Tuesday, August 24, 2010

The Next Manufactured Financial Crisis

I’ve said from the start that Greece is not really in any trouble, and that the financial distress surrounding Greek sovereign debt is mainly a problem in the international financial system. The government in Greece has shown itself willing to make adjustments, even ones that go against the country’s recent political culture, to keep things going. The popular rebellion that was supposed to overthrow the Greek government and throw the country into anarchy this summer — that according to Wall Street observers — never materialized. The economic slowdown in Greece is leading to a mass exodus of foreign workers in the service sector, a misfortune for the workers involved, but not in the long run a disadvantage for the country of Greece.

The reason you can be confident in Greece’s future is that policymakers have set their sights on getting the most basic things in the economy right first. This will result in a stable economy where growth comes easily, even if it does not look like that right now.

Greece’s financial reputation has been so diminished that it will be forced to accelerate payments on its national debt, and though that will be uncomfortable, it also will not create a lasting disadvantage for the country.

The important thing to note is how easily speculators created a financial crisis around Greece. It makes you wonder who they might target next. Will it be Ireland, or Spain . . . or California, or the United States? Any government body with high debt and institutional constraints makes an easy target for Wall Street and the international financial community to take down — but doesn’t that scenario describe the United States better than any other country? The United States has the largest national debt of any country, and it has a government in gridlock, with one party determined to block any measure that comes before them. Worse, the United States, unlike Greece, has not focused on stabilizing the framework of the economy — at least not yet. The U.S. economy is more top-heavy than it was three years ago, making it easy for any number of small players, including ones from other countries around the world, to rattle the whole economy.

This is one of the reasons why the economic stimulus idea has run its course for the moment. The U.S. government cannot borrow more, and lacks the political consensus that it would take to fund economic measures in any other way. Stimulus was the wrong idea in the first place. The focus should be on the institutional reforms that are so desperately needed to stabilize the economy. But if Congress is unable to take up those measures now, I am sure they will find a way to do so if the United States becomes Wall Street’s next target.