John Cochrane thinks the renewed bank competition in Greece by HSBC and the like is good news.
Why is this good news, you may ask? It’s just feeding the run away from local banks, which have invested heavily in now-tanking local economies and loaded up on sovereign debt.
Here’s the answer. My favorite solution for Europe is sovereign default and keep the common currency. (Actually, that’s my second favorite. Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much.)
The natural rejoinder is, what about the banks? Since the local banks have all loaded up on sovereign debt, then the banks will all go under, and won’t that be a disaster?
My response has been to remind people of the difference between existing banks and a functional banking system. Countries need a functional banking system. They do not need all of the existing banks to continue, nor do they need all of the existing bank’s creditors not to lose a cent.
Read the whole thing. Then read John’s nearby post “Simon Johnson on the Euro“. Now that I’ve read both, and Simon’s essay I am just as worried as I was this morning. Dr. Cochrane may be correct that “sovereign default and keep the common currency” is the best available option. But is there any political support for that path? I don’t think so. I think the politicians will keep doing what they have been doing, making the same mistakes over and over. Kicking the can down the road, until Simon’s future arrives.