Mark Karlin: In "Pity the Billionaire," on page 71, you note that "market populism" shifted over the years from being "almost exclusively a faith of the wealthy" to being "the fighting faith of the millions." You definitely single out Glenn Beck as being a shill for this "faith" among the "disgruntled" masses. Was his role that important?
Thomas Frank: Glenn Beck had a huge role in the rise of the Tea Party and the broader shift of the nation to the right. Remember, during the period we're talking about, Beck was on the cover of Time as well as the New York Times Magazine; he was the subject of two separate biographies. Whether we like it or not, he was the face of that political moment, the voice that caught the public imagination. In fact, it is hard to make any sense at all of the Tea Party movement absent Glenn Beck's strange views of history and his dread of the Obama Administration. Go back and look at footage of Tea Party events or interviews with Tea Party participants, and you will find that they often echo, sometimes word for word, the idiosyncratic lessons taught by Professor Beck.
What I meant by market populism is the idea that markets speak with the voice of the people; that they are a sort of naturally occurring democracy; that whoever is attuned to the holy spirit of the market is one with the spirit of the people themselves. Vox populi, vox dei. When I first wrote about this idea, back in the 1990s, it was a straight-up propaganda ideology of management theorists and other corporate shills. Today, though, it is everywhere.
MK: When we talked in 2004 about your brilliant and seminal book, "What's the Matter With Kansas?," you tried to unravel your bemusement with how people of your home state, many without significant means of any sort, had become cheerleaders for reducing taxes on the rich. Were many of the people you met and described the precursors of the "Tea Party"?
TF: I haven't kept up with them, but I'm sure some of them have moved into the Tea Party. Others probably have not. The important distinction is this: Social conservatives are often working-class people who are uninterested in the grander conservative project of reversing the New Deal. The Tea Party, by contrast, says it is not concerned with culture-war issues; all they're interested in is trying for that unregulated free-market utopia. This shift has been, amazingly enough, a response to hard times, which has pushed the culture wars off the front burner, just like hard times did in the early 1930s (in those days the issues were evolution and prohibition).
What unites the two is the crushing irony of populist conservatism. In both cases you're talking about a movement that empowers the powerful but that does so by imagining that it's standing up for the little guy or the common man.
MK: In "Pity the Billionaire" you marvel that the Ayn Rand myth of the free market could make such a sweeping comeback with "free market" deregulation almost cratering the US economy. On page 118 of your new book, you bring up Naomi Klein's shock doctrine theory - and the irony that the right claimed that the Obama administration was trying to take advantage of the economic crisis to move America to the left. But didn't the conservatives and their economists apply the shock doctrine to America's economic meltdown to force an even more utopian vision of a free market?
TF: What Naomi Klein was talking about were deeply unpopular policies forced on nations at moments of crisis. You might say that the Wall Street bailouts of 2008-09 fit this pattern: at a moment of supreme danger, the country was asked to prop up the banks that had basically spent the previous decade in an orgy of fraud and bonuses. Give Wall Street what it wants, we were told, or else.
But what is really spectacular is how this alarming historical episode got processed through the right's upside-down machine and came out as the story of how power-hungry leftists tried to "transform America" by force during a crisis: Rather than Hank Paulson and Co. bailing out their friends, it was Big Government trying to get its fingers around the throat of free enterprise. This was the moment, you will recall, when sales of "Atlas Shrugged" really spiked, and the great fear of a crazed government reacting to hard times by grabbing economic power really got going. The year after that (2010) saw the publication of Glenn Beck's novel, "The Overton Window," with its big central idea of liberals using fake crises to grab power.
The funny thing is that everyone wants to imagine themselves as the victims of the "shock doctrine" - even the parties that were manifestly the beneficiaries/architects of it.
MK: I want to return to the Tea Party for a moment. Despite being organized by Americans for Prosperity (Koch brothers) and FreedomWorks (Dick Armey), it's taken on a life of its own that's driving the GOP presidential primaries. Although "Pity the Billionaire" focuses on the sleight of hand that the right successfully pulled off of doubling down on disastrous economic policies, aren't many of the "free market" populist backers crossovers with the religious and "social values" white "American-entitlement" movement?
