Greece, Germany, and the Dangers of Beggar Thy Neighbor

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Investors continued their flight from risky assets as the wobbling Greek rescue looked ready to morph into a broader sovereign debt crisis, compounded by fears that a China’s expansion, once seen as inevitable and enduring, is now looking at risk of fading as the officialdom tries to dampen inflation.

But the focus on the Greece trigger is masking a bigger and more complicated set of issues. The supposedly successful rescue of the global financial system was achieved by making sure bank investors took no pain. That was a dangerous decision: it promoted moral hazard (risk capital, like shareholders and bondholder, are supposed to take losses when businesses come a cropper) and kept the incumbents in place, assuring that there would be no change in any of the firms that had driven themselves off the cliff. The rationales were many: there wasn’t enough time to wind down a dealer, the banks were too interconnected to permit any major one to fail.

But Greece is now showing how blinkered this calculus was. No one in the EU officialdom appears to have anticipated that the populace would seek to shut down the economy to protest the austerity measures; they perhaps hoped for the gentler repudiation of cheating and budget shortfalls as deflation took hold. It unwittingly reveals that in a complex, volatile situation, they focused unduly on the demands of the market and underestimated the pushback from the public at large.

The effect of the bank rescues was a massive transfer from the citizenry to financiers, the greatest looting of the public purse in history. And the perps have behaved in a singularly ungrateful fashion, paying themselves record bonuses a year after being saved from their own greed and recklessness and adding insult to injury by carrying on, all too frequently, about how talented and invaluable they are.

Greece and Germany are demonstrating, vividly, how a comparatively small number of people who aren’t willing to play by the rules of the financiers, can cause disproportionate dislocations. Now pretty much everyone who wasn’t selling the viability of a Greek rescue package was of the view that a default, most likely in the form of a restructuring, was inevitable. Reader Hubert in German put it at six months; the somewhat more cautious Wolfgang Munchau opined that Greece would not default this year, but deemed it to be certain. Simon Johnson has also repeatedly said that the austerity program demanded of Greece was unprecedented and a default was in the cards.

But the unspoken consensus was that the authorities could kick the can down the road a little while. This optimistic view has collided with two ugly realities: social unrest and rising violence in Greece, and alarm and anger in Germany over the demands that they assist Euro debtors.

The irony here is that both sets of actions are self destructive, and both are rooted in the same reflex. In each case, a social compact under strain has been pushed to its breaking point by the crisis aftermath. You can argue that the Greek arrangements were ripe for breakdown, given the country’s chronic fiscal deficits, accommodative posture towards wealthy tax evaders, and acceptance of bribery as a way of doing business. But as dysfunctional as it looks, it functioned nevertheless. And now that it is breaking down, many citizens are striking out at the parties they think have sold them out: the banks and government officials. This too has a certain logic. Many studies have found people will spend time and effort to punish cheaters, even if they wind up worse off as a result (I’m not saying the violence is effective or aimed at the right targets, merely that this kind of reaction isn’t surprising).

Although the reaction of the German citizenry looks more reasoned, it too ultimately is self destructive. Even though the Greek model was (arguably) based on corruption and the German on hard work and thrift, the German was ever bit as unsustainable precisely because it was overly export dependent. That meant it required countries that would go into debt to buy its exports. Germany and Greece are not independent phenomena; they are merely two sides of the same coin. And many Germans seem as keen to punish profligate debtors as Greeks are to punish the banks and officials they think sold them out.

Was there a better way out? Hindsight is always 20/20. The eurozone’s fracture lines were bound to be tested in a crisis, but this one has the potential to kick off a new phase of the global financial meltdown (hopefully a mere August-September 2007 version rather than a September-October 2008 variant). Had the banks and investors taken more pain, had more rescue funds gone to ordinary people rather than those at the top of the food chain, calls for austerity and shared sacrifice may well have been much better received. There was never going to be a pretty way out of this mess. But political fights are taking a decidedly parochial, combative tone at precisely the time when it would be best for everyone to take a deep breath and consider how high the stakes really are.

Update: Martin Wolf reminds us who the real winners and losers are: “Greece is being asked to do what Latin America did in the 1980s. That led to a lost decade, the beneficiaries being foreign creditors.”

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  1. Abhishek

    I think that the transfers to the financial sector are not going to be easy this time around as it was during the TARP times.People have wised up to the so called “bailouts” which are essentially bailing out the big financial institutions.Greeks are facing a bleak future with sharp cuts in GDP,unemployment and possibly inflation. It would be better off to default on the debt than to take such severe austerity measures . The street protests may turn out to be something larger

    1. Yves Smith Post author

      I’m not disagreeing. Remember, a restructuring means the creditor takes the hit. We are well past the point of pretending there won’t be losers; this is now, implicitly a fight over who loses how much.

