POWIP Piece of Work In Progress – Former Abode of Dan Collins

A Companion Piece to Yesterday’s Zero Hedge Post on US Bailouts of European Banks

Francis Cianfrocca's absolutely right about the legislative component of the global financial meltdown.

Of course, if the full bailout of Greece happens, the people of Greece will take it in the neck, with onerous fiscal-austerity requirements. They’ll suffer a permanent reduction in living standards, in order to pay back their old debts.

Policymakers will strongly prefer this course of action, and primarily for this reason: because it will allow private creditors in France and Germany to avoid taking losses. No one wants to see a big name French or German bank become the next Lehman Brothers.

A great many conservatives would respond to this the same way they responded to TARP: “Let the bankers fail! No one held a gun to their head to force them to make stupid loans.”

Except that this isn’t quite true. Policymakers and politicians DID INDEED encourage private lenders to expand their commitments to Greece; and to many other defaulting countries; and to US homebuyers, etc etc etc.

The point here is that the expansion of credit is what has stood behind the broad-based economic growth of the three decades to 2008. If bankers didn’t take more risk (with implicit government guarantees), then growth would not have been so strong. There has been clear political support for credit-driven growth in the developed economies for decades now.

But as it turns out, the cost of that risk could not be avoided. When we use official money to buy impaired assets at nearly (nominal) par, the effect is to ratify the original overpricing of this risk, and to shift the resulting losses from private creditors to taxpayers. The INEVITABLE result is an effective deflation or austerity.

That explains the position of Greece today; of the US economy after the housing-bubble collapse; and most ominously, of the US in the near future as we come up to a huge expansion in social commitments.

And it's still the legislative component that to this point hasn't been exposed by the MSM. Between the devaluation of illiquid assets and the devaluation of the dollar, Americans can expect a substantial reduction in quality of life, no matter what the intellectual elite may imagine about compensatory societal improvements.

Dan Collins

Dan Collins is a dude who blogs. He used to blog elsewhere. Now he blogs here.

More Posts - Website