Just how much of a mess is Greece in, and what will happen?

[BeidAmmikon]

Thanks, RegisterMe, for taking your time to clearing some things up.
Of course, the worst part* of this crisis is when a lot of people (the "middle class") who are accustomed to lead a certain way of life are suddenly forced into another, and they have no idea how all this happened, be it merely to know why they're suffering exactly, and what to avoid in the future. And then, they look up to their protectors seeking help and answers - the governments and the economists who were supposed to keep them safe and keep the world going smoothly - and see instead that not only those people have nothing at hand to restore faith in stability, but they obviously either didn't see this coming at all, or just looked at it from the margin and let it happen.
Who will dare to come now and say that his system is better than the previous one? Should I believe them?

* worst, because it has a huge potential leads to civil unrest

[Aye Capn]

Now if only we could reinstate the death penalty.

There's really a law that prevents public workers from being sacked?
You need two "death penalties" ...

I think it would be healthier for all of us in the long run if no country ever gets a bailout. What that would do is teach the banks and lending institutions not to loan money to bad governments.
Governments can not always be counted on to maintain fiscal discipline. Their constituents become addicted to spending and like addicts will do anything to keep the government payouts coming. For proof just look at the riots. Those people could be looking for real work, but their addiction to government cheese compels them to violence.
And like the bartender who keeps serving the drunk, government debt is only made possible by its enablers. These irresponsible lenders shouldn't be allowed to assume that if their favorite customer passes out someone else will step in and pick up the tab. They need to think twice before they hand even more money to out-of-control big spenders.

Your recipe for Greek recovery is a page right out of Hayek. I hope that your 60% majority for common sense is able to balance the budget and maintain your country's dignity. As much as banks need a lesson in saying "no" I would hate for it to be your country that goes into default. You're better than that.

[ClearSky]

Have to agree with that, in principle at least.

However, I firmly believe that absolutely nothing will change in the attitudes of the bankers and other lenders until individuals within these organisations are made to be personally liable for their stupidities.

When (to dredge up a bit of old news) someone like Fred Goodwin can walk away from a disaster such as befell the Royal Bank of Scotland with 12 million pounds sterling in his pocket for his troubles, then you know something is seriously wrong with the system.

What I would like to see is severe restriction on the movement of any individuals assets when that movement is solely for the purposes of avoiding taxation or putting the assets out of reach. I would also like to see those in positions of great responsibility have their assets directly chained to their performance. If they stuff up they lose all or an appropriate portion.

The sad fact is that these, largely unpleasant, individuals are mostly sitting on vast personal fortunes, and feel no responsibility other than to themselves.

Easy to sound contrite for bringing the economy to its knees when you have a few million in the bank, isn't it?

Icky

[philip_hughes]

I think thats what gets stuck in our collective craws. The fact that the world is going to hell in a handbasket and the guys responsible for the train wreck are given giant wads of cash. Not only that, but our various governments have to fork over more to them because things would get worse if they didn't.

Oversimple? Maybe.

[Aye Capn]

Not only that, but our various governments have to fork over more to them because things would get worse if they didn't.

F*ck that. If we all have to suffer in the short term to bring in some much-needed accountability it will pay dividends many times over in the long term.

If Greece does default on its debt and there's no bailout I guarantee you lenders will think twice about loaning money to governments that lack the discipline to maintain solvency.

All this "betting on the bailout" crap, "too big to fail" is another, it's all a scam. Investments generate a return because the taking of risks is worth a premium. When a third party underwrites the risk for free all the lenders become nothing but freeloaders on whomever is suckered into covering the potential losses. "Whomever" is almost always the taxpayer.

[philip_hughes]

Unbelievably I do agree. I have seen nothing good come from bailouts. In Australia the Ansett bailout didn't stop the company going under, just gave us a new tax which to my knowledge is still there.

The other, possibly too simple observation is the principle of basic prudence.
If a guy has demonstrated a track record of losing money, what do reckon will happen if you give him more? And if the answer is "lose more" why are we bailing out execitives/countries?

