Michael Lewis on the Crisis of Greece

September 7, 2010 4:56 PM

"If there were any justice in the world the Greek bankers would be in the streets marching to protest the morals of the ordinary Greek citizen." Michael Lewis investigates Greece's economy. "In Greece the banks didn’t sink the country. The country sank the banks." In this terrific Vanity Fair piece, Michael Lewis visits Greece and examines a country where the general sense of civil society and trust has broken down, allowing mismanagement of the country's finances and economy on an unbelievably massive scale.

Tax evasion and fraudulent book-keeping is pervasive and generally accepted amongst both the governing elites and the ordinary population. Years ago, Greece joined the Euro while hiding a deficit roughly five times the amount they were allowed under Euro rules. Today, public sector workers are rioting against new austerity measures and a Greek default (or "restructuring") on emergency EU loans seems likely. Meanwhile, the Greek public debate is distracted by the scapegoat-ish real estate scandal of The Holy Monastery of Vatopaidi.

Also: Michael Lewis's online Q&A on this article ("What we are looking at is a morally indignant Germany, which is kind of a new thing. In my lifetime, I can’t remember a time when the Germans were allowed to be self-righteous. And now they are justifiably self-righteous, because everybody screwed them. It is creating a climate where German politicians tell the Greeks they need to sell the Acropolis.")

Previously: Michael Lewis on Iceland's financial meltdown

posted by Bwithh (69 comments total)

The NYT had a great piece on Greek Tax Evasion a few months ago.

"Various studies, including one by the Federation of Greek Industries last year, have estimated that the government may be losing as much as $30 billion a year to tax evasion — a figure that would have gone a long way to solving its debt problems"

Astounding.
posted by helmutdog at 5:05 PM on September 7, 2010 [3 favorites]

Yeah, the tax evasion in Greece is blatant and expected. I mean really, really, really blatant. As in people paid with bags of money to avoid taxes.
posted by Justinian at 5:10 PM on September 7, 2010

Sorry, but I found the piece to be pretty glib and full of generalities, with very little insight or nuance.

Besides which, the writer shows up at the monastery wearing a mauve shirt and lies to a priest.
posted by KokuRyu at 5:12 PM on September 7, 2010 [2 favorites]

A question- if Greece knowingly used fraudulent data to make itself eligible for EU membership, can it be kicked out of the EU?
posted by foxy_hedgehog at 5:15 PM on September 7, 2010

Re: the "glibness", that's just Michael Lewis's signature style, which he's used for all his pieces (mainly financial journalism) since his first book in 1989, Liar's Poker (on his experiences as a Wall St bonds salesman in the 1980s). YMMV on whether's its entertaining or not. As to the generalizations issue, I can't speak to that personally, but this article was first strongly recommended to me by a friend who is a Greek national with an international business background.
posted by Bwithh at 5:38 PM on September 7, 2010 [2 favorites]

I covered the Greek shipping industry in the 1990s when Greek owned companies, ultimately, carried 70% of all world bulk commodities. Think about that: 70% of all the oil, all the grain, all the coal.

A hint: that money did not go into the general tax base.
posted by digitalprimate at 5:57 PM on September 7, 2010 [1 favorite]

Bankers protesting about morals? I. Um. Er. Nup. Nothing.
posted by Gamien Boffenburg at 6:02 PM on September 7, 2010 [2 favorites]

There are many places in the world where you can get away with not speaking Greek.

Hm... yes?
posted by qvantamon at 6:03 PM on September 7, 2010

Does anyone else feel like Goldman Sachs is becoming like one of those shady organizations from cheap sci-fi? Like, those TV series that are supposed to be story arcs, but have episodes that are basically about random shit, except sometime towards the end "The Corporation" gets namedropped and it's next season's screenwriter's problem how to tie all that random shit together.
posted by qvantamon at 6:14 PM on September 7, 2010 [14 favorites]

As David Harvey points out, the crises of capitalism are somehow always the fault of nebulous generalities like 'defects in the Greek character'; this makes me intensely wary of articles like this from Lewis which play into such distracting myth-making (just as his article on Iceland linked as 'Previously' found a supposed "peculiarly Icelandic logic behind the meltdown"). While he pays lip-service to the wider context in one of his early paragraphs, the general tenor of his article does come off as an attempt to site causation in this or that feature of Greek society, government or people and that's plainly entirely backwards.
The fact (which Lewis does acknowledge in passing) that the same process was/is unfolding in several other countries makes clear the wider roots of the crisis. That in Greece it has manifested with local particularities and exposed weaknesses in the Greek state (as a speaker in this discusion puts it) is only natural and should be no surprise. This of course raises a whole series of political questions for Greece; but even if all citizens were like Lewis's 'good Greek' Minister Papaconstantinou and more 'Anglo'*, the country would still be facing a crisis, just with different specifics. That makes this sort of exercise, an outsider turning up to wag the finger at the no doubt many faults and failings of Greek society just as earlier he's done with Iceland, ultimately just a bit of unedifying opportunistic schadenfreude that deliberately or otherwise draws attention away from more fundamental questions.

*"attended N.Y.U. and the London School of Economics in the 1980s, then spent 10 years working in Paris for the O.E.C.D. (Organisation for Economic Co-operation and Development). He’s open, friendly, fresh-faced, and clean-shaven, and like many people at the top of the new Greek government, he comes across less as Greek than as Anglo—indeed, almost American."
posted by Abiezer at 7:10 PM on September 7, 2010 [22 favorites]

The Tea Partiers are aiming the US toward a Greek-style fiscal meltdown, and for the same reason: they don't want to pay for the services they expect.
posted by Jimmy Havok at 7:15 PM on September 7, 2010 [4 favorites]

His description of Athens—"It's Los Angeles with a past"—is sublimely accurate.
posted by Civil_Disobedient at 7:17 PM on September 7, 2010 [2 favorites]

Sounds like a country with not enough hard-working, law-abiding suckers, willing to be the net losers in a financial arrangement. In America, they're called Christians. And Democrats.
posted by fleacircus at 7:21 PM on September 7, 2010 [4 favorites]

*disclaimer: not a Greek, but the daughter of one, with a million Greek relatives who make the average tea partier's cynicism about the U.S. government look like the faith of a true believer.

