Europe's deepest problem is bad ideas. Unpleasant price movements represent "illiquidity," "speculators," "market manipulation," "lack of confidence" and "contagion," not the hard reality of looming default. The point of policy is to "calm markets" and "provide confidence"—not to solve financial problems.
The worst idea of all is that Europe's admirable economic free trade zone and currency union cannot survive a sovereign default. It is precisely allowing sovereign default, and isolating the central bank from sovereign default, that is the only way to keep the union together. That is, after all, how the euro was set up in the first place. It's almost too late. But not quite.
Wednesday, September 28, 2011
Letting Greece Go
John Cochrane makes a good point about Greece: if you don't let it default within the Euro framework, the Euro is doomed.
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I dont know if it is a good point. Market panics and credit crunches are purely mass psychological events. Restoring confidence is the only solution, not solving financial problems. Banks are insolvent when faced with a panicked public that demands to withdraw its savings, the system is based on rolling over everything into the future. Faith and confidence makes it all work.
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"Panics" are created by a lack of information. Having Greece default and the banks take their pain quickly and honestly is the best economics AND the best psychology.
Investors sense that Greece is running unsustainable government deficits, and don't want to fund them anymore, which makes it so they can't roll over their debt. I agree that crises can be self-fulfilling, but in this case I think it's rational, because Greece's permanent budget deficit is relies on an infinite inflow of outside capital.
OT, but Warren Buffett exemplified your point about envy/relative status in an interview with Bloomberg this morning. The subject of the "Buffett rule" came up, and the reporter asked Buffett why he didn't just write a check to the US Treasury for a few billion, to set an example. Buffett dodged the question at first and then said something along the lines of, "If Mike Bloomberg and some others get together and decide to do likewise, I'll join in.". Of course, if every billionaire coughs up the same percentage of his fortune to the US Treasury, their relative status hasn't changed.
Isn't Buffett already playing at one-upmanship? He is portraying an image of being more "moral" than other wealthy citizens. This is the flip side of envy, "holier than thou."
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