

In praise of default  - cwan
http://blogs.reuters.com/great-debate/2010/07/06/in-praise-of-default/

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RyanMcGreal
It's historically interesting that we're talking about a general default in
the context of Greece, given that arguably the most famous default in history
- Solon's "shaking off of burdens" in ancient Athens - ushered in a golden age
of wealth and prosperity amid rising international trade.

Yet these days we're more inclined to a Draconian than a Solonian approach to
our economic and political woes.

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_delirium
My impression is that as far as Greek public opinion goes, "will it work?" is
currently the biggest open question. If Greece is going to end up defaulting
anyway, a lot of people are in favor of just defaulting now and getting it
over with, instead of paying huge interest bills on a loan that they'll never
be able to overcome anyway. Selling the austerity plan requires selling people
on "yes, it'll work", which so far many people don't really believe.

~~~
SkyMarshal
I think as long as Greece's economy is resilient to a default, and the
government able extract taxes from it afterwards, it will work.

The creditors will be screwed, but new ones will be ready to lend again to a
government with tax revenues and no debt.

It depends how much of the defaulted debt is foreign-held, and how much is
domestically-held. If too much the latter, the economy may not recover right
away, putting them in a pinch.

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bsaunder
_We’ve already printed money, the fifth option, and in my opinion may well
print a whole lot more._

This is said so matter-of-fact yet not given much more weight in the argument
presented for default. As I see it, default and inflation are the only two
ways out of this (and I'm not sure they are binary and mutually exclusive).
Both seems to penalize the affluent with assets and benefit those with debt.

Why people not talking more about inflating our way out of this? Wouldn't a
devalued currency also increase jobs as things are brought back on-shore?

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hga
The problem here is secondary effects of default. I.e. it's widely perceived
that a default by Greece would result in a _lot_ of more northern European
banks going insolvent and having your banking system break down is ... really
bad. Its one of the things that made the '30s a "Great" Depression.

A general but not very satisfactory solution has been to drag things out for a
decade slowly building bank capital so that they can finally officially
realize their losses without closing down.

~~~
kiba
Some people rather experience an extreme loss in employment but rapid gain in
employment, instead of a _slow_ misery that last for a decade. By defaulting
banks, we could reallocate resource quickly as banks' assets get sold to
healthy banks.

Rather than trying to avoid pain, we should acknowledge failure as a part of a
healthy free market system and optimize for a robust system that can handle
failures instead of having "too big to fail."

It should be like when circuit-city falls, there isn't much damage to the
economies, instead of the fear that comes from when financial institutions are
failing.

~~~
hga
The problem of course is when you allow too many "too big to fail"
institutions to exist and suffer a cascading failure such as the ones started
by Creditanstalt in May 1931 (<http://en.wikipedia.org/wiki/Creditanstalt>)
and Lehman Brothers in September 2008
([http://en.wikipedia.org/wiki/Subprime_crisis_impact_timeline...](http://en.wikipedia.org/wiki/Subprime_crisis_impact_timeline#September_2008)),
the latter fortunately got stopped.

One obvious solution is outlaw "too big to fail" although that seems to be
hard (the current US financial regulation bill enshrines them), and it still
doesn't address the lemming like behavior you see in bubbles which allow near
total systems failures.

In fact, wasn't the US banking system of the '30s mostly comprised of small
banks (as I recall, 8,000 of them had failed when FDR closed the rest, but my
memory of that number could be off or maybe that was the total???).

~~~
anamax
> The problem of course is when you allow too many "too big to fail"
> institutions to exist

Folks keep talking about certain financial institutions as "too big to fail",
but what about countries?

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RiderOfGiraffes
Here are some earlier items on this subject:

<http://news.ycombinator.com/item?id=1175576>

<http://news.ycombinator.com/item?id=1011716>

<http://news.ycombinator.com/item?id=726110> <\- This has lots of comments

There are more, but my search-fu isn't up to it. "default" is a common word.

------
evaryont
My initial thought was that this was going to talk about default settings,
like for computer applications.

I was disappointed. (And I don't like the situation the markets are in now
anyways, but this article and plenty others have already voiced all I can
think of.)

