THIS WEEK IN THE BLOGOSPHERE
Greek Chorus
"Why," asks Reuters financial blogger Felix Salmon, "should the prospect of default in Greece or elsewhere in Europe concern the average American?" Why indeed?
To answer, let's back up a little. Greece's problem, put simply, is that its political system is dysfunctional. It's been living beyond its means for years, borrowing money from foreign creditors to sustain a level of spending far higher than it can afford. And now the jig is up: Nobody will loan it more money, and that means that unless Greece is bailed out it won't be able to pay its debts. And who does it owe money to? Mainly German, French, and British banks. If it can't pay them off, they're in danger of failing themselves, and that in turn would likely bring down still other banks, turning Greece's default into a global systemic crisis. Sound familiar?
But wait. There's more. Greece could, of course, solve its problems by getting its budget in line. But that would require a combination of tax increases and spending cuts, and those are political third rails. The government just can't do it. Sound even more familiar?
So it turns out there are two answers to Salmon's question. The first is straightforward: The global financial system is still fragile, and an uncontrolled Greek default presents at least some chance of touching off another banking crisis and another recession. That would affect Americans as much as anyone.
The second answer is that Greece is the canary in the coal mine. America is nowhere near Greek levels of financial distress yet. We're bigger and richer than Greece, our economy is stronger, our debt level is lower, and when we borrow from foreigners we do it in our own currency—which just happens to also be the world's reserve currency. Lucky us. But historically, banking crises like the one we just went through cause government debt levels to double, and within a few years that will put the United States into dangerous territory. Not Greece-level territory, but still uncomfortably high. And it means that a second banking crisis might very well get us the rest of the way there.
There are two lessons to take from this. First, we need to make sure we don't have a second banking crisis anytime soon. That means passing effective financial reform. Second, we need to fix our dysfunctional political system. We can't keep borrowing from abroad forever and we can't keep running enormous federal deficits forever. That means Democrats are going to have to accept the inevitability of entitlement reform and Republicans are going to have to accept the inevitability of tax increases. It doesn't have to happen tomorrow, but it has to happen soon. It's nice to think that what happened to Greece can't happen to us, but history doesn't bear that out. Even the biggest economy in the world has limits.
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