Sorry, I think Paul Krugman’s grad school friendship with Mario Draghi has blinded him to the obvious. Syriza, via Varoufakis, has refused the latest tranche of its “bailout” loan because it is convinced it can continue its debt payments past the end of February with its own resources. That’s supposed to give it negotiating time. But the real ticking clock is its banking system. There has been a steady, persistent run on Greek banks, with deposits down 6% in the month before the latest election. No doubt the rate has accelerated since then. And now the ECB has announced that one of its two funding facilities to backstop the Greek financial system has been shut down until further notice.
You can debate what this means technically, whether the ECB’s emergency liquidity assistance (ELA) is large and credible enough to do the job, but the primary effect will be to turn the bank run into a rout. That appears to be the intent. This will presumably demonstrate to Syriza that the game is up, and there is no alternative but to stop making demands and get back on the program. You would have to do a lot of analytical gymnastics to conclude, with Krugman, that an engineered Greek bank run is really just a covert message to Germany to be more reasonable.
The moment of decision for Syriza is not later but now. Capitulation is out of the question. The only choice is to formulate its own plan, separate from the ECB, to cope with the collapse of its banks. I hope they recognize that direct attempts to stop the run through capital controls and withdrawal limits are a form of political suicide: if depositors are denied access to their funds the government will not last another week. The task is to develop a source of funding that does not require prior withdrawal from the eurozone.
Meanwhile, it is difficult to express how utterly wrongheaded this latest ECB move really is. It is one thing to equivocate about being a lender of last resort, another to foment a bank run on purpose. Sort of like the fire department in Fahrenheit 451.
Thursday, February 5, 2015
Tuesday, February 3, 2015
Update On Saudi King Salman's Condition
Some time ago I also posted on reports in the Washington Post that newly elevated King Salman of Saudi Arabia is suffering from dementia. This claim appeared in the Jan. 24 Washington Post, which quoted Simon Henderson of the Near East Policy Institute. Apparently today the Post has now retracted this story and declared that the claim was "speculative" and not supported by further evidence. This was reported with more details on Crossroads Arabia.
I had speculated that one possible motive for Obama's visit to Riyadh was in fact to personally check out this rumor. They apparently met for a full hour together. No reports came out of that of any dementia. Anyway, it appears that somebody misled Henderson, and the WaPo is now admitting that he misled them, for whatever reason.
Barkley Rosser
Update, Feb. 4: In today's WaPo there is a large, highlighted column by closely-connected-to-the-White-House, David Ignatius, clearly an effort to offset their embarrassment over the Simon Henderson affair. It is based on an article in London-based al-Sharz al-Aswrat, which is owned by King Salman's family, so the source must be considered. But it is all praise of the new crowd in Riyadh, particlarly Salman's 34-year old son, Mohammed, now Minister of Defense and Chief of the Royal Court. He is depicted as really running the show and being super competent and also super-friendly with the US, as is new Deputy Crown Prince Mohammed bin Nayef, both of them second-generation Sudairis. Nothing is said about Salman's health, but the photo of him accompanying the column has him looking strong and alert.
I had speculated that one possible motive for Obama's visit to Riyadh was in fact to personally check out this rumor. They apparently met for a full hour together. No reports came out of that of any dementia. Anyway, it appears that somebody misled Henderson, and the WaPo is now admitting that he misled them, for whatever reason.
Barkley Rosser
Update, Feb. 4: In today's WaPo there is a large, highlighted column by closely-connected-to-the-White-House, David Ignatius, clearly an effort to offset their embarrassment over the Simon Henderson affair. It is based on an article in London-based al-Sharz al-Aswrat, which is owned by King Salman's family, so the source must be considered. But it is all praise of the new crowd in Riyadh, particlarly Salman's 34-year old son, Mohammed, now Minister of Defense and Chief of the Royal Court. He is depicted as really running the show and being super competent and also super-friendly with the US, as is new Deputy Crown Prince Mohammed bin Nayef, both of them second-generation Sudairis. Nothing is said about Salman's health, but the photo of him accompanying the column has him looking strong and alert.
Is Oil Moving Out Of The $45-$50 Per Barrel Window?
As of yesterday the Brent crude oil price rose above $50 per barrel, and today the West Texas Intermediate (WTI) followed it above to nearly $52 per barrel while Brent is up to nearly $57. Several weeks ago I called a bottom to the oil price at $45, which did get down to $44 twice briefly. This was based on the public statements made in November by leading Saudi figures that they were planning their budget on an oil price within this particular window. Of course, it is no problem for the Saudis see a price above the top end of this window. It certainly makes their budgeteering easier, and making them more money. The more serious part of the matter was their calling of the bottom, which now looks much more like it is going to stick for awhile, even this price surge stops soon.
I am not going to provide any links for this post, but have gone dredging around through various sources and posts. The upshot is quite a hodge podge of forecasts and trends. Nobody is calling for a fall below $45, although some are talking about a window of $45 to $55 (for the WTI). The clear immediate cause of the price rise is a report of an unexpectedly sharp fall in the number of drilling rigs in the US fields. This seems to have led to an exit of the shorts, although for how long?
Some analysts claim the price could go to $61 and stay there or near there. For the Brent price, that is not too away, so certainly could happen. More dramatically at the far high end, although this is not a near term forecast, OPEC Secretary-General as-Badri has told BBC that the price could go to $200 per barrel. Well, maybe, but indeed probably not in the near future, and Saudi figures have said that we shall not see $100 per barrel price again, or at least not any time soon.
On the other side, there are some near term factors that could hold the price down or even push it back down. One is that apparently Chinese demand has fallen and inventories near China are up. Furthermore, inventories at Cushing, OK have reached an all time high. It may be that awareness of this on-the-ground situation rather than forecasts of what may happen months from now as the supply cutbacks gradually come in, that has held the WTI price further behind as speculators in Europe have pushed up the Brent price on the basis of these reports out of the US.
So, there are lots of possibilities, although nobody is calling for a sustained price below $45 anytime soon. That looks indeed like the bottom, more or less.
Oh, and I have heard that Russian media figures are claiming the price will go to $70 per barrel or above by March. This seems a bit overly optimistic for their position, although apparently that is a major cutoff for some of their production fields to make a profit. But, I am not going on further at this time or place on how reliable statements or forecasts possibly involving wishful thinking coming out of Russia are.
Barkley Rosser
Updtate, Feb. 4: Well, this recent price surge may be over. WTI is down to $50.37 per barrel as of a few minutes ago, just barely out of the $45-$50 window. It has moved down more than Brent crude, which is now nearly $6 higher than WTI. Given that reportedly the uipward surge was based on deelo;pments in the US, what is happening with WTI may be more indicative of the underlying situation.
Oh, and linking my last two posts, there is now a report floating around that indeed the Saudis are consciously acting to keep the price lower in order to pressure the Russians to make nice in Syria and reduce their support of Assad. I think that remains to be seen.
Later 2/4 update: Promise this will be the last for this thread, but end of day WTI was at $48.40 and Brent at $54.64 or something like that, more than a $6 gap, which was less than a dollar a couple of weeks ago. Anyway, WTI is back in that $45-$50 corridor for now, even if Brent is still ousside it. Will it stay there? I am not going to comment or forecast further unless somebody else does in the comments, which nobody has bothered to do so far. But, there it is.
I am not going to provide any links for this post, but have gone dredging around through various sources and posts. The upshot is quite a hodge podge of forecasts and trends. Nobody is calling for a fall below $45, although some are talking about a window of $45 to $55 (for the WTI). The clear immediate cause of the price rise is a report of an unexpectedly sharp fall in the number of drilling rigs in the US fields. This seems to have led to an exit of the shorts, although for how long?
