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This one sentence sums up what I think is the fundamental problem: "An insolvency problem was thus dealt with as if it were a case of illiquidity." That is, the

This one sentence sums up what I think is the fundamental problem: "An insolvency problem was thus dealt with as if it were a case of illiquidity." That is, the problem isn't some ephemeral panic where people are temporarily unwilling to lend. The problem is there are massive capital losses that have yet to be acknowledged. The problem is that Euro politicians believe that by continuing to bankroll Greece they will stem a wider panic. But as John Mills observed in a speech given to the Manchester Statistical Society in 1867, “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works” The losses must be acknowledged. The only question is by whom? By the people who made the loans? Or will the taxpayers of Europe be called upon, as the taxpayers of America were, to eat the losses?

arethuza 12y ago
"to eat the losses" We already had to eat the losses of our own banks - look at the epic bail-out of RBS here in the UK.
- Spearchucker 12y ago
  UK.gov will turn a profit on RBS. RBS is not a loss.
  - zo1 12y ago
    Getting the government to bail out your failing business? Sounds like a big win for the business. *Note. I don't know the details of the RBS issue in the UK. Just commenting on a simple interpretation.
    - tedunangst 12y ago
      If a business wins, is it then implied that the government must lose?
      - zo1 12y ago
        Depends on quite a lot of details. But just by itself? Of course not. Though I wouldn't say it's the pinnacle of a voluntary transaction on both sides. I'd also say that other business lose, in an indirect way. As well as the individuals that are now lured into transacting with a business that has failed or is more likely to fail in the future due to past performance.
beamatronic 12y ago
> "continuing to bankroll Greece" What are the EU treaty obligations in this regard? Is this still undecided? Is it a "corner case" that was never really spelled out how to handle it?
- matt4077 12y ago
  There are no obligations, just necessities. Without the bailout, Greece would have defaulted and (it was feared) the French/German/Spanish banks that had financed the Greek debt would have fallen as well.
  - leoc 12y ago
    It's worse than simply "no obligations". EU and ECB bailouts of EU member states were specifically forbidden under the Treaty of Lisbon http://euwiki.org/TFEU#Article_123 http://euwiki.org/TFEU#Article_123 http://euwiki.org/TFEU#Article_125 http://euwiki.org/TFEU#Article_125 . Instead, not only did both the EU and the ECB prop up Greece's borrowing, they moved to block Greece's access to a normal IMF program, which would have involved losses for non-IMF creditors.
- yxhuvud 12y ago
  Treaty obligations doesn't matter when they try to enforce something that is not possible.
mathattack 12y ago
I agree with everything you say up to “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works” In todays fractional banking system where banks only hold a fraction of liquid assets to cover their liabilities, a run on a good bank could still put it under. (Lehman, Bear and others were both illiquid and insolvent, but runs can kill good banks too) This is why the FDIC was put up to guarantee commercial banks. Nothing similar existed to protect investment banks.
- nhaehnle 12y ago
  Not quite. If a bank is solvent but illiquid, they can get a loan from the central bank. This is the central bank's "lender of last resort" function. So no, a good bank cannot be put under by a bank run. We will probably never be able to say to which extent the big banks at the time of the financial crisis were still good banks. The problem there was that banks had a massive amount of assets that were indirect (i.e. whose inherent value relied on other assets) and that were structured in such a complicated way that nobody could assess their inherent value. Before the panic, the inability to measure the inherent value of those assets was ignored because they could be valued according to their market value. With the panic, the market simply stopped doing anything, and there was no market value anymore. The FDIC is orthogonal - it is an insurance of deposits (up to a limited amount) even at bad banks.
  - mathattack 12y ago
    In theory that's the central bank's job. 2 issues, though... 1 - It can be hard to tell the difference between solvency and liquidity. What's a derivative of an MBS really worth? Or a CDO that's made off of other CDOs that are trading at an undetermined liquidity discount? Or a unique plot of real estate? 2 - The bailout decisions are often political, as well as based on imperfect reads of fundamentals. Yes, the FDIC provides run protection from both bad banks and good. Protecting bad is the price of protecting the good.
    - nhaehnle 12y ago
TheOtherHobbes 12y ago
Well, no. The fundamental problem is that Germany has been treating the rest of the EU as an expedient export market while refusing to allow equivalent imports, and at the same time aggressively insisting that countries in the EU should somehow magically not need debt... to continue buying from Germany. There's also the minor point that this is yet another excuse to indulge the usual neoliberal hatred of social spending and everything else that improves the condition of ordinary people who work for a living. Germany has a long post-war history of renegotiating or ignoring debt. So crashing the Greek economy by enforcing murderous austerity - literally murderous in its effects, and not hyperbole - is a new peak in self-serving hypocrisy.
- jacquesm 12y ago
  > while refusing to allow equivalent imports That very much is in citation needed territory, please give at least one example of how Germany is refusing intra-European imports in any category. Free trade is one of the cornerstones of the EU, Germany imposing a tariff or blockading goods produced elsewhere in Europe would make some pretty fat headlines.
  - rrggrr 12y ago
    Refusing isn't the right word. From my experience there are fewer categories of products where a German consumers gets value add from purchasing non-German products (B2C or B2B) as compared to, say, Greece. First how much could Germany import from Greece at the outset. And, not specific to Greece, there is a general aversion to buying the lowest cost product just to save money; and there is a general preference for predictability, longevity and quality. Others may have the opposite experience, but for me German demand for domestically made products is a sensible and a cultural "refusal" and not an institutional one.
  - bildung 12y ago
