In Greek Debt Crisis, Some See Parallels to U.S. By DAVID LEONHARDT

May 11, 2010
In Greek Debt Crisis, Some See Parallels to U.S. By DAVID LEONHARDT

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country.

Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator. Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government.

Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals.

The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint.

This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out. Mr. Greenstein’s politics make him sympathetic to the worry that all the deficit talk will become an excuse to pull back on stimulus spending while unemployment remains high or to gut social programs. But he also knows the numbers well enough to understand that our Greece moment, whether it takes the form of a crisis or not, is coming.

“Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

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For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state. Greek citizens will soon have a harder time retiring in their 40s.

Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility.

It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit.

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.

Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient.

What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices.

“It’s not a matter of whether we have the resources to solve our problems,” as Alan Krueger, the chief economist at the Treasury Department, says. “It’s a matter of political will.”

For now at least, our elected officials are hardly the only ones who lack that will.

Market Drop Fueled by a Crisis, Anxiety and an Error By FLOYD NORRIS

May 6, 2010
Market Drop Fueled by a Crisis, Anxiety and an Error By FLOYD NORRIS

Combine one part nervous traders, one part Greek crisis and one part trader error. Stir in one part central bank complacency. Bring to boil. Panic.

That combination produced one of the wildest days ever in financial markets, with the Dow Jones industrial average, at one point, down almost 1,000 points while the euro sank to its lowest level in more than a year. There were substantial declines in emerging markets, whose economies had seemed to be booming, and in developed markets fearful of renewed recessions.

Even though a substantial part of the worst plunge appeared to be linked to a trader error — one $40 stock fell for a time to one penny — prices had fallen around the world even before such mistakes began to happen.

It appears that investors are again growing more hesitant to own assets like stocks and bonds, particularly since many now cost far more than they did only a few months ago. Another sharp retrenchment by investors, consumers and businesses could threaten the current global recovery by choking off financing and new orders for companies.

For much of the last 14 months, the prices of risky assets around the world have been rising rapidly. That recovery, from lows reached in March 2009 amid talk of a new Great Depression, both reflected and encouraged a revival in economic activity. Manufacturers in most countries this week reported rapidly growing order books.

The most recent recession was made in the United States, and to a large extent it was unmade here as well. If it was the subprime mortgage market and other credit excesses that sent markets reeling, it was also a willingness of the American government, including the Federal Reserve Board, to plow in money when fears were at their highest that helped to bring those markets and economic activity back.

For the last several months, worries have been alternately rising and receding that the next crisis would be made in Europe, where Greece has faced the possibility of default. Europe and the International Monetary Fund have announced plans for a bailout, but there have also been riots in Greece amid anger over the steep budget cuts being forced on the country.

On Thursday, Jean-Claude Trichet, the president of the European Central Bank, said at a news conference that the bank’s governing council had not even discussed the possibility of buying government bonds. That was taken as a disappointment by some traders, who had hoped the central bank would follow the Fed’s lead in spreading liquidity around if conditions grew worse.

Instead, fears are growing that Europe, which is worried that the crisis in Greece could be followed ones in Portugal and Spain, will follow the pattern laid down by the United States government in 2007, when officials offered frequent reassurances that the subprime mortgage problem was “contained” but delayed taking the bold action that finally did stop the panic.

The height of panic on Thursday was reached shortly after lunchtime in the United States. First some currencies began to fall rapidly, with the euro suffering especially against the Japanese yen.

That could have been an indication that some large traders were unwinding positions. It has been popular to borrow yen at low interest rates and then use the money to speculate in higher yielding assets denominated in other currencies. Anyone unwinding such a trade would buy yen to repay the loan.

Then, within a few minutes, the United States stock market appeared to be collapsing. Some of the decline was real, but another part of it was simply trading gone awry.

Temporary plunges in the price of Procter & Gamble and 3M, the former Minnesota Mining, cost the Dow about 300 points, and appeared to be the result of errors, not intentional sell orders. Similarly, Accenture, a large consulting firm, fell from more than $40 a share to one penny.

By the close of the day, the Dow was down 347.80 points, or 3.2 percent, to 10,520.32.

There were also substantial declines in most major European and Asian indexes. In Greece, however, the stock market put on a small rebound after falling to a 13-month low on Wednesday.

Europe faces many obstacles in trying to deal with the growing crisis there. The European Central Bank, which handles monetary policy for the 16 countries in the euro zone, has fewer powers than the Fed does, and there is no Europe-wide government with powers to act quickly. Even now, after months of talking, the Greek bailout has not been approved by all whose approval is needed. The German parliament is expected to approve it on Friday.

Moreover, the American crisis developed before budget deficits spiraled upward. Coming up with cash now would be harder, a fact Mr. Trichet pointed to when he called on European governments to cut their budget deficits.

Spending large amounts of cash to bail out European governments is unlikely to be popular with voters in countries that are not in trouble, but a failure to do so could threaten many financial institutions around the continent.

A traditional way to reduce debt is to devalue currencies, which leaves the outstanding debt worth less. Countries in the euro zone cannot do that, which is one reason Greece is in such difficulty.

But some investors seem to expect that eventually worldwide inflation will form a significant part of the solution, enabling governments and other debtors to pay back loans with currencies worth less than when the loans were made. In the last three days, while the Standard & Poor’s 500-stock index has lost 6 percent of its value, the price of 30-year inflation-indexed Treasury security has risen by almost 4 percent.

There is no way to know whether this week’s jitters will be put aside as more good economic news is released, or whether Europe’s woes will create a repeat of the growing panic that engulfed American markets not that long ago.

In the second case, this could be another one of those times when markets move from one extreme to the other. In the fall of 2008, the collapse of Lehman Brothers sent investors fleeing. The following spring, hopes that the bailouts and stimulus plans were working helped to begin a strong bull market in nearly every asset category.

If this is another turning point, some of the winners will be those who, by luck or vision, managed to sell securities while the selling was easy. On Tuesday, Beazer Homes, a builder that was almost given up for dead in 2009 — when its shares traded for less than 25 cents — managed to raise $350 million selling new shares and new bonds. The money will go to refinance debt that otherwise could have forced the company into bankruptcy.

By the close on Thursday, investors who bought shares at that offering, paying $5.81, had lost almost 10 percent of their money as the stock closed at $5.25.

All this is taking place as the Senate debates financial reform amid considerable public hostility to banks. That no doubt will lead some on Wall Street to say that the markets are warning against making regulation too harsh, but the wild gyrations also serve as a reminder that the efficient markets hypothesis is not a very good model of what actually happens.

Markets turn out to be very bad at assessing values under some circumstances. They were far too optimistic is 2006, and ridiculously pessimistic in early 2009.

That is not a reason to get rid of markets, if only because any alternative, like letting judges and government officials set values, would likely be worse. But it does serve as a counterpoint to the infatuation with markets that led to the creation of a virtually unregulated shadow financial system. Those who believe in regulation will point to that, and say that if this wild ride continues, it will provide further evidence that markets need adult supervision.