My parents taught me the virtue of prudence and austerity. However, if you go by current state of world economy borrow and splurge is the way to go. Today's big relief rally across the world shows how much people love government spending. I agree there were some systematic risk associated with debt crisis in Greece. ECB needed to send a strong signal to market that they can control the situation. However, lining up $1T of rescue package is like adding more fuel to fire. Instead of concrete step to achieve restructuring the debt in troubled countries ECB sought the easiest path of forcing the problem 6-12 months down the road. Markets are now going to price an explicit guarantee that ECB will rescue its member country till there is an eventual default. After the see-saw of the market over last week, I cannot help but notice that regulators are being regulated by market.
In another associated news, Fannie Mae which being a government agency sailed smoothly through the financial crisis when Goldman bore the wrath of public anger, went back to US government asking for additional $8.4 bn. Total bailout cost of housing giants (Fannie and Freddie) stands at $145 bn and current estimate suggest that the total cost of rescuing can jump to as much as $ 500 bn by 2020.
My lesson from this crisis is simple work less, party more, borrow as much as you can, spend as much as you want to, but keep in mind involve everyone around you in the same behavior. If you can achieve a critical mass there is no reason why government will not sponsor bailout for you.
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Unfortunate, but I have to agree to your analysis. Such type of spending should finally lead to a war, where one group of people try to eat fruits of someone else hard work and we all know US has strongest armed forces in the world and moreover they keep on upgrading them.
ReplyDeleteI have heard a lot abt this EU crisis ? wht exactly it is ? could u send me some link to read about it....
ReplyDeleteI think people forget that debt only makes sense when it's taken on for financing investment to increase productive capacity so that there is something left after the debt is repaid. Debt is not for financing consumption, which is what I think has been happening. (Interestingly, it's stated in the book "This time is different" that Greece has spent about half of the time since its independence in some state of default!)
ReplyDeleteTo me, the most interesting thing about the Euro crisis is figuring out how the incentives line up in a monetary union. There is common monetary policy without common fiscal policy, which means each state has to exercise its own fiscal discipline - but from a game theory point of view, this is like the prisoners dilemma right? One country can gain at the expense of others by not cooperating. In this context, maybe the current situation is not entirely surprising.