You know what the word capital stabds for right ?
Your friend is getting any amount of near 0% interest rate credit because he is using that money to invest and occasionally pay back his debt. What he is doing is being a capitalist. Greece do not got debt in order to invest and pay it back later. The money was used to sustain cosuption or paying interest of other loans. Greece is not being a capitalist. Unless, of course, you assume they were thinking welfare is a investment. In that vase they were capitalists, but aweful capitalists.
Yes, I know my cousin would use the money to make more money.
But, Greece was using the money for short-term gains, which is also very capitalistic. As long as they could keep borrowing, it worked. Remember, they were able to keep the ball in the air for the last 20 years. This isn't a sudden issue. As long as the economy was doing well, they would keep making short-term gains with their borrowing strategy.
Now that the ball is dropped, they're either going to have someone else pay the bill or they're going to declare bankruptcy and drag everyone down with them. Sound familiar? That's how capitalism works now. Keep making short-term gains until someone else has to pay. Since that strategy works, people us it. There is no "honor" or "right/wrong" in capitalism, there is just money.
You know what the word capital stabds for right ?
Your friend is getting any amount of near 0% interest rate credit because he is using that money to invest and occasionally pay back his debt. What he is doing is being a capitalist. Greece do not got debt in order to invest and pay it back later. The money was used to sustain cosuption or paying interest of other loans. Greece is not being a capitalist. Unless, of course, you assume they were thinking welfare is a investment. In that vase they were capitalists, but aweful capitalists.
Yes, I know my cousin would use the money to make more money.
But, Greece was using the money for short-term gains, which is also very capitalistic. As long as they could keep borrowing, it worked. Remember, they were able to keep the ball in the air for the last 20 years. This isn't a sudden issue. As long as the economy was doing well, they would keep making short-term gains with their borrowing strategy.
Now that the ball is dropped, they're either going to have someone else pay the bill or they're going to declare bankruptcy and drag everyone down with them. Sound familiar? That's how capitalism works now. Keep making short-term gains until someone else has to pay. Since that strategy works, people us it. There is no "honor" or "right/wrong" in capitalism, there is just money.
Seems like you're using a pop-culture (marxist counter-culture!) view of capitalism as definition, not the actual meaning of the word. Capitalism is not about being greedy and competitive about making money. The definition of capital used by all schools of economics and business is that capital is resources (time, money, assets) used NOT in short-term consumption, but in production-enhance activity in way that the future gains will make up for the short-term opportunity loss. That's what capital is and capitalism is a market economic system were this sort of activity can be engaged by anyone, unlike previews economic systems were capital was controlled by a centralized governing body.
By the above definition, it's clear that Greece was not behaving capitalistic. Getting money and spending on consumption does not makes this money and this consumption "capital". The word capital would loose 100% of it's analytic utility if that was the case.
You're mixing up short-term financial gains done by speculators and banks with fiscal crisis of the state because in both cases moral hazard can be used to explain miss behavior. But for god sake, failing to moral hazard is not the definition of being capitalistic. Moral Hazard is a agency problem resulted from uncertainty, it DOES exist outside of capitalism.
Again, you're having the wrong view on the laws concerning banking activity and government loaning. My last post explained it well enough and I will just repeat. The are two kind of risks:
i. Risk of a established legal contract failing. That's the risk you get when you eat on a restaurant and don't know the hygiene standards, when you buy something online and have the risk of having your item delayed / missed and so on. It's the risk of a contract you did not being respect by the third party. This risk is NOT internalized by the party who gets the risk. If you are poisoned eating out in a restaurant, you can sue the restaurant and the restaurant can't use "hey, he had accepted the risk of eating here ! There's no reason for him to be upset!" as defense.
ii. Risk established in a legal contract. That's the risk you get when you bet money on lottery or when you play poker. In that case the risk is internalized by you, because you signed a contract accepting the risks. And funny enough, if it's proved that the real risk is not the risk established on the contract, then you actually took risk type i and will not internalized it, reason why you can sue a lottery that gives miss information.
Banks engage in both type of risks but the vast majority of loans, including the loans done with governments are risk type i, meaning the risks are not internalized by the banks. Banks are not playing lottery and sending the bills to you via the governments when things go wrong. That's just not what happens.
Again, you're having the wrong view on the laws concerning banking activity and government loaning. My last post explained it well enough and I will just repeat. The are two kind of risks:
i. Risk of a established legal contract failing. That's the risk you get when you eat on a restaurant and don't know the hygiene standards, when you buy something online and have the risk of having your item delayed / missed and so on. It's the risk of a contract you did not being respect by the third party. This risk is NOT internalized by the party who gets the risk. If you are poisoned eating out in a restaurant, you can sue the restaurant and the restaurant can't use "hey, he had accepted the risk of eating here ! There's no reason for him to be upset!" as defense.
ii. Risk established in a legal contract. That's the risk you get when you bet money on lottery or when you play poker. In that case the risk is internalized by you, because you signed a contract accepting the risks. And funny enough, if it's proved that the real risk is not the risk established on the contract, then you actually took risk type i and will not internalized it, reason why you can sue a lottery that gives miss information.
Banks engage in both type of risks but the vast majority of loans, including the loans done with governments are risk type i, meaning the risks are not internalized by the banks. Banks are not playing lottery and sending the bills to you via the governments when things go wrong. That's just not what happens.
Doesn't this make it even worse though? Banks are taking actions that they *KNOW* have a high chance of failing (subprime housing loans, repeated lending to Greece when they have no way to actually pay back the debt), and because it is a Type I risk, they also know that they stand to lose very little when the failure inevitably happens.
They're not playing roulette and sending the bill for their losses to the people via the government, they're having the people via the government bankroll them from the start.
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Quick question: Why is anyone trying to bail out Greece? Specifically, why does anyone think loaning Greece even more money will result in anything different than what has been happening?
I'm not saying they're wrong for thinking this, because I know pretty much nothing about the situation. I'm asking why they would think this.
Because of that great big incestuous institution called the European Union. Similar to how the US cannot allow Arizona as a state to completely foreclose in the same way EU cannot allow other EU countries to just fold.
Again, you're having the wrong view on the laws concerning banking activity and government loaning. My last post explained it well enough and I will just repeat. The are two kind of risks:
i. Risk of a established legal contract failing. That's the risk you get when you eat on a restaurant and don't know the hygiene standards, when you buy something online and have the risk of having your item delayed / missed and so on. It's the risk of a contract you did not being respect by the third party. This risk is NOT internalized by the party who gets the risk. If you are poisoned eating out in a restaurant, you can sue the restaurant and the restaurant can't use "hey, he had accepted the risk of eating here ! There's no reason for him to be upset!" as defense.
ii. Risk established in a legal contract. That's the risk you get when you bet money on lottery or when you play poker. In that case the risk is internalized by you, because you signed a contract accepting the risks. And funny enough, if it's proved that the real risk is not the risk established on the contract, then you actually took risk type i and will not internalized it, reason why you can sue a lottery that gives miss information.
Banks engage in both type of risks but the vast majority of loans, including the loans done with governments are risk type i, meaning the risks are not internalized by the banks. Banks are not playing lottery and sending the bills to you via the governments when things go wrong. That's just not what happens.
Doesn't this make it even worse though? Banks are taking actions that they *KNOW* have a high chance of failing (subprime housing loans, repeated lending to Greece when they have no way to actually pay back the debt), and because it is a Type I risk, they also know that they stand to lose very little when the failure inevitably happens.
They're not playing roulette and sending the bill for their losses to the people via the government, they're having the people via the government bankroll them from the start.
If the high chance of failing is *KNOW* why the first-party would engage in the contract to begin with ? The legal conditions surrounding type i risks makes so that you only want to make such contract if you know you can honor it. The role device was created to fulfill that role: B wants a loan from A and A got the money but doesn't know if B will pay him back, because A doesn't have perfect information of B, but B knows he can pay A back. B makes a contract that he will be arrested if he doesn't pay and present it to A, which convinces A to make the loan as A is convinced B doesn't want to be arrested and review his expectation on B trustworthiness.
In reality those contracts are done not to the binary loan or not loan decision. They influence the interest rates. So you can adept this hypothetical example to a situation were B wants a lower interest rate then what A is currently offering and devise the contract to convince A to lower the interest for him. You see, this contract is made to transform a type ii risk in a type i risk. Agent B accept to internalize all the risks in exchange for a lower interest rate from A. If B s doing a type i contract and knows he can't pay B, he is the one acting on bad faith here.
Governments and banks tend to make deals using type i risks because a good government will easily pay back it's debt and because they want the lower interest rates. No one was landing money to Greece expecting it to not pay it's debt (that would a awful way of loosing money). Greece was on the eurozone and under the ECB monetary policy, every highly rated european country was backing up Greece (while pressuring it to step on the line). Greece could have payed it's debt if it had abide the script, which was joining the eurozone and using the new resource for development policies and reform it's welfare system. However it used the new resources on consumption in the form of higher salaries and welfare.
Only later the creditor's started to worry about their money and the troika was formed to guarantee the payment of the debt and the stability of Greece's economy, in that order of priority. A mistake Greeks and left wing commentators keep doing about this is that the troika is bad because it doesn't have Greece's best interests in mind. Of course they haven't ! The troika defends the interests of the eurozone as a whole, they are much more interest in seen money where it belongs then helping out Greeks come out of the hole they dig in for themselves.
Imo the only act of bad faith done by Greece's creditors was advertising austerity as a form of immediate recovery for Greece, which was a lie and everyone but the very naive knew it. The austerity programs were devised to make Greece pay and preserve the euro's value and reputation, which is a righteous objective on itself.
I'm happy to see a deal has been reached. I don't see a lot of details going on the media, but it seems the deal is much more Europe-sided then Greece-sided. My reading from all this is that Greece was overplaying it's cards. They were on the stark belief a "grexit" would break Europe as whole and thus they had a lot of margin to ask for a restructure of their debt. In reality the looses of a "grexit" is much lower then the looses of a "gefault".
Whilst there needs to be some blame put on Greece for running up massive debts there is a lot of truth behind the old adage it takes Two to Tango. Greece would not be in this situation if the foreign banks had not been so reckless in lending that vast quantity of money to Greece.
I have never understood this sentiment or the point it's trying to convey. If I go into thousands of dollars of debt buying Magic cards, is it as much Wizards' fault for selling me the cards as it is my fault for buying them?
Of course, in the strict literal sense one can't incur debt without a willing lender. But that does not mean the lender is responsible for the debtor's decisions.
Banks lend out in hopes of making a profit. It is their job to evaluate the credit worthiness and risk of the parties they are lending to. If they do a bad job, they should theoretically run the risk of not getting paid back.
If banks loan to Greece, they should run the risk of not getting paid back by the Greek government.
The banks probably loaned money to Greece because they knew they were going to get paid back no matter what. Even if Greece couldn't pay them back, they reasoned, someone would loan money to Greece (i.e. bailout) so that Greece could pay back its original debtor. That in fact happened. On several occasions in fact. That's the problem with bailouts. They create a moral hazard.
In this manner reckless lending by foreign banks can exacerbate the problem. Reckless lending basically increases the size of the hole bad debtors can get themselves into.
Let's be honest and frank. We are here because we (third parties) care about Greece. We care about them leaving the euro and the financial shock to the rest of the world this could cause, not to mention the political consequences to the stability of the eurozone. We don't know the long term fall out this could have. It could be little, it could be a lot.
Once a third party starts caring about Greece and their financial stability because their own economic stability depends on Greece indirectly, then indeed the size of the hole Greece gets themselves into matters.
This is total non-sense.
The existance of risk not a justification for breaking a contract. We all take food poisoning risk when we eat on a restaurant, it doesnt change the fact the restaurant is owning us if we get poisoned for eating there.
The risk banks take on landing money is akin to the risk you take when you buy something online or when you employ someone new. It's NOT like the risk you take on lotery, on poker or on spory bets. The difference between the two kinds of risks is, one is the risk of a stabilished legal contract failing, the other is a risk stabilished by a legal contract.
I really don't think you know what you're talking about. In fact it sounds like you are conflating terms and jargon the way a layperson would understand it.
First of all you didn't understand a word I said. So there's a problem there. I'll start with that issue.
1. A bank makes loans to parties (any party, a country, a town, a person) to make money. The interest they charge on the loan they make is how they profit. Does that make sense so far?
