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The Averting-Disaster Syndrome



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The American Enterprise Institute’s Kevin Hassett has an interesting piece in Bloomberg this week. He explains that an Irish debt default wouldn’t necessarily be the disaster that everyone predicts. He makes the case that many countries have defaulted on their debts in the past, and while it’s never good and it has consequences, “we are still here.”

Also:

Today we are supposed to believe that if one small country such as Ireland goes down, the rest of us will too. Yes, the world is more interconnected now than 200 years ago. That doesn’t make every cough a sure sign of pneumonia.

This means the impulse to bail out countries that are in trouble in not always justified. Moreover, he reminds us that bailouts have a cost, too:

These days, when European leaders see Greece and Ireland on the brink of default, they don’t send gunboats — they send money. The word “restructure” is taboo. Somewhere along the line it became unacceptable to take 80 cents on the dollar from a debtor nation, but acceptable to give that same nation 20 cents to keep its payments on schedule.

The problem is, once you do that, everyone wants 20 cents.

That reminds me of a really good paper by Russ Roberts called “Gambling with Other People’s Money,” in which he explains that “we are what we do” and “what we do in the United States is make it easy to gamble with other people’s money — particularly borrowed money — by making sure that almost everybody who makes bad loans gets his money back anyway.” 

While defaults are not good news for a country, it is important to remember that they are the symptom and not the disease itself. Sometimes default, rather than systematic bailouts, can be the opportunity for a country to get in better shape. It’s not painless, but there isn’t another way.

When is it really necessary to help a country because the consequences of default would be too great? That’s a question that even governments seem unable to answer. It doesn’t follow that we should then bail out everyone. In fact, our default position should be against bailouts. Ireland has been in this position already, in the 1980s. Back then, its financial situation was abysmal, and it devalued its currency and adopted serious austerity measures. That’s something to keep in mind as we are facing our own debt crisis.



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