I’ve said this before in different ways, but I will say it once more, “Governments are smaller than markets; markets are smaller than cultures.”? The reasoning is simple:
- Governments can only control a fraction of what an economy or culture does.? Governments that are overbearing on an economy or culture may gain greater proportional control, but the size of the pie will shrink.? More of the economy or culture goes into hiding, away from the prying eyes of the government.
- Markets only express a fraction of what mankind does.? They cover the tradeable aspects of what we do, but typically do not give us our deeper goals or desires for ourselves, and the culture as a whole.
When I look at the biggest economic problems facing the world today, many of them stem from deeper cultural problems.? Let’s start with the current poster child, or, canary in the coal mine, Greece.
Greece got into the Eurozone via subterfuge; they lied about the true status of their indebtedness, and Wall Street (with its counterparts in European investment banking) helped them do it.? So did a number of the other nations in the Eurozone that are presently under stress.
Now, the core members of the Eurozone wanted the Euro to grow as a currency — they were committed to an ever-wider and -deeper union.? The dream of a united Europe made them willfully blind to the low probability that the nations which were fiscal basket cases had genuinely changed.? The core should have been skeptical, and now they are paying the price, though not paying any money, yet.
The core nations that could pay or guarantee to help Greece are playing a tight game.? They act as an internal European IMF, insisting on reductions in the Greek budget deficit.? Greece does its part by saying it hasn’t asked for aid, which is unlikely.? At the same time, reductions in the Greek budget deficit bring the competing political factions inside Greece out in force.? Protests!? Strikes!? There are few arguing for what is best for Greece overall, and many arguing for a larger piece of what is a shrinking pie.? In a situation like this, it might be better for outsiders to let Greece fail,but they won’t do that.? Why?
The banks in the core nations can’t afford a default by Greece if by contagion it leads to defaults in Portugal, Spain, Italy, and Ireland.? A failure of the banking system does not conduce well to maintaining power for elites.
I have already talked about the perverse incentives for the core European nations to do anything to support Greece.? If Europe was rational, they would abandon the experiment now, or press for a Federal Europe akin to the US.? I don’t see either happening — I just see slow suffering for now, and futile playing for time.
Dubai is a place where anything can get done.? Anything indeed, but who pays the bills?? Dubai is a place of big ideas and little responsibility. ?? It is a moral flaw to bite off more than you can chew, particularly if you do so on behalf of others.
Many US States and Municipalities are in a world of hurt, because they compromised their long-term financial position to solve short-run budget crises.? That is the nature of the crises that we face today.
The same is true of the current US government — they fight for short term political advantage, rather than the long term good of the nation.? Who will favor the long-term and sacrifice for the greater good?
A simple summary statement here is “Greed is not good.”? Societies that are willing to sacrifice self interests have a much better probability of succeeding than societies that pursue self interest.
That’s all for now, I will pick this up in part II.
Thanks for your blog.
The issues right now are pretty well known. But how much can Germany keeps doing to save other irresponsible countries, without hurting itself.
The ideal thing would for the Germany to wave middle finger to Euro and go back to DM.
I really hope Germans show necessary courage, but at this point do you believe Merkel, does not know whats at stake.?
Given her background, I get a feeling, Germany and Merkel will leave Euro.
As old cliche goes, we will soon find out.
Thanks for your blog and best to you.
Sir Panic
One of great arguments in favor of a limited, as opposed to omnipotent, system of democratic government is that it discourages overreactions to short term passions and prevents reckless behavior, strongly tempting in the short term, but to the detriment of the long-term interests of the nation. There is a cultural component, to be sure, but I think the Constitution was written with an eye to fundamental human tendencies.
Though they were no strangers to the problems of government debts and promises, I don’t think the founders ever really envisioned the emergence of the kind of system we have today with its associated problems of promises.
If they had, I strongly suspect they would have added another layer of restriction on the financial activities of the legislature. I wonder what form that would have taken.