I thought the article was pretty good actually, particularly the focus on how cynical the Greek public is. (I can't say that I really blame them, btw. If I knew that there was a good chance that nearly every public servant and business person was on the take or expected a "tip" for just doing their job, I likely would be a lot less willing to pay taxes, just from a practical standpoint: I'd need that tax money for paying bribes.)

Though he mentioned it briefly, Lewis should have spent more time discussing how much Greeks hate feeling like suckers:

I am told 50 times if I am told once that what Greeks care about is “justice” and what really boils the Greek blood is the feeling of unfairness.

I've talked to many Greeks who don't see why they should follow the rules when nobody else is. They don't really have a philosophical problem with paying taxes for state services, but they do have a problem with paying when so many people aren't. It just doesn't seem fair to them.

I wish there was some way of making Greeks less cynical, but I'm not sure it's possible without outside intervention at this point (perhaps something like the concept of an EU task force that will go after corruption, as mentioned in this article).

Also, I think we would be foolish to look at Greece and think that it couldn't happen here.
posted by longdaysjourney at 7:53 PM on September 7, 2010 [18 favorites]

One thing that Lewis didn't talk about was the modern (post-WWII) political history of Greece and how that may have shaped some of the cynicism apparently pervasive in Greek society today. This is something I know next to nothing about and I am reluctant to speculate, but I wonder if the feeling of unfairness about US/CIA (and to a lesser extent British) covert intervention in Greek politics plays into a general attitude of cynicism about global capitalism, international institutions and intervention from the outside (e.g. the EU and the Germans today) that's counterproductive in this current crisis? That's not to say that the Greeks don't have reasonable historical grievances to complain about, but this may also make it harder to negotiate economic reforms with the outside world?

The still-strong radical left political tradition (based on the little I've read) is apparently still strong (govt. police forces are still, I think, not legally allowed onto university campuses (havens of student radicalism) for instance) in Greece too, partly related to Anti-American feeling because of the history of CIA meddling - and that's a factor in the political culture that Lewis doesn't mention either.
posted by Bwithh at 8:36 PM on September 7, 2010 [2 favorites]

Wow, that article is awful. He talks about things like "overpaid" government employees if that's an odd thing around the world. It's as if this fellow has never been outside of the US, Canada, and western Europe.
posted by wierdo at 8:41 PM on September 7, 2010 [1 favorite]

Gamien Boffenburg: "Bankers protesting about morals? I. Um. Er. Nup. Nothing."

Bankers can have morals. They can even write philosophy books on the subject, like Adam Smith, serial failed banker, did in The Theory of Moral Sentiments:

The Theory of Moral Sentiments was written by Adam Smith in 1759. It provided the ethical, philosophical, psychological, and methodological underpinnings to Smith's later works, including The Wealth of Nations (1776), ...

Smith was a professor of moral philosophy at Glasgow and contemporary of Hume. And generally regarded as the founder of free market economics. I once heard someone say he founded a bank or two but I can find no evidence of that.
posted by pwnguin at 10:33 PM on September 7, 2010

Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.” What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish.

What does this last bit even mean???
posted by KokuRyu at 10:36 PM on September 7, 2010 [2 favorites]

KokuRyu: I'm under the impression that Ireland was trying to set itself up as a FIRE economy, by encouraging real estate development and the banking sector, as opposed to having an export based economy built around agriculture and manufacturing. This is a gross and probably ill informed generalization on my part, but I think that's what he's referring too.

It's a useful article to me, in spite of the frills, because it shows how corruption, once it becomes normalized becomes self sustaining and ultimately infectious at every level. The management of a 1000 year old monastery was not immune to the temptation to game the system, and the people who are (the tax collectors, the finance minister), get marginalized and live in fear of their jobs.
posted by Grimgrin at 11:22 PM on September 7, 2010

I think the writing is actually pretty great. This made me smile:

Unless you know what to expect on Mount Athos—it has been regarded by the Eastern Orthodox Church for more than a millennium as the holiest place on earth, and it enjoyed for much of that time a symbiotic relationship with Byzantine emperors—these places come as a shock. There’s nothing modest about them; they are grand and complicated and ornate and obviously in some sort of competition with one another. In the old days, pirates routinely plundered them, and you can see why: it would be almost shameful not to, for a pirate.

posted by mr_roboto at 11:50 PM on September 7, 2010 [3 favorites]

A question- if Greece knowingly used fraudulent data to make itself eligible for EU membership, can it be kicked out of the EU?

If I recall correctly, the EU was pretty keen to look the other way and bend rules to ensure Greece and other countries were able to join the Euro (I think it's Euro membership, rather than EU membership, that's the issue here - see the section headed 'Grecian Formulas').

I can't speak directly to the rules on this, but there has certainly been speculation that Greece will be asked or forced to leave the euro. Being deliberately vague, I can say that people have been looking at the legalities and practicalities of how this might happen. Maybe this is just contingency planning for a low-probability but high-impact event. Maybe it's seen as a more serious possibility. I don't know.

There hasn't been a lot of talk about this recently, but that's presumably because the government and financial sector shuts down for summer here. Things will start picking up from this week or next week, so we may have a clearer idea in a few months.
posted by Infinite Jest at 1:16 AM on September 8, 2010

infinite jest Yup, it's euro membership, not EU (Greece joined the then-EEC well before the euro was introduced). But it's simplistic to say that the "EU" looked away. One should remember that the EU still is an association of sovereign states, wherein the national governments are all loath to let outsiders poke into their inner workings, let alone run their accounts. If a government submits its accounts and swears they're true, there's little that the EU's executive (the European Commission), or the European Central Bank can do about it. It works on the honour system, with the specific problem that it's politicians' honour we're talking about.
Secondly, I don't think for a minute that Greece will be thrown or asked out of the euro. For starters, nobody can stop it from keeping the euro as legal tender (like several non-EU states, mainly in the neighbouring countries). And quite frankly, Greece needs a change in currency like it needs a hole in the head, especially with all its euro-denominated debt. Since it has openly slashed salaries, the main attraction of an independent currency (regaining competitivity via stealth salary cuts through devaluation) has lost much of its interest.
Finally, though it may be tempting to feel smug about Greece's lack of civics, what's happened there is just a preview of what's happening everywhere else: middle-class taxpayers demoralised by seeing the rich and powerful avoid taxation with the blatant connivence of governments and lawmakers? That isn't such a specifically Greek problem, is it?
posted by Skeptic at 3:08 AM on September 8, 2010 [3 favorites]

TWEEET

(eriko walks over, shows author Yellow Card.)

