Grasping Reality on TypePad, by Brad DeLong

Basically, because debt has one big advantage, and it’s the same advantage that market economies have over command economics--it’s really really efficient in terms of the amount of information that people need to gather about each other. If you’re lending money under a debt contract, all you need to think about is "Do I think this guy is good for the money?", and all the borrower needs to think about is "Can I pay this back?". If you’re trying to make an investment and share the risks, all sorts of other questions come into play: "How much could this be worth in a really good outcome? What further projects might grow out of this one? What effect will the sharing of the upside and downside have on the way the thing is managed? Am I selling my shares too cheap?".

If you’ve ever watched “Dragons’ Den” (the format was broadcast as “Shark Tank” in the USA), you’ll note that the real human drama in the series is not really when the entrepreneur is pitching his or her new invention. What people come to watch that show for is the bit where one of the investors makes an offer. The guy has said he wants £200,000 for 10% of his company, and Duncan Bannatyne or equivalent says he’ll give the money, but he wants 40%. And the entrepreneur sweats on the spot. This, in microcosm, is the stuff that gets cut out of the process when you’re dealing with debt rather than equity. David Graeber wrote a whole gigantic book, one of the messages of which was that from an anthropological view, debt contracts denatured exchange relationships and took them out of their context of cultural human interactions, but in my review, I noted that Graeber didn’t seem to appreciate the extent to which this is a collossal time saver. Having a debt relationship with someone means that they don’t really care all that much about your project as long as you pay them back, but that’s a good thing; it makes investing much less intensive in time and effort.

And this even extends into credit analysis. I once calculated, to win a bet with a client, that given the volume of banking transactions, if banks were to carry out a full credit assessment on all of their counterparties, every time they incurred a new exposure, then this would take up all of the time of every Chartered Financial Analyst ever to have got the qualification, doing nothing other than these credit checks. It’s literally impossible for the system to work without a degree of blind faith that most credits are money-good.

The conclusion of this sketch of the nature of lending is that it really is that there’s a limit to the amount of work which it was ever sensible to ask people to do in terms of imagining the kind of outcome that actually occurred. From both the banks’ and Greece’s point of view, these weren’t bad loans--they were good loans which went bad. And to be honest, even if banks and the Greek government had decided to be super cautious and ask themselves if it was really sustainable for a country to have a normal European-scale welfare state on the back of a normal US-style tax take, they would still not necessarily have got it right. Because everyone believed that when push came to shove, Greece’s debts were backed by the EU as a whole, which means they were backed by Germany.

Why did people believe this? Because the permanent government and the political system of the EU very much wanted them to. Even while promises were being made for rich-country political consumption that there was no “transfer union” in the euro, and no mutual guarantee, the financial markets were being given the fair old nod and wink that yes there was. Well into 2011, the official line from the Eurogroup was that it was “inconceivable” that any euro member state would be allowed to default, and two or three Big Schemes of varying degrees of legal and institutional ropeyness were cobbled together to try and prevent it happening. People were fooled because a lot of effort went into fooling them. Even the notorious Goldman Sachs transactions which had the effect of moving Greek obligations off balance sheet--well, people did notice them at the time. Eurostat cried bloody murder about them, and got told to shut up, in almost so many words, because they were making it more difficult to achieve Economic and Monetary Union. The real fault for the state the Greek economy is in has to be laid at the door of all those European politicians who decided, for the sake of their places in the history books, to launch a single currency well ahead of any real democratic support for doing so, and to paper over the obvious economic problems--like the lack of a lender of last resort, or the lack of a mechanism to balance the internal current account--by a combination of ignoring them, and claiming that the Stability & Growth Pact would have effects that would be literally miraculous.

All of which isn’t to say that the banks deserved to get paid back, quite the opposite. Just to say that the 70% writedowns that they took should probably be regarded as them having done their stir and received just punishment for the extent to which they were culpable. The fact is that, as I say, everyone went a little bit batty in the aftermath of the end of the Cold War and the passing of the Millennium. Finland, a country which really has no obvious reason to be in the euro at all, joined it out of sheer relief about not having to worry about being invaded by Russia any more, and more or less admits the fact today.

Everyone made decisions just as bad as the Greeks, but as I say, Greece was less able to deal with the consequences. We’re talking here about a society that was torn in two by the Second World War, further damaged by the massive ethnic cleansing that created the modern boundaries of Greece and Turkey and further damaged by the years of military rule. It’s easy to start reaching for the phrase “low trust society” to describe Greece, but that isn’t quite the flavour of it--I’ve travelled in genuinely low trust societies and they’re different. Greece is a society of tight, small networks of trust, and one in which lots of groups of Greeks seem to regard each other as enemies, for reasons that reach back fifty years and which outsiders can’t hope to understand, or even identify the groups.

What’s happened here is that if England hasn’t managed to get past the Second World War culturally yet (and, my god, we haven’t), how do you expect Greece to? France dealt with Occupation at the level of the national psyche largely by repressing and never talking about it. Germany dealt with its role basically by doing nothing but talking about it. Other European countries coped in their own ways, but you shouldn’t be surprised to see that one or two of them didn’t cope. That’s what happens with big traumas; some patients get better quickly and some don’t get better at all. Georgia has recovered from the American Civil War, but Alabama hasn’t, and that was a hundred and fifty years ago. The problems in Greek society which led to its deeply dysfunctional economic model are very deep seated and aren’t going to be solved easily, and if it hadn’t been this crisis which brought them to a head it would have been something else.

And the biggest emnity within Greek society is between the population and the state, as far as I can see. That’s why I don’t see much of a future for SYRIZA in the long term, although I might be wrong in this prediction, and if I am it will be because of the personal abilities of Kostas Tsipras, who is a genuinely gifted politician. The SYRIZA coalition draws its support from public sector workers, and from the young. In other words, from people without jobs, and the people who are keeping them out of the jobs. As long as there is Germany to blame, it’s a viable coalition, but that won’t last forever.