Something I don't understand about economics

[Kreeshak]

Ok I agree with the notion of the evil corrupted Greece with the huge civil sector and tax evasion.
It seems for plenty of years we've been living out of loaned money.

What I don't understand is why the markets would loan us money, when they knew we couldn't repay them.
Why not (the markets) let Greece either bankrupt 20 years earlier or take austerity measures 20 years earlier by denying loans.

Are the markets without responsibility if they turn out to lose their money by a potential default?

I just don't understand how economics work.

[Twotonsteak]

I wish I had a logical, sensible, answer. But I don't. I look at the US, with a spiraling debt and a President who has said he isn't interested in balancing the budget, and I wonder many of the same things you are.

And the only answer I can come up with, that makes any form of sense, is that the people running the show really don't care. They don't care because by the time the poo hits the fan they've taken their money and left.

[Valerean]

The markets loaned you money when we were living in a gigantic artificial credit bubble. Credit was plentiful and incredibly cheap, and for some insane reason, Governments chose to ignore the laws of economic gravity and continued to spend / buy up crap debt until the entire thing exploded.

Greece has been bailed out recently because otherwise the country would most likely default and crash out of the Eurozone. European leaders regard the Euro-project as something that is too important to fail, and so have imposed a decade of miserable austerity on the Greek people in return for bailout funding.

And yes, as with every bailout, it is the taxpayer getting annihilated on behalf of a group of bankers.

[belfpala]

All investments are risks. Just look around at, oh, I don't know, what happened in the US in 2008.

[Kreeshak]

Do "the markets" have a name? Are they private investors like for example Bill Gates? Are they rich governments like say Germany?

[Deleted]

The people who make the decision to lend the money know that they personally won't lose money.

[Deleted]

It was the implicit thought, that ECB would not let any EU states go bancrupt. And while Maastricht treaty conversion clauses were not strictly enforced, some movement in that direction was seen in most Euro member countries. On top of that Greece is a special case as it cooked it books way more drastically than anybody else outside Africa or South America.

Also french and to a lesser degree german banks had most to lose if Greece was to go bancrupt. Those two are not without influence in the Euro zone.

[Valerean]

Do "the markets" have a name? Are they private investors like for example Bill Gates? Are they rich governments like say Germany?

Lots of different commercial banks, hedge funds and wealth funds. The majority of the big ones were French and German (so Societe General, Credit Agricole, Deutschebank etc...)

[Deleted]

Ok I agree with the notion of the evil corrupted Greece with the huge civil sector and tax evasion.
It seems for plenty of years we've been living out of loaned money.

What I don't understand is why the markets would loan us money, when they knew we couldn't repay them.
Why not (the markets) let Greece either bankrupt 20 years earlier or take austerity measures 20 years earlier by denying loans.

Are the markets without responsibility if they turn out to lose their money by a potential default?

I just don't understand how economics work.

Well I dont know how common, known or actually factual this is but one politician (nordic country) once said something along the lines of: if you keep certain amount of debt, as country, you will get future loans with better "interest rate" due that so thats why "paying all the debt wouldn't be the main-goal for now"

[Deleted]

Ok I agree with the notion of the evil corrupted Greece with the huge civil sector and tax evasion.
It seems for plenty of years we've been living out of loaned money.

I wouldn't say evil, just mis-developed.

And it wasn't just loaned money, also EU grants when Greece was the poorest EU country (Until the Eastern European countries joined.)

What I don't understand is why the markets would loan us money, when they knew we couldn't repay them.

a) They believed other EU countries would pay the bills, and b) they were completely out of touch with Greece's problems.
Consider a bondtrader sitting behind his desk in New York, he has never done business in Greece, never even visited the country. But he sees Greek bonds for sale with a decent investmentrating and nice interest rate, and decides to buy them.

Are the markets without responsibility if they turn out to lose their money by a potential default?

Actually, most of the Greek government's debt is now owed to Greek banks and European taxpayers. If Greek banks lose their money through a default, every Greek with a savingsaccount loses his possessions. European taxpayers only stepped in to save both Greece and the financial system. They bear no responsibility for irresponsible loans during the boom-years.