      A restructuring is in the cards for Greece. So why are the authorities trying to pretend they can extract more from the populace than is realistic? The more they try to pretend that there won’t be big losses on Greek debt and keep trying to push off the day of reckoning, the more it puts pressure on the whole system. Uncertainty is often worse than taking losses and moving on.

      1. anon

        “A restructuring is in the cards for Greece. So why are the authorities trying to pretend they can extract more from the populace than is realistic?”

        I can tell you that in France, the issue is being used as propaganda for the neoliberal “reform” (i.e. looting) of the retirement pension system. Some, like media analyst Daniel Schneidermann, have taken to referring to the “Greek crisis-retirement reform soap opera” as a single issue:
        (That’s in French.)

        The idea is that the French people ought to submit to the partial privatization of their retirement funds and so on because agreeing now will be less heinous than it would be later if the IMF, etc., were to be involved.

        When I then read about what the Simpson-Bowles Fiscal Commission seems to be trying to do – reduce the deficit by privatizing social security in the USA…

        …it’s hard not to imagine that there isn’t some kind of worldwide neoliberal co-ordination at present. Class war or conspiracy theory?

        1. DownSouth


          You hit the nail firmly upon the head.

          The Libertarian-Austrian-Neoliberal (LANie) prescriptions, having been implemented numerous times, are now cookie-cutter: always the same easy and simplistic prescriptions, always promising a free-market utopia, and always with the same catastrophic results. One has to look no further than Latin America—-the “laboratory experiment” for LANiesism as Business Week put it—-to see where LANieism leads. American economists may have been writing “treatises” on the “way the world should work, but it is [Chile] that is putting it into effect,” Barrons commented of the “Chicago Boys” inordinate influence upon Pinochet’s economic policies.

          Under Pinochet’s firm hand, the country, according to prominent Chicago graduate Cristian Larroulet, became a “pioneer in the world trend toward forms of government based on a free social order.” Its privatized pension system, for example, is today held up as a model for the transformation of Social Security.

          That privatized pension systems have one and only one beneficiary—-industry—-has been demonstrated numerous times, as Miguel Teubal shows was the case in Argentina:

          Another financial deal that was to favor the financial establishment of Argentina as well as international financial interests was the privatization of a substantial portion of pensioner and retirement funds. Early in 1994 any person in Argentina had the option of choosing a private pension or retirement fund to manage the funds provided for his or her own retirement instead of the state. This implied that a substantial portion of potential government income was transferred to the AFJP, which is the private administrator of pension and retirement funds. Money withheld from government contributed to the fiscal
          deficits that were to characterize the late 1990s and to the subsequent increases in foreign indebtedness.

          It has been estimated that in the period 1994–2003 over US$30 billion were transferred to these private pension and retiree funds. These companies associated with local and international banks charged US$10 billion in commissions.
          At the same time the payments that employers were required to make to the overall pension system were eliminated. These factors represented additional subsidies to local firms to the tune of US$35 billion. Thus about US$65 billion was the amount the government did not receive due to the creation of this private pensioner and retirement funds system. This was money transferred outright to finance interests and private firms (see Página 12, 31
          August 2004).

          1. Andrew Bissell

            All the Austrians I’m aware of are advocating restructuring and default of public debts. Maybe you can point me to the Mises Institute’s article touting the virtues of the IMF?

          2. DownSouth

            Andrew Bissell,

            You know, the LANies always want to start history today. In that way they can escape accountability for their failed theories and disastrous policy prescriptions. The prominent role their anti-government, laissez faire and anti-regulation absolutism played in creating the crisis thus simply disappears.

            Part and parcel to this is that the LANies, just like the Stalinists, require constant purging of former apparatchiks, Hoover and Greenspan being prominent examples.

            As I have repeated many times, the LANie prescriptions for the economy are tantamount to allowing people to drink and drive, and then when some drunk plows into a crowd of innocent bystanders, the only punishment suffered is that taxpayers are not forced to buy the drunk a new car.

            Granted, this may be an improvement over the system we currently have, where taxpayers are forced to replace the drunk’s totaled out vehicle with a shiny new Lamborghini. But it is horribly naïve and simplistic to think that alone will fix our current problems.

            Regulation never should have been dismantled, and the perps must be punished.

          3. Andrew Bissell

            Part and parcel to this is that the LANies, just like the Stalinists, require constant purging of former apparatchiks, Hoover and Greenspan being prominent examples.

