Our big, fat Greek bankruptcy

The trouble with socialism, according to the old saying, is that sooner or later you run out of other people's money.

Greece has just about reached that point, with frightening ramifications not just for Europe but for Americans as well. The ancient land of Homer and Plato is broke, the remedies proposed by European leaders are transparent placebos, and Greek voters are predictably rebelling against painful austerities. Taxpayers in more solvent eurozone nations, meanwhile, are not eager to finance Greek living standards by extending more loans that are unlikely to be repaid. So it's probably only a matter of time before the country defaults -- and crucial that this happen in a controlled manner.

It's remarkable that a nation of just 11 million could threaten the global financial system, but a Greek meltdown could sink some European banks, sending shock waves rippling out across the world. American money market funds are holding $360 billion in European bank debt. U.S. banks are at risk for perhaps $41 billion of losses on Greece. In short, an uncontrolled collapse could hammer the U.S. economy.

That's why it's vital for European leaders to stop dithering and face facts. The challenge isn't avoiding a Greek default or even persuading investors to accept a "voluntary" haircut, as is now being discussed. Getting paid less than you're owed under these circumstances is no more voluntary than getting a limb amputated to stem life-threatening gangrene. The real challenge is preventing Greece from becoming another Lehman Brothers, the collapse of which in 2008 escalated our own financial troubles into a full-blown global crisis.

How did things get so bad? Greece was admitted to the

eurozone after lying about its deficits, and then used its newfound access to cheap money to underwrite a dysfunctional society in which corruption and tax evasion are rampant. Government payrolls are bloated, retirement is early, pensions are generous, and a host of occupations can legally exclude newcomers. Entrepreneurship is stifled at every turn. Exports are scant.

European leaders so far have chosen to send in the Band-Aids, but as with so many disorders, postponing pain in this case will only give things a chance to get worse. The best of the bad choices facing Europe now would be to acknowledge Greece as bankrupt while doing everything to keep the crisis from spreading to Portugal, Ireland and other weak eurozone members. Greece must open up its economy, shrink its government, and consider a return to the drachma. Many of the risks of abandoning the euro -- default, bank runs, etc. -- are already at hand, but Greece could at least devalue its own currency and thereby make its exports cheap enough to bring in more money.

European taxpayers may yet have to take on Greece's debt, either directly or by bailing out banks that own Greek bonds. U.S. bankers and regulators meanwhile should get busy to protect our own financial system from a severe potential shock by assessing its possible magnitude and boosting bank capital, which provides a cushion against losses.

This particular Greek tragedy has gone on long enough. Now let's make sure the actors don't take their show on the road.