I’ve been thinking about the economic crisis in Greece (and the rest of Europe), and I have one question: When did bankers stop acting like businessmen and start acting like gangsters, who will kneecap customers if they don’t repay their loans?
I don’t ask this question because I am a socialist, I ask it because I am a capitalist! The whole point is that in order for capitalism to work, there must be risk associated with any reward. I have invested in many companies, big and small. I’ve made money off some of them, and some of them have failed and I lost some or all of my money.
Yes, Greece made bad decisions. They have huge debt. But what nobody seems willing to point out is that you can’t rack up debt without somebody loaning that money to you and charging you interest. The interest is the reward for doing business. The risk of doing business is that some of the loans will fail, and the bank will lose money.
This is not a bad thing. Without risk, there is no incentive to make good loans. We saw what happened in the US when the economy melted down, because bankers lost all incentive to make good mortgage loans. Stupidly, we bailed them out — I’m not talking about the homeowners who were in danger of becoming homeless, we insanely bailed out the bankers who made the bad loans. And then the bankers gave themselves bonuses for their “success”. Seriously.
And now the same thing is happening in Europe. If Greece doesn’t repay all of their debts, with interest, Europe will kick them out of the Eurozone. When did we give bankers power over whole countries? Even the IMF is admitting that by forcing austerity on Greece, it will further damage their economy. Do we never learn? A good definition of insanity is to keep doing the same thing when it keeps failing.
And the real hypocrisy is Germany, who are lecturing Greece about repaying their debts. As economist Thomas Piketty points out, Germany has never repaid its debts. They didn’t after WWI, and again after WWII. And not just Germany. Other countries, including Great Britain and France, were once in the situation facing Greece today.
And the bankers have the audacity to say that if we don’t punish Greece for their bad decisions, they will never learn. Will bankers ever learn that they can’t have rewards without risk? Bankers, heal thy selves.
25 Comments
Usury/interest is perpetual slavery.
But I do not seem to understand (perhaps need more research), why defaulting is not an option. By that I mean, Greece does owe money to banks, if they do not pay back, banks will be screwed and lose money (which is fine), and Greece in turn of defaulting also gets punished by exiting euro. Both made bad decisions (one giving loan, other taking it), and by defaulting both lose, which how capitalism is supposed to be.
Do banks have guarantee that someone else will pay that money? Your article does not mention it, but if banks have guarantee of not failing, then that sucks.
It looks even worse than that. Apparently, Goldman Sachs was playing fast and loose with shady complex loan deals with Greece a few years back, much the same way it did here with sub-prime loans and derivatives and hedge swaps that helped lead to the housing market crash and Great Recession.
http://www.bloomberg.com/news/articles/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels
Whether we or Greece ever “learn” or not doesn’t seem to matter. Wall St. has Congress in its back pocket, the regulators (SEC) and regulatees work a revolving door, and there seems no end to the market manipulations they will concoct to assure their pound of flesh. Heads they win, tails we lose.
When will we ever demand that if you’re too big to fail you’re too big to exist? Answer (perhaps): Sanders-Warren 2016!
Greece’s problem must be that they promised to pay back the loans in anything other than purely-Greek currency. Like the old Drachma, for instance, though the European Union made that impossible. Had they promised to repay in Drachmas, then, like some other countries that have financial problems, they could simply print more money with which to repay the loans.
Yes, this would cause inflation but, as in certain other cases, the effects of such inflation would be diluted by exactly the same level of inflation being distributed among the debtor nations… one excellent reason for there NOT to be any sort of shared economic union which is not at the same time a shared governmental one.
Good lesson, though.
I usually enjoy your blog a lot, but there are quite a few misunderstandings here.
Nobody is really threatening to “kick them out of the eurozone”. There is no mechanism for doing any such thing. The reason Greece would leave the eurozone is this: If the Greek government defaults on their bonds, they will no longer be able to borrow money at the normal capital markets (you wouldn’t lend to somebody who is bankrupt). Thus, as soon as they are out of cash they can spend no more. Since shutting down fire departments, hospitals, schools etc. and not paying people’s pensions is not really a good idea, at this stage usually a government would print its own money. The Greeks can’t do that, because they are part of the eurozone. So, if they lose access to the capital markets and don’t have a bail-out in place their only option to prevent utter chaos may be to leave the eurozone and print their own currency.
Additional point: Largely, the Greeks do not owe their money to banks (the banks already accepted a lot of debt restructuring) but to other eurozone government, effectively to other tax payers, who bought the Greek debt to prevent Greece from going under in 2012.
Finally, the issue is not to “teach them a lesson”. The issue is that, if the creditor governments effectively just gift Greece those tens of billions of tax payer money, there are currently no signs that the Greek government will not just squander this money as well since the necessary structural reforms have not been enacted. The statement by the eurozone creditors was clear: “Succefully complete the current bailout (which would have ended this month) and the reforms you already agreed to, then we can talk about debt restructuring (e.g. debt forgiveness)”.
