Repeating History

James Surowiecki makes the case that the ECB is falling into the liquidation strategy Andrew Mellon pushed in the Great Depression (h/t Ritholtz):

So the problem is not that the E.C.B. can’t act but that it won’t. The obstacles are ideological and, you might say, psychological. To begin with, there’s the concern that printing money to buy up bonds risks inflation. This seems like an odd thing to worry about, given how weak the European economy is. But even the hint of inflation is politically toxic in Germany and ideologically offensive to the E.C.B. The Germans are also obsessed with the idea that, if the E.C.B. does end up helping Italy and Spain, they’ll never learn their lesson. Moral hazard is a reasonable concern, but the Germans have reaped enormous benefits from the euro—most notably, it made their exports cheaper for the rest of the continent—and they should be willing to bear some of the costs. And it’s not as if the miscreants were still carrying on as usual. Italy and Spain have both tossed out their ruling parties, and all the weak economies in Europe have adopted austerity budgets. The push for more short-term spending cuts is both heartless and self-defeating: these countries desperately need anything that can promote economic growth.

At root, the E.C.B.’s opposition to helping out Italy and Spain reflects a deep sense that it’s morally offensive to let countries off the hook by inflating one’s way out of trouble. The head of the Bundesbank calls inflation “sweet poison,” making it sound like heroin, while the E.C.B. is praised for its toughness and rectitude. The attitude recalls Herbert Hoover’s account of Andrew Mellon’s advice on how to deal with the Depression: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” For Mellon, liquidation wasn’t just economically sensible. It was a necessary process of purification. Austerity would “purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life.”

Germany has utilized the euro to strengthen its manufacturing sector, now when the bills are coming due, they don't want to hold the system together.  If they let the Euro go, their currency will strengthen tremendously versus the periphery, which will kill their exports to those markets.  We're at the point where the creditors will have to eat their losses to let the system heal.  I don't think the Germans need to worry about others getting away without suffering.  There will be plenty of suffering to go around, the question is if they will create more suffering than necessary with a giant market crash.