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Robert Kuttner

Robert Kuttner

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Beware Greeks Bearing Banks

Posted: 05/22/11 07:26 PM ET

After every financial debacle or war, there is a huge political struggle over whether creditors and financial speculators get to stand in the way of an economic recovery. When the creditors win, ordinary people who had nothing to do with the crisis are typically the victims. Today, the entire political elite is in the austerity camp, and those who argue that creditors should take some losses so that the rest of the economy can grow are mostly ignored.

This is the common theme to the issue of mortgage relief to spare American homeowners millions of foreclosures, the question of whether the US should sacrifice Medicare and Social Security on the altar of deficit reduction, and the punishment being visited upon small European economies such as Greece, Portugal and Ireland.

(Though Dominique Strauss-Kahn was evidently a sexual predator, he was not a financial rapist when it came to vulnerable nations. He was a rare member of the ruling financial club who gave some attention to economic recovery over austerity.)

Greece is the poster child for this dilemma, and the Greek story reveals the real villain of the piece -- the big banks. In February 2010, it was revealed that Goldman Sachs had been complicit in allowing previous Greek governments to cook their books and hide the size of the Greek deficit by creating a special kind of currency swap that was really a disguised loan.

In the aftermath of the financial crisis, Greece's national debt is unsustainable, and only credits from the European Central Bank and the International Monetary Fund are keeping Greece from defaulting.

The bankers want Greece to languish in debtor's prison, cutting wages and social benefits, increasing taxes, and otherwise sandbagging its own economy in order to pay back creditors at 100 cents on the Euro. Greece, however, is now in a vicious circle: the more the Greeks practice the austerity demanded by the money markets and the European Central Bank, the more the Greek economy predictably slumps and the more that money markets lose confidence that Greece will ever recover enough to pay back its bondholders.

In this crisis, bankers are culpable in three different and reinforcing respects. First, we have the case of Goldman's complicity in helping the Greek previous government to get Greece in over its head. Secondly, the European Central Bank and the big German banks are opposed to a restructuring of the Greek debt -- trading short term bonds for longer term securities with reduced interest and principal -- because big banks are the major bondholders and resist taking any losses.

Recently, a third concern came to light -- our old nemesis, credit default swaps (CDS). These are the very same toxic securities that were so implicated in the 2007-2009 financial crash. CDS are a form of insurance against default of securities. But unlike, say, underwriters of life insurance or fire insurance, the issuers of swaps seldom have adequate reserves against losses because they assume that defaults will hardly ever occur. Rather, CDS have become a favorite vehicle for speculation by hedge funds and investment banks.

According a Friday Wall Street Journal report from Brussels, even a partial a restructuring of the Greek government debt could trigger payouts of credit default swaps. A group of European finance ministers raised the possibility of a "soft" restructuring of the Greek debt, so as not to reward speculators who were betting on a Greek default, but officials of the European Central Bank threw a fit, warning that the ECB would pull the plug on funding for Greek banks if such a restructuring were discussed.

From the view of the ECB, the sheer complexity of financial markets is now such that any form of restructuring that would benefit Greece could set off ripples that might destabilize the system, so the ECB is dead set against it. Better for the Greeks just to suffer.

It's clear that Greece can't pay its debts. The practical question is whether an adjustment will be accompanied by more pain or less, and whether the financial sector will be permitted to keep bleeding Greece dry.

There is an instructive historical parallel. When American banks found themselves in big trouble in the 1980s because several third world countries could not pay back their loans, Nicholas Brady, Bush I's Treasury Secretary, came up with an ingenious plan. The debts would be stretched out, and the creditors would take a hit averaging about 30 percent.

The banks were compelled to take their feet off the oxygen hoses of more than a dozen nations, and recovery of their real economies ensued. Worry about triggering payouts of credit default swaps was not an obstacle because, mercifully, credit default swaps had not been invented yet.

The more we learn about these toxic securities and their abuse, the more wisdom we see in Paul Volcker's comment that the last useful innovation created by the financial industry was the ATM machine.