I agree that debt forgiveness for Greece is the only way forward, but only once they have shown willing to fix the actual underlying problems.
Daniel. Misunderstandings? I got my information from Thomas Piketty and other economists. Did you read that link?
For example, you say that there is no signs that the Greek government will not just squander this money. Bullshit! The Greek government did balance their budget, but the creditors are insisting that they cut spending even further in order to fully pay off their debts, which would damage their economy even more. According to the IMF, it is the current austerity, which was forced on Greece by their creditors, which caused the economic shortfall that drove them to miss their repayment. Doubling down with even more austerity would just make things worse.
Greece’s immediate problem is that they don’t have a working banking system. That’s partly their own fault, and partly due to the passive-aggressive sabotage of the European Central Bank (they could easily arrest the run on Greek banks with normal procedures already in place).
BTW, bankrupt companies borrow money all the time – it’s called https://en.wikipedia.org/wiki/Debtor-in-possession_financing
Yes, I read that link. Piketty is right, I see nothing wrong in principle with Greece defaulting. However, nobody is threatening to “kick greece out”. It is rather expected that if Greece defaults, this is the only course of action open to them.
The IMF has stated, and I agree, that Greece will need debt relief. I can not find any reference of the IMF saying that austerity has forced the economic shortfall which caused Greece to miss the payment. Rather (imho), the chaos created by the Syriza government and the loss of bailout funding are to blame here.
In fact, in 2014 the Greek economy showed all the signs of returning to growth under the austerity regime. Just google “greek economy returning to growth” and marvel at the long list of optimistic articles from 2014, in papers ranging from the Guardian to WSJ.
However, instead of sticking to the agreements Greece had made with creditors in return for which European tax payers gave them very cheap (much below market rate) credit, Syriza threw these agreements out the window, called their creditors “criminals” and “terrorists” and then went back to ask them for more money under easier conditions.
I do, however, agree with Max: Since the ECB found at least 3 Greek banks to be adequately funded in their stress test, they really should provide liquidity assistance to them. The problem is, this would not necessarily quell the bank run, since at least part of the reason is not that Greeks fear the banks run out of cash but that they fear their accounts will be converted from Euros to something else if Greece should drop out of the eurozone.
Finally, an article that comes to pretty much the same conclusion as I did, but with additional facts — http://www.businessinsider.com/greece-referendum-result-and-the-meaning-of-debt-2015-7
Their point is that the ECB (European Central Bank) made a suicidal decision to transfer the Greek debt from private investment banks (like Goldman Sachs) to the EU and IMF. One has to wonder why the president of the ECB did that.
Why all financial calamities have Goldman Sachs somewhere.
“Hassan wrote:
Why all financial calamities have Goldman Sachs somewhere.”
Just a coincidence…
I’m currently in Europe (Lithuania), so I’m getting most of my news about this topic from this side of the pond. All of the talk right now is about the likelihood of a “Grexit,” which is the cute buzzword everyone is using. I do have to agree with IK’s interpretation that there is talk of kicking Greece out of the Euro, even though Daniel is correct that there is no prescribed mechanism to do so.
When Greece was applying to become part of the Eurozone, there was a lot of controversy regarding their application. As part of the process, countries need to demonstrate certain fiscal requirements. There were a lot of people that believed (rightfully) that there was a lot of cooking the books regarding Greece’s economy. This controversy is being brought back as an excuse to kick Greece out. That is, there is a growing discussion of accusing Greece of submitting a fraudulent application and demanding they leave. It’s certainly unprecedented, but the talk is there.
I saw a statistic recently on one of the major networks that Greece fails to collect 89% of its levied taxes. Apparently, the vast majority of its economy is off the books, so it looks like the books have been getting cooked for some time now.
Another story reports the gov’t steeply raised the tax on heating oil recently, forcing many to turn to wood (the dirtiest fuel) to heat their homes and cook, ironically leading to lower overall tax revenues from oil than before.
Sounds like an economic implosion happening in slow mo over there.
Wood is also renewable.
My great great Grandfather Thomas Mellon started his bank before the depression of 1870. When it came, the banks called in the loans. Mellon said in his book “Thomas Mellon and sons” that he was very lenient during the crisis. Look where that led the bank!!!!!!
Hassan and others,
I’m a bit of a “cowardly atheist” in that sometimes I cry out for G*d to help me, and other times wonder if there really is such a thing.
However, anytime I doubt whether there is a Satan and/or demons, I just have to read an article about Goldman Sachs to know such things exist. Is there no limit at all to their evil?
Ok, maybe not truly Satanic, but surely close, no?