    > > while refusing to allow equivalent imports > That very much is in citation needed territory, please give at least one example of how Germany is refusing intra-European imports in any category. (Not GP.) You are of course right that Germany has not created import tariffs or other direct and illegal options. OTOH the German government has implemented numerous actions that indirectly had wage-suppressing effects (which per definition lowers imports and raises exports) in the last decade - to a degree that even the IMF(!) felt the urge to demanded actions for more domestic demand on multiple occasions [1][2]. The one notable exception is the implementation of a minimum wage law in 2015. [1] 2012: http://bigstory.ap.org/article/imf-urges-germany-spur-domestic-demand http://bigstory.ap.org/article/imf-urges-germany-spur-domest... [2] 2014: http://www.bloomberg.com/news/articles/2014-05-19/imf-urges-merkel-to-help-euro-region-by-boosting-domestic-demand http://www.bloomberg.com/news/articles/2014-05-19/imf-urges-... edit: here's a graph comparing income-adjusted wage development of the developed countries: http://nrt.revues.org/docannexe/image/1382/img-2.jpg http://nrt.revues.org/docannexe/image/1382/img-2.jpg
panarky 12y ago
Why do news reports keep saying that Greece got bailed out? Let's say you lend $100,000 to my startup. I have to pay you $10,000 a year until the loan is paid off. I hire a thief as a CEO who gives the $100,000 to his friends and family, and my startup has nothing to show for it. Now my startup is bankrupt. I'm working as a waiter in a restaurant to pay the rent. I can't make my annual payments to you, much less pay back the principal. You've just suffered a $100,000 loss. That's the risk you take as a lender. Surprise! Now the government steps in and gives you $50,000 to buy this bad loan from you. What a great deal! It would have been a total loss! Then the government garnishes my wages from my waiter job for the next 50 years to reimburse the government. Who exactly got bailed out here? Me (the Greek people), or you (foreign banks and bondholders)? And what happened to the thieving CEO who stole the money in the first place?
- Eleutheria 12y ago
  Then you hire a new CEO who writes emotional letters to the creditors so he can steal more money from new credits. While you keep working your ass off washing dishes and prostituting your children.
  - macns 12y ago
    But he already said he doesn't want more money. The latest, 7 billion euro loan was declined by Greece. It's all over the news
    - johnchristopher 12y ago
      Now that's interesting because the French newspapers didn't mention it at all. I wish we had a European press.
      - bjelkeman-again 12y ago
        It seems really hard to sell that. The Guardian Weekly is a good attempt, and it has articles from Le Monde and Washington Post in it regularly as well. Combined with Le Monde Diplomatique (In English), which you could get as hard copy bundled, it gave a much better European view. Unfortunately they don't sell an electronic copy, which I would certainly subscribe to.
hga 12y ago
Nit: in 2008 the US had both insolvency and liquidity problems. The former from the real estate bust, the latter from things like securitizing loans collateralized by said real estate, with the holders of and potential buyers for those securities just not being able to determine what they might actually be worth at the time. So e.g. TARP was explicitly sold as program to buy up those securities, wait for the dust to settle, and then sell them for what they turned out to be worth (that that sales job was a lie is another matter).
netcan 12y ago
I disagree. The solvency problem is ongoing, even regardless of current debts. Greece cannot raise more taxes. It's trying, but taxes are declining. A government system can't be reformed in a few years and achieve 40% savings without (a) causing mass unemployment and knock on effects, further reduction in tax base, etc and (b) massive reduction in government services, including those necessary for economic activity that is necessary in order to "put those resources to their highest value use" to borrow some vocabulary from the more free market side of the debate. Think of the US' Detroit. Decline breeds decline. Once the Government cannot keep the roads or pay the cops people leave and tax declines further and on it goes. I realize that Keynsian economics is unpopular here and I am pretty sympathetic to free market ideas myself. Greece is in a bing that we don't know how to solve. Unless creative destruction of Sovereign States is on the table (easy to say when you're far enough away) what real options other than inflation are there? If Greece defaulted tomorrow, and all the banks and lenders took the loss without collapsing the financial system again, what then? Greece would not be able to pay salaries the following day without borrowing money. I have the same reaction as I assume you do when I see Greeks demanding government jobs when that is what caused this. But, that doesn't mean "austerity" is working. We have seen pretty much no cases of countries rapidly slashing their spending and managing to stabilize their budgets. Inflation (AKA monetary easing, printing money..) is the way countries get out of these binds. I genuinely like a lot of Austrian-inspired ideas for putting losses where they belong, and allowing market feedback to do its job. But nothing guarantees that a government will not run into insolvency at some point. At EU scale, its practically guaranteed once a decade (once every 300 years per country). We still need to answer the question "What happens when a State is insolvent?" Printing money carries risks and costs, but it works. What else works?
- nationcrafting 12y ago
  You make some good points. I think the solution has to be one that looks at the state as a service provider. Until the issues have been depoliticised, decisions will be made for political reasons rather than good business reasons. As a service provider, the state has 2 sources of revenue, primarily: private customers i.e. people, and corporate customers i.e. companies. Both those customer groups pay for services in the form of taxes. Now, those customer groups must be, by and large, wealth creators for there to be any wealth that can be taxed or even redistributed (if that is your political inclination). So, it simply won't do to just reform the state, to spend less, etc. A system has to be put in place rapidly that boosts wealth creation. This includes: minimal bureaucratic lag in the creation of new companies (Chile, for example, enables new company creation within 2 days), very low taxes, easy interaction with regulation bodies, a business-friendly environment, etc. If the state is too sclerotic to reform, it can be set up through free-trade zones in isolated parts of the country. This was China's route, when they essentially replicated Hong Kong in Shanghai, Shengzen, and all the other FTZs. It allows to you to be ultra-reformist in small experimental areas without putting at risk the power structures that exist in the state at large.

