I’ve previously written on the unfolding Greek financial debacle (see “Drunk on Debt, a Greek Tragedy), but as the tragic politics there seem to be gaining momentum rather than heading off potential disaster, it deserves an update.
Perhaps what worries me most about the current events in Greece is that we’ve seen very similar circumstances even in our own country, and neither we nor the Greeks seemed to have learned the lesson.
Reminiscent of our own Great Depression beginnings and the events in Cyprus just a few years ago, the Greek government called for all Greek banks to close today, and stay closed for six days in reaction to long lines of people attempting to withdraw (what they thought was) their money from the banks.
In case you don’t understand the basics of fractional reserve banking and why they would do this (and part of why so many countries and their people are in unmanageable debt these days) I’ll give an elementary explanation here.
In order to increase investment and the money supply, banks are allowed to use what’s called fractional reserve banking. It’s called that because banks are only required to maintain a fractional amount of every dollar deposited by its customers, and the other (vast majority of) fractions are allowed to be lent out in loans and investments.
Nobody seems to bat an eye when times are great, the markets are soaring and everyone makes money (well, the banks make money). But when the times are bad, as almost all of the markets are somehow connected, we begin to see the effects of greed and poor decisions.
The tragic events usually begin something like this: something happens to spook the markets (stock market collapse, real estate market collapse, currency devaluation, etc), and people rush out of fear to their local banks to get their money.
This “run on the bank” takes more cash than the banks (completely legally by the regulations of fractional reserve banking) keep in their vaults. The banks, now low on cash, need to call in their debts and loans. Because of the initial issue that caused the run on the banks, most people or businesses can’t afford to pay off those loans.
People get homes foreclosed on, can’t afford to pay taxes, strain the larger economy by losing their jobs (as people get into financial difficulty they shop less which means businesses take in less money which means they pay less in taxes, so on and so forth).
And most of this, I believe, usually boils down to a simple point: somewhere along the line, as was very apparent in Greece (and currently here in the US), a politician comes along who promises money for nothing, to promise more money for less work, tighter regulations making more small businesses to close, elevates the public sector and government jobs (paid for in taxes from those same small businesses closing) to the most highly regarded (and paid) of jobs, and essentially takes the hard-working culture that defines most great nations away from all but those naturally inclined to keep their nose to the grindstone.
The politicians do what politicians do and pander to the majority, but seem to forget that while voters are easy to sway, the bill collectors holding your debts usually are not. And funny enough, even the people who voted this “free money” administration into power in Greece are showing in recent polls that they’re already prepared to take another vote and throw them out.
This does not seem like it will end well for Greece no matter what happens, and my only hope is that its repercussions don’t leak too far out into the global markets.
But it does go to teach an important lesson that I wish people would learn on the microeconomic level: nothing in life is free, no matter what the politicians on the campaign trail promise.
Robert Patrick Lewis was a Green Beret OIF/OEF combat veteran with 10th SFG(A), is an award-winning author of “The Pact” and “Love Me When I’m Gone: the true story of life, love and loss for a Green Beret in post-9/11 war” and the host of “The Green Beret MBA” and “Center Mass with Rob and Silent J” programs on Vets on Media.