I'm not exactly sure why, maybe because it's super-depressing, but nobody seems to be talking about the fact that the Dow dropped 980 points in 30 minutes today.
Folks, it is becoming clear that the international financial system is broken. I mean really, great depression broken. The massive salaries and misallocation of capital should have been the first clue. Why are MIT PhDs getting jobs on wall street?
But I digress, the root of this problem is Greece and its relationship to the Euro. But it's not just Greece. It's Spain. It's Italy.
They are going to have to devalue their currency at some point in the future. That will require a currency that is not the Euro.
That's why I'm thanking Christ that Barack Obama is president right now. There is a sane adult in the White House and he is thinking about this problem. And it's a big problem that will probably require a fundamental restructuring of our financial system.
You see, the problem isn't just Greece and its debt.
It's also Spain (or all of PIIGS). There are the same systemic imbalances there, just on a much more massive scale.
Like Greece, Spain had a huge housing bubble. Also like Greece, Spanish labor is something like 30% more expensive than German labor.
Unlike Greece, Spain ran solid and responsible budgets during the boom, but they are still fucked. Spanish unemployment is at like 20%.
Normally, the tool that policymakers would use to escape this nightmare is devaluation, which reduces the relative cost of labor and makes exports more competitive.
Unfortunately for Greece and Spain their monetary policy is controlled by... Germany. The ECB has a specific governing mandate to fight inflation.
So they have to leave the Euro, and devalue with a new currency. The only alternative is a decade of high unemployment and grinding deflation. I don't think the political systems of these countries are equipped to handle that. I don't think the German political system is capable of coming up with the money that would be needed to make that do-able.
And if a country leaves the Euro (or just announces its intention to leave the Euro) it causes bank runs:
http://krugman.blogs.nytimes.com/...
And speaking of bank runs, German and French banks own a whole shitload of Greek debt. Worthless Greek debt that will never be repaid.
This isn't just a financial crisis. At its core it is a political and institutional crisis. European political systems (individually, and collectively as the EU) are not capable of the kind of concerted action that would be needed to 'fix' this system. You can't have a unitary monetary policy without a unitary fiscal policy. For Europe, that is politically impossible.
History is putting Barack Obama in the unique position of being able to reshape America's financial sector.
Hopefully he will do something about all the hedge fund pirates that are stealing from us all.