Tuesday, July 12, 2011

Greece: Bigger Than Lehman Brothers

What a frigging disaster. Back in 2008, the US Federal Reserve let the Lehman Brothers investment bank - which held more than a bellyful of toxic debt, go to the wall. It was meant to bring "calm" to increasingly panicked financial markets. That will probably go down in the books as one of the more stupid decisions of the first decade of the new millenium. Rather than calming anyone, it caused the global financial system to lock up as banks lost trust in each other and in the solvency of large borrowers more generally. Everyone was potentially tainted and unstable. Business literally couldn't run because there was a money strike. It was a concrete example of how much the global system had come to depend upon credit for its basic functioning.

Global capitalism seemed to hang in the balance for days and weeks. Ben Bernanke went to the US Congress and told them they had two days to sign off on a $700 billion bailout package or it was game over. Then AIG went to wall - it provided insurance for the toxic debt that turned out to have no value - and the government had to bail them out, to the tune of close to $100 billion. By the time the panic was over, the US debt had doubled.

The extent of the Lehman Brothers bad debt is unclear - in fact, part of the problem that led to the lockdown of the credit system was that the whole derivative structure of the shadow banking system was completely opaque, mixing good and bad debts together in "collateralized debt obligation" packages. However, prior to the bankruptcy declaration, Lehman's had about $65 billion in commercial and residential real estate debt, much of it toxic. They'd also recently borrowed $138 billion from JP Morgan - a debt that the US government dutifully covered for them.

The Greek government has significantly more debt than that, about $470 billion. And if Greece goes, it raises questions about Italy, Spain, Ireland, and Portugal, which involves trillions of dollars. This is mammoth and unprecedented. In Italy, the newest country to be put under severe borrowing pressure, the immediate response of the right wing government of Silvio Berlusconi is to propose an austerity package to slash the budget deficit.

But the rush to austerity is to throw gas on a fire - as Greece has discovered. Massive cuts to government expenditure have an impact upon the real economy, depressing consumption as workers are laid off and business contracts. And when the economy contracts, fewer tax dollars make their way into government coffers, which increases the debt, leading to further pressures for austerity.

It is also to blame the wrong people for the crisis. Workers haven't created this debt load, it has been the greed of the wealthy who have benefited from deregulation and tax cuts over the past three decades, leading to greater debt and greater instability. It has also been a product of the imbalances built into the European Union, which tries to mimic a unified state but is still riven by rival nation-states that compete with each other. It also suffers from imbalances in levels of development. Germany is a manufacturing powerhouse with significant trade surpluses to its European neighbours. Greece, Spain, Ireland buy German goods but could only pay for them as a result of the asset bubbles that saw property prices go through the roof for the better part of a decade. But when those bubbles burst back in 2008, governments were saddled with debt.
...budget deficits were the result of the policies implemented by states with the aim of preventing the economic crisis from morphing into a depression as well as the result of the reduced fiscal revenues and increased social spending provoked by the 2008-9 recession. The overall result has been to transfer the bulk of the bad debts that were threatening the banks onto the states that bailed them out, thus simply displacing the problem. The euro crisis of spring 2010 was the practical demonstration of this. Speculation over whether the banks were insolvent was transformed into speculation about the solvency of sovereign entities. And while every state is subject to pressures coming from the financial markets rapidly to reduce its exposure to debt, this pressure is much stronger on small and weak states, like Greece for example. What is more, the fact that the huge deficits brought to the centre of attention the capacity of each state to pay back its debts exposed the flawed nature of EMU.
What will happen now? It is likely that panic will continue to spread as European leaders remain deadlocked about what to do about the spreading default hysteria. Germany may well use its clout to attempt to force through a solution more aggressively than it has up till now. Certainly, any solution from the political and business leadership of Europe will involve pain for the working class. What is also certain is that combined with some serious inflation problems in China and a moribund US economy, we are headed back into recession.

The real question is whether workers, so soon after accepting a kick in the teeth to "do their part" in the "last" recession in 2008 (did it really end?), will accept for austerity and rollbacks. We've some magnificent fightbacks in the past year - from Greece to Madison, Wisconsin and even to Hamilton, Ontario, where Steelworkers have been fighting against attacks on pensions. But none have broken through. Sooner or later, workers struggle will have to break through or political leaders in Europe and North America will austerity us into the ground and the economy will continue to fail. The real problem is not that workers earn too much or work too little or have pensions that are too fat. The real problem is a system based upon insane and uncontrolled greed, where the priorities are increasingly based upon financial gambling of the most craven sort. 

Greece set to default on massive debt burden, European leaders concede | Business | The Guardian
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