Meanwhile, across the pond . . .

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Europe's ongoing disaster is starting to match ours.  This not only seriously challenge the idea that the main problem is American bank regulation--everyone is having the same problem, despite different regulatory regimes--but also puts us in much deeper jeopardy.  From the Wall Street Journal:

Germany issued a blanket guarantee of all its consumer bank deposits on Sunday, as a group of European countries adopted emergency measures to shore up the Continent's financial system against the widening international credit crisis.

In tandem with its surprise move to protect deposits, the government of Germany, Europe's largest economy, arranged a bailout for Hypo Real Estate Holding AG, a giant property lender that came close to collapsing after private lenders pulled out of an earlier €35 billion ($48.2 billion) aid plan last week.

Also Sunday, the governments of Belgium and Luxembourg arranged a deal under which French lender BNP Paribas SA will take over the Belgian and Luxembourg operations of Fortis NV for roughly €15 billion in cash and stock. The deal for the Dutch-Belgian-Luxembourg insurance-and-banking giant came after a previous rescue plan last week failed to prevent an exodus of customers, and the Netherlands nationalized the Dutch wing of the company.

In Italy, meanwhile, the board of banking giant UniCredit announced that it would launch a €3 billion emergency capital increase. Sunday's meeting was a surprise; just days earlier, UniCredit's chief executive had gone on national television to say that the bank was solid.

But executives decided to call the meeting after the bank's stock was pummeled last week, as investors fretted about the credibility of the bank's reassurances and persistent worries over its cash levels. At one point UniCredit's stock reached a 10-year low before rebounding.

The patchwork of measures all came less than 24 hours after the leaders of Europe's four largest countries pledged after a meeting in Paris to protect their financial system. "We are taking a solemn commitment to back banking and financial institutions," French President Nicolas Sarkozy said at a news conference after Saturday's summit.

In the U.S., fed officials have taken aggressive actions in recent weeks to try to alleviate the severe pressures weighing on damaged short-term funding markets. New measures from the central bank are likely in the days ahead. It is not yet clear exactly what steps the Fed will take, but it could be aimed at commercial-paper markets, which have been damaged by skittishness among money-market funds, a big investor in this asset class.

The crisis in Europe now has broadened from the implosion of U.S. mortgage-related assets to a mounting unwillingness among European banks to lend to one another and a growing loss of confidence among investors and in some cases depositors. Adding to the predicament, governments from Ireland to Germany are trying to reassure their increasingly anxious voters. Denmark and Austria were also preparing extra protection for consumer deposits in the wake of the German move.

Other European banks could face similar funding strains to those of Fortis and Hypo, requiring public or private financial aid, as investors avoid making the kind of short-term loans that banks depend on for funding. In a sign that banks' borrowing costs are rising, the euro London interbank offered rate, or Libor, a measure of the rates at which banks lend to one another, hit 5.33% Friday, compared with 4.95% on Sept. 1.

The European Central Bank still seems highly focused on inflation, in a worrying echo of the 1930s Federal Reserve.  It's going to be a very . . . er . . . interesting week.


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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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