To be fair, it was an abysmal ballot. Basically, the voters were asked"Do you think Greece should accept all the conditions set out in these two documents you probably don’t have access to and, if you do, you probably haven’t read and, if you have, you probably don’t fully understand?" It’s hard to get a meaningful result out of that.
You were alleging that default led to better results for Iceland than austerity. As your cite pointed out, Icelanders pay their taxes, their government seems to listen to the results of referenda, and they have natural resources and a highly educated population. Greeks, not so much. So since Greece doesn’t have those things, it is hard to see that they would recover from a default as Iceland did.
You know all the terrible things that would happen under austerity? That’s what it means for Greeks.
Regards,
Shodan
Because the U.S. has a common currency and a common government and Europe has only the former.
Which is why the Greeks voted to default on their debts. The outcome is the same for them either way, so why not make their creditors feel the pain as well? That way there is always the chance the Central Bank will blink, and if they don’t? Oh well, they are no worse off than if they had agreed to the bank’s demands.
I disagree. The current budget deficit is still a lot higher than any time before 2009. Cite. And the Obama administration has repeatedly justified this by using 2009 as the point of comparison. Which is exactly the problem I was discussing.
Well I’m discussing what’s politically realistic and not general principals. I imagine one reason that proposal is not on the table is because the Greeks - who are very resistant to pension reform as it is - are not willing to understake that for anything less than a bigger package deal.
Correct me if I’m wrong, but AFAICT the situation in Iceland did not involve a country defaulting on its debts, as you imply (and as is the situation with Greece). In Iceland it was apparently a matter of privately owned banks defaulting on their debts.
The reason it may be a bit confusing is that these were pretty big banks and their collapse significantly impacted the Iceland economy, which put the prospect of the government paying off their creditors on the table (similar to what the US did with AIG et al) - and this is what was rejected. But that’s not the same thing as a government defaulting on its own debt.
No you misunderstand me. The center of my analysis is not foreign debt. The center of my analysis is devaluing the currency so as to spark an export boom. Tell the foreigners to fuck off and fund investment internally. Greece doesn’t need foreign money to grow. I’m basically applying the lessons from the Asian crisis of the 1990s, and hell any number of financial crises before that.
Foreign investment is typically a small share of domestic investment anyway.
Would Greece literally tell foreigners to fuck off? Of course not: it would be more polite and drawn out. Is telling the foreigners to fuck off optimum? No. Could we do this in the US? Is it constitutional in the US? No, as I understand it. Just noting this. Do I like telling foreigners to pound sand? Not really. Are the foreigners evil? Hardly. The problem is that Greece is suffering a worse depression than the US did during the 1930s, and lacks the fiscal or monetary tools to fight it. They need to be handed one tool, the other tool or both. The alternative is basically to wait until the economies of the center start roaring: a tepid recovery won’t pull Spain and Greece out of the hole.
And again, I’m applying textbook economics. Apply austerity with fixed exchange rates to a recession and you get depression.
Considering that Greece imports almost twice as much as it exports, how do you expect that to work?
Regards,
Shodan
ISTM that works the other way. Nowhere to go but up, aka more room for improvement.
Never laid a glove on this one - explain, please?
Regards,
Shodan
If “Greece imports almost twice as much as it exports” at this time, then that suggests it has a lot of room for improvement if they cease to be harmed by sharing a currency with countries with stronger economies. Even if they changed the ratio from 2:1 to 3:2, it would still be helpful to them, let alone if they did better than that.
If they were already export-driven and were still doing poorly overall, that would imply less room for improvement from currency devaluations, becauser their export sector would already be doing well. But as it is, it would seem that they have a lot of room to improve.
Q1: What do you expect to happen with an overvalued exchange rate?
Q2: Are you including tourism? Not that it matters: see Q1.
- At any rate, any improvement in the balance of payments will stimulate the economy, even if the trade deficit persists. Which is by no means clear.
(Incidentally, Shodan, among those with economic training you are making a jackass out of yourself. )
Gotcha, thanks. Much of Greece’s problem is that they don’t have much to export, and their economy is inefficient, with lots of government workers, pensions, unemployment, and so forth.
That means so much coming from you.
Regards,
Shodan
That’s all true. But the fact that they have these issues doesn’t mean that being tied to the Euro isn’t also a problem for them. They’re obviously exporting something even given the current situation, and it would make sense that if they had a cheaper currency that amount would rise.
