"The forty-hour week adopted 30 years ago needs re-examination to determine whether or not a shorter work week, without loss of wages, would produce more jobs, increase productivity and stabilize prices" -- 1968 Republican Party Platform
Thanks to Bruce Bartlett for the tip!
Monday, February 9, 2015
Naomi Klein Thinks Low Oil Prices Can Help Us Fight Climate Change
I’m not joking. Read this interview transcribed on Grist. In this first installment, Klein makes two arguments: (1) Because of low oil prices there is less investment in unconventional oil, Arctic oil and fracking, and (2) Low oil prices give us a convenient opportunity to introduce carbon taxes because people are used to high prices.
The first is crazy. The main reason for low oil prices is the expansion of supply in a decelerating global economy. If supply expands in region A and this crowds out investment in expanding supply in region B, supply still expands. It is more supply and more fossil fuel consumption that will fuel climate change. There is a slight benefit from substituting less carbon-intensive sources, like conventional oil deposits, for more carbon-intensive ones, like the Alberta oil sands, but the difference is hardly sufficient to qualify as progress against climate change. I suppose Klein thinks declining economic growth in the continuing aftermath of 2008 is a good thing, but that’s another argument I've already thrashed out.
Ah, you say, but with lower oil prices and less investment in new sources of supply, eventually supply must stop growing, and prices will go up again. Yes, of course. This is a normal investment cycle, and it will put us back to where we were when oil prices were high. In the meantime we will have had this hiatus of lower prices and higher-than-otherwise consumption.
The second is only slightly less crazy. First, there is no real-world evidence that the price of oil plays a role in the political ability to introduce a carbon tax or permit system. In fact, insofar as high oil prices (when they’re high) represent scarcity rents, a tax or auctioned permit functions in part as a transfer of that rent from fossil fuel companies to the public, so you could make a case that high prices are politically beneficial. Of course, there’s no evidence for that either.
The deeper point is that the fossil fuel consumption patterns we saw in the world during the period of high oil prices were not nearly sufficient to put us on a path to avoid catastrophic climate change. We will need much higher costs to consumers to do that. Will people be happier about $15 a gallon gas if the starting point is $2 rather than $4? Your call.
The first is crazy. The main reason for low oil prices is the expansion of supply in a decelerating global economy. If supply expands in region A and this crowds out investment in expanding supply in region B, supply still expands. It is more supply and more fossil fuel consumption that will fuel climate change. There is a slight benefit from substituting less carbon-intensive sources, like conventional oil deposits, for more carbon-intensive ones, like the Alberta oil sands, but the difference is hardly sufficient to qualify as progress against climate change. I suppose Klein thinks declining economic growth in the continuing aftermath of 2008 is a good thing, but that’s another argument I've already thrashed out.
Ah, you say, but with lower oil prices and less investment in new sources of supply, eventually supply must stop growing, and prices will go up again. Yes, of course. This is a normal investment cycle, and it will put us back to where we were when oil prices were high. In the meantime we will have had this hiatus of lower prices and higher-than-otherwise consumption.
The second is only slightly less crazy. First, there is no real-world evidence that the price of oil plays a role in the political ability to introduce a carbon tax or permit system. In fact, insofar as high oil prices (when they’re high) represent scarcity rents, a tax or auctioned permit functions in part as a transfer of that rent from fossil fuel companies to the public, so you could make a case that high prices are politically beneficial. Of course, there’s no evidence for that either.
The deeper point is that the fossil fuel consumption patterns we saw in the world during the period of high oil prices were not nearly sufficient to put us on a path to avoid catastrophic climate change. We will need much higher costs to consumers to do that. Will people be happier about $15 a gallon gas if the starting point is $2 rather than $4? Your call.
Sunday, February 8, 2015
Libertarian Paradise in Greece
Never let a crisis go to waste. The depression in Greece has made the old rules unenforceable, and free-market economics has arisen to fill the vacuum.