            Ah, then perhaps, in addition to the aforementioned articles praising the IMF and full payment of all public debts, you can also point me to the articles the Austrians wrote praising Greenspan’s tenure while he was in office? Feel free to go as far back in history as you want. (I suspect you’ll find more apologia from Brad DeLong than you will most of the Austrians.)

            Of course, you can point me to neither of these things, and will mostly likely respond with yet another tired metaphor or Hannah Arendt quote.

          4. DownSouth

            Andrew Bissell,

            What exactly are you trying to say? Are you trying to say that anti-government, laissez faire and anti-regulation absolutism are not part of the Austrian creed? Are you trying to say that Greenspan was not a champion of these? Are you trying to say that Greenspan was not successful in implementing these?

            If you have quotes by prominent Austrian school adherents denouncing Greenspan’s failure to appropriately regulate the banking sector prior to the 2007 implosion, and urging him to take a firmer stance in supervising the banks, by all means, out with them. I’m all ears.

      2. VP

        I disagree. Greece is running a deeply negative primary balance, so defaulting will not solve anything. They are in big trouble whatever they do.

        Nobody expects Greece to pay back those loans. This so-called Greek bailout is all about saving EU banks and socializing their losses at our expenses.

  2. Hubert

    The Greek debt deal is all theory. Will Greeks work longer and start paying taxes ? Will Greek money go back into its banking system ? Will Greek banks use this money and redeem their loans at the ECB ? That sounds wonderful but very improbable.

    Or will they force their government to honestly default and say “you lent us the money, you idiots, go fy!” and leave the Euro ? No.

    They will pretend to make progress, Brussels will pretend they believe in this progress, and the ECB will take Greek shit collateral and send Euros to Greece.
    As the FED became the big illegal money laundering mechanism into Wall Street (with some others), the ECB will just go along as its balance sheet (with uncollectable Greek debt) gets kicked down the road.

    I heard some rumours of 80 bn Greek collateral at the ECB currently. Just watch the figures. I guess TPTB will handle it as a state secret going forward.

    There is no happy end to this. We are only buying time here, very expensively.

    1. RagingDebate

      Wonderful comment Hubert and wonderful article Yves. Keeping the management in charge while the plane was going down was all about an orderly golden parachute exit as the rest of the passengers hit the ground and burn.

    2. Chad


      I think that you and Yves are right on the money…so to speak.

      It makes me wonder if we aren’t getting a sneak-peak into what the future might in fact look like under a larger framework of more centralized global economic controls/bail-outs. Enter the global special interest groups (i.e., Greece).

      No sweat; the IMF stands ready to save the day. “Winners and losers”, absolutely not! Everyone’s a winner…unless you work for a living and/or pay your bills.

  3. Swedish Lex

    The euro drama is the most recent incarnation of the private and public deleveraging that still has a few years to go. Governments indirectly and, more or less, covertly assume the liabilities of the private sector through the various bailout mechanisms. The logic is that a somewhat controlled process of winding down debt, or at least attempting to begin a process of debt de-tox, is better than a total and imminent re-boot of the whole economy.

    The U.S. is as frail as the euro zone but has had its currency, world currency and federal structure for long enough to better keep up appearances.

    1. Yves Smith Post author

      Being geographically spread out and having a bourgeois distaste for taking to the streets also helps.

      1. MindtheGAAP

        “Being geographically spread out and having a bourgeois distaste for taking to the streets also helps.”

        This distaste will change if Washington and NY continue to remain tone-deaf. People are really hurting, and their anger is slowly boiling over. You don’t have to take my word for it–go to a public place (far from WS) and listen to what people are saying and how they want the problems to be resolved. They are no longer talking about jailing the bankers–they’re becoming far more extreme in their desired forms of punishment.

        Whatever the government (and banksters) are hoping for, this is not going to go away–quite the contrary, in fact. I would not want to be anywhere in NY or Ca once people find out that their pensions are worthless…

    2. Hubert

      I understand that. German government taking over german state banks loans to Greece directly (splitting off “worse banks” from “bad banks”) or giving the money indirectly via Greece paying interest and principal.

      What most people do not understand though is the interconnectedness of the Euro, they “incredible lightness of capital flight” in Kundera´s term. The whole banking system can run away from Greece as long as somebody fills the holes. That somebody is the ECB.

      Wolf, Munchau, Evans-Pritchard, the whole Anglo-Saxon commentariat does not get this point, at least not openly.