That was the good news. The long-term picture was far bleaker. In addition to its roughly $400 billion (and growing) of outstanding government debt, the Greek number crunchers had just figured out that their government owed another $800 billion or more in pensions.

Ahh, my favorite financial lie -- equating current debt to future liabilities. What if we to rewrite that to: "In addition to its roughly $400 billion in government debt, there was a pension liability of $20 billion a year."

Hmmm? So? If you can beat the $400B problem, the $20B a year problem is easy.

See, pensions act as loans that cannot be prepaid or ballooned. You may have $800B in future pension liabilities, but there will not be a time when someone walks up and demands $800B, right now, to pay all the pensions liabilities you ever have. Indeed, even if you wanted to, it would be very difficult to prepay that total -- too many ways for inflation or bad investments to destroy that capital before you need it*, which just means you'd have to pay it again. **

Having some of it stashed away -- see the Social Security Trust Fund -- means that you don't have to jack up taxes to cover the bad times. Call it a financial capacitor. But trying to have all of your future pension liabilities stashed away and then ignore them -- a financial battery -- is a good way to get to retirement and find yourself with a dead battery.

There will be a constant, vastly lower payment, required, and if you are smart, you've paid some of it already, but the only reason someone will cite pension liabilities in the same sentence as current liabilities -- which do need to be paid right away -- is to lie to you about the true situation, usually to justify destroying those pension benefits.

* Which is why 401Ks are fucking you over. The assumption is that they'll never lose money or fail to gain over inflation. Hint: Over history, that bet has never paid off. Get and out at the right time, sure, but over the whole course of time -- everyone's currency either inflates to nothingness or is destroyed when the sponsoring country dies.

** The reason Social Security works is that current dollars pay current costs. Indeed, the huge trust fund is arguably a mistake -- we need some, but not the huge pile of old money that we have, just waiting for inflation to destroy. Those telling you that Social Security is doomed to fail are, once again, lying to you -- every year, we push back the year that the trust fund will run out, and even if it does, it doesn't mean that payments stop -- they'd drop some, but they'd continue.

Unless, of course, we up the payroll tax a percent and double the cap, in which case, it wouldn't happen. Period. Anyone telling you different is lying to you, because they want to steal your money and your future. The correct answer to them, in all honesty, is a quick punch to the face.
posted by eriko at 5:16 AM on September 8, 2010 [11 favorites]

Having some of it stashed away -- see the Social Security Trust Fund

The SSTF is completely fictitious. Proof is really, really easy, too, and it surprises me how many people refuse to believe it even when you walk them through it.

The system as it is now:

1. SS gets inflows from all the tax receipts.
2. Congress takes those tax receipts and replaces them with IOUs.
3. When SS needs to pay out, they give some of the IOUs to Congress, Congress gives them some money, and they send the money to pensioners.

If the SSTF didn't exist:

1. SS gets inflows from all the tax receipts.
2. Congress takes those tax receipts.
3. When SS needs to pay out, they tell Congress. Congress gives them some money, and they send the money to pensioners.

The SSTF is a fig leaf. It's pretend saving. It doesn't change anything substantial about where the money comes from or goes to. They're SUPPOSED to be saving and investing the money, but instead they're forced to give it to Congress, and then Congress will (supposedly) fund them when they need cash. And that would happen with or without those bonds.
posted by Malor at 6:16 AM on September 8, 2010

the crises of capitalism are somehow always the fault of nebulous generalities like 'defects in the Greek character'; this makes me intensely wary of articles like this from Lewis which play into such distracting myth-making

It is equally distracting myth-making to blame Greece's problems on anything remotely relating to capitalism. Read the article. Pay attention to all the massively bloated government pensions, the national (i.e. state-owned) railroad which pays 4 times more in salaries that it earns in revenue, and the governments refusal to enforce tax laws in an election year. The article also makes clear that the only people who do pay their taxes are the salaried employees of corporations, who don't have a choice.

The article also makes clear that Greece's bankers are among the few in Europe who never bought into US sub-prime loans. Their biggest failed investment was a loan they made to the national government.

So tell me again about the crises of capitalism.
posted by Pastabagel at 6:46 AM on September 8, 2010

Malor wrote: "The SSTF is a fig leaf. It's pretend saving. It doesn't change anything substantial about where the money comes from or goes to."

I take it you don't own any Treasuries? Because anything you say about the "trust fund" is equally applicable to them. Sovereign default is always a possibility, but I don't think it's particularly likely in this case. If we default on the bonds the "trust fund" owns, we might as well default on 'em all for all the difference it will make to people's willingness to own them.

eriko wrote: "Unless, of course, we up the payroll tax a percent and double the cap, in which case, it wouldn't happen."

Remove the cap and we not only have an instant surplus for both Social Security and Medicare out to the forecast horizon, but an increase in benefits for future retirees. The constant whinging is just post-Reagan Republicans doing what they do, decrying any and all government outlays that don't line the pockets of their supporters and defense contractors.
posted by wierdo at 6:53 AM on September 8, 2010

That was the good news. The long-term picture was far bleaker. In addition to its roughly $400 billion (and growing) of outstanding government debt, the Greek number crunchers had just figured out that their government owed another $800 billion or more in pensions.

The point of this passage is not that Greece has to pay the $800b now, it's to make the point that there is a continuing and growing obligation in the future that can't be solved by raising taxes because NO ONE PAYS THEIR TAXES.


