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Market Crises Versus Sovereign Crises


This article first appeared in the Wall Street Journal

Markets always make good scapegoats. When they do well, they are populated by profiteers. When they do badly, they are accused of causing trouble for everyone else.The denizens of the Dow, Nasdaq, CAC and DAX floors may be speculators and myopics. Yet it’s hard to find even the most reckless private participant who behaves as though his credit is limitless.

What about the governments that set the frame for these markets? Consider that the U.S. government had more or less guaranteed most of the loans on the subprime market by the time that market failed and caused the 2008 crash. Or that Athens multiplied public expenditures, hid its deficits and saddled itself with debts now worth more than 160% of its GDP. Greece was not alone, of course, in financing cradle-to-grave welfare and an army of bureaucrats through borrowing with impunity. Italy’s public debts now exceed 120% of GDP, Ireland’s 100%, France’s 87%—more than twice Paris’s annual tax receipts.

These governments’ early remedies to address the 2008 crash proved worse than the disease. Politicians borrowed at full-throttle to prop up economies that were already sinking under the weight of state programs and regulations. The U.S. has now sunk more than $1.6 trillion into an attempted stimulus that appears to have been completely in vain. When the French government took out its own €35 billion “recovery” loan, it had the gall to claim that it was simultaneously tackling the public deficit.

The crisis of 2008 may have been the reason that some states invoked the ghosts of Keynesianism and started drawing zeroes on checks willy-nilly. In any case, the crisis served as political cover at the time. But this flow of money has come at a huge cost. When governments spend, it is always with other people’s money; there can be no other way. Every dollar, euro and yen they pour into the economy will be a dollar, euro or yen not spent by taxpayers, either now or in the future. Though politicians like to accuse investors of being short-sighted, it’s the governing class that too often fails to consider the costs of the unseen, as Bastiat warned more than a century ago.

There’s no question that some market players benefited from the recent state of affairs, at least for a time. For instance, creditors extended billions to Greece, taking advantage of creeping sovereign-bond yields without showing the slightest concern for the underlying risks of their euro-denominated debt holdings. Frantic to keep these creditors happy and lending, euro-zone leaders did everything in their collective power to signal that Greece could not and would not fail to pay its bills in full. For much of the last two years, sovereigns have been the new subprime.

The party is finally ending. Sovereign bonds are not the popular bet they used to be, after Germany informed private creditors last month that they would have to cover at least some of their own euro-losses, and after the U.S. lost its triple-A rating this month. Bond and equity markets are proving increasingly volatile, which Brussels, Paris and Washington are dubbing a “crisis of confidence.”

Actually, the crisis they’re facing is called reality. Sovereign debts involve risk—often more risk than other securities because governments tend to borrow and spend as if there were no limits to their resources. They’re running up against those limits now, and it’s hard to see any way out for public authorities but to cut back.

With any luck, the greedy, myopic markets will learn their lesson and not lend to governments so insouciantly in the future. More importantly, Western societies might finally now start to question the sanity of their modern welfare states. Painful as it is, the crisis will be worth it if it reminds us once and for all that no one is rich enough to live without working or to spend without counting.

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