May 12, 2010
Greek Crisis Nothing NewBy Christopher Chantrill
Last week, government workers in Greece were marching through the streets chanting "thieves, thieves" to the industrialists and politicians that have robbed their nation blind. These workers would be experts on that, with their 13th- and 14th-month bonuses and early retirement.
So the global banking crisis has arrived at the stage of the sovereign debt crisis. The economic fallout from a big financial crisis usually digs a hole in government finances as tax collections crater, write Carmen Reinhart and Kenneth Rogoff in This Time is Different. Typically, government debt will double, and the weaker governments will default on their debt as their interest rates skyrocket.
It all starts with a boom in real-estate prices, or a one-time "bonanza" in technology or natural resources. Should people worry about the huge run-up in valuations? Not at all, say the experts. There's no need to worry. This time it's different.
We are talking here about experts whom people take seriously. Federal Reserve Board Chairman Alan Greenspan, his successor Ben Bernanke, and Treasury Secretary Paul O'Neill all reassured us in the Oughties that there was nothing to fear from the big housing bubble.
It turns out every time that this time is not different. Instead, the usual things happen. People react to an unusual rise in real-estate prices, or a "bonanza" in the economy, by doubling down on their borrowed bets. They leverage up, and lenders let them. Maybe the government encourages them.
At some point, the real economy turns south, and then the highly-leveraged folks start defaulting on their debts. The crisis is on. You get a banking crisis, which is when people are afraid to lend to banks.
Governments are just as bad as real-estate speculators. Politicians promise goodies to their supporters. If there isn't enough tax revenue to pay for the goodies, they borrow the difference. That's OK when the economy is expanding. When the economy turns south, the revenue goes down, but the politicians keep spending. Government borrowing goes up until you get Greece and a sovereign debt crisis. A sovereign debt crisis is when the banks are afraid to lend to the government.
For Americans, there is something shocking about a sovereign debt crisis, when a government reneges on its debt. But nothing could be more ordinary. Governments renege on their debt all the time, according to Reinhart and Rogoff.
Typically, government default is not as blatant as Zimbabwe's hyperinflation or Argentina's seizure of bank accounts. Instead, governments do partial defaults by currency devaluation or revising the terms of their debt. The United States did this in 1933 by abrogating the Gold Clause. The Brits did it in 1932 by consolidating World War I debt into a perpetual annuity at 3.5 percent interest.
Only really dumb governments refuse to pay their debts outright. But there are plenty of those. Greece, for instance, has defaulted on its sovereign debt five times since winning independence in 1829. Argentina has defaulted seven times since independence in 1816.
One of the big takeaways from the This Time is Different is that nearly all governments make a mess of their finances.
My takeaway is this. We know that the U.S. government has an unfunded liability of about $100 trillion, mainly in unfunded Medicare promises. It is obvious, from Reinhart and Rogoff, that the U.S. will default on its promises. The only question is how. Will it be by default on the debt? By inflation? By seizures? Perhaps they will freeze everyone's account at Vanguard and Fidelity. But default it will. Default is what governments do when the going gets tough.
Years ago, after the Three Mile Island accident, Charles Perrow wrote in Normal Accidents that close-coupled complex systems like nuclear plants are accidents waiting to happen. Nuclear plant operators just don't know or understand enough to take the right action when things go wrong in the reactor. For some reason, our liberal friends have never seemed interested in extending this analysis to Big Government and Big Finance -- big, complex close-coupled systems that nobody understands.
Meanwhile, we have the crisis over Greece's sovereign debt. It is nothing new, and the solution will be nothing new: devaluation, default, taxes, lower living standards.
But here in the United States, there is cause for hope. This time it's different.
The Tea Party movement in the United States is an instinctive reaction against the recklessness of government and their middle-men in the finance industry. Maybe the Tea Party moms, young women like Dana Loesch, understand the problem with reckless government spending.
This is, as I wrote last fall, nothing less than "woman-led conservatism." Maybe it takes a mom to lead America away from financial crisis and default, back to small government and a decent future for our children.