Greek Referendum Poll

[grumbler]

Greek parliament has passed the reform bills.  Tsipras, as expected, relied on opposition support.  Some of his own MPs rebelled.

I wonder what makes the Greeks convinced that Grexit is the greater evil.  These are the people who elected an explicitly anti-austerity far left party to take power, held a referendum on the rescue package at the risk of angering everybody else in Europe, voted "no" in defiance, then within a week, folded to creditor demands that are even harsher than the original proposals.  They seem convinced that Grexit means ruin.  Maybe they are right, but what makes them think that way?

Essentially, they fear that, while Grexit will eliminate debt, it will also eliminate savings.  Anyone on a fixed income (e.g. pensioners) would have their incomes converted to a fixed number of Drachma, and soon would be worth a fraction of their current value.  Ditto bank accounts.  Personally, I think it's a bullet they have to bite, but maybe a miracle will happen and they can recover inside the Eurozone.

[Razgovory]

I think scale makes a difference.  Three guys who now have to pay slightly higher taxes doesn't really make austerity.  I would not consider the "fiscal cliff", austerity as it wasn't really a deliberate scheme but rather failure of compromise.  In a discussion about Greece and more broadly the Eurozone I think when we refer to Austerity we refer to Greece and more broadly the Eurozone or perhaps the European Union not the US having slightly higher tax revenue then it did the previous year.  So in this thread when someone says Austerity failed, they are talking the Greek debt reduction scheme or similar ones enacted in the EU and not the US reducing defict in 1998 or the personal austerity of monks.

If you want scale, how about an $800 billion stimulus package?

I don't see what difference a "deliberate scheme" vs. "failure of compromise" makes.  Aggregate demand is aggregate demand whether it's the result of a "deliberate scheme" or a "failure of compromise."

Furthermore, operating just with your own narrow definition of austerity, the UK has among the highest growth rates in Europe, it has stabilized debt/GDP at 90%, and it has preserved its credit rating and is currently paying about 1.5% on long term bonds.

So no, you can't say "austerity doesn't work."

When did Britain stabilize debt/GDP?  This year?  Was it before or after the British government declare Austerity to be a failure?  The difference between, "deliberate scheme" and "failure of compromise" is one of intent.  A policy of Austerity implies intention.  You can't have policy by happenstance.

[Tamas]

When did the UK declare austerity a failure? It has worked for them and the government just got re-elected.

[Admiral Yi]

I missed that declaration of failure too.

So presumably if Greece had cut pensions by happenstance instead of on purpose, their economy would be hunky-dory right now?

Incidentally, the reason there wasn't a second Obamastimulus and the reason there was a sequester was concern about the debt.

[Admiral Yi]

I took at look at Britain's historical debt/GDP, and was surprised how low it was until fairly recently.

[celedhring]

Our debt was around 30-40% until fun times started.

I remember analysts in 2008 saying we were in good shape to face the recession because of our low public indebtedness. Heh.

[Syt]

http://www.theatlantic.com/business/archive/2015/07/greece-crisis-banks-greedy/398603/?utm_source=SFFB

Blame the Banks

Why is Greece chastised for reckless borrowing while the financial institutions that profited for years seem to get off scot-free?

One of the first lessons I was taught on Wall Street was, "Know who the fool is." That was the gist of it. The more detailed description, yelled at me repeatedly was, "Know who the fucking idiot with the money is and cram as much toxic shit down their throat as they can take. But be nice to them first."

When I joined in Salomon Brothers in '93, Japanese customers (mostly smaller banks and large industrial companies) were considered the fool. My first five years were spent constructing complex financial products, ones with huge profit margins for us—"toxic waste" in Wall Street lingo—to sell to them. By the turn of the century many of those customers had collapsed, partly from the toxic waste we sold them, partly from all the other crazy things they were buying.

The launch of the common European currency, the euro, ushered in a period of European financial confidence, and we on Wall Street started to take advantage of another willing fool: European banks. More precisely northern European banks.

From '02 until the financial crisis in '08, Wall Street shoved as much toxic waste down those banks' throats as they could handle. It wasn't hard. Like the Japanese customers before them, the European banks were hell bent on indiscriminately buying assets from all over the globe.

They were so willing, and had such an appetite, that Wall Street helped hedge funds construct specially engineered products to sell to them, made of the most broken and risky subprime mortgages. These products—the banks called them "monstrosities" and later the media dubbed them as "rigged to fail"—only would have been created if they had reckless buyers, and the European banks were often those buyers.

When a bank buys an asset it is lending money; the seller is the borrower.In buying various assets European banks were doing what banks are supposed to do: lending. But by doing so without caution they were doing exactly what banks are not supposed to do: lending recklessly.

The European banks weren't lending recklessly to only the U.S. They were also aggressively lending within Europe, including to the governments of Spain, Portugal, and Greece.

In 2008, when the U.S. housing market collapsed, the European banks lost big. They mostly absorbed those losses and focused their attention on Europe, where they kept lending to governments—meaning buying those countries' debt—even though that was looking like an increasingly foolish thing to do: Many of the southern countries were starting to show worrying signs.

