Wall St. Helped to Mask Debt Fueling Europe’s Crisis

http://www.nytimes.com/2010/02/14/business/global/14debt.html

by sailormoon • 16 years ago

21 17 16 years ago

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.

The banks not only enabled these countries to borrow beyond their means, but also loaned them the money. If anyone feels a populist fury that requires retribution against Wall Street then the course is clear: don't bail Greece out. The best way to teach bankers not to engage in this sort of behavior is to show them that their faith in "too big to fail" is not well founded and that moral hazard is really hazardous.

The other important idea in this story is that governments are just as eager as corporations and homeowners to engage in overspending and shadowy accounting, so it's not clear why anyone should expect regulation to be a panacea for any of these problems.

raheemm2• 16 years ago

You arguments make sense. What would you say to those who support bailouts and their logic, which if I understand correctly, is as follows:

if you dont bailout Greece, then the markets will get nervous about other bigger economies with debt (Spain, Ireland, etc) and call in the debt to these countries as well. Many of these countries are likely to default, which in turn would lead to more panic and more debt being called in, leading to a repeat of the financial crisis of 2008 (ignited by the bankruptcy of Lehman), where banks trust no one, every debt obligation is called on immediately, and everyone hordes cash out of panic. A vicious cycle like the great depression develops and even relatively healthy economies, banks and companies go bankrupt.

Then what? Yes, this process does weed out the weak banks/companies/economies. But it also destroys everything else, including social and political institutions and the worse case scenario is you have global anarchy, unrest, wars etc, etc.

I think moral hazard is important. But is it so important that we destroy the whole system? There must be a more balanced approach, but not sure what that should be.

dsplittgerber2• 16 years ago

You make a lot of assumptions that are not necessarily true. Markets didn't collapse (went down 4% I guess) after Lehman went bankrupt and Lehman was at no point of systemic importance, which crucially, lots of proponents of bail-outs made it out to be. Some market players believed so, but it turned out to be wrong - people tend to overestimate such things because you cannot disprove them. This is exactly the same reason Greece should not be bailed out. Not every debt obligation is going to be called on immediately because lots of players are going to look for a save haven for their money, there will be contrarians etc. Lehman showed us that the whole melt-down scenario is probably (no one can be sure) overblown. And considering the social costs of moral hazard, one can make an equally valid argument, that it's no one's business to bail out any private enterprise or country.

mtts2• 16 years ago

If anyone feels a populist fury that requires retribution against Wall Street then the course is clear: don't bail Greece out

As a non-Greek European, however, I'd rather Greece was in fact bailed out because if Greece collapses, my own economy, which shares a currency with Greece, goes along with it even though there is not all that much wrong with the financial practices of my own government (I'm Dutch).

This is probably one reason why banks (and Greece itself) got away with what they got away with for so long: if Greece collapses, Germany and France and a whole lot of other economies with which there really isn't all that much wrong, will go along with it.

Which just isn't worth it.

So what will probably happen is that the EU will force Greece to swallow a draconian austerity package that will clean up their government finances but that will bring comparative hardship to 11 million Greeks. This way they avoid causing economic misery for the rest of the 328 million inhabitants of what is known as the Euro zone

bootload• 16 years ago

"... As a non-Greek European, however, I'd rather Greece was in fact bailed out because if Greece collapses, my own economy, which shares a currency with Greece, goes along with it even though there is not all that much wrong with the financial practices of my own government (I'm Dutch). ..."

And that highlights a point many underestimate - the interdependence of finance. What cuts are made to Greece will hit other areas of the EU. Where else?

"... If anyone feels a populist fury that requires retribution against Wall Street then the course is clear: don't bail Greece out. ..."

The populist fury should be over the "bail-out in the US" of Wall St. Greece is pretty much as far from the centre of Western financial influence as you can get.

RobGR3• 16 years ago

I question the notion that Greece would collapse if not bailed out; and I question even more strongly, the notion that if Greece did collapse, the Dutch economy would go "along with it" as you say.