---------- Post added 2013-03-19 at 04:28 PM ----------

Well I dont know how common, known or actually factual this is but one politician (nordic country) once said something along the lines of: if you keep certain amount of debt, as country, you will get future loans with better "interest rate" due that so thats why "paying all the debt wouldn't be the main-goal for now"

It's true for some countries, because people/businesses with a lot of money prefer to keep it as government bonds instead of on a savingsaccount, since governments are safer than banks. For example the US.

But I doubt it applied to Greece.

(And of course the Greek government also falsified its financial data.)

[Kreeshak]

They bear no responsibility for irresponsible loans during the boom-years.

how is that so? How come the bondtrader sitting behind his desk in New York won't lose money? :S

[Yunru]

Best explained in this flash video:

http://www.newgrounds.com/portal/view/599348

This is how the greece banks worked.

[Kujako]

What I don't understand is why the markets would loan us money, when they knew we couldn't repay them.

Because we can repay them. Despite all the doom and gloom we're at about 7% of GDP as debt (that is the ratio of money our economy generates compared to what we pay back each year). Right now, interest rates are so low that we would be crazy not to borrow more money. Look at it this way, if we could borrow money and invest it in our economy in programs that generated more money then they cost why wouldn't we (education and infrastructure come to mind)?

But somewhere along the line "fiscal conservative" switched from making money to just never spending it.

[ringpriest]

I'm no finance expert, I'm just a average citizen who has listened and read too much news on this subject over the last several years. Here goes my best shot at answering your questions.

Ok I agree with the notion of the evil corrupted Greece with the huge civil sector and tax evasion.
It seems for plenty of years we've been living out of loaned money.

What I don't understand is why the markets would loan us money, when they knew we couldn't repay them.

10 or 20 years is a long time down the road for someone whose bonus depends on what numbers look like next quarter. There was also likely a great deal of willful ignorance, bankers believing their own propaganda, etc. Maybe even some honest mistakes and misunderstandings.

Why not (the markets) let Greece either bankrupt 20 years earlier or take austerity measures 20 years earlier by denying loans.

Because there was no point in time where taking such action would have been good for the career of the person making the decision. It's the "kick the can down the road" mentality that both corporations and elected governments suffer from.

Are the markets without responsibility if they turn out to lose their money by a potential default?

Not exactly - it gets complicated rapidly. So far, there actually haven't been any defaults - part of the reason things like Greek austerity, various bailouts, and the (possible) Cyprus deposits seizure keep happening is to avoid having any of these loans actually go into default. Most banks that made loans, and the assorted other financial institutions involved in the loans have some sort of financial "insurance", that will pay them off if their loans default. The problem is that no one ever actually expected to need such "insurance", and certainly not at the level that would result from an actual national-level default. So there's a lot of fear that if a major country actually defaults, and then the "insurance" on those loans will be unable to pay out, and the entire international finance system will be revealed as a house of cards that will soon come tumbling down. I suspect there was also always a great deal of confidence by the bankers and traders that no matter what happened, some government could be convinced to bail the big banks out. (That's certainly how it has worked here in the U.S. for the most part.)

I just don't understand how economics work.

You're in good company. Many winners of the "Nobel Prize in Economics" don't understand how economics works either, nor do many U.S. Treasury Secretaries and Chairmen of the Federal Reserve. (Fun fact - the Economics Nobel award is not actually a Nobel Award; it's just been set up "in his memory" by the Swedish central bank, unlike the Prizes in Physics, Medicine, etc.)

[zerocarbs]

Right now, interest rates are so low that we would be crazy not to borrow more money. Look at it this way, if we could borrow money and invest it in our economy in programs that generated more money then they cost why wouldn't we (education and infrastructure come to mind)?

Our governments have defaulted before and they will default again. Precisely because of bubbles created by infrastructure boondoggles.

And how exactly does one 'generate money?' Is that like when you enter more zeros into a computer? Or do you just raise taxes?

[Kujako]

And how exactly does one 'generate money?' Is that like when you enter more zeros into a computer? Or do you just raise taxes?

You really want me to explain how the GDP works and how infrastructure increases it?

