Greece

[Tjerk12]

A while ago I posted a thread about the economic problems in Greece. I was puzzled about it, because I did not understand economics. I like challenges, so I studied a bit. I am wiser now. Not that I fully understand the mechanisms, but my view is a bit clearer now.
First of all I did notice that a lot of specialists are easy talkers, but in fact they don’t understand economics either. It is all mainly parrot talking.

What is happening in Greece?
Greece is bankrupt. They have debts and are not able to pay the money back.

But who is bankrupt?
The factories? No!
The people? No! (some of them maybe, but the common Greek not)
It is the Government that spent more money than they could.

How could they do so?
You and I cannot spend more money than you have in your wallet. How manage Governments such behavior? (the same in the USA)
They borrow money. They sell bonds (a paper in which they declare that they will pay the money back with interest).

Who buys such bonds?
Mainly banks and investors.

Why?
It is not probably that countries go bankrupt, so you are rather sure that you get your money back and the interest is good.

But why taking the risk with a country that is financial unstable?
When the chance that a country is not able to pay the money back is growing, they have to promise more interest. So you can earn more money. It is a bit of a gamble. A lottery.

In a lottery you can win or lose.
In case of Greece the banks and the investors have bad luck. It seems that Greece is not able to pay the money back.
A simple situation one would say. But banks and investors are clever. They sow panic. The whole financial system will break down. We must help Greece to fulfill their payments!

Is this true?
I don’t think so.

What is actually happening?
The banks and the investors bought lots and had bad luck. No price money. They are unhappy about that. So defend their position. We (the governments of other countries) must help Greece. Send money, so they can do their payments.

What does this mean?
We (the people) pay money to Greece. So they can pay the banks and the investors! In fact we pay our own banks and investors for their mistakes! Fuck them! Let them go bankrupt. It was their lottery, not ours!

So what would be wise (in my opinion)?
Let Greece go back to the Drachme. They will go bankrupt. “Our” banks and investors will not see their money back. Some of them will go bankrupt. Painful, but that is the consequence of taking risks.

Will that do collapse our economy?
I don’t think so. The money institutions are not the fundament of our economy. Labor is the fundament of our economy.

And what about Greece?
We should help the common people in Greece generously. They should not be the victims of this financial misrule. But in a way, that all hawks stake out.

(I do hope that it is a bit understandable. My English improved, but this is a bit above my limit).

 

[topdog]

Very good comprehensive post on Greece - thank you!

I will add my perspective.

Keep in mind that banks and financial institutions are not gambling with their money. They are betting our money. We give them the money to invest, so if they lose it then we are out of luck. (Take a look at the many individuals and organizations that invested with Bernie Madoff and lost all of their savings.)

So I don't see a division between the banks and us. We are all connected and in this mess together. Greece is teetering on the brink, and Spain, Portugal, Italy, and Ireland (and the USA!) may soon follow. So what will that mean when those things happen?

• The Euro will fall in value. (If the US also defaults the dollar will devalue at the same time - so try to figure that one out!)
• Financial funds in France, Germany and Britain will loose their principle funds, and in the best case will take many years to build that money back up for the families and pension funds that invested their money.
• US banks have less invested in Greece, but they have many (still unregulated) credit default swaps (CDS) with their European counterparts which they will have to pay out if European funds go under. So there is a domino effect around the globe.
• We will be in 2008 all over again. Investors will flee to safer products. Interest rates will rise. States will be unable to use bonds to raise money for road and bridge projects. Business will not be able to get affordable loans or credit to expand business. Employees will be laid off.
• Consumers stop spending - afraid for their jobs. This accelerates once again the cycle shrinking business due to smaller demand - which leads to more layoffs, etc.

You are absolutely right that Greece overspent and banks took the risk financing the spending. However, to be fair, quite a few banks had their arms twisted by the European Commission, the European Central Bank and the International Monetary Fund to make additional loans last year hoping that a final injection of cash would solve the problem.

So I think our views differ only on focus. You are concerned with justice (who is at fault and who should pay the consequences). I concentrate on pragmatism (how will this affect me and what do I have to do to make sure that doesn't happen).

Looking at the issue from both perspectives keeps things interesting.

 

[Tjerk12]

I think that your conclusions about the consequences are correct, Topdog. But maybe the healing process can only be painful. In Dutch we have a proverb: "zachte heelmeesters maken stinkende wonden (Literal translation: "Gentle healers make stinking wounds." Meaning: "It is better to treat a problem thoroughly even if the treatment is painful, otherwise it may get worse.").

Besides there is a third option. We could use the money for the people who are the victims of the bankruptcy of the banks.

The State debts all over the world are causing more and more trouble.
When it would be possible to travel in time, we would be able to learn from history and the future. Maybe we should travel back to Old Roman Times and persuade them to change their proverb "Pecunia Non Olet" into "Pecunia Olet"!

 

[hawtsean]

Maybe we should travel back to Old Roman Times and persuade them to change their proverb "Pecunia Non Olet" into "Pecunia Olet"!

However, when dealing with investment banks and government regulators thereof, one should remember that:
"Piscis primum a capite foetet "


Translation: "Fish stinks from the head first".