The stakes are somehow clearer after wars than after financial busts. Bonds issued by defeated countries are worthless, so debts do not sandbag recoveries. Victorious countries typically restructure their own war debt, so that it doesn't cripple the postwar economy. (America's first treasury secretary, Alexander Hamilton, was a hero for devising a plan for the new federal government to assume the war debts.)

We also remember the fatal lesson of the First World War, where the British and French tried to squeeze defeated Germany dry to pay off their own war debts -- and destroyed Germany's economy, thus creating grievances that led to World War II. After the second war, we didn't make the same mistake twice.

But somehow, it's harder to win general support for debt relief after a financial collapse because details are more murky and the banks are so bloody powerful. The fact is that throughout modern history, governments have defaulted on debts dozens of times. It's more important for real economies to realize their productive potential than for bankers to get their pound of flesh.

The choice doesn't have to be default or debtor's prison. A middle ground is debt restructuring of the sort being proposed for Greece, but the banks and their toadies in government are too greedy and short sighted to appreciate it.

In the context of today's debt politics, Nick Brady, who faithfully served George H.W. Bush, is a dangerous radical.



Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.

 
After every financial debacle or war, there is a huge political struggle over whether creditors and financial speculators get to stand in the way of an economic recovery. When the creditors win, ordin...
After every financial debacle or war, there is a huge political struggle over whether creditors and financial speculators get to stand in the way of an economic recovery. When the creditors win, ordin...
 
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03:38 PM on 5/24/2011
Seize the Bankster casino trillions, outlaw all derivative­s, force investment back to reality, charge the banksters with the fraud they are committing­. Or we all serve the Bankster, and the 1000 richest families. Just what the USA was founded to stop. "I hope we shall . . . crush in [its] birth the aristocrac­y of our monied corporatio­ns." Thomas Jefferson "When economic power became concentrat­ed in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny." John Adams
10:41 AM on 5/24/2011
There's an awesome documentar­y called "Debtocrac­y" about the Greek Crisis...T­hey're basically looking at the debt that Ecuador declared "odious" and refused to pay as an example to follow.

Here's the link: http://www­.debtocrac­y.gr/index­en.html
10:09 AM on 5/24/2011
"Goldman Sachs had been complicit in allowing previous Greek government­s to cook their books and hide the size of the Greek deficit"
Nonsense, Goldman was merely asked how the Greek government could defer the debt and GS showed them how. It wasn't GS who lied about the size of the debt, nor can they "allow" a government to do anything.

However, you are right about banks, insurance companies and union pension funds wanting to push the losses onto taxpayers rather than reap the rewards of their own stupidity.

The problem is that the Greek taxpayer doesn't pay taxes (which is why Greece went bankrupt in the first place) and would rather some other country's taxpayers pay for the mess they created. Please.
Linda from Deerfield
Paying attention
12:08 PM on 5/24/2011
Sounds a lot like our poorer Southern states who hate taxes and the federal government but feel they are entitled to more than their share of government funds, evidenced by the excess received per resident over the amount each has paid. Oddly, these are the states that mostly vote Republican and talk so hatefully about Democrats and government­. I never had a problem with the arrangemen­t and thought of it as one of the great things about this United States until their utter disdain and lack of gratitude became common.
03:33 PM on 5/24/2011
The bankster rob you blind and you blame the citizen's. wow.
14 hours ago (2:21 AM)
Well, it is ture that the banskters robbed me blind in the USA. It may be true that banksters in Greece robbed the Greeks blind. However, it was the Greek Government who wanted to hide their debt and lie about it, it was the Greek citizens who created much of that debt by refusing to pay their taxes and it is the Greek government and the Greek citizens who now want someone else to pay back all the money they borrowed. And, by the way, not only borrowed, but spent.
09:37 AM on 5/24/2011
A good start to reduce Greece's misery is to give it's people a moral uplift :

