Teaching Comparative

Borrowing or lending to blame?

And another look at austerity.

Why Greece’s Lenders Need to Suffer

There is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece’s crisis as a moral failing on the part of the Greeks.

GR0133004177 is the technical name for a bond the Greek government sold on Nov. 10, 2009…

A bond is a form of i.o.u.; when a government or a company issues one, it is actually borrowing money with a precisely defined promise to pay it back after a specified period of time at a set interest rate. Every bond has the same basic criteria: duration, yield and risk. This means that bonds can be easily compared and traded…

Federal bonds funded the growth of an American highway infrastructure and created a truly national economy; municipal bonds brought the South out of its agrarian doldrums. In Europe, the impact was even greater. European bonds allowed money to flow freely across borders, knitting disparate states that had warred for millenniums into one unified economy. More prosaically, bonds provided objective rigor to the funding of private companies’ activities, helping to break up a cozy, WASPy boys’ club that had determined which enterprises got to borrow money…

On that day in 2009 when GR0133004177 was issued, investors had every reason to assume that this was an especially risky loan… I was shocked, looking back, to see the winning number: 5.3 percent. That is a very low interest rate, only a couple of percentage points above the rate at which Germany, Europe’s most creditworthy nation, was borrowing money. This was a rate that expressed a near certainty that Greece would never miss a payment…

In hindsight, of course, we know that the investors should not have lent Greece anything at all, or, if they did, should have demanded something like 100 percent interest. But this is not a case of retrospective genius. At the time, investors had all the information they needed to make a smarter decision. Greece, then as now, was a small, poor, largely agrarian economy, with a spotty track record for adhering to globally recognized financial controls. Just three weeks earlier, a newly elected Greek prime minister revealed that the previous government had scrupulously hidden billions of dollars in debt from the rest of the world. In fact, the new leader revealed, Greece owed considerably more money than the size of its entire annual economy…

The original sin of the Greek crisis did not happen in Athens. It happened… in Frankfurt and London and Shanghai and New York. Yes, the Greeks took the money. But if I offered you €7 billion at 5.3 percent interest, you would probably take the money, too. I would be the one who looked nuts. And if I didn’t even own that money — if I was just watching over it for someone else, as most large investors do — I might even go to jail…

The institutions that bought that €7 billion in Greek debt in 2009 made a very bad judgment. Even at the time, it was clearly a foolish gamble — so foolish, in fact, that it can be explained in only one way. They believed that in the event of default, the Germans would bail the Greeks out. And just to be clear: This doesn’t mean they believed that the Germans would be kind to the Greeks. It means they believed that the Germans would be kind to the people who owned Greek bonds, a significant percentage of whom were certain to be German themselves. In lending money to Greece at 5.3 percent interest, they weren’t calculating Greece’s ability to pay. They were calculating the German government’s willingness to help out German banks…

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Labels: austerity, concepts, economics

posted by Ken Wedding @ 5:30 AM 0 comments

Savings policy or austerity?

If you're not up to your eyeballs in austerity (a term that will almost certainly NOT appear on an exam in the next few years), there's a great article in Sunday's New York Times Magazine.

Even if the term doesn't appear again, the topic will and this is a timely segue into the complexities of economics.

The Tough Love of ‘Austerity’

‘‘Austerity’’ has become the catchall word for the cost-cutting a government enacts in order to balance its books: Cut pensions, cut the public payroll, cut social services — cut whatever and wherever. Shrink spending, shrink debt, shrink deficits. The idea is to inspire confidence and make the place more attractive to investors, who prefer a government that’s tough and lean to one that’s marbled and tender…

Austerity implies deprivation, undertaken under duress, to be suffered through or endured; a ‘‘savings policy,’’ by contrast, sounds practical and prudent, a solid foundation for a sensible way of life…

[T]he market was to be left alone — ‘‘laissez faire’’ — so that it was free to operate according to its natural laws. Recessions and downturns were the market’s way of correcting itself. When government intervenes, it invariably distorts…

Even those who are sympathetic to austerity may have a harder time with the word now. John Cochrane, an economist at the Hoover Institution at Stanford University, told me that it ‘‘started as bad marketing for some sensible policy’’ and has since become a ‘‘general-purpose insult.’’ He tries to avoid it: ‘‘I’m in favor of ‘growth-oriented policies’ — isn’t that a much prettier term?’’ Yes, though what it loses in insult, it perhaps makes up for in euphemism. ‘‘Growth-oriented’’ is as irresistible to an American sensibility as sparen, ‘‘to save,’’ is to a German one: It sounds like a no-brainer.

It also masks something that the word ‘‘austerity’’ does not. Austerity is often promoted as not only economically but morally necessary too — Greece, according to this argument, needs to be taught a very painful lesson, or else it’s going to continue to do silly things with other people’s money. Mark Blyth, a political economist at Brown University, told me that austerity policies, whatever we want to call them, turn an economic situation into ‘‘a morality tale of saints and sinners,’’ leading to punishment rather than problem-solving. Besides, he says, this morality tale gets it backward. Austerity programs have historically been enacted in reaction to a banking crisis: A government goes into debt in order to rescue the banks, and so private debt is transferred onto the public balance sheet. Public spending is slashed as a result.

Given that the poor benefit more from the kind of government spending that is cut, Blyth writes in his book, austerity ‘‘relies on the poor paying for the mistakes of the rich.’’ Greece’s people are becoming poorer: Last year, Unicef calculated that more than 40 percent of Greek children were living in poverty, a doubling from four years earlier. The conversations about Greece sound depressingly familiar, mimicking the ones we have here about the poor, the rich and who ‘‘deserves’’ what. The setting might change, but the moral stays the same: Those with less are expected to be the ones to do without.

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Teaching Comparative blog entries are indexed. Use the search box to look for country names or concept labels attached to each entry.

---

What You Need to Know: Teaching Tools, the original version and v2.0 are available to help curriculum planning.

---

What You Need to Know 7th edition will be ready to help soon.



Amazon's customers gave this book a 4-star rating.

---

Just The Facts! 2nd edition is a concise guide to concepts, terminology, and examples that will appear on May's exam.


Just The Facts! 2nd edition is available NOW!. Order HERE.

---

Labels: austerity, concepts, economics

posted by Ken Wedding @ 5:30 AM 0 comments