The Latest Bailout: It's Still Greek to Me

With the latest bailout package now aimed at the crisis with the "PIGS," we need to step back and ask just what has been done, for it is not what it seems. Unfortunately, we have seen the cheers from the Usual Suspects, beginning with the New York Times, which declared in an editorial:

Europe’s leaders stared into the abyss and finally decided to act. The nearly $1 trillion bailout package, arranged over the weekend, is intended to head off Greece’s default and stop the crisis from dragging under other weak economies — Portugal, Spain, Ireland and Italy are all vulnerable.

The European and American markets celebrated on Monday. The CAC-40 index in Paris rose almost 10 percent. The Dow Jones industrial average rose 3.9 percent. It was certainly the right thing to do. Coupled with the European Central Bank’s promise to buy bonds from stricken European countries, it arrested the financial turmoil — at least for now.

The last sentence is unintentionally prophetic, for whatever “good effects” the announced bailout supposedly will create, they will be short and are paving the way for future crises. While Greece and other European countries were facing disaster at the present time, it is nothing like the disaster that looms because there still is an economic piper to pay.

To make matters worse, the U.S. Government and especially President Obama urged this package under the "try something big" approach, as opposed to the advice of "try something intelligent." Yet, that is what we are going to get: stupid policies that ultimately will undermine any hope of recovery.

First, and most important, the European Central Bank is not buying bonds with real money, just the printed stuff that will filter throughout Europe and elsewhere and devalue the accounts of anyone who is holding Euros. Like the United States, Europe is broke, and will be even more so once this “bailout” goes through.

Second, for all of the talk of “rescuing” Greece, Spain and Portugal, one asks: Rescued from what? It is easy to diagnose the sources of their difficulties: a bloated public sector complete with militant public employee unions and workplace rules that raise private employment costs to such ruinous levels that all three countries must deal with high unemployment. The “rescue” packages supposedly deal with the former (although I remain a skeptic that they will), yet the real problem lies with the latter, as government policies shackle private investment.

Keynesian economists believe that because governments man the printing press, an economy cannot go broke. Thus, Paul Krugman can write in his NYT blog:

A more expansionary monetary policy could make a real difference — especially if the ECB ends up accepting somewhat higher inflation. Suppose that Speece or Grain need to get relative prices down 15 percent over the next five years. If the eurozone has 1 percent inflation, that’s 10 percent deflation in the periphery. If the eurozone has 3 percent inflation, all you need is stable prices. Also, a stronger overall eurozone economy means higher GDP and hence higher revenue, making the fiscal slog less grim. (Emphasis mine)

There he goes again. Keynesians believe that as long as people are spending (and spending and spending), an economy automatically moves along and all is well. Austrians, however, understand that while things might seem fine on the surface, there is turmoil and distortion among the factors of productions. Although Keynesians believe that the factors are homogeneous and that factor prices always adjust evenly to consumer spending, that simply is not the case.

Economic downturns do not occur because people stop spending, as Keynesians believe. Instead, people stop spending because the economy moves into recession, and stuffing more paper money into the hands of people so they can continue to spend only makes matters worse. Why? Because the recessions are centered on malinvestments which no longer can be supported by consumer spending patterns, the factors associated with those malinvestments also must be liquidated or transferred to other uses in order to allow a real economic recovery to begin.

Bailouts do not just prevent that process, but they also encourage malinvestments to continue, furthering the patterns of distortion and making them worse. At some time, the further rounds of inflation no longer can paper over the distortions and the resulting economic collapse is much worse than it should have been. Thus, instead of “saving” Europe, the central bankers only have put off the Day of Reckoning, which surely will arrive at a future date.