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Three years after the Lehman Brothers bankruptcy precipitated a financial collapse from which we have yet to recover, the sovereign debt crisis in Europe threatens another meltdown. The prevalent narrative sees both situations as lessons in the danger of profligate borrowing. The remedies that follow from this diagnosis are austerity and foreclosure. Our reflex may be to judge behavior in moral terms, but our challenge is to find solutions that work economically, and the response to date, both here and in Europe, has prevented the very growth that the world economy needs in order to recover.

The securitization market that fueled our real estate bubble and a single-currency regime in Europe were both very good at two things: distributing money and then hiding the risks of that lending, at least for a while. But they both are like cars without a reverse gear. When the markets head down it is very hard to unwind things. There are multiple stakeholders at the table for every negotiation. Each obligation is part of a complex web. It is, ironically, like something out of Greek myth, where the ropes that were meant to lift us become instead tethers that hold us down.

The problems here and abroad are enormous, but one thing seems intuitive: restoring equilibrium to any system that ties people together cannot be accomplished by putting the cost of recovery on just one part of that system. Yet sadly, and predictably, the official response so far has been to rescue the banks in order to save the system, but to resist assisting borrowers because that would undermine it. You do not, however, restore the health of a financial system by impoverishing its customers.

Three years into our own crisis it has become clear that recovery is impossible without substantial reductions in mortgage debt. And, similarly, European governments realize that they cannot avoid disaster simply by squeezing the Greek economy. It has taken far too long, but over time we will find our way out of these problems by recognizing that any system that distributes benefits must also allocate its sacrifices.
With a Perspective, this is Paul Staley.