The Zero-Sum game

When I was a child I was taught that when I made a mistake, the best course of action was for me to admit my mistake and to try to learn from it. Later on, I was taught to be a good student of history, so that I would not repeat the mistakes others might have made before me. Things have changed since my childhood days. They say, we have progressed, but have we really? In the so-called gentler world we live in, it seems that it is always the other guy who makes a mistake. People tell me that we have evolved since my boyhood days. Have we, really?  Is evolving unidirectional? I do not think so. Evolving is bi-directional, we can get better, surely, but we can also get worse.

Two cases in point …

The case of the housing fiasco

During the mid 1990’s our government officials and politicians encouraged us to get a mortgage, never mind that we could not afford one. Lending institutions were pressured to make risky loans, the so-called sub-prime loans.

I remember hearing a politician say on TV that even poor people should be able to buy homes. So, the government pressured lending institutions to make loans to the so-called underserved community, who could not come up with the customary down payment. I remember reading that some loans exceeded the purchase price. Why? With the extra cash people could afford to furnish their new house.

Before the binge buying, to get a loan you needed to be a permanent resident of the United States (green card holder or U.S. citizenship). But, government officials pressured lending institutions to make exceptions for undocumented immigrants residing the country for several years. The economy overheated, prices skyrocketed; the frenzy was on. Not wanting to be left behind, many people joined the buying spree.

With cheap interest rates, many homeowners were encouraged to apply and get home equity loans so that they could pay off their credit cards and avoid exorbitant interest rates. By doing so, they whittled down the equity in their homes, accumulated over several years.

When the bubble burst, the economy went into recession, and many folks lost their jobs, or had their hours cut. Housing prices nosedived in several communities. Those who had little or no equity in their homes just walked away from their loans. Those who had a negative equity scrambled to unload their now over-priced home.

So whose fault was that? Some politicians pointed the finger at the lending companies for creating an artificial market so that they could reap huge profits. Indeed, many financial institutions did just that. Some unscrupulous mortgage salespersons qualified people on flimsy or plainly false information so that they could earn huge commissions. Many accused Wall Street for the greedy, crooked, heartless manipulation of capital.

In hindsight, it was everybody’s fault, not just “them”. Yes, unscrupulous lenders, unrealistic buyers, wedge politicians, and government institutions.  But you cannot be elected for saying that. It is better to point the finger at “them”.

The Greek Case

Progressives and far-left politicians and political economists accuse Greece’s creditors for being heartless and dictatorial. They should have not lent Greece all that money and at those high interest rates. They made huge profits funding the Greek debt. The interest Greece pays, 90% goes to the banks, and only 10% reaches the people. The creditors’ Nazi grandfathers had invaded and occupied Greece 71 years ago.

Never mind that Greece could not spend what they could not earn faster than the creditors could lend. Never mind that the country is broke and cannot pay what it owes. Never mind the endemic habit of most Greeks of not paying their taxes. Never mind a labor market riddled with featherbedding practices and archaic rules. Never mind that people could retire at age 42-45 at full pay (no other country can afford to do so indefinitely). Never mind the widespread corruption.

In hindsight, far-left and far-right might agree that it was not somebody else’s fault; it was “their collective selves”. Greece, after all, has been governed in the last 40 years by the right and the left.

Learning from history …

As I said in the beginning, if we do not learn from history, we are bound to repeat the same mistakes over and over.

·      Countries that cannot live within their means will eventually have to pay the piper.

·      100% or higher, as is the case with California, public pensions will eventually bankrupt the state. Greed knows no boundary.

·      Capitalism without a heart will fulfill Lenin’s prophesy that: capitalists will sell you the bullets with which to kill them. Compassion is not a dirty word; it is a virtue.

·      Playing the blame game is a zero-sum game. For certain issues, the best solution is not necessarily the one that the left or right espouses, but the one that fits the best interest of everyone involved.

More Lessons from the Greek Bailout

The last tango in Europe …

Late last night, The European leaders unanimously agreed on a package of 82-86 billion euros over three years in exchange for some tough conditions: privatization of certain sectors, elimination of the “baby” pensions, increase in sales taxes, modernization of the justice system, and so on. In exchange, some debt relief was agreed to, not in the nominal part of the debt, but in its interest rate and timeline.

The package is conditional on the approval by the Greek Parliament by this Wednesday. It took a marathon session to conclude the agreement. Greece was facing a shortfall in its cash and the possible exit from the Euro Zone by the end of the month for failure to make payments due to its creditors.

Greek Prime Minister Tsipras has now the onerous task to convince Parliament members to adopt the strong medicine dictated by the accord. It will be a hard sell. Members of Tsipras own party (Syriza) have already voiced opposition. Other MPs have uttered harsh words: humiliation, surrender, etc. So the Greek tragedy has not yet ended.

European leaders, led by German Chancellor Angela Merkel, stood tough after losing faith in Tsipras and his bombastic Finance Minister Varoufakis, who had antagonized his counterparts with his radical approach and vitriol. They were miffed in particular when Tsipras walked out from negotiations on June 29^th and hastily called a consultative referendum on the bailout terms and conditions. 

Sixty-one percent of the Greek voters voted Oxi (no) at the urging of Tsipras and his government, hoping that such vote would empower Tsipras to get a better deal. In his gamble, Tsipras and his government lost the trust of most European leaders, in particular Germany's and the North and Central European nations'. 

Varoufakis’ resignation did little to change a ruptured relationship. Trust is easy to lose, and very hard to regain, we have learned over the years.

The prophecy of many …

As many predicted, including little old me, the whole affair would turn out to be a classic Pyrrhic victory. Rather than getting better terms, the new bailout turns out to be much harsher, not just in financial terms, but also in lost sovereignty. Rather than concluding the bailout in 48 hours as predicted by Varoufakis, the deal took much longer to reach. A famous saying by professional poker players is: Know when to hold them, know when to fold them. European leaders called the Greek bluff and they won.

