By JOHN H. COCHRANE [Wall Street Journal] – Europe’s deepest problem is bad ideas. Unpleasant price movements represent “illiquidity,” “speculators,” “market manipulation,” “lack of confidence” and “contagion,” not the hard reality of looming default. The point of policy is to “calm markets” and “provide confidence”—not to solve financial problems.
When the price of bread rose in their revolution, the French took bakers to the guillotine. They got more inflation, and less bread. When their descendants saw bond prices falling, they passed restrictions on short sales. They got lower prices, and less liquidity.
This is not a temporary market dislocation. This debt will not be paid back. Greece and the others might well rather default. Cleared of past debt, like Argentina, they are likely to be able to borrow again soon. These countries surely don’t want austerity. And least of all do their political classes want to reform their great-scam states—there is pervasive rot in an economy where every occupational license is a political favor—though reform is the one thing that could actually return them to strong growth and let them pay back debt. . .
The worst idea of all is that Europe’s admirable economic free trade zone and currency union cannot survive a sovereign default. It is precisely allowing sovereign default, and isolating the central bank from sovereign default, that is the only way to keep the union together. That is, after all, how the euro was set up in the first place. It’s almost too late. But not quite.
Continued in The Wall Street Journal | More Chronicle & Notices.
