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June 27, 2011

Trotters in the Public Trough

Their salaries are grossly out of line; their retirement benefits are astronomical. We, the public, are paying to maintain their lifestyles while our own income goes down. Their influence on elections keeps politicians from all major parties in line with their interests. They threaten us with ruin if we don't keep them in the style to which they've become accustomed. Greece is an example of the endgame when their interests clash with ours.

This isn't about public sector employees; it is about bankers, specifically the leaders of huge international banks.

There is no question that public employees in Greece (and in the US) will have to pay more for their own benefits. Public employment is already being reduced towards more reasonable levels. But the world's big banks have grown even bigger since we bailed them out. Their compensation practices haven't changed; and they're still being protected with our money by governments around the world.

Banks charged Greece extremely high interest rates for the money they lent them because the bankers knew these loans were risky. Greece, unwisely, kept borrowing even at high rates because it didn't want to reform its economy and its public sector. Now these banks face the prospect of losses on these risky loans. The European Central Bank (ECB) is saying that these same banks, which profited greatly from the high interest rates they charged Greece, should not have to suffer a penny of loss no matter how much money that costs the taxpayers of Europe. Any "default" by Greece will unstabilize the whole world according to the ECB. It will be "another Lehman Brothers". IMHO letting Lehman fail was one of the few things done right during the last fiscal crisis, although it probably wouldn't have had to happen if Bear Stearns had been allowed to fail earlier. Central banks including both the ECB and the Fed seem to think that their responsibility is to protect banks at all costs (to us).

If the European (and perhaps American and perhaps Chinese) banks have to write their Greek (and perhaps Irish and perhaps Portuguese) loans down to their actual value based on the debtors' ability to pay, these banks will be exposed as having inadequate capital and perhaps actually being insolvent. The ECB and the bankers want to use public money to paper over this insolvency; they claim that there will be a worldwide catastrophe if we see that the emperor has insufficient assets to cover his liabilities. Nonsense; whatever capital insufficiency exists is a fact; hiding a fact doesn't change it; it just delays working out the underlying problems. We can see that in the slow motion continuing housing "crisis" in the US.

It should be unthinkable that banks can charge high interest for risky loans when the risk is being taken by the public and not by the bank's shareholders; but this is just what happened when the banks counted on federal housing loan guarantees while they were inflating the housing bubble with subprime loans. European banks are being promised repayment at public expense of the loans for which Greece was charged a risk premium. Yes, banks will be more reluctant to make risky loans if they actually have to take risk; they might not lend to countries with large structural deficits or people who can't afford the houses they'd like to buy. That reluctance would be a pretty good outcome of letting the banks take the losses they've earned.

Yes, Greeks and Americans will have to be stingier with public sector workers; yes, Greeks and Americans will have to live without and/or pay for unfunded benefits their governments have promised them. But, while we're all making these sacrifices, bankrupt banks need to be allowed to fail. There isn't enough public money for them, either.

Related posts:

The Demopublican Duopoly is Due for a Fall

Bad News for Investment Banks; Good News for the Rest of Us

Election Analysis: It Was TARP that Boiled the Tea

We've Been T*RPed

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