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Comment by jstalin | Hacker News Reader

The article's title tells me that the author doesn't understand what's going on. "Why austerity is destroying Europe." How about the reality of the situation -- overspending and borrowing have destroyed europe.

Iceland seems to have fixed the problem the correct way: default.

Greece just did the equivalent of a credit card balance transfer while converting the loan to a secured transaction. In the name of "saving" the banks of Europe, Greece has been financially raped. Spain is next.

Oh, and Japan and the United States aren't too far behind.

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Iceland seems to have fixed the problem the correct way: default.

This is the part that dumbfounds me, Iceland ignored the common wisdom when they common wisdom said that very bad things would happen to them if they did not listen to the "smart" people. They went ahead and did it, and none of the bad things happened, further things got a lot better. But somehow we allow everyone to convince us to ignore the blatant evidence that Iceland presented that those saying don't default are pretty much lying through their teeth, because they have a conflict of interests.

common wisdom said that very bad things would happen to them if they did not listen to the "smart" people

That's not true. The "smart people" understand Keynesian economics and said that pretty much any policy was better then austerity.

Unfortunately, there seem to be social pressures that seem to encourage the very thing that will make things worse during a recession. How many times have you heard things like "everyone is suffering and the government must share that pain and tighten its belt too"? In fact, the "smart people" are screaming to do the opposite!

IIRC the common wisdom at the time, was to put all of the private risk onto the public which is what was proposed, Iceland said no, you got yourselves into this mess and you are not going to spread that risk to the public. Austerity was the proposed solution, in other countries, only after the governments became saddled with the consequences of private risk taking, conveniently after the private risk takers where clear of the consequences of their speculation.

It might have been the best decision for Iceland, but it's not all roses:

http://www.npr.org/blogs/money/2012/04/13/150586792/should-i...

Sure and I apologize if my comment implies that, I don't think that I did though, I was simply stating that Iceland unlike a host of other countries, made the best worst decision available in times like these as such they should serve as an example of how to manage a financial crisis and more importantly as a reminder that governments need to keep their eye on what should be their #1 concern, their citizenry. When choices have to be made they should be made for the good of the people first, with all other interest being second.

> How about the reality of the situation -- overspending and borrowing have destroyed europe.

How about the reality of the situation: Spain was a paragon of fiscal virtue prior to the crisis:

http://krugman.blogs.nytimes.com/2012/04/15/insane-in-spain/

Spain had low debt and a large budget surplus.

Low public debt, sure, but private debt was high and the housing crash left Spanish banks in a precarious position.

It turns out though that the private debt of large banks is a form of public debt in disguise, at least as far the "solutions" to the debt problem have been implemented by every country with the exception of Iceland (i.e. the public purse has been used to bail out the catastrophically over-indebted banks directly or indirectly).

I think US would rather devalue the dollar by 30% in a very short amount of time than get in trouble over its debt. That would still be a catastrophic outcome, but I'm just saying that's most likely the option they will take.

I agree. I think the reserve-currency status of the US places it in a position where inflating out of debt will be less devastating than in other parts of the world.

You're probably right. But what happens after that?

On one side of the coin, people see that investment in US debt isn't so safe as they thought. Thus, borrowing becomes more expensive for the USA.

On the other side of that coin, America will have mostly escaped the really bad consequences of its behavior. I submit that we will not learn our lesson from it, and won't alter our behavior in any meaningful way.

I see those two things combining in a really vicious cycle.

I think you are right.

Why default when you control the currency that all your foreign debt is denominated in? The us has an option other countries in this position do not.

Printing money to repay the debt will tend to both devalue the debt through inflation and repay it directly, so to reduce the debt by 30% we would need way less than 30% inflation. And looser monetary policy would tend to reduce unemployment and raise tax revenues anyways. Thanks to having our own currency which our debt is denominated in, the US has far, far better options than Spain does.

Didn't Greece's creditors have to take a pretty nasty haircut with that swap - a 79% reduction in value that is being viewed as a default?

That's still 21% too much they got to keep.

Also, only private creditors had to take a haircut. State creditors (IMF, ECB) have so far not had to take a haircut at all, so the net reduction in Greek debt levels is far less than the "haircut" figures would have you believe at first glance.

"Spain was running budget surpluses and had a considerably lower debt to GDP ratio than Germany."

http://www.cepr.net/index.php/blogs/beat-the-press/spain-did...

I earn $100K and have a $400K mortgage, so I have a much worse debt:gdp than the homeless guy collecting cans in the bus station

If the homeless man and you ask for equivalent loans in proportion to your salaries, he is also a far better investment than you.

But in terms of "likely to get your money back" would you lend to Germany or Spain?

After imposed austerity or before?

Japan is one of the major lenders of current secure debt in Europe. Japan would only have to default if the primary borrowers defaulted, which is possible.

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