Some analysts claim the price could go to $61 and stay there or near there. For the Brent price, that is not too away, so certainly could happen. More dramatically at the far high end, although this is not a near term forecast, OPEC Secretary-General as-Badri has told BBC that the price could go to $200 per barrel. Well, maybe, but indeed probably not in the near future, and Saudi figures have said that we shall not see $100 per barrel price again, or at least not any time soon.
On the other side, there are some near term factors that could hold the price down or even push it back down. One is that apparently Chinese demand has fallen and inventories near China are up. Furthermore, inventories at Cushing, OK have reached an all time high. It may be that awareness of this on-the-ground situation rather than forecasts of what may happen months from now as the supply cutbacks gradually come in, that has held the WTI price further behind as speculators in Europe have pushed up the Brent price on the basis of these reports out of the US.
So, there are lots of possibilities, although nobody is calling for a sustained price below $45 anytime soon. That looks indeed like the bottom, more or less.
Oh, and I have heard that Russian media figures are claiming the price will go to $70 per barrel or above by March. This seems a bit overly optimistic for their position, although apparently that is a major cutoff for some of their production fields to make a profit. But, I am not going on further at this time or place on how reliable statements or forecasts possibly involving wishful thinking coming out of Russia are.
Barkley Rosser
Updtate, Feb. 4: Well, this recent price surge may be over. WTI is down to $50.37 per barrel as of a few minutes ago, just barely out of the $45-$50 window. It has moved down more than Brent crude, which is now nearly $6 higher than WTI. Given that reportedly the uipward surge was based on deelo;pments in the US, what is happening with WTI may be more indicative of the underlying situation.
Oh, and linking my last two posts, there is now a report floating around that indeed the Saudis are consciously acting to keep the price lower in order to pressure the Russians to make nice in Syria and reduce their support of Assad. I think that remains to be seen.
Later 2/4 update: Promise this will be the last for this thread, but end of day WTI was at $48.40 and Brent at $54.64 or something like that, more than a $6 gap, which was less than a dollar a couple of weeks ago. Anyway, WTI is back in that $45-$50 corridor for now, even if Brent is still ousside it. Will it stay there? I am not going to comment or forecast further unless somebody else does in the comments, which nobody has bothered to do so far. But, there it is.
Greek Default Options
No, not default as in default on debt—default as in “what Greece can do if there is no agreement with the EC/ECB/IMF”. This is a game theory term. In bargaining theory, everything depends on the cost to parties of not agreeing: the weaker your default option, the worse your expected bargaining outcome.
Broadly speaking, Greece is vulnerable on two counts. First, it relies on loans from the Troika institutions to service its loans to them. This is essentially a shell game, and Varoufakis is right that pretending it solves anything is not the solution but the problem. Nevertheless, in practice this means that if further loan tranches are not delivered and debt payments aren't made, Greece defaults—using default now in its finance sense. With its primary surplus, funding the Greek state is not the issue; rather, default exposes Greece to political retaliation, expulsion from the eurozone or from the EU altogether. There have been noises from various quarters that unilateral refusal of debt service is a fallback option for Greece, and of course it is a theoretical possibility, but I doubt anyone really wants to see where it will lead. Nevertheless, since default in the finance sense is so hazardous for Greece, it makes a lousy default in the game theory sense. Bad for their bargaining position. Greece needs some other form of leverage on this front.
The second vulnerability is in their banking system. This in turn results from two factors. The first is that Greek banks have been repositories for the funds of domestic oligarchs, and Syriza has promised to go after this crowd. That means capital flight, which is not a currency problem (because of the euro) but is a financial stability problem. Assuming that Syriza is serious about political and economic reform, capital outflows are unavoidable. (It would be nice if the rest of Europe cooperated by bringing transparency and accountability to flight capital, but why start now?) Thus shoring up the financial system is a concomitant of attacking the cronyism that has bled the country for decades.
Meanwhile, Greece is vulnerable to old-fashioned garden variety bank runs. There is no clear lender of last resort for Greek banks or for any other banks in the eurozone for that matter. National governments can’t open the spigot unless they've already got the fiscal space for the job, and Greece obviously doesn't have it. This is because, in theory, they can’t print euros. Meanwhile, the ECB's formal mandate does not include LOLR, nor have they made any credible commitment to perform this function; it is strictly ad hoc. If there is a run on Greek banks, who protects depositors?
I will say again that, in this respect, Greece is not helpless. By far, the preferred option is an agreement that invokes ECB backstopping, but what if there is no agreement? What’s the default option? I think Greek officials should be taking a close look at the possibility of printing euros for the sole purpose of redeeming insured deposits. On one level this is a flagrant violation of EU rules. But, while a violation of the letter, it is not hostile to the spirit: wiping out deposits eliminates money, and redeeming them simply restores the same amount of money. It just replaces deposit-money with paper-money. Would there be screaming and yelling from Berlin and its accomplices? Yes, of course. Would there be consequences for Greece? Unclear. I’m not saying this is where Greece wants to go—it isn't—but it constitutes a potential default option if bargaining breaks down and a bank run ensues. What’s the alternative?
Just to be clear: default options are not what you want to do. They are what you have to do if there’s no agreement, and, in a bargaining-equilibrium world (which Varoufakis argued against in Rational Conflict) their main effect is in altering the terms the parties finally arrive at.
Broadly speaking, Greece is vulnerable on two counts. First, it relies on loans from the Troika institutions to service its loans to them. This is essentially a shell game, and Varoufakis is right that pretending it solves anything is not the solution but the problem. Nevertheless, in practice this means that if further loan tranches are not delivered and debt payments aren't made, Greece defaults—using default now in its finance sense. With its primary surplus, funding the Greek state is not the issue; rather, default exposes Greece to political retaliation, expulsion from the eurozone or from the EU altogether. There have been noises from various quarters that unilateral refusal of debt service is a fallback option for Greece, and of course it is a theoretical possibility, but I doubt anyone really wants to see where it will lead. Nevertheless, since default in the finance sense is so hazardous for Greece, it makes a lousy default in the game theory sense. Bad for their bargaining position. Greece needs some other form of leverage on this front.
The second vulnerability is in their banking system. This in turn results from two factors. The first is that Greek banks have been repositories for the funds of domestic oligarchs, and Syriza has promised to go after this crowd. That means capital flight, which is not a currency problem (because of the euro) but is a financial stability problem. Assuming that Syriza is serious about political and economic reform, capital outflows are unavoidable. (It would be nice if the rest of Europe cooperated by bringing transparency and accountability to flight capital, but why start now?) Thus shoring up the financial system is a concomitant of attacking the cronyism that has bled the country for decades.
Meanwhile, Greece is vulnerable to old-fashioned garden variety bank runs. There is no clear lender of last resort for Greek banks or for any other banks in the eurozone for that matter. National governments can’t open the spigot unless they've already got the fiscal space for the job, and Greece obviously doesn't have it. This is because, in theory, they can’t print euros. Meanwhile, the ECB's formal mandate does not include LOLR, nor have they made any credible commitment to perform this function; it is strictly ad hoc. If there is a run on Greek banks, who protects depositors?
I will say again that, in this respect, Greece is not helpless. By far, the preferred option is an agreement that invokes ECB backstopping, but what if there is no agreement? What’s the default option? I think Greek officials should be taking a close look at the possibility of printing euros for the sole purpose of redeeming insured deposits. On one level this is a flagrant violation of EU rules. But, while a violation of the letter, it is not hostile to the spirit: wiping out deposits eliminates money, and redeeming them simply restores the same amount of money. It just replaces deposit-money with paper-money. Would there be screaming and yelling from Berlin and its accomplices? Yes, of course. Would there be consequences for Greece? Unclear. I’m not saying this is where Greece wants to go—it isn't—but it constitutes a potential default option if bargaining breaks down and a bank run ensues. What’s the alternative?
