As I wrote on Thursday, leaders in the eurozone and elsewhere around the world are no longer terrified that Greece defaulting on its debts would lead to a massive financial crisis. That's one of the main reasons Greece's creditors are so comfortable taking a tough line on the Greek government, which, in turn, is one reason a deal is so hard to achieve.
Larry Summers — the economist and former senior policymaker in the Clinton and Obama administrations — says this complacency is dangerous in a scary new op-ed in the Washington Post. He concedes that "there are good reasons to think enough foam has been placed on the runway to prevent financial contagion." But he reminds us that "this was asserted with respect to LTCM, subprime and the fall of Lehman." And, indeed, the lead-up to Lehman's collapse featured things like articles explaining why Lehman Brothers was no Bear Stearns.
The op-ed is paywalled, but suffice it to say that Summers is really amping up the panic level. Some choice lines:
- "Historians understand how the first world war was allowed to start but are still, a century later, incredulous that it happened."
- "Greece will get far worse than it is today and it will probably become a failed state."
- "A massive northern out-migration of Greeks will strain national budgets throughout Europe — not to mention the challenges that will come as Russia achieves a presence in Greece."
- "Financial historians may look back at the events of next week and wonder how Europe’s financial unravelling was permitted."
So who's right? I have to say that Summers is probably wrong here. People have had years to recognize that Greece might end up defaulting on its debts, and the very extended negotiating process since January means there's truly no chance of a surprise.
But probably may not be good enough here. How hard do you want to work to avoid a 40 percent chance of financial crisis? 20 percent? 10 percent? 5 percent?