In a recent letter to the editor in my hometown paper (Springfield Journal-Register), a writer helpfully offered to clarify the European financial situation for us economic rubes.
He used a parable of a banker named Angela Merckel (coincidentally, the same name as the German Chancellor) who heartlessly imposes strict conditions on a hapless but well-meaning borrower who’s hit one of life’s rough patches. Let’s assume our victim — who apparently lost her job and then filled out a loan application instead of a job application — is Greek. As things go from bad to worse for this poor wraith, the banker continues to arbitrarily add stricter and stricter conditions to the loan.
The writer then proposes a “radical idea for loans. How about only requiring, as a condition for loans, that they be paid back on time? Isn’t that the way it’s supposed to be?”
I only occasionally write responses to argue with “experts” like this. Firstly, they’re just so wrong on so many levels that it’s cumbersome to mount a rational argument in anything smaller than a novel.
For starts, banks don’t loan money to people who aren’t working, unless the government tells them otherwise. They can’t add stipulations to a loan after it’s made; they can if you go back for MORE loans to make the payments on your first loan and keep spending money you can’t pay back. But they wouldn’t increase the loans on an already bad loan — unless the government told them otherwise. And banks have always pretty much only cared, as a condition of making a loan, that you can pay it back on time. Unless the government tells them otherwise. So these days his idea isn’t radical — it’s quaint.
Secondly, in the back of my mind there’s always that old saw about arguing with this type of expert, where the risk is they’ll “drag you down to their level and then beat you with experience.” Oh wait, that wasn’t arguing with “experts.” I think it was “idiots.”
Well like I said, I was going to just let that one slide by, but I serendipitously just happened to get a copy of a delightful new book on the European debt debacle titled “Boomerang.” It’s written by a fellow named Michael Lewis. If you’re not an armchair economic nerd who finds well-written tales of economic disaster hilariously entertaining, you may have heard of another little tome he wrote under the title “Moneyball.” Apparently, it has something to do with baseball and they even made it into a movie with some Brad Pitt guy.
“Boomerang” is a great read even if you’re not one of the aforementioned economic nerds (although I’m not sure why you’re still reading this if you’re not). He covers several of the main countries involved in the ongoing global financial meltdown, easily ranging back and forth from global macro-economics to man-on-the-street insights from both major and minor players. He has interviews with Ministers of Finance on one hand, and another with an Englishman who went to a stockholders’ meeting solely to throw rotten eggs at a bank CEO. It’s fun to read, fairly short, very contemporary (some of the stories are literally from just a few months ago), and if you read it you’ll know more about world finance than 94% of the general population, 98% of economists and other experts, and 100% of politicians.
At any rate, Greece — our unfairly put-upon damsel in distress in the previous story and the “G” in the PIIGS acronym of economic dead countries walking– gets a complete chapter. Turns out there’s a few twists the SJ-R perfesser didn’t cover. Let’s put on a dark suit and power tie so we can play international banker, then take a look at how it looks from the lender’s side of the desk. ..
(Note that some of the money numbers I’m listing — the ones without dollar signs –are actually in euros instead of dollars — a euro works out to about $1.35 as I write this.)
Greece has a population of a bit over 11 million people. While we’re talking about a hopelessly bankrupt sovereign entity with a morally corrupt and intellectually inept government, it’s instrumental to note that the population of Illinois is maybe a million or so over that number.
Greece has already recently been loaned an additional $145 billion. This loan was made primarily so they could pretend to make some payments on their previous loans and also make a few payrolls for its monstrous government workforce and even more monstrous retirement benefits (kind of like charging your credit card payment to another card, and also buying a round for the house).
How monstrous? Reference Illinois again for comparison — our bureaucrats admit to unfunded pension liabilities of over $80 billion. Of course, it’s really much more. We’ve also got, depending on who you ask, $8-12 billion of unpaid bills and “structural deficits.” That’s because you can’t call state borrowing you’ll never pay back “national debt.” We’re beyond broke, and honestly pretty much beyond bankrupt.
Greece, roughly comparable in population, has unfunded pension liabilities of over $800 billion. That is in addition to the over $400 billion of national debt it’s eagerly piled up. That comes out to over $100,000 per citizen — over a quarter of a million apiece if you want to spread it out over the minority who actually work. Of course, it’s really much more.
How do you get that bankrupt? Well, as an example, they’ve got a national railroad system that takes in 100 million a year. Unfortunately, the rail system’s annual payroll cost is over 400 million (plus 300 million of other operating expenses). It’s easy to run up that kind of payroll because they employ way too many workers and then pay them an average of 65,000 a year. They never run on time, even when they’re not on strike.
You may have read about the riots when our poor heroine was forced by the evil “bankers” to raise the retirement age for government pensioners from 58 to 60 years as part of this new, severe austerity. The horror. You probably didn’t know that the retirement age is even lower — 55 for men and 50 for women — for “arduous” occupations. You may be thinking “ok — cop?, firefighter?”, but you’d be missing several of the hundreds of others given this designation. Radio announcers, for instance. And hairdressers. And waiters.
So here in our loan department this maybe not-so-innocent applicant is asking for another loan, to be used to make a payment on the last loan you made to her, and to also make payroll for all of her friends in her sundry businesses that all have expenses several times what their revenues are.
Did I mention that when she got the first monster “loan” it was only after making solemn promises that she was only spending 3 or 4% more than she was making (numbers provided and vouched for by her close friends at Goldman Sachs)? But then the day after she got the money — and spent it all — and the bank finally received copies of her credit card statements, it turned out she was already spending 12-15% more instead?
There’s absolutely no hope that she’ll ever be able (or intends) to scrape together an honest payment. And when you asked why she couldn’t maybe ask some of her friends and relatives why they couldn’t perhaps pitch in a bit to help — like her cousin the doctor, for example, who lives in the million euro house — she explained that they where all poor and in fact none of them not on the government payroll ever make more than 12,000 a year. At least that’s what they all claim on their taxes. All of them.
Knowing a bit more about the reality of the situation, then, are you going to loan even more ungodly sums of money to this poor down and out hard luck case?
HA! Trick question again. You keep falling for that one over and over!
Huge chunks of that money are loans from the International Monetary Fund (IMF), and the U.S. is obligated to fund 17% of IMF loans. They’re loading up to step in with even more as you read this. The U.S. ante will probably be around $100 billion for this next hand. (BTW, nearly half of the money in U.S. money market funds are in paper from the European banks that are holding those worthless Greek loans — so much for your “safe money” you thought was on the sidelines.)
Everyone “in the know” knows she’s never going to pay you back. But you see, you already did make the loan, and you’re going to make the next loan, too.
How’s that for radical?