[BeidAmmikon]

Irish Cabinet meets to approve formal request for bailout

From defiance to capitulation: six days that humbled Ireland

It's incredible. We were used to individuals and businesses going broke, but now we hear people talking countries! In fact, there's millions of people there, under the sweeping term of "country X". It's not the country, stupid, but the million individuals who were humbled!
Word goes that there are individuals who, when they experience something so dramatic or tragic that their existence and perspective is crumbling down, they think of it all as something that's influencing the whole world around them (this is somewhat certified by the Bible - cue the Flood ) So, I hope that the Irish people will see their plight this way exactly. Also, I hope the country-buyers of PIIGS and others will have their hands full tempering the people therein, otherwise the superstatal, unnatural, malevolent* entity called the EU, God willing, will dissolve into the nothingness where it came from, following in the steps of the Soviet Union. And I hope the IMF will lead its way out.
And in Lisbon, we've been promised a "missile defence shield" for the whole NATO. This is what we are being prepared for: war. (Defence) against whom? Russia? China? Iran (LOLZ)? Maintained with money from whom? Europe is almost broke - hello? Is there a leader in the house?
Amazing.

* There are millions of acres in the EU destined to agricultural needs that are not being used, because Bruxelles said so because the GM industry has to gain big money from the EU, and states outside the EU come and buy those acres off, to grow food for themselves.

[Aye Capn]

From what I can tell Ireland bailed out so many banks for such vast sums they bankrupted themselves into needing a bailout of their own. The banks themselves had failed because of real estate speculation.

I fully admit that's probably an oversimplification. There are some real financial wizards on this site who I'm sure could provide all the grisly details.

[imperium3]

Eric Cantona calls for a boycott of banks

The King speaks

Actually although it's a bloody crazy idea (what he proposes is effectively an organised run on the banks), it's also quite inspired. These days it's possible the only way that consumers can really put pressure on the government...

[BeidAmmikon]

Eric Cantona calls for a boycott of banks
The King speaks
Actually although it's a bloody crazy idea (what he proposes is effectively an organised run on the banks), it's also quite inspired. These days it's possible the only way that consumers can really put pressure on the government...

I don't want the banks to ruin entire countries, nor do I want chaos caused by people who will ruin their countries too - because* I think that's what you'll get in exchange for this^, if it'd happen. Plus, not everywhere on Earth people will heed the call, so I call it a Fail from the very start.
This hydra's got an awful lot of heads attached to its putrid body**.

* Has this happened before - people withdrawing their money en-masse from the banks? And what happened afterwards? What about the (daily) limit for withdrawal by individuals, how can one avoid it?
** aka "the System"

[silenced]

I'm always reading about 'crisis' and 'countries with financial issues' and such stuff, but there is no crisis, and there are no financial issues, there are only a few banks that went too far and their speculations failed.

Especially Ireland is a nice example, I can still remember a few years ago, as Ireland was a top example of how a country has to be run and that we, especially Germany, should take them as example how to do it right. Just look at those low 12.5% taxes for business, hell, wtf!, of course everyone was running over there and building up some business and giving them an incredible growth. It's great that in the EU the 'big' countries give money to the 'small' ones to become their biggest threats in terms of economy ... but this backfires sooner or later. Biggest fail of course is the financial sector, you cannot turn Ireland into London, impossible but they've tried, and failed. Now Ireland needs all the money (those ~ 80 billion €) to pay the INTEREST! of their debts at the banking institutions ... isn't that, how to say, fail again? In reality: the bailout of Ireland is a huge payment to the banks involved into that mess. Next will be Portugal, followed by Spain, followed by Italy.

I'm really curious who will be paying the debts for Germany when we go bancrupt ... we might be the last in the chain but this will be the end of the Europe we know. At least a small positive aspect.


Anyways, what we really need is a removal of all banks, and then each country gets his own bank, and only ONE!, which is responsible for EVERYTHING, it is proven that private banking is not working as intended. Just look at the Wallstreet, it's all corrupt and insider trading. Especially Goldman Sachs should be destroyed ASAP!, they gamble with companies and their success or no success while having their own people sitting in core positions in these companies, so they often gamble that a company makes a huge loss -> and then of course they make a huge loss, controlled. Company is losing, GS is winning. But it's not only GS, it's all the crappy banksters, that's how the system works. And this money made out of nothing is what ruins the economy. It's much easier to take the cash you get from the FED for example and gamble with it in that corrupt controlled environment, why take a risk and give credits to companies that produce REAL products and create REAL revenue when it is SO simple and much easier/faster?


Capitalism is fine and so far the best economic model we've developed, but there's too much greed and that's why even the capitalistic system will fail. Sadly.

