Editor's Note: Daniel Gros is Director of the Center for European Policy Studies. For more from Gross, visit Project Syndicate or follow it on Facebook and Twitter.
By Daniel Gros
Greece’s ballooning public debt is again throwing Europe’s financial markets into turmoil. But why should a debt default by the government of a small, peripheral economy – one which accounts for less than 3% of eurozone GDP – be so significant?
The answer is simple: the financial system’s entire regulatory framework was built on the assumption that government debt is risk-free. Any sovereign default in Europe would shatter this cornerstone of financial regulation, and thus would have profound consequences.
This is particularly visible in the banking sector. Internationally agreed rules stipulate that banks must create capital reserves commensurate to the risks that they take when they invest depositors’ savings. But when banks lend to their own government, or hold its bonds, they are not required to create any additional reserves, because it is assumed that government debt is risk-free. After all, a government can always pay in its own currency.
This assumption makes sense, however, only when a government issues debt in its own currency; only then can it order its central bank to print enough money to pay its creditors. Before the introduction of the euro, this was the case in all advanced countries.
But the countries that adopted the euro can no longer rely on the printing press. They are, instead, effectively borrowing in a “foreign” currency (or, rather, a currency that they cannot individually control). It should thus have been clear that with the start of European Monetary Union (EMU), participating countries’ public debt should no longer have been considered risk-free.
But it was. Indeed, eurozone regulators not only maintained the assumption that the public debt of a bank’s own country was risk-free, but chose to extend it to all eurozone countries, implying that banks did not have to provide additional capital against their holdings of any eurozone public debt. This is the key reason why one-third of all public debt in the European Union is held by banks. And this concentration of public debt on banks’ balance sheets is what makes the entire European banking system so vulnerable to a sovereign default.
Moreover, given the prevailing assumption that public debt was risk-free, banks were not bound by the usual rules against “large exposures”: they could accumulate as much exposure to any one government as they wanted. That is why Greek banks could end up holding more government debt than they have capital. A government default would thus wipe out the entire Greek banking system.
It is now too late to turn back the clock and suddenly force banks to get rid of their excessive holdings of public debt. Unfortunately, regulators do not even appear to be learning from the current crisis in order to prevent the next one.
The EU’s rules on how much capital banks must hold are about to be revised. The rules, which are detailed in a 500-page legal proposal, called “CRDIV” and published recently by the European Commission, will increase the amount of capital banks must hold, but only for lending to the private sector. Lending to eurozone governments continues to have a zero risk weight. This will only increase the bias in bank lending towards government debt and against lending to enterprises, especially small and medium-size businesses.
This is a mistake. The European Commission should have introduced capital requirements on banks’ holdings of public debt. The justification would be simple: no one can seriously claim that the bonds of all eurozone governments are without risk. It should thus be obvious that banks should hold some capital against the risks they assume when lending to governments with particularly high debts or large budget deficits.
Moreover, the new rules will require banks to hold more liquid assets. It is easy to guess which assets the authorities consider liquid: public debt. In this way, too, banks will be induced to hold public debt rather than to finance private investment, despite the obvious fact that government bonds can become very illiquid (for example, those issued by Greece, Ireland, and Portugal). The definition of what banks should hold for liquidity purposes should have been broadened beyond public debt to include a wide range of private-sector assets based on market size.
Both key elements of the new banking rules thus go in the same direction: they increase the bias in bank financing against lending to the private sector.
It is easy to understand why the authorities persist in favoring public debt: the rules are set by finance ministers, who are naturally inclined to give themselves a good deal. Moreover, it is difficult for politicians to see that their budgets compete for a limited pool of savings. Lower financing costs for public debt appear to be a net gain to society, because the government then saves on debt service and can keep taxes lower. But any gains from lower taxes are more than offset by the losses to the private sector, which, facing higher financing costs, will invest less, in turn lowering economic growth – and thus reducing government revenues.
Many steps have been taken in recent years to reinforce regulation of the banking system. But what is proposed now will make lending for investment even less attractive and increase the incentive to concentrate sovereign risk in the banking sector. This can only worsen Europe’s sovereign-debt problem and weaken its already meager growth prospects.
The views expressed in this article are solely those of Daniel Gross. Copyright: Project Syndicate, 2011. For a podcast of this commentary in English, click here.
© 2012 Cable News Network. Turner Broadcasting System, Inc. All Rights Reserved.
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Bankrupsy is never easy. If they were good at accepting tough choices then they would have made them years ago and avoided this mess.
Actually, one of Greece's biggest issues was the fact that they refused to investigate and prosecute for tax dodging by the wealthy. One report showed several multimillion dollar households with luxurious pools in the landscape and the owners did not pay for their taxes.
Funny how the poor's services were cut to offset the rich not paying their share... Sound familiar, the same thing is happening here in the U.S. Coca-Cola, GMAC, G.E. and many other companies have no tax debt but public services are continuously cut....
The greeks think that they are smarter than anybody else.They fooled the EU,US AND THE imf. Now they blame Goldman and Soros.
What a stupid, STUPID.. comment. This is why I hate freedom of speach in this country. It allows the dumb morons like you to open your mouths.
William, it's pretty ironic when someone who misspells easy words (e.g., speech) condemns anyone for being a "dumb moron."
ouzo1964,
Leaving aside yoru racist comment, perhaps you shoudl learn to read. The article discusses how all developed nations are in the same boat. So are you saying the older larger EU coutnries like Italy, France, and Germany as well as newer European countries "think they are smarter" and "fooled the EU,US AND THE imf" your statement makes no sense. The article points out how Greece is just first because it is the SMALLEST economy in the Euro zone.