TF: Possibly. However, the Tea Party movement has been pretty forthright about not wanting to discuss culture-war issues. This was especially the case in 2009-2010, when economic issues drove everything else off the front pages. I think of the Tea Partyers as small business people, by and large, for whom the culture-war issues are secondary, and attacking "red tape" and organized labor are primary. As EJ Dionne has pointed out, the communitarian spirit that drove culture wars populism for decades is very different from the individualistic spirit of the free-market creed. If anti-evolution types suddenly got the old-time religion of the free market, I think that's fairly remarkable. Which is not to say it can't happen or it won't happen - Lord knows these groups have come together before. Anything is possible when you don't have a vigorous left contesting these people's views and making the contradictions obvious. People might start to believe that Jesus was a great venture capitalist or something.
MK: Explain the difference between the perception of "capitalism" by many Tea Party members and "the American way of life" (i.e., the unleashed "potential" of small business and the entrepreneurial spirit). How is this working-class anger used to enhance the Wall Street/global corporation Ayn Rand philosophy?
TF: Of course the true believers think "capitalism" and "America" are synonymous, but after that it gets complicated. What makes the Tea Party so powerful is that it also appears to be an uprising against capitalism, against Wall Street, in particular against the bailouts. For example, protesters often talk about how much they hate "crony capitalism." It's only when you dig down deep that you discover that their understanding of "what went wrong" in the housing bubble and the financial crisis is that government played too large a role in the economy, not too small a role. And their way of getting revenge on "crony capitalism" is to cut red tape and get regulators out of the picture altogether. A perfect example of this is Newt Gingrich's Super PAC's TV commercials against Romney and Bain Capital: The ad's narrator is all for "capitalism," but oh how he hates what Bain Capital has done to working people's lives! (Needless to say, Newt's solution would be further deregulation.)
MK: You describe, in your book, how the right wing and their media shills suffer from a "victim complex." How is this possible? It's hard to wrap the brain around it, books such as "The Persecution of Sarah Palin."
TF: That they do indeed understand themselves as victims is undeniable. It is Sarah Palin's entire raison d'etre. Whenever I see her face appear on my TV screen, I know that very soon someone is going to make the point that someone, somewhere was mean to her. This is also what explains the whole fantasy of concentration camps for conservatives, which is still (sort of) going on in places. [See this link, for example.] It is the absurd theme that runs throughout "Atlas Shrugged," where the main character, who has organized a strike of the billionaire class, describes himself as "the defender of the oppressed, the disinherited, the exploited - and when I use those words, they have, for once, a literal meaning." That's right, in one of the most popular novels in recent history, billionaires are said to be - insisted to be! - the "disinherited" and "exploited" class.
Understanding how conservatives get themselves to this point is slightly trickier. They merely understand "elitism" in a different way than you and I. The true powers of society are not the rich, but the professionally-credentialed and the government-connected. Conservatives basically invert the populist categories of yore. Instead of blue-collar workers or farmers being the exploited producer class, it is entrepreneurs, who work so hard and have to comply with regulations and pay taxes and put up with the whining of their tattooed hipster employees. And it is the rest of us who are the real parasite class.
MK: You state that "there is no such thing as pure capitalism." Ironically, wasn't this true of communism - and eventually led to its downfall? It's sort of comical to imagine Paul Ryan and Karl Marx each pulling an oar on the same rowboat.
TF: You've put your finger on one of the parallels that I most hoped readers would get - that utopian capitalism is, in all sorts of ways, a parallel delusion to utopian communism. It's not a coincidence that both movements had their heyday as responses to systemic economic breakdowns, and that both of them have spawned similar social movements, in which the gleam of the utopia is so blinding it cancels out all sorts of things that are obvious to everyone else (famine in the Ukraine; the role of credit default swaps). There are dozens of other curious parallels, all of them drawn out in shocking detail in the book, so I'll stop there, but I'm grateful to you for getting it.
MK: You bemoan that President Obama was too accommodating to Wall Street. You assert: "This [the Obama presidency] was the time for a second FDR, not Clinton II." Have we crossed the Rubicon - despite the Occupy Movement and Obama's new-found moderate populism - in that the assets of the US have shifted so much into the hands of the few that bipartisan big money governance is unstoppable?
