It’s finally become clear to everyone the key problem in the current Eurozone crisis is just too much democracy.
Pesky voters opposed to austerity measures get in the way of efforts to cut government expenditures in order to reduce deficits and make repayment of national debts more likely.
China’s Global Times on Greece, November 2:
[E]ven at this critical moment now, the government may still be wavering between the public’s demand and the country’s long-term future.
At a time of economic difficulty, the government needs to demonstrate more determination to go against popular will.
Exactly one week later, Megan McArdle (via Kevin Drum) has her own authoritarian epiphany: democracy makes even the most advanced, free-est, smartest, most pundit-blessed, whitest countries incapable of doing “the right thing”:
I used to write about developing countries a fair amount. Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt….And the other journalists and I would cluck our tongues and say “Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?”
Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it.
Just one week! The gap between elite attitudes in China and the United States is really not that great.
And I’m not joking here.
Count the voters of Greece and Italy cowed, if not entirely convinced by media handwringing on behalf of the vengeful gods of the bond market.
Greece, of course, walked back on the referendum plan. Instead, it has installed Lucas Papademos, previously VP of the European Central Bank, as PM to shepherd the austerity program.
In Italy, Berlusconi is on his way out and a government of “technocrats” i.e. economists focused on deficit reduction and tasked with ignoring public squawking about austerity—will soon be in.
What is perhaps less well understood is that the true nature of many Western governments is being revealed.
The quick and dirty shorthand is that government is like a business. When it borrows, it’s to bridge the temporary imbalances between the income and the outgo.
Not so. Western governments today are not businesses managing revenue and expenditures on behalf of their shareholders (the voters) and working to increase business volume (i.e. economic growth) in order to maximize revenues (tax receipts).
The issue is not the deficit (yearly revenue shortfall); it’s the indebtedness (the ability of the enterprise to issue debt).
Many national governments are quasi-state bucket shops for investment banks, providing a flow of debt product to investment banks for packaging and sale–very much like the mortgage brokers who frantically signed up suckers in the free-money era so the investment banks would have plenty of mortgages to securitize, CDO-ize, and pour into the hedge funds.
Now national governments issue the debt, providing the sovereign low-risk imprature that allows investment banks to send debt-backed securities flooding into the market in search of the greatest fool.
When the naked lunch moment—the time when it looks like the greatest fool is going to wise up, and the wise guy sees it’s time to cash out—arrives, everybody clubs together to make sure that the people responsible for this glorious party, the investment bankers, don’t get hurt.
When debt repayment becomes a problem, governments don’t turn to the prosperity solution; they turn to the austerity fix.
Almost automatically, national governments tilt toward policies that protect the ability of the banks to recover on the debt—and, perhaps more importantly, sustain the viability of the government as a vehicle for continued issuance of debt in the future– by cutting the expenditures that might prop up personal and national incomes and could be seen to interfere with the flow of interest payments.
In the last analysis, the governments aren’t working for the shareholders (voters), even if examples like Argentina hint that a country might do well by defaulting on its debt.
I don’t even think they’re working for the bondholders, at least not for the dumb sheep who end up getting shorn (“taking haircuts”).
They’re working for the investment bankers who look forward to rolling over, increasing, securitizing, and slicing and dicing government debt—which is the most marketable, available in enormous volume, and is a perceived lower risk because taxpayers are, in the final analysis, hostages of their government when it comes to debt repayment (as long as they can be persuaded they don’t have an alternative).
How governments turned into debt vehicles is a matter for historians to sort out. But I guess it has something to do with trying to keep the rich happy (by cutting taxes) while keeping the rest of us happy (by spending money on services).
When the bills come due, the rich (who have a perpetual interest in low taxes and an addiction to leveraging their profits through investment banking) turn out to have the most votes in our post-democracy democracies.