2. Some parties will not pay back the bank, either due to being a bad lender, falling on hard times, etc. Does that make sense?
3. When a party does not pay back a bank loan, the bank will lose money. Does that make sense?
4. Hence, it is job of the bank to evaluate the risk of the party they loan the money to. Does that make sense? This is risk of default.
5. Some parties are more risky to lend to. Some are less risky.
6. Some parties are special. They are special because if they are about to default, someone might give them additional money to pay back the loan. This is called a bailout.
7. I dont get bailouts. You don't get bailouts. The average person doesn't get bailouts.
8. Countries get bailouts! AIG gets bailouts!
9. When a country get's bailouts, the bank lender gets EXTRA protection. If the country defaults, the bank will still get paid back anyway if the defaulting country get's a bailout.
10. If the bank loaned money to me and I couldn't pay back the bank. The bank loses money. But if the bank loaned money to Greece, and someone (germany) bails them out, then the banks get paid back.
11. The party giving bailouts doesn't like giving bailouts
12. It incentivizes banks to be less cautious about who they loan money to, so that they loan money to parties likely to get bailouts.
13. This creates a moral hazard.
14. Moral Hazard doesn't mean morality in the sense of right and wrong. and Hazard doesn't mean dangerous.
15. Moral Hazard is instead: "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."
I really don't think you know what you're talking about. In fact it sounds like you are conflating terms and jargon the way a layperson would understand it.
First of all you didn't understand a word I said. So there's a problem there. I'll start with that issue.
The tone of your post is extremely patronizing. Italofoca was making a fairly straightforward distinction which you failed to engage with. The distinction is between risk contemplated by performance of a contract versus risk not contemplated by performance of a contract. Let's say you and I place a (legal) bet on the outcome of a sports match. The risk that I might lose the bet is a risk contemplated by the terms of the contract. If I lose the bet, then complete performance of the contract by all parties will result in me taking a loss. However, let's suppose instead that I win the bet but you refuse to pay me. That is a risk not contemplated by the terms of the contract; it is a risk of non-performance and only occurs when one or more parties violate their legal obligations.
Italfoca is pointing out that in the case of non-payment of a debt, the harm is caused by the non-performance of a legal obligation. Many people would say that non-performance of a legal obligation is morally bad or blameworthy. Therefore, rather than assign blame to the lender or a third party in the case of a default on debt, we should assign blame to the debtor. This argument is independent of any incentive problems, such as moral hazard, that might cause one or more parties to the contract to make bad lending or borrowing decisions. The point is that a contract exists, whether the terms are good or bad, and violation of that contract constitutes a morally blameworthy action.
To be clear - I don't necessarily agree with this argument. But you have not addressed it at all.
Also, I completely agree that bailouts create moral hazard, which is why I do not support bailouts. However, as you said, the word "moral" in moral hazard is a bit of a misnomer; it's more accurate to call it a negative externality. Therefore, while it may be a profoundly bad idea to create a moral hazard by offering bailouts to lenders, it is not necessarily "immoral" to do so. The concept of moral hazard does not necessarily help us assign moral blame for the Greek crisis.
When telling me this story he said he felt -at the time- like maybe this was a IQ test from his company or something. From the women's response he told me it was clear he was going off script, but he didn't understand -when he realize it wasn't a test- why his company thought calling people who's job it was to make money with such a deal was a good idea. He explained if you can get money cheep, any good capitalist would take all he can get. It's practically your responsibility to do so.
Was Greece irresponsible when suddenly they where offered an unheard of -for them- low rate? Probably. Were they acting like good capitalists? Probably?
What was Greece doing with the cheap money? Investing it in ways that would provide a higher return than the interest rate, as your cousin would have, or just spending it in ways that would leave the cupboard bare when the loan came due?
Taking a hamburger today and paying for it on Tuesday only works if you're going to have money on Tuesday.
So I'd suggest what Greece was doing was following the "Wimpy" brand of capitalism. You can be very good at that but only until Tuesday.
The reference is to old Popeye cartoons in case you're not old enough to have seen them.
Whilst there needs to be some blame put on Greece for running up massive debts there is a lot of truth behind the old adage it takes Two to Tango. Greece would not be in this situation if the foreign banks had not been so reckless in lending that vast quantity of money to Greece.
I have never understood this sentiment or the point it's trying to convey. If I go into thousands of dollars of debt buying Magic cards, is it as much Wizards' fault for selling me the cards as it is my fault for buying them?
Of course, in the strict literal sense one can't incur debt without a willing lender. But that does not mean the lender is responsible for the debtor's decisions.
Banks lend out in hopes of making a profit. It is their job to evaluate the credit worthiness and risk of the parties they are lending to. If they do a bad job, they should theoretically run the risk of not getting paid back.
If banks loan to Greece, they should run the risk of not getting paid back by the Greek government.
The banks probably loaned money to Greece because they knew they were going to get paid back no matter what. Even if Greece couldn't pay them back, they reasoned, someone would loan money to Greece (i.e. bailout) so that Greece could pay back its original debtor. That in fact happened. On several occasions in fact. That's the problem with bailouts. They create a moral hazard.
In this manner reckless lending by foreign banks can exacerbate the problem. Reckless lending basically increases the size of the hole bad debtors can get themselves into.
Let's be honest and frank. We are here because we (third parties) care about Greece. We care about them leaving the euro and the financial shock to the rest of the world this could cause, not to mention the political consequences to the stability of the eurozone. We don't know the long term fall out this could have. It could be little, it could be a lot.
Once a third party starts caring about Greece and their financial stability because their own economic stability depends on Greece indirectly, then indeed the size of the hole Greece gets themselves into matters.
This is total non-sense.
The existance of risk not a justification for breaking a contract. We all take food poisoning risk when we eat on a restaurant, it doesnt change the fact the restaurant is owning us if we get poisoned for eating there.
The risk banks take on landing money is akin to the risk you take when you buy something online or when you employ someone new. It's NOT like the risk you take on lotery, on poker or on spory bets. The difference between the two kinds of risks is, one is the risk of a stabilished legal contract failing, the other is a risk stabilished by a legal contract.
I really don't think you know what you're talking about. In fact it sounds like you are conflating terms and jargon the way a layperson would understand it.
First of all you didn't understand a word I said. So there's a problem there. I'll start with that issue.
1. A bank makes loans to parties (any party, a country, a town, a person) to make money. The interest they charge on the loan they make is how they profit. Does that make sense so far?
2. Some parties will not pay back the bank, either due to being a bad lender, falling on hard times, etc. Does that make sense?
3. When a party does not pay back a bank loan, the bank will lose money. Does that make sense?
4. Hence, it is job of the bank to evaluate the risk of the party they loan the money to. Does that make sense? This is risk of default.
5. Some parties are more risky to lend to. Some are less risky.
6. Some parties are special. They are special because if they are about to default, someone might give them additional money to pay back the loan. This is called a bailout.
7. I dont get bailouts. You don't get bailouts. The average person doesn't get bailouts.
8. Countries get bailouts! AIG gets bailouts!
9. When a country get's bailouts, the bank lender gets EXTRA protection. If the country defaults, the bank will still get paid back anyway if the defaulting country get's a bailout.
10. If the bank loaned money to me and I couldn't pay back the bank. The bank loses money. But if the bank loaned money to Greece, and someone (germany) bails them out, then the banks get paid back.
11. The party giving bailouts doesn't like giving bailouts
12. It incentivizes banks to be less cautious about who they loan money to, so that they loan money to parties likely to get bailouts.
13. This creates a moral hazard.
14. Moral Hazard doesn't mean morality in the sense of right and wrong. and Hazard doesn't mean dangerous.
15. Moral Hazard is instead: "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."
lol and I'm the one who's the laymen here.
You messed up on point 4. I'm going back to my other post and explain again why banks are entitled to pursue legal means to force people to get their money back when people don't pay then.
There's a asymmetry of information between financial agents (A) and people who owns then (B). A don't know B's chance to pay then back - that's risk. The higher the risk, higher the interest A will ask from B, for any given loan. That's risk premium.
However it could be that B is actually very capable of paying back his loan but A doesn't know it, so B could have access to lower interest rates if there wasn't a asymmetry of information. This is why both A and B engage in a different kind of risk. A and B can reach agreement were B agree to assume all the risks - in other words, if B doesn't pay back A, A is entitled to sue B. Commercial banks (the ones who lend money to people) normally use this kind of contracts and so does governments when they sell bonds.
What this means is that you point 4 and forward is messed up. Banks don't simply "loose" money when people decide to not pay then, they can actually go after you legally, but because it's you, not then, who are breaking the law. What the bank can get from you depends from country to country, on the size of the debt and in a million other details. But overall it means the financial agents cannot be accounted for not being paid back. They are not being irresponsible, they are just using contracts third parties sworn to honor and governments sworn to enforce.
In other words, my argument is very simple: institutions (banks, funds, other governments) do not internalize risk when they buy government bonds because they already accepted a lower interest rate. You can't simply argue they dropped the ball and the economy is paying for it. It was not then who dropped the ball and the economy will pay because the contract say so.
@bitterroot: you got my point but keep in mind I'm not arguing from a moral stand point. I'm arguing mostly from a legal standard point and partially from a economic stand point as well. Bailout > Moral Hazard aside, you will easily notice that the non-fulfillment of this kind of contract (if agent A couldn't sue agent B) would in and on itself create moral hazard.
This is were economic efficiency comes in my argument: it's easily proved that not allowing this kind of contract is economically inefficient; it's also easily proved that allowing this contract and not enforcing it creates moral hazard. The only normative conclusion of this analysis is that the contract must be allowed and enforced, speaking in purely economic terms.
Conclusion: What creates moral hazard is not bailing out creditors, it's letting debtors getting away with everything. So the troika is right, if the objective is to create a more stable and reliable financial system, Greece must either be forced to pay the debt via austerity or being kicked out of the eurozone, the first being the best alternative (and the one everyone is pursuing).
This is were economic efficiency comes in my argument: it's easily proved that not allowing this kind of contract is economically inefficient; it's also easily proved that allowing this contract and not enforcing it creates moral hazard. The only normative conclusion of this analysis is that the contract must be allowed and enforced, speaking in purely economic terms.
Economics is not an inherently normative discipline. If you're reaching normative conclusions then you certainly are "arguing from a moral stand point" on some level. I think there is a lot of confusion from both you and TomCat as to what exactly is being debated. Maybe you should each write out the ultimate conclusion you're trying to prove or disprove.
Also, the statement "it's easily proved that not allowing this kind of contract is economically inefficient" is quite meaningless because the term "inefficient" depends on your reference point. I would agree that "it's easily proved that not allowing this kind of contract is economically inefficient as compared with perfectly pareto-efficient economic conditions." But we don't live in a pareto-efficient world, so your burden is to prove that the option to enter into this kind of contract is efficient under the conditions of the economic world in which we live. One circumstance that could make this kind of voluntary contract inefficient is if it carries with it a large externality. For example, if such a contract shifts part of the cost of risk to a non-consenting third party (e.g. the taxpayers of a country). In a world of bailouts, it is certainly possible that some voluntary lending transactions are economically inefficient because not all of the costs are borne by the transacting parties.
This is were economic efficiency comes in my argument: it's easily proved that not allowing this kind of contract is economically inefficient; it's also easily proved that allowing this contract and not enforcing it creates moral hazard. The only normative conclusion of this analysis is that the contract must be allowed and enforced, speaking in purely economic terms.
Economics is not an inherently normative discipline.
It is normative when you talk about alternative policies as you're not only talking on how things works but how they SHOULD work. I disagree anything normative is "moral" unless you have a very broad definition for the word. For example, finding a tax rate that maximizes the equilibrium path of output per worker is a normative exercise but not a moral one.
Also, the statement "it's easily proved that not allowing this kind of contract is economically inefficient" is quite meaningless because the term "inefficient" depends on your reference point. I would agree that "it's easily proved that not allowing this kind of contract is economically inefficient as compared with perfectly pareto-efficient economic conditions." But we don't live in a pareto-efficient world, so your burden is to prove that the option to enter into this kind of contract is efficient under the conditions of the economic world in which we live. One circumstance that could make this kind of voluntary contract inefficient is if it carries with it a large externality. For example, if such a contract shifts part of the cost of risk to a non-consenting third party (e.g. the taxpayers of a country). In a world of bailouts, it is certainly possible that some voluntary lending transactions are economically inefficient because not all of the costs are borne by the transacting parties.
