Wednesday, May 12, 2010

Greek Calculus

The Greek bailout is rather depressing, but I'm empathetic. As Reinhardt and Rogoff show, a financial crisis increases real government debt an average of 86% of GDP (this is noted five separate times in their book 'This Time It's Different' on the history of financial crises, so it's the #1 fact of financial crises). Think of this as the cost of letting a crisis happen. On the other hand, there is the cost of continuing to overspend, which also adds to the debt, and further signals to others that they too need not discipline their budgets. The hope is that the bailed-out party will amend its ways and not need a further bailout down the road--clearly, this isn't usually the case.

So, it's a trade-off, and it's benefits would depend a lot on intrinsically subjective probabilities. Reasonable people can disagree.

5 comments:

matrix said...

And what a note of 500 Czech's Crowns pictured on top of this article has too do with Greece?
Or with overspending?
As far as I remember Czechs are doing fine...

J said...

You are empathic with the management of the crisis, maybe, but remember how they arrived to it. Originally, Euro countries promised to run less than 3% budget deficits, but Greece consistently falsified the books and lived high on debt. Now the Germans will see their saving and pensions losing worth. Empathy for whom?

group messaging said...

The Germans knew about this cheating right from the start, and they allowed it.

J said...

You mean they deserved it.

Eric Falkenstein said...

I know it's a Czech note, but I do think Mr. Bean would be more appropriate!