[vijayboyapati]

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?

[panarky]

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?

[galfarragem]

It is not your lender's fault that you were careless and didn't audit your startup. While your CEO was making bad decisions you were having fun.

Now you think that your mistakes are your lender's responsability. Ok, just don't expect them, or anybody else, to lend you more..

[netcan]

Analogies are tricky.

The fundamental difference in my opinion is that you can't shut down a government. So, this startup is still going and it's still borrowing to keep itself afloat. Makes it harder to say 'lets move on.'

I agree though, the EU should have a bankruptcy for states. The problem is that introducing that in crisis time raises borrowing costs. France, Italy, and other countries would suffer a lot of immediate pain.

[panarky]

> it's still borrowing to keep itself afloat

That's not actually true. After the severe austerity, Greece is now running a "primary surplus". Excluding interest payments on the debt, revenues are greater than expenses[1].

The issue is not whether you can shut down a government. The issue is that the debt burden is too large to ever be repaid based on the revenue-generating capacity of the economy.

And austerity only makes that worse. Banks and bondholders freely made loans to Greece that now cannot be repaid. The people of Greece didn't benefit much from these loans, as the vast majority was siphoned off by corrupt officials.

Why were rich banks and bondholders bailed out, while generations of ordinary Greeks must suffer in poverty and unemployment?

[1] http://blogs.wsj.com/brussels/2014/04/23/greek-primary-surpl...

[Eleutheria]

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]

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

[panarky]

My point is that each of these "bailouts", like the latest $7 billion euro "loan", don't benefit any actual Greek people.

It's an ECB "loan" that goes from one ECB account directly to another ECB account as "payment" on debt. Exactly zero euros of these go to Greek people.

If I was Tsipras I'd decline these "loans" as well. They do nothing to help Greek people, and they just obscure who is really getting bailed out.

[johnchristopher]

Now that's interesting because the French newspapers didn't mention it at all.

I wish we had a European press.

[bjelkeman-again]

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.

[dbdr]

http://www.lemonde.fr/europe/article/2015/01/31/la-grece-se-...

[johnchristopher]

Thank you, I stand corrected.

[mathattack]

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]

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]

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]

1 & 2 basically elaborates on what I said ;)

And no, FDIC protection intentionally protects deposits at bad banks. This is not an accident. Trying to put the burden of evaluating what a bad bank is onto regular people is not going to end well, so you guarantee deposits at all banks, full stop.

Besides: Deposit insurance for deposits at good banks is pretty pointless, don't you think? It would never be used by definition.

[mathattack]

I think we agree on 99%.

My point is just that a good bank can still have a run in the absence of the FDIC guarantee.

Let's say a bank has $100 million in deposits. They keep $10 million in liquid assets, and lend out $90 million in un-securitized loans to local businesses. There's a false market rumor of something bad happening at the bank, and all of a sudden $20 million in depositors want their money back. The bank isn't able to resell the loans quick enough on the secondary market to make up for the shortfall. This could happen.

The FDIC guarantee protects the bank because there's no longer a need to have the run - everyone will get paid.

[nhaehnle]

I think you're right about our mostly-agreement :)

Just to clarify, I think we have to distinguish between the likeliness of a bank run and the effects of a bank run.

Indeed, the FDIC makes a bank run extremely unlikely. Perhaps this is what you mean by "protecting the bank".

However, even if there were no FDIC, a bank run on a good (solvent) bank would not cause that bank to collapse, due to the central bank's lender of last resort function.

The bank run would "merely" cause a shrinking of the bank's balance sheet, which the bank would have to offset by selling its assets over time.

It is true that a big change in the balance sheet like that could still lead to the eventual death of the bank, e.g. because the bank has high fixed costs (in the form of physical branches, non-fireable employees, and so on) which can no longer be covered by profits from its regular business. However, this eventual death is (a) not certain since the bank has plenty of opportunity to turn things around and (b) a slow death, very much unlike the sudden implosions that people usually think of when they hear "bank run".

[frandroid]

Yeah, but unless you have massive disinformation, you can't create a panic on a solvent bank in today's world. The examples you use were ones where capital had been destroyed.

[tspareme]

I guess you have to define what a solvent bank is. I don't think any bank can handle a sustained run given their liability duration mismatch. So I am not sure what do you mean that you can't create a panic. Its always possible to have runs just not very easily.

The financial crisis showed that bank liabilities are really liabilities of the country that the bank incorporates in. So in case of Ireland, Greece, Iceland, it is up to the country to step up and backstop their banks. If a country can not, then you will have panic on a bank. And in order for a country to be able to backstop their banks, the debt of the country must be credible.

[notahacker]

I'd argue a solvent bank is one whose expected return on assets, adjusted for expected losses, is sufficient to ensure it can repay money lent to it at the discount window rate [for all plausible trajectories of the base interest rate over the lifetime of its outstanding assets]

There's no logical reason why a central bank wouldn't lend to such a bank at the discount window even if some irrational hysteria caused its depositors to withdraw en masse, or why another bank not suffering from depositor hysteria wouldn't buy its loan portfolio.

