From the comments section of Paul Krugman's blog, this deserves wider distribution:
The high level of false statements and open disinformation about the current crisis in Greece, and its implications for the Euro, shows both the way ideologies have captured even so-called expert economists, and the media's general failure to understand, much less convey, the complexities of monetary policy.
A few largely ignored facts:
1. False story: "Greek public profligacy caused the crisis." NO. Greece has indeed spent more than it took in -- but the problem was not one caused by a particularly high expenditure level. Greek public spending has been average for the Euro zone countries; but Greek tax collection has been much lower than the Euro zone countries, in part because of massive tax evasion and corruption. If Greece had simply collected legally-mandated taxes from their own elite and corporations, the crisis would never have happened.
2. False story: "The best solution to a large public deficit is cutbacks in spending, which would allow the Greek government to pay its bondholders." NO. Cutting back public spending in a modern economy causes recession (especially when the world is in recession). Recession has a leveraged effect on public revenue, decreasing revenue disproportionately, and raising public costs. Thus, the series of sharp cuts in public spending that the Greek government faces will in fact make the government LESS able to pay off its bonds.
3. False story: "Public money is bailing out lazy Greek hairdressers." NO. Public money from German, European and even American taxpayers is bailing out wildly-leveraged European banks (these banks took on leverage levels comparable to the most risky American investment banks, and now face huge losses). Those banks, and the hedge-fund industry, no doubt leveraged up in with toxic 'fiscal products' when they saw the inevitable crunch (they are smart, some of these folks!), and now expect public money from the trough because, sadly, giant banks that collapse because of gross greed and incompetence are a danger to everyone, and must therefore be propped up.
Of course, the Greek fiscal imbalance over the last 10 years was a real, if rather modest problem. The Conservative government in power happily conspired with investment banks, including Goldman Sachs, to lie about public finances, year after year, while allowing the wealthy to dodge even the too-low taxes on the books.
Only when a social-democratic government that honestly reported the facts was elected was there suddenly a 'crisis', with loud cries about how 'government had failed.' Once again, the lie that political conservatives are somehow 'responsible about public spending' is revealed to be false. The story is really not so different from what happened in the United States. Lies, greed and denial persisted under conservative rule, sharks saw the coming collapse and leveraged up (making it worse), and the progressives had to clean up the mess by helping out the worst culprits with public money (since the gun of a massive depression was at their heads, and they themselves still had too many ties to the banks and the 'system').
The obscenely rich people benefiting from this massive transfer of wealth (bailout) don't need to care about demand problems. They've got theirs. In addition, this whole manufactured crisis is about enforcing discipline on the rest of up to accept whatever crumbs they throw our way. Doesn't matter if the rest of society explodes when you're behind the iron bars of a gated "community."There are no "progressives" in govt. If there were we'd have single-payer, real financial reforms and a real stimulus.
ReplyDeleteI wonder whether "bondholder" will ever become a dirty word in the mind of the public? Because much of the financial gyration and deprivation will be because bondholders must be paid. Fire a teacher or a cop to pay a bondholder.
ReplyDeleteOf course, if bondholders start getting screwed, there go the pension funds that hold them, and small-timers like my mom (has a few munis.) And interest rates will go up. But perhaps then places like Greece, and especially Cali, will have to live within (or increase) their tax-means. And that would not be a bad thing.
With my less-than-perfect comprehension, I have not fully nutted out the ramifications of widespread bond defaults or reductions in paybacks. Maybe you could point to, or do, an explain on that.
Bukko -- I found this discussion of default interesting.
ReplyDeletehttp://www.ianwelsh.net/deciding-to-default/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+IanWelsh+%28Ian+Welsh%29
Interesting perspective, Dope. If a few jump ship, then ALL will be forced to do so. (At least if the ones who didn't default want to issue new debt or roll over existing stuff.) Isn't that a bit like a twist on the old logic game of "The Prisoner's Dilemma"?
ReplyDeleteI fear that we're headed for a giant "RESET" of the system. It will probably shake out better in the long run than trying to keep the current unsustainable game going. But while the shaking is going on, a lot of people will get shook off...
There is a saying, "if you owe a bank $5,000, you have a problem. If you owe a bank $500,000,000, the bank has a problem."
ReplyDeleteThe ultimate solution to the government debt problem in the United States is probably going to be to print money by having the Federal Reserve buy government bonds from all levels of government. If the economy had shortages of goods and services this would cause inflation because there would then be more money in the economy than there were goods and services. But right now, it would have no (zero) effect on inflation, because as Keynes pointed out in 1936, when you have more goods and services than you have buyers, all that more money does is move more goods and services off the sidelines and back into the economy, meaning that you still have the same amount of money per given unit of goods and services that are actually trading in commerce within the economy, and thus no inflation.
Hmm, interesting thought, there. I need to make a full-scale post with examples and such.
But anyhow, back to municipal defaults: when Cleveland defaulted in 1978, it was predicted there would be a wave of defaults. However, legally speaking, there is no way for cities to legally wipe out these debt obligations. Even Cleveland ended up paying back every dime of that debt in the end. So simply defaulting doesn't do a city much good, they can then be sued by the bondholders and city assets seized under court order, including major tax streams. At that point the city ceases to be a viable entity, much as the Ottoman Empire ceased to be a viable entity after the Default of 1875 and the resulting Public Debt Administration which captured most Ottoman tax revenue to pay back European bond holders. Lacking tax revenue to maintain itself, the Empire effectively dissolved as a viable entity, shambling along simply because everybody was busy squabbling over which piece of the empire should belong to which nation until the Allies finally put an end to it after WWII. But if Los Angeles defaulted... well, what's gonna happen, Anaheim is going to invade and conquer LA? Heh!
- Badtux the Economics Penguin
Bukko -- what you said. You gotta wonder how long Big Finance can keep sucking money out of the middle class before the well runs dry.
ReplyDeleteMr. Tux -- I take your point re: Cleveland and Turkey. However, these seem to be (somewhat) isolated examples. Has there ever been a tidal wave of city bond defaults? The "system" can discipline one municipality and eventually get all its money back. But I wonder about the outcome if *everybody* (more or less) defaults. From a popcorn-eating perspective, I'd like to see how that plays out.