Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Is there such a thing as “too small to fail”? Greece’s debt — if rescued again by the ECB-led bailout 2.0 — will be larger by far than its entire economic output. But that debt is held by the largest Eurozone banks and by the ECB itself, so if Greece goes down, so do they, and there is no European form of the infamous US TARP program that bailed out our banking giants when they went long and wrong on housing derivatives and credit default swaps.
But there are those in Europe and on American cable TV– like the ideological “reporter” Rick Santelli on CNBC, who are arguing that Greece should be allowed — indeed, forced –to fail and their investors along with it in order to avoid the mother of all moral hazards. Recall that the same folks were actively pressuring Hank Paulson and Ben Bernanke to let Lehman go under as a lesson to others, after the bad taste left by the Fed’s engineered bailout of Bear Stearns (although of course the Bear shareholders lost their fortunes).
Readers of this Blog can look up our comments at the time that letting Lehman fail would prove a lot more expensive to the US taxpayer than a bailout – a view that proved to be overwhelmingly correct. We need to keep in mind the same lesson with respect to Greece, even though “kicking the can down the road” obviously leaves a bad taste. The fact is that the European banking sector is not yet healthy enough to handle a Greek default and it will take a couple more years — at least until 2013 — for them to recover enough from the housing/financial meltdown of 2008. If the European authorities listen to the braying of cable TV commentators and German politicians, in a way similar to the cowering by Paulson and Bernanke to Rick Santelli et al in the US in the case of Lehman, we will have a Lehman 2.0 in the form of Greece, and the European Central Bank may even turn out to be AIG: ironically, forcing the Germans to bail out their own Frankenstein for a change,
Filed under: Uncategorized
