Matthijs compares the situation to the U.S. subprime crisis. Who was really at fault for the housing crisis in the U.S.: The subprime borrowers who bought houses they couldn’t afford, or the predatory lenders who encouraged them to take them out?
I, too, see parallels with the subprime crisis. However, I do not think that predatory lenders are to blame for either. In both cases, bank regulators were responsible for allocating credit. In the first instance, the regulators encouraged banks to treat mortgage loans as low risk. In the second case, they encouraged banks to treat all European sovereign debt as low risk. See The Regulator’s Calculation Problem.
The irony is that after messing up credit markets, the regulators ask for and receive more power. With the sub-prime crisis, the regulators were rewarded with Dodd-Frank. I presume that the ultimate outcome of the Greek crisis will be similar.
I don’t think arguing it is reasonable to argue that bank regulators are steering the ship, and also argue that they are subject to regulatory capture, and are being outplayed by financial institutions. I think the latter is more likely.
Regulators have to decide something, even deciding not to decide is a decision, so we shouldn’t be surprised they take their lead from those they would regulate. Their decisions are of the least common denominator, never requiring, only allowing, which is why there was variation among institutions with the riskiest failing. Now they incorporate the lessons of the winners which will work until their circumvention and excesses lead to the next crisis but that should be a ways off.
Lenders are predatory but against taxpayers, not borrowers who are just their patsies or complicit, the ignorance of those who don’t want to know since that would interfere with their profits and dancing while the music plays.
The predatory lenders went insolvent. That is poor predation.
It is The Fed’s job to determine whether economy-wide credit is at appropriate levels.
(1) Isn’t it interesting that practically no one finds it even thinkable (or speakable) that anything but ordinary income and (mild) wealth taxation is on the table as ways for Greece to raise money to pay its debts and provide for its people?
Tyler Cowen often makes the point – for example in the Italian context – that it is a mistake to focus so heavily on GDP while ignoring wealth. And Greece is loaded with unused land wealth, but turf is sacred and transfers of territory are considered an ultimate taboo. Where are the seasteaders? Where are the charter-city people?
Greece has anywhere from 1,200 to 6,000 beautiful, warm-climate islands (depending on how you count them), only 200 of which are even inhabited at all, and 20 of which are larger than 50,000 acres (Crete alone is 2 million acres). Some of these are already privately owned, and in the Bahamas, islands routinely go for over $100,000 – $1M an acre (and how much more would the land be worth if the transfer were of permanent, total sovereignty?) Larry Ellison owns his own Hawaiian island, Lanai, which he bought for over half a billion dollars. How much would Germany pay to add, say, all the Dodecanese, to its territory?
The current narrative seems to be that transfers of wealth are morally obligatory, but transfers of sovereign jurisdiction over land are unthinkable sins against humanity.
(2) Lurking in the background of all this is how the various financial troubles in the other heavily-indebted, slowly-growing ‘periphery’ countries will be resolved, but most of the top commentators want to avoid that discussion as much as possible.
They are strangely reluctant to admit this particular episode might signal the setting of any precedents or to otherwise lay out any kind of comprehensive model for how these matters ought to be resolved in general, because, of course, the trouble is that doing what they propose for Greece might be ruinously expensive if also done for Spain, Portugal, etc. Also, one of the major creditors here is the IMF – and how exactly are they supposed to cut middle-income Greece a better deal than they do for any lower income states? There’s also the whole issue with the UK staying out of the Euro and eventually voting in just a few years (we’re told) on whether to remain within the EU.
There is practically acknowledgment of the argument that the institutional creditors can’t give Greece an easy path to a better deal, even if they wanted to without threatening the whole system.
(3) There is also a strange disconnect between the rhetoric that concedes, “Ok, it’s not innocents vs. villains, exactly. Mistakes were made, Greece should not have adopted / been-allowed-to-adopt the Euro, they should not have borrowed / been-allowed-to-borrow that much money, they should have spent the money more wisely and made more neoliberal reforms, the regulators should not have deemed its debt ‘risk-free’, etc.” and the lack of actual proposals from the same people to ensure these things don’t happen again. Nothing like, “Ok, let’s forgive all this debt for sake of the greater good, ‘The Great European Political Project’ and chalk it up as a cost of doing business, but after that, the new rules to ensure this will never happen again will be X, Y, Z, etc.”
It’s pretty clear that any reasonable and non-laughable X, Y, and Z will have cross-border financial consequences that are politically unacceptable, and so people are doing their best to isolate the intellectual framing of the current crisis from any implications for any other scenarios, either in other countries or in the future: the most extreme version of short-sightedness.