Out of the Woods

The Greeks and the US

Athens is more than 5000 miles away from Washington DC. Greece is a small country with relatively few resources. Ours is a very large, rich and powerful country. In spite of the differences, there are lessons to be learned from the suffering of the Greek people.

The Greek government owes a whole lot of money to banks in Germany and France. For a long time, these banks were happy to turn over Greek loans, but in the present global financial crisis they have become much more reluctant to make loans to Greece and the Greek government is running out of money.

How did the Greeks manage to get themselves into this tight spot? The answer to this question depends pretty much on whom you ask. Some observers blame the generous social safety net and pension arrangements for Greek workers. The government paid out more money than they could afford and so they borrowed. That served to maintain the popularity of the governments in power and to get them reelected.

Add to that the Greek government's inability to collect taxes. In Greece tax evasion is a national sport. Even the local vegetable seller will not give you a sales slip. That keeps the transaction off the government's radar and enables the vegetable seller to evade sales taxes.

This is the sort of explanation that blames ordinary Greeks, but, of course, the major tax evaders are the rich in Greece, not the ordinary people who barely get by.

Also, the banks who lent money to Greece were not doing it out of the goodness of their heart. Banks in the wealthy European countries were sitting on a lot of cash. Lending it out to countries like Greece was very profitable inasmuch as interest rates on loans to Greece were higher because the loans were considered riskier.

But as long as the interest payments came rolling in, the banks continued taking the risks and lending out money. But then the 2008 financial crisis hit. The banks in the wealthy countries suddenly became reluctant to lend out more money and the Greeks were stuck with an enormous debt they could not pay back.

There is clearly plenty of blame to go around. For the sake of short-term profits the banks took excessive risks. Citizens, rich and poor, evaded their civic responsibility by not paying taxes. Governments put their narrow political advantage ahead of the well being of the country they had sworn to enhance. The European Community ignored its own rules.

Everyone was looking out for number one. And now all are losers, common people in Greece worst of all. With 25% unemployment and a seriously torn social safety net, the poor, the sick, and the elderly are suffering.

On the surface, conditions in the US seem very different. The Greek debt is 130% of the Greek national income. Our national debt is just slightly larger than what we produce. Ordinary people do not evade taxes, much. It is only the largest corporations like Exxon and GE that do not pay any taxes. US governments do not get re-elected by giving ample benefits to ordinary people. They manage to stay in power through welfare to the rich while cutting benefits to retirees and the neediest in the nation.

But in both countries the banks play a central role.

Banks originate when ordinary people and businesses need someone to keep their money for them. At other times, individuals, businesses or countries are a bit short on cash and they want to borrow some. So they all get together and establish a bank. Everyone gets what they want. The deposits of some become loans to others. It is one more way in which neighbors get together to help each other out.

Until . . . . some rich guys get together and start their own bank, not as a service but in order to make money. They take in deposits and invent all sorts of fees to make money off the depositors. They make loans and they like the risky ones because those carry higher interest payments. They start, essentially, gambling with risky loans and make side bets to insure themselves against losses. They enter transactions so complicated that even they do not fully understand them. (Doing that J P Morgan recently lost somewhere between $2 and $9 billion).

The Greek crisis, in part, is the result of huge for-profit banking just as is the 2008 meltdown whose effects we are still feeling.

The lesson? Let's go back to not-for-profit banking, to credit unions or cooperative banking. Not everything we do needs to be a way to make money. We do not have families and children to make money. For many—not for all—religion is not a source of profit. Most creative people make music, write novels, or tinker in their garage not to make money but for the pleasure of it. Most people participate in sports to be healthy or, again, just for the joy of it.

For-profit banking, the entire huge financial industry, is a big mistake. It sank Greece. It will sink us, unless we take measures to protect ourselves against their recklessness.