* Which is why 401Ks are fucking you over. The assumption is that they'll never lose money or fail to gain over inflation. Hint: Over history, that bet has never paid off. Get and out at the right time, sure, but over the whole course of time -- everyone's currency either inflates to nothingness or is destroyed when the sponsoring country dies.

This is an impossible lie. 401k simply defines the tax-exempt status and legal structure of the investment. The actual fund in it could be an investment ins US stocks, bonds, corporate bonds, foreign securities, etc. How can you categorically say that this bet has never paid off, when there are literally a myriad of different bets, AND that the mix of investments in a 401k account (should) change over time. Before you run to a Yahoo! Finance chart to make your point, remember that stocks pay dividends, and the income from those dividends (or the additional securities from reinvested dividends is not reflected in the chart).
posted by Pastabagel at 6:54 AM on September 8, 2010

The SSTF is a fig leaf. It's pretend saving. It doesn't change anything substantial about where the money comes from or goes to. They're SUPPOSED to be saving and investing the money, but instead they're forced to give it to Congress, and then Congress will (supposedly) fund them when they need cash. And that would happen with or without those bonds.

What would saving and investing the money look like in your model? I mean, let's say the trust got it's receipts what should they do with them instead of buying treasuries?
posted by justkevin at 6:59 AM on September 8, 2010

I am Greek and I run a business both here and in the US. I've posted about this before. Greece is an insider/outsider economy where vastly different rules apply to the two sides. The outsider economy (where I work, thank you) is functioning under non-workable conditions.

As an example (real-life): we can expect to pay 15-18% on top of a US employee's salary for a good health plan (full coverage, no HMOs). The equivalent is ~35% for Greek employees. I.e. out of a $1000 'salary', the employer contributes $280 on top to Social Security, and the employee (by mandate) $160 (so, take home $840, cost to employer $1280). What do our Greek employees get for that 35% of their cost to us (this is before income taxes, VAT, or anything else mind you)? a lousy central health system that barely functions (and where you need to bribe doctors to get not great but decent health care), pensions way below your last salary, and thanks to this crisis, complete uncertainty for your future.

On the inside (i.e. the state sector) you have higher salaries, lower contributions to social security (why not?), actually better pensions and a job for life. That is for jobs where you may have nothing to do all day (literally).

The current government has responded to this by slashing government spending, increasing the VAT (punching the outsiders in the gut) and only slightly cutting insider salaries (by ~15%, which still hasn't bring them down to private sector levels). There have been no firings of state employees (for those few that can be fired), no privatizations.

If you think capitalism ruined Greece, you don't understand what capitalism is.
posted by costas at 7:17 AM on September 8, 2010 [3 favorites]

How the heck do you get away with 18% of salary for health coverage, payroll tax, UI, workman's comp, etc?

My SO was once employed by one of the largest professional firms in the world, so a pretty big risk pool. Her health coverage cost the company around 30% of her salary. (well over $10k/yr)
posted by wierdo at 7:27 AM on September 8, 2010

wierdo: I do mean only health coverage, to compare like-for-like. There's no worker's comp or payroll tax in the Greek example either.
posted by costas at 7:28 AM on September 8, 2010

This is an impossible lie. 401k simply defines the tax-exempt status and legal structure of the investment. The actual fund in it could be an investment ins US stocks, bonds, corporate bonds, foreign securities, etc. How can you categorically say that this bet has never paid off, when there are literally a myriad of different bets, AND that the mix of investments in a 401k account (should) change over time. Before you run to a Yahoo! Finance chart to make your point, remember that stocks pay dividends, and the income from those dividends (or the additional securities from reinvested dividends is not reflected in the chart).

The point is the switch between defined benefit pensions i.e. SS and personal investment funds structured by 401k or whichever. The point of a pension is to support people when they are no longer capable of working. This is particularly important for industries like construction where you really can't work until you are 65 or 67 or whatever number they come up with to balance the books. On a certain level, if your 401k is doing better than average, it's because someone elses is doing poorly. But are you really comfortable saying: "sorry Grandpa, you were a good carpenter, but you suck at finance, guess you'll just have to eat catfood or move in with me, hey wait..."

It's possible to make money on the market but, unless you have the resources to hedge and/or cover your losses, it's a recipe for penury. The money for those million dollar executive salaries has to come from somewhere....
posted by ennui.bz at 7:36 AM on September 8, 2010

costas wrote: "wierdo: I do mean only health coverage, to compare like-for-like. There's no worker's comp or payroll tax in the Greek example either."

Is there no equivalent in Greece, because it's paid by the government out of (supposed) tax receipts? If not, what are the equivalent numbers for everything over and above salary that the company has to pay for?

In case it seems like it, I'm not intending to attack your numbers, I'm just curious.
posted by wierdo at 7:50 AM on September 8, 2010

There's payroll tax, which depends on salary and tax brackets, so it's not a set percentage. Worker's comp is supposedly covered by social security but in reality the coverage is so bad that either employers will offer to buy it, or employees will.

There's also a vast amount of indirect taxation: VAT, real estate taxes, transaction taxes (to lawyers for example), and of course gas taxes and consumption/luxury taxes. All of these are built to sustain the insider economy while providing little if no value.
posted by costas at 7:57 AM on September 8, 2010

I'm not getting it. Exclusive of VAT, we have all those things here in the US also, so I don't see how it follows that they are "built to sustain the insider economy."

I get that there's a lot of dysfunction (as I implied upthread, I've been in countries where government is almost completely dysfunctional and almost nobody pays the real tax they owe), but I'm just not seeing how what you're saying is particularly evidence of that.

I'm having a dense brain morning, I guess.
posted by wierdo at 8:06 AM on September 8, 2010

Well, you may not be seeing the scale of the imbalance: we have 3x the state employees for the EU average. We have more doctors and teachers per capita than anyone else with much, much worse services. We are #2 or #3 in the world in per-capita spending on defense with little to show for it. All of that is not sustainable without a vibrant private economy, and ours is far from it.

