By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.
The EU, IMF and friends have rolled out the shock-and-awe bailout package for Greece and the Euro. This package supersedes earlier packages and has already generated a significant volume of comment and criticism. The financial markets were awed, but political foundation is showing cracks, i.e. the German election results and the earlier riots in Greece.
Unfortunately, there is no agreed-upon set of criteria to grade or evaluate financial rescue packages. The stakes are high, decisions must be made with imperfect information and in a dynamic setting, and there are numerous uncertainties. Hence the decision to mount this financial rescue package and decisions to go to war have much in common. This suggests that it might be useful to examine this financial rescue package in light of what has become known as the Powell doctrine. Named after the former US Secretary of State Gen. Powell Colin, it specified the criteria under which the US would take military action. It provides a pre-existing, independently determined set of criteria by which complex international decisions can be judged.
The Powell Doctrine consists of eight criteria, all of which must be satisfied for the US to take military action. Unfortunately, a quick review suggests that the EU and the IMF would not be able to justify this rescue package if the Powell doctrine were employed as a test. The criteria are:
A vital national interest is threatened (In this case, a vital supra-national interest is threatened)
The current crisis is clearly seen by the European political leadership as threatening both political and economic stability in the EU. The behavior of the financial markets suggests that market participants also see profound repercussions should Greece or any country in the EU default on its debt.
There is a clear, attainable objective
There is a clear and attainable objective, i.e., preventing a default by Greece. The package is large enough to prevent an immediate default by Greece and stabilize markets in the near-term. There are, however, questions as to whether or not the bailout package will be structured in a way that will prevent this crisis from re-emerging, spreading or encouraging future similar crises.
The risks and costs been fully analyzed
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