      The Eurozone is a half-dead experiment. If one wants to save it, one should put up the defences where it can be defended, where the integrity of the banking system might be sufficiently supervised. I have my doubts if this includes the PIS but I am sure that the G banking system is totally rotten.

      The domino theory was a lazy way of thinking it times of the Vietnam war; the domino theory in Eurolands does waste precious resources and goodwill on a country that should drop out here and now.
      Look, Greece will get the money and what did it help the PIS ? CDS spreads of all of them blew out yesterday anyway. This is not about domino. Maybe it is even the other way around – the “anti-domoino”: The more money for stupid rescues the less money and probability for less stupid ones.

      1. Yves Smith Post author


        I suspect you are right re the backdoor bailout via the ECB not being acknowledged. However, (per alex black’s amusing comment) we ran that movie in the US and we still had a run on the shadow banking system and needed explicit bailouts.

        Long winded way of sayin’ the ECB measures may not prove sufficient, and some countries (the UK, Switzerland, and Germany, to name a few) have banking sectors so large relative to their economies that their governments cannot credibly bail them out if you see widespread trouble. So this could indeed look pretty wobbly even with the ECB providing a lot of assistance.

        1. Hubert


          sure. IMF and Intra-States programs are limited and time-bound, the letter running risk of parliamentary disaproval going forward.
          The ECB has a digit-printing-device though. To stop here and now will certainly be more prudent then to stop in 2 years time. It is all about the timing of the two words: “no mas!” – maybe exactly in this language.

    3. charcad

      but has had its currency, world currency and federal structure for long enough to better keep up appearances.

      You left out a few details:

      1. Absolutely, positively no question about which government is sovereign and which fifty aren’t. Let us imagine one of the state governments here behaved as fraudulently about its budget as Greece’s officials have about theirs. I can assure you the government officials dealing with them would be the responsible U.S. District Attorney and assistants. The other state governors and the President would not be negotiating with them as equals.

      2. Unified markets with free movement of capital and labor between non-sovereign states.

      3. A space-air-sea imperium that Lord Jackie Fisher couldn’t even dream of. Not one barrel of oil (or one shipping container of plastic consumer junk) floats anywhere without the forbearance of the USN.

      You might reflect on these differences as the euro crashes and burns.

      1. Swedish Lex

        Are you unable to read?

        I mentioned the U.S. federal structure (i.e. those prosecutors of yours plus a lot more), in which worker mobility can be included, to be a factor that allows the U.S. to paint over its flaws in ways that the EU cannot.

        Plus the U.S. has an oversized navy paid for on the big AmEx card. Et alors?

  4. attempter

    This piece seems to still be framing things as if there’s such a thing as “Greece” and “Germany”, as opposed to two groups of workers under assault by bandits. If we saw a peasant village organize to fight marauding bandits instead of pay them tribute, probably nobody would even think to say “it’s cheaper in the short run for them to pay than to fight, so they should just pay.”

    Why is the calculus suddenly different where some of the members of the bandit gang are home-grown?

    Slavery is never “functional” for human beings, but only perhaps for tyrants and slaves. And as we see, this particular system of debt tyranny, a ponzi scheme of debt and fictive “growth”, was only temporarily functional anyway by any measure.

    On the other hand, it’s never self-destructive for the people to fight to destroy tyranny and regain their freedom, even if the result may be temporary material sacrifice. Again, the alleged material “prosperity” the system afforded was only ephemeral and conditional anyway. The “middle class” is being liquidated regardless. Fight or don’t fight, “destructive” or not, the material position is being destroyed anyway.

    I think I can guarantee if people submit meekly to incipient serfdom, their material position will in the end be far worse than if they refuse and revolt.

    As always, those who surrender freedom for the sake of a temporary material boon (or in the case of today, a temporary slowing of the pace of liquidation?) will end up with neither and deserve neither.

    Of course I’m not kidding myself that most of the people protesting aren’t just trying to cling to their own meager little piece of neoliberal “prosperity” and just want the ststus quo ante. But the conscious motivation of most resisters isn’t the point by now. They can’t have the status quo ante regardless, but by fighting for it they can still hinder and prevent the Bailout from proceeding at maximum speed and “efficiency”, and thereby hasten the day where it unravels completely.

    1. A. Gouveia

      Ehem.. there only slaves because they indebted themselves, so they can retire as early as 55 (actually, even earlier in some cases).Either if they default or not, they will have to give it up. The US citizens have much more reasons to complain.

    2. Dan Duncan

      The government workers of Greece as slaves…

      I suppose a candle light vigil is in order. OK, Attempter, you lead with your deepest bass voice:

      κούνια χαμηλός, γλυκός άρμα

      …which, of course is Greek for:

      “Swing Low, Sweet Chariot.”