The discussion here is gonna become increasing technical and thus off-topic. I will give a brief response, if you want details PM me:
i) Pareto-efficiency is not a "condition". Conditions in economic theory are the exogenous hypothesis such as "Are good x rival or non-rival?" or "Are property rights enforced? Are they enforced for free ?" or "Are markets under perfect competition ?" or "How's information ? (It is perfect or imperfect ? Symmetric or asymmetric ? If it's asymmetric who's the principal ?)".
Pareto-efficiency or the lack of it is a characteristic of a equilibrium. No one starts a economic analysis assuming the economy is "Pareto-efficient", we assume conditions that are relevant to the issue at hand and these conditions might lead or not to pareto-efficiency.
ii) We not living in a Pareto-efficient world has no bearing on the utility of that criteria. You are mixing up Pareto-efficiency and the hypothesis that leads to it. Normally economic efficiency analysis are based on comparing two state of things if one state is Pareto-efficient and the other isn't we know one condition is more efficient from that particular criteria. If both states are Pareto-efficient the criteria can't be used to choose between then. If both states are not efficient then we can still evoke Pareto-efficiency to construct a third ideal state and from this third state we can use some measure to establish a second best from our first two states.
So, yeah, I know we live in a world of uncertainty and market failures and thus not Pareto-efficient. It doesn't change the fact that unreachable contracts desired by two parts might be a clue of inefficiency.
iii) You're correct that if there was some form of negative externality in this contract we should be glad he is not reachable. But It's not the standard practice in academics to disregard people's arguments by saying "hey, there might be negative externality there! Prove it doesn't exist !". The burden is on critiques to elaborate a more convincing model showing conditions not taken in consideration invalidates the previews results. If you're not convinced by my unreachable contract argument you're free to show me why that particular contract in the real world might be bad socially.
iv) Going back to the "model" I presented, you have to remember that's a model of contracts that are being enforced. There's no possibility of moral hazard for A and B because if B do not pay he will be punished by contract and this punishment eliminates the moral hazard. It's the reason why there's no moral hazard in most car insurances because if you crash your car you still have to pay a fee for the insurance company. So moral hazard only exists if the contract cannot be enforced.
v) Why I think my approach (no moral hazard) is better at looking at Greece situation ? First, government bonds are the kind of contract I'm talking about here and that contract was enforceable by the EU. There's no moral hazard for the banks as they assume no risk when buying government bonds. There's no moral hazard for Greece in selling the bonds because it feared being kicked out or just getting some bad sanctions. The second reason is that a fiscal crisis of the state have happened before a trillion of times in history and many times there wasn't the IMF or other institution to bail out. Sometimes there was, but the bail out wasn't anticipated and thus not able to create moral hazard.
vi) These fiscal crisis, imo, are a result of political cycles in the absence of fiscal controls. In the absence of those, parties can use government spending to improve their chances of winning a election. The larger spending on election years is largely documented by literature (http://www.jstor.org/stable/2138764?seq=1#page_scan_tab_contents). This creates a problem were parties seek short term gains for then while creating long-term debt to the government as a whole. The easiest way to resolve this is obviously having stronger fiscal controls (laws that make it impossible for the government to spend unjustifiably), which Greece lacks and refuses to implement.
Note: The above is not moral hazard. Moral hazard is always created by asymmetry of information in certain types of agent-principal models. Parties screwing over government finance has nothing to do with it. Maybe you can classify it as a negative externality but that's pushing it as there's no market here as well.
This is were economic efficiency comes in my argument: it's easily proved that not allowing this kind of contract is economically inefficient; it's also easily proved that allowing this contract and not enforcing it creates moral hazard. The only normative conclusion of this analysis is that the contract must be allowed and enforced, speaking in purely economic terms.
Economics is not an inherently normative discipline.
It is normative when you talk about alternative policies as you're not only talking on how things works but how they SHOULD work. I disagree anything normative is "moral" unless you have a very broad definition for the word. For example, finding a tax rate that maximizes the equilibrium path of output per worker is a normative exercise but not a moral one.
I'm calling anything on the "ought" side of the is-ought dichotomy a moral statement. Simply engaging in the exercise of finding a tax rate that maximizes the equilibrium path of output per worker is not moral or normative. It's an "is" statement: the output is this if the tax rate is that. But if you're saying society "should" or "ought to" choose a tax rate that maximizes the equilibrium path of output per worker, that's a moral statement that implies it is somehow "good," "right," or "correct" to maximize output per worker.
i) Pareto-efficiency is not a "condition". Conditions in economic theory are the exogenous hypothesis such as "Are good x rival or non-rival?" or "Are property rights enforced? Are they enforced for free ?" or "Are markets under perfect competition ?" or "How's information ? (It is perfect or imperfect ? Symmetric or asymmetric ? If it's asymmetric who's the principal ?)".
Pareto-efficiency or the lack of it is a characteristic of a equilibrium. No one starts a economic analysis assuming the economy is "Pareto-efficient", we assume conditions that are relevant to the issue at hand and these conditions might lead or not to pareto-efficiency.
Let's set the condition/property semantics aside; I'll use whatever terminology you prefer. My point is this: it is provable that there are certain necessary conditions for Pareto efficiency. (These include perfect competition, perfect information, and an absence of externalities, among other things.) Let's say we start from a set of conditions that define a perfectly Pareto-efficient equilibrium. In that case, making any contract in that economy unreachable is, by definition, economically inefficient. This is because all reachable contracts in a perfectly Pareto-efficient economy are efficient. This is not true in an economy that is not perfectly Pareto-efficient. In a not-perfectly-Pareto-efficient economy, some reachable contracts are inefficient. Therefore it may be efficient to outlaw certain reachable contracts in an economy that is not at a pareto-efficient equilibrium.
So, yeah, I know we live in a world of uncertainty and market failures and thus not Pareto-efficient. It doesn't change the fact that unreachable contracts desired by two parts might be a clue of inefficiency.
I agree that it "might be a clue to inefficiency," and is worth investigating, but that is a far cry from what you said previously: "it's easily proved that not allowing this kind of contract is economically inefficient."
iii) You're correct that if there was some form of negative externality in this contract we should be glad he is not reachable. But It's not the standard practice in academics to disregard people's arguments by saying "hey, there might be negative externality there! Prove it doesn't exist !". The burden is on critiques to elaborate a more convincing model showing conditions not taken in consideration invalidates the previews results. If you're not convinced by my unreachable contract argument you're free to show me why that particular contract in the real world might be bad socially.
Both TomCat and I have very clearly pointed out the negative externality that you are not taking into account - the existence of governement bailouts. A bailout shifts a portion of the risk cost of the lending contract to a third party, resulting in an inefficiently low price (interest rate). This inefficiently low price causes an inefficiently high demand for the good (lending capital). Thus the quantity/price equilibrium reached by the willing borrower and lender under bailout conditions is different from the pareto-efficient equilibrium that would exist absent the bailout. The deadweight loss of this inefficiency is borne by the country/taxpayers responsible for the bailout.
iv) Going back to the "model" I presented, you have to remember that's a model of contracts that are being enforced. There's no possibility of moral hazard for A and B because if B do not pay he will be punished by contract and this punishment eliminates the moral hazard. It's the reason why there's no moral hazard in most car insurances because if you crash your car you still have to pay a fee for the insurance company. So moral hazard only exists if the contract cannot be enforced.
I agree that in a world of perfect contract enforcement, there is no moral hazard. However, perfect enforcement cannot exist, so your model is flawed. First, a borrower in arrears may simply be unable to pay - there is not enough money in the coffers and insufficient resources to generate the money to repay the debt. This is more likely to happen on a personal level than on a national level, but it is still possible in either case.
Further, a country that is technically able to pay its debts may be simply unwilling to make the sacrifices necessary to do so. A population forced to pay high taxes while foregoing most government services may simply revolt and elect a government that refuses to pay. In that event, recovering the debt would require a war or a similar form of extraordinary coercion. The cost of such a war might be comparable to or larger than the debt itself (not to mention the loss of life). In that event, it's also not feasible to enforce the contract.
And enforcement of a contract always comes with transaction costs that makes the effective recovery some amount less than the full balance owed.
If a lender has the reasonable expectation of a bailout or government subsidy in any of the three scenarios I've just described, then we have a moral hazard problem resulting in an economically inefficient loan.
The second reason is that a fiscal crisis of the state have happened before a trillion of times in history and many times there wasn't the IMF or other institution to bail out. Sometimes there was, but the bail out wasn't anticipated and thus not able to create moral hazard.
Right, the anticipation of a bailout has changed the nature of the game. The ex ante expectation that your debt might be bailed out changes the cost/benefit calculus for countries like Greece, resulting in inefficient lending and borrowing decisions.
vi) These fiscal crisis, imo, are a result of political cycles in the absence of fiscal controls. In the absence of those, parties can use government spending to improve their chances of winning a election. The larger spending on election years is largely documented by literature (http://www.jstor.org/stable/2138764?seq=1#page_scan_tab_contents). This creates a problem were parties seek short term gains for then while creating long-term debt to the government as a whole. The easiest way to resolve this is obviously having stronger fiscal controls (laws that make it impossible for the government to spend unjustifiably).
I agree with this statement completely. But that doesn't mean moral hazard from bailouts isn't also playing a role. If TomCat thinks bailouts are 100% to blame for Greece's bad fiscal position, then I disagree. But if you think bailouts are 0% to blame, then I also disagree with you.
Seems like you're using a pop-culture (marxist counter-culture!) view of capitalism as definition, not the actual meaning of the word. Capitalism is not about being greedy and competitive about making money.
"Capitalism is "production for exchange" driven by the desire for personal accumulation of money receipts in such exchanges, mediated by free markets."Wiki: Capitalism-Characteristics
Wiki is counter-culture now? Guess I missed the bus on that one. A full one-third of their bulletin point summary of Capitalism is "Money to beget more money."[1] So, while I agree my explanation was flippant, I would also say it is at least 1/3 correct.
Getting money and spending on consumption does not makes this money and this consumption "capital".
They didn't spend it on "consumption," they gave it to their citizens (who still -likely- have it). Just because 'the world' can't get to the value of that money doesn't mean -unless I am very much mistaken- the value ceased existing altogether. They took the value out of one pocket and put it in a different one, and now they're getting Germany to pay the difference.
What was Greece doing with the cheap money? Investing it in ways that would provide a higher return than the interest rate, as your cousin would have, or just spending it in ways that would leave the cupboard bare when the loan came due?
Taking a hamburger today and paying for it on Tuesday only works if you're going to have money on Tuesday.
So I'd suggest what Greece was doing was following the "Wimpy" brand of capitalism. You can be very good at that but only until Tuesday.
The reference is to old Popeye cartoons in case you're not old enough to have seen them.
This is were economic efficiency comes in my argument: it's easily proved that not allowing this kind of contract is economically inefficient; it's also easily proved that allowing this contract and not enforcing it creates moral hazard. The only normative conclusion of this analysis is that the contract must be allowed and enforced, speaking in purely economic terms.
Economics is not an inherently normative discipline.
It is normative when you talk about alternative policies as you're not only talking on how things works but how they SHOULD work. I disagree anything normative is "moral" unless you have a very broad definition for the word. For example, finding a tax rate that maximizes the equilibrium path of output per worker is a normative exercise but not a moral one.
I'm calling anything on the "ought" side of the is-ought dichotomy a moral statement. Simply engaging in the exercise of finding a tax rate that maximizes the equilibrium path of output per worker is not moral or normative. It's an "is" statement: the output is this if the tax rate is that. But if you're saying society "should" or "ought to" choose a tax rate that maximizes the equilibrium path of output per worker, that's a moral statement that implies it is somehow "good," "right," or "correct" to maximize output per worker.
That's why I said "broad definition of the word" (moral). Normally when people refer to moral they are referring to theories or arguments or fields that use moral philosophy in some way. According to your definition engineering or business management is a moral field, which is very broad way of seen things. But that's just semantics so we can settle this one here.