More lessons learned …

·      While politicians continue to play the fiddle, the population pays the price. Many older folks on fixed income will feel the pinch. Many unemployed people, especially the young, will continue to live a precarious existence. Many businesses will be hampered by the increased cost of doing business.

·      Radical, far left rhetoric might sound great, but often it has no clothes. If it sounds to be too good, it usually is not. There are economic laws that cannot be repealed with slogans.

·      Arrogance is a vice, not a virtue. Beggars, we say, cannot be choosers, as the Greeks might have learned. Humility is not a sign of weakness, but a sign of maturity and good sense.

·      Negotiations are most difficult when the parties involved do not trust one another, impugn each other’s intentions, and are driven by the win-lose.

·      I am sure that you, the reader, can add to the list.

Closing

I spent a great week in Athens and the island of Hydra last month. It was a great week. I love the Greeks and their love of life. I love Greece's beauty and great history. I did, however, see a suffering nation, burdened by economic excesses and past populist policies. 

The radical, leftist Syriza duped the electorate last January by vowing to negotiate an end to the five-year austerity program. In the process it killed a small, but steady progress, and, in my view, made things much worse. 

Syriza’s victory was celebrated by other leftist parties in Europe, and raised hope in Italy and Spain, in particular, that you can vote austerity out without consequences.  I call this Fool’s Gold! Many buy it!

Your view ? …..

The Lessons from the Greek Debacle

I have been following the events about the Greek referendum for the past week with keen interest. Now, the results are in. Over 61% of voters voted Oxi (no), the remaining 39% voted Nai (yes). About 65% of those eligible voted in the referendum. So, less than 40% of the eligible Greek voters actually voted No. 

But what exactly did people vote for or against?

It all depends how you define what either Yes or No meant to them. The referendum’s words, I am told, were somewhat ambiguous.

Let’s examine three reasons folks would vote No:

1.    The terms and conditions of the bailout proposed by the creditors were too onerous, unjust, or humiliating. Greece has been under an austerity regime for the past 6 years. The unemployment rates are off the chart: 27% overall, and almost 60% for those under 35%. Pensions have been cut, public employees furloughed, and the social fabric damaged.

2.    Rejecting the bailout offer sends a message to the creditors that Greeks are fed up with the prospects of more austerity.

3.    By rejecting the bailout offer, the government can use the democratic vote to get a better deal, e.g., debt forgiveness, no interest payment for at least 20 years, and other concessions.

Now, lets examine three reasons folks would vote Yes:

1.    Accepting the terms and conditions of the bailout offer would permit Greece to stay in the Euro zone, and thus avoid a huge devaluation and an inflationary spiral.

2.    Accepting the terms and conditions of the bailout offer would ensure that Greece remains an integral part of the European Union.

3.    Voting Yes would protect current deposits and purchasing power.

Exit polls suggest that the younger voters, those under 45, voted overwhelmingly No, while those over 45 voted overwhelmingly Yes.

It is safe to assume that the elders have more deposits to protect. It is also safe to assume that younger voters are fed up with high unemployment and the precarious prospects for their future.

In total, there are two completely different agendas in play.

A little history might help …

The economic crisis hit Greece particularly hard six years ago. Their national debt is the highest in all of Europe: 160% of GNP.

Greece received billions from Brussels, after it joined the EU in economic aid, in order to bring its infrastructure to EU standards. Much of this aid was misused. Public employees were able to retire at age 50-52 at full pay. Public spending exceeded tax revenues. Greeks are notoriously tax dodgers, critics say. Welfare spending, in particular, became excessive. As an example, in a small island of 800 souls, 700 receive disability payment for being blind, when less than 100 are so impaired. By joining the Euro, Greece’s ability to print Drachmas was gone.  

The current accumulated interest is high and the nation does not produce enough surplus to cover interest payments.

Last January a left-wing government came to power with the promise that it would negotiate more favorable terms or it would entertain Greece withdrawing all together from the Euro zone, if creditors did not bend to the Greek will.

A bombastic finance minister took little or no time to antagonize creditors by calling them terrorists, lecturing them on macroeconomics (some more experienced and better educated than him, some point out), and otherwise behaving like a bully.

The new government called hastily a referendum, in the name of democracy.  If people voted Yes, ministers promised to resign; if people voted No, ministers would be emboldened and more able to get a better deal in 48 hours. 

The creditor nations are mostly from the richer EU nations, e.g., Germany, Holland, Luxemburg, etc. Led by Germany, they have been forcing Greece to adopt a strong medicine. Germans, in particular, resent the generous benefits Greeks enjoy with their money, they say. They and their Eastern European counterparts loathe the undisciplined government practices and what they perceive as irresponsible behavior. Voters from other Southern European nations (Italy, Spain, Cyprus, and Portugal) support a rescue of the Greek economy.

To put the Greek economy in perspective, it has been pointed that its size is more or less the same as the economy of Miami and its suburbs. A pittance by U.S. standards, but the Greek debt is big enough to affect negatively the financial markets throughout the world.

My Take Aways …

·      Countries that spend more than what they receive in tax revenues ultimately experience a financial disaster.

·      The test of whether a social program should be funded depends on whether such a program can be afforded in good as well bad times.

·      Graft, loopholes, and corruption are the thermites that eat away all well-intended government programs.

·      The financial Golden Rule? Those who have the gold rule. Was the referendum a Pyrrhic victory for Tsipras and his government?

·      Is the referendum another Trojan horse? Some folks remind everyone to “… beware of Greeks bearing gifts.”

What is your view?

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