Just to be clear: default options are not what you want to do. They are what you have to do if there’s no agreement, and, in a bargaining-equilibrium world (which Varoufakis argued against in Rational Conflict) their main effect is in altering the terms the parties finally arrive at.
Monday, February 2, 2015
If You Want To Support Varoufakis And The Greek Government
Jamie Galbraith has sent around a message urging people to sign a petition supporting the efforts of the Greek government to renegotiate the agreements they have with their creditors. People wishing to do this and have an effect, should do so by tomorrow (Tuesday) evening.
To do so, send a message to cedric.durand@ehess.fr providing your name and affiliation.
Barkley Rosser
To do so, send a message to cedric.durand@ehess.fr providing your name and affiliation.
Barkley Rosser
Waiting for the Greek Thatcher
That’s Tyler Cowan, who seems to be really bothered by the respect that Syriza is getting from the center and left of the economics spectrum. He wants us to know that the leaders of the party are ignorant and frivolous, and that they are marching their unsuspecting supporters into the maw of chaos. He cites a fringy libertarian think tank to assert that Syriza is really a stalking horse for Putin or international communism or some amalgam of the two. The conclusion? “Greece needs its Thatcheropoulous.”
Now I realize that Cowan is a denizen of the Mercatus Center, which should make him an expert of sorts on fringy libertarian think tanks. His blog pushes hard right, but he gains credibility by doing it complexly, in a cultivated manner, acknowledging exceptions. The Syriza thing, though, seems to really get under his skin. How can an avowed Marxist like Yanis Varoufakis be treated like an enlightened human being, much less a superior economist to the virtuous, Keynes-hating paragons of Euro-austerity? What about the fatal conceit? The gulags? These people must be denounced!
But the result is a blog post that is simply an incoherent, red-baiting mess. In particular, he writes, Greece needs leadership that is “strong, credible, pro-debt renegotiation, pro-capitalism, anti-corruption, pro-tax fairness, and pro-foreign investment.” Well, I don’t know what pro-capitalism means (does it include worker co-management as in Germany?), but the rest of the items were specifically mentioned in post-election news conferences by Varoufakis. When you strip away the rhetoric, Cowan doesn't have an argument, just his animus.
Now I realize that Cowan is a denizen of the Mercatus Center, which should make him an expert of sorts on fringy libertarian think tanks. His blog pushes hard right, but he gains credibility by doing it complexly, in a cultivated manner, acknowledging exceptions. The Syriza thing, though, seems to really get under his skin. How can an avowed Marxist like Yanis Varoufakis be treated like an enlightened human being, much less a superior economist to the virtuous, Keynes-hating paragons of Euro-austerity? What about the fatal conceit? The gulags? These people must be denounced!
But the result is a blog post that is simply an incoherent, red-baiting mess. In particular, he writes, Greece needs leadership that is “strong, credible, pro-debt renegotiation, pro-capitalism, anti-corruption, pro-tax fairness, and pro-foreign investment.” Well, I don’t know what pro-capitalism means (does it include worker co-management as in Germany?), but the rest of the items were specifically mentioned in post-election news conferences by Varoufakis. When you strip away the rhetoric, Cowan doesn't have an argument, just his animus.
Saturday, January 31, 2015
On Being A "Very Serious Person"
Paul Krugman and many others, including me, have long made fun of the category of people labeled "Very Serious People"(VSPs). They have been identified as those in Washington especially, but also their close allies and sycophants in Europe (not too many in Asia, but a few), who have made numerous predictions and related policy prescriptions over recent years on various topics, with those that have had a chance of being proven true or not to have been found to be false, but, unfortunately those people having great power in many nations.
This VSP cult has been centrally allied with those calling for ever lower budget deficits, with many forecasting either massive slowdowns of growth (see the discredited hysteria over the 90% debt/GDP cliff of Reinhart and Rogoff), or some imminent outbreak of inflation, in the more extreme ranks even hyperinflation (our more clubbable and think tankable not going along with the worst of this nonsense, of course). In Washington in particular, this has also gone along even among supposed liberals at the Washington Post and certain think tanks with constant demands for cutting Social Security and Medicare, because, well, heck, by 2030 the US might have the demographic ratio of young to old that Germany has right now, whom we must all support against the loonies currently running the Greek government, obvious disaster that Germany clearly is right now economically.
Which brings us to a curious development. After all these years of ridicule, the takeover of the Greek government by a group seriously challenging the currently established practices of the Eurozone are being declared to be so bad that they must be replaced by "Very Serious People," because, heck, imitating Chuchill, the only thing worse than VSPs is non-VSPs. It is Tyler Cowen who has suddenly stepped forth in the face of the current challenge to world rationality and order to enunciate this doctrine, thereby making respectable the previously unrespectable, not that those previously unrespectable have remotely admitted what a bunch of failures at analysis or forecasting they have been, and only now facing actual threats to their stranglehold on world economic policy.
For whatever reason, I have been unable to link to Tyler's specific post successfully, but, this is a general link to his site. The title of his post is "The new Syriza goverment is against all-inclusive resorts," now third on the queue, but will move down shortly. As of right now, the big revelation is that the new Greek PM used to criticize all-inclusive resorts, but, noticing as if they had not known it that tourism is the single biggest contributor to the Greek GDP, they have now backed off doing anything to those places, just as they are backing off some other positions previously articulated by current members of the government, such as super opposition to EU sanctions against Russia.
It is from this sort of nonsense, where in fact the current Greek government is showing that it is in fact in touch with reality, that somehow Tyler declares that it should be overthrown so that "Very Serious People" can be in charge. I really am not sure if he is being ironic or what. Really. Calling for the overthrow of a government for not doing something he disapproves of, well, this is not serious. Really.
Barkley Rosser
This VSP cult has been centrally allied with those calling for ever lower budget deficits, with many forecasting either massive slowdowns of growth (see the discredited hysteria over the 90% debt/GDP cliff of Reinhart and Rogoff), or some imminent outbreak of inflation, in the more extreme ranks even hyperinflation (our more clubbable and think tankable not going along with the worst of this nonsense, of course). In Washington in particular, this has also gone along even among supposed liberals at the Washington Post and certain think tanks with constant demands for cutting Social Security and Medicare, because, well, heck, by 2030 the US might have the demographic ratio of young to old that Germany has right now, whom we must all support against the loonies currently running the Greek government, obvious disaster that Germany clearly is right now economically.
Which brings us to a curious development. After all these years of ridicule, the takeover of the Greek government by a group seriously challenging the currently established practices of the Eurozone are being declared to be so bad that they must be replaced by "Very Serious People," because, heck, imitating Chuchill, the only thing worse than VSPs is non-VSPs. It is Tyler Cowen who has suddenly stepped forth in the face of the current challenge to world rationality and order to enunciate this doctrine, thereby making respectable the previously unrespectable, not that those previously unrespectable have remotely admitted what a bunch of failures at analysis or forecasting they have been, and only now facing actual threats to their stranglehold on world economic policy.
For whatever reason, I have been unable to link to Tyler's specific post successfully, but, this is a general link to his site. The title of his post is "The new Syriza goverment is against all-inclusive resorts," now third on the queue, but will move down shortly. As of right now, the big revelation is that the new Greek PM used to criticize all-inclusive resorts, but, noticing as if they had not known it that tourism is the single biggest contributor to the Greek GDP, they have now backed off doing anything to those places, just as they are backing off some other positions previously articulated by current members of the government, such as super opposition to EU sanctions against Russia.
It is from this sort of nonsense, where in fact the current Greek government is showing that it is in fact in touch with reality, that somehow Tyler declares that it should be overthrown so that "Very Serious People" can be in charge. I really am not sure if he is being ironic or what. Really. Calling for the overthrow of a government for not doing something he disapproves of, well, this is not serious. Really.