TF: I don't know about crossing the Rubicon, but it's clear to me that we have missed what will probably prove to be our generation's greatest opportunity to reverse the direction of history. In 2008 and 09, Wall Street was in such high odor - so hated by the American public - that we could easily have chosen a New Deal type of direction. The conservative economic policies of the last forty years were in ruins around us. But Obama wasn't willing to point this out. The opportunity was squandered, but "squandered" isn't a strong enough word. Barack Obama had a once-in-a-lifetime chance to take the financial oligarchy apart - not just for electoral reasons, but because that was what democracy requires - and despite the right's perception of him as Robespierre reincarnated, he didn't do it. Yes, he may win re-election this fall, but at best he will be remembered as another Clinton: a guy who triangulated and got the best deals he could while facing down a right-wing nation. That the nation isn't right wing, and that it would have followed him had he led with boldness, is something that people like you and I will get to meditate on sourly for the rest of our lives.
MK: Let's return to what I'll call the bait and switch of the "small business operator" vs. the emergence of global corporations, many based in the US. One of the biggest myths of the populist right that the Wall Street/global corporate overseers exploit is that an absolute "free market" benefits the US. The reality is - that with the global trade agreements - global financial markets and corporations don't have significant national allegiances. Multinational corporations put small business out of business; think pharmacists, hardware stores, clothes stores, small grocer, bakeries, book stores etc. These global corporations belong to the market place and labor forces of the world, not to the US. But there are no Tea Party members I know of out protesting Walmart or General Electric. Any thoughts?
TF: The important fact you're getting at here is that the Tea Party, and to some degree the larger conservative revival generally, is a movement of small business. Small biz carries with it its own variety of populism, which is sometimes mistaken as representative of the interests of the people as a whole, but which almost always tends to act as a front for the larger corporate interests. So: Small merchants are out there in the town square, mad as hell about the Wall Street bailouts, rallying the public with them, but their solution is always to get government "off their backs" and to defenestrate organized labor, solutions which have nothing to do with the problems before us.
The funny thing is, you can see a situation where small business might have gone the other way, had the Obama administration made the smallest effort to complicate their populist narrative. Once upon a time, small business people were fairly progressive - because progressives were who enforced antitrust laws. So how might the Obama team have reached out to the angry small retailers demonstrating in the park down the street? Well, by promising to bring back antitrust enforcement and Glass Steagall, just for starters - things that are deep in the Democratic tradition, but that for whatever reason are off limits in this day and age. But even to bring this up is to realize the terminal absence of creativity from which the Democrats suffer.
MK: One of my favorite novels is the "Great Gatsby." It ends: "Gatsby believed in the green lights, the orgiastic future that year by year recedes before us. It eluded us then, but that's no matter - tomorrow we will run faster, stretch out our arms further.... And one fine morning - So we beat on, boats against the current, borne back ceaselessly into the past."
Your last two sentences of "Pity the Billionaire" are, "Every problem that the editorialists fret about today will get worse, of course: inequality, global warming, financial bubbles. But on America will go, chasing a dream that is more vivid than life itself, on into the seething Arcadia of all against all."
Gatsby, an aspiring romantic member of the nouvelle riche, was shot to death. You end on an almost equally gloomy note. Any ray of hope?
TF: You are the first one who has caught that. Fitzgerald is, of course, my favorite author, and what you quoted is one of my favorite passages of his. I was deliberately trying to echo my hero there, I confess it. What I meant by it was, the "hope" and utopia for conservative protesters - achieving a seething Arcadia of all against all - is a pit of hell for everyone else. Their green light ought to be a bright, flashing red light for the world.
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Paul A. Volcker, former chairman of the Federal Reserve. Adam Bernstein/Reuters
By JESSE EISINGER, ProPublica February 22, 2012, 12:04 pm
Last week, it finally became clear that the Volcker Rule was as good as dead.
The Volcker Rule, named after Paul A. Volcker [ http://topics.nytimes.com/top/reference/timestopics/people/v/paul_a_volcker/index.html ], former chairman of the Federal Reserve, is meant to bar financial institutions that are protected and subsidized by the federal government from trading for their own accounts. That is, it’s pretty simple: Traders shouldn’t speculate for their own personal gain using the money you and I pay in taxes.
