World Bank Says, Fix Banks First. Uh-Oh.

by: Tom Lindmark

The World Bank threw its two cents worth into the debate about what the G-20 needed to focus on. Robert Zoellick, the President, says it’s the banks, stupid.

"Stimulus packages alone are not enough,” the World Bank president said. “The International Monetary Fund research of some 122 financial and economic crises shows that turnaround can’t happen unless you clean up the bad assets and recapitalise the banks."

This is one thing that I suspect Europe and the U.S. may well be able to agree upon. They both will roundly disregard this advice and proceed along their merry way, the Europeans pushing for a king to regulate the entire system and the Americans for more irresponsible spending.

Both have stared into the pit that constitutes the world’s financial system and can’t see the bottom. The Americans know that they could fix their system only at great cost to their economy. The Europeans know that they do not have the resources to fix their system. Politicians of both know that any attempt at a real fix would mark the end of their careers.

So they have chosen to put out fires as they develop, nibble around the edges, camouflage the issues with accounting changes and hope that time and a recovering economy do what they can’t or won’t.

If Zoellick is right and economies can’t recover until the banking problem is resolved, then their strategy will not work. Here’s hoping he’s wrong.