Throwing Cash

At Stressed Banks And Countries

To the Editor:

The European Union bailout for Greece is only a Band-Aid not a permanent fix. It does nothing to eliminate Greece’s excessive debt nor provide a solution to pay it down to a sustainable level. President Obama called officials in the European Union requesting that aid provided be a big number (which it is at $1 trillion dollars). But that makes the problem ultimately much bigger when the bill comes due.

Ask yourself, “How long will this cash infusion by the EU and IMF, and the US Federal Reserve who is willing to make unlimited amounts of US cash available for a short time to European banks kick the problem down the road, six months or maybe one year? But without a long-term solution for paying down Greece’s debt, probably not much longer.

Imagine European banks — owners of heaps of sovereign debt from Greece, Spain, Italy, Ireland, and Portugal, as well as Iceland — are happy to sell that stuff to the ECB and borrow short-term cash to lever up into an equity rebound. This bailout encourages privatized profits and socialized losses that favor the financial industry — exactly like the process the Federal Reserve and Treasury used during the 2008 crisis here in the United States. But that crises and the US debt, like that of Greece, is only growing larger by the day because President Obama and Congress refuse to stop deficit spending.

The immediate question about Greece is, “Will this work?” It depends on the definition of “work.” Throwing wads of cash at stressed banks, the ECB alleviates the immediate threat in the market that bond yields spike and a liquidity crisis sets in. Note, enabling debt-landed countries to take on more debt hardly seems like a long-term solution to the problem of living above your national means. Nor will additional taxes help increase consumer spending or increase business activity and job creation.

Rules of “physics” and “economics” do not disappear because politicians ignore them. “You cannot make any nation who is unable to service its accumulated debt more creditworthy by extending more credit!” observes Jeremy Batstone-Carr, analyst at Charles Stanley. “If the EU lends Greece money, the loan will only increase that country’s public sector debt. The interest on the additional loan, whatever it eventually proves to be, will increase the public sector deficit. Debt-servicing costs will rise, increasing the burden on peoples cash flows. At some point in the future, loans will have to be paid back or face default. This is true here as well as in Greece or in any of the 40 countries that have external debt levels that cannot be sustained.

Note, after this fix, interest on Greek bonds has not dropped nor has demand for those bonds increased. The market is saying “doubt remains” as does the Greek crisis. Greece really wants someone else to pay their debt for them because “socialism” works living off your neighbors nickel. And Obama volunteered a lot of our nickels without Congressional approval.

Daniel Kormanik

85 Great Ring Road, Sandy Hook                                   May 17, 2010