The problem of national governments' economic policy lacking credibility is largely orthogonal[1]; central banks that underwrite private banks print money rather than borrowing it

[1]except to the extent really inept inflation-boosting fiscal policies compel the central bank to make aggressive and unanticipated interest rate rises that drive banks into insolvency.

[tspareme]

The issue is expected loss. No one knew what is the expected loss in a crisis. This is why some of the Lehman debt holders actually made money from the bankruptcy. This is why TARP actually made money. It is because there is a substantial difference in asset price while in crisis and not in crisis. The asset price is what is making the bank solvent.

Of course, the central bank (unless you are locked into a monetary union of course) can lend freely during a crisis. However, it must also be careful as to not trigger inflation or worse yet cause people to lose faith with your currency. There is also moral hazard as well but that's more of a soft issue.

The bigger issue is what happens if your bank liability is many times larger than your countries GDP. This was the case with Iceland or Britain. Then you can't print enough money to make your bank whole.

[TheOtherHobbes]

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.

[jahewson]

Your statement about Germnay refusing to allow imports is manifestly false. The EU is a free trade area and its member states are not permitted to engage in such activities. The EU has its own courts to enforce such rules.

It's certainly true that Germany is a net exporter: this is because of their ability and competitiveness in engineering and technology, combined with the fact that Germans are not big consumers and prefer to save their money. It would be good for Europe as a whole if Germans spent more money on imports - but the idea that they are deliberately blocking imports is bogus.

Europe doesn't really have neoliberals, so I'm not sure what your point is there. If anything, Europe leans to the left.

If you want to find a country with a long history of ignoring debt, then look no further than Greece, which has defaulted over 20 times. It is a country in deep need of structural reforms in order to have a viable economy. Yet the reforms haven't happened, due to corruption, cronyism and general foot-dragging. This is the real problem and debt-reduction isn't going to solve it.

[yxhuvud]

No, Germans are not more frugal than other people. The main issue behind lacklustre German consumption is that neither their wages nor their investment in infrastructure has kept pace with their productivity growth.

[rwissmann]

15-20 years ago Germany was the sick man of Europe. Labour market reforms in line with an industrialization boom in Asia restored the competitiveness of her industrial economy.

The real problem with this argument is that they are too short-sighted. Germany cannot artificially reduce its competitiveness to appease other EU countries, because competition happens on a global stage and so the EU would simply lose out further to North America and Asia.

Your are correct that Germany should spend more on infrastructure.

[seizethecheese]

What's your source, your intuition? Germany is one of the highest savers in the Euro area; much higher than Greece.

http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS

[antman]

This table does not mention personal savings. It is cannot provide insight, is as useless as GPD per capita.

[yxhuvud]

That Germany, the state, is living beneath its means does not say anything at all about the German people or if they save their wages or not.

[bildung]

If I understood GP right you both say the same: Being frugal means consuming less (= saving instead).

[jahewson]

Wages and infrastructure are key factors, but they're not the complete story. Other countries have lower wages, yet import more per-capita.

[galfarragem]

Completely agree. Just compare Athens or Lisbon subway with Berlin subway. It seems that Germany is the most poor of these countries.

[tspareme]

The issue here is that we know Greece is not as competitive in exports as Germany. So what can Greece do to run a trade surplus while in a common currency union with Germany? They are not able to depreciate their currency. They are not allowed to put up tariffs either. Also, where does the German do with their export surplus. They don't just hide it under the mattress. German banks is also looking for a outlet, however, Greece is not allowed to implement capital control to block the inflow. So the only alternative is to out compete Germany or some other Euro-zone countries (but this just substitute Greece for some other PIGS).

The key here is that for everyone in the world, the trade surplus and deficit must sum to zero. So someone has to run a trade deficit if German/Japan/China wants to run a trade surplus. German now wants the entire eurozone to run a trade surplus which means someone else must run a even bigger trade deficit.

BTW, it is in theory possible for Greece to run a government budget surplus but a trade deficit. This would mean that the private sector is loading up on the debt. Even in this case, the private sector is really the banks which has to be backstopped by the government anyway. So bank debt is just another form of government debt.

[jahewson]

Yes, that is the core issue: can the Euro sustain both Germany and Greece given how diverse their economies are? I have my doubts, but perhaps what we're seeing is an emerging solution wherein Germany subsidises the weaker members of the Euro indefinitely. That still doesn't absolve Greece of financial responsibility but it would support their position of having a sizeable portion of their debts written off. It's a sort of sovereign welfare state...

[x0x0]

Europe doesn't have neoliberals? How else do you explain post 1990 economic policy?

TheOtherHobbes isn't discussing rules or laws, but merely the current and recent economic structure. Germany net exports. Therefore, without floating currencies, only one thing may occur: someone must borrow money. You write about this -- "a country with a long history of ignoring debt" -- as if it were a moral claim, rather than an accounting identity.