I think it is a bit of fear-mongering thrown about to get people to acquiese in massive, questionable government backed financial schemes. It reminds me of George W. Bush asserting "if we don't pass this bill, the whole sucker could go down" or the member of Congress who claimed that if the 700 Billion dollar bailout was not passed, "your ATM machine will not work Tuesday morning."

Let's think through the worse case senario. The Greek government defaults on it's debt, and a variety of people around the world discover that the Greek bonds they hold are worthless. Some investors will have bought funds that are mixtures of all the EU country's debt, and those investors may dump those funds, thus making it expensive for the Dutch government to borrow money for a time - say, a year. Exchange rates will also shift, but that always brings good with bad no matter which direction -- likely the Euro will drop, making it easier for other people to buy Dutch products, and helping Dutch exporters but making it more expensive for you to buy imports.

Perhaps you could take some advantage of the situation by being stingy and saving money, not buying imports, and instead buying high-yeild Dutch bonds, for a year or two. But even if you didn't, by three to five years from now the difference in your personal wealth would be tiny.

A collapse of the market in Greek bonds does not break dikes or light fires in Holland. No "real" wealth will be destroyed in your country.

Now let's consider what happens if you bail out the Greek government, and by extension, whatever unlucky stooges Goldman Sachs saddled with those bonds. The Euro will see some inflation, dropping its value, but the effect is more long term than the "collapse" senario. Goldman will hawk the bonds of Spain, Italy, Portugal, and any other shaky government as having an implicit backing of the hard work of the honest Dutch, and those goverments will borrow more because of it.

So I don't agree with your argument of "comparitive hardship" to 11 million Greeks vs. "economic misery" to 328 Europeans.

In some ways, this is just a preparation for what will happen in the US with the State of California, whose default will be larger than Greece's. Is it in the best interests of the whole USA to assume the obligations that California undertook ? If California defaulted on it's bonds, it would surely cause some financial turmoil and hardship, but it's not clear that financial turmoil and hardship would be avoided by guaranteeing their bonds. Backing those bonds decreases the already shaky credit of the US as a whole. On the other hand, states that need to borrow may not be able to for a period, and many retirement plans and pension funds will suddenly be shrunk.

I'm not in favor of either bailout. The cost is a general undermining of the world financial system as a whole, and I don't think you will get the short term good effects that are hoped for.

RobGR3• 16 years ago

It's unlikely that any bankers lent Greece any of their own money. More likely, they convinced pension funds and other sources of cash to buy Greek debt, and took fees from the borrower and the lender for setting up the deal.

Similarly, while Greek bus drivers may get steep cuts in pay, it is unlikely that Greek politicans and financiers will suffer as much.

Therefore, while a failure of the Greek bond market may have some good effects, it is not guaranteed to find all the guilty.

Do you also believe that Madoff should have been allowed to simply stop paying his "clients", and that their subsequent loses would be enough to stop future frauds while Bernie sailed away on his yacht ?

yummyfajitas• 16 years ago

I wrote a more detailed explanation of what happened in a previous version of this article (explaining the particular derivatives).

http://news.ycombinator.com/item?id=1117719

sailormoon• 16 years ago

Oops - I hadn't seen that previous article. Thanks for the summary.

mos1• 16 years ago

Greece got about $1b from 85 Broad via a swap.

They had approximately $300b in additional debt.

This article exists because many readers like to pretend that bankers are the root of all evil.

dsplittgerber2• 16 years ago

When I read this article, I felt that hypocritical governments are the root of all evil here. Goldman just did the job it was paid for. But Greece duped the EU into believing it fulfilled its membership criteria, got away with faking statistics and hiding true debt levels for a long time and is probably getting away with it all by being bailed out. So who are (EU) governments to criticise banks for acting the way they do when they tolerate it amongst themselves?

vtnext• 16 years ago

Just because bankers are not the root of all evil does not mean they are not evil.

The key message is that bankers do a lot more damage than good with the money and leverage handed to them by the govt. Their positive impact on the economy has been vastly overstated, and the public is increasingly wise to that scam.

MaysonL• 16 years ago

See also: "Goldman Sachs goes Rogue" http://baselinescenario.com/2010/02/14/goldman-goes-rogue-–-...

Wall St. Helped to Mask Debt Fueling Europe’s Crisis

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