The concern
about a Greek default is really more about the contagion effect. The central
question is how does one contain the impact arising from a disorderly Greek
default. From this follows the discussion about potential bank
recapitalization. There are all sorts of sub-plots in the recapitalization
schemes, from the moral hazard issue, to the inequity inflicted on those who
have been fiscally responsible, to whether or not an effective scheme can really
be created to many more. Politicians have been receiving the brunt of criticism
because of the perceived lack of leadership in dealing with an extremely
complex, and perhaps insoluble by mere mortals problem. I would be one of the
last ones to come to the defense of the politicians, however, the political
posture of the “deer in the headlights” when facing public outcry to “do
something, do anything”, is understandable giving the mutually check-mated
position the global financial situation has emerged into.
The idea of
recapitalization is lacking unless one can quantify with some reasonable degree
of confidence the extent of recapitalization that would be needed to
effectively resolve the issues. I have heard plausible figures of up to $2 trillion
dollars worth. I have not, however, seen much discussion of potential
derivative exposure, and counter party risks which might amplify the amount of
fiscal deficiencies, and the number of
systemically important institutions which may be impacted. If there is one
thing that the institutional failures of 2008 should have taught us, it is that
with the degree and scale of economic and financial integration that currently
exists, it is all but impossible to see where the chips may fall, or the
ensuing consequences. Moreover, when talking recapitalization, ultimately one
is talking about using public money to enable those who, either directly or
indirectly, were responsible for egregiously imprudent financial behaviors to
retain their private ownership interest with minimal risk of loss. The backlash
from this sort of thinking is emerging at the main street level that
potentially will threaten governments if it continues. As evidence witness the
emerging demonstrations in Greece and on Wall Street, and the rising pervasive
discontent among so many of the affected citizenry. Perhaps a more honest and
equitable approach to allowing Greece to default, and stabilizing the banking
system would be an outright state takeover of those systemically important
institutions to give the funding public an equity stake rather than a debt
holders stake in future recovery. When looking at the impact of the US TARP program
the argument is made that the US actually made money from many of its bailouts.
I think, however, that this misses the point, if governments are going to use
public money to bailout out private institutions, it should be done with the
focus of maximizing the return of the investing public, as well as a policy
measure to provide a consequence to those who have acting so financially imprudent,
directly, or through agency. It really is time to start acting like responsible
adults.
