The Greek philosopher Plato believed that those who are extraordinarily intelligent, virtuous and brave are best suited to run government. What would he say about how Greece is being run now? Or Europe? Or the United States?
On the Marketplace Morning Report, we reported on the European Union’s decision to rescue Greece from the distinct possibility of defaulting. Greece faces a proverbial mountain of debt from bailing out banks and showing little to no fiscal restraint. Stop me if this sounds familiar. Our European Correspondent Stephen Beard on the EU’s sketchy plans:
What we know is it involves loans to the Greek government guaranteed by other Eurozone members and requiring the Greek government to make a cast-iron commitment to cut its budget deficit. The Germans are stressing this is not a subsidy or a blank check; the Greeks are going to have their feet held to the fire, they’re going to get extra top supervision.
Greek workers don’t like the sound of that. They’re striking because they’re worried the government will have to brutalize its own economy in exchange for the EU bailout. Greece will have to show real, extreme fiscal restraint. Let’s check in with Plato on that:
PLATO: “Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments.”
The EU may feel it has little choice but to save Greece. If Greece were abandoned, it may well cause panic not only there, but in other highly indebted EU countries like Portugal, Spain, Ireland and Italy. But Bloomberg London bureau chief Mark Gilbert argues that it’s time that economic failure finally be punished:
Let Greece go bust if it can’t pay its own way. Sure, it will be messy and scary. A lot of banks will realize they still don’t focus enough on the credit quality of the firms they do business with. The euro project will suffer a crisis of confidence.
The lesson from the credit crisis, though, is that the alternative of helping Greece off a hook of its own making is far, far worse.
All of the “PIGS” — Portugal, Ireland, Greece and Spain (and maybe Italy, if you’re feeling particularly uncharitable or skeptical) — have been living beyond their means, much like the investment banks did in the credit boom.
A bailout of one will produce the same outcome as the rescue of Bear Stearns did; moral hazard will kick in, and instead of allowing economic Darwinism to cleanse the gene pool, the weaker nations will lose any incentive to cut spending and trim their swollen deficits.
The Too Big to Fail paradigm has now shifted from the banks to the governments, thanks to government’s attitude of TBTF toward the banks. Should we be worried that the Greek tragedy will play out next in the United States? [In the Financial Times](
bf44-00144feab49a.html?nclick_check=1) historian Niall Ferguson says yes:
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Never once in its history has the United States failed to pay off a debt. But our current level of debt is pretty extraordinary. Take a look:
Greece has very few (if any) options compared to the United States. But the US is in its own unique, unprecedented situation — unfettered military spending, massive looming problems with the entitlement programs, not to mention all the economic rescue spending.
Plato said “a good decision is based on knowledge and not on numbers.” I don’t know. The numbers are pretty scary.
Do you think the EU should bail out Greece? Are you worried the US will face a similar conundrum down the road?
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