Pandemonium erupted in
Congress yesterday as senators disagreed on how to deal with the subprime
problem. Borrowers are still finding it difficult to repay, despite the
government buying these mortgages from the banks seven years ago and imposing
strict conditions on the borrowers. Some senators favour continuing the program
of compulsory community service and self-improvement lessons, but now others in
the senate are openly talking about revoking the US citizenship of these
borrowers.
The Great Recession and the Eurozone crisis are normally
treated as different. Most accounts of the Great Recession see this as a
consequence of a financial crisis caused by profligate lending by - in
particular - US and UK banks. The crisis may have originated with US subprime
mortgages, but few people blame the poor US citizens who took out those
mortgages for causing a global financial crisis.
With the Eurozone crisis that started in 2010, most people tend
to focus on the borrowers rather than the lenders. Some ill-informed accounts
say it was all the result of profligate periphery governments, but most
explanations are more nuanced: in Greece government profligacy for sure, but in
Ireland and other countries it was more about excessive private sector
borrowing encouraged by low interest rates following adoption of the Euro.
Seeing things this way, it is a more complicated story, but still one that
focuses on the borrowers.
However if we see the Eurozone crisis from the point of view of
the lenders, then it once again becomes a pretty simple story. French, German
and other banks simply lent much too much, failing to adequately assess the
viability of those they were lending to. Whether the lending was eventually to
finance private sector projects that would end in default (via periphery
country banks), or a particular government that would end up defaulting,
becomes a detail. In this sense the Eurozone crisis was just like the global
financial crisis: banks lent far too much in an indiscriminate and
irresponsible way.
If borrowers get into difficulty in a way that threatens the
solvency of lending banks, there are at least two ways a government or monetary
union can react. One is to allow the borrowers to default, and to provide
financial support to the banks. Another is to buy the problematic loans from
the banks (at a price that keeps the banks solvent), so that the borrowers now
borrow from the government. Perhaps the government thinks it is able to make
the loans viable by forcing conditions on the borrowers that were not available
to the bank.
The global financial crisis was largely dealt with the first
way, while at the Eurozone level that crisis was dealt with the second way.
Recall that between 2010 and 2012 the Troika lent money to Greece so it could
pay off its private sector creditors (including many European banks). In 2012
there was partial private sector
default, again financed by loans from the Troika to the Greek government. In
this way the Troika in effect bought the problematic asset (Greek government
debt) from private sector creditors that included its own banks in such a way
as to protect the viability of these banks. The Troika then tried to make these
assets viable in various ways, including austerity. Two crises with the same
cause but very different outcomes.
