Wednesday, May 5, 2010

Will The Greeks Reject The Shock Therapy?

Over the last 30 years, as Naomi Klein has thoroughly documented in "Shock Doctrine",  numerous governments have used crises to ram through deeply unpopular "free market" reforms that have really been little more than thinly disguised efforts to make massive social spending cuts and to direct vast sums of lower and middle wealth to the corporate/government elite.

They've done this in times of crisis because, without some catastrophe to frighten and shock them, the citizenry would never go along with the plans. Whether it's been hyper-inflation in South America, Yeltsin's attack on the Russian Parliament or the millions of pounds of ordinance dropped on Bagdad in the Shock and Awe campaign, these crises have always done the trick. And the trick is to force severe austerity measures on all the citizens of already stressed nations. 

Today, it's Greece's turn. Greek sovereign debt has risen to unsustainable levels, and, without a bailout from the EU, Greece is headed towards default.

So, naturally, the EU has decided to bail them out. And, just as naturally, they are calling for austerity measures, which will mean severe cuts in the pensions, salaries, and jobs of ordinary Greek citizens, all while taxes are being raised.

If you just read the headlines, you'd think that this bailout is a great thing for all of Greece. And you would be wrong. The money from this bailout will go to paying off the banks and institutions that made bad decisions and lent Greece more money than they should have. These are banks which are based in the countries which are organizing the bailout, so in essence these countries are bailing out their own banks at the expense of the Greeks. These banks screwed up royally, but they'll get paid off in full. It's the average Greek citizen which will get screwed.

Now, you may have heard that Greek pensions, salaries and social spending levels are unsustainable, and that the people who are protesting because the pensions they were promised won't be there should realize that the deal they had was too good to be true, and shouldn't expect it to be honored. And there may be a shred of truth in that statement. 

But the institutions that lent Greece money, and banks like Goldman Sachs that actively enabled Greece to get around it's debt limits, should realize that when you lend people more money than they can afford to repay, you shouldn't expect that deal to be honored either.

In other words, there are two parties to this mess. The first is the Greek citizen, who has gotten perhaps too good of a deal when it comes to social benefits. (This, of course, is open to interpretation. If Greece bothered to collect taxes on the rich, these benefits would be a lot more affordable.)

The second party comprises the institutions that lent Greece money, all of which have made massive amounts of money in fees and interests, and whose executives have paid themselves handsomely for lending money to a country that was already too far into debt.

The first party is expected to accept new taxes and deep and painful wage cuts, social service cuts, pension cuts, and cuts in virtually every public sector in a country that relies heavily on public spending. These cuts will be catastrophic for the Greek economy, as the massive reduction in income will lead to reduced aggregate demand and a deflationary spiral which will push the country into the abyss and which will be extremely difficult to recover from, and that could easily take a decade or more to do so.

But they will be asked to do this so that the second party, the banks and institutions that enabled this crisis in the first place, can get their shitty loans paid back in full.

Does this sound like a raw deal? It does to me, and, apparently, it does to the Greeks as well, who are taking to the streets by the thousands to protest the austerity measures just announced by the government. In fact, the NYT is reporting that three people were just killed in the firebombing of a bank in Athens.

Of course, many (including leading economists) have criticized these banks, saying that they should have known better than to lend Greece money. But that misses the larger point, which is that they knew that the IMF or the European Central Bank would make sure that they were made whole, no matter how insane their lending standards. So it wasn't that they didn't know better; it was that they didn't care. They expected that the Greek people would be forced to pay for their mistakes and the mistakes of the Greek leaders. (As Yves Smith points out, the moral hazard implicit in this bailout is one of its worst features. It will encourage banks to continue to lend to countries at unsustainable levels, secure in the knowledge that the IMF will bail them out and make the citizens of the countries pay with their livelihood or lives.)

The Greeks understand that this is not about bailing them out. It's about making them pay for the mistakes of others, and about transferring vast sums of Greek wealth to the financial elite, in a process which will destroy the Greek economy and impoverish its people.

And for what? To stave off a sovereign debt default which is coming anyway? To ensure that they can remain in the very currency union which is currently preventing them from using monetary policy to escape the clutches of the IMF and the ECB?

This is not a case of figuring out some way forward that is best for everyone. As always, this is about large financial institutions and their executives getting preference over the middle class and the poor. There is absolutely no reason on earth why bondholders shouldn't take a hit, but taxpayers should. 

But this is how it's done. A country is frightened into believing that the end of the world is coming if they don't agree to massive social spending cuts. The money that is saved by making these cuts is then transferred to the people who made foolish loans to that country's government, hoping to make a killing, but assuming they would be bailed out either way. And then the massive cuts in spending lead to a widespread unemployment, reduction in demand, and an accompanying economic meltdown. 

But by this time, of course, the bankers have their money.

This is happening right now in the United States, with the debt hysteria that is being whipped up by bondholders who can't wait to slash social security and unemployment, but who wouldn't even consider cuts to the bloated military trough their rich buddies feed from. 

Greece needs to reject the bail-out package. It should default on its debt; it has no moral obligation to pay it. This will require them to withdraw from the currency union, but so what? It has been a disaster for them anyway. And with debt repudiation, Greece will at least have a chance to start anew.

Let's just hope that the protesters can be successful without further bloodshed.

1 comment:

  1. Ok, suppose Greece defaults on their debt, then what? They are just as fucked, correct?

    I'm with you: I think they should default, but this path is going to be just as ruinous to their economy and I think you should have written a paragraph or two about this as well.