I’ve been silent on here as of late, but it doesn’t mean I haven’t been watching the news.
Normally I write about US issues. However, I want to point your attention to the Greek financial crisis and tell you to take a good look. What is happening there is a foreshadowing for what is going to happen here in the US if we keep racking up our national debt. Eventually, we will not be able to pay for it, just like the Greeks. So please, read below and ask questions, comment, disagree, but don’t say I didn’t warn you.
I don’t know if you have been watching the news on the European bailout of Greece, but the issue has ballooned in recent days with the bailout they proposed two days ago. The call it containing ‘The Contagion’. Let me give you the history.
Basically, Greece has some debt payments coming due in a week or so. It is short term debt that comes up every couple of years. Problem is, Greece LIED to everyone about how much debt it had. Once elected, the new government came clean and the markets lost all confidence in the country to meet it debt obligations (because it has so much more than it should); so the interest rates they get charged to finance their debt went up. Not good when its coming due. So, they needed some kind of bailout from their European Union (EU) partners to make the debt payment. To get the money, Greece agreed to cut back their government spending. Among other things, that comes in the form of actually making Greek citizens pay their taxes, laying people off, not having government workers have juicy bonuses and labor contracts, raisng retirement age from 61 to 65, and raising sales tax to 23% and heaping up more value added taxes as well. Well, the Greeks are NOT happy at actually having to work, pay taxes, and have their benefits cut; so they riot. It made for some great photos and some sheer stupdity when people actually died. disgraceful.
Well, from all of this, the other governments and banks in the EU have noconfidence that Greece can get its house in order and they begin to believe it will default. So, they cut their losses and pull their money out – creating a run on the bank…but its not a bank its a country. Not good, but this isn’t Germany or the US, this is Greece…Greece with its dinky little economy. They’ve defaulted before, and they are going to again. The difference this time is that their currency is the Eurodollar and their economy is tied to all the other countries in the eurozone. Portugal, Ireland, Italy, Greece, and Spain (the PIIGS as they are called) all have similar debt woes. If Greece defaults, then investors are afraid that the other 4 countries in similar economic shape could default as well, creating runs there. That spreading is ‘the contagion’ and it would be bad. So bad, that it would drag the European economy down, destroy the value of the Eurodollar and affect us here across the pond because Europe is a huge trading partner and our financial types have significant investments in major European economies.
At first Greece needed the equivalent of something like a $25 billion bailout, then it was $60 billion, and then it was $144 billion to shore them up. Well, it became such a crisis in confidence that the finance ministers across Europe decided that this wouldn’t be enough. Everyone knew that the money would just vaporize, paying off all the debt holder – much like AIG was over here and it would be throwing away good money after bad. These ministers had waited too long and too much panic had entered the markets. So, to reassure everyone and to stop the contagion from spreading, these same finance ministers proposed a $1 trillion dollar bailout fund to essentially backstop all of this government debt from all of the PIIGS. It is a direct correlation to letting Lehman Brothers fail over here in 2008 and the resulting tanking of the financial market that was bailed out by the TARP program. It is the same basic principle.
Europe’s version of our TARP program sucks for the exact same reasons.
It does not address the root causes of this problem – which is too much soverign debt. Period. That applies to Greece, Spain, the UK, and here in the US too. If you think entitlement programs are out of control here, they have been out of control for years in Europe. They ARE socialists in Europe. Citizens there expect all sorts of government handouts whether they work or not. Those that do work, pay high taxes to support such a structure. Most are okay with this because so much is provided for them…but they grow to expect it. You have serious problems when they are taken away. Hence rioting.
The problem with all of that is that it does not encourage personal productivity or work. This is especially obvious in Greece, Spain, and Portugal which are not known as hard-working societies. Why work when the government will pay for just about everything for you? Those goodies aren’t free, so the government pays for them – hence far too much government spending = government debt. All the while the recipients aren’t paying nearly enough into the system, so the government borrows even more. It is an unsustainable cycle and the chickens are coming home to roost – and in the developed world, it is first happening in Greece.
So, instead of making the necessary austerity adjustments as outlined above, the Greeks get bailed out. Their bad behavior is rewarded. They keep on spending. The Greek people are not prepared to make the necessary cuts and Europe’s financial leaders do not have the easy ability to control Greece and are as of yet unwilling and unable to boot them out of the Eurozone. Remember, these are sovereign countries that do not control their money supply so it is much more complicated
The solution is to cut the Greeks off, not go into more debt to bail them out. There is no need to create a massive bailout fund that reassures the European banks that Greece will not default on the debt it owes them. All you do is delay the inevitable. That is why the pundits say they are just kicking the can down the road a couple of years. There is still a spending problem. More debt does not make it go away. Rewarding feel-good bad behavior does not encourage painful good behavior.
You cut the Greeks off by having the balls to kick them out of the Eurozone. They go back to dracmas, its value plummets, and they default on their loans. Shame on Greece for its spending and shame on the big banks for making the bad loans to a poorly run country in the first place. That is a learning moment that does not reward bad behavior. Neither side played by the rules and couldn’t keep their house in order and thus they have to pay for it.
You then safeguard the other PIIGS nations with much smaller financial backstops, but let Greece fail. It sends a message that tells the other countries that the same will happen to them if they don’t get straightened out. That will send a message to those nations’ leaders and citizens and they need to do whatever it takes because they don’t want to end up like the Greeks.
The problem with my proposal is that these politicians are humans. Just like here, political leaders don’t want to have to pay the piper on their watch. They think that they can borrow and spend their way out of the crisis and leave the problems for the next guy. Why jeopardize their money, power, and influence? Hence the ill-used bailout of Wall Street which didn’t help Main Street America and this bailout of Greece which isn’t going to help them or the EU.
This papering over of the problem only lets it continue on for longer and makes the problem that much worse when things finally do fall apart.
Remember, the US Government is the lender of last resort. There is no one to bail us out when our financial chickens come home to roost. Just like this massive $1 trillion finacial backstop, our actions of the past 2 years have only bought ourselves some time. Watch what happens in Greece and Europe in the next few years because they are in worse shape than us. Greece is the canary in the economic coal mine, but management just pulled a switcheroo and replaced the dead canary with a new healthy one. The mine is still poisonous and this new canary will eventually have the same fate as its predecessor.
– G. S.