For proof, see today’s New York Times, which has a heart-warming story about disruptive innovation in the Greek health care sector. Bloated public hospitals have seen their budgets slashed, and one of the results is that overpriced nurses aren't roaming the halls any more, looking for the occasional task to keep boredom at bay. No, there is now a lively market in nursing, where patients are empowered to seek out the nurses at their preferred price point and pay them only for the work they perform.
One of the beneficial byproducts of this development is the undermining of Greece’s system of requiring nurses to attend (equally bloated) universities in order to obtain licenses. Economic theory proved long ago that licensing is simply a ruse that pampered professionals put forward to justify their unearned rents. Once professional work is firmly placed on a market basis reputation will be sufficient to achieve an efficient level of consumer-driven quality.
You might object that the Times story presents these developments as a catastrophe, not a renaissance. That’s because most of their sources are these same moochers from the public trough, while the few hard-working free-market nurses they contacted were clearly intimidated by the threat of reprisals from the all-seeing state. Naturally, those who are disrupted are against disruption: that’s the innovator’s dilemma.
Will it take a depression to bring the same reformist spirit to America? How long must we wait until American hospital patients are free to choose their own nurses and parents are free to choose the teachers and schools they want for their kids?
For proof, see today’s New York Times, which has a heart-warming story about disruptive innovation in the Greek health care sector. Bloated public hospitals have seen their budgets slashed, and one of the results is that overpriced nurses aren't roaming the halls any more, looking for the occasional task to keep boredom at bay. No, there is now a lively market in nursing, where patients are empowered to seek out the nurses at their preferred price point and pay them only for the work they perform.
One of the beneficial byproducts of this development is the undermining of Greece’s system of requiring nurses to attend (equally bloated) universities in order to obtain licenses. Economic theory proved long ago that licensing is simply a ruse that pampered professionals put forward to justify their unearned rents. Once professional work is firmly placed on a market basis reputation will be sufficient to achieve an efficient level of consumer-driven quality.
You might object that the Times story presents these developments as a catastrophe, not a renaissance. That’s because most of their sources are these same moochers from the public trough, while the few hard-working free-market nurses they contacted were clearly intimidated by the threat of reprisals from the all-seeing state. Naturally, those who are disrupted are against disruption: that’s the innovator’s dilemma.
Will it take a depression to bring the same reformist spirit to America? How long must we wait until American hospital patients are free to choose their own nurses and parents are free to choose the teachers and schools they want for their kids?
The Ongoing Division of Libya: Cyrenaica and Tripolitania Redux
Nearly four years ago the former Qaddafi regime of Libya was in the process of disintegrating as many internal rebels, backed by foreigners mostly from European nations formerly implicated in colonial shenanigans, were on the rampage. At the time there appeared to be a major split between the more pro-rebel eastern part, with its capital at the later more notorious for other reasons, Benghazi, and the more western and pro-Qaddafi part, with its leading city the official national capital, Tripoli. In March of 2011 I posted on the situation, noting that this division reproduced a deep historical split between the ancient Roman provinces of Cyrenaica in the East and Tripolitania in the East, rarely politically united and having substantial ethnic and religious divisions (more Berbers in the West, with Qaddafi being mostly an "Arabized berber," followers of the Melki variety of the Shari'a Sunni code in the East, also a major home of the originally modernizing Salafist movement and close to Egypt). I shall not repeat here all the historical stuff in the link.
So, I had not thought about this for awhile until I just read a month old The Economist from Jan. 7, which had a big and interesting story on Libya, plus some maps. Even though I had predicted it, I had not realized it had returned, but there on p. 22 of this 1/7/15 issue, there it was, a map showing current reportedly "unraveling" Libya, split in half near the old boundary, with the article even raising this old issue of the deep historical differences between the two and how this is a factor in the ongoing falling apart of Libya, ruled in the West by fragmented Islamist militias, while portions of the East are ruled by a remnant of the supposedly official government and remnant military, many of whose leaders originally came from there, with troubled Benghazi arguably the main point of struggle between the two, with the local university substantially burned down and destroyed.
