May 20, 2012

A Greek Tragedy for us all

COLIN READ, Everybody's Business

---- — Greece is in the news, again.

Actually, it has rarely been out of the news the last couple of years. It gives a new meaning to Greek drama.

This may be its final reckoning. The Greek people are angry with austerity and have voted for parties that would dismantle their contract with Europe. Following their recent election, they have failed to organize a parliament and will have to conduct a second election, with one question — whether to renounce austerity and foreign aid or to stay in the Euro zone.

This Greek tragedy tells us a lot about ourselves. It has also affected us profoundly. The Greek Games have caused world markets to decay. Trillions of dollars of equity has been lost worldwide, from yours and my retirement savings, and, of course, from the 1 percent, too.

The Greeks seem to be playing out one of two strategies. They have heard this saying among bankers. If I default on my $1 million loan, that is my problem. If I default on a $1 billion loan, it becomes the bank's problem. Greece may be banking on being too big to fail, just as our own largest banks' machinations forced the largest corporate bailouts in our history. The theory goes something like this: If the world realizes that Greece's troubles are our troubles, we will have no choice but to bail Greece out on its terms.

Their terms mean an end to austerity. If we succumb, we will be forced to lend Greece more good money after bad and allow them to spend it, ostensibly, on rebuilding their economy. Our own Congress held the same political gun to President Obama's head just three years ago. Obama developed a stimulus plan that, while most economists agreed was too little, was designed to remedy the failing construction industry through infrastructure improvements.

Had that plan been given a chance, construction would have recovered and, with it, aggregate demand, income and employment would have recovered. We would then have primed the pump to rebuild our economy and renewed the ability of states to maintain their own fiscal order.

Congress, in a pique of mistrust for the president, instead produced a budget that gave money to the states directly. The states were able to continue their profligate Greek-style ways. There was no reform, and there was no repair of the construction industry.

Instead, what we needed, and what the Greeks need, is fundamental economic reform. A bloated public sector needs to adjust to a changing demographic. But, to simply send irresponsible governments, in Albany or Athens, more money is simply to appease the crackhead with more dope.

The Greek calculation seems to be that they can make things so costly for the rest of the world that we will have to give in. The same strategy is employed by screaming 2-year-olds. Of course, 2-year-olds can't come back to the Central Bank time and again promising to reform, then decide not to once the tab has run up to astronomical proportions.

The Greeks believe they can have their baklava and eat it, too. They probably realize that their win is a loss for the taxpayers of the rest of Europe, but they are too busy contemplating their own future to consider the misfortune of others.

Isn't that what we do at times here, too? Take an iota of irresponsibility and mix in a dollop of anger at the "other side." It doesn't matter if we voluntarily got ourselves into our own messes. Wouldn't it be nice if we can expect someone else to bail us out?

On the other hand, perhaps the Greeks are not even that calculating. It may be they simply do not know they are playing Russian roulette with their economy and the global economy. The cradle of democracy has demonstrated the Achilles heel of a mob's foray into high finance.

If the Greeks withdraw from the Euro zone and default, surely no nation will lend to them for the foreseeable future. They will be forced to print money and will experience a hyperinflation that will take a decade to overcome. That sobering thought won't likely sober them up, though. Ah, the art of magical thinking.

Colin Read chairs the Department of Economics and Finance at SUNY Plattsburgh. His tenth book, Great Minds in Finance — the Efficient Market Hypothesists, is coming out this fall. Continue the discussion at