The Highest Stakes Game of Poker in the World

Tyler Cowen writes that we're way past the time when modest measures might save Italy and the eurozone:

Why should another two percent inflation a year turn the tide? The inability to implement any kind of credible rule means that the “in the moment” solution has to be all the stronger. So the “answer,” if that is the right word, is ten percent inflation a year for the eurozone — plus the firehose to Rome — to get the real value of those debts down and quickly. Maybe twelve.

I don’t feel like debating whether this would be better or worse than the status quo; I am content to suggest it probably won’t happen, not even if German and French leaders understand the gravity of the situation, which I suspect they do....It’s a common meme these days that the German leaders “don’t get it,” but I view it in reverse: they’re the ones who understand how grave a problem it is, and how truly hard to fix it would be, which is why they are not doing more. They don’t see the point in pulling out the peashooter against the elephant, and the blunderbuss is not yet available, if it ever will be.

Perhaps. Public statements from various German worthies have been contradictory enough that you can reasonably draw a lot of different conclusions about what they do and don't understand. But Tyler may be right. One plausible interpretation of German actions is that they're simply playing a very high-stakes game of poker. They know it's inevitable that they're going to go all-in at some point, but they want the periphery countries to commit as much as possible to the pot first. After all, even a blunderbuss won't work unless there's a pretty serious willingness to accept substantial fiscal reforms among the folks getting the bailouts.

In a way, the dynamics here are similar to TARP. The serious objection to TARP isn't that we should have just let the banking system collapse, it's the fact that we bailed out our banks with too few strings attached. We should have nationalized them, or broken them up, or insisted on major compensation clawbacks first. This is my guess about what's going on in Germany. They're going to bail out Italy and the others eventually, but they want to have plenty of strings attached. And that won't happen until the level of panic is considerably higher than it is right now.

That's the optimistic view, anyway.