So, five of the world’s biggest central banks have decided on co-ordinated action to bail out – once again – the European private banking sector. In other words, central bankers are hoping to shore up private bankers, help their defer their losses, and prevent them being disciplined by market forces for their reckless lending to EU sovereigns.
Shareholders and investors in these banks must be delighted. Once again, reckless speculation and lending has paid off. Once again the world’s taxpayers have ridden to the rescue.
Where does that leave the people of Greece? Sad to say, but they are and will be being disciplined – by the coercive insistence that their politicians adopt ‘austerity’ policies. Such is the profound injustice of the liberal private finance system – subsidised and backed up by publicly-owned, but unaccountable, central bankers, while the people of Greece, not responsible in any way for the reckless lending of private bankers and the irresponsible borrowing of their politicians and policy-makers – are denied a public ‘bail-out’. On the contrary: they will be expected to shoulder the full burden of losses for this lending….and will be made to swallow the austerity medicine.
The question now is this: at what point will austerity policies so shrink economic activity in Greece, that her government and taxpayers are unable to generate the revenues needed to repay foreign loans to private European bankers, and official loans to e.g. the IMF and EU? The chart below gives some indication of how this drama might play out…by comparing Greece’s GDP declines with those of Argentina – prior to Argentina’s default on part of her debt in 2002.