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The Story of Greece’s Economic Crisis is More Than a Story About Debt and ‘Big Government’
Greece has been to this dance before, as investment strategist Ed Yardeni notes today:
The first recorded default in Greek history occurred in the fourth century B.C. Back then, 13 Greek city states borrowed funds from the Temple of Delos. Most of the borrowers never made good on the loans, and the temple took an 80% loss on its principal. Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894, and 1932).
So nothing since 1932? A pretty good run by Greek standards. Anyway, in my new The Week column I point out that Greece’s problem aren’t just about too much debt and crony capitalism. The economy has also suffered from bad macroeconomic policy in the form of a too-tight, inflation-phobic European Central Bank.
Along the same lines, as AEI’s Desmond Lachman has noted, there’s also been the “application of draconian budget austerity within a Euro straitjacket.” By focusing purely on its debt and supply-side problems and missing Greece’s monetary policy-currency story, some center-right politicians and policymakers are getting the story wrong, or at least terribly incomplete. It is the same faulty analysis, I also write, that gets applied to the Great Recession here.
Finally, maybe now is a good time to think about what role debt forgiveness should play in a policymaker’s toolbox, as I wrote late year: “Was not massively helping underwater homeowners a massive mistake?” And as Kenneth Rogoff recently wrote about the US and Europe:
In particular, policymakers should have more vigorously pursued debt write-downs (e.g. subprime debt in the US and periphery-country debt in Europe), accompanied by bank restructuring and recapitalisation. In addition, central banks were too rigid with their inflation target regimes. Had they been more aggressive in getting out in front of the Crisis by pushing for temporarily elevated rates, the problem of the zero lower bound might have been avoided. In general, failure to more seriously consider the kinds of heterodox responses that emerging markets have long employed is partly a reflection of an inadequate understanding of how advanced countries have dealt with banking and debt crises in the past.
Published in Economics
I cannot begin to explain how irritating it is that people who did the right thing … ie DID NOT borrow themselves into insolvency …. Are called upon again and again to bail out those who DID borrow themselves into insolvency. ENOUGH!
If all you have to offer is loan forgiveness and debt restructuring … Please, by all means, feel free to buy that debt yourself and forgive it. But leave me out of it.
I read your piece over at AEI. I don’t see any mention or consideration of moral hazard, though I noticed someone mentioned it in the comments. And I quote:
That says it all. Any response?
Those of us who inhabit the regions outside the Beltway have concerns other than the macroeconomic issues you raise.
I wonder what the cost of that debt going back to the 4th century BC is worth today? Let’s see, future worth at 3% annual inflation over 2500 years? LOL, that’s probably a lot of money Greece owes.
I’m pretty certain the markets fully understand Greece not only cannot pay this debt in full, but that the debt can also be understood to be odious debt. Which means there’s a morality play going on, and the EU (especially the Germans) are very much on the losing side of this morality play.
The markets clearly understand it now. However, this Greek tragedy has been underway for the better part of a decade. The markets have discounted Greek debt over the many years since this began.
The EU and Germans are on the losing side? I think not. Time will tell. Frau Merkel and Mme. Legarde seem to be taking a hard line with the support of non-Greek Europeans. Greece is the sick man of Europe. As explained in this piece, Grexit is a process not an event; it’s already well underway.
I get the impression that Mr. Pethokoukis does not read the comments to his posts on Ricochet.
If he does, I have not seen him deign to reply to any.
To refresh my memory, I used the link to his page of things he has posted on Ricochet and looked for his name on any comment to any of his posts since 5/18 (the last post listed on the first page).
I suppose to be fair, he might be too busy writing to reply to comments, but since I find that I have reservations about many of the assumptions he seems to carry through his posts, I would really like for him to reply.
If this guy’s thinking is what passes for insight inside the beltway, we’re in bigger trouble than I thought.
I very much second this as someone who more than once has found something to agree with in James Pethokoukis’s posts.
You know James, I think you are exactly right. Greece needs, nay Deserves debt forgiveness; but only from the current and future pensioners that they will be unable to pay. If they do that, they can repay their other creditors.