The current economic distress in the US and in the EU have common threads both financially and politically. Certainly the public reactions do. In particular, both involve protecting lenders to a much greater degree than borrowers and much more than the public, which in various ways pays to protect the lenders. They also both involve a public which has little or no influence, much less control over the decision making.
An article, Once Greece goes… by John Lanchester in the London Review of Books has some pointed insights regarding the political conflicts and public resistance in Greece regarding the European Union’s demands for loans (not bailouts) to avoid a short term default, while they figure out how to avoid default entirely. Here are some of my favorites:
So this is the new plan A: the Greeks borrow another €120 billion, the bondholders allow their debt to be rolled over, Papandreou’s government introduces further austerity measures and privatisations, rich Greeks start paying their taxes, the Greek economy recovers, and by the time the next huge chunks of debt repayment are due – from mid-2012 – Greece can afford to pay back its lenders and the crisis is over.
Does that sound plausible? It shouldn’t. This scenario is somewhere on the spectrum of unlikely to impossible, because while nobody questions Papandreou’s intentions – he is the only politician I’ve ever known to tell his electorate so consistently things they don’t want to hear – the Greeks are showing clear signs that they are unwilling to submit to the programme.
It isn’t the consequences for Greece of a Lehman-type ‘credit event’ that worry the central bankers and governments: the risk of ‘contagion’, as they call it, throughout the Eurozone is what preoccupies them. The euro was not designed to default, so when Greece does, other European countries who have had to ask for non-bailout bailouts – Ireland and Portugal – will have their ability to repay their debts questioned. If one or other of them undergoes a ‘rollover’, or ‘restructuring’, or ‘rescheduling’ of its debt – all polite words for default – the next country in line will be Spain, and that is where everything changes. The ECB/EU/IMF ‘troika’ can write a cheque and buy the Greek economy, or the Irish economy or the Portuguese economy. But Spain is the world’s twelfth-largest economy, and the ECB can’t just write a cheque and buy it. A Spanish default would destroy the credibility of the euro, and quite possibly the currency itself, at least in its current form.
From the worm’s-eye perspective which most of us inhabit, the general feeling about this new turn in the economic crisis is one of bewilderment. I’ve encountered this in Iceland and in Ireland and in the UK: a sense of alienation and incomprehension and done-unto-ness. People feel they have very little economic or political agency, very little control over their own lives; during the boom times, nobody told them this was an unsustainable bubble until it was already too late. The Greek people are furious to be told by their deputy prime minister that ‘we ate the money together’; they just don’t agree with that analysis. In the world of money, people are privately outraged by the general unwillingness of electorates to accept the blame for the state they are in. But the general public, it turns out, had very little understanding of the economic mechanisms which were, without their knowing it, ruling their lives. They didn’t vote for the system, and no one explained the system to them, and in any case the rule is that while things are on the way up, no one votes for Cassandra, so no one in public life plays the Cassandra role.
It’s this last paragraph that best captures the reasonableness of the public reaction. It makes a very nice backdrop to Joe Nocera’s “Exit Interview of Sheila Bair” yesterday in the New York Times now that Bair left the FDIC.
Most pointedly, Bair bluntly says:
The should have let Bear Sterns fail.
Why?
Let’s face it. Bear Stearns was a second-tier investment bank, with – what? – around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they supposed to fail. So, yes, I was amazed when they saved it. I couldn’t believe it. When they told me about it, I said: ‘Guess what: Investment banks fail.’ “
Until, the erstwhile “big boys” make sure they don’t fail. No wonder the public is cranky.
Here’s another quote of the day. Bair on bonuses:
You know Wall Street barely missed a beat with their bonuses. Isn’t that ridiculous?
Talk about pithy.
Go read both articles.
Tagged as:
Bair,
Default,
Economics,
EU,
Germany,
Greece,
QOTD