Barkley Rosser
Friday, January 30, 2015
Greek Negotiations Begin with a Blast
As mentioned earlier, Yanis Varoufakis, the new Greek finance minister, did his first work in economics as a game theorist. I don’t know who came up with it, but the announcement today that Greece will not consult with the Troika is a very big game theory move.
First the announcement: Varoufakis said his government will not collaborate with auditors from the Troika nor negotiate with its representatives. It regards, with considerable justification, the Troika to be an extra-legal body that has micromanaged its economy without any mandate from legally constituted institutions. Henceforth Syriza will engage only with individual European governments and, presumably, the ECB.
On an immediate level this is a challenge to Germany and its allies, since they have used their influence over the Troika to compel Greece to adhere to its (Germany’s) policies. If governments express their views separately, Germany’s position will sit side-by-side with that of every other eurozone country; there is no institutional mechanism by which it dominates them. I can imagine that officials in Berlin, Amsterdam, Helsinki and elsewhere are going ballistic right now.
But there is a deeper implication to this move. After the election, there was quite a bit of public speculation regarding the prospects for negotiation over Greek financial commitments. Most commentators saw Greece in the position of a supplicant: they were throwing themselves at the mercy of European opinion, exhibiting their suffering for all to see. Or so people thought.
The latest move challenges this frame. It is unilateral, and it indicates that Greece does not see itself as without resources. I have no way to judge the effectiveness of the legal challenge to the Troika, but it clearly communicates a stance that says, “We are going on the offensive and will deploy every resource we can get our hands on.” Personally, I believe this does not exhaust the “hidden” resources available to Greece, and I suspect they have contingency plans to roll out other options should the need arise. The point is that Greece has indicated it will not be a pushover, and it has frontloaded its challenge at a moment when the costs to retaliation against them are at their highest.
The next move belongs to the European Commission. They can accede to Syriza’s new framework for negotiations, or they can issue an ultimatum of their own: deal with the Troika or we will expel you from the eurozone. I suspect the second option is out of the question, which would make the strategy pair, up to this point, subgame perfect. We shall see.
This looks much more like game theory than macroeconomics to me.
First the announcement: Varoufakis said his government will not collaborate with auditors from the Troika nor negotiate with its representatives. It regards, with considerable justification, the Troika to be an extra-legal body that has micromanaged its economy without any mandate from legally constituted institutions. Henceforth Syriza will engage only with individual European governments and, presumably, the ECB.
On an immediate level this is a challenge to Germany and its allies, since they have used their influence over the Troika to compel Greece to adhere to its (Germany’s) policies. If governments express their views separately, Germany’s position will sit side-by-side with that of every other eurozone country; there is no institutional mechanism by which it dominates them. I can imagine that officials in Berlin, Amsterdam, Helsinki and elsewhere are going ballistic right now.
But there is a deeper implication to this move. After the election, there was quite a bit of public speculation regarding the prospects for negotiation over Greek financial commitments. Most commentators saw Greece in the position of a supplicant: they were throwing themselves at the mercy of European opinion, exhibiting their suffering for all to see. Or so people thought.
The latest move challenges this frame. It is unilateral, and it indicates that Greece does not see itself as without resources. I have no way to judge the effectiveness of the legal challenge to the Troika, but it clearly communicates a stance that says, “We are going on the offensive and will deploy every resource we can get our hands on.” Personally, I believe this does not exhaust the “hidden” resources available to Greece, and I suspect they have contingency plans to roll out other options should the need arise. The point is that Greece has indicated it will not be a pushover, and it has frontloaded its challenge at a moment when the costs to retaliation against them are at their highest.
The next move belongs to the European Commission. They can accede to Syriza’s new framework for negotiations, or they can issue an ultimatum of their own: deal with the Troika or we will expel you from the eurozone. I suspect the second option is out of the question, which would make the strategy pair, up to this point, subgame perfect. We shall see.
This looks much more like game theory than macroeconomics to me.
Thursday, January 29, 2015
Uber-Marx
“We may end up with a future in which a fraction of the work force would do a portfolio of things to generate an income — you could be an Uber driver, an Instacart shopper, an Airbnb host and a Taskrabbit,” Dr. Sundararajan said.
“In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.” (The German Ideology)
“In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.” (The German Ideology)
No Return To Yawning Yet, But Greek Markets Have Bounced
Yeah, the crisis may be over. Just like that, although probably not fully. Anyway, the general hysteria of yesterday seems to be way overblown, even if the markets return to declining. As it is, the Athens stock market rose today, after a sharp fall yesterday. While the 3-year and 10-year bond yields are higher than yesterday, they shot way up in the middle of the day, but then turned around and fell, more or less mirroring the stock market. The 3-year peaked at over 19%, but then fell to about 17.5%, about a 1/2 % above yesterday's close. A similar but less dramatic move happend for the 10-year, ending well below the 3-year at 11.13%.
So, what is up? Well, I would say that new Finance Minister Varoufakis and PM Tsirpas are following a good game theory strategy. They have thrown down a maximalist hand publicly upfront, entrenching a lot of outcomes they would like to achieve and dumping all the "bad news" on the markets at one time. There should not be any further nasty negative shocks coming from the Greek leaders themselves. It is all out there now: cancelled privatizations, no more public workers laid off (and some rehired), pension increases, minimum wage increases, and so on, not to mention the assertion of their pro-Russian position. Let me forecast that assuming there are serious negotiations and not just a train heading off the rails, that some of this may get scaled back as a result of them in exchange for a debt haircut (effective, if not official). But that would leave them with much of what they said they wanted, even if it looks like they may have "lost."
It should also be noted that the Greeks may have some support in the negotations from some important players. In particular, President Hollande of France has made public statements at least somewhat sympathetic to the idea of reducing the Greek debt burden. This has not received much publicity in the noise coming from German hardliners, but this is not all a one-sided affair.
Regarding the more detailed specifics of the market dynamics, it should be kept in mind that the main immediate threat, indeed really the only immediate threat, has been that of a full-bore bank run in Greece. There has apparently been quite a lot of running, maybe as much as 1/5 of deposits. That is a lot, and it accelerated yesterday, and bank stocks took the largest hit of any in the Greek market, some down as much as 40%. However, there is every reason to believe that the ECB will help them out. An ELF was established by the ECB to support the Greek banks a week ago Wednesday. These are reviewed every two weeks, but one is in place, and offhand, given the commitment by the ECB to making the euro work, I see no reason why that will be shut down any time soon. And I suspect realization of this may well have played at least some role in the markets bouncing today.
Furthermore, although apparently tax revenues are below expectations, Greece has been running a pretty healthy 5% primary surplus. They really do not need to borrow from anybody (exept for maybe their banks from the ECB) any time soon. About 80% of their sovereign debt is held by the ECB already, with most of that not up for serious renewal until July. This looks like a big chicken game between Greece and the troka/Germans, with the latter threatening they do not need Greece in the euro, although they seriously want to keep them in, and Greece making major policy change and demands on the debt restructuing side, while saying they want to stay in the euro, even as many of their supporters say "Go, go, go to Grexit!" So, there will be tough negotiations, but from where I sit I do not see anything at all insurmountable about them.
It will probably take a few months of cliff hanging and carrying on, with the markets very likely to do some major see-sawing between now and then, but at some point a muddling through deal may be cut, and the markets can go back to their earlier yawning.
Barkley Rosser
Update on 1/30: Athens stock market rose 8.6% today, and bond yields have fallen noticeably, with the 3 year down to 15.6 and the 10 year down to 9.6, nearly 2% for both of them. That this crisis has stopped being a crisis and turned into a merely unpleasant situation looks increasingly to be the case, although the news media does not seem to have picked up on this yet.
