Once again nightriders are warning the world that its economy is on the edge. And if they are not listened to this time, the plunge will be deeper and longer lasting than the last. Here are bites with links from two voices in the night. They are worth reading in full, especially Kaletsky.
And now, almost unbelievably, there is a serious risk that the world’s failure to understand the true lessons of Lehman will precipitate another financial disaster.
The key lesson from the failure of Lehman was that, in the midst of a systemic financial crisis, no significant bank should ever be allowed to fail. When an entire financial system is in peril, the cost of offering unlimited government guarantees and taxpayer bailouts will always be much smaller than the losses from allowing any significant bank to collapse.. . . In dealing with systemic financial crises, the risks of increasing moral hazard are irrelevant in comparison with the certainty of disaster triggered by the failure of any significant bank. . . . .
Today exactly the same analysis has to be applied to the risk of Greece or any other European government defaulting on its debts or dropping out of the eurozone. If any such default were to occur, it could trigger a global financial catastrophe even larger than Lehman. Yet the possibility of a Greek debt default or restructuring is being positively promoted by many of the world’s most respected economic and financial commentators. . . . .
The fact is that if Greece were allowed to renege on its debts, the foreign banks that held €338 billion of Greek debt at the end of 2009 would immediately move to dump their additional €333 billion of Portuguese debt and probably their €1,500 billion of Spanish debt. And who knows how well over two trillion euros of Italian debt would be treated? The plunging value of Greek and Iberian bonds would immediately threaten several of the main French and German banks with insolvency, requiring government guarantees that would run into trillions of euros.
The immediate Greek debt crisis may have been moved to the backburner, but nothing has been resolved. The fundamental problem remains that the country will be very unlikely to pay back its debt on current terms, either now or in three years’ time.
In fact, the austerity cuts being forced on Greece probably make repayment even less likely in the longer term, as it is likely to push the country into a deep recession.
Concerns are also understandably rising about the state of the public finances in Portugal, Spain and Italy, with the latter country yesterday unveiling its own budget cuts worth some €24 billion . . . . .
More immediately, though, it is the threat of another financial crisis that appears to be most concerning markets, and the possibility that such a crisis could lead to a second global economic downturn, and this time without central governments having the option of further bailouts or fiscal stimulus. . . . .
The banking sector across Europe certainly seems to be coming under renewed pressures, with fears increasing about the sovereign debt exposure of major banks in France and Germany. And as we saw in 2008 and 2009, once one bank goes over the rest have a tendency to fall like dominos.
The irony would be laughable if it wasn’t so injurious to ordinary people.
First the banks lend themselves into the ground in the interests of chasing a quick buck; then their losses are socialised in the form of unprecedented levels of government debt while they are allowed to go about their business once more; and now this towering pile of government debt threatens to come back and bite them – and us - on the backside once more.
At some point, one fears, we must all face the possibility that there will be no one left to blame, and that governments will be too broke to bail out the banks. And what then?