The only person who is on drugs is the same forgetful jackass that cannot seem to remember me saying over and over and over that all I agree with is that a debt problem cannot be solved with more debt. That person would be you, of course. Hey, I know! Maybe you can bring up that time when I posted an incorrect article on European tourism, and supposedly didn't apologize for it! That always makes you feel chummy.
Submitted by Charles Hugh-Smith of OfTwoMinds blog, All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds. Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08. As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime's go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp "low-risk" on the mortgage because it was quickly sold to credulous investors. The bank made its money in transaction and origination fees, and passed the risk of default on to investors who accepted the fraud that the loan was low-risk. The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront. Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece's loan application. Though anyone with the slightest knowledge of Greece's economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece's northern neighbors, and then sell them as low-risk sovereign debt investments. In effect, the banks were free-riding the magical-thinking belief that membership in the euro transformed risky borrowers into creditworthy borrowers. It's as if the $25,000/year worker wrote in a rich cousin's sterling credit score on his mortgage application. The lender and applicant conspired to fudge the numbers to lower the apparent risk of the loan. In the case of Greece, Greece and the lenders each fudged the numbers; there was no real penalty for doing so, and the rewards for doing so were substantial. Marginal borrowers eventually default, and sure enough, both the subprime borrower and Greece soon defaulted. Life isn't perfect; people lose their jobs, get divorced, have medical emergencies, etc., and recessions lower GDP and national income. Prudent lenders make allowances for these risks. But lenders who make big money originating loans and offloading them to others have no incentive to be prudent; rather, they have every incentive to make as many loans as they can, as quickly as they can, to maximize their profits. Faced with massive writedowns, the lender has two choices: it can loan the defaulting borrower more money, with the explicit guarantee that the borrower will use the money to pay interest on the original mortgage. The total loan amount goes up, but the loan stays on the books at full value. Or the lender can roll the mortgage into a lower-interest loan, effectively entering partial forbearance: the promised return on the mortgage plummets, but as long as the borrower makes small monthly payments, the loan stays on the books at full value. Both of these strategies have been deployed in Japan for decades to keep impaired debts on the books at full value. The last choice is to turn the mortgage into a zombie loan: the loan is neither written off nor listed as being in default: it enters a zombie state, not in good standing but not in default, either. The mortgage can stay in this netherworld for years, as the lender waits for the market to rise enough that the house can be sold without the lender absorbing a huge loss on the mortgage. Unfortunately for buyers of sovereign debt, there is no house that can be sold to pay down the debt. Lenders can demand the debtor-nation sell off its assets to make good on the loans, but there is little recourse should the debtor-nation refuse. When the borrower can barely make the monthly payment, he becomes a zombie. The loan principal barely budges, and so the future is unending penury. The borrower can cut expenses--bike to work, only eat beans and rice, only buy thrift-store clothing, etc.,--but this austerity doesn't change anything: he still can't afford the loan. This is why austerity is a fake solution: no matter what the guy earning $25,000 a year does, he will never be able to pay down the $500,000 mortgage. Meanwhile, the poorly constructed McMansion is falling apart. The loan didn't boost the borrower's productivity, or create a new income stream; the borrowed money was squandered on something that did nothing for the borrower that something much, much cheaper could have done just as effectively. What did Greece get for its $300+ billion in debt? Did it transform the lives of all citizens for the better, fix all its dysfunctional systems, and build an economy for the 21st century? No; the borrowed money simply masked the dysfunctional systems and allowed the Status Quo kleptocracy to reap fortunes. Greece's lenders want to keep the imprudently issued loans on the books at full value.They followed the strategy of loaning Greece more money, but only to make the interest payments. Now there is fevered talk of some version of partial forbearance: rolling the debt into new loans, perhaps writing off a chunk of the debt, etc. None of this changes the fundamental fact that Greece was unqualified to borrow that much money. No matter what the guy earning $25,000 a year does, he will never be able to service the $500,000 debt in a way that frees him from zombie servitude to the lender. So the hapless subprime borrower with the crumbling McMansion and Greece both have the same choice: decades of zombie servitude to pay for the crumbling structure, or default and move on with their lives. All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds. They are simply new frauds piled on the initial fraud of issuing a visibly imprudent loan. The borrower was not creditworthy and the lender should never have offered him loans of that magnitude and at that low interest rate. The losses belong to the lenders, period.
