As the Occupy movement clashes with municipal governments across North America and protests continue against austerity in Europe, governments, the broader public and the media continue to debate as to what these protesters really want. The Occupiers and European protestors decry the “inequality” and “injustice” of the current western economic model that has bred “excesses” thatfavoured the top one percent of taxpayers. However, most of the other 99% have not embraced the movement-why not? Perhaps an investigation of these terms will help us figure out why.
First to the US protest movement, upset that Wall Street received its bailout while mainstreet USA got nothing. Not true – the meltdown of US financial assets that was unleashed in the fall of 2008 was largely due to the inability of the US’ most recent homeowners to pay for the mortgages that they signed for with no money down, no principal payments in many cases and amortizations that stretched to the middle of the century. The US home ownership rate rose from 65% in 1995up to 69.2% within ten years, and that increase was mostly in the hands of those who could least afford to pay for their slice of the American Dream. Many regular, middle-class Americans were caught in the real estate frenzy that ensued and took out more debt than they could handle since the banks had been encouraged to promote home ownership. The Clinton administration told Fannie Mae and Freddie Mac to stop redlining and promote home ownership as tacit government policy. Once these two giant lenders opened the door to clients who were previously considered unworthy of mortgage financing, home ownershiptook off and prices rose dramatically between the mid-1990s and the peak of 2005.
So where is the inequality? The US government facilitated the contracting of mortgage debt for those who could least afford it. US tax policy provides for the deductibility of mortgage interest that acts as a giant subsidy to the middle class (largely) and allows homeowners to refinance credit card debt by dumping it on their houses, since rising values created more mortgage room. The problem started when the financial industry packaged and resold these mortgages and mixed poorly rated loans in with good ones, and rated the entire package as a quality investment. However, pause to consider who bought the mortgages. They were purchased by other “evil, greedy” financial institutions desperately in search of high yield investments in a low interest rate environment. So, let’s summarize the sequence of events – the government promoted giving mortgages to those who could not pay, rising real-estate values goosed consumer spending as homeowners dumped more debt on their houses, the evil lending institutions got rich and then used greedy financial intermediaries to sell the debt to even greedier investment institutions. From a left wing perspective, what’s wrong with that?
But wait, it gets better. When the markets froze up and there was no lending going on, the government started bailing out the banks so that as many homeowners as possible could keep the homes they were in AND consumers could still get loans to sustain their spending, and keep savings intact. Again, if you hate the banks and love government intervention, this is policy Valhalla. There is little injustice in this equation – lots of bankers and investment professionals within the top 1% lost their jobs in the Great Recession as the banking industry retrenched, just like the other 99% suffered increasing unemployment. The bankers were following the path laid out for them by their government, and those who invested in the bad debt lost billions of dollars as it was revalued. Small investors who had their savings protected by the US FDIC kept their money, while Wall Street will take decades to recover. The government bailouts were designed to save everybody, not just the rich. Just don’t tell that to the Occupiers.
The protestors among the EU’s weaker members are similarly delusional. The only reason Greece could afford to sustain a bloated civil service, rampant tax evasion, generous retirement and pension regimes and unsustainable social programs was because they were contracting their debt in Euros. The Euro was backed by its powerful northern member states like Germany and France, and their unwavering support of pan-European financial and political institutions created security in the minds of those buyers of Greek (and Italian, and Spanish)debt that the North would always support the South. This belief was so strong that it was the banks from Northern Europe who were the major purchasers of Southern European debt, far beyond what was prudent when compared to their capital base.
In the end, the debt racked up by the PIIGS (Portugal, Italy, Ireland, Greece and Spain) became unsustainable as their growth rates faltered, productivity stagnated and their own real-estate bubbles burst just as they had in the United States. So when the Greeks protest outside the parliament, what are they asking for? Garnishing the assets of all the wealthy people in Greece would not solve the problem. The government cannot sustain, nor restore spending that it cannot borrow for in the open markets. If they were protesting the incompetence of the Papandreou government, then that would be one thing – but they really see their international lenders as the ultimate bad guys. If they had been lending Greeceun-repayable sums of money up until now, how dare they stop? Sustaining irresponsible lending would be seen the only decent thing to do. It was such a nice arrangement until someone started asking uncomfortable questions about how it was ever going to be paid back.
I understand the frustrations of Europe’s protestors. The Austrian school of classic, conservative economics has a very limited playbook when it comes to debt crises like this one; cut spending, write off debt and raise revenues until the problem is corrected and positive economic growth can be revived through investor confidence. The problem is compounded by the remedy; further cuts under the austerity program actually increases the economic contraction and conditions get worse before they get better. The Austrian school also never foresaw a world where sovereign economies are so closely connected and that a crisis in a tiny country like Greece could be amplified to affect all of Europe, and thus the US and eventually China. What demands would Schumpeter set to bail out Greece, whom he would certainly consider profligate and undeserving?
Schumpeter would probably be equally disgusted with the French and German investors who bought up the Greek paper because they wanted the high yield on Euro-denominated debt. If Greece had issued its debt in Drachmas, the lack of pan-European guarantees for the solidity of the currency would have brought their borrowing to a halt years earlier. The protesters have to realize that as they rail against the European Central Bank, the IMF and the World Bank, these institutions worked to keep the party going much longer than it should have. Just like the Occupiers, the European protesters are manifesting against the forces who were their greatest enablers.
Some debtor nations are now getting the message. The Spanish have just elected the People’s Party, the conservative opposition led by Mariano Rajoy to replace the Socialist Party and Prime Minster Zapatero. Rajoy has promised tough love via more austerity, reforms and deficit reduction to calm Spain’s international lenders. Unlike the Greeks, the Spanish realize that there is no easy way out. What the Spanish want is resolution to the crisis, as painful as the process may be. The Occupiers and the Greek protesters, in contrast, are unfocused and unrealistic. The Occupiers will disappear as winter forces them from their encampments; the Greeks face a longer winter of discontent as their economic remedy will be much colder and last much longer than ever imagined.