David Levin,
This wasn't a racist comment. The OP was referring to Greeks. He could have made comment on French, British, Japanese, Germans, or whoever, and that would not be "racist". It would be a reference to the people of a given country. That has little to nothing to do with RACISM. You're too sensitive. Go get a dictionary and relax.
bahhh bahhh. That's all I see when I read your post.
@RonnieReagan, it was racist. It is like saying the Jews lie or the French "think they are better" or "lie" or "Americans are murderers because of actions of their government or banking institutions or any institutions.
By the way Ronald Reagan was the biggest deficit spender/GDP in the past 50 years. Look it up at wikipedia "deficits by US presidential administration"
The fact is those making sweeping statements on Greece, or racist statements on Greeks, have simply NOT read the article. Greece is first because it is the smallest economy in the Eurozone. The US would be in the same [position five years ago if it could not print money. Even Alaska woudl have been bankrupt an in default in 2008 if Palin had not put a state tax on federal property (Federal taxpayer owned oil and gas)
Goat of Evil, If you understood the word, then don't spend the time correcting my spelling. Only someone as single minded as you feels it's more important to correct someones spelling than to ascertain the meaning of thier arguement. So... you're a moron too..
The greeks have balls. They will not put up with this shit. When the bankers realize it only takes three hundred Spartans to kick their butts they will go home with their tails between their legs.
Sorry to have to tell you this, but nationalities are not races. Caucasian is race. Being French or Greek is not.
skase malaka
skytag.my guess is you are outside the US. Here in the US, bigotry assigning negative attributed based on ethnicity is racism.. Just go to dictionary.com For the poster to say the "Greeks think they are better" is no different a slur than saying "Jews think they are better."
If you look at the statistics, Greeks are more productive than the average European. Their problems have to do with scale, defense costs, and corrupt banking institutions.
And "Greeks lied"? No, if you look at the history of t his (WSJ has has several good articles) Goldman Sachs, Lehman and other bankers in NY, Paris, London and Berlin lied
Look the only touch choices that are to be made here is which banks should go bankrupt, and which banks should be allowed or even forced to fail. It is clear that the bankers made major dumb decisions. When the crisis arose four years ago, they should have fallen. Now they are zombie banks who do not lend, and practice extortion against National Governments. Chop them and burn the pieces.
@ Bman – I think what you and most other people are missing about the article is that the banks involved didn't just load up on sovereign debt because they were dumb. They did it because the regulations created by the EU encouraged them to do it. The EU is re-making these regulations but instead of dealing with the problem, they are continuing to pretend that sovereign debt is risk free – by doing so they keep interest rates that they (the ones making the rules) pay. It is simple self-dealing.
It is not unlike the issues that caused the mortgage meltdown in the US. The untold story was that the reason it happened was not because of a lack of regulation (though some well placed regulation could have helped), but because of the way AAA debt is treated in the US. Two things happened – the US government told lots of businesses they could only have AAA debt on their books. Then they limited to S&P and Moody’s the right to determine what AAA meant. Because of the high demand for AAA debt any existing debt had very low yields. People that packaged together mortgages saw that there was a need for more AAA rated debt. They went crazy trying to produce as much AAA debt as possible using house mortgages. To get AAA ratings for what turned out to be junk debt they essentially bid out the rights to rate the mortgages to the only two companies allowed to rate the deals. Whichever company would give them the higher rating got the business. And we wonder why it all came crashing down.
It's so blatantly clear that it was a huge mistake to introduce a single currency to a group of countries with diverged social and economic background. The French and Germans still don't want to give up this currency as it would be too costly to turn the clock back. So we all have to fasten our seatbelts as a bumpy ride lies ahead of us. Nobody benefits from a frail Eurozone. A weak Euro is no good for non-Euro countries neither.
the issue is not a single currency per se, but super national monetary policy and national fiscal policy. That is why the Europeans who blame the Greeks, as well as American right wingers, sputter in their arguments when presented the facts.
Even in the US Alaska would have been bankrupt five years ago if it could not tax a federal asset (all the oil and gas there is owned by the US taxpayers, not the state of Alaska). Essentially Alaska (and Texas) have imposed energy taxes on consumers nationwide to balance their books
In some extent I can follow the reasoning but, what did the banks in a recent past? They speculate and by doing that they took very high risks by buying junk bondsand other financial products from the USA. The EU (even the US) governments had to bailout the banks and thereby borrow money and increase their debts. Now the same banks, and their accomplices, the rating agencies like S&P or Fitch, are faulting the governments because they have too high debts. The financial markets, and even the governments, are completely deconnected from the reality. What's going on today is in some extent what happened in 1789, wealthy people had fun while the people was hungry.
To meditate : "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."
Thomas Jefferson 1802
Well said and Jefferson was correctr.
Great quote. Only one problem, Jefferson never said that according to Snopes.
http://www.snopes.com/quotes/jefferson/banks.asp
this is a REMINDER to our American government to stop SPENDING AND START PAYING DOWN OUR DEBT!
Also, a good reminder to all the idiotic Americans to do the same.
Hey Bob why do you say all idiotic Americans? The recession is global and not the sole responsibility of one country. The next time you want to say Idiotic Americans take a moment and think about the computer you are using and just remember where computers and the internet were ivented and developed. Or better yet why dont you just not use it because Americans are idiotic and you cannot bear to use something from idiotic America. You are such a Jack A##!
Maximus debtimus.
Hey Bob – there are idiots everywhere. As a Brit who has traveled I've met great people here in the US and yes, I've met a few idiots. Bubba – this country boasts many, many inventions but the electronic computer was invented by a Brit (Alan Turing) and the WWW was the brainchild of another Brit (Tim Berners-Lee).
