Wall St. Helped to Mask Debt Fueling Europe’s Crisis
nytimes.com
nytimes.com
The banks not only enabled these countries to borrow beyond their means, but also loaned them the money. If anyone feels a populist fury that requires retribution against Wall Street then the course is clear: don't bail Greece out. The best way to teach bankers not to engage in this sort of behavior is to show them that their faith in "too big to fail" is not well founded and that moral hazard is really hazardous.
The other important idea in this story is that governments are just as eager as corporations and homeowners to engage in overspending and shadowy accounting, so it's not clear why anyone should expect regulation to be a panacea for any of these problems.
if you dont bailout Greece, then the markets will get nervous about other bigger economies with debt (Spain, Ireland, etc) and call in the debt to these countries as well. Many of these countries are likely to default, which in turn would lead to more panic and more debt being called in, leading to a repeat of the financial crisis of 2008 (ignited by the bankruptcy of Lehman), where banks trust no one, every debt obligation is called on immediately, and everyone hordes cash out of panic. A vicious cycle like the great depression develops and even relatively healthy economies, banks and companies go bankrupt.
Then what? Yes, this process does weed out the weak banks/companies/economies. But it also destroys everything else, including social and political institutions and the worse case scenario is you have global anarchy, unrest, wars etc, etc.
I think moral hazard is important. But is it so important that we destroy the whole system? There must be a more balanced approach, but not sure what that should be.
These assumptions were made by leading economists and bankers(Ben Bernanke, Gov of Bank of England, Treasury sec, etc) and they are also based on direct experience from the great depression, the Asian financial crash/contagion of the 90s, etc.
"people tend to overestimate such things because you cannot disprove them."
The problem is that during a financial panic, you cannot make reasonable estimations. History shows financial panics to be very, very destructive. And in our highly interdependent economies, a financial panic is far more destructive than previous times.
The most effective way to deal with financial panics seems to be bailouts. We may not like it, and rightly so. But what choice is there?
As a non-Greek European, however, I'd rather Greece was in fact bailed out because if Greece collapses, my own economy, which shares a currency with Greece, goes along with it even though there is not all that much wrong with the financial practices of my own government (I'm Dutch).
This is probably one reason why banks (and Greece itself) got away with what they got away with for so long: if Greece collapses, Germany and France and a whole lot of other economies with which there really isn't all that much wrong, will go along with it.
Which just isn't worth it.
So what will probably happen is that the EU will force Greece to swallow a draconian austerity package that will clean up their government finances but that will bring comparative hardship to 11 million Greeks. This way they avoid causing economic misery for the rest of the 328 million inhabitants of what is known as the Euro zone
And that highlights a point many underestimate - the interdependence of finance. What cuts are made to Greece will hit other areas of the EU. Where else?
"... If anyone feels a populist fury that requires retribution against Wall Street then the course is clear: don't bail Greece out. ..."
The populist fury should be over the "bail-out in the US" of Wall St. Greece is pretty much as far from the centre of Western financial influence as you can get.
I think it is a bit of fear-mongering thrown about to get people to acquiese in massive, questionable government backed financial schemes. It reminds me of George W. Bush asserting "if we don't pass this bill, the whole sucker could go down" or the member of Congress who claimed that if the 700 Billion dollar bailout was not passed, "your ATM machine will not work Tuesday morning."
Let's think through the worse case senario. The Greek government defaults on it's debt, and a variety of people around the world discover that the Greek bonds they hold are worthless. Some investors will have bought funds that are mixtures of all the EU country's debt, and those investors may dump those funds, thus making it expensive for the Dutch government to borrow money for a time - say, a year. Exchange rates will also shift, but that always brings good with bad no matter which direction -- likely the Euro will drop, making it easier for other people to buy Dutch products, and helping Dutch exporters but making it more expensive for you to buy imports.
Perhaps you could take some advantage of the situation by being stingy and saving money, not buying imports, and instead buying high-yeild Dutch bonds, for a year or two. But even if you didn't, by three to five years from now the difference in your personal wealth would be tiny.
A collapse of the market in Greek bonds does not break dikes or light fires in Holland. No "real" wealth will be destroyed in your country.
Now let's consider what happens if you bail out the Greek government, and by extension, whatever unlucky stooges Goldman Sachs saddled with those bonds. The Euro will see some inflation, dropping its value, but the effect is more long term than the "collapse" senario. Goldman will hawk the bonds of Spain, Italy, Portugal, and any other shaky government as having an implicit backing of the hard work of the honest Dutch, and those goverments will borrow more because of it.
So I don't agree with your argument of "comparitive hardship" to 11 million Greeks vs. "economic misery" to 328 Europeans.
In some ways, this is just a preparation for what will happen in the US with the State of California, whose default will be larger than Greece's. Is it in the best interests of the whole USA to assume the obligations that California undertook ? If California defaulted on it's bonds, it would surely cause some financial turmoil and hardship, but it's not clear that financial turmoil and hardship would be avoided by guaranteeing their bonds. Backing those bonds decreases the already shaky credit of the US as a whole. On the other hand, states that need to borrow may not be able to for a period, and many retirement plans and pension funds will suddenly be shrunk.
I'm not in favor of either bailout. The cost is a general undermining of the world financial system as a whole, and I don't think you will get the short term good effects that are hoped for.
And, it tells CA that it can go on a binge and get someone else to pick up the tab.
CA does stupid things because there's no negative consequences to doing stupid things. CA would be better off if it didn't do such things. And, if it does, the rest of the world would be better off if such things were funded by volunteers.
The best case is for CA is to wipe out bond holders and be forced to live within its means. The next best case is for CA to wipe out bond holders and then find a new group of suckers to voluntarily fund the next round of crazy. The worst case is for CA to get bailed out by taxpayers.
Of course, if one of the main products of the Netherlands (or Europe, or the United States) is itself bonds, similar to how some small governments fund themselves by selling collectors stamps, then you might be screwed by a general fall in demand for bonds. However that situation is unlikely to remedied by selling more bonds to buy back the Greek bonds.
Similarly, while Greek bus drivers may get steep cuts in pay, it is unlikely that Greek politicans and financiers will suffer as much.
Therefore, while a failure of the Greek bond market may have some good effects, it is not guaranteed to find all the guilty.
Do you also believe that Madoff should have been allowed to simply stop paying his "clients", and that their subsequent loses would be enough to stop future frauds while Bernie sailed away on his yacht ?
They had approximately $300b in additional debt.
This article exists because many readers like to pretend that bankers are the root of all evil.
The key message is that bankers do a lot more damage than good with the money and leverage handed to them by the govt. Their positive impact on the economy has been vastly overstated, and the public is increasingly wise to that scam.