With both President Barack Obama and congressional Republicans unlikely to come to much agreement as the debt ceiling deadline approaches, Greece and the EU are a microcosm for what the U.S. should and shouldn’t do.
Greece is in shambles and will have to default on its debt. As the Los Angeles Times reports, the EU will now be loaning the Greek government another $157 billion and asking those who hold Greek bonds to turn them in, in exchange for new bonds that will not mature for another 30 years. Many European banks and insurers are supporting the bailout, and Reuters’ Felix Salmon claims that “Greece will be the first EU country to default on its debt. But I doubt it’ll be the last.”
Many members of the EU are not pleased this may spread. The supposed “contagion” of Greece (as well as Portugal and Ireland) threatens to inflict the fragile economies of Spain and Italy. In response to the Greek bailout, the economic management of the EU, and frustration over loose immigration policies, Europe’s right-wing parties are gaining popularity. "If you're in the north like Finland, you resent having to bail out people to the south," says former U.S. Ambassador to NATO Kurt Volker. "If you're in the south, you resent being told what to do by the north." The political and economic bonds tieing the EU together appear to be thinning.
The situation and turbulence experienced by the EU are eerily similar to the problems facing the U.S. and are a direct result of massive government spending, fractional-reserve banking, and an insistence on socializing the costs the poor economic decisions that predictably result.
These interventionist policies have not only created bubbles, debt, and stagnant economic activity, but have contorted the essence and the inherent regulatory checks of capitalism. Free markets depend on savings and delayed consumption, rewarding those who have planned for the future with excess capital to invest, spend, or lend. This method of financing credit is based on the discipline of market interest rates and real capital based on savings.
What the governments of Europe and the U.S. have done, however, is introduce the concept of fractional-reserve banking that is the heart of modern finance. Instead of interest rates and credit being determined by the market and capital accumulation, fractional-reserve banking is a system where we place our money into a bank which then lends it out for interest. The bank has “fractional” reserves, usually carrying only about 10% of deposits on hand, and crosses its fingers that depositors do not come demanding their money back at once.
The problem with this loose lending is it makes it very easy for governments to take on large-scale endeavours for short-term political gain. Governments issue bonds in order to fund these promises, which are quickly purchased by banks and investment firms. This is how Greece (and almost every other country) finances the heart of its welfare state: the pensions, the short hours, the retirement benefits. The losses of these “investments,” too, are socialized as governments try desperately to prop up this already shaky and chaotic finance structure.
The problem, of course, comes when the actual bill comes, which is what the U.S. faces today. Trillions of dollars worth of promises of “entitlements” and a globe-straddling empire funded by crooked finance and crooked capitalism are ultimately unsustainable.
Americans currently have the luxury of watching Europe’s financial chickens coming home to roost from afar. Only time will tell if we will mimic the EU’s band-aids or learn the lessons from across the Atlantic and create an economy built on sound money, 100% reserve banking, and free markets not poisoned by government interventionism.
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