Sunday, June 28, 2015

Turning a Minor Problem into a Catastrophe

The collapse of the already weak Greek economy that had its beginnings in the 2010 bailout accord is a tribute to political stupidity.  The political leadership of Sarcozy, Merkel, Draghi, Lagarde has taken a minor and small problem -- a sovereign bankruptcy -- and turned it into a major political and economic disaster that threatens the entire Eurozone.

When Detroit defaulted, did that default threaten the dollar or the United States?  No.  In fact it was a minor event and not the first time that Detroit had defaulted, in any event.  So, why the heartburn when Greece was threatened with a default in 2010.  Ignorance, mainly.

When borrowers borrow more than can be repaid, borrower and lender sit down and "work out" a solution that imposes costs upon both the borrower and lender.  This is commonly known as bankruptcy.  That's the normal solution to the problem of unpayable debts. 

But, for mostly absurd reasons, the political leadership of the Eurozone, the European Central Bank, and the International Monetary Fund, decided that they knew better.  They collectively decided that free markets are irrelevant and that politicians could "rescue" Greece.   Thus the logical and normal free market solution of a controlled bankruptcy was never even considered by these political hacks.

But, at the end of the day, markets work.  Greece will default, regardless of what politicians may think.  If Greece leaves the Euro, that will be a political decision, not an economic decision.  There is absolutely no reason for Greece to leave the Euro, even it defaults, any more than Detroit should have created its own currency when it went bankrupt.

Both the media and politicians deserve an F- in economics for the past five years of stupidity regarding Greece.  Now, attention will shift to Spain, Italy and Portugal and it will be interesting to see if the same failed strategy of the "troika" will be pursued in regard to these countries. If so, look for these countries to be headline stories for the next five years, with the same easily predictable results as will soon befall Greecc.

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