The sight of a finance minister caught in reporters’ lights is more usually associated with an emerging market crisis. But Hank Paulson has a lot in common with emerging markets of late. It was Yale-educated former Mexican President Ernesto Zedillo who once commented that markets overreact, so policymakers need to do so as well. Mr Paulson has taken a leaf out of that book.

He has taken no chances with the bail-out of Fannie Mae and Freddie Mac. Other investors were not prepared to recapitalise them or buy sufficient amounts of their debt to bring mortgage rates down. So the government will instead. The former investment banker has in essence converted the Treasury into the US hedge fund of last resort (with the Federal Reserve as its prime broker). Oddly, Mr Paulson’s package has proved uncontroversial and been supported by both presidential candidates (although President George W. Bush has kept relatively quiet). And, paradoxically for the self-proclaimed home of democracy, it was enacted by unelected officials.

Contrast that with policymaking on the other side of the Atlantic. The Fed has cut interest rates by 325 basis points since late last year, while the Bank of England has cut rates by “only” 75bp. The European Central Bank has even raised rates. As for fiscal policy, the US has opened the taps, unlike in the UK, while the eurozone is constrained by the stability pact.

Such European do-nothingism is only partly explained by institutional arrangements. Many European countries are less leveraged than the US, with notable exceptions such as the UK and Spain. The effects on the real economy of the credit crunch have also been slower in coming – although that is changing fast.

Which response will prove best? The US is using further debt-creation to clear up after the credit party. Europe is letting recession do that work. The UK is following a middle path, hoping that sterling’s depreciation will shield it from depression. Judging by the dollar’s continuing rally, most money seems to be on the US emerging first.

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