[RegisterMe]

That's a pretty uninformed post there silenced . Have you read anything I've written about the banking industry, the credit crunch, and current economic circumstances?

[Aye Capn]

Hey, Reg, of everyone on the forum it is your knowledge of the financial sector I respect the most.

So straight up, do you think first that bailouts are ever a good idea and second whether Ireland's bailouts were a good idea?

(Answering "yes" to the second question would seem to imply Ireland was inevitably doomed to financial disaster regardless of what they did. That doesn't sound right, but maybe they were victims of the times?)

Oh, yeah, bonus question, do you think Greece should get a bailout? (Sorry if you've already answered it.)

[imperium3]

Also, to take one point from silenced's post, is there a problem with having a state-owned bank? For example why doesn't the UK Government fully take over Lloyds and run it until it makes back the money it cost to bail it out (plus a suitable cut)?

[BeidAmmikon]

Perhaps someone knowledgeable will understand more from this piece than us commoners: International Forecaster November 2010

[Dragoongfa]

Hey, Reg, of everyone on the forum it is your knowledge of the financial sector I respect the most.

So straight up, do you think first that bailouts are ever a good idea and second whether Ireland's bailouts were a good idea?

(Answering "yes" to the second question would seem to imply Ireland was inevitably doomed to financial disaster regardless of what they did. That doesn't sound right, but maybe they were victims of the times?)

Oh, yeah, bonus question, do you think Greece should get a bailout? (Sorry if you've already answered it.)

You forgot about me

EDIT: For all concerned just read the post below this one for a better explanation.

Since Reg hasn't answered yet I will provide my opinion and a relatively simple explanation of it.

Bailouts are ever a good idea?

Sometimes yes, most of the time no.

The main effect of the financial crisis were the liquidity deficits of various banks and industries.

In a short and oversimplified explanation you have liquidity issues when you do have the money but you can't access that money for a period of time (investments, loans etc). Now if in an emergency you need hard currency you won't be able to go to the money you already have, then what do you do?

You take a loan from a bank, in theory the bank checks your economic projections and if they see that you cannot pay back they send you away; for quite some time many banks in the US did not do so and they actually lost much of the money.

So when is a bailout a good idea?

When one simply faces a liquidity issue, you know that he can pay you back in time (provided he changes some of his habits); so you give him the money to stay afloat for a while.

A bailout is a bad idea when the one that is asking for the bailout simply cannot pay it back no matter what he does.

So is the bailout of Ireland a bad idea?

Depends, can Ireland give the money back once things are stabilized?

If yes, then its a helping hand with a 5% interest for the one who does the helping.

Should Greece have received its bailout?

Kind off a weird question to answer since I am biased

Greece has wealth, proud and hardworking people; Greece's main problem is her political system/caste, the overgrown government and the corruption that stems from it.

If I was in the IMF lead, I wouldn't have given a penny unless under strict conditions that shit would change.

Which is what we more or less got, the problem is that the politicians and their lackeys are still loose.

@Beid

I say that the article is full of bull

For one thing, Gold has always been used as a hard currency between nations; Gold was once directly related to currency yes, what that meant was that one could go to a bank, hand over his cash and receive an amount of gold equal to the amount that the cash represented.

When this relationship was dissolved Gold was simply not a factor as to the value of ones currency. On the other hand it is still used as a hard reserve by all nations, the US has a gold reserve, the various EU nations and etc.

All nations are currently buying gold because its the only 'currency' that does not lose its value over time, China and Russia are two major gold producers but they are also two great exporters (Industry for China, Energy for Russia) which gives them a surplus of foreign currency. It is only logical that they invest part of their surplus to endeavors they believe are safe, buying gold being the most easy choice.

But they are not the only ones who buy gold, everyone wants to buy Gold at the moment because its the only 100% safe investment.

http://en.wikipedia.org/wiki/Gold_reserve

As you see with the link above, the largest gold reserves are held in the US and the EU areas.

China and Russia are simply trying to divert a percentage of their foreign currency reserves into gold simply to balance things out.

[RegisterMe]

Dragoonfa, I laughed, you posted just before me . I've just spent the last two hours writing this.....

***********************

Wall of text warning. Apologies in advance......