Let's set the condition/property semantics aside; I'll use whatever terminology you prefer. My point is this: it is provable that there are certain necessary conditions for Pareto efficiency. (These include perfect competition, perfect information, and an absence of externalities, among other things.) Let's say we start from a set of conditions that define a perfectly Pareto-efficient equilibrium. In that case, making any contract in that economy unreachable is, by definition, economically inefficient. This is because all reachable contracts in a perfectly Pareto-efficient economy are efficient. This is not true in an economy that is not perfectly Pareto-efficient. In a not-perfectly-Pareto-efficient economy, some reachable contracts are inefficient. Therefore it may be efficient to outlaw certain reachable contracts in an economy that is not at a pareto-efficient equilibrium
Neoclassical perfect market competition conditions leads to Pareto-efficient equilibrium, but Pareto-efficient equilibrium exists even if you break some of those conditions. For example, monopolies with perfect price discrimination are Pareto-efficient. So, I still don't understand why you think the situation at hand is working under a non-Pareto efficiency, which is kind absurd since the contract of type i risk I presented was created PRECISELY to construct a new Pareto-efficient equilibrium.
I understand what you're saying, the fundamental theorems of welfare doesn't hold under certain conditions. But they hold under the conditions at hand.
I agree that it "might be a clue to inefficiency," and is worth investigating, but that is a far cry from what you said previously: "it's easily proved that not allowing this kind of contract is economically inefficient."
The clue means you should check out if it's inefficient. I've checked and it is.
Both TomCat and I have very clearly pointed out the negative externality that you are not taking into account - the existence of governement bailouts. A bailout shifts a portion of the risk cost of the lending contract to a third party, resulting in an inefficiently low price (interest rate). This inefficiently low price causes an inefficiently high demand for the good (lending capital). Thus the quantity/price equilibrium reached by the willing borrower and lender under bailout conditions is different from the pareto-efficient equilibrium that would exist absent the bailout. The deadweight loss of this inefficiency is borne by the country/taxpayers responsible for the bailout.
The bailouts is not sufficient condition for a moral hazard issue and you guys are under the impression it is. If the banks loose money on the failing of the contract (which is what happens in a government bond default even if bailout occur) there's no moral hazard on the creditor decision making. Maybe the debtor is printing too much bonds hoping to be rescued but this is do not explain Greece fiscal crises because Greece KNEW they were getting screwed later because they couldn't use monetary policy to fix the situation.
I agree that in a world of perfect contract enforcement, there is no moral hazard. However, perfect enforcement cannot exist, so your model is flawed. First, a borrower in arrears may simply be unable to pay - there is not enough money in the coffers and insufficient resources to generate the money to repay the debt. This is more likely to happen on a personal level than on a national level, but it is still possible in either case.
Further, a country that is technically able to pay its debts may be simply unwilling to make the sacrifices necessary to do so. A population forced to pay high taxes while foregoing most government services may simply revolt and elect a government that refuses to pay. In that event, recovering the debt would require a war or a similar form of extraordinary coercion. The cost of such a war might be comparable to or larger than the debt itself (not to mention the loss of life). In that event, it's also not feasible to enforce the contract.
And enforcement of a contract always comes with transaction costs that makes the effective recovery some amount less than the full balance owed.
If a lender has the reasonable expectation of a bailout or government subsidy in any of the three scenarios I've just described, then we have a moral hazard problem resulting in an economically inefficient loan.
When you say "perfect enforcement not existing" is a contractual risk situation. It means people who buy government bonds, despite having the law on their side saying there's no risk, there's the risk of the law failing. This risk is internalized by the bond buyers (reason why countries have risks scores determined by risk agencies). However this risk was not taken in consideration in my first explanation because this risk is of no consequence to this once there's no bailing out of contractual failing. Let me explain:
Let's say Greece refuses to pay it's debt. Then the rules says the troika is in charge of sanctioning Greece's economy. A contractual failing happens if for some reason the troika is unable to do this. Moral hazard on this risk is a very poor explanation of the events for a couple of reasons:
- The troika IS able to enforce the contract, the contractual risk is virtually zero.
- Even if for some cosmic event the troika decided to side with Greece in this matter it would be a unexpected event and thus would not generate moral hazard.
- Greece restructuring it's debt is much more likely outcome of the EU regulations failing then a bailout, meaning banks loose money if the contract fail and thus there's no moral hazard.
About the transaction costs, it's obvious the revenue generated by the lower interests rates have to be higher then the transaction costs in order for this contract be Pareto-efficient if we even consider governments as player. This is a matter so trivial that theoretical examples ignore for sake of clarity. In this applied case the transaction costs of the eurozone is worthy of it's own thread.
Right, the anticipation of a bailout has changed the nature of the game. The ex ante expectation that your debt might be bailed out changes the cost/benefit calculus for countries like Greece, resulting in inefficient lending and borrowing decisions.
As I said, governments bond contracts prevents moral hazard given both parties can count on international courts to apply sanctions (contract exists and is enforced). If bond contracts were like "country x you pay at certain interest rate and if they don't the IMF will bailout and nothing happens with country x" the system would surely not work, but it's not how things work. A bailout to another government never happens without a restructure of the debt which means creditors loose money in those.
The trading of governament bonds among banks and governments is not the root of the problem here, the nature of the bond contract already presents moral hazard. The problem comes from poor fiscal controls.
I agree with this statement completely. But that doesn't mean moral hazard from bailouts isn't also playing a role. If TomCat thinks bailouts are 100% to blame for Greece's bad fiscal position, then I disagree. But if you think bailouts are 0% to blame, then I also disagree with you.
Dividing the cause of a problems in % always felt confusing to me. Let me put it this way:
Would Greece fiscal crisis exist if UE bailout possibility didn't existed ? Yes.
Would Greece fiscal crisis exist if UE bailout possibility existed but Greece played by the book anyway ? No.
Given that Greece was not willing to play by the book, did those early bailout made things worse ? Yes, they did, but only because politics sucks.
Dividing the cause of a problems in % always felt confusing to me. Let me put it this way:
Would Greece fiscal crisis exist if UE bailout possibility didn't existed ? Yes.
Would Greece fiscal crisis exist if UE bailout possibility existed but Greece played by the book anyway ? No.
Given that Greece was not willing to play by the book, did those early bailout made things worse ? Yes, they did, but only because politics sucks.
The only correct answers to these questions is "maybe." The real world of macroeconomics is one of butterflies and hurricanes. It's not possible to draw a clean line of causation between a particular policy and a particular outcome in the real world. In the analysis you're purporting to do above you're ignoring all effects other than first-order effects. The presence or absence of a bailout policy can affect the decisions of multiple economic actors in a variety of ways, and these decisions can have unforeseeable consequences. For example maybe the absence of a bailout policy starts a chain of events that results in different politicians getting elected, or different managers being hired to run the lending institutions, etc.
But we can answer these questions:
Does the presence of a bailout policy, ceteris paribus, tend to depress the price (interest rate) of lending capital? Yes.
Does a lower price for a good result in greater demand for that good? Typically, yes.
Can we therefore assume that the presence of a bailout policy increased the equilibrium quantity of debt demanded by Greece? Yes.
Whether this increase in demand for debt was "responsible" for the crisis is not a question we can answer accurately, unless you have some very high quality economic data that I'm not aware of (and even then I'm skeptical that we could build a sufficiently accurate model of Greece's real-world borrowing behavior).
So, can someone please explain this to me, because I'm very confused about all of this:
A lot of people in Greece were willing to play bankruptcy chicken, and indeed many are mad that they didn't do just that, because of the austerity measures attached to the bailouts.
What, exactly, are these austerity measures that so many people were willing to go that far to object to?
Dividing the cause of a problems in % always felt confusing to me. Let me put it this way:
Would Greece fiscal crisis exist if UE bailout possibility didn't existed ? Yes.
Would Greece fiscal crisis exist if UE bailout possibility existed but Greece played by the book anyway ? No.
Given that Greece was not willing to play by the book, did those early bailout made things worse ? Yes, they did, but only because politics sucks.
The only correct answers to these questions is "maybe." The real world of macroeconomics is one of butterflies and hurricanes. It's not possible to draw a clean line of causation between a particular policy and a particular outcome in the real world. In the analysis you're purporting to do above you're ignoring all effects other than first-order effects. The presence or absence of a bailout policy can affect the decisions of multiple economic actors in a variety of ways, and these decisions can have unforeseeable consequences. For example maybe the absence of a bailout policy starts a chain of events that results in different politicians getting elected, or different managers being hired to run the lending institutions, etc.
Ok, you just took the debate to a completely different direction here. You don't expect me to argue about the epistemology validity of theoretical economic modeling here do you ?
If you want to create a thread so we can debate THAT I'm up for it, but be ready to bring in the big guns. If you can somehow convince people that merely talking about economics (what everybody else is doing here) is more accurate then formal modeling, I will be very impressed.
I will just start that debate and point out that talking about economics IS modeling except you are: 1) hiding your hypothesis; 2) not demonstrating the logical consistency of your arguments; 3) being vague and imprecise in your assertions.
To be honest I didn't cover point 2) either because I didn't posted the formal proofs of the statements I made here because honestly this is not the place for it and it's unnecessary because those proofs are text book material. For this debate, in my mind, point 1) and 3) is already sufficient to make clear and precise arguments.
But we can answer these questions:
Does the presence of a bailout policy, ceteris paribus, tend to depress the price (interest rate) of lending capital? Yes.
Does a lower price for a good result in greater demand for that good? Typically, yes.
Can we therefore assume that the presence of a bailout policy increased the equilibrium quantity of debt demanded by Greece? Yes.
Whether this increase in demand for debt was "responsible" for the crisis is not a question we can answer accurately, unless you have some very high quality economic data that I'm not aware of (and even then I'm skeptical that we could build a sufficiently accurate model of Greece's real-world borrowing behavior).
The answers you're giving are not compatible with the vagueness of your assumptions.
The presence of bailout policy is not a sufficient condition for a lower interest rate. For example, if the player that are bailing others out (let's say, Germany in this case) have methods of punishing the player who are under moral hazard, it can foresee this situation and adopt a punisher strategy (https://en.wikipedia.org/wiki/Strategy_(game_theory)) to eliminate the moral hazard completely. Your statement that Greece was under moral hazard carries the enormous hidden assumption that this kind of strategy was not adopted or not enforced but you refuse to give any arguments for why you think that's the case. Again, you guys are under the illusion that bailouts implies moral hazard. Worse, you're using double standards here as if you think macroeconomics are impossibly complex "butterflies and hurricanes" good luck applying the ENTIRELY mathematical-theoretical concept of moral hazard to anything.
You're completely unaware of how government bonds works. Governments are the only sellers of it's own bonds. Banks and other financial people are on the demand side here. Banks do not decide how much credit governments can buy at each interest rate, governments decides how much "debt" it will sell.
You criticized my approach by criticizing my hypotheses, I criticize you because you haven't established yours. You're still on that dark place were you don't even know the assumptions you're making to say what you're saying.
So, can someone please explain this to me, because I'm very confused about all of this:
A lot of people in Greece were willing to play bankruptcy chicken, and indeed many are mad that they didn't do just that, because of the austerity measures attached to the bailouts.
What, exactly, are these austerity measures that so many people were willing to go that far to object to?
The Big ones in the last agreement are:
Raising the age that you retire and claim a pension to 67 and reducing it.
Increasing the VAT rate to 23% and removing exemptions.
50Bn Euro of Assets transfered out of direct Greek control into a fund to "contribute to the recapitalisation of the country’s banks."
Whilst none of them seem that onerous on paper in reality they are going to do a lot less than advertised.
The Greek unemployment rate is about 25% for the country and 50% for the "youth", so increasing the age at which you can retire won't do that much for the 1 in 4 who need some kind of support now.
Likewise increasing VAT, people don't have the money to purchase the goods the tax is going to be applied to or will find someway of getting around it.
I would also be very surprised that even if they managed to find that amount of Greek assest they would get close to that value for them if they were privatised.
A couple of Days ago the IMF pretty much stated that the plan agreed to On Sunday is unworkable as Greece still won't be able to pay back the money it owes and is going to be back in a couple of months needing yet another bailout.
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I Became insane with long Intervals of horrible Sanity
All Religion, my friend is simply evolved out of fraud, fear, greed, imagination and poetry.
