Saturday, November 19, 2011

Profligate Consumers or Greedy Bankers? Which Story Will Prevail?

[Of course, you all know it doesn't have to be either-or.]

What are some of the possible stories out there about the US financial crisis as well as the European crisis?

The Establishment Stories:

1.  The banking system is the backbone of our prosperous societies.  It keeps money moving in our economy so that businesses and consumers can get the cash that keeps capitalism rolling and everyone can enjoy a much higher living standard than would otherwise be possible.  The housing crisis put that whole system into jeopardy and only through bailing out the banks could governments prevent civilization as we know it from collapsing. 

2.  Greece and Italy, among others, have been profligate in their spending and now can't pay back all the loans they took. Greece and Italy must now tighten their belts and pay back the loans they made.

Counter Stories

1.  The US  banks and the real estate industry, not to mention the American dream, all ganged up on consumers (is that how you identify yourself when someone asks you to say something about yourself?) to sell unrealistic loans to millions of Americans.  Those in the system who had any brains at all knew that many loans would never be repaid.  But they lied to the consumers and convinced them to take out the loans, because they got well compensated, and they weren't going to be the ones holding the loans when they went belly up.

2   In Confessions of an Economic Hitman  John Perkins describes his job as an expert consultant sent to developing countries to do studies of their infrastructures.  The studies were designed in advance to recommended huge construction projects that were more than the country needed, but perfect for the needs of foreign companies that wanted to extract the countries natural resources.  And these projects came with loans that the country could not afford and would put them in debt to the countries or international organizations lending the money.   Is this what happened with Greece and Italy? 

What really happens if the banks take the big hits instead of the Greek people?  Or if the hit is shared to some degree?  And what would have happened if instead of paying off the banks, the US would have given the money to the people defaulting and just let them pay their mortgages?

This piece from George Friedman at Stratfor fleshes out the Greek scenario:
Two dimensions explain this outcome. The first was national. 
1.   The common perception in the financial press is that Greece irresponsibly borrowed money to support extravagant social programs and then could not pay off the loans. 
2.  But there also is validity to the Greek point of view. From this perspective, under financial pressure, the European Union was revealed as a mechanism for Germany to surge exports into developing EU countries via the union’s free trade system. Germany also used Brussels’ regulations and managed the euro such that Greece found itself in an impossible situation. Germany then called on Athens to impose austerity on the Greek people to save irresponsible financiers who, knowing perfectly well what Greece’s economic position was, were eager to lend money to the Greeks. 
Each version of events has some truth to it, but the debate ultimately was between the European and Greek elites. It was an internal dispute, and whether for Greece’s benefit or for the European financial system’s benefit, both sides were committed to finding a solution. [I reformatted this a bit to emphasize the two perspectives]
He goes on to explain that inside Greece, the elites will do fine when Greece repays the debts, but the average folks "would lose jobs, pensions, salaries and careers. . ."

The question lots of people have is whether this was all engineered to redistribute wealth from millions of people to a few people.  And it's all intangible and complicated enough that few people can know for sure.  But as the dust settles, a lot of just every day folks are beginning to think they were scammed big time.

And if you listen to any financial news you know they say "the economy needs more consumer spending" and then the next minute they say "Americans aren't saving enough."  What's wrong with a system that requires you  to spend the money that you're also required to save?  Do I hear the word "unsustainable"?

I heard someone on the radio the other day complaining about the inconveniences the Occupiers were causing near Wall Street.  Seems to me Wall Street caused a lot of inconvenience for a lot of Americans themselves.  Just as the European financiers are causing a lot of trouble for Greeks and Italians.  (I'll leave the Spaniards out of this for now, but in case Tomás is reading this, I better mention them.)

 My sense is that Occupy hasn't begun to flex its muscles.  This is a global movement that isn't unrelated to the Arab Spring, the Tea Party, and Wikileaks.  Those folks who still write this off as a bunch of unemployed bums who just need a job and a haircut don't have a clue.

Here's a video that shows both the imagination and technical skill of people involved.  There's certainly great irony in using the Verizon building to post this message.

Thanks JL for the Stratfor reference.  Thanks to Phil for the video.

1 comment:

  1. Yeah, Steve, I was missing Spain in the list... Today we have elections. The goverments of Greece and Italy have lost their heads; it's (almost) for sure Spain will change today with the electoral upset. But you know Spain has the highest unemployement levele of the whole european country... That looks very bad...


Comments will be reviewed, not for content (except ads), but for style. Comments with personal insults, rambling tirades, and significant repetition will be deleted. Ads disguised as comments, unless closely related to the post and of value to readers (my call) will be deleted. Click here to learn to put links in your comment.