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Holding Spendthrifts Responsible

Posted By Vasko Kohlmayer On March 1, 2010 @ 12:00 am In FrontPage | 3 Comments

“Greece on Friday unleashed a fierce attack on its European Union partners,” reported the Financial Times. The outburst was occasioned by the country’s rapidly deteriorating fiscal situation. In a televised message to his cabinet, Greek Prime Minister George Papandreou accused EU countries of sending “mixed messages about our country… that have created a psychology of looming collapse which could be self-fulfilling.”

This is a strange way of looking at the situation. For one thing, the “looming collapse” is not a psychological phenomenon, as the Greek prime minister tries to imply. It is a cold inescapable reality delineated by hard figures. Running budget deficits of nearly 13 percent GDP and carrying public debt of more than 110 percent, the Greek government has run the country into a fiscal hole.

Having assumed more obligations that it can make good on, Greece is for all practical purposes broke. If it does not get bailed out, the government will have to default and the country will go bankrupt. In other words, utter fiscal recklessness of Greek politicians has brought the nation to the brink. To blame it on others – as Papandreou tries to do – is as disingenuous as it is absurd. This, however, is politicians’ normal modus operandi: to charge others with the messes they make. They do not admit their own guilt even when the issue is as straightforward as overspending by the very government they themselves run.

But it was not only other countries that came in for blame. Papandreou also vented his wrath at the market, the favorite whipping boy of profligate politicians. In his remarks, the Greek prime minister complained that his country had become “a laboratory animal in the battle between Europe and the markets.” It is difficult to ascertain the precise meaning of his remark, but its tenor makes it clear that the markets are the bad guys. The implication cannot be missed: It was the markets that somehow managed to rip the nation off despite the noble efforts of the conscientious Greek government.

Speaking of those evil markets, Spain’s National Intelligence Centre recently began looking into the possibility of “speculative attacks” on Spain’s public debt. The investigation was opened after investors began demanding higher interest on Spanish government bonds in the wake of the Greek crisis. The country’s authorities promptly concluded that there may be a conspiracy afoot to bring down the Spanish government. Public Works Minister Jose Blanco hinted darkly at “somewhat murky maneuvers” on the part of the markets.

It has apparently not occurred to Spanish politicians that the rising bond yields may be somehow related to the fiscal morass they have created. With a soaring budget deficit of 11.4 percent GDP and a mounting public debt, investors demand higher interest to compensate for the risk of default. What Jose Blanco calls “somewhat murky maneuvers” is simply the natural reaction of creditors to the deteriorating balance sheet of the debt-issuing entity. But the Spanish authorities for some reason cannot see this basic axiom of finance at work here. Instead they authorize the country’s intelligence service to investigate the matter for signs of subversion. One would not be surprised if they eventually bring someone up on charges of market manipulation. Such is the instinctive thinking of all ruling elites. If something goes wrong, it is never their fault. The problem must be the work of insidious forces.

Our government is no exception. We have seen this dynamic during the bursting of the real state bubble and the subsequent unfolding of the financial and economic crises. One after another American politicians stood up to denounce the culprits which included the markets, bankers, capitalism, greed, derivatives, lenders, and much else besides. Even the late Ronald Reagan received his share of blame. In short, our politicians blamed everyone and everything except themselves. We should not be surprised if they send the CIA and the FBI to investigate the impending dollar collapse which their out-of-control spending will eventually bring about.

No matter how gross their corruption and mismanagement politicians never admit their wrongdoing. When the inevitable hour of reckoning arrives and the crisis hits, they lash out instead. More dangerously yet, politicians are especially adept at concealing the calamities they are in the process of creating. In the United States, for example, the federal government does not report its astronomical entitlement obligations on the nation’s balance sheet. In the corporate world this kind liability concealment constitutes a crime. In Greece, politicians masked their fiscal excesses with accounting tricks and complex currency transactions involving derivatives. Guess who they are now blaming for that? The bankers who helped them to execute the sales.

Fortunately there are still those who do not fall for this nonsense. Wolfgang Gerke, president of the Bavarian Center of Finance and honorary professor at the European School of Business, had this to say:

“Greece falsified deficit statistics, and that can’t be legal. Greece needs to be kicked out of the EU because otherwise there will be new copycats, and that could lead to the next catastrophe on financial markets.”

It is good to hear a sane voice for a change. Gerke’s approach should be applied rigorously at every level and in every country, be it in Europe or in America. Let us not tolerate the absurd excuses and specious accusations. The prodigal politicians responsible for the public debt crisis that is affecting much of the western world must pay the price. People should keep that in mind when the next election comes around.


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