When Former Secretary of the United States Treasury Paul O’Neill was in New York for a busy week of meetings recently, he sat down with Wealth Manager Editor in Chief Kate McBride at the Waldorf Astoria for an exclusive interview. It was May 18, not long after the European Union announced a bailout of Greece at close to $1 trillion. O’Neill spoke with McBride about global economic issues, pension and tax funding and financial reform legislation.
WM: The European Union bailout of Greece: It’s nearly $1 trillion; is it enough? Is it the right kind if bailout?
O’Neill: No I think it’s a really bad idea–what’s going on with the Greece process. I don’t think it’s repeatable–I don’t think there’s another $5 of $6 trillion that could be cobbled up. When individual countries get into fiscal difficulty, as Greece has, it’s not reasonable to expect the rest of the world to basically tax their own citizens to support a legion of bad decisions by the Greece government. Even though we’ve masked it with high-sounding ideas like the International Monetary Fund or European Union…at the end of the day, doing what they’ve done transfers the default to unsuspecting, unknowing citizens in other countries. It’s not only wrong because it’s a precedent that can’t be sustained, but it’s unfair to other people around the world to have to put up their money to make good on obligations that were made by a sovereign government.
By me, a correct solution would be for the Greeks to announce to their bondholders: “We’re not going to pay interest anymore because we can’t; we’re not going to redeem your bonds and therefore your bonds are worth zero.” Instantaneously the Greek government would be in a balanced budget because it would not be able to borrow money from anyone else and it would not be able to spend more money than it takes in tax revenues.
To a degree–ideally to a 100% degree, Greece is going to have to default on its outstanding obligations and go forward from there. I think this just stretches out the pain and tries to distribute the pain to other unsuspecting people around the world. As a general matter, countries that get themselves into this kind of trouble should be left to get themselves out.
Some people are saying this would be much easier if Greece had its own currency again, and in a superficial sense, that’s right. But, at the end of the day, if Greece had its own currency and if solved its financial problem by effectively having its currency devalued by the international markets, it would be basically expropriating its own people by stealth. So, then instead of having a front door announcement that we’ve done bad things, the relationship to other world currencies gives you the luxury of cheating your people, with it being less obvious. The consequence of where Greece is, is a reduction of the purchasing power of the people in Greece vis-?-vis other countries in Europe of about 21%. Ideally they and other governments that have borrowed more than they can fund need to deal with this thing in an upfront way.
WM: Is there any parallel that you see, from the last 50 years, of any other country doing what Greece has?
O’Neill: Really, except for the Argentinean case, it has been the tradition since the Second World War to do what the world is now doing vis-?-vis Greece. It’s just an inherently flawed idea because it doesn’t require people to be accountable for gross missteps they take in the management of a sovereign state.
WM: Closer to home, everybody’s worried about the PIIG countries.
O’Neill: They all have the same problem, fortunately to a lesser degree. In the case of Spain you could make an argument that they were in a relatively good position until the debacle that was triggered by the housing problems in the United States, and in Spain and other countries where people had abandoned reason. It’s not really reasonable to give someone who has no income, and no wealth accumulation, a home mortgage for $500,000 with nothing down. In the first six months of 2006 in the United States, 30% of the mortgages that were written were what we’ve now come to call liar’s loans, no income, no wealth, and in fact a very big portion of those loans in 2006 never made the first payment on the mortgage. We had plenty of warning for this.
WM: Why do you think the signs that were pretty evident, at least by 2007, were swept out of sight, almost?
O’Neill: When you’ve got momentum, and you’re flying through the air, you probably think you’re a bird–even if you’re a rock!