Commentary Magazine


Topic: All About Eve

The End of the Welfare-State Model?

Stuart Varney of Fox Business News said Thursday on Fox News Special Report that what we are witnessing with the debt crisis in Greece and the swoon of the markets over the last week and a half is the end of the welfare-state model of governance. I think he’s right.

Markets are notorious for sometimes being oblivious to developments in the economy that, in retrospect, seem obvious — and then, suddenly, waking up and acting. The American economy began to slow down in the spring of 1929, for instance, but Wall Street — usually ahead of the economy — paid no attention and soared over the summer to heights unseen before. Then, on the day after Labor Day, for a trivial reason, the market panicked in the last hour of trading, and the mood turned instantly from “the sky’s the limit” to “every man for himself.” Six weeks later, the great crash of 1929 happened.

For years, democratic governments have been promising citizens ever-increasing benefits in the future to win votes in the present. What they haven’t been doing is arranging to pay for them. Instead, they have used phony bookkeeping to make things look under control. New York City did this in the 60s and 70s until one day the banks said they weren’t rolling over the city’s paper anymore. Now, Greece has suffered the same fate. It lied to the EU to get in and has been cooking the books to hide the gathering fiscal disaster ever since. The market has now made it clear that it thinks Greek bonds are for wallpaper, not investing. With more than 10 billion euros in bonds coming due on May 19, Greece had no choice but to accept draconian cuts in its benefits and strict accountability in the future to be bailed out by its euro-zone partners. They, of course, fear the collapse of the euro as a currency and a spreading contagion to larger countries that have also been doing what Greece has done for so long.

Europe would need $60 trillion in the bank, earning government-borrowing-rate interest, to fund its future welfare benefits. Needless to say, no country has four times its GDP in the bank.

In short, the market has suddenly become aware that the emperor known as the welfare state is, financially speaking, buck naked. The cost of insuring against bank default in Europe, according to Bloomberg, is now more than it was when Lehman Brothers collapsed. Other rates are nowhere near those levels, but it would not take much to set off a global panic. Markets have been down all week, and the Dow was down today by 1.34 percent, down 7 percent since Monday.

Great Britain and the United States, insulated from the crisis in Europe because they do not use the euro, have big financial promises they can’t pay for, either. President Obama, of course, wants to make more promises.

If Greece stands up to its unions and its outraged bureaucrats and reforms its ways, I suspect the current crisis will pass. But unless the rest of the democratic world reforms its ways — and soon — then, as Bette Davis famously said in All About Eve: “Fasten your seat belts. It’s going to be a bumpy night.”

Stuart Varney of Fox Business News said Thursday on Fox News Special Report that what we are witnessing with the debt crisis in Greece and the swoon of the markets over the last week and a half is the end of the welfare-state model of governance. I think he’s right.

Markets are notorious for sometimes being oblivious to developments in the economy that, in retrospect, seem obvious — and then, suddenly, waking up and acting. The American economy began to slow down in the spring of 1929, for instance, but Wall Street — usually ahead of the economy — paid no attention and soared over the summer to heights unseen before. Then, on the day after Labor Day, for a trivial reason, the market panicked in the last hour of trading, and the mood turned instantly from “the sky’s the limit” to “every man for himself.” Six weeks later, the great crash of 1929 happened.

For years, democratic governments have been promising citizens ever-increasing benefits in the future to win votes in the present. What they haven’t been doing is arranging to pay for them. Instead, they have used phony bookkeeping to make things look under control. New York City did this in the 60s and 70s until one day the banks said they weren’t rolling over the city’s paper anymore. Now, Greece has suffered the same fate. It lied to the EU to get in and has been cooking the books to hide the gathering fiscal disaster ever since. The market has now made it clear that it thinks Greek bonds are for wallpaper, not investing. With more than 10 billion euros in bonds coming due on May 19, Greece had no choice but to accept draconian cuts in its benefits and strict accountability in the future to be bailed out by its euro-zone partners. They, of course, fear the collapse of the euro as a currency and a spreading contagion to larger countries that have also been doing what Greece has done for so long.

Europe would need $60 trillion in the bank, earning government-borrowing-rate interest, to fund its future welfare benefits. Needless to say, no country has four times its GDP in the bank.

In short, the market has suddenly become aware that the emperor known as the welfare state is, financially speaking, buck naked. The cost of insuring against bank default in Europe, according to Bloomberg, is now more than it was when Lehman Brothers collapsed. Other rates are nowhere near those levels, but it would not take much to set off a global panic. Markets have been down all week, and the Dow was down today by 1.34 percent, down 7 percent since Monday.

Great Britain and the United States, insulated from the crisis in Europe because they do not use the euro, have big financial promises they can’t pay for, either. President Obama, of course, wants to make more promises.

If Greece stands up to its unions and its outraged bureaucrats and reforms its ways, I suspect the current crisis will pass. But unless the rest of the democratic world reforms its ways — and soon — then, as Bette Davis famously said in All About Eve: “Fasten your seat belts. It’s going to be a bumpy night.”

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