Sunday, May 9, 2010

$ 645 Billion Fund Makes Matters Worse Not Better

The problem is that budget deficits in Europe are out of control -- in every country. Nothing in the bailout package deals with that. The so-called "austerity plans" will not work in the middle of a recession. As the economies stagnate, so do tax revenues. So even budget cuts will be offset by revenue declines. Only economic prosperity will generate the tax revenues needed and, as prosperity goes forward, then budget cuts become possible, though they are never popular.

All the bailout package does is, ironically, postpone any serious efforts by European countries to bring their fiscal houses into order. So the situation will get worse. In a nutshell, the problems of Greece, Spain, Italy, and Portugal are now the problems of German and France. In time, someone will need to bail out Germany and France. Who will that be?

The only answer is to let Greece, Spain, Italy, and Portugal take some kind of controlled bankruptcy similar to what Argentina did in the late 1990s. Greece, for example, could offer bondholders $ .25 on the dollar for every bit of outstanding sovereign debt. Sure, French banks and German banks would then be in some serious trouble, but they are going to be in trouble anyway, eventually. Why not take the medicine now?

If you permit these countries to do a partial default, then there will be no need for extreme austerity measures and they can issue new debt, which they will now be able to do. This is the correct policy for Greece, Portugal, Italy, Spain, California, New York, Illinois, New Jersey, and so forth. There should be no bailouts. They will only permit miscreants to continue their miscreant ways.

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