Where Greece not in a currency union, they could have gradually restructured, as drachmas depreciated against foreign currency, or they were forced to borrow in a foreign currency. Their problem is that the EU is set up, by design, to actively fuck less productive southern states. States, whether states in a union or independent states, either need their own currency in order to accommodate differing productivity levels, or high productivity net exporters must accept permanent subsidization (as northern / coastal states do for the American south) of less productive states.

The simple fact of the matter is that the ECB has long acted in a way that favors Germany while the German government has carefully avoided explaining to Germany the consequences of running an export economy inside a currency union. Now that they have had 20+ years of economic success as the outcome of the union, they wish to duck the consequences.

[jacquesm]

> 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.

[bildung]

> > 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-domest... [2] 2014: 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

[rwissmann]

Germany had anemic economic growth about 15-20 years ago. After hard political fighting these sort of reforms were enacted.

Competition is global. Greece is not just not competitive with Germany, but also with China, the US, Japan, Australia, ... . That is the real problem.

[jahewson]

Except that Greece isn't in a currency union with those other countries. If Greece had their own weak currency then it would make their exports cheaper, which might make them better off (except that leaving the Euro would trigger a financial collapse). China has been trying to keep the Yen cheap against the dollar for this reason, if your goods are cheap then ohers will buy more of them or prefer you over another producer.

[rrggrr]

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.

[nhaehnle]

TheOtherHobbes used a bit of an ellipsis here. There is no outright refusal of imports by law, but there is a refusal to allow the kind of economic conditions (such as wage increases in line with productivity increases) that would lead to a balance of imports and exports.

As for citations, a recent comparison of the relevant metric, the relative unit labor cost: http://krugman.blogs.nytimes.com/2015/01/29/i-do-not-think-t...

It is evident that of all Eurozone states, Germany is the one that deviates the most from a policy of stability. Unfortunately, the deviation is in a direction that ends up with Germany in a position of power.

[mafribe]

Germany deviates from the European norm by having products on offer that are globally competitive. What a crime. Let's make Europe more stable by turning every country into Greece!

[nhaehnle]

Competitiveness is a matter not just of value, but also of price, which is largely a matter of how much you pay your employees. Germany achieves its competitiveness by paying employees badly. That is a not a virtue, it's a vice.

That's the key here, and again I encourage you to read and contemplate the post that I linked to, since it clarifies the issue.

[mafribe]

Krugman's article like everything he writes is not insightful. Wages are no per-se too high or too low, but rather relative to wage levels of competitors and desirability of produced goods. Germany competes in a global market and in that global market Germany is a high-wage country. When it had higher averages wages, Germany lost its competitive edge.

Here are more interesting questions: which are the average wages paid in Greece appropriate for the product Greece seeks to sell? Which products from Greece do you buy on a regular basis? Greek smartphones? Greek cars? Greek chemical products?

[bibabo]

"[...] literally murderous [...]"

Exactly. This needs to stop immediatly. Suicide rates in Germany are 4X (!) as high as in Greece. Germany is living on an extreme austerity program since more than 10 years - the Agenda 2010 implemented by the socialists in 2003. Cuts to unemployed people, cuts to families, cuts to everyone, stagnation of income for over a decade except for the top 1%. Where do they think this should end?

( http://en.wikipedia.org/wiki/List_of_countries_by_suicide_ra... )

[bibabo]

Germany is importing work (which is not measured in the usual import/export KPIs) on massive scale with money going back to the originating countries. This has been going on with Italy and Turkey over decades (60-80), with Poland in the 90s and currently with Spain and Eastern European countries.

Real import/export KPIs would take this into account. Then I would assume Germany is a net importer not exporter.

[Onoshobi]

I spent a year living in Greece, and the impression that I got was similar to what you are saying.

Greeks felt abandoned by the Eurozone -- they expected a 2 way street, and felt cut loose when they needed a hand.

[happyscrappy]

Greece and Germany both profit from a Grexit, it is middle tier countries that will suffer with the demise of the EU.

[hga]

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).

[beamatronic]

> "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]

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]

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_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]

Treaty obligations doesn't matter when they try to enforce something that is not possible.

[netcan]

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]

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.

[netcan]

All well and good. There are lots and lots of ideas for making states work better, be me effective, responsible and everything else.

That all has nothing to do with this. This is about what happens when governments fail financially. Financial commitments that exceed tax revenues and no way to balance them. European austerity measures can work (as they sort of are in Ireland) when the political situation is relatively stable and the underlying financials are not too severe. But, Greece is a case where it cannot work.

Printing money (aka monetary easing) is not just an alternative to what you suggest, it's what you do when the state's financials collapse.

[arethuza]

"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]

UK.gov will turn a profit on RBS. RBS is not a loss.

[zo1]

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]

If a business wins, is it then implied that the government must lose?

[zo1]

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.