On April 22, I wrote a diary Is Another Lehman Coming? Disaster Brewing in Athens...
By playing chicken and failing to accept losses, all sides risk a new Lehman style event that will engulf not only tiny Greece but the entire eurozone, threatening to break up the eurozone. Any chaos resulting from a breakup of the eurozone would be similar to Britain's action in September 1931 to break up the Postwar Gold Exchange Standard, and the resulting systemic crisis could engulf the world anew:
The headline today?
Investors' fear that Greece could become a sovereign version of failed investment bank Lehman Brothers boiled over on Thursday and drove the U.S. market sell-off, according to one noted investment strategist. "The dam burst today," said Ed Yardeni, president of Yardeni Research. The mass selling "displays a widespread concern that Greece might be the next Lehman, and markers are getting ahead of it," Yardeni said. The solution, he added, rests with the European Central Bank, which Yardeni said needs to step in decisively and buy Greek bonds. "This all relates to the bond vigilantes saying 'no mas' to Greek debt, or however that translates into Greek," Yardeni said. "Once the bond market shut down for Greece, the response had to be a credible rescue plan and that apparently has not been delivered."
The reason for this is extremely simple. For decades, investors have put their money into government bonds confident on the assumption that if the government guaranteed it, it would be repaid. What this was dependent on was a relatively docile population accepting actualy, physical, mechanical measures that take place in government finances in order for the government to repay the bond market.
What happened in the past two weeks is that this was tested: What started off as a little worry about Greece grew slowly, and at each step it became apparent that the people of the various democracies involved, such as Germany and Greece, were deeply reluctant to make the commitments needed. The Germans felt it was unfair "Why should we pay to bail out the overconsumption of the Greeks?" The Greeks too felt it was unfair "Why should we pay? Why don't the rich pay?" In short, no one wanted to pay. As a result, bond market investors naturally started to think that they wouldn't get paid.
What makes this dramatic is that if this is the case in Greece, formely considered a well adjusted Western democracy, what of Portugal, Spain, Ireland, Italy? What of the UK, Germany, France? What of the United States? Will we really pay our debts, or would we riot if that were tested?
What about Central Banks? If they print too much money, there is inflation. But there is no inflation in the Eurozone right now-- in fact there is deflation. Today, Jean Claude Trichet of the ECB said there would be no printing money to help ward off the crisis. That suggested that he, too, was putting monetary stringency ahead of bondholders.
The problem is us. It's not the "banksters"- they're being rational. If you don't think you're going to be paid back why would you lend? It's not even the governments- they're stuck between the strong opinions of the people they represent and the unspoken mandate to preserve prosperity.
I'm here to say it's in our interest for bondholders to get paid off. When debts don't get paid, lending doesn't take place. And when lending doesn't take place, the entire economic structure of capitalism-- which is based on lending, ceases to function. Without lending, capitalism is no better than communism. It may even be worse than communism, because it is less stable. It builds up expectations only to destroy them. We as a people need to rethink the value of bondholders and the value of paying debts if we want to preserve a capitalistic society.