Robert Reich Tries Hard but Falls Short

Leave it to a public policy professor from the University of California at Berkley and former Secretary of Labor to fail miserably at identifying the real issue behind Greece's troubles.  As Prime Minister Papandreou surprisingly called for a referendum for the new bailout deal (conflicting reports seem to dictate no one knows what is going on with the vote), Robert Reich is jumping up and down on the triumph of democracy over the market as if government can evade economic laws.  From the HuffingtonPost:

Which do you trust more: democracy or financial markets?

If you wanna lose some money, we can take a bet on where Reich stands.

Greek Prime Minister George Papandreou decided in favor of democracy yesterday when he announced a national referendum on the draconian budget cuts Europe and the IMF are demanding from Greece in return for bailing it out.

Wrong, G-Pap decided he would bust out every stop to win another vote of no-confidence.

Or, more accurately, the cuts Europe and the IMF are demanding for bailing out big European banks that have lent Greece lots of money and stand to lose big if Greece defaults on those loans -- not to mention Wall Street banks that will also suffer because of their intertwined financial connections with European banks.

Wow, maybe I misjudged Reich.

If Greeks accept the bailout terms, unemployment will rise even further in Greece, public services will be cut more than they have already, the Greek economy will contract, and the standard of living of most Greeks will deteriorate further.
If Greeks reject the terms and the nation defaults, it will face far higher borrowing costs in the future. This may reduce the standard of living of most Greeks, too. But it doesn't have to. Without the austerity measures the rest of Europe and the IMF are demanding, the Greek economy has a better chance of growing and more Greeks are likely to find jobs.

Endorsing default over bailout out banks that made bad decisions? Don't tell me Reich cracked open a book by Mises, Rothbard, or Hayek.

Of course, if Greek defaults on its loans, global investors (fearing that a default in Greece sets a dangerous precedent) may yank their money out of Italy. This would almost certainly bust several big European banks -- and generate panic on Wall Street. That's why Tim Geithner has been pressing Europe to bail out Greece.

Damn, this guy is on a roll.

We've been here before, remember? Here in the United States, at the end of 2008 and start of 2009. Wall Street had made lots of bad loans, and the question we faced then was whether to bail out the Street.
The difference is, we didn't hold a referendum. Instead, the Bush administration told Congress the nation risked "economic Armageddon" if it didn't immediately authorize a giant bailout of the Street -- with no strings attached. Of course Congress hastily agreed. Hank Paulson, Ben Bernanke, and Tim Geithner (as head of the New York Fed) then doled out the money. And the Obama administration (with Geithner installed as Treasury Secretary) gave out more.

This can't be Robert Reich, it makes way too much sense.  Here he is decrying Wall Street bailouts while criticizing George "wanna be free market" Bush, Barack "I talk sh!t on Wall Street while strapping on their knee pads" Obama, Ben "never bank haircuts" Bernanke, Hank "tank in the streets" Paulson, and Turbo Tax Timmy.  The coup de grace:

So instead of allowing the Street to live with the consequences of its negligence, we bailed it out -- and allowed the Main Streets of America to suffer the consequences.

And we go downhill....

If Americans had been consulted about the bank bailout, I doubt it would have happened the way it did. At the very least, strict conditions would have been placed on the banks in return for the money. The banks would have had to eat the losses of the predatory mortgages they sold, and help homeowners reduce those mortgages. They'd be required to improve the capitalization of small banks in communities across the country. They'd be forced to accept stringent new regulations, including resurrection of Glass-Steagall.

Right for the first half, utterly confused for the second.  As Tom Woods pointed out today, Glass-Steagall is a red herring  Reich makes no mention of how the Fed and regulators had a part in promoting the housing crisis.  Government bureaucrats are always far sighted angels except when they bail out Wall Street.  Reich starts to end well:

But Americans weren't really consulted. It was an inside job.
As a result, Wall Street has prospered but the rest of the nation hasn't. One out of four homeowners is underwater, owing more on their homes than the homes are worth.

But like fiat financed bubble, he pops and continues his downward trajectory:

And with the worst economy since the Great Depression, we're now embarking on fiscal austerity. Either Congress's super-committee comes up with $1.2 trillion of federal budget cuts that Congress agrees to -- going into effect a little over thirteen months from now -- or $1.5 trillion of cuts are made across the board. Meanwhile, states and cities have been slashing public services for the past three years.
So which is it? Rule by democracy or by financial markets? Based on what's happened in America, I'd choose the former.

No acknowledgement of when large cuts in government expenditure lead to economic recovery following the Depression of 1920-1921 and WWII.  They don't fit the theory that governments must combat overspending and debt with more overspending and debt.  Reich comes close to nailing the Euro crisis but falls short by choosing tyranny of the majority over voluntary transaction.  I bet he didn't see this coming either:

It's gonna be a wild ride from here on out.  On new ECB President Draghi's first day, he got to deal with some real fireworks.  Perhaps this may clear some things up tomorrow:

Draghi, along with German Chancellor Angela Merkel and French President Nicolas Sarkozy, will be briefed by Papandreou on the sidelines of a Group of 20 meeting in Cannes tomorrow.

Hopefully some more hilariously worthless rhetoric will come out of the G20 tomorrow.  The sideshow is just beginning.

Update- Reggie Middleton argues that MF Global's bankruptcy was the result of a bank run:

So what on earth went wrong? Italy and
Belgium are, after all, still very unlikely to default before the end
of 2012. There is no reason, therefore, why the bonds shouldn’t payout.

Which leaves only the
possibility of some skittish repo counterparties suddenly getting cold
feet and pulling out (or demanding a greater proportion of
over-collateralisation with respect to the loan.

If repo contracts were completely reneged upon, this
would not only have left MF with a sudden liquidity issue — especially
if they couldn’t find a fresh counterparty — but also with a sudden need
to mark-to-market the bonds.

Indeed as Reuters reported on Monday:

Last week, counterparties likely pressed MF Global to post more
collateral on derivatives trades and may have started reducing the
company’s repo financing lines, market sources said.We’re not sure
exactly how easy it is to undo a “repo-to-maturity” trade, but it does
leave us wondering who exactly those counterparties might have been.

Hmm, interesting.  Clearly some important people were getting skittish about Corzine's bravado driven attempt to mimic Goldman and make MF Global the next risk taking cool kid on campus.