symptoms.

The balance sheets of the very biggest banks in both the US and Europe have been a nightmare for a year and only recently have people woken up to that.  There’s still denial about how big the problem is.  And here’s what makes things surreal: We are seeing the monetary base explode, but with very little to show for it, as banks seem to be just swallowing up all this capital.

Now about the Fed.  So long as global markets still treat the dollar as the world’s reserve currency, that gives the Fed room to maneuver. That room, however, is not limitless.  There will come a point when the credibility of the Fed’s own policies will be called into the question along with the dollar itself. 

As I mentioned at the beginning of the interview, any significant move away from the dollar before this crisis is resolved could then lead to a very unpleasant scenario where foreign lenders, seeing their investments rapidly diminish in value, sharply curtail their lending.  This would force interest rates up to attract deficit financing, which in turn would choke off recovery.