I realized that many Americans, including me, have not been on top of this sad situation and how it has fallen into this very old pattern. As it is, we must realize how American discussion and policy have simply degenerated into rank silliness and stupidity. I really must admit that I cannot blame the Obama administration for not publicly saying a word about what is going on there, although I suppose there are people in the US government paying attention while saying as little about it as possible. Obviously the reason nobody says anything of any significance now about the place in the US is that all discussion of the place has been hijacked totally since late 2012 by Republicans ranting about the events that occurred on 9/11/12 in Benghazi, which particularly involved the murder of the then US Ambassador, Chris Stevens, whose family said his death should not become a political issue, but, hey, who gives a what about what the family of a dead ambassador says when there is a political hot dog to cook for years and years and...
Yes, it is still ongoing. I am not sure exactly how many of these investigations have been carried out. The most important recent one was done for two years by the House of Representatives Intelligence Committee, chaired by Republican Rep. Rogers. While criticizing a failure to defend the facility where Stevens was located (and the nearby CIA facility), they essentially dismissed the numerous conspiracy theories involving Obama and Hillary Clinton somehow messing things up and causing the deaths, and then covering up all their awful and treasonous malfeasance. But, that has not shut things down. The Congressional GOP leadership quickly distanced itself from this study, and suported a new super committee by Rep. Trey Gowdy from South Carolina, providing him with an unilimited budget and no time limit. Dems on the committee have complained that, contrary to previous practice on these committees, Gowdy has been interviewing witnesses without telling the Dem members at all. Surely if they keep at this, they might find something, I mean something!!! with which to blame Hillary for the death of Amb. Stevens.
(I cannot resist adding a small point I have posted here on numerous occasions, which the committee partially reinforced. They admitted that the "lies" Susan Rice supposedly told about the events that evening being triggered by a riot over a video was what she was told by CIA and not some coverup (although charges of that led to her stepping back from becoming Sec. of State). What the committee still could not quite come to accept is that in fact while the local Islamist rads had been plotting for some time to attack the CIA facility, it was indeed the infamous video and riots in Cairo that same evening that provided the immediate trigger as openly stated by figures who led what happened. It remains a bit unclear whether they knew ahead of time that Stevens was in the smaller facility, where he once headed the de facto US embassy in support of the rebel government prior to the fall of Qaddafi, but, heck, so what? Clearly what matters is that Hillary and Rice and Obama... !!!)
In the meantime, who gives a whatever about what is going on in Libya right now, although I suppose it is comforting to know that history repeats itself, and an old and familiar pattern is reappearing on the ground, if not fully recognized officially.
Barkley Rosser
So, I had not thought about this for awhile until I just read a month old The Economist from Jan. 7, which had a big and interesting story on Libya, plus some maps. Even though I had predicted it, I had not realized it had returned, but there on p. 22 of this 1/7/15 issue, there it was, a map showing current reportedly "unraveling" Libya, split in half near the old boundary, with the article even raising this old issue of the deep historical differences between the two and how this is a factor in the ongoing falling apart of Libya, ruled in the West by fragmented Islamist militias, while portions of the East are ruled by a remnant of the supposedly official government and remnant military, many of whose leaders originally came from there, with troubled Benghazi arguably the main point of struggle between the two, with the local university substantially burned down and destroyed.
I realized that many Americans, including me, have not been on top of this sad situation and how it has fallen into this very old pattern. As it is, we must realize how American discussion and policy have simply degenerated into rank silliness and stupidity. I really must admit that I cannot blame the Obama administration for not publicly saying a word about what is going on there, although I suppose there are people in the US government paying attention while saying as little about it as possible. Obviously the reason nobody says anything of any significance now about the place in the US is that all discussion of the place has been hijacked totally since late 2012 by Republicans ranting about the events that occurred on 9/11/12 in Benghazi, which particularly involved the murder of the then US Ambassador, Chris Stevens, whose family said his death should not become a political issue, but, hey, who gives a what about what the family of a dead ambassador says when there is a political hot dog to cook for years and years and...
