Eurocrisis

It's been said many times that democracies are unable to deal with economic crises, but I don't mind saying it again. Voters always respond to promises of free lunch, despite having been told, over and over again, that there is none.

Keynesian economics really ought to work — and would, were it not for democracy. Stimulus really is necessary to pull an economy out of a recession, but the other side of Keynesianism never happens: when economies are booming, responsible governments should raise taxes and cut spending, building reserves to use during the inevitable downturns. Democracy makes that impossible. When there's extra money flowing in, pandering politicians delight in giving it away.

By comparison with most of Europe — especially the south — the USofA doesn't look all that bad. Greece, of course, is a total basket case. Word is out that bondholders will have to take a 50% haircut, although I'm inclined to think 50% won't be enough, and we should brace for the crash and burn. The Germans have approved about $600 billion in bailout funds, but most economists think that's not nearly enough. It's more than enough for the German voters, however, who don't want their tax money going to bail out those feckless, swarthy southerners.

One of the biggest problems central banks around the world have to deal with, as usual, is lack of transparency. Nobody is clear on how much exposure banks around the world are carrying — not only for Greek debt, but for sovereign debt from other shaky countries as well. Banks have been allowed too much power to hide their holdings, worldwide.

For Europe, moreover, getting a fiscal solution to the financial crisis is even harder than it is in the United States. If the Eurozone is going to survive, it needs fiscal as well as monetary union — and the usual democratic political restraints make that look next to impossible. The ECB, if it gets up the nerve, may just have to inflate Europe out of its dilemma. Bankers and bondholders, of course, will hate that — but the only way I can see for all that sovereign debt to be paid off is with a much cheaper Euro.

The Germans, of course, will hate it the most — but so will individuals whose savings, in Euros, are greater that their debts. It would, of course, also hurt all those trying to boost their economies by exporting to Europe. All in all, it's a mess.