Published in The News Tribune, December 2, 2011
It’s an extraordinary world we live in when a country 6,000 miles away and the size of Washington threatens America’s economy.
But so it is. Even Olympia’s latest revenue forecast identifies evolving events in Greece as the wild card in its predictions. How much our state government will have to cut services to our most vulnerable citizens hangs on the fate of Greek bonds – as well as on bonds of other European nations caught up in Greece’s contagion effect. It goes to show how interconnected we’ve all become.
Americans have a strong stake, then, in how things play out in Greece. We should hope that the widespread fear of buying Greek IOUs abates very quickly rather than spreads. Otherwise, the Greek government defaults on its IOUs (bonds), leaving its creditors holding the bag.
Greece’s creditors are mostly European banks which have taken citizens’ deposits and invested them in Greek bonds. If Greece can’t repay them, these banks can’t repay citizens. A classic “run on the bank” will follow — such as we witnessed in the Great Depression, the Great Recession, and with George Bailey’s bank in the film It’s a Wonderful Life. The upshot could be a massive financial collapse in Europe, the effects of which could wreck havoc here.
Essentially, then, bankers have made the world a smaller place. And central bankers (those of the European Central Bank, equivalent to our Federal Reserve) can come to the rescue by investing heavily in Greek and Italian bonds. This would help convince other investors that those governments won’t default because the Central Bank “has their backs,” so to speak. There would be no run on the banks, credit wouldn’t dry up, and we should avoid another recession.
What’s surprising in this tale is realizing that what’s good for the poor here is making sure bankers aren’t left holding the bag. This was also true back when Wall Street was collapsing: Our government stepped in to assure those banks didn’t collapse, and it’s a safe bet that the poor are better off for it.
Is the message, then, that bankers unite us and improve the lot of the poor?
Not exactly. Rather it’s that financial markets have powerful effects on all our lives: Greek bonds affect Washingtonians and Wall Street touches every corner of the globe. Knowing this, bailing out Wall Street wasn’t optional. Let’s hope Europe reaches the same conclusion about Greece.
These instances reveal to us how interconnected we are and how fragile can be the global economy. But another message is that you can neither trust markets nor governments. Markets were driving Wall Street’s irresponsible buying and selling of mortgages. Meanwhile the Greek government went on a reckless borrowing spree.
What we Americans aren’t very good at – it’s not surprising our elected officials aren’t either – is thinking beyond the “markets are good (bad)/government is bad (good)” dichotomy. Some markets work really well and best to leave them alone. Others can be extremely problematic. The same holds true with government policy.
Both financial markets and government fiscal policy share in common the fact that they can cause a financial collapse. This is especially true when each has access to vast amounts of foreign capital offering easy credit. Too much money from one country seeking to invest elsewhere leads investors to throw caution to the wind; plus it worsens the “contagion effect” if things go wrong. It’s for these reasons the world’s economy now hangs on the fate of a few countries’ bonds – that is, why we’re so interconnected.
Today’s hyper-connected economy is why all of us should cast very watchful eyes over financial markets. And why we should worry about governments promising more than they can deliver. We didn’t do the former and Europe didn’t do the latter; that’s what led to the circumstances requiring us to first bail out Wall Street, and now hopefully Greece.
For our own sake, let’s pray Europe comes quickly to Greece and Italy’s rescue. But let’s also become less simple minded about the strengths of free markets or the wisdom of governments. Both can falter when they aren’t adequately scrutinized. And when they do, there can be weighty consequences for all of us.