Friday, July 3, 2015

Let Borrowers Accept the Responsibilty

The lesson in Greece is that other countries should not offer bailouts.  Bailouts left the impression with bond buyers that Greece was more credit worthy than it really is.  Thus, Greece was able to dramatically increase its debt load over the past five years, while avoiding politically painful reforms.  This was a big, big mistake.  The losers will be both Greece and bond buyers.

All of this was completely unnecessary and was the result of meddling politicians.  Greece should have faced its bankruptcy alone, as Detroit did in the US.  Had Greece defaulted in 2010 without any comments from Draghi, Lagarde, Merkel or all of the other silly politicians, Greece would now be thriving and would have, by now and on its own, made the numerous economic reforms required to return to the sovereign debt market.  No bailout necessary, plus a good outcome.

Generally, the absence of government yields optimum results, while government intervention creates problems that would have never existed had it not been for the meddling of politicians.  Markets are great disciplinarians.  Markets convince people to do the right thing in order to survive.  Politicians pretend that no discipline is really required.

The Greek outcome is a story that will be repeated numerous times in the future.  In every case, it will come as a shock to the media and to the politicians, although the numbers are completely obvious today and the outcomes ahead are easily predictable.

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