So, what is up? Well, I would say that new Finance Minister Varoufakis and PM Tsirpas are following a good game theory strategy. They have thrown down a maximalist hand publicly upfront, entrenching a lot of outcomes they would like to achieve and dumping all the "bad news" on the markets at one time. There should not be any further nasty negative shocks coming from the Greek leaders themselves. It is all out there now: cancelled privatizations, no more public workers laid off (and some rehired), pension increases, minimum wage increases, and so on, not to mention the assertion of their pro-Russian position. Let me forecast that assuming there are serious negotiations and not just a train heading off the rails, that some of this may get scaled back as a result of them in exchange for a debt haircut (effective, if not official). But that would leave them with much of what they said they wanted, even if it looks like they may have "lost."
It should also be noted that the Greeks may have some support in the negotations from some important players. In particular, President Hollande of France has made public statements at least somewhat sympathetic to the idea of reducing the Greek debt burden. This has not received much publicity in the noise coming from German hardliners, but this is not all a one-sided affair.
Regarding the more detailed specifics of the market dynamics, it should be kept in mind that the main immediate threat, indeed really the only immediate threat, has been that of a full-bore bank run in Greece. There has apparently been quite a lot of running, maybe as much as 1/5 of deposits. That is a lot, and it accelerated yesterday, and bank stocks took the largest hit of any in the Greek market, some down as much as 40%. However, there is every reason to believe that the ECB will help them out. An ELF was established by the ECB to support the Greek banks a week ago Wednesday. These are reviewed every two weeks, but one is in place, and offhand, given the commitment by the ECB to making the euro work, I see no reason why that will be shut down any time soon. And I suspect realization of this may well have played at least some role in the markets bouncing today.
Furthermore, although apparently tax revenues are below expectations, Greece has been running a pretty healthy 5% primary surplus. They really do not need to borrow from anybody (exept for maybe their banks from the ECB) any time soon. About 80% of their sovereign debt is held by the ECB already, with most of that not up for serious renewal until July. This looks like a big chicken game between Greece and the troka/Germans, with the latter threatening they do not need Greece in the euro, although they seriously want to keep them in, and Greece making major policy change and demands on the debt restructuing side, while saying they want to stay in the euro, even as many of their supporters say "Go, go, go to Grexit!" So, there will be tough negotiations, but from where I sit I do not see anything at all insurmountable about them.
It will probably take a few months of cliff hanging and carrying on, with the markets very likely to do some major see-sawing between now and then, but at some point a muddling through deal may be cut, and the markets can go back to their earlier yawning.
Barkley Rosser
Update on 1/30: Athens stock market rose 8.6% today, and bond yields have fallen noticeably, with the 3 year down to 15.6 and the 10 year down to 9.6, nearly 2% for both of them. That this crisis has stopped being a crisis and turned into a merely unpleasant situation looks increasingly to be the case, although the news media does not seem to have picked up on this yet.
Wednesday, January 28, 2015
More Deficit Hysteria From The Washington Post
Yes, once the CBO changed its forecast of future GDP growth and also thus future federal tax revenues, thanks to their deciding that interest rates will be higher than they had previously forecast (the reason for this change is apparently that GDP has been doing better than expected with a lower unemployment rate resulting, thus presumably leading to the Fed pushing interest rates up higher than was previously expected, several econobloggers (including at least Paul Krugman, Dean Baker, and Angry Bear's Bruce Webb) forecast that various VSP journalist deficit hysterians would go off the cliff yet again in the near future. And, sure enough, the especially hysterical team of VSP deficit hysterians at the WaPo have come through right on time.
In this case, the first out the door is the third and least vocal of their main team, Ruth Marcus, who comments on this less frequently than their supposed economics expert, Robert J. Samuelson, and their ed page editor, Fred Hiatt. She is even less well informed and educated about econ than RJS at least (there I go again, bringing up credentials), but her effort in today's Post was particularly pathetic. Dean Baker has already pointed out several simply false statements she makes, as well as several conceptual issues where she simply has no idea what she is talking about. But, gosh, she certainly is appropriately hysterical, which will please new WaPo owner, Jeff Bezos. Let me simply add to this commentary by pointing out more atmospheric aspects of her commentary.
First of all, while it is true that Obama did not remind people of this during his SOTU address, which is the takeoff for her column, everybody who has been paying any attention at all has been fully aware that with no other changes in the budget, deficits will indeed start to rise again another couple of years as indeed that tide of retiring baby boomers begins to push spending on benefits for Social Security and Medicare upwards, as long forecast and expected. So, this is not news. What is news, or at least a matter of debate, is by how much, with this new forecast of higher interest rates and lower growth from the CBO changing their forecast. So, how much has this changed?
Well, frankly, not all that much. What has Ruth Marcus so upset? Well, while the current debt/GDP ratio is 0.74, the new forecast for what this will be a decade from now in 2025 after this big surge of baby boomer retirements, that ratio will zoom surge explode to 0.79 (!!!!). Yes, she describes this forecast as being the "ugly picture" (apparently for a figure on the front of the CBO report), yes, "ugly." Ooooh. She later notes that when the financial crisis started, the ratio was "(!)43 percent of GDP," not noticing that an increase over a decade from 0.74 to 0.79 does not remotely resemble or match the past increase from 0.43 to 0.74, when this former increase was prior to the coming surge of spending-boosting wave of baby boomer retirements. Looks not so bad, actually.
For that matter, even as she describes this outcome as "ugly," it is still well below the 0.90 that Reinhart and Rogoff were advertising 4 years ago as being a "cliff"beyond which we would suffer much lower growth. We now know that R&R were full of it with that claim, but this supposedly ugly outcome will not even be all that close that not really dangerous after all level.
Oh, and at another point in the column, she declares that "the future is not pretty." Gosh, not only "ugly" but "not pretty." Gack! It may well be that the future is indeed "not pretty," but somehow I doubt that there being 0.79 debt/GDP ratio in 2025 will constitute a major reason for such a lack of prettiness in our future, much less ugliness.
Not only does Ruth Marcus not know much economics, but I think her sense of aesthetics is pretty awful as well.
Barkley Rosser
In this case, the first out the door is the third and least vocal of their main team, Ruth Marcus, who comments on this less frequently than their supposed economics expert, Robert J. Samuelson, and their ed page editor, Fred Hiatt. She is even less well informed and educated about econ than RJS at least (there I go again, bringing up credentials), but her effort in today's Post was particularly pathetic. Dean Baker has already pointed out several simply false statements she makes, as well as several conceptual issues where she simply has no idea what she is talking about. But, gosh, she certainly is appropriately hysterical, which will please new WaPo owner, Jeff Bezos. Let me simply add to this commentary by pointing out more atmospheric aspects of her commentary.
First of all, while it is true that Obama did not remind people of this during his SOTU address, which is the takeoff for her column, everybody who has been paying any attention at all has been fully aware that with no other changes in the budget, deficits will indeed start to rise again another couple of years as indeed that tide of retiring baby boomers begins to push spending on benefits for Social Security and Medicare upwards, as long forecast and expected. So, this is not news. What is news, or at least a matter of debate, is by how much, with this new forecast of higher interest rates and lower growth from the CBO changing their forecast. So, how much has this changed?
Well, frankly, not all that much. What has Ruth Marcus so upset? Well, while the current debt/GDP ratio is 0.74, the new forecast for what this will be a decade from now in 2025 after this big surge of baby boomer retirements, that ratio will zoom surge explode to 0.79 (!!!!). Yes, she describes this forecast as being the "ugly picture" (apparently for a figure on the front of the CBO report), yes, "ugly." Ooooh. She later notes that when the financial crisis started, the ratio was "(!)43 percent of GDP," not noticing that an increase over a decade from 0.74 to 0.79 does not remotely resemble or match the past increase from 0.43 to 0.74, when this former increase was prior to the coming surge of spending-boosting wave of baby boomer retirements. Looks not so bad, actually.