David, your article cuts to the core of the problem: People don’t change. Modern media does a very poor job of incorporating political economy into it’s analysis.
Note: besides the fact that Greece has spent 1/2 its brief history in default, the great Spaish empire went bust multiple times because of excessive spending. The shiploads of gold and silver from the New World were never enough to meet the ambitions of the Spanish kings (plus inept management).
One way or the other, Greece will default. It’s a dead man walking. The important factor will be the follow-on effects on W Europe banks and the US debt markets. We could see the dollar and debt rally on a flight to safety that could last several quarters if the EU gets shaken badly….or we could be seen as the next debt bomb.
Interesting times, indeed.
Interesting start to your thoughts David… One assumption I don’t agree with, and I don’t think really ties with your title: you seem to imply that Germany will bail out Greece because they have too much exposure to Spain and Ireland (and others to a lesser extent).
As other commenters have already pointed out — Spain is a perrenial monetary failure. Spain will fail, whether Greece is bailed out or not. As you yourself point out, the Spanish aren’t going to change centuries of habit just because of a piece of paper in Brussels (that no one voted on anyway)
Ireland has a history of being hard workers who are very willing to make incredible sacrifices to survive — but they don’t like being told what to do. Not by London, not by Brussels either. Ireland is going to have more economic problems, whether or not Greece is bailed out. The Irish will respond as they always have, whether or not Greece gets bailed out
In recent polls, 80% of Germans do not support any bailout. Every major political party in Germany, including Merkel’s, have publicly stated opposition. Germany is the only country that could realistically do a bailout, and they are adamantly opposed.
The EU can’t do a bailout — it has no taxing authority. EU laws and the ECB’s articles of incorporation explicitly prohibit a bailout — a bailout is not lawful. The very same documents that give the EU its existence also strictly prohibit a bailout. Any bailout (a decision to nullify EU law) nullifies the EU itself.
And everyone in Europe knows a bailout, even in concept, is a lie. If Greece were to be bailed out, they will blow the bailout money and be back for more, more, more — until one day Germany is forced to say no. Greece isn’t asking for a one time bailout, it is asking for a permanent annual stipend.
A bailout is not going to happen, not now and not ever. The EU is done — whether it survives on paper or not is irrelevant. It makes no difference how many prop traders with Greek debt exposure want to have their p&l bailed out — there is no Henry Paulson to force the German populace against their will. I question whether Paulson could repeat his behavior in the US in today’s environment.
In the end, Germany — like the rest of Europe — will do what its culture has always done. They will bail out German banks. They may also bail out (or otherwise help) contiguous trading partners like Poland and the Netherlands.
The answer for Germany is very obvious. The EU is finished, or more accurately it was never real in the first place.
The answer for the United States is less obvious. We can’t jettison California as though it was Greece (economically, it is the same). Unlike the EU, the US is a cohesive whole
We have spendthrift states, and we have a spendthrift government (under both parties). The culture of Washington DC is not going to change, so how do we create effective economic (as opposed to political) checks and balances?
Greg, I am undecided on whether Germany will bail out Greece or not. It all depends on whether they feel protecting their own banks is worth the political heat or not.
Personally, if I were in the shoes of Angela (what was her obscure last name?) I would lead Germany out of the EU, or, I would stiff Greece, and offer aid to my banks, rather than aid to Greece. To me, that is the simple solution, and it would send a strong message to Spain, Portugal, Italy, and Ireland.
“I would stiff Greece, and offer aid to my banks, rather than aid to Greece. To me, that is the simple solution, and it would send a strong message to Spain, Portugal, Italy, and Ireland.”
This seems exactly correct to me. If you’re committed to doing a bailout, the question is whose moral hazard are you going to encourage? The Germans at least have control over their own banking sector, and can monitor and regulate their activities via-a-vis sovereign debts to try and ensure that they won’t soon be exposed to this kind of disaster again while the sector is still vulnerable.
