In the United States during the heights of the housing bubble in mid 2000 borrowers with no visible means of paying for the mortgage were lured into securing loans to buy homes. Now that the bubble has burst there is a major foreclosure crisis in the US as homeowners are unable to pay for houses that have fallen far below in value to when they bought them. The crisis shows no signs of abating as lenders insist not just on the full return of their money but they are the same ones who are demanding that government tighten its belt and stop spending money on projects that will create jobs, and instead cut aid to the neediest and pay down the Federal debt.
The US has an official unemployment rate of 9.2%, but that is only of those who are looking for work. If we take into account those who have given up looking for a job, the percentage doubles.
Greece managed to become part of the European Union by cooking its books to show that it was a healthy economy with budget deficits less than 3% of its GDP. When the current Prime Minister Papandreou came to power in late 2009, he shocked the country and the world by admitting the extent of the country’s budget deficits (6% of GDP) and debt (more than 100% of GDP). In quick succession the Greek government bonds were downgraded by the rating agency Fitch. This meant that potential investors who loaned Greece money by buying these bonds were being told their chances of getting their money back were low. This in turn made the investors ask for ever higher interest-rates in order to lend to Greece, making it that much harder for Greece to pay back the loans. The investor confidence was gone.
Greece needed a bailout. It has both a liquidity problem (i.e. it does not temporarily have cash to pay interest on the loans it has taken) as well as a solvency problem (it is simply not in a position to pay back its loans). The country has a massive parallel cash economy with a tax evasion problem, a bloated and unproductive public sector that is mainly a substitute for welfare and no real industry to speak of aside from tourism and olives.
The European Central Bank (ECB) and the IMF have moved in fits and starts to deal with the crisis that threatens (much like the Lehman Brothers collapse in 2008) to bring down the Eurozone as the crisis spreads to Ireland, Portugal, Spain and even Italy. The solution of the ECB is similar to the lenders in the US and that is to demand full repayment from Greece by imposing harsh austerity measures on Greece that only increase unemployment, decrease tax-collection and postpone the day Greece will be economically healthy again.
Throughout much of the Western world there is a crisis of deleveraging, as consumers fearful of jobs and the debts they have accumulated cut back on spending, try to pay down their debts and increase their savings. They also have a much greater difficulty in getting loans from banks. But this makes businesses operate at lower capacity and lay off workers and reduce their own debt as demand for their products falls. This creates a vicious deflationary spiral, much like the one Japan has been stuck in for the last two decades where even a zero interest-rate for borrowing doesn’t attract borrowers.
So how to make sense out of the attitude of lenders who in the face of an obvious problem of solvency are demanding a collective punishment of entire countries? One way to look at this is to realize that there is an unceasing conflict between the interests of debtors and the interest of creditors. Debtors seek to increase the quantity of money and try finding substitutes for it. Creditors on the other hand seek to increase the value of money by restricting its supply and refusing to accept substitutes for it. Even though the total amount of debt and credits is the same, debtors are usually more numerous and poorer (whether a sovereign nation like Greece or an individual homeowner) than the few but powerful creditors (usually major banks or international institutions like IMF). Debtors also include many politicians and entrepreneurs and of course the government itself is usually one of the biggest debtors. It is this distribution that matters.
Throughout much of history from pre-feudal times to now, the pendulum has swung from debtors getting their way until a major crisis comes to swing the pendulum the other way with the powerful creditors emerging to protect their interests at the expense of vast majorities. The pendulum clearly has swung in the direction of creditors. And it is wreaking havoc on the lives of millions, many of whom were model citizens who took Shakespeare’s words to heart.