Yet bank lobbyists with complicit regulators and legislators took a simple concept and bloated it into a 530-page monstrosity [ http://www.sec.gov/rules/proposed/2011/34-65545.pdf ] of hopeless complexity and vagueness.
They couldn’t kill the rule. Instead, they are getting Congress and regulators to render it morbidly obese and bedridden.
Of course, that is no accident. The biggest banks, which are in business today only because taxpayers bailed them out, want to protect their valuable franchises.
“Most of the length, complexity and questions are in there because of industry lobbying,” said Dennis Kelleher, who runs Better Markets, a financial regulatory reform [ http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/index.html ] group. The rule is “the bastard child of the lobbying industry,” he said. “You can’t demand and insist and lobby for all these rules and exemptions and then complain that it’s too long and complex.”
The banks are making sure the rule stays incapacitated. By Mr. Kelleher’s count, of the substantive responses, 13 were pro-reform, compared with 300 from the industry.
The regulators and legislators deserve some sympathy against such an onslaught. But only so much. Responsibility for the gross inadequacy of the Volcker Rule lies with them. They added the loopholes and exceptions.
Regulators did so out of vanity. They are confident they will be smart enough to navigate all the complexities. Regulators have already testified that they wanted to carry out the rule in a nuanced fashion. They aspire to distinguish intentional proprietary trading from unintentional cases, a standard that is tantamount to pre-emptive surrender. That will make enforcement all but impossible without a trader stupidly putting something incriminating in an e-mail.
Even at this late hour, regulators still have a choice. The final rule is not in place. They could radically simplify it. The law could merely state that prop trading is illegal at banks backed by the government, and not explain what the inevitable exceptions and exemptions would be. And regulators could make sure to emphasize, in public pronouncements, that the penalty would be stiff. If regulators carried that through, banks would scream that the sky would fall — that they wouldn’t know what was legal and what wasn’t.
Please.
What would happen is that regulators and financial houses would settle into a situation where only the most egregious violations would be prosecuted, while most acts that came close to the line would pass through. The result would be exactly the intent of the law: to reduce sharply any truly risky activities because lawyers would not be able to find rationalizations in any of the law’s language. The Volcker Rule should be a lean and mean single sentence.
O.K., fantasy time is over.
Second-best is to introduce some bright-line rules into this monstrosity. Then Volcker would not be hostage to whichever heavily lobbied regulators happen to be on staff at any given moment.
As it stands, “it’s as if we told the banks to stop speeding and required them to have speedometers,” said a Congressional official familiar with the rule-making. “But we didn’t set the speed limit.”
Yes, bright-line rules set up an arms race between the law firms that figure out ways for banks to comply with the letter but not the spirit of the law, and the government cops that are trying to figure them out. That is a race that government can never win outright. But with some enforcement, regulators could prevent the worst risks.
In all their pages of concerns, what is the anti-Volcker crowd most worried about? Nothing convincing.
Banks and their industry groups have mainly argued that the rule would reduce liquidity, or the ease with which a customer can buy or sell an investment. Less liquidity would raise the cost of capital for those seeking it.
Bogus. There is a surfeit of liquidity on Wall Street. It generates fees and short-term gains but little social worth. It is the opposite of useful. It disappears when most needed, as in the “flash crash” of 2010, thus exacerbating collapses.
Trading has risen inexorably in the last couple of decades, but has that resulted in more companies raising cheaper capital? No. Indeed, Professor Thomas Philippon of New York University [ http://pages.stern.nyu.edu/~tphilipp/papers/FinEff.pdf ] has found that the financial sector’s costs to society have risen, not fallen, in recent decades.
Banks say the rule will hurt their market-making businesses. But as the Occupy letter points out, market-making is a competitive, profitable business. There is no law of nature that requires banks do it.
Regulators could, if they wanted to, ban all market-making by deposit-taking institutions. The Columbia economist Joseph Stiglitz [ http://topics.nytimes.com/top/reference/timestopics/people/s/joseph_e_stiglitz/index.html ] and Robert Johnson of the Roosevelt Institute wrote in their letter (below) to regulators on the rule, “If absolute simplicity is truly what the industry demands, then the regulator should provide that.”
