By John Tamny
With Greece expected to default on its government debt, markets are to varying degrees convulsing. The obvious question is whether or not the panic is rooted in something real to worry about. Not really. As is always the case, market fears are a creation of government error, not worries about a very minor economic entity.
To see why, it needs to first be remembered that a Greek default would be nothing new. As Carmen Reinhart and Kenneth Rogoff noted in their much talked about 2009 book This Time Is Different, Greece has been in default mode roughly half of its modern existence. That its creditors might suffer a “haircut” on what is owed them is far from novel.
The only reason a default constitutes news has to do with who holds some of the country’s debt. As evidenced by how the shares of German and French banks have rallied over the years each time a potential debt workout was reached, the story behind the non-story that is a Greek default involves banks that do not have an Athens address. In short, Greece’s debt troubles have little to do with an historically profligate country, and everything to do with banks that are wrongly seen as too important to be allowed to suffer their mistakes.
Importantly, if banks were properly allowed to fail much like other private business are allowed to with great regularity, bank exposure to Greece would be a non-story. Better yet, banks likely wouldn’t have exposure to Greece in the first place given its lousy track record. In short, government involvement in what should be the private doings of the private economy has created a “crisis” that would not exist absent the desire of politicians to insert themselves into a global economy that would be much healthier without political meddling. Read More..