Um....I hate to say it, but Al Gore invented those.
Although he is stoic enough to be a Brit....
Well said. I'm frustrated with my fellow Greeks, however the economy is Global. It's interconnected and much is at stake here at home.
American public debt is in American currency. Greece would not be having many of their current problems if their debt was in Greek currency. In fact, export credit, the World Bank, IMF, etc. have already well illustrated the perils of a government holding large debt obligations in another currency. It has caused numerous crises not unlike Greece's. However, those crises have not affected a nation as wealthy per capita as Greece, Ireland or Protugal before. Therefore, it is more visible.
Argentina is a good example of the problems caused by not owning you public debt currency. Argentina pegged its currency to the dollar at a fixed exchange rate. Because the US economy is so much larger than Argentina's, effectively all savings and debt in Argentina was in United States currency. After Argentina unpegged its debt (defying the IMF and numerous international finance institutions and bringing on predictions of gloom and doom for Argentina), Argentina's economy recovered in a couple of years and experienced a tremendous boom until the most recent global recession.
In short, the lessons of Greece, Argentina and other nations have little or nothing to do with the current situation of the United States. Public debt in the United States poses a problem of a completely different nature. Our situation looks more like Japan's than Greece's.
Spot on!!! I just wanted to add that this doesn't invalidate the need in America to address the debt issue. Far from it. Take a good look at Japan's economy over the past 20 years; this is similar to what will happen in the United States if we continue our current path. If you're from the US, ask yourself if this is really the direction you want our country to go. For me the answer is no!
I know there are some differences; the Japan to US compare is not perfect. Still, it's much closer than comparing the US to Greece.
If we in the US want to avoid the trap Japan finds itself in today, we need to start addressing the debt issue now.
They need to go back to having there own currencies. They will not, until way after its too late thou. But, it has to happen. It's pretty much how each country can save themselves in the event they run up too much debt. They will have devalued money, but that is fixable over time. Rather then go thru all this to only end up waiting to fix it after you get your currency back. You just wasted even more time, and extended the crisis.
The US problem can be fixed in my view. Rase the debt ceiling to about $20 Trillion. Borrow at the low rates we get now. BUILD this country back up. Roads, bridges, trains, etc. Get our economy moving, literally! Tax the rich more by actually taking away many of there loop holes, so they pay there fair share. You don't have to actually raise there taxes. You can even lower them a bit, and still make more money back. Tax goods that are made from other countries and imported here (ie CHINA!). Stop spending so much on defense. Cut that in half or more over 5 years, and keep it low going forward.
SS/Medicaid/care can be fixed. Lower benefits by a hair (1% on the low end, and up to 35% on the high earner end, rich people don't need it anyway. They should just be contributing, and getting a less back from it. What millionaire needs a $1000 check each month when they are MILLIONAIRES! ). 1% less benefits on 95% of the population would not effect many if any people at all. Especially if its done over time (say 5 to10 years). Universal healthcare solves this even better! No more insurance for profit companies. 95 cents on the dollar should pay for health care. The other 5% pays the staff the people making sure the bill gets paid! Doctors should be paid on an hourly salary (or salary in general). Keeping the costs down. Not saying pay them $20 an hour. But, lets get an average range and work it from there, based on location your at and what type of doctor you are.
Encourage business to hire by lowering their taxes the more they hire US workers. You get lower taxes the more you hirer in the US only!
Wow – all I have to say is wow – you understand nothing -
On a free market you can't borrow at the low rates we have now. Investors are going to want more than they are getting now to loan the US MORE MONEY.
The rich actually pay their fair share and then some – try starting with the US has the HIGHEST tax rate in the civilized world. They pay 80% of the budget. You can't tax other countries goods without starting a trade war. You can start by stopping your shopping trips to Walmart. Social security benefits need to be adjusted by more than a hair. Everyone on the system is receiving far more than they ever put into the system – in private finance they call that a ponzi scheme.
Obamacare as you call universal health care is broken – if you don't pay the dr's a good salary – you won't have any doctors to work in your free clinics. How about if I rate your work and what type of work you do and tell you what your salary should be...
You can encourage businesses to hire by knocking off all this knee jerk regulation. No one is hiring because the economic conditions suck and no one knows what new regulations are coming down the pipe. Businesses don't like uncertainty – and they show it by not hiring or reinvesting their money. The current administration hates business and they are not afraid to show it.
Lower taxes for hiring more workers doesn't make sense based upon the productivity of the worker. You would have to pay negative taxes for that to work and then you have no income.
When someone refer to the health care law as "Obamacare," we should all quit listening. The term was created by right wingers to stiffle serious discussion of the merits and problems with the law. When you can demonstrate an ability to think and speak for yourself without becoming a walking sound bite for the Tea Party, then I will be glad to participate in the discussion.
Brad, please share your sources for your ridiculous statistics. Research "capital gains tax" and "rich" and tell me what you find.
Actually the richest 1 percent of Amercians have 39 percent of the wealth. They pay about 40 percent of the taxes. This is according to the American Taxpayer Union.
84 percent of the taxes are paid by the upper 15 percent who also have 85 percent of the wealth. The rest of the country has the remaining 15 percent of the wealth.
This unequal distribution of wealth is unfair. The upper 1 percent can easily afford to pay more taxes.
Such a well written comment. Sad that it has no basis in reality. Here are some compiled results from a 2005 OECD survey of world tax rates: http://en.wikipedia.org/wiki/Tax_rates_around_the_world. Looks like the US may have the highest *corporate* tax rate, but we are near the bottom in terms of *personal* tax rates. Looks like Belgium wins the highest personal tax rate. The top 5 are Sweden, Hungry, France, Germany, Belgium.
