Europe must take immediate and decisive action to safeguard its banking system, while the U.S. economy is at stall speed and needs a dose of fiscal stimulus, top bankers and investors said on Thursday.
The troubles on both sides of the Atlantic have cast a pall over the prospects for global growth in recent weeks and have undermined confidence among investors, business and consumers.
Some European banks have had trouble accessing short-term loans to fund operations because investors fear they are too heavily exposed to government debt from troubled euro zone countries such as Greece.
Europe's worsening debt crisis and the strain it has put on its banks topped a list of concerns at the Bloomberg Markets 50 Summit of top money managers and bankers on Thursday.
It is very strongly in our interests, and by that I mean U.S. interests, to avoid having Europe, in particular its banking system, collapse, especially when the U.S. economy is right at stall speed, said Peter Orszag, vice chairman of global banking at Citigroup and a former head of the Office of Management and Budget in the Obama administration.
The European Central Bank said on Thursday it would work with other major central banks and conduct three-month dollar liquidity operations in the fourth quarter to help banks through the year-end period.
European and U.S. shares rose after the central bank announcement, but several investors said more needed to be done, including more aggressive capital injections for banks that are overexposed to heavily indebted euro zone countries.
A EUROPEAN TARP?
Wilbur Ross, chairman of private equity firm WL Ross & Co, said the euro zone needs to imitate the U.S. Troubled Asset Relief Program, a view echoed by others.
The TARP was adopted in 2008 to help recapitalize U.S. banks and underpin the financial system following the collapse of investment bank Lehman Brothers.
There has to be some mechanism to inject capital into banks, said Dino Kos, managing director at Hamiltonian Associates.
Thursday marked the third anniversary of Lehman's failure, which occurred as doubts about the firm's solvency caused other banks to stop providing short-term loans, leaving Lehman unable to conduct business.
Its collapse nearly brought down the U.S. banking system and sent shock waves through the world economy that are still being felt today.
The trouble European banks have had in accessing short-term loans has invoked uncomfortable memories of that time.
I think everyone is incredibly wary of allowing that first domino to fall in Europe because once that falls, it is not easy to limit it to one (institution) and prop up every other one and it becomes fantastically more expensive once the first event has occurred, said Ralph Schlosstein, president and CEO of Evercore Partners.
U.S. FISCAL POLICY NEEDED
In the years after the Lehman collapse, the Federal Reserve pumped trillions of dollars into the U.S. financial system to ensure solvency and to spur lending and investment.
But that failed to inject much life into the broader economy. Growth has slowed sharply in the first half of 2011 and the jobless rate remains stuck above 9 percent.
Bob Doll, chief equity strategist at BlackRock Inc, said the United States needs to use fiscal as well as monetary policy to convince cash-rich corporations to hire and invest.
He said companies are more likely to raise their dividends or buy back shares than to invest and hire because they do not know what policy to expect from Washington.
President Barack Obama has proposed a $447 billion job stimulus program, but it remains unclear how much will be approved by a Republicans in Congress intent on unseating him.
Some lawmakers have objected to more government spending for fear it will swell an already large budget deficit currently running at nearly 10 percent of output.
The inability of U.S. lawmakers to agree on measures to reduce federal debt prompted Standard & Poor's to strip the United States of its AAA rating last month.
John Chambers, head of the agency's sovereign ratings committee, said the downgrade and the large U.S. debt burden reflected that there will be less ability to stimulate the economy with fiscal measures going forward.
But others said reducing the deficit should be a long-term goal and urged the government to take advantage of super low borrowing costs to boost near-term spending.
If the world continues to be willing to lend us money at 2 percent for 10 years, for crying out loud, if there was ever a time to spend, this is the time, said Don Brownstein, chief investment officer at Structured Portfolio Management.
(Editing by Dan Grebler)