Thursday, April 29, 2010

The Greek Debt Crisis (Part 1): Moral Hazard For Nation-States But Not Banks

I've been trying to follow this Greek debt crisis closely. Not only is it clearly affecting global financial markets, but it says a lot about big issues of political economy and social relations. Who is paying for this recession in terms of class and geography? What is the appropriate fiscal policy response to deep recession to pull us out of it? Is a double-dip recession around the corner? I'm going to leave these big issues aside for now, and juxtapose the EU's response to this crisis and its response to the earlier financial crisis.

First off, this Greek crisis has laid bare the gross hypocrisy of neo-liberal elites in Europe (and here) with regard to moral hazard. So many commentators have stated that Greece (and so many of them conflate this with the Greek working class) must be punished with severe budget austerity as a condition of a EU or IMF bailout, or otherwise other countries will not be sufficiently deterred from running into debt trouble themselves. This is a basic principle of capitalism. To achieve market efficiency, people who make bad decisions must pay the price or else they will continue to make bad ones. And to be absolutely clear, the Greek government is responsible for much of this crisis. It used interest rate swaps with the help of the wonderful people at Goldman Sachs to conceal its actual debt levels before the recession, after which greatly reduced tax revenues pushed its budget much, much deeper in the red. (How much is our fault as the collapse of our housing bubble set off a global recession? Ah, but I digress.)

Yet big European and American banks made similar if not worse mistakes. They over-leveraged i.e. ran up too much debt, made poor investments, and hid liabilities through shadow institutions and tricky devices like the Repo 105 method of Lehman Brothers. According to classical capitalist thinking, they should have been allowed to fail, or at the very least punished severely in exchange for being rescued. Instead, the Federal Reserve, European Central Bank (ECB), and the Bank of England offered extremely low interest loans to these banks, bought toxic assets off their books, and guaranteed loans. Governments similarly provided great amounts of cheap capital for these inept banks, except they used taxpayer funds rather than "printing money." Of course, some response was necessary to stave off a worse collapse, but they did practically nothing to punish the banks. So much for moral hazard!

What does it say morally about the structure of the EU's political economy when a nation-state is punished for running into solvency issues while banks are coddled? Sure there are people that work for banks, but saving banks is mostly about preserving the value of money and assets, mostly held by the rich. Last I checked governments are responsible for entire populations. Call me crazy, but I think people are more important than banks.

There's a very interesting link between these two crises, and not just in how they expose the hypocrisy of neo-liberalism. Why are interest rates on Greek bonds going so high? The media refers to the market causing this as some sort of mystical force that dispassionately calculates the risk of Greek default. In the real world, it's bond traders that determine that rate by their interest in purchasing the bonds. Given the immense concentration of huge wealth in transnational financial institutions, this gives them a lot of power to mess around with rates. In other words, speculation and even bullying plays a role in addition to calculated analysis. The great Marshall Auerback of the Roosevelt Institute calls these folks, the very same ones we bailed out I might add, "big dick swinging bond traders." Is it rational to allow these jerks to push our governments and by extension us around? I encourage you to check out an excellent article by him on this subject at the New American Perspectives blog here.

The other important players are the rating agencies that assess the risk of different bonds. The lowered rating of Greece and other smaller European countries by Moody's is what drove their bond rates so high and set off this crisis. Hmm, Moody's, sounds familiar. Oh yeah, they're those incompetent bastards who gave AAA ratings to securities consisting of bundled sub-prime mortgages that would later bring down global financial markets!

So not only is the EU punishing Greece after it propped up the financial sector, but it's letting that very same bailed-out financial sector run its smaller member states into the ground. Remember that the next time you hear an American commentator bemoan Greek "profligacy" and "excess."

No comments:

Post a Comment