The Proper US Analogy for the Greek Crisis

Greek Borrowers and German Bankers

I was listening to a little bit of Majority Report on Monday, when Sam Sader was interviewing Georgios Giannakopoulos about Sunday’s vote in Greece. It was all quite interesting. But there were two things that Seder brought up that I thought were worth discussing a little bit.

The first thing was a common analogy that anti-Greece people in Europe say, “How would you like it if the people of New York had to bail out Texas?!” As Seder noted, we already do. That’s what a real union does. It isn’t every state for itself. California pays a lot more in taxes per capita to the federal government than it gets back in benefits. Part of that is just that we have a relatively young population, but that’s just part of our general system that money goes to where it is needed. The argument that people are making in Europe is a big part of the problem. They want a united Europe, but not if it has to cost their particular country any money.

Associated with this kind of thinking is something that has been bugging me for years about rhetoric against Greece. That is this idea that the European countries are bailing out Greece. To begin with, that isn’t even true. All that the loans from the EU have done is to cause Greece to sink slower than it normally would have. It’s kind of a slow motion torture. But regardless, almost none of the money has gone to Greece. Instead, it has gone to the reckless banks that loaned Greece money in the past. It drives me crazy that everyone focuses on borrowers, when borrowers are not expected to be conservative. The bankers are supposed to be the “adults” in a lending situation. But it is always the bankers who are portrayed as the wounded party, as if we don’t all pay more in interest to make up for precisely these kind of bad bets that the banks know they sometimes make.

That leads us to Seder’s other comment. He noted that rather than “New York bailing out Texas,” the better analogy is the bailout of the banks in 2008. In that case, the government could have bailed out homeowners. After all, if it had stopped all the foreclosures, that would have indirectly saved the banks. But instead, the banks were saved. Now I understand: from a practical standpoint, there might not have been the time to do that. But the truth is that after the banks were saved, almost nothing was done for homeowners.

The government’s position seemed to be that it could give hundreds of billions of dollars to the banks without much thought. The banks were, in other words, the “right” kind of people. But when it came to helping out homeowners, the government saw them as the “wrong” kind of people. Troubled homeowners had to go through all kinds of contortions to get relief, which meant that most of them never got any. But it wasn’t just the government. To a large extent, the people agreed. I’m constantly amazed how the people in mass identify with institutions that on an individual basis are their tormentors.

The best example of this, of course, is the Tea Party. It started, for the umpteenth time, as a reaction to the idea of bailing out troubled homeowners. The actual bailout of the banks was not what got the Tea Party started. Sure: they complained a lot about the bank bailouts. But that was long after the hundreds of billions had been given out. Where were they when that was happening? I don’t know. Partly, it was just that Fox News and the Koch brothers weren’t around to fund their outrage. But it was more that they just didn’t care when bankers were getting bailed out.

It’s the same thing in the EU now. Greek would have been best to just default on its debt. I’ve been saying that since 2010. Everyone knows that at the very least, the bankers will have to write off some of Greek’s debt. And it may end up a full default. So what have the last five years been all about other than giving hundreds of billions of euros to the bankers? The people of the EU should be angry at the Troika for wasting their money on rich German banks; Greece has only been harmed because of these bailouts.

Update (Before Publication)

Paul Krugman addressed that “New York bailing out Texas” analogy:

Ahem. As it happens, the people of Manhattan did bail out Texas, big time. I wrote about it here. The savings and loan crisis, which was very costly to taxpayers, was mainly a Texas affair:

The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that’s around $75 billion in aid — not loans, outright transfer.

Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.

But of course Manhattan was never asked to bail out Texas; we had a national system of deposit insurance, and the big Lone Star bailout was automatic.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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