Greece Just Blew Up the Death Star of Debt
The Greek Elites and kleptocrats are terrified of the discipline that leaving the euro will impose, but the general public should welcome the transition to an economy and society that has been freed from the shackles of Imperial debt and the kleptocracy that has bled the nation dry.
Although the financial media is blathering about negotiations and gamesmanship, the truth is Greece just blew up the Empire’s Death Star of debt. There’s nothing left to negotiate except the official admission that the Imperial Death Star of debt, the most fearsome threat in the galaxy, has been blown to smithereens.
There are three fundamental points that need to be emphasized, mostly because they’ve been lost in handwringing, fearmongering and the ceaseless chatter of propaganda shills.
1. Impaired debt and defaults result from imprudent underwriting and lender incompetence/greed. Since when did it become accepted policy to reward imprudent lending, incompetence and greed?
Classical Capitalism is very clear on what should happen to lenders who ignored risk management; they get destroyed.
As imprudently issued loans default, the losses pile up and the lender become insolvent. At that point, Capitalism kicks in and the management is fired, the stock goes to zero, the lender’s assets are auctioned off and the creditors are issued whatever remains after wages, taxes, accounts payable, etc. are paid.
There’s nothing complicated about it: Capitalism requires the discipline of losses being taken by those responsible, the firing of incompetents and the destruction of imprudent lenders.
Yet somehow the dominant narrative has reversed this essential core of Capitalism into blaming the borrower for the losses.
Look, if someone offers to loan me a billion dollars with no collateral and no assessment of the risks that I might not be able to pay the interest or principal, then who’s the fool? The idiot who wants to give me $1 billion without any risk assessment, or the borrower who takes the “free money” being offered?
Yes, no one should borrow money that they can’t pay back, blah blah blah, but theprimary fiduciary responsibility is on the lender to not offer loans to marginal borrowers and those at high risk of defaulting on their debts.
Yet the official line on debt is “the lenders are blameless, the borrowers are at fault and should pay.” The borrowers were imprudent to take on debt they couldn’t service, but it is the lenders who made the bad loans who are ultimately are at fault and who should suck all the losses.
Let’s set aside the propaganda for a moment and get real: anyone with the slightest knowledge of Greek finances and the power structure of the Greek economy/society knew it was insanely risky to loan Greece billions of euros.
No one can deny this, yet somehow the lenders deserve to be paid for their avarice, stupidity, incompetence and total disregard for the standards of prudent lending? No, they deserve to be destroyed–closed down and their assets auctioned off.
2. Greece will not be wiped out by leaving the euro currency–it will be freed to rebuilt itself with prudent fiscal management and policies that reward investment and penalize risky borrowing, speculation and corruption.
Here’s the thing about Greece issuing its own fiat currency–it will force fiscal discipline in a way that the euro did not and could not. This is why the Greek Status Quo is quivering with fear–the gravy train of irresponsibility enabled by the euro is ending, and they are terrified of living within their means and having to face the discipline that the market will impose on the Greek fiat currency.
If there’s one thing Greece needs more than anything, it’s the discipline and the rewards of the market. Any nation that issues its own fiat currency has a choice: it can exercise fiscal prudence and enforce policies that reward entrepreneurism, prudent lending, savings, wise investments, fair taxation, etc., or it can try to prop up its bloated, corrupt kleptocracy by printing rivers of fiat money.
If it chooses the Dark Side and prints money in excess, it will soon drive the value of that currency to near-zero. The kleptocracy that hoped to benefit from money-printing is impoverished or forced to move their capital elsewhere.
In other words, Greece returning to being responsible for its own currency is a good thing. The new currency will be valued cheaply relative to other currencies at first, and this is also a good thing, as imports will be unaffordable for all but the wealthy (kiss BMW sales in Greece good-bye) and everything produced in Greece becomes a bargain globally.
This will attract capital seeking places where it can make a profit and is treated fairly, and it will enable Greece to rebuild its export sector and boost its substantial tourist trade.
The promise that marginal borrowers would be transformed into sterling-credit borrowers by adopting the euro was always a fantasy–and a painfully visible fantasy at that. Anyone with their eyes even partially open could see that the vast differences in productivity, credit, risk and culture between the eurozone nations made the euro unworkable from the start.
It was equally visible that the eurozone’s inept policies and loose lending standards would obscure these fundamental differences until the damage would be too great to hide–which is exactly what transpired.
3. The hundreds of billions of euros in so-called bailouts did not help Greece–all they did was bail out imprudent lenders and Euroland Elites. Virtually none of these vast sums helped the Greek nation or its people; what little did stay in Greece flowed to the kleptocrats that continued to rule Greece.
The harsh reality of misrule and corruption was recently spelled out in Misrule of the Few: How the Oligarchs Ruined Greece:
“Greece has failed to address (rising wealth/income inequality) because the country’s elites have a vested interest in keeping things as they are. Since the early 1990s, a handful of wealthy families — an oligarchy in all but name — has dominated Greek politics. These elites have preserved their positions through control of the media and through old-fashioned favoritism, sharing the spoils of power with the country’s politicians. Greek legislators, in turn, have held on to power by rewarding a small number of professional associations and public-sector unions that support the status quo. Even as European lenders have put the country’s finances under a microscope, this arrangement has held.”
