Sovereign Debt Crises

Dear Friends,

This morning French President Hollande is quoted as saying that the Greek proposal is serious and credible, while Angela Merkel continues to rule out a reduction in the principal amount of the debt.  Her position is wrong economically and morally.  History has demonstrated that the only viable solution to excessive sovereign debt is to reduce the principal amount.

An article in The New York Times (here) a couple of days ago contained the following paragraphs

The good news is that by now economists generally understand the contours of a successful approach. The bad news is that too many policy makers still take too long to heed their advice — insisting on repeating failed policies first.
“I’ve seen this movie so many times before,” said Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard who is perhaps the world’s foremost expert on sovereign debt crises.
“It is very easy to get hung up on the idiosyncrasies of each individual situation and miss the recurring pattern.
The recurring, historical pattern? Major debt overhangs are only solved after deep write-downs of the debt’s face value. The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be.

Of course the Germans know first hand about having their own sovereign debt reduced.  After World War I, Germany had significant debt from the war and reparations which it could not repay so it defaulted.  Many people believe that Germany's enormous debt was one of the reasons that Hitler could come to power.  After World War II, Germany took on additional substantial debt for reconstruction which it could not pay back and in 1953 an agreement was reached with its creditor nations (including Greece) to cut its debt in half.

Not only did the 1953 agreement cut the principal amount owing in half, it limited the payments to be made on the debt to 3% of export earnings each year.  This deal permitted Germany to build its economy into one of the most powerful in the world.  Now that it is on top of the economic heap, it has forgotten its past and the fact of history that only significant debt reduction can solve a sovereign debt crisis.  There is a great op-ed piece in The Guardian from February, 2013 (yes 2013) that does a great job of explaining the history.

If Greece were to receive a deal like the one that Germany got after World War II, it would have a great opportunity to build its economy and become an important part of the European Union.  Unfortunately not only are the creditors opposed to any debt forgiveness they think that debt repayment is the highest priority of spending and think that 15% to 20% (not 3%) of export profits is sustainable which, of course, it is not.

Unfortunately, Greece is not the only country to be treated in this manner.  As the op-ed in The Guardian points out:

Following the London deal, West Germany experienced an "economic miracle", with the debt problem resolved and years of economic growth. The medicine doled out to heavily indebted countries over the last 30 years could not be more different. Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become "more competitive".
As a result of this, from Latin America and Africa in the 80s and 90s to Greece, Ireland and Spain today, poverty has increased and inequality soared. In Africa in the 80s and 90s, the number of people living in extreme poverty increased by 125 million, while economies shrank. In Greece today, the economy has shrunk by more than 20%, while one in two young people are unemployed. In both cases, debt ballooned.

The op-ed piece ends with these two paragraphs:

The German debt deal was a key element of recovering from the devastation of the second world war. In Europe today, debt is tearing up the social fabric. Outside Europe, heavily indebted countries are still treated to a package of austerity and "restructuring" measures. Pakistan, the Philippines, El Salvador and Jamaica are all spending between 10 and 20% of export revenues on government foreign debt payments, and this doesn't include debt payments by the private sector.
If we had no evidence of how to solve a debt crisis equitably, we could perhaps regard the policies of Europe's leaders as misguided. But we have the positive example of Germany 60 years ago, and the devastating example of the Latin American debt crisis 30 years ago. The actions of Europe's leaders are nothing short of criminal.

The economic elite continue to control the fate of all of the people in the world and the inequality in income and wealth continues to skyrocket.  I hope that it will not take the rise of people like Hitler or populist revolutions to take this power away from the economic elite and return it to the people.

Thanks for reading and please comment,
The Unabashed Liberal

President Jimmy Carter

Dear Friends,

I have always thought that President Carter was a great President primarily because of his moral leadership, a trait completely absent in most presidential politicians today.  President Carter was wrongly maligned and criticized during his presidency and has not gotten the credit he is due for the incredible work he has done since then to make this world a better place.  I did not always agree with his political positions, but I always respected him for his honesty and moral integrity.