For that matter, even as she describes this outcome as "ugly," it is still well below the 0.90 that Reinhart and Rogoff were advertising 4 years ago as being a "cliff"beyond which we would suffer much lower growth. We now know that R&R were full of it with that claim, but this supposedly ugly outcome will not even be all that close that not really dangerous after all level.
Oh, and at another point in the column, she declares that "the future is not pretty." Gosh, not only "ugly" but "not pretty." Gack! It may well be that the future is indeed "not pretty," but somehow I doubt that there being 0.79 debt/GDP ratio in 2025 will constitute a major reason for such a lack of prettiness in our future, much less ugliness.
Not only does Ruth Marcus not know much economics, but I think her sense of aesthetics is pretty awful as well.
Barkley Rosser
Tuesday, January 27, 2015
Michael Pettis on (Some of) What’s Wrong With Economics
This is in the context of dueling predictions of future Chinese growth, where the bulls are bullish, Pettis says growth has to slow way down because of excess debt accumulation, and then the bulls claim victory because China hasn’t collapsed. Pettis didn’t say it would but has a theory for why people influenced by economics would think the choice is between robust growth indefinitely and collapse.
....most orthodox economists find it very counterintuitive that the performance of an economy can be systematically affected by the structure of the balance sheet. They tend to think of economic activity as a linear process that tends towards equilibrium, and this path towards equilibrium is perturbed only by external shocks. Equilibrium is assumed to be determined by fundamental factors, and so this is why most economists focus primarily on the fundamentals — i.e. the asset side — and how these fundamentals are managed. External shocks are of course unpredictable, and so they simply incorporate them into their analyses as they occur.
If you think about the economy as a dynamic “system”, however, then it is easier to understand how institutions, including the balance sheet, can create systematic biases and how imbalances evolve and must ultimately reverse themselves. When you read Minsky, for example, he spends a lot of time insisting that the economy is a system, and that it has its own internal dynamic, which is one of the reasons why he said stability is unattainable. It is also why it takes a huge “event” that only Minsky can explain to bring him into the mainstream debate. In ten years he will no longer be part of the debate.
....The framework most orthodox economists have does not permit systematic biases and unsustainable growth. When a finance guy says that the growth in the debt burden is implicit and necessary to maintain growth, and also that it cannot continue, it doesn’t matter how many times I say that I do not expect China to collapse, I don’t think they are able to combine the two statements. They genuinely believe that there is no difference between saying that growth is unsustainable and that China will collapse in a few months. To them, either China is following a stable equilibrium, or it is on the verge of collapse — nothing else is possible in the orthodox framework.
Monday, January 26, 2015
Prospects for Syriza
A day after the Greek elections, and we are all in speculation mode. Here is what I’m thinking.
Greece faces two short-term financial obstacles, service on its outstanding sovereign debt and backstopping of its financial sector, and the longer-term challenge of rebooting its economy. Let’s take them one at a time.
Thanks to the extend and pretend policy of the Troika, virtually all the external holdings of Greek sovereign debt are in the ECB. The point of the fictional bailout program, which had no overlap with reality, was to buy time so that private financial institutions could unload the bad stuff, which they did. Now the creditors are public. And they can price these bonds however they want. The point is that a formal writedown is not required; all that matters is servicing.
Now, in an economic sense, Varoufakis is right when he says that these bonds have already lost value: they can’t possibly generate their official payment stream. One way or another the creditors have to take a hit. But the problem is not distributional, it’s political. Demanding a level of servicing beyond the ability of the Greek state to provide, and then financing these payments through a “bailout” conditional on Greek “reforms” is a shell game, to be sure, but its purpose is to punish the Greek population and impose policies they would never accept through democratic processes. If you put it this way, the question is not about how the shell game is reconfigured—how large or small the fictitious flow of financing to Greece and then back to its creditors—but the role and content of political conditions. Syriza’s position seems to be maximalist in this respect: no political conditions. If they stick to this, there can be no deal unless Germany and its allies do a complete about-face, which is difficult to imagine for domestic political reasons.
But the political terrain is wide and has many dimensions. For instance, Syriza has proposed an overhaul of the tax system to finally end the impunity of the upper class. That ought to qualify as a “reform” to any reasonable person, and if moral hazard is your concern, it gets to the heart of it. Similarly, Syriza claims it wants to release the state from the clutches of the oligarchs, who have managed it as a source of profit for decades. I don’t know how they will pull this off, but surely this is the sort of reform Greece really needs. In other words, from the very beginning what was distinctive about the Greek case compared to the other financially strapped peripheral countries was the extent of corruption by the elite. This is widely known. If Syriza can package its domestic program as “reform”, and if some portion of it can be acknowledged on those terms by Germany and its allies, there is a basis for a sovereign debt settlement. Again, the issue has nothing to do with how much money is transferred in a “bailout” or how much of the debt is written off. The only real question is political.
Second, what about the Greek banking system? Between their large holdings of sovereign Greek debt and the nonperformance of much of the rest of their books, given the state of the Greek economy, these institutions are presumably bankrupt. Even though, under eurozone rules, Greece cannot supply its own currency, it remains on the hook as lender of last resort—an intolerable situation. In a better world, the ECB would assume responsibility for this function, since it is the liquidity creator of first, last and in-between resort. But that’s not the world we’re in. So what can Syriza do about this?
There are two sets of parties whose assets are at risk in the Greek financial system, investors (shareholders and creditors) and depositors. A plan for getting through a domestic financial crisis has to take both into account.
I think the first, if it can be separated from the second, is relatively easy. Allow existing private institutions to fold and let the investors take the full hit. But be prepared: take immediate steps to create a public institution that can function as a “good, new bank”. In the resolution of failed institutions the public entity would acquire still-performing assets, including those deemed to be potentially performing when normal conditions return—the Bagehot test. Let the rest go down with their respective ships. Meanwhile, the public entity can hire experienced, talented staff from the banks forced to close their doors. This is essentially the plan proposed in 2008-2009 for the US and Europe by many economists, such as Willem Buiter, Joseph Stiglitz and, much less prominently, by yours truly. It confronts moral hazard head on, and it avoids the continuing drag of zombie, or at least balance-sheet impaired, financial institutions. It is not without risk, but if the public entity is up and running before the private institutions collapse, it should do the job.
The bigger problem, of course, is the depositors. Again, this would not be such an obstacle if Greece could legally issue its own currency, but it can’t. Worse, the eurozone does not have a clear policy for backstopping depositor protection, as we saw in the Cyprus episode. At this point, it is quite possible that Europe would stand aside and allow the Greek public to have its accounts wiped out. There are elements in various governments that would even relish the spectacle as retribution for the sin having voted for Syriza in the first place. If depositors cannot be protected, Syriza will be out of power in a flash. This is Argentina territory.
I won’t bother with a discussion of the evolving eurozone banking supervision system; it is too slow and conditional to matter for Greece in 2015. In all honesty, I can’t see any substitute for an immediate arrangement specific to backstopping Greek deposits. My sense of the Cyprus experience is that it was chastening for the eurocrats, but I could be wrong. What can Syriza do if depositors are held hostage as leverage for austerity? I might be crazy, but I think this could be the one realm in which a print-your-own-euro plan makes sense. What would happen if the Greek CB created new currency for the sole purpose of redeeming deposit accounts at insolvent banks?
It should be added that, as soon as plans are begun to anticipate a banking crisis, that crisis will accelerate. This means that negotiations on deposit protection ought to begin immediately in private, and that plans to establish a resolve-and-replace financial facility in Greece have to wait until some solution is reached. This is the part that worries me the most.