The “Germany never repaid its debts” line is a red herring. The post-WW1 debts were a punitive component of the Versailles Treaty and were reparations and not accumulated debt.
JB,
You should list out your history professor/economics CV before you go up against Thomas Piketty in your “red herring” issue.
Otherwise, you risk sounding like climate change denialists that lack a PhD & peer reviewed publications in meteorology.
@C-DAWG: Play the ball, not the man
This isn’t economics – it’s highlighting false comparisons.
Here are the facts:
The London Agreement on German External Debts, also known as the London Debt Agreement (German: Londoner Schuldenabkommen), was a debt relief treaty between the Federal Republic of Germany and creditor nations. It was concluded in London during negotiations which lasted from February 27 to August 8, 1953.
The London Debt Agreement covered a number of different types of German debt from before and after the Second World War. Some of them arose directly out of the efforts to finance the reparations system, while others reflect extensive lending, mostly by U.S. investors to German firms and governments.[1]
The parties that were involved besides West Germany included Belgium, Canada, Denmark, France, Great Britain, Greece, Iran, Ireland, Italy, Liechtenstein, Luxembourg, Norway, Pakistan, Spain, Sweden, Switzerland, South Africa, the United States, Yugoslavia and others. The states of the Eastern Bloc were not involved. The negotiations lasted from February 27 to August 8, 1953.[1]
The total under negotiation was 16 billion marks of debt resulting from the Treaty of Versailles after World War I which had not been paid in the 1930s, but which Germany decided to repay to restore its reputation. This money was owed to government and private banks in the U.S., France and Britain. Another 16 billion marks represented postwar loans by the U.S. Under the London Debts Agreement of 1953, the repayable amount was reduced by 50% to about 15 billion marks and stretched out over 30 years, and compared to the fast-growing German economy were of minor impact.[2]
An important term of the agreement was that repayments were only due while West Germany ran a trade surplus, and that repayments were limited to 3% of export earnings. This gave Germany’s creditors a powerful incentive to import German goods, assisting reconstruction.[3]
The agreement significantly contributed to the growth of the post-war German economy and reemergence of Germany as a world economic power. It allowed Germany to enter international economic institutions such as the World Bank, International Monetary Fund and World Trade Organization.
Some of the agreement included debts to be paid after the reunification of Germany. Over decades it seemed unlikely to transpire, but in 1990 another 239.4 million Deutsche Mark of unpaid coupons were revived. On 3 October 2010 the last payment was made of 69.9 million euro.[4] This is considered to be the last payment by Germany on all known debts resulting from both world wars.
Source: Wikipedia
@C-DAWG: Play the ball, not the man
Correction.
Assuming that you’re American, this metaphor is perhaps inappropriate given the rules of American football.
For the rest of the world, it means “avoid ad hominem attacks”
interesting read JB, but i’m still not completely sure from the article who paid their debt and who didn’t. It says that Hitler cancelled all payments in the 30s, but doesn’t specifically state that these debts were re-instituted after ww2. It also says that ‘Finland also was the only country which fully paid its war reparations.’, not sure where this statement fits into the discussion.
Bottom line is that maybe they should give Greece 100 years to pay off its debt and forgive massive interest payments when necessary instead of trying to crash their economy?
(no nutmeg here)
Happy to see a lively discussion in here. I just want to agree that one of the nice things about this blog is that we are relatively good at avoiding personal attacks. They do sneak in occasionally, but I think most readers recognize them for what they are.
@IL-08
The proposal to restructure the debt over a longer period at lower interest rates is gaing significant support in the German economist and banking community. I’d not be averse to a haircut for the banks – if they didn’t know what they were getting into, they shouldn’t be in investment banking…
@JB:
I’m not trying to put words in you mouth, but are you saying that “anonymous comment board poster gets called out in his/her one sentence rebuttal of world-renowned professor Thomas Pinketty (in Prof. Pinketty’s area of expertise)” is an ad hominem attack?
My knowledge of the various economic issues & treaties following WWI & II is superficial. So when I read an anonymous commenter with a wiki quote -vs- a peer reviewed professor writing in his area of expertise, it’s obvious which one I should give the “win”.
Again, I’m not attacking you. I’m just pointing out that when you rebut a guy like Prof. Pinketty in his territory, you gotta bring something pretty serious to the rebuttal.
“you gotta bring something pretty serious to the rebuttal.”
Facts, for example.
More here: http://ftalphaville.ft.com/2015/07/08/2133806/lets-talk-about-the-1953-london-agreement-on-german-external-debts/
I work with a professor of economics at a German university, we co-published (peer-reviewed obviously) and presented a paper at a WACRA conference.
We’re both recognised experts in our respective fields, but it doesn’t stop us occasionally talking rubbish.
And I don’t expect someone to have a PhD to be able to join the conversation and correct me.
Same applies here