By 2010 one of those countries—Greece—could no longer pay its bills. Over the prior decade Greece had built up massive debt, a result of too many people buying too many things, too few Greeks paying too few taxes, and too many promises made by too many corrupt politicians, all wrapped in questionable accounting. Yet despite clear problems, bankers had been eagerly lending to Greece all along.

That 2010 Greek crisis was temporarily muzzled by an international bailout, which imposed on Greece severe spending constraints. This bailout gave Greece no debt relief, instead lending them more money to help pay off their old loans, allowing the banks to walk away with few losses. It was a bailout of the banks in everything but name.

Greece has struggled immensely since then, with an economic collapse of historic proportion, the human costs of which can only be roughly understood. Greece needed another bailout in 2012, and yet again this week.

While the Greeks have suffered, the northern banks have yet to account financially, legally, or ethically, for their reckless decisions. Further, by bailing out the banks in 2010, rather than Greece, the politicians transferred any future losses from Greece to the European public. It was a bait-and-switch rife with a nationalist sentiment that has corrupted the dialogue since: Don't look at our reckless banks; look at their reckless borrowing.

* * *

The European Union started with an economic agreement on coal and steel and good intentions. It was, at least in part, an attempt to diminish through shared economic incentives the nationalism that had led to past wars.

The economic unification became a currency union in 1999 with the creation of the euro zone. The common currency was adopted despite a lack of political union, a sequence which many at the time described as putting the cart before the horses.

Along with the common currency came a wave of regulatory changes that provided the banking sector with more opportunities for growth—and the chance to become the fool. The rule changes enabled the banks to treat the debt of all euro zone countries equally; Greece, as far as the rules were concerned, had the same risk as Germany.

The markets had thought differently, with Greece having to pay more to borrow than countries such as Germany. The northern banks, seeing easy money, started lending to Greece, happily receiving higher fees for the "same risk."

It was the beginning of a self-fulfilling feedback loop with the banks at the center. Southern Europe (especially Greece), started borrowing more, allowing them to buy more, which caused them to grow, which collapsed the cost of their borrowing, with led them to borrow more, and so on.

The buying spree benefited everyone, especially the northern European countries. The South boomed as things got built and bought, and the North boomed as factories churned out products to sell to the South. The banks sat in the middle, happily taking a spread.

This feedback loop was uniquely European, dependent on the false sense of stability provided by a common currency, which amplified the bankers' naive belief that a country could not default.

This loop kept going until the sheer weight of the debt amassed by Greece became too huge for the markets to ignore. It kept going until the markets, shocked by the U.S. housing crisis, prompted skepticism, which forced Greek borrowing fees to rise. The European banks, in too deep to stop, were still willing to lend, but others less so.

By 2010 this could go on no more. The markets refused to lend more to Greece and a bailout was necessary.

But the bailout was primarily focused on saving the banks, not Greece: Rather than forgive a  portion of the  Greek debt and hand the banks a loss, Greece was to continue paying its bills. New money was lent by a variety of public sector entities (i.e.The European Commission, the IMF, and the European Central Bank) to pay off the old bills. The banks were consequently made whole, with most of the money from the new loans passing through Greece right back to the banks. For acting as a conduit to a northern European bank bailout, Greece was asked to change its ways—to spend less, tax more, and restructure the public sector.

This did not work. Greece was plunged into an even more dire depression. Two years later it was once again unable to pay its bill and required a new bailout. This time Greece's debt was cut, roughly by 40 percent, but by then the banks had far less to lose, with many of the loans having already matured and been fully paid.

That first furtive bailout of the banks in 2010 introduced and encouraged a narrative of southern borrowers as the victims of only their own incompetence, sloth, and greed. It allowed the banks to play the role of upset parents to immature children.

That narrative was further encouraged and politicized by passing any future losses from Greece onto the European public, mostly the northern European public, encouraging an us-versus-them mentality. It was policy dressed in nationalism: the antithesis of everything the common currency was supposed to stand for.

Why were the banks, rather than Greece, bailed out in 2010? Why was Greece asked to change its ways and accused of reckless borrowing, rather than the banks accused of reckless lending?

One argument was that Europe was still not closely aligned enough, their regulators not coordinated enough, to pull off such an operation. The louder argument was that the European banks were too vulnerable, fragile, and essential, to suffer losses. Those losses would of propagated around Europe, collapsing other banks and other countries and, ultimately, breaking up the euro zone.

That argument continued: The banks were too central to the operation and health of the economy, no matter how recklessly they had behaved, to punish with losses. It is an argument one hears during a crisis in order to justify bank bailouts, to justify favoring the creditors over the lenders. It is a strong argument—because it is true.

Consequently it is also the strongest and best argument for why banks should be heavily regulated and controlled in the first place: to prevent exactly that sort of behavior—before it destroys countries and economies.

​* * *

Politicians, regulators, and bankers can calculate the immediate costs of bank failures. They can't calculate the longer-term human toll that follows.

Greece is experiencing immense pain from a depression greater than that of the U.S. in the '30s. Poverty, homelessness, suicide, addiction—all have risen. A generation has seen the present diminished, and the future diminished even more. 

