Financial markets are treacherous. I’m not saying this because I’ve lost a lot of money to them recently- oh wait, we all have! – but because they’re pathologically antisocial yet somehow exotically enticing. They’re the new femmes fatales. No matter how many times we wine and dine them, and how many times we pay for it, they’ll keep us hooked.
The financial markets have been jittery with speculation about Greece defaulting on its debts- unsurprisingly, really, if we consider that Greece has the highest gross government debt as a percentage of GDP in Europe- somewhere around 125%. And, many ask, if Greece does default, what will happen to other countries with high debts, such as Spain and Portugal? Will they survive the same financial attacks – if interest rates rise the deficit effectively increases because of rising interest on the bonds – or will they show more ‘fiscal responsibility’.
Lecturing for Stable Economics
On Monday evening the Nobel-prize winning economist Joseph Stiglitz gave a talk at the London School of Economics in which he noted:
“The irony of this attack should not go unnoticed: the fact that Europe and America were brought into the current mess because of the failures of the financial system. Their deficits grew in the attempt to save the banks and the economy as a result of the financial system failure, and now the financial systems are lecturing the governments about the size of the deficits that their behaviour created…the fact is that the financial markets are again exhibiting the same kind of irrationality and short-sightedness they continually exhibited. What matters is not one side of the balance sheet, it’s both sides. Deficits are a liability, but on the other side are assets: it depends on how you spend the money. And if you spend the money well, on education, on technology and infrastructure, the returns only have to be 5-6% for the long-run national debt actually to be lowered, and the banks should understand this.”
In other words, a ‘credible’ response to tackle the Greek government’s debts does not mean cutting money from health, education, technology and the environment to pay back bond holders – it means instead that lenders understand that investment in these sectors will secure their repayment over the long run. The economic cases for more regulation and a ‘Robin Hood’ tax are also strong. But, I suppose, the markets are worried. And we’re still hooked.
The governments of Europe and America bailed out the financial sector and stimulated the economy. The deficits now need repaying, and it’s becoming clearer who’s going to pick up the tab. Our message to the banks is clear: “don’t worry, we’ll get that”. Because, honestly, we really will get that, and we really, really don’t want you to worry about it.