What we really need to do is when the economy is good, we have to take the windfall and pay down our debt. Pretty simple math really. Sadly Bush mortgaged our country's future by giving tax breaks and refunds in order to buy the voters' favor instead taking advantage of the good times to give us a better future. Now we're paying the price for Bush's short-sighted policies and, frankly, our own greed in not insisting the the government behave in a fiscally sound manner. Everyone thinks they can take, take, take and somehow leave the problem to someone else. Humanity just never seems to be able to learn that lesson.
Some of what you're saying makes sense, some is just plain wrong.
Correct: We do need to raise the debt ceiling. We should eliminate most tax breaks, not just on the wealthy. Federal Revenue needs to increase. I recommend: Keep the current tax brackets, eliminate most deductions and tax incentives, and stop using the IRS for welfare disbursement.
Yes, we should make cuts in Defense. End the wars, reduce the # of troops deployed oversees in areas that no longer require the numbers currently deployed (Japan and Germany come to mind), and reduce development of new weapons technology by 25% until the debt issue is under control.
Fixing Social Security – It's stupid to have a retirement benefit plan in place w/o automatic adjustments for morbidity improvements. No insurance company would work this way and be profitable. I realize Social Security is more than just a retirement benefit plan, but at least the retirement portion should be tied to and adjusted automatically for life expectancy changes.
Fixing Welfare: #1 – Reduce fraud and misuse. Greatly strengthen the requirements for qualifying for benefits and prosecute those who actively try to misuse the system.
War on Drugs – Legalize, regulate, and tax marijuana. Treat Tobacco, Alcohol, and Marijuana the same. Possession should not be illegal. Selling any of these w/o a proper license should be considered a felony, as well as distributing any of these to anyone under 21. Stronger drugs should continue to be illegal.
Improve business – Yes, place tariffs on imports from countries with questionable business practices/ human rights practices such as China and most of the Middle East. However, as Brad stated, reducing redundant and confusing regulations combined with a modest (25%) corporate tax rate decrease (combined with eliminating most corporate tax incentives to reduce fraud) would work wonders for the US economy. SOX is a joke, and Obama's administration is threatening to make it worse. If Obama would reverse course and make these types of changes today, unemployment would drop below 7% by December. The Federal Government's role in business should be to make sure businesses are playing fairly and honestly, it's not it's job to tell business HOW TO run their business.
Arts, Public Service Television, Foreign Aid, etc... . Until the debt crisis is under control, we should cut funding for programs with little or no value add should be reduced by at least 50%. We need to do a cost benefit analysis on all Federal Spending; programs w/o a tangible (or non-existent) CBA need to be eliminated or reduced until our Debt/GDP ratio is a more reasonable 60%.
I don't know if what I suggested is enough (I don't think so); however, it's a big step in the right direction. I say implement these types of changes, monitor the situation, and readjust every 12 months until we get it right. Once we're back to a self-sustaining pattern, then we can revisit some of the programs that were cut or reduced to see if we want to reinstate them.
Everything is going according to plan: Cause worldwide panic. Next make people believe the government is acting on their favor. When the poor turn on the government, use the minorities as scapegoats in order to rid illegal immigrants and minorities from the country. After this is accomplished, establish one currency for North America, and eventually one currency worldwide. Greece WILL default. If greece accept more money from IMF, there will be MASSIVE chaos which the elite cannot afford. Brilliantly executes. Unfortunately the reign by the Elite will come to and end soon. Then there will be peace.....
The fall of Greece due to high taxes has been a favorite conservative talking point. As with all innaccuracies and generalities, it bears more investigation. From the assessment below, the situation in Greece is not about tax increases. Greeks "accumulated [their debt] by telling lies about their budget deficits, with their millionaires lying about their incomes, widespread pathological non-compliance with tax rules, and cushy conditions for public employees." http://www.telegraph.co.uk/finance/financialcrisis/8556557/Will-Germany-and-France-stave-off-a-Greek-default.html
The whole greek society is full of transactions under the table. I think the only people that pay their taxes are the ones that actually work for the government. Stop knocking on the millionaires, they might be part of the problem but their entire society is the problem. So is ours, Greece will probably fail, and then we could be next. Stop spending and start saving. We pay too much for Social Security and Medicare/Medicaid as it is. They have blank checks and they need to be on a budget
Greeks work and retire at the age of 55! Here in Sweden we retire at the age of 65! Greeks do their business under the table. Taxes that the government should use as income for public finance shine with absence. For public finance you need to have sources of income – just like your private economy runs! The government Greece has done some great borrowing instead and spent more than it brings in – accumulating a public debt that has ballooned over time. The problems in Greece are many! The rich in Greece left the country for a long time ago – at least electronically for they continue transacting but with wealth stacked in offshore banks. There is a service sector too that does business but who records it and how does the government in Greece know who is working and not working. Looks like there is no control in the system of running things and it is the survival of the fittest where the winners are those with high mobility – able to move resources without recording. This a European banana economy that was able to join the EMU system on creative statistics. The politicians have themselves exacerbated the problem through historically enlarging the public sector and creating plenty of jobs in Greece for their supporters. Greece is a sinking ship!
You can easily identify the root of the Greek problem.
The GREEKS.
They need to learn to grow up, stop pretending that thier idiot form of socialism works, goto work, and pay their taxes.
Oh...and when the (fill in the blank) Greek-union decides to go on strike...fire every single one of them and never let them work in a public job EVER AGAIN for the next five generations of their families.