- Edgar Allan Poe
You criticized my approach by criticizing my hypotheses, I criticize you because you haven't established yours. You're still on that dark place were you don't even know the assumptions you're making to say what you're saying.
This is because I don't have an affirmative hypothesis. I am pointing out that neither you nor TomCat have established your hypotheses.
TomCat has not proven that the Greek crisis was caused by the existence of a bailout policy.
You have not proven that, in the absence of a bailout policy, the Greek crisis would have happened anyway.
I'm skeptical that the tools of contemporary economics can establish which position is correct. The complexity of the relationships involved are too high. It's like looking at a puddle of water and trying to model the shape of the block of ice it melted from. Anyone who claims to be able to answer that question is just wrong.
Ok, you just took the debate to a completely different direction here. You don't expect me to argue about the epistemology validity of theoretical economic modeling here do you ?
If you want to create a thread so we can debate THAT I'm up for it, but be ready to bring in the big guns. If you can somehow convince people that merely talking about economics (what everybody else is doing here) is more accurate then formal modeling, I will be very impressed.
I will just start that debate and point out that talking about economics IS modeling except you are: 1) hiding your hypothesis; 2) not demonstrating the logical consistency of your arguments; 3) being vague and imprecise in your assertions.
I am saying that neither formal modeling nor "talking about economics" is sufficient to establish the existence or non-existence of real-world causal relationships between policies and macroeconomic outcomes. Macroeconomics cannot be reliably predicted, period. That's not to say there is no value in microeconomic models, which can give us insights into behavioral trends and incentives. These types of models might allow us to say that a certain policy will tend to have a certain macroeconomic effect, but not that it actually will have this effect.
Let me analogize here. Our understanding of the laws of physics allow us to almost perfectly model the behavior of an individual molecule of a gas, such as oxygen or water vapor. From there, it should just be a trivial matter of applying these laws at a macro level to perfectly predict the weather, right? Wrong. The amount of data that would be needed is unreasonably large, and even if we collected all this data the interactions involved are complex beyond our ability to model them. Of course, we can use our rudimentary tools to predict trends and tendencies ("the cold front this weekend makes is more likely that it will rain") but we cannot draw clean lines of causation between two events ("weather event X this week will definitely cause weather event Y next week"). Causation is too complex at the macro level.
You're completely unaware of how government bonds works. Governments are the only sellers of it's own bonds. Banks and other financial people are on the demand side here. Banks do not decide how much credit governments can buy at each interest rate, governments decides how much "debt" it will sell.
As you know, in a marketplace neither party is really "deciding" how much debt will be bought and sold. It's a two way transaction that depends on the supply and demand curves. I've been framing the analysis as "buying lending capital" but you can also frame it as "selling debt." The conclusions are the same if you do the analysis correctly.
Give Greece money... for what? It's a bit like giving an alcoholic a bottle of Stoli, isn't it? Also, screw the organizations who lent the government (well, or any government) money. It's not like it's some secret where the money comes from; all they're doing is causing taxes to be raised on today's toddlers (who are too young to vote).
Also, it's somewhat annoying to see capitalism blamed for the profit motive in a socialist system. Seems like a committee investigation on why a tragic airplane crash happened determining that the cause was gravity.
You criticized my approach by criticizing my hypotheses, I criticize you because you haven't established yours. You're still on that dark place were you don't even know the assumptions you're making to say what you're saying.
This is because I don't have an affirmative hypothesis. I am pointing out that neither you nor TomCat have established your hypotheses.
TomCat has not proven that the Greek crisis was caused by the existence of a bailout policy.
You have not proven that, in the absence of a bailout policy, the Greek crisis would have happened anyway.
I'm skeptical that the tools of contemporary economics can establish which position is correct. The complexity of the relationships involved are too high. It's like looking at a puddle of water and trying to model the shape of the block of ice it melted from. Anyone who claims to be able to answer that question is just wrong.
Nope I haven't and neither claimed I had proved that Greece would be in the same situation if bailout didn't existed. Moral hazard not being important to here is my opinion and I never claimed anything more then that.
However, my opinion is based on known formal modeling which makes it a better opinion then one that doesn't use such artifice. Unless you think this modeling is useless. As I said, if you want argue how useful models are, we can do that, but it's just way too off topic to do it here.
I don't really like analogies because they often say nothing about the issue at hand that can't be said with a direct approach. I feel like those are normally used just so you can say something about a subject and sound like yu know what you're saying without really knowing it and sadly I think this is the case.
Even if you take the hardest problems in theoretical economics (just not economics, sciences in general) they have very little with the problem you just described (which is, the lack of a path dependency between the water peddle and the sahpe of the ice). Macroeconomic variables are majorly statistically proved to be path dependent, so the problem you describe here almost never happens in economics.
I am saying that neither formal modeling nor "talking about economics" is sufficient to establish the existence or non-existence of real-world causal relationships between policies and macroeconomic outcomes. Macroeconomics cannot be reliably predicted, period. That's not to say there is no value in microeconomic models, which can give us insights into behavioral trends and incentives. These types of models might allow us to say that a certain policy will tend to have a certain macroeconomic effect, but not that it actually will have this effect.
1. Funny you say economics can't be predicted "period" when there's a billion dollar market of economic prediction agencies, economic prediction are employed by companies, agencies and governments in every single country and there's a entire field of study on statistical economic prediction with thousand of universities across the world. You can say "it can't be predicted with 100% accuracy" but that's a moot point because nothing stochastic can (that's the nature of stochastic stuff!).
2. Macro data prediction is actually much more accurate then micro data prediction, you're just proving more and more you don't know the field of economics at all. The reason is that in aggregate data the deviations tends to even out, something that is requires in most statistical regression methods. In micro data non-expected deviation not necessarily evens out and is very likely to be correlated with explanatory factors, which makes any statistical analysis much harder and data intensive.
3. It's well known that theoretical modeling in both macro and micro economics is not meant for prediction, it's meant to explain predictions. This is true for a great number of scientific fields.
4. When you have a game were player are country you're talking about micro economics which are used to do precisely "insight into behavioral tends and incentives". All my talk on moral hazard not existing for Greece is PRECISELY that, I'm arguing there's not a moral hazard type of incentive at play here.
Let me analogize here. Our understanding of the laws of physics allow us to almost perfectly model the behavior of an individual molecule of a gas, such as oxygen or water vapor. From there, it should just be a trivial matter of applying these laws at a macro level to perfectly predict the weather, right? Wrong. The amount of data that would be needed is unreasonably large, and even if we collected all this data the interactions involved are complex beyond our ability to model them. Of course, we can use our rudimentary tools to predict trends and tendencies ("the cold front this weekend makes is more likely that it will rain") but we cannot draw clean lines of causation between two events ("weather event X this week will definitely cause weather event Y next week"). Causation is too complex at the macro level.
This analogy do not hold in any way you think it does.
Using micro behavior in macro level analysis is more akin to use knowledge of a particular fauna and flora to theorize on the properties of a ecosystem, which is a established practice. Your analogy would be a bit more realistic if people were trying to use neurology to make a theory of human behavior and from that theory establish a macroeconomic theory. In other words you just using a appeal to complexity (http://www.seekfind.net/Logical_Fallacy_of_Appeal_to_Complexity.html#.Va5g7vlViko)* to disregard my argument which was actually very simple:
- People said Greece was taking too much credit because bailout policies created moral hazard.
- I said moral hazard in that case is not possible because government bonds are contracts are already moral hazard proof, much like car insurance contracts. My opinion was that the lack of fiscal control is what led Greece into this situation.
* I think you're doing a appeal to complexity here because you're just arguing there's a complexity barrier between game theoretical economics and the behavior of countries while not exposing precisely what this complexity is. You're only argument on that direction so far was analogies using unrelated difficulties in other field of studies that are not even using a similar theoretical structure and statistical approach. Not to mention if it turns out you're right and this complexity barrier actually makes game theoretical economics not useful to analyse this situation then your own initial claim of moral hazard would be invalidated !
Greece is once again in need of a bailout and the IMF have refused to play ball unless there is some form of debt reduction involved in the deal.
Quote from Greece"s latest financial emergency is both tragic and absurd »
It’s that time of year again. Greece is running out of money. There are violent protests in Athens. Eurozone finance ministers are gathering in Brussels in an “emergency” conclave to decide what to do next.
The International Monetary Fund has already made it clear what it thinks should happen. It says Europe should cut Greece some slack by easing the terms of its bailout agreement and offering a solid dose of debt relief.
Christine Lagarde, the IMF’s managing director, has said that if Germany and its allies in the Eurogroup of finance ministers insist on making unrealistic demands of Greece she will not risk any more of the fund’s money.
Debt is a concept that is basically like this. You go back to ancient Sumeria, whenever a new king took over he cleared everyone's debts. This allowed people to "move on with their life." This is where the 50 year Jubilee comes in with Ancient Israel, to again clear debts.
Every generation or two there is a major financial crisis without major financial legislation and a lot of government intervention. Traditionally, whenever there was major war or famine, bankers would make a lot of money. However, whenever a government failed to pay they would just kill their banker or seize money out of church vaults and rich people. Take your pick, whether you use the Byzantine and ancient Roman system or whatever else is out there.
Now, in the common view you have finance and economics. Finance is standardized off of Walrasian Equilibrium which is a fancy theory that says money in and money out are always balanced on the books. However, as we know in economics there is a crash.
Now for Greece, the best thing to do is to get out off of the Euro, crash their economy hardcore, and reboot with a new currency and make drastic changes to their government. This reboot takes seven years to achieve with high inflation to reach balance of payments. Otherwise, you're basically going to place all that debt into a super fund, like after WWII, and set it at an extremely low interest rate as well as trade off debt cancellation.
That's it.
What they want is Shock Doctrine with what occurred under Ally occupied Germany.
It basically means you take off all price controls and let the market do what it will, but the problem is you need a hardworking culture with a history of good governance. Basically what you had was Germany had a strong tradition and decimated, yet they had the knowledge and expertise to rebuild within seven years. Again Japan the same way, but they did not have shock doctrine and a different system transitioning from the zaibatsu system to the kiraitsu system for corporations.
The EU is an economic union without a political one. They are confederacy of nation states, while the US at two points had a confederacy they both failed economically. The first confederacy was under the Articles of Confederation that while winning the war against England because of its flexibility, the US was not totally economically successful until we federalized under the Constitution. By which each state became subordinate truly to the federal government that had the real power to tax and used that to pay off the remaining debt.
The EU is in an attempt to do what the US did prior to the Constitution.
Now we can argue that the "US is Greece," it's not just a different set of problems. Greeks basically no one pays taxes and they don't export a lot that people want to buy. The US exports a lot of goods that people want to buy that are finished goods. The problem is mostly the American war machine and tax evasion by corporations and the top income earners. Although, I feel people are getting "smarter" about "being screwed" whenever you have a populist and an avowed socialist running.
The problem with the US is corruption and war. The problem with Greece is stupidity. Americans know what is going on, Greeks are in denial.
I'm feeling more and more that the term "chicken hawks" and "war mongering" with the GoP is something that is an annoyance combined with the failure of supply side economics. Conceptually I think supply side was good, but it is just Keynesianism redux that was necessary to get rid of the inflation under Volcker. But deregulation has created a situation where we're now prone to bank crashes, whereas Canada has much stricter banking laws historically and don't have bank runs and their depression are milder with milder economic growth.
The issue with 19th century economics was 3 great years, 3 really bad years, and 3 neutral years. You could basically set your watch. But then the generational banking crisis would hit and you ended up with a seven years of really bad economics like what we just went through. We managed to not have a banking run until the start of deregulation with the S@L Crisis in '89. I feel as a conservative, that deregulation of the banking field failed when the regulations just needed consolidation across state lines.
The real issue is that there is an honest fear that "Greece will go back to normal" if they are forgiven. However, we tried this with the Weimer Republic and it failed miserably and are already seeing Greek Nazi's and so forth. I'm just along the point, it's time to move on from bad debt and eat the losses. I'm not really as morally concerned with banks that help facilitated tax fraud against the US like UBS. Sorry folks, can't always win.
What Germany did to Greece with the "bail out" aka "Debt Enslavement Package" (DEP) was akin to what the was done to it with the Treaty of Versailles. It asked for an untenable solution to paying back perceived debts which completely destroyed the targetted economy and the prosperity of its people, thereby destroying any hope of Greece ever paying off its debt. They should have instead bailed out the banks, forgiven the debt and simply moved on, with perhaps some sort of lower payment within the realm of reason for a government of it's economic stature to pay. Why? Because it was as much the fault of the lender lending to an unreasonable lendee as it was the lendee asking for the loan.
