What, Me Worry? Denial, Addiction and the Sorry State of Global Finance
"Denial ain't just a river in Egypt." -- Mark Twain
As Europe's leaders scramble to prevent an economic meltdown, it has emerged that Greece was warned in 2009 in a draft report by the International Monetary Fund that excessive and unsustainable debt was leading the nation toward the point of no return.
"Greek officials saw the draft and complained to the I.M.F.," report Landon Thomas Jr. and Stephen Castle last week in The New York Times. "So the final report, while critical, played down the risks that Athens might one day default, an event that could have disastrous consequences for all of Europe."
Even more concerning is that it wasn't an isolated incident. "The reversal at the I.M.F. was just one small piece of a broad pattern of denial that helped push Greece to the brink and now threatens to pull the euro apart," write Thomas and Castle. "Politicians, policy makers, bankers -- all underestimated dangers that seem clear enough in hindsight. Time and again over the past two years, many of those in charge offered solutions that, rather than fix the problems in Greece, simply let them fester." Denial has proven yet again to be much more than the longest river in the world.
MAIN STREET STRUGGLES, POWER ELITE DENIES AND DELAYS
Denial has been on the lips of several economists lately. Citigroup chief economist Willem H. Buiter told Thomas and Castle, "Because of all this denial and delay, Greece will need to write down as much as 85 percent of its debt."
In August, Walker F. Todd, a research fellow at the American Institute for Economic Research who served as an assistant general counsel at the Federal Reserve Bank of Cleveland, said that institutions were the benefactors of the recent government bailouts -- not citizens -- and criticized the Fed for accepting stock as loan collateral for a bank.
"If you make a loan in an emergency secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow?” Todd asked in a New York Times article. "And yet this, the Fed has steadfastly denied ever doing."(The article was aptly titled, "The Fed's Rescue Missed Main Street.")
THE RICH, THE POWERFUL, THE ADDICTED
Earlier this week, Santo Versace, the brother of the late fashion designer Gianni Versace and an Italian legislator who recently abandoned his party, Il Popoli della Libertà (PdL), told The Day that he broke off relations with Prime Minster Silvio Berlusconi because he "didn't deal with the economic crisis, denying at first that it even existed in Italy."
This week, Italy's government bonds hit the widely accepted danger level of unsustainability, 7 percent, the level that its fellow PIIGS -- Portugal, Ireland and Greece -- reached right before they needed a bailout. The math is simple, yet scary: If Italy wanted to borrow a 10-year loan today, their interest rate would be 7 percent. (Thrifty Germany, by comparison, would have just a 1.73 percent interest rate on the same loan.)
Sigmund Freud believed that denial was an ego defense mechanism, a tactic called up by the brain when a situation is too difficult to handle, allowing a person to block out certain facts from their awareness. It's an important facet in the theory of addiction. And if we as a society are, as the title of the 2009 television series hosted by Irish economist David McWilliams asserts, "Addicted to Money," then the long and hard road towards economic recovery begins with the first step: admitting that we have a problem to begin with.