“Lords of Finance,” Liaquat Ahamed’s magisterial 2009 history of the events that led first to the Great Depression and then to the Second World War, is, necessarily, a book about policy mistakes. Central bankers and Treasury secretaries, presidents and prime ministers: all of them are locked into their own economic and political orthodoxies. Each is certain that his is the only sensible course of action. Crippled by their blinders, they consistently make economic choices that appear to us, nearly a century later, to be insane but to them seemed completely sensible.
Perhaps the worst of the policy errors during the post-World War I period was the insistence of the Allies that Germany pay war reparations — reparations that went far beyond anything that the defeated Germans could afford. As the victors, the Allies felt that it was only fair for Germany to pay for the terrible war it had waged, and they didn’t much care about whether such payments would cripple the German economy.
Which, of course, they did; by the early 1930s, the country was effectively bankrupt. And the Allies’ unrelenting demand for reparations bred immense resentment among the German people. There is not much doubt that this combination of public anger and economic distress helped facilitate the rise of Adolf Hitler.
Today, it is Germany that is making policy moves that seem insane. Locked into their modern-day orthodoxies, German politicians look at Greece with something akin to contempt. Aid to Greece — aid that is given grudgingly, when it is given at all — must be accompanied by severe austerity measures, the Germans believe, because the Greeks need to learn how to live within their means, the way Germans do.
For months, Germany has strongly supported the European Central Bank’s unwillingness to do the one thing that might have stemmed the euro crisis: buy and guarantee large amounts of distressed sovereign debt. When I asked Martin Wolf, The Financial Times columnist whose crisis coverage has been indispensible, why the E.C.B. was reluctant to act, he theorized that it “accepts the German view that monetizing government debt is inherently immoral.” As a result, though, what should have been a small crisis centering on Greek debt has turned into a full-fledged European contagion.
Can’t the Germans see, one wonders from afar, that their economy was the great beneficiary of the bubble economy that caused Greece — and the other peripheral euro-zone countries — to get in over their heads, because they were buying German exports? Don’t they understand that their banks should share the blame for lending to countries that couldn’t repay the debts? Don’t they realize that the collapse of the euro zone — unthinkable a year ago; perhaps inevitable now — will hurt Germany much more than Greece? Other currencies will be devalued against Germany’s, making German exports more expensive. And German banks — woefully undercapitalized and stuffed with sovereign debt — will face a major solvency crisis when other sovereigns devalue or default.
You would think that all of this would be obvious to the Germans. But it is not. Germany can’t get past the fact that it is being asked to bail out “club med” countries where no one pays taxes and everyone retires at the age of 50. From the German perspective, it doesn’t seem fair. And that overwhelms even the most powerful economic arguments that bailing out Greece and the other distressed countries also helps Germany.
The Germans, of course, are hardly alone in allowing their sense of righteousness to get in the way of sensible policy. Earlier this month, I wrote a column advocating principal reduction as a way of stemming foreclosures. My view is that housing, historically, has led most recoveries and that the foreclosure crisis is one of the things preventing the economy from truly reviving. Never-ending foreclosures cause housing prices to continue swooning and risk a deflationary spiral that could be devastating. They cause more homeowners to suddenly find themselves “underwater.” They hurt not just those losing their homes, but everybody. My argument is rooted not in morality, but in economics.
Yet the response I got from that column was, for the most part, fiercely negative. Why should people who took out loans they couldn’t afford get bailed out — while those who lived within their means get nothing? What about moral hazard? One reader wrote: “We should reward people who took large loans or refinanced their homes to go on vacations? Sorry, but correct ethical choices are more important.” In other words, it didn’t seem fair.
Such a view is understandable — in America and in Germany. But if we — and they — can’t stop obsessing about what is fair, we’re never going to get out of our current messes. The only thing that should matter is what works. Even if it means bailing out club med nations or underwater homeowners.
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