The only thing the current policy did was guarantee harm to greek people who were not responsible for the decisions. ******* awful policy all around.
Not responsible? Don't they vote in Greece? I think there is more enough blame to go around for everyone.
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The European Debt Crisis Visualized
Yes, I know my cousin would use the money to make more money.
But, Greece was using the money for short-term gains, which is also very capitalistic. As long as they could keep borrowing, it worked. Remember, they were able to keep the ball in the air for the last 20 years. This isn't a sudden issue. As long as the economy was doing well, they would keep making short-term gains with their borrowing strategy.
Now that the ball is dropped, they're either going to have someone else pay the bill or they're going to declare bankruptcy and drag everyone down with them. Sound familiar? That's how capitalism works now. Keep making short-term gains until someone else has to pay. Since that strategy works, people us it. There is no "honor" or "right/wrong" in capitalism, there is just money.
Deal has been reached. Still looking out for anything that can happen.
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Seems like you're using a pop-culture (marxist counter-culture!) view of capitalism as definition, not the actual meaning of the word. Capitalism is not about being greedy and competitive about making money. The definition of capital used by all schools of economics and business is that capital is resources (time, money, assets) used NOT in short-term consumption, but in production-enhance activity in way that the future gains will make up for the short-term opportunity loss. That's what capital is and capitalism is a market economic system were this sort of activity can be engaged by anyone, unlike previews economic systems were capital was controlled by a centralized governing body.
By the above definition, it's clear that Greece was not behaving capitalistic. Getting money and spending on consumption does not makes this money and this consumption "capital". The word capital would loose 100% of it's analytic utility if that was the case.
You're mixing up short-term financial gains done by speculators and banks with fiscal crisis of the state because in both cases moral hazard can be used to explain miss behavior. But for god sake, failing to moral hazard is not the definition of being capitalistic. Moral Hazard is a agency problem resulted from uncertainty, it DOES exist outside of capitalism.
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Again, you're having the wrong view on the laws concerning banking activity and government loaning. My last post explained it well enough and I will just repeat. The are two kind of risks:
i. Risk of a established legal contract failing. That's the risk you get when you eat on a restaurant and don't know the hygiene standards, when you buy something online and have the risk of having your item delayed / missed and so on. It's the risk of a contract you did not being respect by the third party. This risk is NOT internalized by the party who gets the risk. If you are poisoned eating out in a restaurant, you can sue the restaurant and the restaurant can't use "hey, he had accepted the risk of eating here ! There's no reason for him to be upset!" as defense.
ii. Risk established in a legal contract. That's the risk you get when you bet money on lottery or when you play poker. In that case the risk is internalized by you, because you signed a contract accepting the risks. And funny enough, if it's proved that the real risk is not the risk established on the contract, then you actually took risk type i and will not internalized it, reason why you can sue a lottery that gives miss information.
Banks engage in both type of risks but the vast majority of loans, including the loans done with governments are risk type i, meaning the risks are not internalized by the banks. Banks are not playing lottery and sending the bills to you via the governments when things go wrong. That's just not what happens.
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StaffDoesn't this make it even worse though? Banks are taking actions that they *KNOW* have a high chance of failing (subprime housing loans, repeated lending to Greece when they have no way to actually pay back the debt), and because it is a Type I risk, they also know that they stand to lose very little when the failure inevitably happens.
They're not playing roulette and sending the bill for their losses to the people via the government, they're having the people via the government bankroll them from the start.
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Because of that great big incestuous institution called the European Union. Similar to how the US cannot allow Arizona as a state to completely foreclose in the same way EU cannot allow other EU countries to just fold.
If the high chance of failing is *KNOW* why the first-party would engage in the contract to begin with ? The legal conditions surrounding type i risks makes so that you only want to make such contract if you know you can honor it. The role device was created to fulfill that role: B wants a loan from A and A got the money but doesn't know if B will pay him back, because A doesn't have perfect information of B, but B knows he can pay A back. B makes a contract that he will be arrested if he doesn't pay and present it to A, which convinces A to make the loan as A is convinced B doesn't want to be arrested and review his expectation on B trustworthiness.
In reality those contracts are done not to the binary loan or not loan decision. They influence the interest rates. So you can adept this hypothetical example to a situation were B wants a lower interest rate then what A is currently offering and devise the contract to convince A to lower the interest for him. You see, this contract is made to transform a type ii risk in a type i risk. Agent B accept to internalize all the risks in exchange for a lower interest rate from A. If B s doing a type i contract and knows he can't pay B, he is the one acting on bad faith here.
Governments and banks tend to make deals using type i risks because a good government will easily pay back it's debt and because they want the lower interest rates. No one was landing money to Greece expecting it to not pay it's debt (that would a awful way of loosing money). Greece was on the eurozone and under the ECB monetary policy, every highly rated european country was backing up Greece (while pressuring it to step on the line). Greece could have payed it's debt if it had abide the script, which was joining the eurozone and using the new resource for development policies and reform it's welfare system. However it used the new resources on consumption in the form of higher salaries and welfare.
Only later the creditor's started to worry about their money and the troika was formed to guarantee the payment of the debt and the stability of Greece's economy, in that order of priority. A mistake Greeks and left wing commentators keep doing about this is that the troika is bad because it doesn't have Greece's best interests in mind. Of course they haven't ! The troika defends the interests of the eurozone as a whole, they are much more interest in seen money where it belongs then helping out Greeks come out of the hole they dig in for themselves.
Imo the only act of bad faith done by Greece's creditors was advertising austerity as a form of immediate recovery for Greece, which was a lie and everyone but the very naive knew it. The austerity programs were devised to make Greece pay and preserve the euro's value and reputation, which is a righteous objective on itself.
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I'm happy to see a deal has been reached. I don't see a lot of details going on the media, but it seems the deal is much more Europe-sided then Greece-sided. My reading from all this is that Greece was overplaying it's cards. They were on the stark belief a "grexit" would break Europe as whole and thus they had a lot of margin to ask for a restructure of their debt. In reality the looses of a "grexit" is much lower then the looses of a "gefault".
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I really don't think you know what you're talking about. In fact it sounds like you are conflating terms and jargon the way a layperson would understand it.
First of all you didn't understand a word I said. So there's a problem there. I'll start with that issue.
1. A bank makes loans to parties (any party, a country, a town, a person) to make money. The interest they charge on the loan they make is how they profit. Does that make sense so far?
2. Some parties will not pay back the bank, either due to being a bad lender, falling on hard times, etc. Does that make sense?
3. When a party does not pay back a bank loan, the bank will lose money. Does that make sense?
4. Hence, it is job of the bank to evaluate the risk of the party they loan the money to. Does that make sense? This is risk of default.
5. Some parties are more risky to lend to. Some are less risky.
6. Some parties are special. They are special because if they are about to default, someone might give them additional money to pay back the loan. This is called a bailout.
7. I dont get bailouts. You don't get bailouts. The average person doesn't get bailouts.
8. Countries get bailouts! AIG gets bailouts!
9. When a country get's bailouts, the bank lender gets EXTRA protection. If the country defaults, the bank will still get paid back anyway if the defaulting country get's a bailout.
10. If the bank loaned money to me and I couldn't pay back the bank. The bank loses money. But if the bank loaned money to Greece, and someone (germany) bails them out, then the banks get paid back.
11. The party giving bailouts doesn't like giving bailouts
12. It incentivizes banks to be less cautious about who they loan money to, so that they loan money to parties likely to get bailouts.
13. This creates a moral hazard.
14. Moral Hazard doesn't mean morality in the sense of right and wrong. and Hazard doesn't mean dangerous.
15. Moral Hazard is instead: "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."
The tone of your post is extremely patronizing. Italofoca was making a fairly straightforward distinction which you failed to engage with. The distinction is between risk contemplated by performance of a contract versus risk not contemplated by performance of a contract. Let's say you and I place a (legal) bet on the outcome of a sports match. The risk that I might lose the bet is a risk contemplated by the terms of the contract. If I lose the bet, then complete performance of the contract by all parties will result in me taking a loss. However, let's suppose instead that I win the bet but you refuse to pay me. That is a risk not contemplated by the terms of the contract; it is a risk of non-performance and only occurs when one or more parties violate their legal obligations.
Italfoca is pointing out that in the case of non-payment of a debt, the harm is caused by the non-performance of a legal obligation. Many people would say that non-performance of a legal obligation is morally bad or blameworthy. Therefore, rather than assign blame to the lender or a third party in the case of a default on debt, we should assign blame to the debtor. This argument is independent of any incentive problems, such as moral hazard, that might cause one or more parties to the contract to make bad lending or borrowing decisions. The point is that a contract exists, whether the terms are good or bad, and violation of that contract constitutes a morally blameworthy action.
To be clear - I don't necessarily agree with this argument. But you have not addressed it at all.
Also, I completely agree that bailouts create moral hazard, which is why I do not support bailouts. However, as you said, the word "moral" in moral hazard is a bit of a misnomer; it's more accurate to call it a negative externality. Therefore, while it may be a profoundly bad idea to create a moral hazard by offering bailouts to lenders, it is not necessarily "immoral" to do so. The concept of moral hazard does not necessarily help us assign moral blame for the Greek crisis.
What was Greece doing with the cheap money? Investing it in ways that would provide a higher return than the interest rate, as your cousin would have, or just spending it in ways that would leave the cupboard bare when the loan came due?
Taking a hamburger today and paying for it on Tuesday only works if you're going to have money on Tuesday.
So I'd suggest what Greece was doing was following the "Wimpy" brand of capitalism. You can be very good at that but only until Tuesday.
The reference is to old Popeye cartoons in case you're not old enough to have seen them.
lol and I'm the one who's the laymen here.
You messed up on point 4. I'm going back to my other post and explain again why banks are entitled to pursue legal means to force people to get their money back when people don't pay then.
There's a asymmetry of information between financial agents (A) and people who owns then (B). A don't know B's chance to pay then back - that's risk. The higher the risk, higher the interest A will ask from B, for any given loan. That's risk premium.
However it could be that B is actually very capable of paying back his loan but A doesn't know it, so B could have access to lower interest rates if there wasn't a asymmetry of information. This is why both A and B engage in a different kind of risk. A and B can reach agreement were B agree to assume all the risks - in other words, if B doesn't pay back A, A is entitled to sue B. Commercial banks (the ones who lend money to people) normally use this kind of contracts and so does governments when they sell bonds.
What this means is that you point 4 and forward is messed up. Banks don't simply "loose" money when people decide to not pay then, they can actually go after you legally, but because it's you, not then, who are breaking the law. What the bank can get from you depends from country to country, on the size of the debt and in a million other details. But overall it means the financial agents cannot be accounted for not being paid back. They are not being irresponsible, they are just using contracts third parties sworn to honor and governments sworn to enforce.
In other words, my argument is very simple: institutions (banks, funds, other governments) do not internalize risk when they buy government bonds because they already accepted a lower interest rate. You can't simply argue they dropped the ball and the economy is paying for it. It was not then who dropped the ball and the economy will pay because the contract say so.
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@bitterroot: you got my point but keep in mind I'm not arguing from a moral stand point. I'm arguing mostly from a legal standard point and partially from a economic stand point as well. Bailout > Moral Hazard aside, you will easily notice that the non-fulfillment of this kind of contract (if agent A couldn't sue agent B) would in and on itself create moral hazard.
This is were economic efficiency comes in my argument: it's easily proved that not allowing this kind of contract is economically inefficient; it's also easily proved that allowing this contract and not enforcing it creates moral hazard. The only normative conclusion of this analysis is that the contract must be allowed and enforced, speaking in purely economic terms.
Conclusion: What creates moral hazard is not bailing out creditors, it's letting debtors getting away with everything. So the troika is right, if the objective is to create a more stable and reliable financial system, Greece must either be forced to pay the debt via austerity or being kicked out of the eurozone, the first being the best alternative (and the one everyone is pursuing).
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Economics is not an inherently normative discipline. If you're reaching normative conclusions then you certainly are "arguing from a moral stand point" on some level. I think there is a lot of confusion from both you and TomCat as to what exactly is being debated. Maybe you should each write out the ultimate conclusion you're trying to prove or disprove.