[Daelak]

Ok I agree with the notion of the evil corrupted Greece with the huge civil sector and tax evasion.
It seems for plenty of years we've been living out of loaned money.

What I don't understand is why the markets would loan us money, when they knew we couldn't repay them.
Why not (the markets) let Greece either bankrupt 20 years earlier or take austerity measures 20 years earlier by denying loans.

Are the markets without responsibility if they turn out to lose their money by a potential default?

I just don't understand how economics work.

The markets, and in this case, the bond markets, and specifically Greece's case, the Euro and it's heavy hitters, didn't know they would have to prop up with this many countries to ensure their interests were secure. Greece has a horrible tax evasion *crisis* as well as right-wing groups usurping power in their government, furthering the disruptive cycle of austerity.

The world bank and IMF can help, and probably should, because social unrest in Europe is always a harbinger of some shitty things to come.

---------- Post added 2013-03-19 at 04:40 PM ----------

You're in good company. Many winners of the "Nobel Prize in Economics" don't understand how economics works either, nor do many U.S. Treasury Secretaries and Chairmen of the Federal Reserve. (Fun fact - the Economics Nobel award is not actually a Nobel Award; it's just been set up "in his memory" by the Swedish central bank, unlike the Prizes in Physics, Medicine, etc.)

This is awesome. A random person on the internet dis-crediting some of the most brilliant minds.

[zerocarbs]

You really want me to explain how the GDP works and how infrastructure increases it?

No, I want to know how money is generated.

[Bolson13]

Countries usually loan money through bonds. Bonds (sort of I owe you) are relative safe but do not generate a lot of profit on your investment normally. There are investors that want to make a lot of money fast so they (usually) deal in in stocks, they call it daytrading as well. There are also rich people that just want something safe + make sure that they get more return then the inflation rate so their money at least keep the same value. Maybe a little profit. People like these usually choose bonds or at the start of the crisis you saw them all go for gold. That was the reason why gold went so high. Anyways, a bond is the standard loan that a country can "take out" or basically sell to the market.

Now, why would anybody buy Greek bonds even though they are bad?

Problem 1
There are the Rating agencies. Because for the average investor it is hard to get a good overview of the finances of a country. So these rating agencies do an audit (they check the books) and give a rating. That rating is roughly what sets the value (what the intrest is) like a sort of risk assesment.

These credit ratings have gotten a lot of flack since the crisis because they made some bad assesments, for instance the mortgage packages that banks in the US sold. They were "sub prime" mortgages (lets call them high risk) but they got up to AAA ratings (the highest). Which is obviously non sense. They used to be able to wave away liability (blame) because they said "our ratings are just advice" but I believe the law in at least the US is now changed. Not 100% sure though, they might still be in the process.

Anyways, Greece got pretty good ratings

Problem 2
They were heavily invested into currency swaps derivatives which I cannot explain very clearly to you (very difficult to understand) but it is a financial product which is very difficult to understand and the Greek government got (as is said) suckered into it by the big American bank called Goldman Sachs. They were sold in part as what they call a "hedge". A hedge is a sort of insurance on a bad investment.
These made the risk lower which also made the rating higher and the deficit lower.
This is mostly the reason why people say that Greece "cheated" their way into the Euro, by cheating their books. This statement needs some refining though because Goldman Sachs, the Rating agency, the Greek government were all guilty and the EU also pushed very hard to get Greece to join.

Problem 3
They were part of the Euro, backed by the ECB (Main euro bank) which makes them part of something then considered "too big to fall".

Investors took these 3 as a sign of safe investment and thus Greece was able to loan at a relative cheap rate. And currently Greek bonds are still being traded but Greece has to pay more intrest on them because obviously the risk is higher.

Hope it is a little more clear now.

[Kujako]

No, I want to know how money is generated.

Money is "generated" by printing it, the value of said money is determined on an international scale through a floating currency exchange system, which is based mostly on what the money can buy. The purchasing power of money is based at least in part on the gross domestic product of the country of origin. The GDP can be grown through several methods, currently with the degraded state of the US infrastructure many economists agree that improvements would increase gross production as well as reduce manufacturing and distribution costs resulting in an increase in GDP.