arethuza 12y ago

"to eat the losses" We already had to eat the losses of our own banks - look at the epic bail-out of RBS here in the UK.

Spearchucker 12y ago
UK.gov will turn a profit on RBS. RBS is not a loss.
- zo1 12y ago
  Getting the government to bail out your failing business? Sounds like a big win for the business. *Note. I don't know the details of the RBS issue in the UK. Just commenting on a simple interpretation.
  - tedunangst 12y ago
    If a business wins, is it then implied that the government must lose?
    - zo1 12y ago
      Depends on quite a lot of details. But just by itself? Of course not. Though I wouldn't say it's the pinnacle of a voluntary transaction on both sides. I'd also say that other business lose, in an indirect way. As well as the individuals that are now lured into transacting with a business that has failed or is more likely to fail in the future due to past performance.

beamatronic 12y ago

> "continuing to bankroll Greece" What are the EU treaty obligations in this regard? Is this still undecided? Is it a "corner case" that was never really spelled out how to handle it?

matt4077 12y ago
There are no obligations, just necessities. Without the bailout, Greece would have defaulted and (it was feared) the French/German/Spanish banks that had financed the Greek debt would have fallen as well.
- leoc 12y ago
  It's worse than simply "no obligations". EU and ECB bailouts of EU member states were specifically forbidden under the Treaty of Lisbon http://euwiki.org/TFEU#Article_123 http://euwiki.org/TFEU#Article_123 http://euwiki.org/TFEU#Article_125 http://euwiki.org/TFEU#Article_125 . Instead, not only did both the EU and the ECB prop up Greece's borrowing, they moved to block Greece's access to a normal IMF program, which would have involved losses for non-IMF creditors.
yxhuvud 12y ago
Treaty obligations doesn't matter when they try to enforce something that is not possible.