Also, the statement "it's easily proved that not allowing this kind of contract is economically inefficient" is quite meaningless because the term "inefficient" depends on your reference point. I would agree that "it's easily proved that not allowing this kind of contract is economically inefficient as compared with perfectly pareto-efficient economic conditions." But we don't live in a pareto-efficient world, so your burden is to prove that the option to enter into this kind of contract is efficient under the conditions of the economic world in which we live. One circumstance that could make this kind of voluntary contract inefficient is if it carries with it a large externality. For example, if such a contract shifts part of the cost of risk to a non-consenting third party (e.g. the taxpayers of a country). In a world of bailouts, it is certainly possible that some voluntary lending transactions are economically inefficient because not all of the costs are borne by the transacting parties.
It is normative when you talk about alternative policies as you're not only talking on how things works but how they SHOULD work. I disagree anything normative is "moral" unless you have a very broad definition for the word. For example, finding a tax rate that maximizes the equilibrium path of output per worker is a normative exercise but not a moral one.
The discussion here is gonna become increasing technical and thus off-topic. I will give a brief response, if you want details PM me:
i) Pareto-efficiency is not a "condition". Conditions in economic theory are the exogenous hypothesis such as "Are good x rival or non-rival?" or "Are property rights enforced? Are they enforced for free ?" or "Are markets under perfect competition ?" or "How's information ? (It is perfect or imperfect ? Symmetric or asymmetric ? If it's asymmetric who's the principal ?)".
Pareto-efficiency or the lack of it is a characteristic of a equilibrium. No one starts a economic analysis assuming the economy is "Pareto-efficient", we assume conditions that are relevant to the issue at hand and these conditions might lead or not to pareto-efficiency.
ii) We not living in a Pareto-efficient world has no bearing on the utility of that criteria. You are mixing up Pareto-efficiency and the hypothesis that leads to it. Normally economic efficiency analysis are based on comparing two state of things if one state is Pareto-efficient and the other isn't we know one condition is more efficient from that particular criteria. If both states are Pareto-efficient the criteria can't be used to choose between then. If both states are not efficient then we can still evoke Pareto-efficiency to construct a third ideal state and from this third state we can use some measure to establish a second best from our first two states.
So, yeah, I know we live in a world of uncertainty and market failures and thus not Pareto-efficient. It doesn't change the fact that unreachable contracts desired by two parts might be a clue of inefficiency.
iii) You're correct that if there was some form of negative externality in this contract we should be glad he is not reachable. But It's not the standard practice in academics to disregard people's arguments by saying "hey, there might be negative externality there! Prove it doesn't exist !". The burden is on critiques to elaborate a more convincing model showing conditions not taken in consideration invalidates the previews results. If you're not convinced by my unreachable contract argument you're free to show me why that particular contract in the real world might be bad socially.
iv) Going back to the "model" I presented, you have to remember that's a model of contracts that are being enforced. There's no possibility of moral hazard for A and B because if B do not pay he will be punished by contract and this punishment eliminates the moral hazard. It's the reason why there's no moral hazard in most car insurances because if you crash your car you still have to pay a fee for the insurance company. So moral hazard only exists if the contract cannot be enforced.
v) Why I think my approach (no moral hazard) is better at looking at Greece situation ? First, government bonds are the kind of contract I'm talking about here and that contract was enforceable by the EU. There's no moral hazard for the banks as they assume no risk when buying government bonds. There's no moral hazard for Greece in selling the bonds because it feared being kicked out or just getting some bad sanctions. The second reason is that a fiscal crisis of the state have happened before a trillion of times in history and many times there wasn't the IMF or other institution to bail out. Sometimes there was, but the bail out wasn't anticipated and thus not able to create moral hazard.
vi) These fiscal crisis, imo, are a result of political cycles in the absence of fiscal controls. In the absence of those, parties can use government spending to improve their chances of winning a election. The larger spending on election years is largely documented by literature (http://www.jstor.org/stable/2138764?seq=1#page_scan_tab_contents). This creates a problem were parties seek short term gains for then while creating long-term debt to the government as a whole. The easiest way to resolve this is obviously having stronger fiscal controls (laws that make it impossible for the government to spend unjustifiably), which Greece lacks and refuses to implement.
Note: The above is not moral hazard. Moral hazard is always created by asymmetry of information in certain types of agent-principal models. Parties screwing over government finance has nothing to do with it. Maybe you can classify it as a negative externality but that's pushing it as there's no market here as well.
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I'm calling anything on the "ought" side of the is-ought dichotomy a moral statement. Simply engaging in the exercise of finding a tax rate that maximizes the equilibrium path of output per worker is not moral or normative. It's an "is" statement: the output is this if the tax rate is that. But if you're saying society "should" or "ought to" choose a tax rate that maximizes the equilibrium path of output per worker, that's a moral statement that implies it is somehow "good," "right," or "correct" to maximize output per worker.
Let's set the condition/property semantics aside; I'll use whatever terminology you prefer. My point is this: it is provable that there are certain necessary conditions for Pareto efficiency. (These include perfect competition, perfect information, and an absence of externalities, among other things.) Let's say we start from a set of conditions that define a perfectly Pareto-efficient equilibrium. In that case, making any contract in that economy unreachable is, by definition, economically inefficient. This is because all reachable contracts in a perfectly Pareto-efficient economy are efficient. This is not true in an economy that is not perfectly Pareto-efficient. In a not-perfectly-Pareto-efficient economy, some reachable contracts are inefficient. Therefore it may be efficient to outlaw certain reachable contracts in an economy that is not at a pareto-efficient equilibrium.
I agree that it "might be a clue to inefficiency," and is worth investigating, but that is a far cry from what you said previously: "it's easily proved that not allowing this kind of contract is economically inefficient."
Both TomCat and I have very clearly pointed out the negative externality that you are not taking into account - the existence of governement bailouts. A bailout shifts a portion of the risk cost of the lending contract to a third party, resulting in an inefficiently low price (interest rate). This inefficiently low price causes an inefficiently high demand for the good (lending capital). Thus the quantity/price equilibrium reached by the willing borrower and lender under bailout conditions is different from the pareto-efficient equilibrium that would exist absent the bailout. The deadweight loss of this inefficiency is borne by the country/taxpayers responsible for the bailout.
I agree that in a world of perfect contract enforcement, there is no moral hazard. However, perfect enforcement cannot exist, so your model is flawed. First, a borrower in arrears may simply be unable to pay - there is not enough money in the coffers and insufficient resources to generate the money to repay the debt. This is more likely to happen on a personal level than on a national level, but it is still possible in either case.
Further, a country that is technically able to pay its debts may be simply unwilling to make the sacrifices necessary to do so. A population forced to pay high taxes while foregoing most government services may simply revolt and elect a government that refuses to pay. In that event, recovering the debt would require a war or a similar form of extraordinary coercion. The cost of such a war might be comparable to or larger than the debt itself (not to mention the loss of life). In that event, it's also not feasible to enforce the contract.
And enforcement of a contract always comes with transaction costs that makes the effective recovery some amount less than the full balance owed.
If a lender has the reasonable expectation of a bailout or government subsidy in any of the three scenarios I've just described, then we have a moral hazard problem resulting in an economically inefficient loan.
Right, the anticipation of a bailout has changed the nature of the game. The ex ante expectation that your debt might be bailed out changes the cost/benefit calculus for countries like Greece, resulting in inefficient lending and borrowing decisions.
I agree with this statement completely. But that doesn't mean moral hazard from bailouts isn't also playing a role. If TomCat thinks bailouts are 100% to blame for Greece's bad fiscal position, then I disagree. But if you think bailouts are 0% to blame, then I also disagree with you.
Wiki is counter-culture now? Guess I missed the bus on that one. A full one-third of their bulletin point summary of Capitalism is "Money to beget more money."[1] So, while I agree my explanation was flippant, I would also say it is at least 1/3 correct.They didn't spend it on "consumption," they gave it to their citizens (who still -likely- have it). Just because 'the world' can't get to the value of that money doesn't mean -unless I am very much mistaken- the value ceased existing altogether. They took the value out of one pocket and put it in a different one, and now they're getting Germany to pay the difference.
See these two posts for my thoughts on the matter:
http://www.mtgsalvation.com/forums/outside-magic/debate/616288-greece-votes-to-reject-bailout-with-austerity?comment=26
http://www.mtgsalvation.com/forums/outside-magic/debate/616288-greece-votes-to-reject-bailout-with-austerity?comment=39
That's why I said "broad definition of the word" (moral). Normally when people refer to moral they are referring to theories or arguments or fields that use moral philosophy in some way. According to your definition engineering or business management is a moral field, which is very broad way of seen things. But that's just semantics so we can settle this one here.
Neoclassical perfect market competition conditions leads to Pareto-efficient equilibrium, but Pareto-efficient equilibrium exists even if you break some of those conditions. For example, monopolies with perfect price discrimination are Pareto-efficient. So, I still don't understand why you think the situation at hand is working under a non-Pareto efficiency, which is kind absurd since the contract of type i risk I presented was created PRECISELY to construct a new Pareto-efficient equilibrium.
I understand what you're saying, the fundamental theorems of welfare doesn't hold under certain conditions. But they hold under the conditions at hand.
The clue means you should check out if it's inefficient. I've checked and it is.
The bailouts is not sufficient condition for a moral hazard issue and you guys are under the impression it is. If the banks loose money on the failing of the contract (which is what happens in a government bond default even if bailout occur) there's no moral hazard on the creditor decision making. Maybe the debtor is printing too much bonds hoping to be rescued but this is do not explain Greece fiscal crises because Greece KNEW they were getting screwed later because they couldn't use monetary policy to fix the situation.
When you say "perfect enforcement not existing" is a contractual risk situation. It means people who buy government bonds, despite having the law on their side saying there's no risk, there's the risk of the law failing. This risk is internalized by the bond buyers (reason why countries have risks scores determined by risk agencies). However this risk was not taken in consideration in my first explanation because this risk is of no consequence to this once there's no bailing out of contractual failing. Let me explain:
Let's say Greece refuses to pay it's debt. Then the rules says the troika is in charge of sanctioning Greece's economy. A contractual failing happens if for some reason the troika is unable to do this. Moral hazard on this risk is a very poor explanation of the events for a couple of reasons:
- The troika IS able to enforce the contract, the contractual risk is virtually zero.
- Even if for some cosmic event the troika decided to side with Greece in this matter it would be a unexpected event and thus would not generate moral hazard.
- Greece restructuring it's debt is much more likely outcome of the EU regulations failing then a bailout, meaning banks loose money if the contract fail and thus there's no moral hazard.
About the transaction costs, it's obvious the revenue generated by the lower interests rates have to be higher then the transaction costs in order for this contract be Pareto-efficient if we even consider governments as player. This is a matter so trivial that theoretical examples ignore for sake of clarity. In this applied case the transaction costs of the eurozone is worthy of it's own thread.
As I said, governments bond contracts prevents moral hazard given both parties can count on international courts to apply sanctions (contract exists and is enforced). If bond contracts were like "country x you pay at certain interest rate and if they don't the IMF will bailout and nothing happens with country x" the system would surely not work, but it's not how things work. A bailout to another government never happens without a restructure of the debt which means creditors loose money in those.
The trading of governament bonds among banks and governments is not the root of the problem here, the nature of the bond contract already presents moral hazard. The problem comes from poor fiscal controls.
Dividing the cause of a problems in % always felt confusing to me. Let me put it this way:
Would Greece fiscal crisis exist if UE bailout possibility didn't existed ? Yes.
Would Greece fiscal crisis exist if UE bailout possibility existed but Greece played by the book anyway ? No.
Given that Greece was not willing to play by the book, did those early bailout made things worse ? Yes, they did, but only because politics sucks.
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The only correct answers to these questions is "maybe." The real world of macroeconomics is one of butterflies and hurricanes. It's not possible to draw a clean line of causation between a particular policy and a particular outcome in the real world. In the analysis you're purporting to do above you're ignoring all effects other than first-order effects. The presence or absence of a bailout policy can affect the decisions of multiple economic actors in a variety of ways, and these decisions can have unforeseeable consequences. For example maybe the absence of a bailout policy starts a chain of events that results in different politicians getting elected, or different managers being hired to run the lending institutions, etc.
