It was questionable if even in the midst of failure Greece was getting the message. When I interviewed Greek finance minister Giorgos Papaconstantinou at the peak of the crisis, he seemed to want to blame not Greece’s notorious overspending but the nature of investment activity. He criticized the lack of transparency in the financial system, particularly around collateralized debt obligations (CDOs), derivatives, and other instruments that “basically corner countries” that are trying to do the right thing and get their financial houses in order. That was one way of looking at it, but most experts were clear that Greece’s problems were of its own making, and the solutions were going to cause a great deal of pain to the population. One observer compared Greece to a subprime homeowner who owed more than he could afford but who might find the cost of a rescue—rising taxes and spending cuts—intolerable.
I spoke with Nassim Taleb, a former Wall Street trader and author of The Black Swan, a critical view of the deception inherent in financial solutions. He emphasized that there was “massive fragility” in the markets that would not be alleviated by an infusion of cash. Granted, he told me, the rescue package for Greece by the European Central Bank and the International Monetary Fund briefly made things better. But, he said, “It’s like putting a lot of Novocain on a decaying jaw. The infection is still spreading. You’ve got to do surgery, and people are afraid of surgery.”
One person who was relatively sanguine about the perceived crisis was the former Bear Stearns chairman Ace Greenberg. He’d seen nearly six decades worth of market fluctuations. He was there when the Dow fell 45 percent in 1973. He was there on Black Monday in October 1987, and he famously said after a huge market drop, “Markets fluctuate. Next question.” So when I asked him in June 2010 about concerns with the stability of the euro, he brushed them off. “I’m sorry Greece is having a problem,” he said. “But Greece is a tiny country, even by the standards of Europe. And, you know, sometimes, Maria, markets go up and down for no reason. In 1987 the market went down 32 percent in two days, and that was the blue chips. The other stocks you couldn’t even sell, so you didn’t know how far down they went. They couldn’t find a reason for why it went down. There was no reason. There were no changes. Over a short spell we made it all back; and it was just a question of, like in the West, enough thunder starts a stampede and everybody runs for the exit.”
Greenberg’s point wasn’t exactly confidence inspiring. Nor did I believe that market activity was entirely random. The stock market was responding to real concerns on a global level. Greece might have been tiny, but it was the canary in the coal mine.
Professor Axel Weber, a European Central Bank Governing Counsel member and Germany’s Bundesbank president, was among the small group putting together the bailout for Greece. He told me that Greece’s problems were not a result of the global financial crisis, but its own failure to control spending over the years. “One thing that is clear is Greece had a fiscal deficit even in the good times of 2004, 2005, 2006,” he said. “So the situation was that fiscal space was stretched at the starting condition, before this crisis. Greece is a special problem, and the Union is dealing with this problem going forward.”
Weber’s caution going forward demonstrated parallels with the efforts of our own Treasury Department to stabilize the economy and protect banks by footing the huge bill. But his primary message was one of fiscal responsibility. “It will be key to use the proceeds of this recovery that we’re about to see in order to get to a sustainable starting position,” he said. “That will be the lesson that has to be drawn. We need more fiscal responsibility in each and every member country. And the crisis told us that this is much more key to the Union than it has been perceived up till now.” Weber’s point was one that we needed to take to heart in America: Don’t just relax into the recovery. Use it as a moment to get our house in order. Greece did nothing to pay down its debt during prosperous times. We are in danger of following the same path.
There was little question that Greece’s main problem—spending money it did not have—was enabled by the same kind of financial maneuvering that nearly brought down Wall Street. When Papaconstantinou was blaming investment banking activities for Greece’s debt, he failed to mention that his country had welcomed the involvement on the part of Goldman Sachs that had allowed Greece to join the Union in the first place. According to a Bloomberg report, Goldman Sachs managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit. These complicated swaps were perfectly legal, and Goldman earned a fat fee of around $300 million for arranging the deal. But like the broke homeowner living in a mansion, Greece was in over its head and didn’t show it. And its grand facade was enabled by an investment banking system that was already breaking down.
Axel Weber turned a hard eye on the banking system as a whole. “Taxpayers around the world have put roughly twenty-five percent of global GDP on the table to deal with bank rescues,” he pointed out. “They have a right to know whether this was a lack of risk management, whether it was simply some flaws in the system, where it was related to some unfortunate market developments, or whether deliberate attempts of fraud were on the line.”
The drumbeat against the investment banking culture was growing louder, and Goldman was bearing much of the brunt, probably because the firm had been
