Some thoughts on Greece
Economic instability can lead to political extremism which can in turn lead to totalitarian governments which are a million times worse than a few bank shareholders taking a haircut. The level of seriousness is simply not there in Troika. This isn’t kindergarten. It’s 1933 and it’s time to stop fucking around and pretending like the worst possible outcome is the Deutsche Bank going out of business. Krugman likes to talk about Very Serious People (“VSPs”) in a pejorative way, and I think this is a good use of the term. There are a lot of serious looking people in suits who are treating this like some sort of game.
The IMF is not to be trusted. They have happily destroyed countries in their pursuit of maximizing lending banks’ profits. When you have Joe Stiglitz calling you out, maybe that’s a red flag for your trustworthiness. Even a cursory examination of the IMF’s history will reveal a litany of failure, at least if you define failure as bad outcomes for the countries being intervened in.
I don’t think bank losses are a big deal, especially when they have had 6 years to insulate themselves from Greek debt. No one thinks the Greeks are going to pay back what they owe. The only question is how much. Any bank wiped out at this point from a Greek default only has themselves to blame. Banks are firms. They can go out of business and new ones will arise to take their place. Bankruptcy is the sign of a healthy economy, because it demonstrates creative destruction is working. No one firm is as important as overall economic performance.
Speed bankruptcy can save the world. Banks deliberately structure themselves so that they are fragile in order to credibly blackmail governments into giving them bailouts when things go downhill. There’s no other reason to finance yourself with so much debt vs. equity. However, there is a counter. If you make bank debt convertible to equity in the cause of a bank run, you take away the bank’s trump card – defaulting on their own loans, and triggering a chain reaction. If another bank is tipped into bankruptcy by the speed bankruptcy, run them through speed bankruptcy as well.
Banking cronyism is THE #1 economic problem in the first world. Lenin taught us that political cronies are interchangeable. Take a page from his book and convince yourself that economic cronies are also interchangeable. Sure, Goldman Sachs looks pretty indispensable right now, but if they’re gone, another investment bank will take their place and throw money into your reelection campaign just like the last bank did.
Prudent lending is just as important as prudent borrowing. If you know someone is going to default and you lend them money anyway, that is your fault as much as it is theirs. Sure, the “predatory lending” story doesn’t fit as well with Greece as they are with sub-prime borrowers, but it rhymes. If you lent Greece a ton of money, you’re going to get what you deserve good and hard and you have no one to blame but yourself.
Default does not change the net wealth of a society. The lender loses by exactly as much as the borrower gains. In fact, default is even better with government debt because government debt is paid back by taxation which has deadweight loss. From a strict economic efficiency perspective, governments should default all the time.
Germany’s mercantilism is stupid in the long run. Sure, in the short run, you can lash yourself to importers and get an artificially weak currency to boost your exports, but in the long run you get exactly the sorts of imbalances you are seeing now. Sure, you help exporters, but only at the cost of hurting consumers who are buying imports. Free trade and floating currency is, and always has been, the first best option.
Conflation of default and leaving the Euro. If a country can’t default without leaving a currency, it should never have entered the currency union in the first place. A U.S. city or state can default without having to leave the dollar. Why isn’t this the case in Europe? Just default and start to issue new debt. You don’t need permission from anyone. Germany can’ kick Greece out involuntarily any more than Greece can tell Germany not to use the Euro.
Greece is going to have to run a primary surplus one way or another, either to stabilize its debt or as a way of avoiding capital markets. And in fact, defaulting may lower Greece’s interest rates. If your debt to GDP is 200% and rising fast, no one thinks you are ever doing to repay it. So your interest rates are going to be sky high, leading to more debt. It’s a vicious cycle. But if you default, suddenly your debt to GDP ratio is 0, and suddenly your debt burden is bearable for a few years. Even if you continue to run small deficits, lenders have more reason to think you’ll pay them back, not less. If you look at historical examples of default, this is exactly what happens.
Reform would be good for Greece no matter what you think about debt forgiveness. Need primary account surplus/balance. Greece has a terrible economic climate, and not just because of the Euro.
If the ECB is going to keep being stupid, it’s not worth staying in. Greece may be able to set up their own CB to act reasonably. No one is cursed by their culture to permanently have high inflation. Problem of idiosyncratic shocks.
The stupidity of the ECB is a major factor pushing Greece not to unilaterally default. A competent central bank can maintain an inflation target in spite of defaults on government debt. The ECB can’t maintain an inflation target in a stiff wind. If the Greeks were to default, there would probably be massive deflation in the Eurozone, maybe even Great Depression levels of it. Given the large number of fixed amount government welfare programs, such deflation would trigger even more debt and more economic chaos. If deflation greater than 10% were to occur, the best outcome I could forsee would be everyone leaving the Euro. The worst outcome would be WW3 and/or a takeover of totalitarian regimes.