[Which is obviously not to advocate them leaving the Euro, which is a more complex matter. But a lot of reputable people seem to think that one area it does disadvantage them is in exports, and this makes sense to me as above.]
From Greece: Greeks Move Past Referendum Results to New Europe Bailout | Time
A lot of Greek people, in other words, did not mean to reject the bailout when they voted to reject the bailout. They want the bailout, because they know how desperately they need one. But they also wanted to reject it first, as a sort of prideful and cathartic gesture, so that they might then accept it with their heads held a little bit higher. On the streets of Athens, this is roughly the reasoning one discovers after talking to enough people for long enough, though in the process an outsider should expect to feel a bit confused from time to time.
What it all boils down to, more or less, is that the Greeks voted not so much with their heads last Sunday as with whatever part of the body is home to their abundant pride. “I voted with my soul, because I cannot vote with reason,” said Natassa Platsouka, a 39-year-old librarian who has had to provide for her two teenage children over the past two years with no job and no income. “For me the first thing was to say ‘No’ to everything we suffered.”
If the referendum will make it easier, psychologically, for Greeks to accept the pain, then I guess it served its purpose. Seems a bit nuts to me, but then I never lived in Greece and don’t know Greek psyche.
She was a splendid girl.
But her mother-in-law was pretty awful.
So the Greeks cut public spending by 20%. It just looks like the remaining 80% is still more than their economy can justify, and so further cuts are necessary. Question is, had they never joined the Euro, where would this spending level have been now?
It’s a little like a kid graduating high school, getting a bunch of credit cards and maxing them out over the next couple years, and then bemoaning the fact that Not being able to get any more cards to continue spending is resulting an unreasonable decline in their standard of living.
Greece in the last 14 years spent a lot of money they didn’t have on stuff that did not improve their economy in any structural way. They didn’t invest - they spent. Their access to low rates on the capital markets which the Euro provided could’ve been a real boon, but they squandered it.
The Greek economy is 80% services (i.e. <20% combined industry and agriculture), which is similar to the U.S. Of course the U.S. is a mature and wealthy and more importantly a very large economy. Countries like Poland, Roumania or, heck, Brazil have economies with industry and agriculture representing >30% of GDP. Greece will have to start working on making some stuff they can sell. Or else, you know, tax those services. Like the Greek shipping companies. Or just about anything on the outlying islands.
There’s a lot of blame to go around here in the Greek situation, and I’ll get to the list of bad actors in another post. And yes, the Greek government was behaving pretty badly with regards to its books in the run up to the financial crisis. But I’m reminded of the situation in California just after the crash.
You see, I live in California. And California has a screwy tax system. Despite how screwy it is, most of the time, it functions just fine. Everyone once in awhile, though, it goes haywire. The last time it went bust was in the aftermath of the 2008 financial crisis (the previous time was in the aftermath of the electric deregulation crisis).
So, California’s in trouble, and Gov. Schwarzenegger goes to the White House and asks for help. And he gets told that help isn’t coming, because the White House doesn’t want to create a moral hazard problem. So, California has to start cutting services and raising taxes.
Now, keep in mind, this is all happening as a result of the mortgage bubble and the financial crisis. If none of that had happened, California would have been chugging (or limping) along okay. But now, we’ve had a bubble and now we have a mortgage crisis. And it’s not limited to California. Pretty much every state in the country is suffering at that point. So, you could point at pretty much every state, with a wide variety of tax systems and benefit systems and spending priorities–and they are all suffering, regardless of what they were doing.
But, no. The White House says there’s a moral hazard problem, and now it’s time for me to suffer. Granted, I didn’t personally suffer a lot. I weathered the financial crisis pretty well. But, still, the state is now going to cut services, so I’m going to be punished. Because I’ve done something wrong apparently.
What did I do? Did I set up California’s tax system? Nope. That was largely done before I was born. Did I deregulate the mortgage derivative market? Nope. That was a coalition of Blue Dogs and Centrists and Neo-Liberals and Conservatives under the Clinton Administration. Did I write stupid mortgages and falsify mortgage records? Nope, that was the bankers and the mortgage brokers. I mean, I did take out a mortgage well before the crash, but it was a fixed-rate traditional mortgage well within my ability to pay. So, what exactly did I do that created the moral hazard problem? Why do I have to be punished?
But the people who did do all these things (the politicians and the investment bankers), well they more or less got off scott-free. Yeah, maybe a few politicians got thrown out of office, but they can always land cushy gigs at some lobbying firm somewhere. The investment bankers got off, the mortgage brokers got off, the politicians got off, but I’m going to be punished by having my services reduced and my taxes go up. I must have done something right? Otherwise, why would I be punished?
