Sunday, May 08, 2011

Overthinking Things

So the Euros are now thinking about asking Greece for collateral for their next loan.
May 8 (Bloomberg) -- European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring, said a person with direct knowledge of the situation.

Expanding the 110 billion-euro ($158 billion) lifeline Greece received last year may mean that assets or revenue from asset sales are used to secure extra funds, the person said. Demanding collateral, an idea floated last year by Finland, may help avoid a political backlash against bailouts.
All of this is a huge example of overthinking the problem. Greece borrowed too much money, more than they could pay back. They didn't borrow it so that they could turn a profit with it by building more industry, or if they did it was an abysmal failure and something which should have been recognized right away. Instead, they borrowed it to pay their people more than they were worth.

In essence, Greece was your shiftless brother-in-law and you loaned him money so he could take vacations. The Euro solution has been to successively loan him still more money with the conclusion of each loan being renewed surprise that he can't pay you back. That would have been a stupid idea for you to do and was an equally stupid one for the European banks, investors and ECB.

All the Keynesian explanations in the world, all of the graphs and charts and equations in all the textbooks serve only to temporarily obscure the fact that loaning money to people who can't show a profit in short order is a stupid thing to do. It's that simple.

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