The German philosopher and political theorist Georg Wilhelm Friedrich Hegel (1770-1831) said that “All that is real is reasonable, and all that is reasonable is real.” Frederick Engels, the collaborator and supporter of Karl Marx, took this to imply that “the value of a social or political phenomenon is its transitoriness,” as Austin Lewis wrote in the introduction to “Feuerbach: the Roots of Socialist Philosophy” (1919) by Engels.

Wind the clock forward a century, closer to the early days of the Obama Administration — days of financial crisis and fear when Wall Street was “melting, melting” a la the wicked witch in the Wizard of Oz. Economist Larry Summers reportedly advised President Obama that time will heal the wounds of the financial markets and that no further action to restructure the big banks or the housing market is needed. The view of leaving the big banks alone is consistent with the line taken by Summers’ political sponsor, former Citigroup Chairman and Treasury Secretary Robert Rubin, who has served as the political protector of Wall Street in Washington for a quarter century.

Writing in The International Economy, “Angela’s Amateur Hour,” Klaus Engelen notes that Summers has criticized German chancellor Angela Merkel’s actions in the euro crisis by supporting the central bankers in Frankfurt, an explicit censure of the EU debate over whether to impose losses on bond holders of insolvent EU banks.

Said Summers: “The European Central Bank is right in its concern that punishing creditors for the sake of teaching lessons or building political support is reckless in a system that depends on confidence.” But can we build or maintain public confidence in markets or governments upon castles made of sand?

Both Marx and  Engels, as well as free market theorists, suggest that all things in politics and life change. The US economy in the post WWII period is certainly an example of this, with the demographic bulge we call the Baby Boom acting as a deterministic wave in terms of economic policy and financial market performance.

Yet somehow both Rubin, Summers and their minions, such as Treasury Secretary Timothy Geithner, seem to think that we can ignore these changes and simply continue along without making any fundamental fiscal and financial decisions — especially changes that will inconvenience them or their associates and clients on Wall Street.

But confidence based on mere rhetoric is an illusion. Confidence in the financial markets starts and ends with getting paid, with the ability of counterparties to perform on their obligations, of investors to value financial assets and consumers to purchase or sell homes. So while the arguments of Summers and others — that we should not reduce debt and compel the bond holders of the largest US banks to contribute to solving the problems in the banking and housing sectors may seem attractive today — they ultimately lead us down the road to long-term economic malaise and political instability.

The reason that Chancellor Merkel and her counterparts in the other EU nations have argued for requiring pain from at least some of the holders of bank debt is that there is no longer any choice. Most of the large banks in the EU are book insolvent as we define it in the US. With the ECB already purchasing the debt of member states in the open market and the EU’s ability to fund these operations limited to the printing press, Western European states are confronted with the grim task of restoring solvency to their banks and nation states by reducing debt.

“There isn’t any bailout big enough to rescue the third largest economy in the eurozone the way there was with Greece, Ireland, and Portugal,” notes Engelen with respect to the prospect of an Italian default. “Italy can only rescue itself.” Thus, with the endgame for Greece seemingly at hand, the next countries in question are Italy and Spain.

Both in the US and in the EU, politicians such as Barack Obama and Angela Merkel have been struggling to manage an economic problem that is problematic in political terms. The path of least resistance politically has been to temporize and talk. But by following the advice of Rubin and Summers, and avoiding tough decisions about banks and solvency, President Obama has only made the crisis more serious and steadily eroded public confidence. In political terms, Obama is morphing into Herbert Hoover, as I wrote in one of my first posts for Reuters.com, “In a new period of instability, Obama becomes Hoover.”

Whereas two or three years ago, a public-private approach to restructuring insolvent banks could have turned around the economic picture in relatively short order, today the cost to clean up the mess facing Merkel, Obama and other leaders of western European nations is far higher and the degree of unease among the public is growing. You may thank Larry Summers, Robert Rubin and the other members of the “do nothing” chorus around President Obama for this unfortunate outcome.

It is still not too late for our leaders to get ahead of the accumulating fear that eats away daily at public confidence in currencies and markets from Los Angeles to Berlin. But the first step to turning things around is to understand that doing nothing, as has been the strategy in both the US and EU since 2008, is no longer a viable strategy. When the public sees government and private institutions acting with purpose to address the core issue of solvency, then confidence will start to recover.