the art of falling apart

I say incurable. This is the diagnosis of an irreversible disease. The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable. It’s not just that restoring trust takes a long time. It’s that under the new technological order in this field, it can not be done. The technologies are designed to sow and foster distrust and that is the consequence of using them. The recent experience proves this, it seems to me. And therefore there can be no return to the way things were before. In other words, we are at the end of the illusion of a market place in the financial sphere.

Let me take this analysis and bring it to bear momentarily on Europe. We speak in a common place way these days of the Greek crisis, the Irish crisis, the Portuguese crisis and so forth, as though these were distinct financial events. This fosters the impression that each can be resolved by appropriate agreement between the creditors, headquartered in Frankfurt, Brussels, Berlin, Paris, and the debtors taken one by one. Good behavior, taking the form of a suitable austerity will be rewarded by a return to normal credit conditions and market access. That, at least, is the official presumption. The financial market, in this imagery, is severe but fair, she cracks the whip on the profligate but praises and rewards the prim.

But that Greece has a weak tax system and a big civil service was hardly news. It’s a fact that’s been true for decades, overlooked in the good times and surfaced when convenient. That Ireland had a housing boom that was intrinsically unsustainable was surely hardly news. The initial shock to Europe didn’t come from the discovery of these facts, it came from American mortgage markets. When European banks and other investors realized the extent of their losses, beginning in late 2008, they looked for ways to protect themselves and they did this as any sensible investor would, by selling the weak assets and buying strong ones: German, French bonds and above all United States treasuries. That is why yields rose on all the small peripheral countries and fell on the big ones despite the very different circumstances in the countries that were badly affected.

It’s obvious that Greece cannot implement the programs demanded of it without crashing its GDP, and driving up its debt to GDP ratio on that account. But even if it could, any event, affecting any European country, or for that matter, some place else in the world, could sink Greece again irrespective of what Greece does. So, there is no national policy solution and no financial market solution. That is the meaning of the negotiations now underway in Luxembourg and elsewhere. There will be a restructuring or a default, and there must be an economic and not merely a financial rescue. And beyond that there obviously must be not only a new European architecture, but a new financial architecture that is not built around the banks as they exist today and the credit markets as they came to exist in the period before the crisis. Either that or the depression in Europe will simply go on and on. Until eventually the European Union falls apart.

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