Greece Austerity Continues Economic Bailout Behavior
As any mildly sentient being knew would happen, the Greek government got its bailout. It was a foregone conclusion, and there’s a 99% chance that the IMF would have disbursed more billions to the profligate government even if Greece’s Parliament had failed to pass an “austerity” program.
The reason why Greece was saved should be obvious, but if not, let’s be clear that the bailout was not one meant to aid a Greek government that has been in default for much of its debt-issuing existence, rather it was a bailout of banks around the world that have exposure to Greek debt. If the latter were not the case, if Greek debt were locally held, it’s near certain that the IMF would not have stepped in, and those with exposure to the debt would have taken a “haircut” on their holdings as normal investors in stocks and bonds do with great regularity.
Sadly for the rest of us, from individuals to small-business owners to big-business CEOs, we’ll all suffer globally for this egregious mistake by an IMF that is the dictionary definition of mission creep. We will because the bailout of Greek government creditors (meaning banks) signals to investors worldwide that all government debt is safe. Indeed, if a country as economically insignificant as Greece can’t be allowed to default given what it would mean for the wards of the state that we call banks, no country can.
The global economic implications are ugly because it’s now true beyond any doubt that fiscally incontinent governments will always be able to raise more debt owing to certainty among creditors that if governments ever experience revenue shortfalls, other governments or other government-sponsored entities will step in to save them as a backdoor bailout of the financial institutions that would be rendered insolvent by a default. The economic harm here is obvious.
Indeed, by virtue of propping up Greece the global economic bureaucracy has clearly stated that government debt is preferred debt. This means the very government spending that screams capital destruction will continue without endpoint, often in support of other strapped governments that will have zero incentive to fix their finances. At the same time private individuals and private businesses governed by market discipline such that they can default will only receive what’s left. There are no entrepreneurs, businesses and jobs without capital, but thanks to the privileged status that governments enjoy in the capital markets, there will be less and less capital for those actually interested in creating wealth with it.
Assuming the opposite of what’s transpired, as in if we lived in a world governed by market signals whereby government creditors were singed, and governments subsequently put on a diet, there would be some room for optimism. Simply put, if Greece’s creditors had suffered a haircut, and a few (or many) banks had failed, the economic signal would be a positive one for investors/creditors being made aware in none too subtle fashion that government debt is not a one-way bet. If so, investors would be forced to rethink their allocation strategies such that what is always limited capital would migrate away from the capital destruction that is government spending, and into private, capital expanding hands.
Of course, the economic tragedy that is the Greek bailout doesn’t quite end there. Indeed, the beauty of pure capitalism is that much like the blind scales of justice, it only knows profit and loss. Or put more simply, capitalism is merely a word for a beautiful process in which bad, economy sapping ideas are regularly starved of capital, while good, economy-enhancing ideas receive it in abundance.
Considering banks, markets guided by the invisible, non-discriminatory hand of capitalism have for at least 100 years been trying to shrink a banking sector that is increasingly unnecessary when it comes to the allocation of capital. If this is doubted, consider that as of the fall of 2008, which was the last time markets tried to right-size finance, 80% of all lending occurred away from traditional banks. To state the supremely obvious, free markets have been trying to rid the economy of banks since at least the early part of the 20th Century, but with banks nothing if not heavily regulated – meaning politically protected – their natural path to obsolescence has been blocked.
The global economy suffers the political class’s unwillingness to let markets work in two harmful ways. For one, bank bailouts disguised as government bailouts ensure that governments around the world will continue to extract far more capital from the productive private sector than they would if actual market discipline were brought to bear on their fiscally irresponsible ways.
For two, banks, which are nothing more than collections of good and bad human talent, would play an even smaller role in the private economy if true capitalism were allowed to work its magic. No doubt some or many financial institutions would fail, and while this would bring short-term pain, the long-term gain from such a scenario would be profoundly good for economic growth given the certainty that former financial professionals, pushed out of a profession that the economy needs less of, would find their way to higher value, economy-enhancing work.
Naturally some will say that the Lehman experience means we can’t let governments default because we can’t let banks fail, but that’s a gross misinterpretation of what occurred nearly three years ago. Lehman’s bankruptcy on its own could never have caused a crisis. Instead, the “crisis” revealed itself precisely because governments occasionally (and improperly) bail out financial institutions. If banks were treated like most other failed economic ideas – as in, allowed to fold – the markets would have been prepared for Lehman’s demise well in advance, and it would have been a quiet economic event.
As Adam Smith long ago observed, stationary economies are stagnant, recessionary ones for the stationary economic state repelling investment. In short, every day we prop up banks that should be allowed to go under for their mistakes, is another day of economic advancement lost for unnecessary concepts being perpetuated at the expense of necessary ones that don’t see the light of day due to capital remaining locked up in the sectors of yesterday.
Though a small, economically irrelevant country, Greece’s troubles and our bailout of same signal something much worse for the global economy. Economies can’t advance without failure, and if fear of near-term pain means we can’t even let Greece fail, we should all get ready for many more years of economic hardship.
John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.