Tuesday, January 27, 2015

Sometimes the truth hurts - but it's still true

The new Greek finance minister, Yanis Varoufakis, may be a rabid Socialist - not far off a full-blown Communist, judging by some of what I've seen and heard and read from him - but he's spot-on in an interview he gave to CNBC today.  You can read the article here, and view the video interview in full (which I highly recommend).

For those who don't want to click over there, here's the money quote.

Q:  You owe the European Central Bank six billion Euros between July and August.  Are you not going to pay?

A:  Well, if you look at the existing agreement, the existing agreement recognizes that, ah, we can't pay.  And it imposes upon us the very strange notion that as a bankrupt state, we must borrow money from our partners - even more money than they've already given us - to repay a central bank which is in the process of printing one trillion Euros.  Now, you only have to state this to realize that this is not a God-given, Divine imperative which Europe shouldn't be discussing.

That's precisely the right answer, irrespective of Mr. Varoufakis' politics or ours.  Basically, the European Central Bank (and most commercial banks in Europe) lent money hand-over-fist to Greece from the moment of its entry into the European Union, even though it was plain as a pikestaff that the country was economically and politically incapable of paying back those loans.  When the whole mess eventually blew up during the 2007/08 financial crisis, Europe insisted on Greek austerity measures to repay the debt that have resulted in a 25% contraction in GDP and an unemployment rate of something like 50% among young people.

At long last the Greek people have demonstrated that they've had enough.  They've proven themselves to be, on the whole, fiscally irresponsible, self-centered and greedy, but I can't disagree with the step they've just taken.  They've elected a government that's dedicated to restoring Greek financial sovereignty, and in the process will punish those who lent irresponsibly.  If banks lend responsibly, to credit-worthy borrowers, they tend to get their money back with interest.  If banks get greedy and lend to anyone who's capable of signing a piece of paper, they should by rights lose their shirts.  In the case of Greece at least, it looks like that may now happen.  It should have happened to many banks in this country during and after the financial crisis, but thanks to the Fed's "too big to fail" mantra we, the taxpayers, were forced to pick up the tab for the bankers' recklessness and fecklessness.  We're still on the hook for it.  It's a big part of the doubling of the US national debt that's occurred under President Obama's administration (although, to be fair, it began under his Republican predecessor).

(Note, too, that from 2008-2011 Iceland chose not to follow the Greek model, but held its nose and took its medicine the hard way.  It rejected calls from politicians and central bankers to assume national responsibility for the bad decisions of its banks.  It showed them the finger, allowed its financial institutions to go bankrupt, and rode out the resulting national and international fiscal storm.  Guess what?  Six years later it's doing very nicely, thank you.  I've no doubt that the lessons learned - and imparted - by Iceland have been absorbed by the upstart wave of rebellious Greek politicians . . . )

Perhaps it's time for a Yanis Varoufakis of our own in Washington.



jordani said...

Totally disagree with author.
Iceland is wrong example. They're not doing very well, compared to UK and Netherland, whom's citizens deposit burn out into Iceland banks.
Iceland is pure example why today's world is better place or why EU and NATO must exist. Some 70 years before and with cheat like Iceland do, they will became occupied territory within 2 days.

Greece: argument for greedy bankers can't be used here. EU banks doesn't lend money to biz or persons, but to govt of Greece, which as much greedy and financially incapable as borrowers are.
Let me remind you that largest debts in the world belong to govt of US and UK, I suppose you don't want to live in the world where both states show finger to their bankers. BTW to which bankers ?!? FED and Bank of England ? It is same to show finger to yourself.

Dan F. said...

Don't think it is possible for that type of person to be elected in the U.S. with its current one party system. It would be way too late if we did anyway.

Anonymous said...

Sorry to disagree Peter.

I see Greece giving the EU Central bank a default notification and going back to spending like a drunken sailor. That was the platform he ran on. That will end any outside investment in Greece and who could blame anyone for not risking their capitol.

Secondly the Greek government ran crying to anyone who would listen, please give us cash to meet our bills. We'll pay you back when things get better.

Renegotiate the rate if you can but don't whine about getting a bad rate when you have terrible credit.

I think Zimbabwe would be a better economic model to look at.


Peter said...

@Gerry: I agree with you. However, if the EU is no longer providing bailout funds, Greece will have to print its own drachmas - and they'll be usable only inside Greece. They won't be accepted anywhere else. That will put a stop to a great many currency-flight shenanigans.

Anonymous said...

"New Greek PM Alexis Tsipras tells his first cabinet meeting his country will not default on its bailout debts, but will negotiate with creditors." -- BBC, this morning.

Maybe this is a politician's way of saying they WILL default.


Anonymous said...

The Greek people most certainly chose SYRIZA, regardless of what hooting or chest-beating Europe or the rest of the world thought about it. The Hellenic Republic is a sovereign nation, and if they wish to begin some fiscal policy that no one else wishes them to begin, so what? The price of dealing with a republic is that their public may simply change its mind. Did anyone become so deluded as to think that Greek bonds and Greek debts acted as voting shares?

If SYRIZA harms Greece through its decisions, the only people to blame is the Greek People for electing them. If Greece harms its creditors through Greece's decisions, the only people to blame are the creditors for lending to them. For once someone in power has stated reality; the show cannot go on. Let us celebrate this, at least.

-- Smithgift. The openID thing seems to have broken.

PapaMAS said...

Bankers being irresponsible should be punished - as should the government officials which forced the bankers to make irresponsible loans.

Rolf said...

Greece can't stay in the EU and keep the Euro currency and dig its way out. The numbers just don't pencil out. Their only real alternative is to quit the Euro and devalue their currency so they can become economically competitive and start getting people back to work, people who have been priced out of the marketplace by the economic straightjacket the EU/Euro has placed them in.

If Greece bails, and starts doing well, expect the other marginal nations in the EU (Portugal, Italy, and Ireland to start with) to do the same. Whether or not the totally repudiate external debt, write it down, convert it to local (devaluing) currency, or what might vary from place to place.

Trying to prevent the pain of dealing with bad debt for REAL, like Japan has for the last thirty years is a recipe for disaster that only a major banking cartel could like.