Greek Bailout, Lehman Deceit, and Tim Geithner

We live in an age of unprecedented bailouts.  The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble.

The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures.  Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?

But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times). 

The sharp decline in market confidence last week – marked by the jump in Greek yields – scared the main European banks, and also showed there could be a real run on Greek banks; other Europeans are trying to stop it all from getting out of hand.  But there is no new program that would bring order to Greece’s troubled public finances. 

It’s money for nothing – with no change in the incentive and belief system that brought Greece to this point, very much like the way big banks were saved in the US last year

If anything, incentives are worse after these bailouts – Greece and other weaker European countries on the one hand, and big US banks on the other hand, know now for sure that in their respective contexts they are too big to fail.

This is “moral hazard” – put simply, it is clear a country/big bank can get a package of support if needed, and this gives less incentive to be careful.  Fiscal management for countries will not improve; and risk management for banks will remain prone to weakening when asset prices rise.

If a country hits a problem, the incentive is to wait and see if things get better – perhaps the world economy will improve and Greece can grow out of its difficulties.  If such delay means that the problems actually worsen, Greece can just ask Germany for a bigger bailout.

Similarly, if a too-big-to-fail bank hits trouble, the incentive is to hide problems, hoping that financial conditions will improve.  Essentially the management finds ways to “prop up” the bank; on modern Wall Street this is done with undisclosed accounting manipulation (in some other countries, it is done with cash).  If this means the ultimate collapse is that much more damaging, it’s not the bank executives’ problem any way – their downside is limited, if it exists at all.

The Greeks will now:

  1. Lobby for a large multi-year program from the IMF.  They’ll want a path for fiscal policy that is easy in the first year and then gets tougher.
  2. When they reach the tough stage, can’t deliver on the budget, and are about to default, the Greek government will call for another rapid agreement under pressure – with future promises of reform.  The eurozone will again accept because it feels the spillovers otherwise would be too negative.
  3. The Greek hope is that the global economy recovers enough to get out, but more realistically, they will start revealing a set of negative “surprises” that mean they miss targets.  If the surprises add to the feeling of crisis and further potential bad consequences, that just helps to get a bailout.
  4. The Greek authorities will add a ground game against the European Central Bank, saying things like:  “the ECB is too tight, so we need more funds”.  We’ll see how that divides the eurozone.

In their space, big US banks will continue to load up on risk as the cycle turns – while hiding that fact.  Serious problems will never be revealed in good time – and the authorities will again have good reason (from their perspective) to agree to the hiding of issues until they get out of control, just as the Federal Reserve did for Lehman Brothers.  Moral hazard not only ruins incentives, it also massively distorts the available and disclosed information.

As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.

Originally published at The Baseline Scenario and reproduced here with the author’s permission.   

Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any

53 Responses to “Greek Bailout, Lehman Deceit, and Tim Geithner”

Guest tooApril 13th, 2010 at 8:28 pm such bailouts or considerations exist for thosewho have no pedigree of significance i.e. Haiti, Afghanistan,Iraq. etc………….u.s.a.they get only destroyed with very expensive shrapnel anddepleted what not..puke here! life starts here.

Evia MellisonMay 31st, 2011 at 12:12 am

Excellent post. I was checking constantly this blog and I’m quite impressed! Very useful info particularly the first part. I care for such info a lot. I was seeking this particular info for a long time. Thank you and best of luck.

Dionne EnmanMay 31st, 2011 at 2:46 am

Excellent piece. I was checking constantly this blog and I am quite impressed! Extremely useful information particularly the last part. I care for such information a lot. I was seeking this particular info for a very long time. Thank you and good luck.

century clubMay 31st, 2011 at 7:04 am

I must point out my respect for your kind-heartedness giving support to persons that need guidance on in this subject matter. Your personal commitment to getting the solution along has been particularly invaluable and has frequently encouraged associates just like me to arrive at their targets. Your new insightful advice can mean a great deal to me and further more to my fellow workers. Many thanks; from each one of us.

Winfred ShapouriJune 1st, 2011 at 5:45 pm

Thank you for writing your ideas. Being writer, I’m always hunting for fresh and different ways to think about a issue. I find fantastic inspiration in doing so. Thank you so much again

hotels linlithgowJune 2nd, 2011 at 3:58 pm

Hmm is anyone else experiencing problems with the pictures on this blog loading? I’m trying to find out if its a problem on my end or if it’s the blog. Any feed-back would be greatly appreciated.

משרדי פרסוםJune 4th, 2011 at 1:45 am

היי אני רוצה להציג על אתר בתחום קידום אתרים בגוגל. באתר האינטרנט ניתןלצפות באינפורמציה בנושא קידום אתרים בגוגל.

Recycled Teak FurnitureJune 4th, 2011 at 5:32 am

There are certainly a whole lot of particulars like that to take into consideration. That could be a nice level to carry up. I provide the thoughts above as normal inspiration but clearly there are questions like the one you convey up the place an important thing will probably be working in trustworthy good faith. I don?t know if finest practices have emerged around issues like that, but I am positive that your job is clearly identified as a good game. Each boys and girls really feel the affect of just a moment’s pleasure, for the rest of their lives.

Jeniffer RubyorJune 4th, 2011 at 3:14 pm

I just found your web website some days ago and i are reading through it frequently. you have got a large range of helpful information on the positioning and i also adore the actual style of the location at an equivalent time. maintain the good work!

Hae RiveriaJune 7th, 2011 at 4:52 pm

When I initially commented I clicked the “Notify me when new comments are added” checkbox and now each time a comment is added I get four emails with the same comment. Is there any way you can remove me from that service? Thanks a lot!

