Friday, June 14, 2013

The IMF Admits That The Response To Greece's Problems Led To A Global Crisis

The fiscal problems in Greece quickly became a problem for the eurozone.  It was important to put the fire out before it spread to the rest of the eurozone.  This was called the contagion problem.  There were two ways of dealing with the problems in Greece.  One was for the other member states to pay down the Greek debt.  That was not feasible.  The other solution was to let Greece default on its debt.  That would create solvency problems for the banks in the rest of the eurozone that held the Greek debt.  It was also part of contagion problem.  A Greek default might increase the risk premium on the sovereign debt of other nations in the eurozone.  Structural reforms and austerity was imposed after the other two solutions were rejected.  The IMF now admits that austerity was the wrong solution for Greece and it became the wrong solution for the rest of the eurozone.  It also spread to the US where conservative politicians warned that the US would become the next Greece unless austerity was imposed upon a fiscally irresponsible government. "Austerity for all" became a global siren call that expanded the Greek tragedy to the rest of the world.  The US was less affected by the austerity siren call than the weaker countries in the eurozone.  It had its own central bank, which acted as the lender of last resort, and its own currency is the reserve currency for the rest of the world.  The rest of the world has not been as lucky.  Many of the nations in the eurozone have been crushed by the imposition of a poisonous medicine.  The UK has also been hard hit by austerity but its central bank has done what it can to support an economy that has been poisoned by the wrong medicine.  The austerity siren in the UK and in the US has been motivated primarily for political purposes.  It will not go away.  It is an attack on systems of income redistribution that are no longer supported by part of the social elite. 

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