Tiny, tiny people

This long post by Steve Randy Waldman has been getting attention in the econ blogosphere and is a slamming bit of writing that's also clear and coherent and seems to explain a lot.

http://www.interfluidity.com/v2/5965.html

The two money quotes, so to speak:

With respect to Greece, the precise thing that European elites did to set the current chain of events in motion was to replace private debt with public during the 2010 first "bailout of Greece." Prior to that event, it was obvious that blame was multipolar. Here are the banks, in France, in Germany, that foolishly lent. Not just to Greece, but to Goldman's synthetic CDOs and every other piece of idiot paper they could carry with low risk-weights. In 2010, the EU, ECB, and IMF laundered a bailout of mostly French and German banks through the Greek fisc. Cash flowed into Greece only so it could flow out to rickety banks. Now, suddenly, the banks were absolved. There were very few bad loans left on the books of European lenders, everyone was clean, no bad actors at all. Except one. There were the institutions, the "troika," clearly the good guys, so "helpful" with their generous offer of funds. And then there was Greece. What had been a mudwrestling match, everybody dirty, was transformed into mass of powdered wigs accusing a single filthy penitent (or, when the people with their savings in just-rescued banks decide to be generous, a petulant misbehaving child).

And

For the record, my sophisticated hard-working elite European interlocutors, the term moral hazard traditionally applies to creditors. It describes the hazard to the real economy that might result if investors fail to discriminate between valuable and not-so-valuable projects when they allocate society's scarce resources as proxied by money claims. Lending to a corrupt, clientelist Greek state that squanders resources on activities unlikely to yield growth from which the debt could be serviced? That is precisely, exactly, what the term "moral hazard" exists to discourage. You did that. Yes, the Greek state was an unworthy and sometimes unscrupulous debtor. Newsflash: The world is full of unworthy and unscrupulous entities willing to take your money and call the transaction a "loan." It always will be. That is why responsibility for, and the consequences of, extending credit badly must fall upon creditors, not debtors. There is one morality tale that says the debtor must repay, or she has sinned and must be punished. There is another morality tale that says the creditor must invest wisely, or she has stewarded resources poorly and must be punished. We get to choose which morality tale we most use to make sense of the world. We do, and surely should, use both to some degree. But if we emphasize the first story, we end up in a world full of bad loans, wasted resources, and people trapped in debtors' prison, metaphorical or literal. If we emphasize the second story, we end up in a world where dumb expenditures are never financed in the first place.

There were several comments challenging his contention that "In 2010, the EU, ECB, and IMF laundered a bailout of mostly French and German banks through the Greek fisc. Cash flowed into Greece only so it could flow out to rickety banks." Here is his response:

http://www.interfluidity.com/v2/6013.html

Of course, as I've said often, I'm not an economist and don't have the knowledge or ability to truly evaluate such arguments. That Waldman’s explanations resonate with me is actually not a good reason to think they're right, in fact is a warning light. Not that it’s a reason to think his explanations are wrong, either. But one of the things that resonates is that the villains in Waldman’s story, the European policy and business elites, created and chose a story that resonated with them and that gave them a villain and scapegoat and simultaneously absolved themselves of the responsibility for examining what they themselves had done and for changing what they’re now doing. The psychology behind their story choice isn’t unlike mine, though I’m not an actor in this story and my self-interest is purely psychological. I’ll also quickly point out that Waldman is emphatically not saying there were no other bad actors, or, for that matter, that there was never any idealism or genuine concern mixed into the elite behavior. The sin he identifies in the elites is their refusing to acknowledge that there was a Europe-wide failure that involved many parties, and that there was a system that encouraged it.

( More links )

( Tsipras capitulates? )