Take it easy scholar. Do your research. The Greece problem stems from 4 decades of corruption, politics, greed, no tax structure and theft from wealthy Greeks. The protesters resent the austerity measures as most feel victimized. This is complicated and don't forget the World is financially connected.
Funny how profitable loans are to the benefit of the lenders, but the burdens of bad loans have to be absorbed by the public at large. And like sheep, we all bleat loudly at the Greek people, getting angry at them for being "deadbeats". Why? Because our masters gave us our marching orders. You know how a free market is supposed to work? A bank lends money and adjusts the rate charged to account for the risk of the loan. If the loan is paid off, the bank makes money. If the loan goes bad, the bank LOSES MONEY. End of story.
You're a moron... It's easy enough for people like you to make simple off handed comments about the Greeks instead of looking at the issues of what seperates the convernments mishandlings over the lives of the people who pay thier taxes and still don't have enough to survive sinece the introduction of the Euro.
Really genious? Are you so brainwashed to see that its the same if not worse here? Corruption, and a busted IRS are some reasons for this implosion.
Here you have everyting and people live paycheck to paycheck, in credit card debt..etc.
This will be the US in a few years if Obama gets reelected in 2012.
Don't try to disguise your 'racism' as 'opinion'.
You are too uneducated to have opinions.
Your opinion to speculate on someone else's education clearly shows your lack of education – considering this is all opinion. And your speculation on racism clearly shows a lack of good judgement abilities considering the post to which you are responding shows neither a lack of education nor a slant towards racism. It simply states an opinion to which I also subscribe. So, clearly you must be in error.
Dude, this will be the US regardless. You just wait..
Hey Progressives, this is what your ideology produces – you getting it yet?
Progressive ideology favors not enforcing tax laws on the wealthiest people? Quite the opposite...
Progressive ideology favors not recording business transactions? Nothing to do with Progressive ideology, but a large part of Greece's problems.
Progressive ideology favors taking out loans to pay for a war of imperialism with an ally of your allies and forcing all the young men of your nation into a year of military service? Nope, quite the opposite, but Greece spent a heck of a lot of its wealth on military confrontations with Turkey in Cyprus. It spends a large amount of its wealth maintaining its bloated, patronage-based military.
Progressive ideology favors letting an international bank set your financial policies? Nope, Progressive ideology generally disfavors the policies desired by international banks. This article talks about the distinctly anti-Progressive problems this has caused in Greece.
Your post completely ignores huge parts of what got Greece into its current situation. You may want to blame the public sector unions for everything, but that does not mean they caused all the problems.
The word "Conservative" means resistant to change. Look it up. Therefore, we should all be conservatives if we think the world is perfect as it is. Otherwise, we should be progressive, at least to some degree.
No we don't get it, you can drink what's trickling down all you want, I think I'll have a beer instead.
If US wants to avoid to be another Greece, then we need to reform the current tax system, by getting rid of all tax breaks/credits (I mean ALL!!!) which is the root of tax loopholes some people and some corps are enjoying, and at the same time lowering all income tax rates and corp. tax rate. This way, we are getting more people paying tax into the government revenue pool, rather than just half of population doing so, and some corps. not outsourced or going overseas to avoid high corp. tax.
Only when this happens, we would create a fair play ground for all people (except the real poor group, not anyone over proverty line!) in tax paying, and fair ground for corps to compete globally at home rather than moving overseas. Thus, government gets more tax revenue, with all people and corps are paying their fair share, and have more money to pay down the national debts.
It is interesting to see Greeks rioting to preserve benefits for which there is no money. Of course, in this country people do not have to riot to preserve benefits for which there is no money. We have a President who has the same irrational notion.
Codswallop, there is money. They are letting wealthy tax dodgers evade and wasting money on military pork barrel projects. There may not be enough money to fully fund the system, but there is money the government is refusing to collect and reallocate.
The governments of the world have decided to, “solve”, budgetary short-falls and deficits by constantly taking it from the people they’re supposed to be protecting. They’re cutting everything they can that helps people, jobs, wages, benefits, health-care, public services, etc. That is their, “solution”; to keep cutting things that people rely-on. Are there no other alternatives to inflicting so much harm on the already devastated people?
Why not add or increase taxes on the gargantuan mountains of excess wealth held by the very rich and on big business profits? And by profits I’m referring to taxing money that would otherwise go to corporate executive bonuses, expansions, except for new jobs, and the dividends to shareholders, all of which would be a percent, perhaps even a small one. Over time, that would solve this too without doing so much horrific damage to people.
I’m sure there are those who claim that this won’t work for whatever reasons and that they are more than happy to post those (along with lies, propaganda, personal insults, financial jargon, etc.) in response to my comment. Even though I’ve disagreed with every one of these reasons that have been put to me, I welcome them anyway, but none of that is my main point in writing this comment.
I want to know why these reasons aren’t being explained to the people, via the, “free”, press, both often and at length. It seems prudent to me that the people, who can burn-down all governments, all banks, all mansions, all big businesses, over night, should be constantly reassured that their continued suffering is necessary and that getting the funds from the very rich and these big corporations just won’t work and precisely why.
While having your own currency and being able to print out money to pay off your national debit appears to be a nice solution, it is basically a massive attack of the government on it's own citizen, dissolving whatever savings they may have.
The reality is there no magic strategy that would allow a country to overspend and increase it deficit continuously. It always leads to a crash. You can't eat your cake and have it, despite what politicians may try to tell you. Nobody is entitled to anything, and everything must be earned/created.