I think the article is over-simplifying a few things and glossing over how we got here, but its insight is spot-on.
posted by costas at 8:23 AM on September 8, 2010

Sounds like a country with not enough hard-working, law-abiding suckers, willing to be the net losers in a financial arrangement. In America, they're called Christians. And Democrats.

No, in America they're called the Middle Class. Political and religious affiliations don't matter a whit.
posted by Civil_Disobedient at 9:05 AM on September 8, 2010

Sorry, but I found the piece to be pretty glib and full of generalities
The glib generalities are the journalistic style of Vanity Fair. Not much different than the Sarah Palin article in the same issue.

Don't make it poor reading, though.
posted by Prince_of_Cups at 9:11 AM on September 8, 2010

I take it you don't own any Treasuries? Because anything you say about the "trust fund" is equally applicable to them. Sovereign default is always a possibility, but I don't think it's particularly likely in this case. If we default on the bonds the "trust fund" owns, we might as well default on 'em all for all the difference it will make to people's willingness to own them.

Congress would pay them anyway. Even if the bonds didn't exist, Congress wouldn't default on SS pensions. All those bonds do is let them steal the money and spend it, while pretending that's not what they're doing -- and it's a successful enough pretense that people actually argue that it's a good idea.

It SHOULD look something vaguely like CalPERS, where the pension fund holds real assets that it can exchange with the open market to get money to pay retirees, without involving the direct state budget at all. Now, CalPERS isn't doing as well as one would like, and they need some additional inflows because of reduced returns from all the financial disorder over the last decade, but they have vast holdings, a very deep cushion. If California had been stealing and spending that money instead, they'd be in far worse shape than they are now.

The SSTF bonds aren't even marketable; they're not the same bonds that you and I hold. They can't sell them to anyone. If Congress wants to welsh on those bond issues without touching others, they could certainly do so.

Social Security holds no other assets, can't sell the bonds it does have have to anyone but the government, and has no other way to generate cash as soon as its outflows go negative. They are completely dependent on Congress to pay for everything. Since Congress would pay them anyway, and the money comes from current-year budget in either case, this is not meaningfully different from having no bonds at all.
posted by Malor at 10:00 AM on September 8, 2010

Don't make it poor reading, though.

Give me 1 page of James Surowiecki's prose any day.
posted by KokuRyu at 11:11 AM on September 8, 2010

Ugh, there we go again. Hi from Greece. To begin with, the profits of Greek banks have consistently grown with a double-digit rate for the last decade and many practices of theirs were later declared unlawful. So much for morals.

Years ago, Greece joined the Euro while hiding a deficit roughly five times the amount they were allowed under Euro rules. Today, public sector workers are rioting against new austerity measures and a Greek default (or "restructuring") on emergency EU loans seems likely.

Are you mixing this up with last year's 13.6 deficit? After the 2004 revision, the deficit was considered to be slightly above the limit with the new auditing methodology, but still under the limit with the methodology used to calculate the deficits of all EMU would-be participants. Then, in 2007, EU accepted a new methodology that raised the Greek GDP (thus lowering the deficit). Eurostat doesn't provide figures for 1999 under that last methodology and checking my newspaper right now I see they ask for details on the Goldman Sachs hoolabaloo, so the jury is probably still out on that one.

It's normal that Lewis wouldn't transcend his status as a visitor, but the angle he chose for his article is laughable. The monks are not collectivists who work in concert to achieve their goals in contrast to an individualist Greek society. They are part and parcel of the same society and in a textbook case of corruption they almost managed to swindle the state from valuable land in exchange for a lake that mysteriously lost its status as a natural reserve.

Sure, Vatopaidi is not the worst scandal in Greece. However, the writer fails to mention the ties between the state and the Church or that the wife of a then-minister handled the contracts of all these land transactions. Vatopaidi was the culmination of scandals that resulted in a change of government, not a single incident.

Whoever provided him with that "quotation" of Isocrates, which was on the first page of a national newspaper, hasn't noticed that it was widely discredited a couple of days later as made up by extremist-right rags. I'm also afraid government protestors do not have much in common with Tea Partiers besides being on the streets. He uses some cheap swipes like Greeks not wanting to govern themselves because the government is not pursuing things in addition to introducing legislation that overhauls large parts of Greek law, the public sector, the pension and the prefectures and municipalities system while juggling a 40% deficit cut and trying to improve revenue to get the money they can't draw from the markets. I'd rather not comment on "As they died, Greeks in the streets screamed at them that it served them right, for having the audacity to work.", as it turns the professional white background of VF to a healthy yellow.

You'd think a financial journalist would have checked the data on Greek pensions (not generous, but there's been some fraud with the deceased still collecting) or noticed ECB officials and Fin. ministers claiming that will be no debt restructuring. Not that their assurances ensure things will be thus, but these people aren't inconsequential either.

Sorry for going on at length, but there's so much absurdity in Greek economy that simple reporting is more effective than rhetorical flourishes.
posted by ersatz at 11:18 AM on September 8, 2010 [3 favorites]

Malor wrote: "It SHOULD look something vaguely like CalPERS, where the pension fund holds real assets that it can exchange with the open market to get money to pay retirees, without involving the direct state budget at all."

Doesn't CalPERS have a fairly large amount of Treasuries in that asset mix?
posted by wierdo at 11:18 AM on September 8, 2010

To be clear, I'm not arguing that the (lack of a) trust fund is a great idea, but it seems like arguing over semantics.
posted by wierdo at 11:20 AM on September 8, 2010

It SHOULD look something vaguely like CalPERS, where the pension fund holds real assets that it can exchange with the open market to get money to pay retirees, without involving the direct state budget at all.

Ah, yes, a fine idea. Invest Social Security holdings in the stock market, where they belong.

How could that ever go wrong? Everyone knows the stock market always goes up.
posted by Jimmy Havok at 11:33 AM on September 8, 2010

Doesn't CalPERS have a fairly large amount of Treasuries in that asset mix?

