What passes for smart on the Greek Debt Crisis
is profoundly stupid and misleading. Over at Americablog I stumbled across a post written by Kevin Drum on the Greek debt crisis, a post which was also linked to approvingly by Digby. It is what passes for smart on the left, these days: superficially correct, but riddled with massive assumptions. Back when blogging was my job, I took out garbage like this regularly, these days I do it rarely, but I’m going to tackle this one because the embedded assumption aren’t just sewage, they are toxic to dealing with the current depression we’re in. Let’s start with the New York Times (I incorrectly attributed this first quote to Kevin Drum, for which I sincerely apologize):
A return to the drachma is unlikely to offer a quick cure for Greece’s ills. Default on the nation’s $500 billion in public debt would become a certainty, depositors would take their money out of local banks and, with a sharp devaluation of as much as 50 percent, inflation would loom. A return to the international credit markets would take years.
It didn’t take years for Argentina when they defaulted. When Iceland told Europeans to go take a long flying leap of a short pier, it didn’t take them years. In fact, my best guess is it would take a year, maybe less. There is too much money chasing far too few returns. Contrary to the idea that there isn’t enough money in the world, the problem is that there is too much, and it is chasing diminishing returns. Remember a default isn’t a bankruptcy, in a default Greece says “we aren’t paying this back as scheduled, we’ll pay you back… eventually”. My suggestion would be to transfer it into 100 year bonds with 1% interest. If creditors don’t like that they don’t have to take it, they can then try and collect on their credit default swaps, but if they make that claim, the Greek government considers that debt cancelled (you don’t get paid twice.)
Moreover, once Greek returns to the Drachma, it can print money. At that point it can’t default on any new bond issues as long as they are issued in Drachma. On to Kevin Drum:
Here’s the thing, though: Greek debt is largely held by German banks that made the loans. [See update below.] If Greece has been irresponsible, so were the German banks that happily loaned out the money. So if Greece defaults, the banks go kablooey. But they’re too big to fail, which means the German government would be forced to bail them out. And guess where the bailout money comes from? Tax dollars.
This means that German taxpayers have a bleak choice. They can shovel lots of money to Greece to keep them from defaulting, or they can refuse, and then shovel lots of money into German banks to keep them from collapsing. Either way, German taxpayers are going to foot the bill.
No, no they don’t have to bail out the banks. Not for the full value of the default (if Greece just said “we won’t pay”, as opposed to “we’ll pay at some point”.) The banks have shareholders and bondholders. Those institutions and people take the losses. Some of them are public (pension funds, etc…) but many of them aren’t. Let them eat their losses. The banks go under, you refloat them, but the cost of doing so is far less than paying off all the bad loans, because the private actors have taken their losses and any excess losses, well, they’re just written off. Same as when you realize cousin Fred ain’t ever paying you back than $100. It’s gone. Done. Over with.
The only reason “all the debts” must be paid off is because the rich demand it. They don’t want to take their losses. This is what should have been done in the US. It is what should be done in Europe. It is what our lords and masters refuse to do at all costs, because the people who own them, or they themselves, or their friends, or their lovers, are the ones who will take the bath.
(on defaulting and going to the Drachma)
But it puts Greece into a death spiral. They can’t pay their debts, so they cut back, which hurts their economy, which makes them even broker, so they cut back some more, rinse and repeat. There’s virtually no hope that they’ll recover anytime in the near future.
According to the IMF, hardly an organization that wants countries to default, the effect on the economy of defaulting is one year of sharp pain, followed (perhaps) by a few years of lesser growth than otherwise. In other words, not that bad, and no worse than Greece has already suffered.
If Greece exits the euro, it will become terrifyingly obvious that other weak countries might exit too. Portugal, Spain, and Italy are the obvious candidates. Investors, spooked at the thought of their money being stuck in a country that might exit the euro and devalue all its bank deposits, would start huge runs on banks in those countries. The ECB would have to intervene and provide liquidity without limit. It would be a disaster.
Uh huh. Or those countries could simply slap on currency controls, which experience shows (most recently and clearly in the Asian currency crisis of the 90s), works. And permanent austerity, which is what France and Germany want to impose on Italy, Greece and Spain (with the apparent cooperation of their political classes, I might add) will erode the value of the bank holdings in time anyway. Drum’s not exactly wrong, but it’s the other options, which never get mentioned, which matter.
There are economic tools for dealing with these issues. Capital and currency controls are one of them, the distinction between default (we’ll pay you eventually, as opposed to we’ll never pay you) is another. The question of who is being bailed out (private investors, in large part) is another. And bailing out those investors is a political act, their money is their political power. The current political class, who is complicit with the current monied class, of course wants to bail them out.
All of this is before we even get to the horribly anti-democratic nature of all of this: the repeated refusal of the political class to allow referendums, the complicity of all major political parties in the process (notice there is no party to vote for if you want to default), and so on.
There is no actual democracy in any part of the world which is attached to the Wall Street centered financial system. Calls can run up to 1000:1 against TARP and it will pass. Strong majorities can be for or against particular policies and if the elite disagrees, that’s all that matters. There are no parties to vote for if you are against the current system.
In a sense, this is fair. Westerners thought that they could have consumer democracy: they didn’t have to participate in it except at election time, when they would vote for parties and platforms paid for and produced by someone other than them. Coke(tm)/Pepsi(tm) politics – you have a choice, you can choose either Coke or Pepsi! Politicians aren’t paid by you (their salaries are the least part of their real income) why would you think they care about your concerns?
You don’t pay for politicians or politics. This is the Facebook rule: if you don’t pay the freight, you aren’t the customer, you are the product. Politicians compete for the money and favors of the rich, and what they sell is the ability to wrangle you: to pass the austerity bills, to cut the benefits, to privatize the jewels of the public system, to force through the multi-trillion dollar bailouts. They control government for the benefit of the rich.
And the rich pay all the way down the line. They control the media, right down to the bottom, to make sure that what is discussed is what they want discussed, in the terms they want it discussed. That default isn’t that bad: forbidden. That currency controls mitigate damage in these circumstances: forbidden. That lenders will lend to defaulting countries almost immediately: forbidden.
I will discuss the pointlessness of media and “popular sentiment” in a post soon. In the meantime, realize that even the supposed left feeds you intellectual sewage on a regular basis.