To take things in reverse order, Beid, I read that piece you linked to. To be honest I am not really sure what I make of it. He obviously has some knowledge (more than me!) of what he is talking about:-

* He talks reasonably about what SCO is, but ignores the fact that it is primarily a security / military outfit. Look carefully at SCO's membership. Would you want to live in any of those countries?
* He talks reasonably about countries wanting to diversify away from their US Dollar holdings (but not so quickly as to crash the price of the US Dollar, thereby wiping out the value of their savings).
* He doesn't like fiat currencies (there are arguments for and against, but this relates directly to his support for currencies backed by gold).
* He's factually wrong when he talks about the Fed's Quantitative Easing 2 (or QE2) - they did in fact create six hundred billion and not the two trillion he talks about.

What I am not so certain about is the motivations he ascribes to the various actors:-

* Are Western powers trying to destroy gold as a backing for currencies? Assuming that are, why?
* He accuses HSBC and JP Morgan Chase of rigging the gold and silver markets - not very successfully then, given that the price of gold has apparently risen 20% against the US dollar, and the Illuminati (see later) is apparently trying to trash the gold price. He also claims that JP Morgan chase is the "major owner of the Federal Reserve". I did actually look for some decent inflation adjusted historical gold data but the amount of spammy "buy gold from us cheapest prices guaranteed" sites you get hit with is a little offputting
* He accuses all Western governments of pushing out bogus data to support their view of the world.
* I also found this Youtube recording of him .

I stopped listening at 7 minutes 39 seconds when he started on about a global Illuminati looking to introduce a one world government. That's a little "here we go conspiracy theory" for me.

So JP Morgan Chase, as the majority owner of the Fed (which he presumably agrees is part of the Western Government machine), is rigging commodity prices to keep those prices down. And yet the gold price has, according to him, gone up by 20%. All I can say is that they're not doing a very good job are they.

In summary I think he has a handle on what he is talking about, I'm not sure about his conclusions, and I think he's a little.... odd.

I think that this is a more reasoned article about the gold price. Still, make your own mind up .


Next up we have the idea of "one state owned bank". Yes, I believe that there are problems with this idea. Firstly the largest drivers of increasing standards of living are innovation and increased productivity. Monopolies, whether power companies, banks, or any other kind of industry, have no incentive to innovate or to increase productivity. The reason they have no incentive to do this is because they face no competitive pressures. (Note that the introduction of any innovation has costs and can be disruptive, whether you are talking about the internal combustion engines, PCs, spinning jennies, or derivative products. Over time we learn to manage the disruption and lessen the negative impacts associated with them. But also over time they lead directly to increased productivity). Believe it or not innovation does happen in finance too, the essential aim being to free up capital to allow for further and more efficient investment. Some examples include:-

* The public limited company - now investors and managers can share risks.
* Mortgages - now you can buy somewhere to live without having to save up the entire purchase price of the property.
* Charge / credit cards - now you don't have to carry cash around with you.
* Unit trusts - now you can invest in a lot of different companies in one go, lowering your costs and diversifying your risks.
* Sumerian wheat futures (oh, I meant derivatives) - now you can hedge.

They've all been abused at one point in time or another. On the whole though they have helped get resources from people who have them but don't need to use them now (savers) to those who don't have them and do need them now (borrowers).

Secondly if you had one state owned bank who would make the lending decisions? Who would put a price on something? Who would choose whether to invest in something or to withold investment? At some point or another your answer has to stop with "politicians", even in terms of "you can lend x percent of your capital to the housing industry, y percent to startups, and z percent to people with credit cards".

The last time this was tried on any large scale (Soviet block) it didn't go very well for anybody. A minor aside, anybody remotely interested in Russia, economics, and good writing, should pick up Francis Spufford's "Red Plenty". It is very hard to categorise - it's a fact based work of fiction that is also a meticulously researched history of the fantasy that was the Russian economy in the fifties and early sixties. Read it, it's brilliant!

Broadly speaking the reason markets work so well (most of the time) is that they send lots and lots of price signals about the value of something (whether it be widgets or a loan). It's the ultimate form of "crowd-sourcing" (though yes, crowds, like markets, can go a little crazy too, they can also get things wrong). Replace that with a central committee deciding who can be lent to, how much they can be lent, and how much the loan (or widget) should cost........