Greece just blew up the Death Star of debt, and now the threat has been lifted from other debtor nations suffering from the yoke of Imperial misrule. The Greek Elites and kleptocrats are terrified of the discipline that leaving the euro will impose, but the general public should welcome the transition to an economy and society that has been freed from the shackles of Imperial debt and the kleptocracy that has bled the nation dry.
The Washington’s Blog
Greece needs an exit option
from Dean Baker
Every fan of the market knows the importance of exit. If your breakfast cereal is too bland, you can buy a different brand of cereal. If your barber charges too much, you can look for a new barber who will charge less. The option to leave is crucial since it forces the cereal producer and the barber to try to please their customers in order to keep them.
The same logic applies to Greece’s position in the euro. The country’s newly elected Syriza-led government intends to press the European Union (EU) for concessions that will allow it to restart its economy. The policies that have been imposed by the EU on Greece since the crisis could win a Nobel Prize for economic mismanagement.
Since the pre-recession peak in 2007, the Greek economy has contracted by more than 23 percent. By comparison, in the Great Depression the U.S. economy bottomed out in 1933 at 26 percent below the 1929 GDP level. However the next year the economy grew by 10 percent and by 1936 it had already made back all the ground it lost. If Greece sustains its 2014 growth rate it will return to its 2007 level of output just before 2050. If the U.S. economy had taken the same hit as Greece, GDP would be lower by more than $4 trillion, implying a loss of annual output of more than $13,000 per person.
The plunge in output corresponds to a plunge in employment. The overall unemployment rate is more than 25 percent, with the youth unemployment rate above 50 percent. If the United States saw a decline in employment comparable to what Greece has endured, nearly 30 million fewer people would be working.
This economic collapse has had predictable consequences for the Greek population. Formerly middle-class people can no longer afford basic health care. Many are facing the loss of their house or apartment or are already homeless. Some scavenge garbage cans for food.
This is the backdrop of Syriza’s election victory. The party promised an end to the disastrous policies being imposed by the EU and a return to economic growth. However the EU, led by Germany, is not likely to reverse course. As far as they are concerned, everything is fine. Their first priority is forcing Greece to run large primary budget surpluses in order to meet interest payments on its debt. The consequences of this policy for the Greek people is of little concern; they want the Greeks to pay their bills.
This is where the exit option becomes important. As one of the smaller, less powerful countries in the EU, Greece stands little chance of being able to force a change in policy on its own. This means that it has to have a viable exit option, both because it may actually want to go this route and also because it needs greater bargaining power with the EU.
There is no doubt that an exit from the EU will initially lead to enormous disruption to Greece’s economy. Returning to the drachma would not only be associated with a default on government debt, but many private businesses and individuals would also be unable to meet debt payments denominated in euros. But other countries have worked through a similar adjustment, often with remarkable results.
Argentina, for example, broke a tie between its currency and the dollar in 2001. Although there was an immediate period of chaos and sharp economic decline, three years later its economy was 17.2 percent larger than before the devaluation. The countries of East Asia had similar sharp turnarounds following the 1997 East Asian financial crisis, as have several other countries.
There is no guarantee that Greece will be as successful with a return to the drachma, but there are reasons for optimism. First and foremost, the country now has both a primary budget surplus and a trade surplus. The primary budget refers to the national budget without counting interest payments. Greece is now running a primary budget surplus of more than 3 percent of GDP (the equivalent of $500 billion a year in U.S. GDP). This means that if it didn’t have to pay interest on its debt, it would not need to borrow to make ends meet.
Since Greece has a trade surplus, it already doesn’t need to borrow to finance essential imports. (The recent plunge in oil prices could save Greece $9 billion a year, or close to 4 percent of GDP.) The drop in the drachma relative to the euro will further improve its trade position, leading to a boost in net exports and a sharp upturn in employment. It is certainly plausible that Greece’s economy will in very short order make up the ground lost to an initial period of instability and then continue on a path of robust growth.
This is where the EU has inadvertently done Greece a favor. It has damaged Greece’s economy and society so severely that the disruptions caused by leaving the euro are likely to seem minor by comparison.
Of course Greece would be far better off retaining the euro and negotiating a budget that allows it to resume growth, but it is far more likely to get the necessary concessions if it also has an exit strategy. Germany and other northern countries are concerned that a successful Greek exit could set an example for other countries facing crisis, such as Spain, Portugal and Italy. The end result would be a rump euro of Germany and a few small neighbors.
But this outcome can be avoided if Greece has a good exit strategy on the table. Just as the threat of changing brands can lead cereal producers to offer a better breakfast cereal, the threat of Greek exit can force the EU’s leaders to become better policymakers.