Hammer and a nail – explaining Merkel’s irrational obsessions

A good friend and reader of my previous post pointed me to a post of Ezra Klein in the Washington Post (The bias towards creditors) which attributes an interesting thesis to Robert Johnson executive director of the Institute for New Economic Thinking. I will shamelessly steal from the blog and try to use the main idea to explain why Merkel (and any politician) behaves as she does in the midst of an economic crisis unlike any we have seen before. How she behaves you say? Irrationally!

Imposing an unprecedented, across the board austerity on the entire continent disguised as economic morality she forces what is left of economic activity to come to a screeching halt bringing the continent on the verge of a recession it may  take years to come out of.

The thesis of Robert Johnson freely (mis)interpreted by myself goes as follows. Confronted with a severe crisis and squeezed between a financial system she does not understand and a population which will not get a chance to express its discontent any time soon, between bankers in expensive suits talking gibberish in arrogant tones and a population of average Joes, a risk averse politician who needs to appear dealing with the crisis tends to choose slapping a decade of austerity on the population she represents (or on one she can attribute economic immorality to) than letting the bankers’ banks fail. Why? Because the politician is trained to understand, handle, deal with voter discontent but is terrified of the hidden and incomprehensible repercussions of letting risk takers fail. This tends to mean that politicians show a bias towards creditors and against debtors.
In other words what explains Merkel’s irrationalities is simply nothing but Maslow’s hammer or else the law of the instrument: if all you have is a hammer everything looks like a nail. Ask the Greeks what being hit in the head with a hammer feels like…

PS: The standard argument that the Greeks (and other debtors in sin) need “punishment” for their “economic immorality” or else moral hazard will be upon us, systematically forgets the moral hazard which comes from creditors being bailed out because politicians are intimidated by the complexities of the financial system…

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