What’s government for?

Yesterday, Europe was back in the news. Whenever Europe is in the headlines, the headlines are bad. And the ideas behind the headlines are absurd. In fact, it is amazing how many crackpot ideas the press can throw at you in a single day.
The immediate problems in Europe were two-fold:
First, it looked like Portugal was going the way of Greece. It would soon need another bail-out, said the papers.
Second, the Greeks themselves were still having trouble settling up with their creditors – despite years of negotiation, bail-outs, rescue plans, and mouth-to-mouth resuscitation. 

 

Bloomberg was on the story yesterday afternoon:

… a stalemate between European policy makers and Greek bondholders over debt relief increased concern that the European credit crisis will spread.
… finance ministers balked at putting up more public money for Greece, calling on holders of its debt to provide more relief. The International Monetary Fund cut its global economic forecast as Europe slips into recession and growth cools in China and India.

“The Greek debt impasse is weighing on the market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The IMF warning this morning dampened any economic optimism.”
At the heart of the market’s nervousness was what Bloomberg calls “demand fears”. As near as we can figure, ‘demand fear’ is the worry that there aren’t enough people who want things and have the money to pay for them. 
Why not be satisfied with the demand as it is? Why not accept the decisions of willing and able consumers as to how much stuff they need and how much they can afford to buy? Why is it important that they buy more than they need with more than they have?
Because it could lead to another Great Depression, says Christine Lagarde.
No kidding. That’s what the head of the IMF told Germany’s Council on Foreign Relations. The Washington Post:
International Monetary Fund Managing Director Christine Lagarde warned of a “1930s moment” for the world economy if Europe does not solve its financial problems and said Germany must contribute more money to rescue efforts if a disaster is to be avoided.
Without such funds, Lagarde said, “we could easily slide into a 1930s moment.  A moment, ultimately, leading to a downward spiral that could engulf the entire world.”
She said the 17 euro-zone countries also must move quickly to integrate their economies as deeply as they integrated their monetary systems with the creation of the common currency. Failure to act, she said, could precipitate a crisis comparable to the Great Depression.
And here’s one of our favourite economists, Larry Summers, writing in the Financial Times. Mr Summers is concerned by a lack of confidence and “uncertainty about future growth prospects,” which he thinks are the causes of the demand shortage.