They may, but the SSTF doesn't have Treasuries, and the difference between what the SSTF has and actual Treasuries is not 'just semantics.' I'd be a whole lot more comfortable with the whole scheme if the SSTF had the same Treasuries that everyone else holds, and purchased them at auction at prevailing rates just like everyone else. But they don't, and there's no good reason for it — at least not one that doesn't involve political chicanery or meddling.
posted by Kadin2048 at 2:03 PM on September 8, 2010

The Germans wanted to be even more German; the Irish wanted to stop being Irish.

What does this last bit even mean???

I was in Ireland during part of the boom --- 04 to 06 --- and the last phrase in that sentence, at least, has a grain of truth to it. What it tells you about import and export ratios ain’t much. But the culture, the zeitgeist of those times --- he’s put his finger on something there. For 200 years, Ireland was a country too poor to keep her children; possessor of a great literary and musical culture and a subtle wit, but a society calcified in many ways, rent by pettiness, a touch mad with insularity round the edges.

But when the boom came --- well, then the problems were flash problems. It was discovered that the richest neighborhood in Dublin had its own accent, even your gran was thinking of having a flutter in the real estate market, there was a flight twice a week from Dublin to Dubai (for shopping vacations, you see --- and if you couldn’t afford that you could certainly afford New York), and the chin-pullers on the telly were all talking about the problem of immigration, for once --- the Poles and Estonians and Nigerians who were suddenly popping up all over the place (so many Poles that one of the tabs started putting out a Polish edition). When I left the latest fad was barbecues. The reason that barbecues, or cookouts, hadn’t caught on during the first 2500 years of Irish history is that you never get more than two hours’ worth of weather together and if the temperature breaks 72 F old ladies start fainting in the streets; fortunately this only happens twice a year. A climate conductive to standing around the yard for 6 hours drinking cold beer it is not. People moaned about these changes, of course, what it was doing to the culture, the thoughtlessness with which the coming generation took all this for granted, and sometimes it seemed that underneath people couldn’t quite shake the feeling that it couldn’t last. But it certainly seemed to me that people preferred moaning about that set of problems instead of all the old ones….and I think that’s what Lewis is getting at with his glib little gibe.

Ireland has several million people; you can certainly find exceptions to any of these phenomena. So too America. And so, I’m sure, Greece or Iceland. But what Lewis is good at, and I think he is good, is giving you the little anecdotes that give you a flavor of a place, the little moments when your ears prick up and you blink and bit a realize, something’s different here. Is that a thorough definition? Is it precise? Would it satisfy an economist or a sociologist? A historian? No, no, no, and no. But it’s a damn fine quality for a magazine writer; I don’t
think he should be damned for lacking the virtues of other pursuits….
posted by Diablevert at 3:24 PM on September 8, 2010 [4 favorites]

Kadin2048 wrote: "But they don't, and there's no good reason for it — at least not one that doesn't involve political chicanery or meddling."

That may be, but I doubt that the Government choosing not to honor whatever it is that the Trust Fund "holds" would be looked upon kindly when they went to sell Treasuries in the future, eh? Besides, repayment of Treasuries is just as subject to the whim of Congress as any other spending. They're not magically better.
posted by wierdo at 4:00 PM on September 8, 2010

if the SSTF had the same Treasuries that everyone else holds

...they'd be driving down the yield by competing for them...except that the Treasury would have to issue more bonds to make up for the ones they knew SSTF was going to buy, making it a wash.

So in the end, big deal if the SSTF is in Treasury notes or its own special bonds, although you'd think they could use an interest-rate formula based on 10-year bonds rather than 4-year bonds.
posted by Jimmy Havok at 6:27 PM on September 8, 2010

For people interested in the fake Isocrates quote that ersatz mentioned, there's a further discussion of what Isocrates actually said here (in Greek only, unfortunately).
posted by longdaysjourney at 8:01 PM on September 8, 2010 [1 favorite]

In the case of Social Security holding bonds, it makes little difference whether they hold Treasuries or the completely ersatz bonds they do have, because in either case Congress gives them money in exchange, and Congress would give them money anyway. All Treasuries would do is allow the SS administration to sell them and buy other assets, but they can't legally do that. They're not allowed, by law, to properly diversify their holdings -- they're not allowed to have any real holdings at all.

In the case of California owning them, that's different, because they're a truly separate fiscal entity. When CalPERS cashes them in, they funds come from an external source. They're being allowed to summon resources from the economy later in exchange for investing resources now, and they can do this without impacting their funding organization, the California government.

I suspect, if they hold many long-term bonds, they'll end up regretting it, not actually getting back as much economic value as they put in. But they'll definitely want to hold some as protection against liquidity crunches. Those will always be temporary, because the Federal Reserve will certainly inject more cash as waves of debt default or derivative blowups wash through the economy, but 'temporary' doesn't matter when pensioners need their checks this month. Treasuries should stay highly liquid for quite a long while yet.
posted by Malor at 8:34 PM on September 8, 2010

s/they funds/their funds/
posted by Malor at 8:51 PM on September 8, 2010

completely ersatz bonds

>yawn<>to properly diversify their holdings

Into what? Real estate? Stocks? Baseball cards?

The break-even point for Social Security has moved up to 2037 now. If it was "properly diversified" it would probably have moved up to 2020.
posted by Jimmy Havok at 11:08 PM on September 8, 2010

That's only if you count the bonds as having an actual function. In 2037, it runs out of bonds, but it starts CASHING IN the bonds in just a few more years.

Last I checked, they'll start cashing in around 2016, maybe 2017... just six or seven more years. In exchange, Congress will give them money.

Now, what happens when there are no more bonds? Nothing changes. With bonds or without bonds, Congress pays them. The money flows don't change. Retirement checks have to come out of Congress' budget for the year. Whether or not those bonds exist, the money comes from the same place, in the same amount, and goes to the same destination. So what purpose do they serve?

Even in "let's pretend" world, where those bonds have some meaning, SS will go broke in 2037. But in the real world, it turns cash-negative in six or seven years.

We have relied on that surplus to 'balance the budget' -- that's why the numbers looked kind of okay all through the Clinton years. They were taking the huge inflows from the Baby Boomers' peak earnings years, and spending it all on hookers and blow. In exchange, we will shortly have a liability each year that will grow quite quickly, which will have to be paid out of that year's tax receipts. The bill starts to come due very shortly.