Regarding the point of the article, that is that regulations require banks to back up loans to private institution but not to backup loans to governments, I totally agree. This is not normal. Governments should be held within a same standard charts as are private institutions. Risk should be assessed and counter balanced just like with any loan. As a matter of fact, money printing should not be regulated by politicians, as they'll always try to bend the reality to their liking.
Money supply should not be controlled by any government, as it allows them to basically rip off population at will. At any given time, a government can print out tons of many and dissolve savings of everyone.
World needs come up with a system of money management that is independent of governments, and that will treat the gov. the same way as private citizens and companies are treated.
In the private world, debt is considered very low at 5% debt / income, and rises progressively until once over 50% it is considered high risk indeed – even for an otherwise perfectly credit worthy borrower. Why is government debt no different ? Yes, under these criteria, the US is in deep doo doo, but so is everyone except Norway and a few other oil producing states. True a government can turn on the printing presses, but that did not reduce the risk – it merely masked it because the return is now lower. The bankers fully understand this, which is why they take in bonuses now, the future anticipated earnings. The rest of the public is being fleeced – and while a sheep can be shorn twice a year, there is nothing more for the people to give. Even tax the rich at 100% – and there's not enough money to pay for everything going out the door. In the mean time, the banks hold "low risk" government debt, and won't lend much of anything to the private sector. Great Depression #2 coming soon. The world may yet end in 2012 – but not from biblical forces, but from economic ones.
individuals go through life cycles and die, countries generally do not. And your 5% figures is incorrect. in the 1950's-90' debt to income of individuals who got wealthy on real estate, including simple homeowners, was more like 300% , not 5%
The most dangerous thing about a government going bankrupt is the prospect of its people discovering that they don't need it in the first place.
It sounds like this guy's saying that the problem is the result of the Euro Zone acting like it would back up the public debts of member nations. Then when push came to shove the EC backed down on that guarantee. Obviously there needs to be some sort of bailout by member nations in order to demonstrate that their guarantees are not empty. If there's no confidence in the monetary union's ability and willingness to back up its members' debt, there's really no point in even having it.
Daniel my friend – you've missed the hole in the honey jar. You would have the banks hold capital reserves to cover default of government debt – but what form would that "capital" take??? For if you hold "reserves" in fiat currencies, then you have no reserves at all. So it really doesn't matter whether Greece did or did not have "reserves" to cover EU debt or Greek debt, or any other sovereign debt because it's ALL in fiat currencies and therefore ALL worthless!!! I'm posting a new piece on my blog about this problem... at michaelepicray.com
Curious as to what then would be the right medium for the exchange of goods and services in a domestic enviroment as large as the U.S. not considering the world market. I believe the arguement being made is that fiat money is worthless because it can be simply printed up...what happens to the "assigned" value of commodities when they are used to back currencies or are currency itself...theres used to be a reason why their was ridges on the edge of coins...might be again if the value of lesser metals keeps rising. If pegging fiat money to a commodity establishes a true market value...then what happens when that market goes up or down?
To all you Republicans blaming the Dems for the debt, I call your BS. The GOP spends like drunken sailors just like the Dems. Look up the numbers for your hero Ronald Regan, for example. Star Wars anyone? B1 contract despite the fact that the Air Force said it was a waste of money? GWB war in Iraq? The list goes on. As an independent, I see both political parties as equally responsible for the US national debt. The only difference I see is what the money is spent on: GOP- unnecessary wars and corporate welfare. Dems- Endless welfare for able-bodied workers, and generational welfare. Both parties pour our tax dollars into corporate coffers- Corn subsidies, Petroleum subsidies, Reality, Banks, etc. When the US goes bankrupt in a few years one thing is for sure- Republicans will blame Dems and Dems will blame Republicans. And they will both be correct.
There are many reasons why Greece is in the situation it is today. What it boils down too is bad decisions and snake oil salesmen who helped fuel these bad decisions. Now the people of Greece get to pay for the mistakes of the people they allow to have power over them. Perhaps less protests, less riots, more beat downs of politicians who got them into this mess and a capitalistic approach is what they need? Simply put they also ran out of other peoples money. Something the USA is starting to figure out. The political leadership that governs at all layers of the US, the federal, the state, and the local, need to be removed from office ASAP and forcefully if necessary. While we do need some governance and a government, it needs to be smaller, tax less, involved in the life of average citizens less, and more focused on doing the job it was originally set up to do. none of this Facist TSA malarky, none of this intrusive IRS BS, the FCC needs to stay away from the internet and the USA needs to stop the welfare "great society" state that has been created, again forcefully if necessary.
Im a greek living in Greece, I like the way all the negative comments are just splurged out there by any random individual not knowing any real basic information.
Yes the TAX system was not the greatest, Greece did have bad leadership. What did the big heads in europe all do about this when they saw it comming?? They continued to sell us weapons, war ships and war planes, Germans, French and U.S have sold us billions of military equipment and half of it is useless for example spending big on six frigates and 15 search-and-rescue helicopters from France. In recent years, Greece has bought more than two dozen F16 fighter jets from the U.S. at a cost of more than €1.5 billion.
Much of the equipment comes from Germany, the country that has had to shoulder most of the burden of bailing out Greece and has been loudest in condemning Athens for living beyond its means.
The military deals illustrate how Germany and other creditors have in some ways benefited from Greece's profligacy, and how that is coming back to haunt them.
Greece, with a population of just 11 million, is the largest importer of conventional weapons in Europe—and ranks fifth in the world behind China, India, the United Arab Emirates and South Korea.
Get all your facts straight maybe the U.S and Europe should have a word with Turkey since you both have shown no interest in the threats that Turkey put on Greece or is europe and the U.S still trying to make money off this poor little country......
On behalf of the ignorance of my fellow countrymen, I apologize.
