We've Gotta Keep Bailing Out Banks Because...

...uh, just because

Iceland vs Greece

via Zero Hedge

 Update:  Whenever I argue with people about this, I find out that we share different assumptions.  Those who seem to support the bailouts assume that given some breathing space, the reckoning in Europe can be avoided.  I assumed the reckoning is unavoidable, and will come either soon or at best in the next cyclical downturn.  And it will be far worse in, say, 2015 than it would have been in 2010.  Every time we delay the reckoning, we make it far worse.

And then there are politicians.  I don't think they honestly know or care if the reckoning is unavoidable. They only care if it does not happen this minute.  For politicians, the discount rate on pain is infinite.  Future pain is thus always better than current pain.


  1. sean2829:

    I think it would be fairer to compare Ireland rather than Greece or Spain. The Irish rate is still higher but not as calamitous.


  2. john mcginnis:

    "Those who seem to support the bailouts assume that given some breathing space, the reckoning in Europe can be avoided."

    Seriously!? Have these people looked at the derivative bubble that hangs over the European banks? It would take several years worth of world GDPs to right this. The ECB/ESM just don't have the cash. Which I believe is why the change in methodology with Cyprus. The Euros recognize they have run out of fingers for the dike.

  3. Elam Bend:

    I would make the critique that Iceland has actual resources (like fish) that can be exported for hard currency to pay for imports and also that their small population creates a natural labor shortage.

  4. Mole1:

    "Every time we delay the reckoning, we make it far worse."

    This assumes quite a bit, don't you think? As it is, the bailouts of Greece have allowed quite a few people to die of old age with only 50%-70% cuts in income, rather than possibly 90%-99% cuts in income. Similarly with investors, their haircuts were spread out over time, lessening the short-term impacts. Figuring out how human lives are affected, which is what matters most, is very difficult and I don't think you can say with confidence that a rapid correction would have been better. For example, over the last few decades Greece became a net importer of food. If they had gone through a sudden correction, it is quite plausible that hunger would again have become an issue, since their purchasing power outside their borders would have become essentially nil. They managed to avoid that.

  5. Matthew Slyfield:

    The sovereign debt issue is a much bigger problem for EU banks than derivatives.

  6. marque2:

    99% cuts in income? Doubtful. The issues you cite are perfect examples of why the corrections should be quick. Your examples are perfect examples of scare tatics by folks who want to keep the status quo. Folks learn quickly themselves how to get by and even prosper in tough situations. Would there be starvation - probably not, but folks would downgrade their food (Go from filet mignon, to beans for awhile) they would cut back on their living expenses and when government funds went dry they would quickly learn how to produce for themselves again.

    What you propose keeps the Greeks in a death spiral and yes eventually throwing a few bucks every few months will cause a Cyprus like crisis where the government really does take 99% - the learning will still occur but it will be much more difficult to cope with once all the wealth is gone, rather than reform when merely most of the wealth is gone.

  7. marque2:

    Greek used to farm. There are olives, there are - just check out this article http://www.greeknewsagenda.gr/2012/01/greek-food-exports-on-rise.html

    They also have the advantage of great tourism. Many folks like to vacation among the islands and beaches because of the perfect climate. And there are those for historical purposes who go to Athens as well. Iceland certainly doesn't have that advantage. Who yearns to vacation in Iceland.

    I don't think the "natural resource" difference really washes. Greeks have started producing less and less goods, because others have been willing to donate more and more to their lethargic lifestyle.

  8. Michael:

    I agree we should not bailout businesses.

    But the comparison of Greece and Iceland is fault.

    Greece has 11 million population with 280 billion GDP
    Iceland has 320 thousand population with 14 billion GDP

    This comparison is more like apples and oranges.

  9. bigmaq1980:

    Sorry. I don't get your argument. Not sure the folks in Iceland would agree, either.

    Each have their banks, presumably with deposits in proportion to the size of their economy/population.

    Sounds close to a "too big to fail" argument, which then circles back to a day of reckoning is coming with the debt load and failure to dispense with failed/poor investments (i.e. loans).

  10. bigmaq1980:

    Assuming you are correct for the rest of your argument, your conclusion, which is the point of the article, is false.

    "They managed to avoid that" (debatable as that is) should end with "...for now".

    If the Germans continue funding successive "bailouts" of the Greek government (as they fail to live to their prior spending reduction agreements), it pushes out the day of reckoning.

    At some point either money or patience runs out from the Germans.

    Leaving the Euro will force Greece to make the stark choices much sooner - whether they want to believe it or not.