Had we not done that, and run SS like CalPERS, it would have a huge portfolio of stocks and bonds from other entities and real estate and commodities. It would start slowly selling those back to the broad economy, sending the proceeds out to retirees. It would run out of those assets around 2037, without affecting the government budget at all until then.

But because all of its 'assets' are just Congressional liabilities, as soon as it goes negative, it impacts the budget immediately. We didn't do any saving, we blew it all and wrote IOUs instead.

I mean, think about it: if California bought $5 trillion of its own bonds, could it then meaningfully claim to have $5T in assets? Of course not -- as soon as it tried to cash them in, it would have to send itself a check.

The SSTF is not an asset. It is a measure of a liability up through about 2037. It's the amount of money Congress is going to have to come up with, spaced over the years between now and then. That may help slightly with budget planning, but it's not going to pay for a damn thing.
posted by Malor at 12:36 AM on September 9, 2010

We have relied on that [FICA] surplus to 'balance the budget' -- that's why the numbers looked kind of okay all through the Clinton years.

Bullshit. The FICA money was indeed used to run the country instead of tax money ever since Reagan et al came up with the "crisis," but it was counted in the national debt. The Clinton surplus was a genuine surplus.

spending it all on hookers and blow

I guess that's one way to describe the "defense" budget.

The SSTF is not an asset. It is a measure of a liability

Duh. Same as bonds.

It's the amount of money Congress is going to have to come up with, spaced over the years between now and then.

Duh. Same as bonds. I guess it was easier than expecting rich people to pay taxes, though, wasn't it?
posted by Jimmy Havok at 2:07 AM on September 9, 2010

Oh, yeah, this:

SS will go broke in 2037

Only if we have a shitty economy for the entire 27 years. Up until Bush ran us into the ditch, the zero date for SSTF moved out approximately two years for every year that passed. It was a crisis that was getting further away every year. Doug Henwood pointed that out 12 years ago:

Compelling "facts" are trotted out to prove the point: the system will start running a deficit in 2013, and will have spent down all its reserves by 2032.

What kind of crisis looms further and further away with every year?
posted by Jimmy Havok at 2:17 AM on September 9, 2010

It's amazing how on fora much more conservatively-biased than this one I've been able to garner agreement with the idea that Social Security is not failed in any meaningful sense, and all we need to do to cover the Boomer shortfall is remove the payroll tax cap, yet here on MeFi, getting agreement with that position is like pulling teeth.

Also, my understanding is that due to the high unemployment rate and generally crappy economy, Social Security is not presently running a surplus, although it is expected to do so once again if/when employment recovers to some degree.
posted by wierdo at 7:10 AM on September 9, 2010

I'd go a step further. Since there really is no crisis, we should remove the cap and cut the amount of personal contributions to reflect the new funds. It would go a certain way toward evening out the shift in income toward the upper percentiles that we've seen over the past few decades.
posted by Jimmy Havok at 9:17 AM on September 9, 2010

I'm not so sure about that. If we don't reduce the rate, benefits will increase sometime in the 2030s to match the greater receipts. On the other hand, less money out of the paycheck of the people who can least afford it.
posted by wierdo at 10:38 AM on September 9, 2010

less money out of the paycheck of the people who can least afford it.

Or, looking at it from the other direction, more money in the paychecks of people who will spend it.
posted by Jimmy Havok at 5:11 PM on September 9, 2010

Hey, Malor, I notice you haven't been in a hurry to define what "properly diversifying" the SSTF would consist of. Why don't you give it a shot? I'd hate to waste my time beating on a straw man.
posted by Jimmy Havok at 5:13 PM on September 9, 2010

What (I think) Malor is getting to is that had the SSTF bought anything except treasuries, congress would not have been able to get as much cheap borrowing, so our overall spending would have been lower (or taxes would have been higher). In a few years when SSTF sold those assets, it would draw in cash externally. As is, when SSTF sells unless there is a truly infinite well of people who want to buy treasuries at low interest, congress will have to raise taxes or lower spending (including on SS benefits to reduce the SSTF selling).

As to what SSTF should have bought, yes, the standard portfolio options. If you think that's so dumb, why is it what rich people do? The SSTF has 20-30 years over which to liquidate, so it's unlikely to get screwed by a market fluctuation.

There are arguments either way as to whether that's a good idea or not. If you think that governments are irresponsible and will waste whatever you give them, ploping several trillion into their bonds is clearly a bad idea. That "lower spending" above could very well have been on Reagan's useless junk. If you think that the money would go to a tax cut instead of spending, you have to decide if it's more economically efficient to keep taxes higher and put the money in the global equity system or to cut taxes, buy the bonds, and hope that the extra growth over the interim years means that in the future when you have to raise taxes back to eliminate the bonds everyone is still better off than having the SSTF directly invest in equity. I think that's pretty close to the reasoning behind SSTF all in bonds: it means you can lower taxes now (in 1980s) to increase growth and make up for it later. Faith in the market and low taxes combined with a burning desire to burn that money now.

Of course now that "later" is happening, it turns out we bought some extra carriers, a missile defense that kinda works, a health system that doesn't, and Iraq. We're also totally unwilling to raise taxes to cover the bonds.
posted by a robot made out of meat at 6:02 PM on September 9, 2010

As to what SSTF should have bought, yes, the standard portfolio options.

Put SSTF into stocks, and the price of stocks is driven up. Hooray, the market is up, we're all rich!

Until it's time to take the money out, which will occur on a very predictable arc, which means everyone who two neurons to rub together will sell out before it happens: the market goes down, and all that SSTF equity evaporates, while the people whose idea it was to put SSTF into the stock market relax on their yachts.

Put it into bonds, and it will drive bond yields down to where your pillowcase will be a better place for cash, until the pool dries up.

Even if you diversify between stocks and various types of bonds, the SSTF money would still produce a big swing, first up when it's buying, then down when it's selling.

I'm of the opinion that the crisis of the '80s was a con game, just like the current looming crisis. SS should have been kept on a pay-as-you-go basis, instead of being used as a revenue source to replace income taxes.