Complex structures and high-risk trading should be eliminated, they argue. The rule, they point out, gives the regulators authority to make “any (their emphasis) limitations or restrictions” they want on trading, which includes banning all trading in securities or derivatives.
Despite the decibel level, the banks’ case is weak. As Peter Eavis of ?The New York Times noted on DealBook [ http://dealbook.nytimes.com/2012/02/14/making-a-theoretical-case-against-volcker/ ], the opposition comment letters substitute dire theoretical predictions for specific real-life examples. Surely, the banks have the data. If the data supported their case, why not trot it out?
The reason is that they didn’t have to. They won anyway.
Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking, not growing. It’s not an official recession yet, but the only real question is how deep the downturn will be.
And this downturn is hitting nations that have never recovered from the last recession. For all America’s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe’s has not. And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain’s slump has now gone on longer than its slump in the 1930s.
Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster.
For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.
Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.
Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.
Furthermore, bond markets keep refusing to cooperate. Even austerity’s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better.
Meanwhile, countries that didn’t jump on the austerity train — most notably, Japan and the United States — continue to have very low borrowing costs, defying the dire predictions of fiscal hawks.
Now, not everything has gone wrong. Late last year Spanish and Italian borrowing costs shot up, threatening a general financial meltdown. Those costs have now subsided, amid general sighs of relief. But this good news was actually a triumph of anti-austerity: Mario Draghi, the new president of the European Central Bank, brushed aside the inflation-worriers and engineered a large expansion of credit, which was just what the doctor ordered.
So what will it take to convince the Pain Caucus, the people on both sides of the Atlantic who insist that we can cut our way to prosperity, that they are wrong?
After all, the usual suspects were quick to pronounce the idea of fiscal stimulus dead for all time after President Obama’s efforts failed to produce a quick fall in unemployment — even though many economists warned in advance that the stimulus was too small. Yet as far as I can tell, austerity is still considered responsible and necessary despite its catastrophic failure in practice.
The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level. Remember all the fuss about whether there were enough “shovel ready” projects to make large-scale stimulus feasible? Well, never mind: all the federal government needs to do to give the economy a big boost is provide aid to lower-level governments [ http://krugman.blogs.nytimes.com/2012/02/17/reversing-local-austerity/ ], allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.
Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.
For Greece, a Bailout; for Europe, Perhaps Just an Illusion
By PETER EAVIS February 21, 2012, 10:14 am
8:28 p.m. | Updated
Even after European leaders appeared to have averted a chaotic default by Greece with an eleventh-hour deal for aid, worries persist that a debt disaster on the Continent has merely been delayed.
The tortured process that culminated in that latest bailout has exposed the severe limitations of Europe’s approach to the crisis. Many fear that policy makers simply don’t have the right tools to deal with other troubled countries like Italy, Spain, Ireland and Portugal, a situation that could weigh on the markets and the broader economy.
“I don’t want to be a Cassandra, but the idea that it’s over is an illusion,” said Kenneth S. Rogoff, a professor of economics at Harvard and co-author of “This Time Is Different: Eight Centuries of Financial Folly.” “I am amazed by the short-term psychology in the market.”
Throughout the crisis, the European Union [ http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_union/index.html ]’s favored strategy has been to provide tightly controlled financial support to highly indebted countries, in the hope of buying them enough time to put in place policies aimed at cutting budget deficits. While such moves can deepen recessions, the goal is to eventually lower debt levels and win back the confidence of the bond markets.
On the margins, investors have become more optimistic. European stocks and government bonds have rallied sharply this year on the belief that Greece would avoid a disorderly exit from the euro [ http://topics.nytimes.com/top/reference/timestopics/subjects/c/currency/euro/index.html ]. On Tuesday, United States equities rose slightly after the Greek deal, while European stocks fell modestly, giving up some of their gains from the previous day.
But Greece’s current predicament highlights the weakness in the European response.
Greece is also resorting to a move that European officials initially wanted to avoid at all costs. As part of the 130 billion euro aid package, the country is going to reduce its overall debt load by requiring some creditors to take losses on Greek bonds. In total, the restructuring will mean private sector holders of Greek bonds take a hit of more than 70 percent.