But we can answer these questions:
Does the presence of a bailout policy, ceteris paribus, tend to depress the price (interest rate) of lending capital? Yes.
Does a lower price for a good result in greater demand for that good? Typically, yes.
Can we therefore assume that the presence of a bailout policy increased the equilibrium quantity of debt demanded by Greece? Yes.
Whether this increase in demand for debt was "responsible" for the crisis is not a question we can answer accurately, unless you have some very high quality economic data that I'm not aware of (and even then I'm skeptical that we could build a sufficiently accurate model of Greece's real-world borrowing behavior).
A lot of people in Greece were willing to play bankruptcy chicken, and indeed many are mad that they didn't do just that, because of the austerity measures attached to the bailouts.
What, exactly, are these austerity measures that so many people were willing to go that far to object to?
Ok, you just took the debate to a completely different direction here. You don't expect me to argue about the epistemology validity of theoretical economic modeling here do you ?
If you want to create a thread so we can debate THAT I'm up for it, but be ready to bring in the big guns. If you can somehow convince people that merely talking about economics (what everybody else is doing here) is more accurate then formal modeling, I will be very impressed.
I will just start that debate and point out that talking about economics IS modeling except you are: 1) hiding your hypothesis; 2) not demonstrating the logical consistency of your arguments; 3) being vague and imprecise in your assertions.
To be honest I didn't cover point 2) either because I didn't posted the formal proofs of the statements I made here because honestly this is not the place for it and it's unnecessary because those proofs are text book material. For this debate, in my mind, point 1) and 3) is already sufficient to make clear and precise arguments.
The answers you're giving are not compatible with the vagueness of your assumptions.
The presence of bailout policy is not a sufficient condition for a lower interest rate. For example, if the player that are bailing others out (let's say, Germany in this case) have methods of punishing the player who are under moral hazard, it can foresee this situation and adopt a punisher strategy (https://en.wikipedia.org/wiki/Strategy_(game_theory)) to eliminate the moral hazard completely. Your statement that Greece was under moral hazard carries the enormous hidden assumption that this kind of strategy was not adopted or not enforced but you refuse to give any arguments for why you think that's the case. Again, you guys are under the illusion that bailouts implies moral hazard. Worse, you're using double standards here as if you think macroeconomics are impossibly complex "butterflies and hurricanes" good luck applying the ENTIRELY mathematical-theoretical concept of moral hazard to anything.
You're completely unaware of how government bonds works. Governments are the only sellers of it's own bonds. Banks and other financial people are on the demand side here. Banks do not decide how much credit governments can buy at each interest rate, governments decides how much "debt" it will sell.
You criticized my approach by criticizing my hypotheses, I criticize you because you haven't established yours. You're still on that dark place were you don't even know the assumptions you're making to say what you're saying.
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The Big ones in the last agreement are:
Raising the age that you retire and claim a pension to 67 and reducing it.
Increasing the VAT rate to 23% and removing exemptions.
50Bn Euro of Assets transfered out of direct Greek control into a fund to "contribute to the recapitalisation of the country’s banks."
Whilst none of them seem that onerous on paper in reality they are going to do a lot less than advertised.
The Greek unemployment rate is about 25% for the country and 50% for the "youth", so increasing the age at which you can retire won't do that much for the 1 in 4 who need some kind of support now.
Likewise increasing VAT, people don't have the money to purchase the goods the tax is going to be applied to or will find someway of getting around it.
I would also be very surprised that even if they managed to find that amount of Greek assest they would get close to that value for them if they were privatised.
A couple of Days ago the IMF pretty much stated that the plan agreed to On Sunday is unworkable as Greece still won't be able to pay back the money it owes and is going to be back in a couple of months needing yet another bailout.
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TomCat has not proven that the Greek crisis was caused by the existence of a bailout policy.
You have not proven that, in the absence of a bailout policy, the Greek crisis would have happened anyway.
I'm skeptical that the tools of contemporary economics can establish which position is correct. The complexity of the relationships involved are too high. It's like looking at a puddle of water and trying to model the shape of the block of ice it melted from. Anyone who claims to be able to answer that question is just wrong.
I am saying that neither formal modeling nor "talking about economics" is sufficient to establish the existence or non-existence of real-world causal relationships between policies and macroeconomic outcomes. Macroeconomics cannot be reliably predicted, period. That's not to say there is no value in microeconomic models, which can give us insights into behavioral trends and incentives. These types of models might allow us to say that a certain policy will tend to have a certain macroeconomic effect, but not that it actually will have this effect.
Let me analogize here. Our understanding of the laws of physics allow us to almost perfectly model the behavior of an individual molecule of a gas, such as oxygen or water vapor. From there, it should just be a trivial matter of applying these laws at a macro level to perfectly predict the weather, right? Wrong. The amount of data that would be needed is unreasonably large, and even if we collected all this data the interactions involved are complex beyond our ability to model them. Of course, we can use our rudimentary tools to predict trends and tendencies ("the cold front this weekend makes is more likely that it will rain") but we cannot draw clean lines of causation between two events ("weather event X this week will definitely cause weather event Y next week"). Causation is too complex at the macro level.
As you know, in a marketplace neither party is really "deciding" how much debt will be bought and sold. It's a two way transaction that depends on the supply and demand curves. I've been framing the analysis as "buying lending capital" but you can also frame it as "selling debt." The conclusions are the same if you do the analysis correctly.
Also, it's somewhat annoying to see capitalism blamed for the profit motive in a socialist system. Seems like a committee investigation on why a tragic airplane crash happened determining that the cause was gravity.
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Nope I haven't and neither claimed I had proved that Greece would be in the same situation if bailout didn't existed. Moral hazard not being important to here is my opinion and I never claimed anything more then that.
However, my opinion is based on known formal modeling which makes it a better opinion then one that doesn't use such artifice. Unless you think this modeling is useless. As I said, if you want argue how useful models are, we can do that, but it's just way too off topic to do it here.
I don't really like analogies because they often say nothing about the issue at hand that can't be said with a direct approach. I feel like those are normally used just so you can say something about a subject and sound like yu know what you're saying without really knowing it and sadly I think this is the case.
Even if you take the hardest problems in theoretical economics (just not economics, sciences in general) they have very little with the problem you just described (which is, the lack of a path dependency between the water peddle and the sahpe of the ice). Macroeconomic variables are majorly statistically proved to be path dependent, so the problem you describe here almost never happens in economics.
1. Funny you say economics can't be predicted "period" when there's a billion dollar market of economic prediction agencies, economic prediction are employed by companies, agencies and governments in every single country and there's a entire field of study on statistical economic prediction with thousand of universities across the world. You can say "it can't be predicted with 100% accuracy" but that's a moot point because nothing stochastic can (that's the nature of stochastic stuff!).
2. Macro data prediction is actually much more accurate then micro data prediction, you're just proving more and more you don't know the field of economics at all. The reason is that in aggregate data the deviations tends to even out, something that is requires in most statistical regression methods. In micro data non-expected deviation not necessarily evens out and is very likely to be correlated with explanatory factors, which makes any statistical analysis much harder and data intensive.
3. It's well known that theoretical modeling in both macro and micro economics is not meant for prediction, it's meant to explain predictions. This is true for a great number of scientific fields.
4. When you have a game were player are country you're talking about micro economics which are used to do precisely "insight into behavioral tends and incentives". All my talk on moral hazard not existing for Greece is PRECISELY that, I'm arguing there's not a moral hazard type of incentive at play here.
This analogy do not hold in any way you think it does.
Using micro behavior in macro level analysis is more akin to use knowledge of a particular fauna and flora to theorize on the properties of a ecosystem, which is a established practice. Your analogy would be a bit more realistic if people were trying to use neurology to make a theory of human behavior and from that theory establish a macroeconomic theory. In other words you just using a appeal to complexity (http://www.seekfind.net/Logical_Fallacy_of_Appeal_to_Complexity.html#.Va5g7vlViko)* to disregard my argument which was actually very simple:
- People said Greece was taking too much credit because bailout policies created moral hazard.
- I said moral hazard in that case is not possible because government bonds are contracts are already moral hazard proof, much like car insurance contracts. My opinion was that the lack of fiscal control is what led Greece into this situation.
* I think you're doing a appeal to complexity here because you're just arguing there's a complexity barrier between game theoretical economics and the behavior of countries while not exposing precisely what this complexity is. You're only argument on that direction so far was analogies using unrelated difficulties in other field of studies that are not even using a similar theoretical structure and statistical approach. Not to mention if it turns out you're right and this complexity barrier actually makes game theoretical economics not useful to analyse this situation then your own initial claim of moral hazard would be invalidated !
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Greece is once again in need of a bailout and the IMF have refused to play ball unless there is some form of debt reduction involved in the deal.
Perhaps this time some one will be sensible and put in place a workable solution that doesn't cripple the country any more.
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Every generation or two there is a major financial crisis without major financial legislation and a lot of government intervention. Traditionally, whenever there was major war or famine, bankers would make a lot of money. However, whenever a government failed to pay they would just kill their banker or seize money out of church vaults and rich people. Take your pick, whether you use the Byzantine and ancient Roman system or whatever else is out there.
Now, in the common view you have finance and economics. Finance is standardized off of Walrasian Equilibrium which is a fancy theory that says money in and money out are always balanced on the books. However, as we know in economics there is a crash.
Now for Greece, the best thing to do is to get out off of the Euro, crash their economy hardcore, and reboot with a new currency and make drastic changes to their government. This reboot takes seven years to achieve with high inflation to reach balance of payments. Otherwise, you're basically going to place all that debt into a super fund, like after WWII, and set it at an extremely low interest rate as well as trade off debt cancellation.
That's it.
What they want is Shock Doctrine with what occurred under Ally occupied Germany.
https://en.wikipedia.org/wiki/Shock_therapy_(economics)
It basically means you take off all price controls and let the market do what it will, but the problem is you need a hardworking culture with a history of good governance. Basically what you had was Germany had a strong tradition and decimated, yet they had the knowledge and expertise to rebuild within seven years. Again Japan the same way, but they did not have shock doctrine and a different system transitioning from the zaibatsu system to the kiraitsu system for corporations.
The EU is an economic union without a political one. They are confederacy of nation states, while the US at two points had a confederacy they both failed economically. The first confederacy was under the Articles of Confederation that while winning the war against England because of its flexibility, the US was not totally economically successful until we federalized under the Constitution. By which each state became subordinate truly to the federal government that had the real power to tax and used that to pay off the remaining debt.
The EU is in an attempt to do what the US did prior to the Constitution.
Now we can argue that the "US is Greece," it's not just a different set of problems. Greeks basically no one pays taxes and they don't export a lot that people want to buy. The US exports a lot of goods that people want to buy that are finished goods. The problem is mostly the American war machine and tax evasion by corporations and the top income earners. Although, I feel people are getting "smarter" about "being screwed" whenever you have a populist and an avowed socialist running.
The problem with the US is corruption and war. The problem with Greece is stupidity. Americans know what is going on, Greeks are in denial.
I'm feeling more and more that the term "chicken hawks" and "war mongering" with the GoP is something that is an annoyance combined with the failure of supply side economics. Conceptually I think supply side was good, but it is just Keynesianism redux that was necessary to get rid of the inflation under Volcker. But deregulation has created a situation where we're now prone to bank crashes, whereas Canada has much stricter banking laws historically and don't have bank runs and their depression are milder with milder economic growth.
The issue with 19th century economics was 3 great years, 3 really bad years, and 3 neutral years. You could basically set your watch. But then the generational banking crisis would hit and you ended up with a seven years of really bad economics like what we just went through. We managed to not have a banking run until the start of deregulation with the S@L Crisis in '89. I feel as a conservative, that deregulation of the banking field failed when the regulations just needed consolidation across state lines.
The real issue is that there is an honest fear that "Greece will go back to normal" if they are forgiven. However, we tried this with the Weimer Republic and it failed miserably and are already seeing Greek Nazi's and so forth. I'm just along the point, it's time to move on from bad debt and eat the losses. I'm not really as morally concerned with banks that help facilitated tax fraud against the US like UBS. Sorry folks, can't always win.
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Not responsible? Don't they vote in Greece? I think there is more enough blame to go around for everyone.