So much for the short term. The long term objective is to get the Greek economy growing again—to provide jobs, raise incomes, and rebuild public services. To some extent this will happen by itself as the restraints are lifted. I disagree with Bill Mitchell, that growth is primarily a function of fiscal stimulus. Yes, stimulus would do wonders. But there is immense pent-up demand in Greece, and if a modicum of social security can be restored I think the income multiplier would be quite high—if the trade balance does not become sharply negative again. Trade has rebalanced during the crisis as a result of demand suppression, not export competitiveness. In some sectors, like tourism, it is possible that internal devaluation can have an effect, but for the most part this is limited. I could write a different, equally long post (or longer) about strategies for improving productivity and export shares, but these are very long term and will not do much for Greece in the next several years.
The only alternative in the time frame that matters for Syriza is offsetting transfers. In a better world the eurozone would come equipped with a range of automatic stabilizers, like a zone-wide unemployment insurance system, that would supply much of the necessary transfer, at least during the initial period in which the Greek economy is severely depressed. That’s not the real world, though. The modest proposal of Varoufakis and Galbraith looks to the European Investment Bank to massively expand their portfolio, which, from a Greek point of view, would be experienced as a transfer. You could regard the current Juncker initiative, which envisions a fifteen-fold leveraging that borders on hallucinatory, as either evidence that the prospects for serious action are hopeless, or that the principle has been acknowledged and now begins the step-by-step process of coughing up the funds. I don’t know which reading is correct.
A final word about politics. In his public statements Tsipras looks to upcoming elections in Spain and elsewhere to ignite a pan-European progressive, anti-austerity (can we say Keynesian?) movement which will change the political landscape and put pressure on Merkel et al. to reverse course. He could be right, but it is all very iffy. This vision is undercut by the profound, perhaps irreparable, defects of Die Linke as a political force in Germany, and the fact that in several northern European countries the threat from the extreme right, not an upwelling from the left, is the main dynamic. I wish for the best, but if I’m a Syriza planner my Plan A will not assume a political alignment more favorable than the one we see today.
UPDATE: And here is what Lagarde has to say: "They must reform the efficiency of the state and get their tax collection system working. That’s not austerity. Those are reforms that they still need to do.” I especially like that she says this sternly, as if it were several more strokes of the cat 'o nine tails.
Greece faces two short-term financial obstacles, service on its outstanding sovereign debt and backstopping of its financial sector, and the longer-term challenge of rebooting its economy. Let’s take them one at a time.
Thanks to the extend and pretend policy of the Troika, virtually all the external holdings of Greek sovereign debt are in the ECB. The point of the fictional bailout program, which had no overlap with reality, was to buy time so that private financial institutions could unload the bad stuff, which they did. Now the creditors are public. And they can price these bonds however they want. The point is that a formal writedown is not required; all that matters is servicing.
Now, in an economic sense, Varoufakis is right when he says that these bonds have already lost value: they can’t possibly generate their official payment stream. One way or another the creditors have to take a hit. But the problem is not distributional, it’s political. Demanding a level of servicing beyond the ability of the Greek state to provide, and then financing these payments through a “bailout” conditional on Greek “reforms” is a shell game, to be sure, but its purpose is to punish the Greek population and impose policies they would never accept through democratic processes. If you put it this way, the question is not about how the shell game is reconfigured—how large or small the fictitious flow of financing to Greece and then back to its creditors—but the role and content of political conditions. Syriza’s position seems to be maximalist in this respect: no political conditions. If they stick to this, there can be no deal unless Germany and its allies do a complete about-face, which is difficult to imagine for domestic political reasons.
But the political terrain is wide and has many dimensions. For instance, Syriza has proposed an overhaul of the tax system to finally end the impunity of the upper class. That ought to qualify as a “reform” to any reasonable person, and if moral hazard is your concern, it gets to the heart of it. Similarly, Syriza claims it wants to release the state from the clutches of the oligarchs, who have managed it as a source of profit for decades. I don’t know how they will pull this off, but surely this is the sort of reform Greece really needs. In other words, from the very beginning what was distinctive about the Greek case compared to the other financially strapped peripheral countries was the extent of corruption by the elite. This is widely known. If Syriza can package its domestic program as “reform”, and if some portion of it can be acknowledged on those terms by Germany and its allies, there is a basis for a sovereign debt settlement. Again, the issue has nothing to do with how much money is transferred in a “bailout” or how much of the debt is written off. The only real question is political.
Second, what about the Greek banking system? Between their large holdings of sovereign Greek debt and the nonperformance of much of the rest of their books, given the state of the Greek economy, these institutions are presumably bankrupt. Even though, under eurozone rules, Greece cannot supply its own currency, it remains on the hook as lender of last resort—an intolerable situation. In a better world, the ECB would assume responsibility for this function, since it is the liquidity creator of first, last and in-between resort. But that’s not the world we’re in. So what can Syriza do about this?
There are two sets of parties whose assets are at risk in the Greek financial system, investors (shareholders and creditors) and depositors. A plan for getting through a domestic financial crisis has to take both into account.
I think the first, if it can be separated from the second, is relatively easy. Allow existing private institutions to fold and let the investors take the full hit. But be prepared: take immediate steps to create a public institution that can function as a “good, new bank”. In the resolution of failed institutions the public entity would acquire still-performing assets, including those deemed to be potentially performing when normal conditions return—the Bagehot test. Let the rest go down with their respective ships. Meanwhile, the public entity can hire experienced, talented staff from the banks forced to close their doors. This is essentially the plan proposed in 2008-2009 for the US and Europe by many economists, such as Willem Buiter, Joseph Stiglitz and, much less prominently, by yours truly. It confronts moral hazard head on, and it avoids the continuing drag of zombie, or at least balance-sheet impaired, financial institutions. It is not without risk, but if the public entity is up and running before the private institutions collapse, it should do the job.
The bigger problem, of course, is the depositors. Again, this would not be such an obstacle if Greece could legally issue its own currency, but it can’t. Worse, the eurozone does not have a clear policy for backstopping depositor protection, as we saw in the Cyprus episode. At this point, it is quite possible that Europe would stand aside and allow the Greek public to have its accounts wiped out. There are elements in various governments that would even relish the spectacle as retribution for the sin having voted for Syriza in the first place. If depositors cannot be protected, Syriza will be out of power in a flash. This is Argentina territory.
I won’t bother with a discussion of the evolving eurozone banking supervision system; it is too slow and conditional to matter for Greece in 2015. In all honesty, I can’t see any substitute for an immediate arrangement specific to backstopping Greek deposits. My sense of the Cyprus experience is that it was chastening for the eurocrats, but I could be wrong. What can Syriza do if depositors are held hostage as leverage for austerity? I might be crazy, but I think this could be the one realm in which a print-your-own-euro plan makes sense. What would happen if the Greek CB created new currency for the sole purpose of redeeming deposit accounts at insolvent banks?
It should be added that, as soon as plans are begun to anticipate a banking crisis, that crisis will accelerate. This means that negotiations on deposit protection ought to begin immediately in private, and that plans to establish a resolve-and-replace financial facility in Greece have to wait until some solution is reached. This is the part that worries me the most.
So much for the short term. The long term objective is to get the Greek economy growing again—to provide jobs, raise incomes, and rebuild public services. To some extent this will happen by itself as the restraints are lifted. I disagree with Bill Mitchell, that growth is primarily a function of fiscal stimulus. Yes, stimulus would do wonders. But there is immense pent-up demand in Greece, and if a modicum of social security can be restored I think the income multiplier would be quite high—if the trade balance does not become sharply negative again. Trade has rebalanced during the crisis as a result of demand suppression, not export competitiveness. In some sectors, like tourism, it is possible that internal devaluation can have an effect, but for the most part this is limited. I could write a different, equally long post (or longer) about strategies for improving productivity and export shares, but these are very long term and will not do much for Greece in the next several years.