European officials want to avoid similar measures for other countries. Last year, after European officials suggested debt restructurings might be employed beyond Greece, the region’s government bonds plunged in price. The market reaction prompted officials to remove debt haircuts from the crisis management toolbox — at least for now.
Instead, European officials have introduced a range of measures over the last year that may buy more time for struggling countries. The European Union is setting up large pools of money to make emergency loans. And the region’s leaders have agreed to move toward more coordinated fiscal policies, which may pave the way for richer countries to transfer funds to poorer ones.
The three-year loans have also helped firms continue to finance purchases of sovereign bonds, bolstering the debt markets. Spain’s government has already sold more than 30 percent of the $114 billion worth of bonds it plans to issue this year.
But one of the lessons of the postcrisis period in the United States is that monetary policies may only temporarily lift the markets and can take a long time to seep into the real economy. Some economists believe that although the European Central Bank has stepped up its response to the crisis, its efforts are not yet as stimulative as those of the United States Federal Reserve [ http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html ].
For instance, the Fed, in its most forceful stimulus measure, spent hundreds of billions of dollars buying bonds. The purchases supplied banks with immense amounts of cash that they were free to use as they wished.
The European Central Bank did something different with its $620 billion of loans in December. Banks had to post collateral against the money they borrowed. While the banks got cash, they still have to pay back the central bank loans in the future, and they still own the assets they posted as collateral. As a result, the central bank loans may have less effect than the Fed’s bond-buying, said Guy Mandy, a strategist at Nomura International.
Even in the United States, monetary policies did little to repair the balance sheets of the most debt-laden sectors of the economy. That means European government debt levels may take a lot longer to fall than officials hope. Certain governments may then require even more aid because they will not be able to sell bonds into private markets at affordable interest rates.
As with Greece, aid-disbursing countries like Germany might demand even tougher conditions on loans. But doing this can set up potential flashpoints that threaten to destabilize domestic politics and markets. “This creates a rolling crisis,” said Silvio Peruzzo, an economist at the Royal Bank of Scotland.
Raoul Ruparel, head of economic research at Open Europe, a policy group that is sometimes skeptical of the need for closer European integration, said, “The approach failed monumentally in Greece.”
For a while, the European Union may decide to keep giving aid to countries that do not meet goals, but this could create wider political conflicts in Europe. “It could drive a wedge between north and south in political terms in Europe,” Mr. Ruparel said.
If troubled countries find that they cannot comply with the loan conditions — and their richer neighbors grow increasingly impatient — they may have to follow Greece’s lead.
The idea with Greece was that private investors, not just governments, needed to foot some of the cost of the country’s aid package, so they were pressured to accept losses on Greek government bonds. If another country finds it difficult to comply with European Union and International Monetary Fund targets, “Germany and other countries will support the idea that the private sector has to pay its fair share of the debt relief,” Mr. Peruzzo said.
Darren K. Williams, an analyst at AllianceBernstein, said: “I think that would be a huge error that could cause all sorts of other problems. It’d make Greece a template.”
The big risk is that investors, fearing forced debt reductions in many countries, would dump European government bonds, leading to new financial and economic weakness in Europe.
But some investors see few options for countries like Italy, whose debt is at 120 percent of gross domestic product, and whose government bond market is among the largest in the world.
“Italy is essentially in a sovereign debt trap,” said Richard Batty, global investment strategist at Standard Life Investments.
For Italy’s debt to be sustainable, the country’s economy either needs to grow at a nominal rate of 5 percent a year, or the interest rate on its 10-year bond needs to be 3.6 percent, Mr. Batty estimates. During Europe’s most recent boom period, from 2002 to 2007, Italy’s nominal G.D.P. grew at an average rate of 3.6 percent, Mr. Batty said. Meanwhile, its 10-year bond, even after a big rally this year, has a yield of 5.43 percent.
If such optimistic results play out, Italy and other troubled countries may just muddle through this period of uncertainty. But if they don’t, the markets and the economy may be in for a bumpy ride.
“I don’t think we’re anywhere near the endgame,” Professor Rogoff of Harvard said.
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