Yes, it is still ongoing. I am not sure exactly how many of these investigations have been carried out. The most important recent one was done for two years by the House of Representatives Intelligence Committee, chaired by Republican Rep. Rogers. While criticizing a failure to defend the facility where Stevens was located (and the nearby CIA facility), they essentially dismissed the numerous conspiracy theories involving Obama and Hillary Clinton somehow messing things up and causing the deaths, and then covering up all their awful and treasonous malfeasance. But, that has not shut things down. The Congressional GOP leadership quickly distanced itself from this study, and suported a new super committee by Rep. Trey Gowdy from South Carolina, providing him with an unilimited budget and no time limit. Dems on the committee have complained that, contrary to previous practice on these committees, Gowdy has been interviewing witnesses without telling the Dem members at all. Surely if they keep at this, they might find something, I mean something!!! with which to blame Hillary for the death of Amb. Stevens.
(I cannot resist adding a small point I have posted here on numerous occasions, which the committee partially reinforced. They admitted that the "lies" Susan Rice supposedly told about the events that evening being triggered by a riot over a video was what she was told by CIA and not some coverup (although charges of that led to her stepping back from becoming Sec. of State). What the committee still could not quite come to accept is that in fact while the local Islamist rads had been plotting for some time to attack the CIA facility, it was indeed the infamous video and riots in Cairo that same evening that provided the immediate trigger as openly stated by figures who led what happened. It remains a bit unclear whether they knew ahead of time that Stevens was in the smaller facility, where he once headed the de facto US embassy in support of the rebel government prior to the fall of Qaddafi, but, heck, so what? Clearly what matters is that Hillary and Rice and Obama... !!!)
In the meantime, who gives a whatever about what is going on in Libya right now, although I suppose it is comforting to know that history repeats itself, and an old and familiar pattern is reappearing on the ground, if not fully recognized officially.
Barkley Rosser
Saturday, February 7, 2015
Walls Have Ears: Wednesday’s Private Meeting between Wolfgang Schäuble and Yanis Varoufakis
The the post-meeting press conference was pretty dispiriting, but behind closed doors there was a clash of weltanschauungs. I’m privy to everything and can report it as it was.
YV: On behalf of my government and from my own personal, deep respect, I’d like to say hello and convey my wishes for collegial, constructive work.
WS: Please pull up a chair.
YV: Before we get down to business I want to make it clear that, while I come here as a representative of the Greek government, I am not interested in trying to reach a deal that’s good for Greece but not Europe as a whole. In fact, I think we can find a solution that is really in the interest of the German people as well as the Greek people.
WS: That’s good.
YV: So let’s begin.
WS: Yes, I was hoping I’d hear that.
YV: As you already know, my government has a clear mandate from the Greek people to seek a new debt arrangement, one that can allow our country to emerge from an economic nightmare. Of course, we don’t expect that this will be quick or easy.
WS: This discussion may be quicker and easier than you expect.
YV: This isn't a meeting to find a solution. I just want to put some ideas on the table and talk about how we can go from here to set up a constructive dialog.
WS: Young man, take that smile off your face.
YV: All right, this is not the tone I was hoping for, but we won’t let that get in the way. As I was saying—
WS: I know all about your ideas. You tell them to the whole world in your blog.
YV: Yes, but now we are going to discuss the ideas of the Greek government, which are not exactly the same as mine, but which I am going to express as well as I—
WS: I don’t think the answer will be any different for your ideas or the ideas of Tsipras or anyone else in your party. Let’s get to the point.
YV: As you wish. The point is that Greece cannot repay the loans under the terms it faces. We can’t afford any longer to pretend that this program is working; it’s not working for us, and it’s not working for you.
WS: We disagree. Greece is repaying the loans as we speak. You are making payments. You have a program to follow.
YV: We are taking on ever more debt to maintain the illusion that we can repay the existing debt.
WS: Yes, and you will have to repay that debt too.
YV: We cannot repay what we cannot repay.
