By Steve Brawner
© 2015 by Steve Brawner Communications, Inc.
Remember the bank run scene in the movie “It’s a Wonderful Life”? George and Mary are traveling to their honeymoon when they see a crowd gathering outside the bank. George runs to the Bailey Bros. Building and Loan to find a crowd of worried customers wanting to withdraw their savings. He explains to them how financial institutions work. (“The money’s not here. Why, your money’s in Joe’s house … and in a hundred others.”) Then he begs them not to panic and starts handing out his own $2,000 in honeymoon savings to tide them over. Meanwhile, across town, Mr. Potter, the richest (monetarily) and most powerful man in town has just become richer and more powerful by taking control of the bank, which would be shut down for a week.
That scene is unfolding on a national scale in Greece.
In a nutshell, Greece’s debt has reached 180 percent of its gross domestic product, it’s not paying its bills, and the patience of its European creditors is wearing thin. Previous loan terms have required the Greek government to impose higher taxes and cut government spending, but the country is still mired in debt. The economy is collapsing. Unemployment is 28 percent. The banks have been closed, and Greeks have been limited to withdrawing the equivalent of $67 per day from their ATMs. On July 5, the Greek people defiantly voted not to accept the terms of a previous bailout proposal. It accomplished little but to strain the tolerance of their creditors, who forced Greek’s prime minister to accept an even worse deal.
Bankrupt debtors don’t get to set the rules.
International economics is above my pay grade. If you’ll pardon the pun, it’s mostly Greek to me.
Here’s what I know: Economies are based on trust. You and I work because we trust we’ll be paid. We deposit our money in banks trusting it will be there if we need it – without considering what would happen if everyone needed it at once. Trust is the basis for loans, investments and insurance. With it, an economy has a strong foundation. Without it, an economy becomes a house of cards.
The United States can’t yet be compared to Greece. America’s debt-to-GDP ratio is 103 percent. It’s still the world’s most dynamic economic engine, with abundant and untapped resources.
But let’s go there anyway. America’s national debt is now $18.2 trillion, or $57,000 for every American man, woman and child. In 1981, just 34 years ago, it was less than $1 trillion. Because of currently unfunded liabilities, that $18.2 trillion is projected to grow much larger. Meanwhile, the political system – long an inspiration to other parts of the world – has become incapable of doing anything about all this.
This behavior should be hurting the United States much worse than it is. One reason it’s not is because American taxpayers are paying very little interest on the debt. Why? Because investors see the United States government as one of the world’s safest places to store their money.
And that should concern us. If economies are based on trust, then what does it say about a global economy when one of the world’s most trustworthy investments is the one described two paragraphs ago?
It’s not just Greece or the United States that have issues. China’s stock market has been in a free fall lately, and Puerto Rico is practically bankrupt. In a global economy, what happens in these places matters, because, metaphorically speaking, our money isn’t just in Joe’s house. It’s also in Qiao’s.
In “It’s a Wonderful Life,” George Bailey prevented a panic by talking sense into his depositors and by handing out his own money. The building and loan survived that day because of the trust he had built.
But there are two realities that can’t be ignored. One is that trust can be lost very quickly. Had George failed to keep his institution open in the coming days, his customers would have pledged their loyalty to Mr. Potter, the powerful autocrat down the road who offered a little temporary security in exchange for some of their wealth and freedom.
The other reality is this: George Bailey was a fictional character. If trust in the real economy – domestic or global, there’s not much difference now – is lost, it’s going to take a lot more than an impassioned speech and $2,000 to calm people’s fears.