Yes me too! Us Americans have the wool pulled so over our eyes, that the real problems in the world are oblivious to us, so it's easy for us to make an assumption that if a country like Greece is struggling, it's thier fault and we don't look at the other veriables involved in contributing to that struggle. So instead of trying to help and offer a solution, we just sit there and criticize. I submit to the morons who have nothing meaninful to contribute to this conversation, to shut the hell up and enjoy your backyard american BBQ.
well said. And for all of you who say that Greeks are lazy and do not work enough, I urge you to come and work here for a couple of months or so....oh and if you can tell me how to retire at the age of 55 (you see I work in Greece and do not know how to do this), please do so.
the solution is so simple! Greece just hires Bono to petition the EU to forgive its debts, just like he does with all the african nations. Problem solved. Anything else i can help you with?
Tim, our Treasury Secretary, can do the same thing. If the lenders say no. We bring out our ultimate Weapon of Mass Destruction, our US$ printer. We will keep on printing more greenback, as we are already doing.
another moron.
The Lesson Learnt: US can print US$ by Fed in whatever amount we want, repay the foreign debts, causing a devaluation of US debt that hurt the lenders, and reduce the average buying power of US consumer. A very devalued US$ will boost export, boosting US domestic employment, and reduce import. Our US$, not our military might, is the ultimate Weapon of Mass Destruction.
Correct me if I am wrong, but if our currency is devalued won't that lead to inflation here in the USA? Also, if our currency is devalued because of printing extra money to cover our debts, wouldn't that eventually lead OPEC and other middle eastern nations to stop using the US dollar as the standard for purchasing oil? Right now, the world's reserve currency is the US$, so if it becomes devalued enough, we will have to pay other nations in Euros or whatever they choose to accept.
I don't see how flushing the value of our dollar down the economic crapper will result in an economic boom.
There is middle ground between damaging inflation, inflation that helps with debt and too low inflation. In fact, low inflation or deflation can cause recession since it gives people an incentive to delay purchases. Modest inflation can help people and governments in an economy shed their debt without being too disruptive. However, investors and people on fixed incomes tend to be hurt by inflation. Finding the right level of inflation and controlling it to get to that level is difficult.
Why doesn't the EU just print more euros to back up countries like Greece?
This is something that is taught in Economics 101.
Greece politicians lied their way into the Eurozone with the help of Goldman Sachs and U.S. and European Bankers in a blatant conspiracy. They hid the extent of Greece’s financial mess before being admitted and then bought time by issuing bonds that they had no idea about how they would ever pay back. They gave government employees huge pension and health benefit packages that could never have afforded before the bond issuance. They collect less then 15% of the taxes they should. Egregious tax cheating in Greece is a way of life with no consequences. They simply don't function with the same work ethics and financial ethics as the rest of the Eurozone. Whatever EU, IMF funds are given them will not work, but only continue to be stolen, mismanaged, wasted and lost down the drain. Why do you think there are 100s of thousands of Greek citizens in the streets protesting their political leadership?
The REAL TRUTH is there are NO COUNTRIES anymore, ONLY CORPORATIONS who buy and OWN OUR POLITICAL PARTIES & LEADERS worldwide. The only answers is– REVOLT!! & STOP VOTING FOR THESE SAME CORRUPT POLITICAL CRIMINALS! – Obama, Sarkozy Merkel, Cameron are included in this secret financial cabal!
STAND UP NOW PEOPLE – BECAUSE THEIR PLANS ARE TO MAKE SLAVES OF YOU!!!
What would happen if government loans are repaid by printing? Surely this could deflate local values resulting with costly trades. Producers cannot make enough to cover employment and the poor consumers mean static market. This is exactly what’s happening here.
It is the result of monopolising the small economy exclusive only to a few elite group who have also failed to generate employment and therefore a static market.
It is IMF that has failed by transfer of society’s wealth to the private sector who only fill their pockets without distribution or trickling down to the worker and back to the market.
If the private sector is not generating growth and employment, they the government has to tax business and capital in order to sustain the market. The trouble is, the private business sector lobbyists are too strong, the government serves their ends as opposed to the people.
Democracy is the rule of the people, by the people, and for the people and not a dictate from behind closed doors.
Government is not an economic growth engine. It can only take from the economy.
Government is not a closed loop system. For every dollar government pays out it has to 'take' it from someone else. The private sector has to be thriving enough to keep up with government spending. When the private sector fails to do so then the government goes into a fiscal downward spiral into debt.
Greece could default on its debt but the EU would claim ownership of its ports and industry. Which means that Greece surrendered its sovereignty when it joined the EU and ran up its credit.
The U.S. is maxing out its credit and has an arrogant policy of printing more money to cover it. Will the world reject the U.S. dollar as payment on the debt? As a result will our 'New World Order' politicians turn over our resources and further surrender our industry and sovereignty without the consent of the American People?
Actually, Mike, the Government can do quite a lot to stimulate economic growth. Your statement is conservative dogma.
The Euro was brought to us by the same bankers that brought us the federal reserve. the fed is a private bank and we pay interest on every dollar that is printed. the US issues treasury bills; china buys them or now that china is not buying them the fed does. then through the dark art of fractional reserve banking they are able to take lets say 100 million dollars worth of t-bills and lend out 600 billion they created out of thin air(can you say quantitative easing?!) the banks during the crash were found out to have been lending 200-500 % more than they had in reserve. housing started collapsing and people wanted their money. the banks didnt have it so WE THE PEOPLE had to bail them out because they are too big to fail. Greece should say not to austerity screw the banks let the euro fall let the whole corrupt system fall. We are stronger than we think and will come out on the other side better and stronger than we were.