 

[gb2000ie]

The problem in Greece boils down to deficits. They spend more each year than they take in. Their tax collection system is a complete mess, so much tax goes un collected. Their government is corrupt, so there are massive inefficiencies in how the money is spent, and many governments bribed their way into office by promising perks they could never pay for, like a very early retirement age etc..

How did they get away with it? By cooking the books. They basically got help from large international financial consultants to help them take their debts off the balance sheet, and make it look like they were in better shape than they were. I.e., they did an Enron. Just like with Enron, the truth will catch up with you eventually, so here we are.

Now, who are the bond holders who Greece can't pay back? It's easy to pretend they are fat cats, but that's not right, they are regular people, like us. Or, to be precise, our pension funds. Pension funds (and banks in general) invest money to make money. That's what makes retiring possible! This is not gambling, this is investment. The stock market is gambling, the sovereign debt Market is investing. Not everything financial is irresponsible wall st. Wankers!

If Greece defaults, then the government, banks, and investors, including our pension funds, lose money. The effect would be global, and would ripple out. There are lots of counties just hanging in there, like Italy. Italian banks and businesses have money in Greek bonds, so if they default those banks and businesses start to go bust too, so the Italian government has to bail them out to save it's economy, but it doesn't have the money, so it has to borrow too uch, then it defaults and so on and so forth ....

The Greeks are in throuble because they lived outside their means. You can't let people retire at 58 in this day and age when people live well into their 70s on average! You can't run massive deficits decade after decade without problems! I hate the wall st. Wankers as much as the next man, but this is not a mess of their making this time.

As for solutions, it is probably not possible to leave the euro, and definitely very hard. The Nobel prize winning economist Paul Krugman has written a lot on that subject and can explain it better than me, so if you are interested, he's the man to read.

Letting Greece default would be a MASSIVE own goal for the world, but especially for Europe, so really, all we can do is bail them out, and insist that inreturn they reform their government so that the nation starts to live within it's means again. Realistically the ðebt will need to be restructured, and perhaps the investors will have to accept a hair-cut on their investments, but an out-right default would be a calamity.

B.

 

[SimplyJakeAndAlex]

This may helps to understand economics

I have a BA in Administration along side with other specific certifications from one of the top North American business school and even though I spent 3 years (that's how long a BA takes to be done in Quebec - it's very condense and intense), the series of doentary may help understand how economics and credit works in the western system... which is not much different accros the world due to globalization of business process (Except in India LOL they're really special in terms of business process... any businessman grows gray hairs when dealing with India LOL) but fell free to watch some of those docs and we can sure discuss of it. Thanks Tjerk this is a great topic.

Anonym zu topdoentaryfilms.com/category/economics/

 

[ritsuka]

Here is a really good article about how Iceland, faced with a similar crisis, has refused to pay the debts of casino capitalists that destroyed their economy and is charting a new independent future without cutting the standard of life their people have enjoyed:

http://anonym.to/http://www.dailykos.com/story/2011/08/01/1001662/-Icelands-On-going-Revolution

Greece should and can do the same, not accept poverty and privatization conditions dictated by the IMF. Everywhere in the world regular people are expected to pay for the corrupt actions of a small political/financial elite that brought down the world economy and are going to further profit through the austerity measures proposed to deal with the crisis. It's sickening.

 

[gb2000ie]

Here is a really good article about how Iceland, faced with a similar crisis, has refused to pay the debts of casino capitalists that destroyed their economy and is charting a new independent future without cutting the standard of life their people have enjoyed:

http://anonym.to/http://www.dailykos.com/story/2011/08/01/1001662/-Icelands-On-going-Revolution

Greece should and can do the same, not accept poverty and privatization conditions dictated by the IMF. Everywhere in the world regular people are expected to pay for the corrupt actions of a small political/financial elite that brought down the world economy and are going to further profit through the austerity measures proposed to deal with the crisis. It's sickening.

You're being far too simplistic - yes, they are both countries in debt, but that really is where the similarity ends!

The crises in Iceland and Greece are completely different. Iceland was not living outside it's means, it had a banking collapse due to corporate greed, and over-dependence on one sector of the economy. Iceland had not been running insane deficits for decades. Greece is broken. The cause of their collapse is WAY more spending than they have income to cover. They are living beyond their means, even if you removed all their debt they'd still be up a certain proverbial creek without a certain implement! If they default, they will not be able to borrow any more, and then they will have no choice but to absolutely rape their welfare state. You can get away with an adjustment over long period, but closing your entire deficit in an instant is a country-destroying catastrophe. It can't be done.

B.

 

[gb2000ie]

Here is a really good article about how Iceland, faced with a similar crisis, has refused to pay the debts of casino capitalists that destroyed their economy and is charting a new independent future without cutting the standard of life their people have enjoyed:

http://anonym.to/http://www.dailykos.com/story/2011/08/01/1001662/-Icelands-On-going-Revolution

A really good article? It has a FACTUAL ERROR in the very first paragraph - not an obscure one, a REALLY basic one!

The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.

Iceland is NOT a member of the European Union!

Why should we assume this article is in any way trustworthy if it is written by someone who is ignorant about the most basic politics of the country and the region. This is a mistake akin to saying Canada is a state in the USA!

What a pathetic excuse for journalism!

B.