מכירת כלי רכבJune 8th, 2011 at 1:05 pm

היי אני רוצה להמליץ לכם על חברה בתחום מכירת רכבים המתמחה בשרותי טרייד אין לסוכנויות רכב ולקוחות פרטיים . באתר, אינפורמציה רבה המלווה בתמונות מכירת הרכבים ורשימה המתעדכנת יום יום עם הרכבים הנמצאים במקום ומיועדים למכירה.

Band SawJune 8th, 2011 at 9:29 pm

Congratulations for posting such a useful blog. Your blog isn’t only informative but also extremely artistic too. There usually are extremely couple of individuals who can write not so easy articles that creatively. Keep up the good writing !!

Recycled Teak FurnitureJune 9th, 2011 at 12:03 am

That is the right weblog for anybody who desires to find out about this topic. You notice a lot its almost exhausting to argue with you (not that I truly would need…HaHa). You positively put a new spin on a topic thats been written about for years. Great stuff, just great!

bootleg moviesJune 9th, 2011 at 3:28 pm

You lost me, friend. Come on, man, I imagine I purchase what youre saying. I’m sure what you’re saying, but you just appear to have forgotten that you will find a few other folks within the world who view this issue for it is really and might perhaps not accept you. You may well be turning away a whole lot of individuals who could have been lovers of this website.

click hereJune 9th, 2011 at 11:31 pm

You ought to really think about working on creating this blog into a serious authority on this market. You evidently have a grasp deal with of the topics everyone is trying to find on this website anyways and you may certainly even earn a buck or two off of some advertisements. I would explore following recent matters and raising the quantity of write ups you put up and I guarantee you’d start seeing some superb focused visitors within the near future. Only a thought, good luck in no matter you do!

ondergoed shopJune 10th, 2011 at 12:29 am

This is one of the best blogs I enjoyed this read in this blog.I m absolutely excited to get to read such a well blog.The amount of data that I get is truly great.This is an good masterpiece.I m truly impressed

heren ondergoedJune 10th, 2011 at 5:21 am

Some things in here I have not thought about before. Thanks for making such a cool post which is really very well written will be referring a lot of friends about this. Keep bogging.

house water systemJune 10th, 2011 at 9:38 am

I just now wished to generate a quick comment as a way to express gratitude to your account for people wonderful pointers you are posting at this site. My time consuming internet investigation has right at the end for the day been rewarded with high quality ways of present to my guests. I would claim that many people traffic are very endowed to exist in a fantastic network with methods . marvellous people who have useful hints. I’m quite privileged to get used your webpages and appearance toward really more fabulous minutes reading here. Thank you for a lot of things.

Sasha GrayJune 11th, 2011 at 3:29 am

I’m speechless. This can be a superb blog and really attractive too. Nice paintings! That’s no longer in point of fact a lot coming from an novice publisher like me, nevertheless it’s all I may say after diving into your posts. Great grammar and vocabulary. Not like different blogs. You really recognize what you?re talking about too. So much that you made me need to discover more. Your weblog has develop into a stepping stone for me, my friend.

Basil ElebyJune 11th, 2011 at 4:46 am

I’m truly enjoying the design and layout of your site. It’s a very easy on the eyes which makes it much more enjoyable for me to come here and visit more often. Did you hire out a developer to create your theme? Excellent work!

HTC Thunderbolt caseJune 12th, 2011 at 12:28 am

Strange this post is totaly irrelevant to the search query I entered in google but it was listed on the first page. If a computer cable has one end, then it has another. Attributed to Lyalls Conjecture

Ashley Madison reviewsJune 12th, 2011 at 8:21 am

I was very ecstatic to discover this site on google.I wished to say thanks to you with regard to this excellent article!! I definitelyappreciated every little bit of it and I’ve you bookmarked to check out new stuff you post.

Rift Automation BotJune 12th, 2011 at 1:11 pm

Hi, Neat post. There is a problem with your web site in internet explorer, would test this… IE still is the market leader and a good portion of people will miss your fantastic writing because of this problem.

Jason TrucksJune 13th, 2011 at 1:20 am

That which you stated produced a lot of perception. But, believe about this, what should you additional a little content material? I indicate, I dont need to inform you the way to run your weblog, but what should you additional something to possibly get peoples consideration? Much like a video clip or perhaps a image or two to obtain people energized about what youve obtained to say. In my impression, it could make your web site come to existence a bit bit.

green iphoneJune 13th, 2011 at 4:36 am

Wow that was unusual. I just wrote an really long comment but after I clicked submit my comment didn’t appear. Grrrr… well I’m not writing all that over again. Regardless, just wanted to say excellent blog!

save pornJune 13th, 2011 at 5:31 am

There’s no doubt that this really is the most vital information in my situation. And i am glad reading your article. But should remark on few general things, Your website style is perfect, the articles really is excellent : D. Good job, cheers

Cameraless PhoneJune 13th, 2011 at 7:23 pm

Hey there this is kind of of off topic but I was wanting to know if blogs use WYSIWYG editors or if you have to manually code with HTML. I’m starting a blog soon but have no coding know-how so I wanted to get guidance from someone with experience. Any help would be enormously appreciated!

.us domain nameJune 14th, 2011 at 6:16 am

Hey there this is a great write-up. I’m going to e-mail this to my friends. I stumbled on this while searching on yahoo I’ll be sure to come back. thanks for sharing.

Kia ThomsponJune 14th, 2011 at 3:57 pm

You can unquestionably see your skills inside the paintings you compose. The sector hopes for much more passionate writers such as you who aren’t afraid to say how they think. At all times go after your heart.

Most Read | Featured | Popular

Blogger Spotlight

Aaron Menenberg Policies of Scale

Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at