You can’t bail out another sovereign nation over whom you have no real political control.
David, the leader of Germany is Angela *Merkel*
Recent opinion polls show 80% of Germans are opposed to a bailout, and every political party (including Merkel’s) have publicly stated they will not support a bailout. A bailout simply isn’t going to happen.
If the EU votes to have a bailout without Germany, who cares? No other country has the money to make it happen. And when (not if) Germany refuses, what is the EU going to do about it? Kick Germany out!?!?! If they lack the courage to kick out Greece…
In the end, Germany may or may not be able to bail out Greece (Germany has problems of its own to deal with, including high deficits). But Greece is not an isolated problem.
Greece is to Europe what Thailand was to Asia – the tip of the iceberg. The so called “PIGS” also include Portugal, Ireland and Spain. Italy is not far behind. Economic problems already exist in Germany’s main trading partners (Poland and Netherlands).
And lets all be a bit honest here: the UK’s economic viability depends on them successfully dismantling RBS. The odds favor the UK succeeding, but it isn’t a sure thing.
Germany might be able to bail out Greece (or might not) — if the population supported such a move, and it does not.
But Germany simply cannot bailout all the other EU basket cases — not even if they wanted to.
Hence, Germany has no choice but to say “Nein!” at some point — just a question of when. The “political heat” of the EU is irrelevant — most of Europe’s voters never voted for the EU in the first place (actually, they weren’t even given a chance to vote). The EU has no economic legitimacy, nor political legitimacy.
But the biggest problem is still: Germany cannot bail out everybody, therefor they won’t. Discussing a bailout is pretty much as insane as discussing whether Germany should relocate its land next to Singapore. Its not possible.
Given that reality, Germany might as well say no right away, and reserve their economic ammo for bailing out German banks and Germany’s immediate neighbors / trading partners.
Greg, I largely agree… wait for my next piece.
David — while I am 99% sure Greece (and the EU) are finished (at least in any meaningful sense) … I am far less certain about how California plays out
I would very much like to hear your thoughts, both on what should be done, and what is likely to be done.
California’s debts do not belong to any other state, and Obama is pretty much out of political capital. Pelosi is hated everywhere other than Congress and (I guess?) her home district. I don’t see any of the crooks in Washington having the political capital to nationalize California’s debts. (yes, the banks — but that was a dumb and IMHO immoral act. Hardly justification for repeating the crime).
All that said, California is a huge piece of the US economy, and many other states are on the same unsustainable spending path (just a few years behind CA).
Do Americans finally learn to live within our means? Do we practice some tough love on California (and other) spendthrifts?
Or do we stick our kids with the bill? I think this would be cowardly, but that doesn’t mean it won’t happen in a country long on spending and short on leadership (both parties)
I don’t have an answer — but curious on your thoughts…
David: your opinion mostly matches the German public.
Greg: “Greece isn?t asking for a one time bailout, it is asking for a permanent annual stipend.”
It already is getting a stipend, it just wants more. Now with such a stipend you should be able to refi quite a bit of debt.
“Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP.” https://www.cia.gov/library/publications/the-world-factbook/geos/gr.html
The bad news for Greece is that if they default they might not get the current stipend anymore, a double whammy. Honestly, I am very confused about all this noise. Greece should be able to roll all its debt with such large inflows. If they can’t do it even in the presence of such subsidies they are really doomed. Germany can recoup all its losses in a Greek default with the subsidies to the EU it saves. But they are still going to lose a market, all this private consumption on the Balkans, where nothing gets produced and the stores are full of German, Chinese and Turkish goods.
Greg/California: IMHO the state of CA is not very indebted relative to the size of its economy and its yearly budget. (Munis are a different story.) But the state is completely dis-functional politically (popular propositions changing the constitution using 50 percent of the vote, 60 percent supermajority on budget etc.)
CA lost most of its credibility, as it is obvious to everyone watching that it is a slow motion train wreck. Slow motion. That’s the scary part.