Creditanstalt II?

Over the weekend in the New York Times, Liaquat Ahamed sounded the alarm on Europe's potential for catastrophe. Quick version: Eastern Europe borrowed huge sums in foreign currencies from Western European banks; once lending died in September, Eastern European countries found themselves with massive short-term liabilities they could no longer roll over; the exodus of capital from Eastern Europe, in conjunction with massive current accounts deficits, has caused currency crises across the region, raising the real cost of debts; because of difficulties organizing collective action, particulalry on the part of France and Germany, Western Europe has been unable to agree on a bailout of its Eastern neighbors despite the risks Eastern European defaults pose to Western Europe's banks.

Ahamed concludes:

The response of the American government to the financial crisis has been criticized for being too slow and inadequate. But at least we have a federal budget, the national cohesion and the political machinery to get New Yorkers and Midwesterners to pay for the mistakes of homeowners in California and Florida, or to bail out a bank based in North Carolina. There is no such mechanism in Europe. It is going to require leadership of the highest order from officials in Germany and France to persuade their thrifty and prudent taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners.

The Great Depression was largely caused by a failure of intellectual will. In other words, the men in charge simply did not understand how the economy worked. Now, it is the failure of political will that could lead to economic cataclysm. Nowhere is this danger more real than in Europe.

I couldn't agree more.