Back to imperium3's question, specifically about Lloyds. The reason the British government doesn't take it over is precisely because they agree with me. Simply put, they don't think they are very good at running banks (please don't laugh ). Just the same as the American government doesn't think it's very good at running car companies. So in both cases the governments in question are "arms length" investors. In both cases too the governments will be looking to get a return on their investments (if for no other reason than they will be pilloried by their electorates. Oh yes, those electorates that the SCO don't have to worry about).


Now, onto bailouts (and thanks for reading this far if you are still with me). Let's back track a little from Ireland and Greece for a minute and talk about the bank bailouts. Western populations were justifiably furious with bankers (less justifiably they should have been a lot more furious with their politicians), and insult was added to injury with the bailouts. The reason that the banks were bailed out (although most shareholders got pretty much wiped out) is that banks are the plumbing of the entire system. Had all the banks failed the entire system would have stopped. Everything. Absolutely everything. No electricity, no food in the supermarkets, no clothes, no transport, no running water, nothing. Zilch. Nada. Ne rien. The result would have been, for all bar self-sufficient hill farms or those lucky enough to have an allottment and be able to defend it, the end of Western civilisation as we know it.

Imagine, overnight, a billion people reverting to a barter economy. Think about the Great Depression. Think how bad that was, and this was before the great march of technology, many more people lived on the land, or at least much closer to it, and nobody had a credit card or needed to get cash out of the wall to pay the person fixing the roof on their house. I doubt a hundred million would have survived. So yes, be angry at the banks, and be angry at the bailouts, but not keeping the banks going would have been very, very ugly. The politicians actually did the right thing here (and you don't see me saying that very often).

In short, there were very good economic reasons to bail the banks out.

The bailouts of Greece, and now Ireland, weren't principally economic. They were political.

They were put in place to defend the Euro and to defend "Europe". Had they not been provided Greece would have a) defaulted and b) left the Euro. This would have made Ireland fall over that much quicker, similarly defaulting and leaving the Euro. The pressure Ireland came under to accept a bailout was directly the result of the EU wanting to forestall more pressure on Portugal, Spain and possibly even Italy. When dominoes fall over they knock the next one in line down. Portugal, Spain and perhaps Italy might well have to accept bailouts (though I don't think there's enough money to sort Italy out).

Had the bailouts not been provided the end result would have been Greece, Ireland, Portugal and Spain leaving the Euro, Italy holding on by its fingernails, and any idea of "Europe" in tatters. If you believe in Europe, in its current incarnation, as being a good thing, then you have to accept that the bailouts are part of the price of keeping the notion alive.

I do believe in Europe. I don't believe in a Europe in denial about its problems, unwilling to accept painful structural reforms, organisationally incoherent, corrupt, inefficient and King Canute-like trying to hold the sea back. The diplomatic ramifications of not bailing Greece and Ireland out would have been horrific. It would have meant the end of the European experiment.

So yes, I do, very reluctantly, support the bailouts of Greece and Ireland (which is different to saying that I am convinced that they will work).

I just don't think that this lesson will be taken on board by the politicians. They simply don't have the moral fibre (which is why I am not convinced that they will work) .

[ClearSky]

Brilliant post! best I have read on these forums for sheer informative power.

Learned a lot there.

<sinks to knees and presses forehead to the ground>

Icky

[BeidAmmikon]

Sumerian wheat futures

Thank you, you put a lot of effort into explaining all this to us.
I have three questions, related to one another.
How far would this contagion caused by the failure of the "Western" financial system go? Specifically - are Russia, China, Singapore, Japan, Brazil, Jamaica, Malta, affected by this crash, or is there any chance that they are going to be? I realize their trading and financial ties with "the West" is not identical, so I guess that the answer would differentiate between them. Then, of those countries which will not be affected in the same way as the US and European countries, aka being bought off by the IMF, why exactly will they not be affected? Lastly, if they remain somewhat outside of the crisis and they laugh their hearts out at "the West" while it's crumbling down, why did the West not pay attention to their financial models for a change, since I, the commoner, may very well presume that their systems are more sane and reliable that "ours", which just crashed and became a major subject of scorn and shame worldwide?
That'd be all for now Thank you anyway, you were most kind to tell us those things.

I doubt a hundred million would have survived

I've overheard that three million people have died of hunger in the USA, back then.

[Dragoongfa]

Ah, I hate you Reg .

Next time I will write the wall of text I will want