WS: You are not at the end of your means. Your government chose to borrow the money, and now you must live with the consequences. It is the same for everyone. No one is allowed to escape the responsibility of repaying their debts.
YV: Do I have to remind you of the wise decision the Allies made to release Germany from—
WS: Don’t give me lectures on German history, young man. That was different. I don’t think it’s such a good idea for the Greek finance minister to come here to request special favors and then give us speeches about something we know far better than you do.
YV: Well then—
WS: I told you not to smile.
YV: Right. Where were we? Oh yes. Let’s not talk about the debt right now. As you know from reading my blog, I think that Europe as a whole can take responsible actions to pull all of our economies forward and reduce debt burdens through growth. I’m talking about a substantial expansion of the European Investment Bank financed by bond purchases by the ECB.
WS: I know. You think wealth can be created by printing money. We think wealth is created by hard work and frugality. When you start saving your own money you can talk about making investments.
YV: I take this as a signal you aren't interested....
WS: You’re getting better.
YV: Well, let’s try something else. Syriza, as you know, was elected on a platform of radically reforming the Greek state and subjecting the oligarchy in our country to the rule of law. We want to make it possible to collect taxes on the wealthy, to have honest bidding for government contracts, and to—
WS: Yes I know. We will help you collect these taxes, but you didn't come here for that. I want to know right now: are you going to go through with the privatizations you've agreed to, with further reductions in public employment, rescind these ridiculous wage increases—
YV: Sir, we were elected. We have a mandate. This is democracy.
WS: We know something about democracy too, Dr. Varoufakis. And people are free to express whatever opinion they want. That’s the democratic way. But voting for this party or that one doesn't change reality. And the reality is that you have to follow the program.
YV: If we have to do what you tell us no matter how we vote, what’s the point of voting?
WS: As I said, voting does not change reality.
YV: But voting has already changed reality, and not only for Greeks but Germans as well. Germany’s economy depends on its exports to us and to the other indebted countries. In fact, these are two sides of the same coin: our debts financed your exports. It’s basic macroeconomics, surely you can agree with that. Our economies are intertwined, what happens to Greece—
WS: No, you’re wrong. German exports have nothing to do with Greece; they are due to the productivity, the hard work of the German people and their willingness to save for the future. There are no shortcuts, Dr. Varoufakis. When Greeks learn how to work hard and save they will have a successful exporting economy too. And it’s the same for every country. And if you don’t like listening to us telling you this, you are perfectly free to refuse our generous support and let your economy go to hell. We will sell our goods to someone else who is more responsible. And one more thing. You have a lot to do in Athens. Don’t bother scheduling any more meetings in Berlin. If you noticed the little message you got from the ECB, your days are numbered. You will be heroes for another week or two, and then I can schedule a meeting with the finance minister of the next Greek government.
YV: This isn't going anywhere, is it? What are we going to tell the press in a few moments?
WS: We agree to disagree.
YV: I don’t think we even got to that.
WS: Do your job. This is what we always tell them. Oh, and one more thing.
YV: What's that?
WS: Tuck in your shirt.
YV: On behalf of my government and from my own personal, deep respect, I’d like to say hello and convey my wishes for collegial, constructive work.
WS: Please pull up a chair.
YV: Before we get down to business I want to make it clear that, while I come here as a representative of the Greek government, I am not interested in trying to reach a deal that’s good for Greece but not Europe as a whole. In fact, I think we can find a solution that is really in the interest of the German people as well as the Greek people.
WS: That’s good.
YV: So let’s begin.
WS: Yes, I was hoping I’d hear that.
YV: As you already know, my government has a clear mandate from the Greek people to seek a new debt arrangement, one that can allow our country to emerge from an economic nightmare. Of course, we don’t expect that this will be quick or easy.
WS: This discussion may be quicker and easier than you expect.
YV: This isn't a meeting to find a solution. I just want to put some ideas on the table and talk about how we can go from here to set up a constructive dialog.
WS: Young man, take that smile off your face.