The only alternative in the time frame that matters for Syriza is offsetting transfers. In a better world the eurozone would come equipped with a range of automatic stabilizers, like a zone-wide unemployment insurance system, that would supply much of the necessary transfer, at least during the initial period in which the Greek economy is severely depressed. That’s not the real world, though. The modest proposal of Varoufakis and Galbraith looks to the European Investment Bank to massively expand their portfolio, which, from a Greek point of view, would be experienced as a transfer. You could regard the current Juncker initiative, which envisions a fifteen-fold leveraging that borders on hallucinatory, as either evidence that the prospects for serious action are hopeless, or that the principle has been acknowledged and now begins the step-by-step process of coughing up the funds. I don’t know which reading is correct.
A final word about politics. In his public statements Tsipras looks to upcoming elections in Spain and elsewhere to ignite a pan-European progressive, anti-austerity (can we say Keynesian?) movement which will change the political landscape and put pressure on Merkel et al. to reverse course. He could be right, but it is all very iffy. This vision is undercut by the profound, perhaps irreparable, defects of Die Linke as a political force in Germany, and the fact that in several northern European countries the threat from the extreme right, not an upwelling from the left, is the main dynamic. I wish for the best, but if I’m a Syriza planner my Plan A will not assume a political alignment more favorable than the one we see today.
UPDATE: And here is what Lagarde has to say: "They must reform the efficiency of the state and get their tax collection system working. That’s not austerity. Those are reforms that they still need to do.” I especially like that she says this sternly, as if it were several more strokes of the cat 'o nine tails.
Sunday, January 25, 2015
Introducing Yanis Varoufakis
In the wake of the remarkable electoral victory by Syriza in Greece, the expectation is that Yanis Varoufakis will be the new finance minister. It is difficult to overstate how important his work will be to the Syriza program: just about everything hinges on the sort of arrangement he can work out with his counterparts in the other eurozone countries.
His name may be new to most observers, even some economists who have just tuned into the Greek drama, but he has been a significant voice in economic debate for many years. He can speak for himself, of course, and does so quite well, but here I’d like to situate him—how his intellectual background put him in the role he occupies today.
Varoufakis began his economic work as a game theorist. He first came to my attention when I read his wonderful Game Theory: A Critical Introduction, coauthored with Shaun Hargreaves-Heap. (It’s not really a textbook for beginners, but develops a trenchant critique at a foundational level.) Over time, however, Varoufakis drifted away from game theory and moved into macroeconomics and political economy.
To be precise, Varoufakis is a practitioner of International Political Economy (IPE). This is a diverse field with many intellectual traditions, but the particular strand he relates to takes as its starting point the observation that the current account surplus or deficit positions of countries are not randomly distributed attributes, flipping stochastically from one year to the next, but semi-fixed conditions. From there the questions revolve around such topics as, why do countries end up in one status or another, what are the macroeconomic forces specific to surplus and deficit countries, how does surplus/deficit status affect the international objectives of governments and their power to achieve them, and what are the consequences of the international economic regimes that result from these political forces? Researchers in this tradition range from the relatively centrist to the relatively left wing; there is, to my knowledge, no right wing flavor of this corner of IPE. (Perhaps this is because Keynes is an indispensable point of departure for everyone who works in this field.) Some names that carry weight in different circles: Barry Eichengreen, Jeff Frieden, Eric Helleiner, Michael Pettis. (You can get an uncredited introduction to IPE in my macroeconomics textbook, incidentally. I felt there was enough overlap between open economy macro and IPE, and enough need to consider them in tandem, to integrate them even at an introductory level.)
Varoufakis responded to the 2008 crisis by steeping himself in this literature and then contributing to it. His book The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy, which appeared in 2011, provides an excellent overview of the IPE perspective and links it to themes in left wing economics and politics. Thus he discusses how the fragility of global financial recycling is a product of but also influences the global order dominated by the US, modern class formation and its expression in domestic political structures, and the burgeoning inequality of income and wealth. Framed in this way, the problems we face can’t be solved by technical fixes alone; they demand a revitalization and extension of democracy. Although it expresses his own views and was not written, as far as I know, in consultation with anyone else, I think the book is consistent with the sort of program Syriza is hoping to implement in Greece and promote in Europe. You could read it if you want to dig beneath the headlines. Varoufakis has also maintained an informative blog—strongly recommended.
The job Varoufakis is taking on is truly daunting. When he walks into a room with other finance ministers, he will probably be the most advanced in terms of academic and intellectual preparation. But international economic negotiations are governed by political calculation, not rules of empirical evidence or formal modeling. To take a grandiose analogy, Harry Dexter White was no Keynes, but the text of Bretton Woods has a lot more White than Keynes. It may turn out that Varoufakis’ earlier work in game theory, like Rational Conflict (1991), will be more relevant to his forthcoming day (and night) job than all the wisdom he’s accumulated in international economics and finance.
His name may be new to most observers, even some economists who have just tuned into the Greek drama, but he has been a significant voice in economic debate for many years. He can speak for himself, of course, and does so quite well, but here I’d like to situate him—how his intellectual background put him in the role he occupies today.
Varoufakis began his economic work as a game theorist. He first came to my attention when I read his wonderful Game Theory: A Critical Introduction, coauthored with Shaun Hargreaves-Heap. (It’s not really a textbook for beginners, but develops a trenchant critique at a foundational level.) Over time, however, Varoufakis drifted away from game theory and moved into macroeconomics and political economy.
To be precise, Varoufakis is a practitioner of International Political Economy (IPE). This is a diverse field with many intellectual traditions, but the particular strand he relates to takes as its starting point the observation that the current account surplus or deficit positions of countries are not randomly distributed attributes, flipping stochastically from one year to the next, but semi-fixed conditions. From there the questions revolve around such topics as, why do countries end up in one status or another, what are the macroeconomic forces specific to surplus and deficit countries, how does surplus/deficit status affect the international objectives of governments and their power to achieve them, and what are the consequences of the international economic regimes that result from these political forces? Researchers in this tradition range from the relatively centrist to the relatively left wing; there is, to my knowledge, no right wing flavor of this corner of IPE. (Perhaps this is because Keynes is an indispensable point of departure for everyone who works in this field.) Some names that carry weight in different circles: Barry Eichengreen, Jeff Frieden, Eric Helleiner, Michael Pettis. (You can get an uncredited introduction to IPE in my macroeconomics textbook, incidentally. I felt there was enough overlap between open economy macro and IPE, and enough need to consider them in tandem, to integrate them even at an introductory level.)
Varoufakis responded to the 2008 crisis by steeping himself in this literature and then contributing to it. His book The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy, which appeared in 2011, provides an excellent overview of the IPE perspective and links it to themes in left wing economics and politics. Thus he discusses how the fragility of global financial recycling is a product of but also influences the global order dominated by the US, modern class formation and its expression in domestic political structures, and the burgeoning inequality of income and wealth. Framed in this way, the problems we face can’t be solved by technical fixes alone; they demand a revitalization and extension of democracy. Although it expresses his own views and was not written, as far as I know, in consultation with anyone else, I think the book is consistent with the sort of program Syriza is hoping to implement in Greece and promote in Europe. You could read it if you want to dig beneath the headlines. Varoufakis has also maintained an informative blog—strongly recommended.
The job Varoufakis is taking on is truly daunting. When he walks into a room with other finance ministers, he will probably be the most advanced in terms of academic and intellectual preparation. But international economic negotiations are governed by political calculation, not rules of empirical evidence or formal modeling. To take a grandiose analogy, Harry Dexter White was no Keynes, but the text of Bretton Woods has a lot more White than Keynes. It may turn out that Varoufakis’ earlier work in game theory, like Rational Conflict (1991), will be more relevant to his forthcoming day (and night) job than all the wisdom he’s accumulated in international economics and finance.
Subscribe to:
Comments (Atom)