As far as I can tell, the only thing I did which contributed to the mess was to vote for a Blue Dog or a Centrist or a Neo-Liberal when there wasn’t anyone else on the ballot to vote for. Well, you all can bet I’ll never make this mistake again.
But if I was some average-joe in Greece, and people were telling me I need to suffer for things I had nothing to do with in creating, yeah, I’d be pissed to. I am pissed. I’m sick of sanctimonious lectures telling me I have to suffer for things I had no part in creating.
This post is already pretty long, so I’ll do a separate post about the Greek crisis.
Ok, so the Greek crisis. Let’s see what all went wrong:
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The Greeks were cooking their books. Ok, yeah. That’s pretty bad. But countries that weren’t cooking their books have also suffered tremendously. Countries that had decent deficit or debt/GDP ratios have also suffered termendously. The people who keep pointing at the book-cooking today aren’t serious about doing economics. They just want to punish the Greeks. If you were serious about doing economics, you’d be asking what are the similarities between the EU countries that are doing badly and the similarities between the EU countries that are doing well?
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The Euro was a bad idea. In economics, there’s something called Optimal Currency Area theory (OCA). We’ve discussed this on the boards numerous times. But the Eurozone does not even come close to meeting the criteria for an OCA. And there were plenty of people warning against the establishment of the Euro precisely because of the type of crisis that we’re seeing. But they were pooh-poohed and called idiots, and the elites went out and campaigned for this. If the Greeks had their own currency, their situation would have sucked, but it would be a lot less dire than it is now. Is anybody going to track down the assholes who pushed for the Euro and berate them?
But forget about that. The whole situation in the Eurozone since the crash has been about as good a proof of OCA as you could ever want. Has the EU taken any steps to actually create an OCA? Nah, of course not. So, we have a broken Eurozone, and everyone is against fixing the broke Eurozone, but it’s the Greeks fault. Okay, then.
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The mortgage bubble and crisis. Yes, the Europeans pretty much did the exact same thing the US did. It let the banks run wild, and the Greeks were no exception here. But, I distinctly remember what was going on during the bubble. The elites were telling us there was no bubble. The central banks weren’t raising rates (because there’s no bubble, you know?). That is the fault of the central bankers, the politicians who deregulated the banks and the bankers themselves. It’s not the fault of the Greek people.
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Bank Debt is now Public Debt. This is the thing I find most annoying. In the old days, when a bank failed, the government was only on the hook for deposits. The other creditors got stiffed. But now, apparently, when a bank fails, all creditors must be paid off by the government. To begin with, the bank insurance programs were never designed to deal with that scenario. But, more importantly, if we’re all worried about moral hazard, what incentive is there for the banks (or their creditors) to not behave recklessly if they know everyone is going to get paid off? This idea that bank debt to private creditors is now public debt that the government has to pay off is pretty insidious. And that’s a contributing factor to the Greek crisis.
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Does anyone know what a sunk cost is? Right now, the majority of the debt we’re talking about when it comes to the Greek crisis is held by governments (such as the German government) or public institutions (such as the ECB or the IMF). Whatever money has been loaned to Greece up to this point by them is a sunk cost. The only thing they should be worried about is how to get the maximum amount back going forward. And imposing further austerity on Greece is clearly not the way to do it. The only way they are going to see maximum return going forward is to make sure the Greek economy grows, not push it into year after year of depression. What bugs me about this is that the ECB and the IMF can certainly wait a hundred years to recover their money. They don’t have shareholders heckling them. Instead, they’ve purposely chosen to screw themselves out of money to conduct some morality play. This isn’t a morality play, this is business. You want the Greeks to pay off their debt? Then you restructure it and let their economy grow.
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The ECB’s inflation targets are too low. I can’t even with this. If the ECB would set a higher inflation target, the would at least shave off some of the problems here. But they don’t even hit their own inflation targets. The keep undercutting their own inflation target by raising rates unnecessarily. Yeah, they aren’t as stupid as the Swedish central bank (which purposely pushed Sweden into deflation), but even an inflation target of 3% would be better than nothing.
There are so many people to blame here. And yet the blame (and the suffering) is always put on people who had very little to do with any of this. I find it hard to believe that some little old lady sitting in her flat in Athens was out writing bad mortgages or setting ECB rates or advocating for a currency union that doesn’t make any sense. But, by God, we’re all going to make sure she suffers, aren’t we?