There appear to be three options for dealing with Ireland, Greece and Portugal. One, loans from Germany. Two, default. Three, break away from the Euro.
Loans from Germany is the least painful alternative, so that’s probably what’s going to happen.
Default is the status quo end-game. It’s a fun idea, in the reap-what-you-sow justice sense, but it probably wipes out German banks. I’ll get to that in a minute.
The last one, floating currency, is probably what should happen. If I were a European taxpayer, I’d be pretty over this interlinked system. Problem there is the risk of everyone shorting the other Euro-weaklings’ debt and causing a crisis when they can’t roll it over. Nobody is going to want to take Greece out behind the woodshed if they think they’re next.
Back to #2, default and dead banks. Here we are, back to worrying about bank solvency!
I remember very well my own brush with intellectual capture right after the Lehman collapse. The median politician does NOT want to deal with bank insolvency, but it sounds like it’s all hand-waving to me. I wish I had the balls to stand up for myself when I had the chance.
I am no less of a coward than Hank Paulson, Dubya and any other politician in congress at the time.
But at least I have a counter-factual fantasy:
Scene: March, 2008.
Big Ben flips Dimon the bird and Bear fails.
Lehman a week later.
Merrill, Morgan Stanley and Goldman all sell themselves. One of their new parents probably dies from indigestion.
Citigroup fails. AIG fails.
GE fails.
That’s just the US.
Here’s the real fantasy: Germany lets its banks go down and France (I laugh as I type) lets ’em go, too.
The stock market crash makes what actually happened look like child’s play. Nominal GDP expectations plummet and Obama, freaking out, nominates Paul Krugman and Scott Sumner to the fed.
Ben Bernanke, stirred from his slumber, shrugs off his chains and leads the emerging Bern-umner consensus on financial crisis management.
The new committee to save the world has a majority at the fed and they GO. TO. TOWN. on the money supply to keep things afloat while surviving banks gobble up the critical teams of bankers now set adrift.
Nominal GDP becomes the new measure of policy-makers’ effectiveness at ‘stewardship’ of the economy. Milton Friedman cheers from the clouds as the fed recedes in significance.
Cries of ‘systemic collapse’ are exposed for what they are: an unholy marriage of ignorance, fear of uncertainty and naked bias from hopelessly effed financial market players.
Systemic reform is stillborn after the bond market monster mercilessly crushes highly leveraged business models and sows their graves with salt.
Policymakers are baffled at their own insignificance while taking credit.
Technocrats cry themselves to sleep.
Not Unreasonable 
I went to one of those State of the Union addresses given by the head economist of a major bank two weeks ago. He said:
“The crisis situations in Greece, Portugal and Ireland continue to be a huge problem…if you are Greek, Portuguese or Irish.”
Not to say he is right, but it got some good laughs.
[…]From the mind of Webtrough, what would have happened (what should have happened) in March 2008[…]