It is a sad instance of a time-old routine: When lenders and borrowers are at odds, it is the borrowers who are blamed and the borrowers who suffer.

[Valmy]

The reason the bankers lent money to Greece is because as part of the Eurozone they figured it was a safe bet. It all gets tagged as 'reckless' but there are not just a ton of fail-safe places to park money.

I mean geez if buying government bonds is criminally reckless what exactly are bankers supposed to do? Invest in jars to bury in the backyard?

And color me skeptical the Euros do not heavily regulate and control their banks. If they don't nobody does.

It is a sad instance of a time-old routine: When lenders and borrowers are at odds, it is the borrowers who are blamed and the borrowers who suffer.

Bullshit. Borrowers are excellent at defaulting and printing increasingly worthless money to screw over the lenders. What a bunch of nonsense.

Just the Greeks cannot do this because of their agreements that nobody held a gun to their heads and forced them to enter into.

[The Brain]

Banks can do what they want, I have no right to tell them what to do. Now governments on the other hand...

[crazy canuck]

Greek parliament has passed the reform bills.  Tsipras, as expected, relied on opposition support.  Some of his own MPs rebelled.

I wonder what makes the Greeks convinced that Grexit is the greater evil.  These are the people who elected an explicitly anti-austerity far left party to take power, held a referendum on the rescue package at the risk of angering everybody else in Europe, voted "no" in defiance, then within a week, folded to creditor demands that are even harsher than the original proposals.  They seem convinced that Grexit means ruin.  Maybe they are right, but what makes them think that way?

Essentially, they fear that, while Grexit will eliminate debt, it will also eliminate savings.  Anyone on a fixed income (e.g. pensioners) would have their incomes converted to a fixed number of Drachma, and soon would be worth a fraction of their current value.  Ditto bank accounts.  Personally, I think it's a bullet they have to bite, but maybe a miracle will happen and they can recover inside the Eurozone.

Right now their best option is the one set out by the IMF yesterday - a restructuring/partial elimination of the debt so that Greece has a reasonable probability of becoming solvent within the Eurozone.  If that doesn't occur then I agree, they will have to exit and bite the devaluation bullet.

[Razgovory]

I missed that declaration of failure too.

So presumably if Greece had cut pensions by happenstance instead of on purpose, their economy would be hunky-dory right now?

Incidentally, the reason there wasn't a second Obamastimulus and the reason there was a sequester was concern about the debt.

I seem to have misremembered the UK bit.  If Greece cut pensions do to failure of the political situation would not be good, it would still be a failure.

[MadImmortalMan]

Blame the Banks

Why is Greece chastised for reckless borrowing while the financial institutions that profited for years seem to get off scot-free?

Trying to keep the damage away from the depositors, I suppose. Also prevent bank runs. I wonder how necessary that would have been if there weren't so few banks.

[grumbler]

Right now their best option is the one set out by the IMF yesterday - a restructuring/partial elimination of the debt so that Greece has a reasonable probability of becoming solvent within the Eurozone.  If that doesn't occur then I agree, they will have to exit and bite the devaluation bullet.

That's the best option for Greece, but it isn't their option.  It's the creditors' option.  Now, given that the result of Grexit is likely a default and the creditors taking a near-100% haircut, it's the best option for them as well, but I am not sure they'll see it that way, given the potential for a demand on the part of the other heavily-indebted countries for their haircut, as well. 

The best overall solution may be a plan that includes both debt forgiveness and a phased Grexit.  The latter would deter others from demanding it, and the timing could help make the transition tolerable.  I just don't think the Greek economy can compete with other euro economies for both cultural and resource reasons.

[crazy canuck]

Right now their best option is the one set out by the IMF yesterday - a restructuring/partial elimination of the debt so that Greece has a reasonable probability of becoming solvent within the Eurozone.  If that doesn't occur then I agree, they will have to exit and bite the devaluation bullet.

That's the best option for Greece, but it isn't their option.  It's the creditors' option.  Now, given that the result of Grexit is likely a default and the creditors taking a near-100% haircut, it's the best option for them as well, but I am not sure they'll see it that way, given the potential for a demand on the part of the other heavily-indebted countries for their haircut, as well.

Greece's best option is to stay in the Eurozone long enough to give the other Eurozone countries long enough to realize that the IMF proposition is the best option for them all. 

The best overall solution may be a plan that includes both debt forgiveness and a phased Grexit.  The latter would deter others from demanding it, and the timing could help make the transition tolerable.  I just don't think the Greek economy can compete with other euro economies for both cultural and resource reasons.

Probably the best solution from the point of view of a German technocrat who has a fear of moral contagion.  Not so good for a Greek pensioner.

[jimmy olsen]

Furthermore, operating just with your own narrow definition of austerity, the UK has among the highest growth rates in Europe, it has stabilized debt/GDP at 90%, and it has preserved its credit rating and is currently paying about 1.5% on long term bonds.

So no, you can't say "austerity doesn't work."

Didn't the UK economy only start to grow after they eased off on the austerity?