YV: All right, this is not the tone I was hoping for, but we won’t let that get in the way. As I was saying—
WS: I know all about your ideas. You tell them to the whole world in your blog.
YV: Yes, but now we are going to discuss the ideas of the Greek government, which are not exactly the same as mine, but which I am going to express as well as I—
WS: I don’t think the answer will be any different for your ideas or the ideas of Tsipras or anyone else in your party. Let’s get to the point.
YV: As you wish. The point is that Greece cannot repay the loans under the terms it faces. We can’t afford any longer to pretend that this program is working; it’s not working for us, and it’s not working for you.
WS: We disagree. Greece is repaying the loans as we speak. You are making payments. You have a program to follow.
YV: We are taking on ever more debt to maintain the illusion that we can repay the existing debt.
WS: Yes, and you will have to repay that debt too.
YV: We cannot repay what we cannot repay.
WS: You are not at the end of your means. Your government chose to borrow the money, and now you must live with the consequences. It is the same for everyone. No one is allowed to escape the responsibility of repaying their debts.
YV: Do I have to remind you of the wise decision the Allies made to release Germany from—
WS: Don’t give me lectures on German history, young man. That was different. I don’t think it’s such a good idea for the Greek finance minister to come here to request special favors and then give us speeches about something we know far better than you do.
YV: Well then—
WS: I told you not to smile.
YV: Right. Where were we? Oh yes. Let’s not talk about the debt right now. As you know from reading my blog, I think that Europe as a whole can take responsible actions to pull all of our economies forward and reduce debt burdens through growth. I’m talking about a substantial expansion of the European Investment Bank financed by bond purchases by the ECB.
WS: I know. You think wealth can be created by printing money. We think wealth is created by hard work and frugality. When you start saving your own money you can talk about making investments.
YV: I take this as a signal you aren't interested....
WS: You’re getting better.
YV: Well, let’s try something else. Syriza, as you know, was elected on a platform of radically reforming the Greek state and subjecting the oligarchy in our country to the rule of law. We want to make it possible to collect taxes on the wealthy, to have honest bidding for government contracts, and to—
WS: Yes I know. We will help you collect these taxes, but you didn't come here for that. I want to know right now: are you going to go through with the privatizations you've agreed to, with further reductions in public employment, rescind these ridiculous wage increases—
YV: Sir, we were elected. We have a mandate. This is democracy.
WS: We know something about democracy too, Dr. Varoufakis. And people are free to express whatever opinion they want. That’s the democratic way. But voting for this party or that one doesn't change reality. And the reality is that you have to follow the program.
YV: If we have to do what you tell us no matter how we vote, what’s the point of voting?
WS: As I said, voting does not change reality.
YV: But voting has already changed reality, and not only for Greeks but Germans as well. Germany’s economy depends on its exports to us and to the other indebted countries. In fact, these are two sides of the same coin: our debts financed your exports. It’s basic macroeconomics, surely you can agree with that. Our economies are intertwined, what happens to Greece—
WS: No, you’re wrong. German exports have nothing to do with Greece; they are due to the productivity, the hard work of the German people and their willingness to save for the future. There are no shortcuts, Dr. Varoufakis. When Greeks learn how to work hard and save they will have a successful exporting economy too. And it’s the same for every country. And if you don’t like listening to us telling you this, you are perfectly free to refuse our generous support and let your economy go to hell. We will sell our goods to someone else who is more responsible. And one more thing. You have a lot to do in Athens. Don’t bother scheduling any more meetings in Berlin. If you noticed the little message you got from the ECB, your days are numbered. You will be heroes for another week or two, and then I can schedule a meeting with the finance minister of the next Greek government.
YV: This isn't going anywhere, is it? What are we going to tell the press in a few moments?
WS: We agree to disagree.
YV: I don’t think we even got to that.
WS: Do your job. This is what we always tell them. Oh, and one more thing.
YV: What's that?
WS: Tuck in your shirt.
Thursday, February 5, 2015
Draghi: Let’s Turn this Bank Run into a Stampede
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.
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.
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.
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