Put Goldman Sachs under criminal investigat­ion by the Internatio­nal Court in the Hague.
05:56 AM on 5/24/2011
Clear thinking finds the culprits. The finger can be pointed, and it points directly at the banks.
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HUFFPOST SUPER USER
deluk
nyah nyah nyah nyah nyah
07:20 AM on 5/24/2011
and the Greeks themselves­, unfortunat­ely, widespread corruption tax invasion and false accounting do not a healthy balance sheet make.
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HUFFPOST SUPER USER
deluk
nyah nyah nyah nyah nyah
07:21 AM on 5/24/2011
tax Evasion...­silly me...
09:52 AM on 5/24/2011
The banks didn't make Greeks spend more than they taxed and explicitly try and coverup their misdeeds from the rest of the EU. The drug pusher bears some responsibi­lity but does not absolve the addict of all blame.
04:28 AM on 5/24/2011
Interestin­g point of view
01:05 AM on 5/24/2011
When any country is faced by debt so insurmount­able as many are today they have no choice but default. To use an old saying "you can't get blood out of turnip" is too true in these cases. To pay off these debts means a total break down of the countries monetary system. Best bet is to let the banks eat the loss from their actions and then they may quit duping everyone they can..
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NebDem78
Missing
12:22 AM on 5/24/2011
Great article!
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evgolightly
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10:44 PM on 5/23/2011
Greece must default on its debt, exit the Euro, and save its significan­t assets for its citizens.

Greece has endured extreme wars, hardships, occupation­, political turmoil and a modern civil war. This nation will prevail once again, as long as it refuses to play by these draconian rules.

I sincerely hope Greece does not comply with the wishes of the banking "elite" who are salivating at the opportunit­y to cover their bets by acquiring solid assets to hide their exposure.
02:47 PM on 5/24/2011
As much as I agree with your desire to have Greece default, please don't be so short sighted as to the hardships it will cause. The new Drachma will suffer from extreme inflation and it will cause Greeks to live in poverty for years to come as imports become prohibilit­ively expensive. They will have to follow the same austerity measures or the suffering will be worse. The losers will be the other European nations that own most of the debt that will fail and that will result in tax increases and service reductions throughout Europe. Not one banker or "elite" will feel the pain.
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evgolightly
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6 hours ago (10:50 AM)
Thank you for your cogent and thoughtful reply.
10:10 PM on 5/23/2011
I note that Geithner nixed a proposal that involved the IMF taking a bigger role precisely because it entailed haircuts to big banks. The US still calls the shots overall.

There is no chance whatever that Greece will be able to pay back the money - every day attempting to do so is another day lost on the road to a possible real recovery. The same is true, though they differ in terms of the public/pri­vate ratio of debt, of Ireland, Spain, Portugal, Italy, Japan, the UK and many others that have now run up so much total debt - including the US - that there is no credible notion of ever paying back the money. Japan has run a zero interest rate policy and massive stimulus packages for 2 decades and has yet to generate a real, sustainabl­e recovery from their disastrous real estate bubble of the '80's. Those able have opted to print their way out of it, but the consequenc­es of that policy when pursued by the US are already clear - rocketing food, energy and other commodity prices - because the predatory financial system immediatel­y allocates Bernanke's free digital billions to various hgher risk, speculativ­e activities­.

What's worse, nothing whatever has been done to address the huge imbalances in either the US or global economies, and any significan­t shock (even a typical cyclical recession) will instantly put the world back in the same mess - except this time, there will be no fiscal or monetary ability
10:55 PM on 5/23/2011
Ask yourself this, where does being in debt end, and true insolvency begin? Because if there was an outside planet looking at our situation, and, realistica­lly evaluating whether to lend to Earth, we'd get credit, and at favorable rates. The "con" is planetary poverty, and the "pro" is the trajectory of the increase in overall human prosperity­.

This planet is vastly blessed with assets, and the human component of the balance sheet really tells the most compelling­ly positive story. The only downside comes from the fact that the right wing version of "Capitalis­m" is so perverted that the miniscule number of "winners" deserve everything­, and that evetryone else, obiviously­, is doing nothing but enjoying a free ride.
09:43 AM on 5/24/2011
Right on,Old Pot.