In The New York Times today, Nicholas Kristof wrote a wonderful column about President Carter  (here).  You really should read the entire piece, and I hope you do.  Just in case you don't, here are a few snippets.

in recent years it has been common to hear that he’s anti-Israel or anti-Semitic (This about the man whose Camp David accord ensured Israel’s future!).
At a time when “principled politicians” sometimes seem a null set, it’s remarkable how often Carter showed spine.
He has a new memoir, “A Full Life,” out this week, recounting that his father was a segregationist. Yet Jimmy Carter says he was the only white man in his town who refused to join the White Citizens’ Council, and he fought to integrate his church. At one point, after a racist slur was posted on his door, he considered giving up and moving away.
When he was inaugurated governor of Georgia, he declared, “I say to you quite frankly that the time for racial discrimination is over.” He then erected a portrait of Martin Luther King Jr. in the State Capitol.
But Carter was also a pioneer. He was the first to elevate human rights in foreign policy. He appointed large numbers of women, Latinos and blacks. He installed solar panels on the White House (President Reagan removed them). He established diplomatic relations with China.
After leaving the presidency, Carter could have spent his time on the golf course. Instead, he roamed the globe advocating for human rights and battling diseases from malaria to blinding trachoma.
Carter, the one-termer who was a pariah in his own party, may well have improved the lives of more people in more places over a longer period of time than any other recent president.

Thank you, President Carter for demonstrating what a moral President looks like and how much a selfless person dedicated to making the world better can succeed.

Thanks for reading and please comment,
The Unabashed Liberal

Clinton/Sanders - Greek Debt Crisis

Dear Friends,

The Greek debt crisis is a defining moment for Europe both financially and politically.  It could also have significant global financial implications.  It is a really big deal.  The entrenched financial and political powers in Europe want to continue to force austerity as a pathway to growth notwithstanding the fact that it does not work and in the case of Greece has caused a 25% reduction in GDP over the last five years.  Greece need significant debt relief and government spending to stimulate the economy as well as some financial reforms.

Bernie Sanders' position is and has been very clear.  He urged the Greeks to reject the further austerity measures, and he blasted Greece's creditors.  Hillary Clinton has not said a word that I can find on the subject.  She is apparently waiting to see how things shake out.  If I were to speculate about where she is on the issue, it would be in support of the creditors.  But the point is not what her position is, the point is that she has no position.  The world is focused on this issue, and she has no position and makes no comment.  That is not leadership.

Thanks for reading and please comment,
The Unabashed Liberal

Clinton/Sanders - Domestic Spying

Dear Friends,

On the topic of domestic surveillance by the NSA, there is a clear difference between the position of Senator Sanders and the position of Senator Clinton.  Bernie Sanders is strongly opposed to secret spying on the American people by their own government, and Hillary Clinton talks in platitudes about transparency while not being overly critical of the NSA.  Hillary Clinton supported the USA Freedom Act and Bernie Sanders voted against it because it did not go far enough to protect Americans from spying.

The attitude of these two people towards Edward Snowden, I think, says a lot about their real views on American's civil liberties.  Hillary Clinton initially was outspoken in her condemnation of Edward Snowden.  As she has watched the feelings of Americans change and has been pushed by Senator Sanders, she has softened her position but it seems clear to me that she would prosecute him to the full extent possible.  Senator Sanders' position seems to recognize the complex issues involved.  Edward Snowden did violate the law but he also bravely disclosed illegal and immoral activities by the United States government.  Bernie Sanders does not believe he should suffer a long criminal sentence or permanent exile.

I would go further than Bernie Sanders.  My position is that unless the United States government is willing to prosecute those at the highest levels of government who broke the law by spying on US citizens and took us to war on false pretenses, then the United States government has lost the moral right to prosecute the person who disclosed the illegal activities.

Thanks for reading and please comment,
The Unabashed Liberal