

Wall St. Helped to Mask Debt Fueling Europe’s Crisis  - sailormoon
http://www.nytimes.com/2010/02/14/business/global/14debt.html

======
bd_at_rivenhill
_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.

~~~
mtts
_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

~~~
RobGR
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.

~~~
mtts
You're forgetting that if the Euro slides as a result of Greek mismanagement,
oil, which is paid in dollars, becomes more expensive, resulting in a lowering
of living standards throughout the European union.

~~~
RobGR
But if the Euro slides, the Arabs selling the oil will then be able to buy
more EU products. In the end, it will all balance out - do you think the
failure of the Greek national government to honor it's honds will cause a drop
in demand for any of the products of the Netherlands, such as electrical parts
or refined petroleum products ?

Of course, if one of the main products of the Netherlands (or Europe, or the
United States) is itself bonds, similar to how some small governments fund
themselves by selling collectors stamps, then you might be screwed by a
general fall in demand for bonds. However that situation is unlikely to
remedied by selling more bonds to buy back the Greek bonds.

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

------
MaysonL
See also: "Goldman Sachs goes Rogue"
[http://baselinescenario.com/2010/02/14/goldman-goes-
rogue-–-...](http://baselinescenario.com/2010/02/14/goldman-goes-
rogue-–-special-european-audit-to-follow/)

------
mos1
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.

~~~
vtnext
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.