mathattack 12y ago

I agree with everything you say up to “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works” In todays fractional banking system where banks only hold a fraction of liquid assets to cover their liabilities, a run on a good bank could still put it under. (Lehman, Bear and others were both illiquid and insolvent, but runs can kill good banks too) This is why the FDIC was put up to guarantee commercial banks. Nothing similar existed to protect investment banks.

nhaehnle 12y ago
Not quite. If a bank is solvent but illiquid, they can get a loan from the central bank. This is the central bank's "lender of last resort" function. So no, a good bank cannot be put under by a bank run. We will probably never be able to say to which extent the big banks at the time of the financial crisis were still good banks. The problem there was that banks had a massive amount of assets that were indirect (i.e. whose inherent value relied on other assets) and that were structured in such a complicated way that nobody could assess their inherent value. Before the panic, the inability to measure the inherent value of those assets was ignored because they could be valued according to their market value. With the panic, the market simply stopped doing anything, and there was no market value anymore. The FDIC is orthogonal - it is an insurance of deposits (up to a limited amount) even at bad banks.
- mathattack 12y ago
  In theory that's the central bank's job. 2 issues, though... 1 - It can be hard to tell the difference between solvency and liquidity. What's a derivative of an MBS really worth? Or a CDO that's made off of other CDOs that are trading at an undetermined liquidity discount? Or a unique plot of real estate? 2 - The bailout decisions are often political, as well as based on imperfect reads of fundamentals. Yes, the FDIC provides run protection from both bad banks and good. Protecting bad is the price of protecting the good.
  - nhaehnle 12y ago

TheOtherHobbes 12y ago

Well, no. The fundamental problem is that Germany has been treating the rest of the EU as an expedient export market while refusing to allow equivalent imports, and at the same time aggressively insisting that countries in the EU should somehow magically not need debt... to continue buying from Germany. There's also the minor point that this is yet another excuse to indulge the usual neoliberal hatred of social spending and everything else that improves the condition of ordinary people who work for a living. Germany has a long post-war history of renegotiating or ignoring debt. So crashing the Greek economy by enforcing murderous austerity - literally murderous in its effects, and not hyperbole - is a new peak in self-serving hypocrisy.

jacquesm 12y ago
> while refusing to allow equivalent imports That very much is in citation needed territory, please give at least one example of how Germany is refusing intra-European imports in any category. Free trade is one of the cornerstones of the EU, Germany imposing a tariff or blockading goods produced elsewhere in Europe would make some pretty fat headlines.
- rrggrr 12y ago
  Refusing isn't the right word. From my experience there are fewer categories of products where a German consumers gets value add from purchasing non-German products (B2C or B2B) as compared to, say, Greece. First how much could Germany import from Greece at the outset. And, not specific to Greece, there is a general aversion to buying the lowest cost product just to save money; and there is a general preference for predictability, longevity and quality. Others may have the opposite experience, but for me German demand for domestically made products is a sensible and a cultural "refusal" and not an institutional one.
- bildung 12y ago
  > > while refusing to allow equivalent imports > That very much is in citation needed territory, please give at least one example of how Germany is refusing intra-European imports in any category. (Not GP.) You are of course right that Germany has not created import tariffs or other direct and illegal options. OTOH the German government has implemented numerous actions that indirectly had wage-suppressing effects (which per definition lowers imports and raises exports) in the last decade - to a degree that even the IMF(!) felt the urge to demanded actions for more domestic demand on multiple occasions [1][2]. The one notable exception is the implementation of a minimum wage law in 2015. [1] 2012: http://bigstory.ap.org/article/imf-urges-germany-spur-domestic-demand http://bigstory.ap.org/article/imf-urges-germany-spur-domest... [2] 2014: http://www.bloomberg.com/news/articles/2014-05-19/imf-urges-merkel-to-help-euro-region-by-boosting-domestic-demand http://www.bloomberg.com/news/articles/2014-05-19/imf-urges-... edit: here's a graph comparing income-adjusted wage development of the developed countries: http://nrt.revues.org/docannexe/image/1382/img-2.jpg http://nrt.revues.org/docannexe/image/1382/img-2.jpg

panarky 12y ago

Why do news reports keep saying that Greece got bailed out? Let's say you lend $100,000 to my startup. I have to pay you $10,000 a year until the loan is paid off. I hire a thief as a CEO who gives the $100,000 to his friends and family, and my startup has nothing to show for it. Now my startup is bankrupt. I'm working as a waiter in a restaurant to pay the rent. I can't make my annual payments to you, much less pay back the principal. You've just suffered a $100,000 loss. That's the risk you take as a lender. Surprise! Now the government steps in and gives you $50,000 to buy this bad loan from you. What a great deal! It would have been a total loss! Then the government garnishes my wages from my waiter job for the next 50 years to reimburse the government. Who exactly got bailed out here? Me (the Greek people), or you (foreign banks and bondholders)? And what happened to the thieving CEO who stole the money in the first place?

