Krugman, Greece and the social construction of lending

New York Times columnist Paul Krugman has been writing a lot lately about the brewing economic crisis in the European Union. Greece is deeply in debt and the EU (led by Germany) is insisting that the country adopt harsh austerity measures in order to pay back as much as possible. Tired of their suffering, the Greek voters recently elected an avowedly anti-austerity government. If Greek banks default on their loans, the country will likely leave the Euro and set up its own currency, which would compromise the integrity of the entire EU project.

I wil leave it to Professor Krugman to enlighten you with the details of the situation as well as his particular take on it. (Recent columns on the subject are here, here and here.) But a point he makes at least once in each column is particularly interesting to me. It is that for a country (or anyone) to borrow irresponsibly, someone else must be lending irresponsibly. But when loans go bad, everyone focuses on the responsibility of the borrower. We see this now in Greece, but it was also a very relevant dynamic in the 2008 financial crisis, in which (most of the) banks who made unwise home loans were bailed out by the government while the people who borrowed the money lost their homes.

You'd think this would be an obvious point to someone like me, who is constantly stressing the relativity of seemingly obvious or immutable economic practices and policies. But in fact I have missed it. A loan is governed by laws, and those laws can--and, it seems, should--say that that lenders are as responsible for evaluating the credit of the borrower as the borrowers are for making a good-faith attempt to repay the money. On that interpretation, eating the occasional bad loan is just a cost of doing business. Governments that press borrowers to repay loans they cannot afford are no more neutral than those who give lenders a "haircut" in making them write off bad loans.