I let all past pages speak for themselves, junkie. Of course did you post mostly for Greece supportive articles and comments. Now Tsipras and his thug colleagues will be exposed to the world for what they really are: Dummies without a single plan other than extortion but they already know by now that Germany is gonna play hardball this time. I would say they pretty much fucked themselves.
omg, please not more of this garbage: "Greece is like the subprime loan borrower and we all know that the banks are to be blamed for this and the poor retard who leveraged head over heels has done nothing to be blamed for". Anyone believing this must have been completely removed from reality, or, must be a junkie: "It was my dealer who destroyed my life, its him".
Oh, the past pages speak for themselves, alright. Those reading might interpret different than you'd expect, though.
Schäuble is right. Greeks want to raise minimum wages and hire more public employees, how does that help recovery? Greece shouldn't get a cent of unconditional money as we all know this will go into a bottomless well. Varoufakis talks as if the new government can simply disregard international agreements the previous government made, it doesn't quite work like that.
Utter BS. There are plenty of people with $25k salaries who pay back loans that size. It's a question of want, not ability. "Zombie servitude" is another term that is entirely subjective, the one accepting the money and the loan terms is liable.
I read what is noteworthy and worth reading. I do not read garbage where the wrong party is blamed for mistakes. A drug dealer cannot be blamed for the bad choices a person makes to become a drug addict. Nor can a bank be blamed for providing funding for a subprime mortgage loan when the borrower should have reasonably assumed that he cannot survive an economic slump. And nor can Europe be blamed to provide funding but Greece should be blamed for having lied and cheated on virtually every single number they provided to their creditors and for breaking covenants and contract agreements. In all examples it does not matter at all whether the drug dealer, the bank, or Europe were naive enough to trust their customer, what matters here ONLY is whether or not the customer lied and cheated and whether he can deliver on the promises and agreements made. The drug dealer has the easiest choice: He can take his losses and move on, he can shoot the junkie and get rid of him, or he can let it lapse knowing that the junkie will come back for more anyway which is good business for the dealer. A junkie does not drown the dealer over an unpaid delivery. However, Greece here is holding several hundred million people hostage even though the only party to be blamed is the Greek people and their irresponsible choices and life style. Let's not make this world more complicated than it already is. Cause and effect in all 3 above examples are very clear and transparent.
yes fully agree, and it angers me to see some French idiots who act selfishly most likely because they have their nest eggs in European equities, knowing the dumb Germans pay for Greek losses anyway. Or will France shoulder the majority of Greek losses? Hardly, given that France itself is drowning in a declining economy. After all the difference between Peugeot/Citroen and BMW/Daimler is like heaven and hell, or the other way around for that matter. Europe and the EMU was originally formed by individuals who believed and delivered on mutual respect, the willingness to share the burden, and together enjoy the fruits of their labor. Today, many European countries are governed by lazy socialists with lots of demands and very low ethical and moral standards (France, for example, is much more interested in how many whores DSK fucked than in how to turn around their stagnating economy and how to address their burning social issues). It can be clearly seen how the majority of socialist governed countries in Europe panic and excuse their wish to assist Greece with their fear of stagnating equity markets; as if it ever was the mandate of politicians to maintain ever rising equity markets. Those are the same countries that know full-well that they would not shoulder any of the additional losses. On the other hand, other countries that are governed rather by fiscally responsible executive branches take a very different, much tougher, stance towards Greece and its extortive demands. Anyone who has not noticed the very changed attitude of Schaeuble towards Greece must be blind. For most Germans time has run out, the willingness to pull even one additional euro into Greece is pretty close to zero.