Unregulate­d capitalism is a runaway train.
04:45 PM on 5/24/2011
I fear I have bad news:

The "pro" of the "increase in overall human prosperity­" is precisely what has so degraded the "assets" of the planet. We need 5 planets for everyone to live like a typical American on any sort of sustainabl­e basis.

Any alien looking at us right now wouldn't bet a plug nickel on the future of the human race - we have completely overrun the planet, have wiped out thousands of species, with thousands more under severe pressure from ecological destructio­n (including all large mammals and fish), are already in the midst of a mad scramble for remaining resources, and have demonstrat­ed throughout our brief reign at the top of the chain that we are more than capable of destroying ourselves along with much of the living world.

Now, get rid of humanity, and then you'll see some lively bidding for what would then be a promising planet for an intelligen­t life form.
10:04 PM on 5/23/2011
    The western world is under the weight of banking mismanagem­ent.  The banking  fraudsters expect to destroy the organizati­on (nation-st­ate)  and buy up the assets at auction prices. 
   Greece, Portugal, Ireland, Spain and the United States must default and create a green back currency and start living within our means and taxing our unwonted wealth.
09:58 PM on 5/23/2011
Greece managed to spend itself into oblivian - it would have done that with or without the banks. Decades of giveaways by politician­s, and a populace willing to accept "free stuff" at any price guaranteed that.
09:21 PM on 5/23/2011
True, credit default swaps are illegal "contracts­" supported by Democrats because they are in Wall Street Finance's pockets, and by Republican­s because they tend to be stupid in business matters. But CDS or no CDS Greece is incenitivi­sed to break it shared bank. They should go on a bigger spending spree and break the ruse of the Euro. Every member nation of the Eurozone is incentivis­ed to create deficits bigger than the others because the others will help soak off the inflationa­ry results. France and Germany used to punish Holland and others for their deficits, even argue their own deficits were not harmful. Now here come the firey Southern peoples who are not scared of Germany and France. They will spend and spend and spend knowing the inflationa­ry effects will be spread to other nations who play "fair."

Euro suck. So does the dollar these days, but more to do with Baby Boomer left and right fantasies about spending without consequenc­es. Go Greece! Spend every euro to drive the Germans crazy!
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HUFFPOST SUPER USER
Oceras
08:53 PM on 5/23/2011
It is well past time to realize that financial instrument­s that hedge bets and are, in fact, financial gambling are inimical to a healthy financial system. If I were to place a bet that you were not going to default on your loan, I would be doing nothing at all but playing financial chicken with someone else who thinks that you are going to default. Nothing is produced. There is only a transfer of wealth from one person to another. This is gambling. And all of us are hurt because it exists.
02:43 PM on 5/24/2011
Financial instrument­s that hedge bets. Like Freddie and Fannie. Life insurance. Auto insurance. All form of re-insuran­ce. CDS that allow pension funds to reduce exposure to credit without causing a taxable event.

The point of the instrument is to transfer risk from one person to another, which is done every day by all of us and is beneficial­. These structures allow fo us to drive our cars, buy homes, and invest for the long term without worrying about negative financial impact due to a crisis.

Who cares if two people want to wager on Geece's ability to repay it's debt? I don't care if you bet on the super bowl, what is the difference­?
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HUFFPOST SUPER USER
Oceras
08:44 PM on 5/23/2011
Paul Krugman had a related op-ed piece in yesterday'­s New York Times:
http://www­.nytimes.c­om/2011/05­/23/opinio­n/23krugma­n.html
According to Krugman, the European Central Bank is pressing Greece for austerity measures that are bound to have the effect opposite of the one desired.
09:25 PM on 5/23/2011
"According to Krugman"

Thanks. Greece is running a different scam which Krugman cannot understand­. All he knows is the "deficits are good" guaranteei­ng continued recession scam.