Thursday, April 30, 2015

Eurozone has a moral hazard problem

The moral hazard of the euro-zone is that you had convergence because the markets began to sense that any sovereign was too big to fail and so all these overly indebted countries got to keep on borrowing money at low rates of interest. Had the eurozone never been created and Greece was trying to borrow in drachma they could not have accumulated all that debt because nobody would have loaned them the money. But there was this moral hazard that should have diffused earlier. Instead, they are feeding it by trying to keep it and make it so that nobody defaults and that is a mistake.

We are doing the same thing here. We bailed everyone out. We prevented a lot of defaults that should have been allowed to occur. We have even more moral hazards than they have in Europe. We've got all sorts of people who have borrowed money who are never going to pay it back. We have all these students that have debt, we have mortgages and credit cards and, of course, the federal government can never repay its debts, either. So in that respect we are no different than Greece.

Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009