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The banks that loaned the money for those "mortgages" are counting on being payed back. If they aren't, they might go bankrupt, causing a financial crisis. Or,

The banks that loaned the money for those "mortgages" are counting on being payed back. If they aren't, they might go bankrupt, causing a financial crisis. Or, they might start lending a lot less, or call in their loans early, putting the squeeze on others, including other banks, causing a financial crisis. And a financial crisis affects everyone. You are nothing to a bank, a bank is huge, and fully expects some people to default on their mortgages. They can take it. However, what if everyone in California defaulted on their mortgages? Then it might cause many banks to fail, cause a financial crisis, and depress the entire US economy, including your neighbours. The monetary union disguised the risk of lending, which was still there.

haberman 11y ago
But everything you're saying would apply whether Greece was on the Euro or the Drachma. Yes, an entire country defaulting would screw a lot of creditors, but the risk of default should be priced into the loan/bond terms (interest rate, etc). That's part of the reason investors can make money on bonds, because there is a risk/reward curve they're riding, and the risk is that they won't get their money back. I get the "too big too fail" argument, I just don't get the "monetary union puts us on the hook for our neighbors" part.
- afterburner 11y ago
  That's funny, your phrasing outlines the paradox: it's a union, yet you don't consider it part of you, but simply a "neighbour" that can be squeezed at will. Monetary unions turn into transfer unions if the regions' productivity are not equal. This is clear from the union of states called the USA. Poor states constantly get federal money taxed from rich states. And there's nothing wrong with that; the whole country benefit from there not being ruined states in the union. Monetary unions also don't work very well without a fiscal union, under which transfers are far more easily arranged...

haberman 11y ago

But everything you're saying would apply whether Greece was on the Euro or the Drachma. Yes, an entire country defaulting would screw a lot of creditors, but the risk of default should be priced into the loan/bond terms (interest rate, etc). That's part of the reason investors can make money on bonds, because there is a risk/reward curve they're riding, and the risk is that they won't get their money back. I get the "too big too fail" argument, I just don't get the "monetary union puts us on the hook for our neighbors" part.

afterburner 11y ago
That's funny, your phrasing outlines the paradox: it's a union, yet you don't consider it part of you, but simply a "neighbour" that can be squeezed at will. Monetary unions turn into transfer unions if the regions' productivity are not equal. This is clear from the union of states called the USA. Poor states constantly get federal money taxed from rich states. And there's nothing wrong with that; the whole country benefit from there not being ruined states in the union. Monetary unions also don't work very well without a fiscal union, under which transfers are far more easily arranged...