Eleutheria 12y ago
Then you hire a new CEO who writes emotional letters to the creditors so he can steal more money from new credits. While you keep working your ass off washing dishes and prostituting your children.
- macns 12y ago
  But he already said he doesn't want more money. The latest, 7 billion euro loan was declined by Greece. It's all over the news
  - johnchristopher 12y ago
    Now that's interesting because the French newspapers didn't mention it at all. I wish we had a European press.
    - bjelkeman-again 12y ago
      It seems really hard to sell that. The Guardian Weekly is a good attempt, and it has articles from Le Monde and Washington Post in it regularly as well. Combined with Le Monde Diplomatique (In English), which you could get as hard copy bundled, it gave a much better European view. Unfortunately they don't sell an electronic copy, which I would certainly subscribe to.

hga 12y ago

Nit: in 2008 the US had both insolvency and liquidity problems. The former from the real estate bust, the latter from things like securitizing loans collateralized by said real estate, with the holders of and potential buyers for those securities just not being able to determine what they might actually be worth at the time. So e.g. TARP was explicitly sold as program to buy up those securities, wait for the dust to settle, and then sell them for what they turned out to be worth (that that sales job was a lie is another matter).

netcan 12y ago

I disagree. The solvency problem is ongoing, even regardless of current debts. Greece cannot raise more taxes. It's trying, but taxes are declining. A government system can't be reformed in a few years and achieve 40% savings without (a) causing mass unemployment and knock on effects, further reduction in tax base, etc and (b) massive reduction in government services, including those necessary for economic activity that is necessary in order to "put those resources to their highest value use" to borrow some vocabulary from the more free market side of the debate. Think of the US' Detroit. Decline breeds decline. Once the Government cannot keep the roads or pay the cops people leave and tax declines further and on it goes. I realize that Keynsian economics is unpopular here and I am pretty sympathetic to free market ideas myself. Greece is in a bing that we don't know how to solve. Unless creative destruction of Sovereign States is on the table (easy to say when you're far enough away) what real options other than inflation are there? If Greece defaulted tomorrow, and all the banks and lenders took the loss without collapsing the financial system again, what then? Greece would not be able to pay salaries the following day without borrowing money. I have the same reaction as I assume you do when I see Greeks demanding government jobs when that is what caused this. But, that doesn't mean "austerity" is working. We have seen pretty much no cases of countries rapidly slashing their spending and managing to stabilize their budgets. Inflation (AKA monetary easing, printing money..) is the way countries get out of these binds. I genuinely like a lot of Austrian-inspired ideas for putting losses where they belong, and allowing market feedback to do its job. But nothing guarantees that a government will not run into insolvency at some point. At EU scale, its practically guaranteed once a decade (once every 300 years per country). We still need to answer the question "What happens when a State is insolvent?" Printing money carries risks and costs, but it works. What else works?

nationcrafting 12y ago
You make some good points. I think the solution has to be one that looks at the state as a service provider. Until the issues have been depoliticised, decisions will be made for political reasons rather than good business reasons. As a service provider, the state has 2 sources of revenue, primarily: private customers i.e. people, and corporate customers i.e. companies. Both those customer groups pay for services in the form of taxes. Now, those customer groups must be, by and large, wealth creators for there to be any wealth that can be taxed or even redistributed (if that is your political inclination). So, it simply won't do to just reform the state, to spend less, etc. A system has to be put in place rapidly that boosts wealth creation. This includes: minimal bureaucratic lag in the creation of new companies (Chile, for example, enables new company creation within 2 days), very low taxes, easy interaction with regulation bodies, a business-friendly environment, etc. If the state is too sclerotic to reform, it can be set up through free-trade zones in isolated parts of the country. This was China's route, when they essentially replicated Hong Kong in Shanghai, Shengzen, and all the other FTZs. It allows to you to be ultra-reformist in small experimental areas without putting at risk the power structures that exist in the state at large.