Maybe we will have to start collecting more taxes in order to pay down those bonds. The big question is going to be how that burden is divided up. If the Tea Partying fools get their way, they'll be paying for it, and whining about how the liberals are taxing them to death the whole way.
posted by Jimmy Havok at 8:06 PM on September 9, 2010

Until it's time to take the money out, which will occur on a very predictable arc, which means everyone who two neurons to rub together will sell out before it happens: the market goes down, and all that SSTF equity evaporates, while the people whose idea it was to put SSTF into the stock market relax on their yachts.

"Everyone else" is not a cartel which has the luxury of liquidating from all forms of investment over a 30 year period. Everyone shorts stocks salivating over SSTF? SSTF sells bonds and commodities to buy them. You'll want to buy those stocks while they're artificially low, won't you? So will everyone else. Absent real economic changes, there's also a bottom represented by the real dividend value of stocks. As it is now, we're in the same position except that the target of predictable timed selling is the entire US economy when the government has to raise taxes and individuals sell to outsiders to pay those taxes. Anyone "with two neurons" will move their assets overseas or to tax-sheltered investments.

The first part of your statement is also wrong. SSTF investing doesn't raise the prices of anything unless it does so in an unbalanced way; they didn't print the money; they took it from people who had to sell (or not buy) those same things to pay taxes.
posted by a robot made out of meat at 7:10 AM on September 10, 2010

a robot made out of meat wrote: "The first part of your statement is also wrong. SSTF investing doesn't raise the prices of anything unless it does so in an unbalanced way; they didn't print the money; they took it from people who had to sell (or not buy) those same things to pay taxes."

I don't understand. Are you seriously arguing that putting more money in a particular class of assets does not drive up the price of that class of assets? That overinvestment in housing didn't drive a housing bubble? That overinvestment in oil did not drive up the price of oil?

More dollars chasing the same number of things increases the price of those things. This is one of the most basic economic concepts around.
posted by wierdo at 7:33 AM on September 10, 2010 [1 favorite]

More dollars chasing the same number of things increases the price of those things. This is one of the most basic economic concepts around.

There isn't more money unless the taxation to pay for the assets is set up such that it increases the accumulation rate. When the government shows up and just takes a piece of your stock portfolio, that doesn't create extra demand for stocks.
posted by a robot made out of meat at 9:26 AM on September 10, 2010

a robot made out of meat wrote: "There isn't more money unless the taxation to pay for the assets is set up such that it increases the accumulation rate. When the government shows up and just takes a piece of your stock portfolio, that doesn't create extra demand for stocks."

But that's not at all what's being contemplated. The idea on the table is that rather than government IOUs, the SSTF should hold stocks, bonds, or whatever else. Presumably, that would be in addition to whatever people buy privately. The government would not be taking anything above and beyond what they already take, so it would be a net flow of capital into the market for whatever the trust fund was buying.
posted by wierdo at 10:57 AM on September 10, 2010

But that's not at all what's being contemplated. The idea on the table is that rather than government IOUs, the SSTF should hold stocks, bonds, or whatever else. Presumably, that would be in addition to whatever people buy privately. The government would not be taking anything above and beyond what they already take, so it would be a net flow of capital into the market for whatever the trust fund was buying.

IOUs means that instead of collecting taxes to pay for both the assets in SSTF and the general fund, taxes only need to be collected for the general fund less the SSTF. To buy real assents into the SSTF and pay the general fund outlays, you have to raise taxes. If you prefer to think of it as the general fund having to borrow from elsewhere rather than direct taxes, it works out the same. Those investors who buy the increased amount of T bills would otherwise have had to invest it elsewhere, for example in stocks and bonds.

If there's a mismatch between the type of income / asset that's taxed and asset that's purchased, that's distortionary. Given how the global pool of liquidity adds up (eg federal borrowing sucks investment out of everything else including the stock market), it's less than you might think. You can make that distortion very small by taxing things similar to what you buy. However, choice of asset to purchase (stock vs federal bonds) doesn't generate extra money in the system. More money chasing the same targets is a result of monetary policy, not fiscal.
posted by a robot made out of meat at 12:10 PM on September 10, 2010

So you're telling me that compared to the present, using the SS tax money to buy stocks, bonds, and other non-government-backed financial instruments would not drive up the price of those instruments as compared to the present practice of using the tax money to buy government debt (or fund current spending, if you prefer)?

Unless your contention is that the government having to reduce non-SS outlays to make up the difference would cause disinvestment, and thus declining prices, I don't get it.
posted by wierdo at 2:27 PM on September 12, 2010

Robot made of meat, I interpret your argument as being "if the SSTF funds were actually invested, instead of being used as a substitute for tax revenues, their distorting effect on the investment market would be countered by the taxes that would be necessary to replace them."

In a broad sense, I agree with you, since I regard the Social Security liquidity crisis that prompted the increases in FICA and the creation of the SSTF to have been a fraud meant to cover up the effects of the Reagan tax cuts, and a means of moving the costs of government off of the upper income cohorts and onto the lower income cohorts. The FICA funds were specifically intended as a substitute for the tax increases that would have been necessary, either if the SSTF had been honestly invested or never created.

However, I do think that the mandated sell-off of hypothetical SSTF assets, occurring as it would have to, in a very predictable way, would have a distorting effect on the investment market, even if strategies such as you suggest were used to minimize it. The extra taxes needed to replace the FICA funds wouldn't be relaxed, so they couldn't take up the sales slack. So given the fact of the SSTF, the way it was "invested" is probably the wisest available.

The fact of the matter is that necessary tax revenues were a) shifted onto the lower income cohorts of the country, and b) deferred onto future generations, starting whenever the SSTF begins to draw down. The plans offered so far to deal with that (other than ending the income cap on FICA) are all in line with the original fraud that led to the situation.

In the end, we are going to have to collect taxes to make up for the budget deficits. Me, I'd like to see those taxes collected from the people who have profited from those deficits.
posted by Jimmy Havok at 3:15 PM on September 12, 2010