Monday, May 10, 2010

Thoughts on the Greek So-called Crisis

What they call a crisis in Greece really has three aspects:

1) The Greek government is unable to make full repayment of loans

2) The impaired ability to repay current loans inhibits the government's ability to access new credit.

3) The governments inability to pay salaries in full makes employees mad, thus there are protests and riots.

What is clear from this is that the Greek government cannot support it's spending habits. They were able to get away with massive overspending in the short run because, for some reason, lenders were willing to lend. The risks associated with lending to the Greek government were apparent. Like al governments that maintain perpetual deficits, the Greek government was running a Ponzi scheme. They had no intention to ever pay down the outstanding principal of their loans. They instead use new borrowers to pay off old debts and hope that system can be maintained forever. Keep in mind, folks, that the new government of Greece came in to power a few months ago promising INCREASED spending.

But this Ponzi scheme has one key difference from the ones operated by Bernie Madoff and others. It's victims are fully aware of the scam.

So today we get news of a giant bailout, nominally of the Greek government. But the bailout will only increase the suffering of the Greek people. It is really the bondholders who are being bailed out. And though I have not the stomach to look at a list of these creditors, you can bet they have names like Goldman Sachs, Citigroup, Bank of America, Banco Santander, etc.

Through all the bullshit talk of contagion, the only people who would truly suffer from a Greek default are those who accepted the risk of a Greek default. And yes that includes a few grandmas and retired teachers, but mostly we are talking about wealthy, wealthy people. Again, we see a massive wealth transfer from the middle class to the rich.

So what about contagion? A Greek default would have little effect on the real economy. What the powers worry about is subsequent defaults of Spain, Ireland, Portugal, California, etc. But those governments need to default. The losses have already occurred. All that remains is to demand who bears those losses. Should it be the people who made the bad decisions? I think so.

So what about the civil servants who will surely be getting paycuts and pink slips? The first think everyone needs to recognize is that these people have been severely overpaid for a long time. The Greek tax base simply cannot support this level of services, nor the salaries given to those service providers. But, right now these people are being asked to shoulder the bulk of the burden of "fiscal responsibility," and that is just plain wrong. The people of Greece and the employees of the Greek government must accept the fact that their lifestyles have exceeded their productivity, and they must retrench, but those who underwrote the excesses must bear their share (in fact, rightfully the largest share) of the loss.

The Greeks were running a deficit of about 14% of GDP, in violation of their commitment to keep the deficit under 3%. I have 2 comments here. First, the Greek government has no right to the promised support from its Euro-neighbors. The Greeks reneged, and the German taxpayers and others should let them default.

But contrary to this, the rest of Euroland is coming to the rescue, and in exchange they are demanding austerity measures. Basically, they want Greece to reduce and limit the size of its deficit. This action obscures the true problem and completely fails to address its root cause. The Greeks do not need to reduce their deficit; they need to eliminate it. And this needs to happen not over the course of a few years; it needs to happen now.

So what should happen? The Greeks should say no-thanks to any bailout. They should negotiate a default with their creditors. This would give them the credibility to level with their citizens and reduce the scope of government action, and relieve them of the burden of paying off debts that have already soured.

This would make it difficult for Greece to access credit markets in the short-run, and there are people who say that a government must be able to borrow. I say that is ridiculous. Greece needs to learn how to operate a balanced budget. If they can prove to lenders that they are responsible, they should be able to borrow. Right now the opposite is true.