The Euro? Um, Next Question Please

Last night, the CNBC anchors addressed the most urgent economic question of the moment - the fate of the euro - to four of the Republican presidential candidates: Herman Cain, Mitt Romney, Ron Paul and Jon Huntsman.

I want to begin with what we saw today, another rough day for our money, for our 401(k)s. Once again, we were all impacted by the news that the Dow Jones Industrial Average dropped 400 points today. The reason, Italy is on the brink of financial disaster.

It is the world's seventh largest economy. As president, what will you do to make sure that their problems do not take down the U.S. Financial system? It is the world's seventh largest economy.

As president, what will you do to make sure their problems do not take down the U.S. financial system?

The results were pretty bad.

Cain struggled to avoid the question altogether, but when pressed, gave an answer that revealed that he did not understand the problem, let alone have a solution to offer.

There's not a lot that the United States can directly do for Italy right now, because they have -- they're really way beyond the point of return that we -- we as the United States can save them.

Ron Paul was of course Ron Paul, always eager to plunge the whole world into a second Great Depression, to chasten us all into repenting our sins and returning to using rocks and metal as money.

you have to let it -- you have to let it liquidate. We've had -- we took 40 years to build up this worldwide debt. We're in a debt crisis never seen before in our history. The sovereign debt of this world is equal to the GDP, as ours is in this country. If you prop it up, you'll do exactly what we did in the depression, prolong the agony. If you do -- if you prop it up, you do what Japan has done for 20 years.

So, yes, you want to liquidate the debt. The debt is unsustainable. And this bubble was predictable, because 40 years ago we had no restraints whatsoever on the monetary authorities, and we piled debt on debt, we pyramided debt, we had no restraints on the spending. And if you keep bailing people out and prop it up, you just prolong the agony, as we're doing in the housing bubble.

For me, the shocker of the evening was Jon Huntsman's answer. Advertised as the thinking man's candidate, his answer to this urgent question was more articulate than Herman Cain's, but very nearly as uninformed.

So we wake up this morning, and we find that the yield curve with respect to Italy is up, and prices are down. So if you want a window into what this country is going to look like in the future if we don't get on top of our debt, you are seeing it playing out in Europe right now.

You are seeing the metastasy effect of the banking sector. And what does it mean here? What am I most concerned about, Jim? I'm concerned that it impacts us in way that moves into our banking sector where we have got a huge problem called "too big to fail" in this country.

We have six banks in this country that combined have assets worth 66 percent of our nation's GDP, $9.4 trillion. These institutions get hit. They have an implied bailout by the taxpayers in this country, and that means that we are setting ourselves up for disaster again.

Jim, as long as we have banks that are "too big to fail" in this country, we are going to catch the contagion and it's going to hurt us. We have got to get back to a day and age where we have properly sized banks and financial institutions.

Of course, the issue facing the US financial system today is not the size of any individual bank, but the size of the collective banks' exposure to Euro-denominated bonds--not only Italian bonds, but all Euro-denominated bonds, including French bonds. The issue is not that we may awake to a higher yield curve, but that we may awake to discover that the world's largest currency zone has broken apart--presenting the whole planet with a de facto continent-wide partial default on debt.

I can appreciate why a politician might want to avoid delivering an answer about such a horrible contingency. But he should at least signal that he understands the issues. Huntsman did not.

On the Italy question Romney was, as usual, unstumpable.

Romney’s answer shows that he understands the nature of the problem in Italy and Europe. He has anticipated the demands that will be put upon the US--that the US will be asked to join a Euro bailout fund, either directly or via the IMF. As always, he has hyper-awareness of the answer his audience wants to hear.

Well, Europe is able to take care of their own problems. We don't want to step in and try and bail out their banks and bail out their governments. They have the capacity to deal with that themselves. They're a very large economy.

And there will be, I'm sure, cries if Italy does default, if Italy does get in trouble. And we don't know that'll happen, but if they get to a point where they're in crisis and banks throughout Europe that hold a lot of Italy debt will -- will then face crisis and there will have to be some kind of effort to try and uphold their financial system.

There will be some who say here that banks in the U.S. that have Italian debt, that we ought to help those, as well. My view is no, no, no. We do not need to step in to bail out banks either in Europe or banks here in the U.S. that may have Italian debt. The right answer is for us...

(APPLAUSE)

BARTIROMO: But -- but the U.S. does contribute to the International Monetary Fund, and the IMF has given $150 billion to the eurozone. Are you saying the U.S. should stop contributing to the IMF?

ROMNEY: I'm happy to continue to participate in world efforts like the World Bank and the IMF, but I'm not happy to have the United States government put in place a TARP-like program to try and save U.S. banks that have Italian debt, foreign banks doing business in the U.S. that have Italian debt, or European debt. We're just -- banks there.

There's going to be an effort to try and draw us in and talk about how we need to help -- help Italy and help Europe. Europe is able to help Europe. We have to focus on getting our own economy in order and making sure we never reach the kind of problem Italy is having.

If we stay on the course we're on, with the level of borrowing this administration is carrying out, if we don't get serious about cutting and capping our spending and balancing our -- our budget, you're going to find America in the same position Italy is in four or five years from now, and that is unacceptable. We've got to fix our -- our deficit here.

"Fixing our deficit here" is not of course a very good answer to the question about how to protect the US from a Euro shock, and Mitt Romney must know that. In fact, Mitt Romney's evident intelligence is one reason that he gets such a rap as a panderer. It's credible that Herman Cain or Rick Perry might believe that "fix the deficit" is a good answer to the Euro question. It's not credible that Mitt Romney believes it. If he says such a thing, we intuit that he must be saying it cynically.

But last night's debate also should also debunk a false charge against Romney. He may pander, yes, but not on the epic scale of the man seeking now to emerge as the next Not Mitt: Newt Gingrich.

Listen to this, from Gingrich's first answer of the night:

GINGRICH: Well, first of all, I think Ben Bernanke is a large part of the problem and ought to be fired as rapidly as possible.

(APPLAUSE)

GINGRICH: I think the Federal Reserve ought to be audited and we should have all the decision documents for 2008, '09 and '10 so we can understand who he bailed out, why he bailed them out, who he did not bail out, and why he did not bail them out.

(APPLAUSE)

GINGRICH: So, I'm glad that Ben Bernanke recognizes some of the wreckage his policies have led to.

The reason we follow -- I think most of us are for tax policies that lead to jobs is because we have had two cycles in my lifetime, Ronald Reagan, and the Contract with America, both of which had the same policy: lower taxes, less regulation, more American energy, and have faith in the American job creator as distinct from the Saul Alinsky radicalism of higher taxes, bigger bureaucracy with more regulations, no American energy, as the president announced again today in his decision on offshore, and finally class warfare.

So I would say that all of us on the stage represent a dramatically greater likelihood of getting to a paycheck and leaving behind food stamps than does Barack Obama.

The Gingrich answer is so vehement that you have to believe it's heartfelt, right? Now look again. That answer has been constructed as delicately as a bird’s nest out of all the discards and fragments favored by the Not Mitt coalition: the attack on the Federal Reserve, the warning of class warfare, the Saul Alinsky paranoia, the sly racial politics of the food stamps slam.

Compared to this pander, Romney’s carefully parsed phrases about “not being happy” about a Euro-TARP look like a profile in courage.

As always, I come away from these debates thinking: I see only one president on that stage. I don’t know that he’ll be a successful president, but at least he won’t be immediately lost in the job and won’t immediately embarrass himself or disgrace the country.