In a way, we have all become Greece. The common element to democratic countries everywhere is a willingness to allow public debt and deficits to gallop out of control and to permit politicians to ride those horses to the edge of financial oblivion as they promise a better world all along the way.
Is the Eurozone bailout going the way of the infamous U.S. TARP? There are reasons why the initial EUphoria over the one trillion dollar package, hastily pulled together by the IMF, the European Central Bank and EU governments led by France and Germany last weekend, should give way to some sober second thoughts.
The scheme offers no stimulus to Europe’s sluggish economies and amounts to already heavily indebted countries going into even more debt to bail out others in seriously crippling debt. No doubt it will generate profits for bond traders and make Goldman Sachs wealthier. But what will it really do for countries experiencing economic downturn? Forcing Greece to take on and pay back more debt and loans at a time when citizens are facing a firestorm of draconian spending and pay cuts, mounting unemployment, slashed pensions, higher taxes and lack of confidence in the future is not an economic strategy. It is a formula for social upheaval and the worst kind of extremism that once before left Europe in flames.
There is no certainty that the scheme will prevent a default by Greece either, even if everyone in the country were rowing in the same direction, which clearly they are not. The IMF seems certain to inflame conditions, not improve them, given its record. Not even the prospect of a trillion dollar bailout could get the Euro to rise. It continues to slump, imposing what amounts to an added tax upon the citizens least able to afford it.
Related currency swaps with the U.S. will mean that the Fed’s already bloated balance sheet will balloon further, ultimately leaving U.S. taxpayers on the hook for those commitments. Currency swaps were all the rage in late 2007, when they were entered into by various global central bankers and the Fed in the hope of combating the credit crisis. They did not live up to those expectations.
We were among the first voices to express skepticism about the TARP, which was never used for its intended purpose and over which members of Congress and the general public have repeatedly registered chagrin. The EU fund created by an unusual, perhaps worrisome, coalition of central bankers and various governments is also facing a clash with sectors of the public and opposition politicians. The fund was cobbled together too fast with little creativity or imagination and a level of recidivism regarding debt that is as mind-boggling as the sum involved. It was done without the slightest bit of consultation with the public. The TARP, too, was heavily criticized for many of the same shortcomings. It never shook loose of its tattered image as a result.
The emergency fund was created in the hope of avoiding something called contagion, where one country’s ills would affect another and eventually spill over into North America. But here is the real contagion concern: in a way, we have all become Greece. The common element to democratic countries everywhere is a willingness to allow public debt and deficits to gallop out of control and to permit politicians to ride those horses to the edge of financial oblivion as they promise a better world all along the way.
Not every nation sees rioting in the streets as we did with Athens, but in democracies throughout the world there is an unsettling and growing gap between those at the top of government and business (and central banks, to be sure) and ordinary citizens. Trust in major institutions to do the right thing has rarely been in shorter supply. Populism is on the rise. In the United States, querulous voters are in a mood to throw out Washington incumbents. That trend also spilled over to Europe where Angela Merkel’s party last weekend lost key regional elections and Gordon Brown’s government was forced to resign after defeat at the polls. The toppling of icons like three-term Republican Senator Robert F. Bennett of Utah, who lost his party’s nod for a fourth-term last weekend, is as frightening to political insiders as any rock-throwing mob. People are looking to narrow the gap between those at the top and everyone else; they want to be viewed as more than a stepping-stone for self-aggrandizing politicians and a cheap source of capital for the financial world and Wall Street. They want a fair deal and honest talk, not Fed speak or talking point spins that rattle any lie detector within a ten mile radius.
We will know progress is being made when we hear the word “trillion” a lot less often and when we find central bankers and politicians who view bailouts and deficits as symptoms of a chronic problem and not the knee-jerk solution they have been turned into.