This is much ado about nothing and, considering Daniel Gros's laziness in research on past articles, his simplistic claims here are ridiculous: "But why should a debt default by [a tiny] economy...be so significant? The answer is simple: the financial system’s entire regulatory framework was built on the assumption that government debt is risk-free. Any sovereign default in Europe would shatter this cornerstone of financial regulation, and thus would have profound consequences."
In the 1980's and 90's the larger economies of Argentina and Mexico were at risk. So Gros's claim there's an "assumption that government debt is risk-free" means Gros is exercising selective thinking here. Did they "shatter this cornerstone of financial regulation"? NO! They RESTRUCTURED their debts, which is EXACTLY what will happen with Greece if it approaches default.
One wonders why we're getting hammered over and over with bad news about Greece and having it's economy, smaller than the small State of Maryland's, portrayed as threatening the whole world's economy? Is it because Gros is European, has spent his entire life in academia or think tanks aimed at European economies, and therefore sees nothing beyond it?
Or is it like all the "buy silver" articles we saw while George Soros was quietly selling his. Who is taking positions against Greece and is trying to stampede people into selling Greek bonds? Goldman Sachs is one, according to Bernanke. Any others?
Greece lied to get into the EURO. And then it lied again in regards to it's budget deficits.
All of these European countries are in the tank. The government of these countries wanted socilization and no country survives in the long run with that. We are headed that way as our government at the moment was it also. Free everything. Welfare, free education, subsudise rent, food stamps, loans to buy houses people cannot afford ( well maybe they could come up with a down payment but can't afford to pay for all the rest that goes with it) credit cards driver licenses, social security when they haven't worked, healthcare and all this for the Illegals coming in here. Our own people with a job cannot hardly pay for this stuff. Socialization will put us in the tank with the restof the world also. If you honestly want that then vote for the same ole same ole.
Lets be honest. US is Exhibit A in a world debt. We should stop lying to ourselves. We are like Greece, only times 20. Our press is rolling fast. By the way, I am sorry for folks who blame Obama for this. They don't understand much. This is, as if to blame surgeons for inflicting pain upon the patient who was shot. I blame the one who pulled the trigger of deregulation.
How much longer can you hold a system bases in unjustice?
This was a very enlightening article. I did not know about the capital requirements of public vs private debt that the banks must follow. Thanks for the information.
Greeks have done nothing except enjoy the fruit of several other countries over the last 4 decades. Bailout is never a solution.. a fall out is the best way for Greeks to learn a lesson and get their lazy a** to work............
Greeks have done nothing except enjoy the fruit of several other countries over the last 4 decades. Bailout is never a solution for them.. It is now time for a fall out in Greece. This is the best way for Greeks to learn a lesson and get their lazy a** to work............
The lesson learned is don't run up the national debt at a time when American Banks are in the process of destroying the world's economy. The banks lost money but the bankers made a LOT of money at our expense.
Eventually several European countries incl. Spain, Iceland, Belgium will be headed this way................And those who don't, including Netherlands, UK, France, Germany, Russia, Norway, Sweden, Denmark will see them inching joining the ranks of the less affluent countries like S.Korea, Taiwan, Thailand....THANKS TO HORDES OF UN-EDUCATED, "WELFARE IMMIGRANTS" FROM THE MUSLIM COUNTRIES!!!! Eventually with Europe embracing Muslim TURKEY, KOSOVO, BOSNIA into the EU, Europe's ISLAMIZATION WILL BE COMPLETE. Already in the UK, the MOST COMMON LAST NAME of children born is MOHAMMED, and the UK Muslim population is galloping at MORE THAN 10 TIMES THE NATIONAL AVERAGE (that includes all other minorities incl. Hindus, Sikhs, Jews etc.), while the POPULATION OF ETHNIC WHITE CHRISTIANS IS ACTUALLY FALLING!!!!
SO THE DEMISE OF EUROPE AS IT EXISTS TODAY IS WELL ON ITS WAY, which will eventually impact America also…..thanks to VALIANT EFFORTS by FAREED ZAKARIA. Dean ObeidALLAH and others in opening the doors for GREATER & GREATER MUSLIM IMMIGRATION INTO AMERICA.
Check these out:
MUSLIM MAJORITY IN EUROPE – Interview of leading ISLAMIC BROTHERHOOD PREACHER IN Egyptian TV
How even MUSLIMS ACCUSED OF TERROR are (mis) using Europe’s lax Immigration laws into gaining citizenship!
YouTube-MOST SCIENTIFIC ANALYSIS of MUSLIM DEMOGRAPHICS –by NewAmerica Foundation-GREATEST
Income& Educational achievements of AMERICAN MUSLIMS (the most progressive Muslim community). They lag behind Hindus, Jes by a ratio of 5 to 1. And ethnic whites by a factor 2 to 1…….PEW Research:
http://religions.pewforum.org/pdf/report-religious-landscape-study-full.pdf#page=61
ISLAM ON THE OUTSKIRTS OF THE WELFARE STATE
http://www.nytimes.com/2006/02/05/magazine/05muslims.html
Amit-Atlanta-USA
The the prospect of a default by tiny Greece having such an effect on world financial markets, how can U.S. politicians be seriously considering staging a default by the United States just for the sake of political grandstanding. Can you imagine how the world's economies would be roiled if that were to happen? Some of these would-be grandstanding politicians say that it would be okay because it would not be an "immediate" disaster. But it would be a disaster nonetheless, even if it took several months to a year for it to unwind. Is the right wing trying to stage a worldwide depression in order to win the 2012 U.S. president campaign? (That's what it sounds like.)
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