      BTW: Can’t wait for the Greek version of “Roots”, which will be a mesmerizing chronicle of the life of the Greek civil servant, Kunta Kinteanos…who had to retire at 63!

      Also, included will be a behind-the-scenes account of the heroic Greek government—which must pay interest at a Mafioso-like FIVE percent.

      [We need to head this off now. Preemptive Reparations are definitely in order. In addition to providing the Greek government unlimited access to unlimited funds, Germany and the IMF should be the ones paying interest to the Greeks. Otherwise, the unforgivable crime of slavery will be perpetrated on these innocent people— who were FORCED to take on this debt.]

      1. Kathi Berke

        Attempter is absolutely right. His framework doesn’t simply refer to Greece. We’re enmeshed in a global Ponzi scheme. If you think the U.S. is being brought down by money-hunger middle classers making $60K you’ve got blinders on.

        We’re in a vicious cycle with financial pirates making gigantic bets and reaping enormous profits with the im/explicit backing of sovereign states who suck up their toxic debt and give them currency in return. Why else is the Fed refusing to reveal who it paid out trillions to but to maintain the illusion that the banks are solvent?

        The very unfortunate part of the U.S. is that there is no history of social rebellion. It was tried in 1932 during the depths of the first Depression when WWI vets came to Washington seeking money promised to them for their service during wartime. At the behest of President Hoover, Major General Douglas MacArthur ordered his men to shoot on American veterans and burn their encampment to the ground.

        Union organizers were routinely assassinated by hired guns of major companies. Dashiell Hammett, the great writer of The Maltese Falcon was deeply affected by being approached to kill Frank Little, an organizer from the IWW (International Workers of the World) by the Anaconda copper mining company when he was a detective for the Pinkerton Detective agency. He wrote a novel about it, Red Harvest. Pinkerton, the low-tech Blackwater of its time, was often hired to break strikes by any means necessary. Hammett refused but Little was killed anyway.

        If it weren’t for unions shedding blood, we wouldn’t have 8 hour work days, minimum wages, health insurance or many things Americans take for granted. Don’t kid yourself. People who did all the right things (work hard, save, go to school) are hanging tenuously onto the middle class. It’s a race to the bottom, and the overlords are only too happy to pay as little as possible.

        1. run75441



          If you believe the Middle Class is still $60,000, hmmmm. I also do agree, this is far bigger than what it is being made out to be. You seem to forget the Wagner act was used against unions also.

          1. Kathi Berke

            Hi run75441–Sorry, I’m a part-time (used to be full-time)teacher & writer. Not sure what caste I’m in. I do remember being able to buy things without obsessing about their cost. I’m not talking about cars, I mean vegetables and cereal. Dunno about deflation worries but I just paid 100% more for some comestibles than I did exactly one month ago.

    3. Tortoise

      Greece has problems of its own. The country has been ruled by a kleptocracy that was tolerated by the populace as long as they received a small bribe of their own. The country gradually lost its competitiveness and a big part of the population lost touch with reality. Now that reality rears its head, the weaknesses of the Greek political system and the economy are revealed. One hopes that the country will find its way.

  5. Daniel de Paris

    Germany and Greece are not independent phenomena; they are merely two sides of the same coin.

    I do not buy that at all that symmetry argument. A neo-con argument that will not the survive this ideology.

    political fights are taking a decidedly parochial, combative tone at precisely the time when it would be best for everyone to take a deep breath and consider how high the stakes really are.

    Not buying this either. Finance has certainly not been parochial enough for quite a period of time. I just do buy the “smart finance” argument. It is about time finance become “parochial” and dumb enough.

    So that anyone can grasp what working and saving do mean…

    Anyway there is no way you can have competitive wage level in “South of Europe” if their ridiculous asset prices do not drop significantly.

    These assets (hear Athens or Valencia RE) will not go down without some level of bankruptcy. Especially in view of the current market mechanisms in these countries.

    Sure the Euro will take a hit and a massive one. But do not expect this to be enough.

    1. Yves Smith Post author


      I am most certainly not a neo-con, and if you keep up unfounded mud slinging at your host, you will not longer be permitted to comment here.

      You refuse to acknowledge basic international funds flows. A persistent exporter REQUIRES that some of its other trade counterparties be chronic importers, hence debtors. This isn’t ideology, it’s capital and credit flows. Thus Germany’s persistent savings and exports means someone (or a bunch of someones) are going to be importer/debtors. One of those someones happens to be Greece. Hence the two sides of the coin.

      1. Hubert

        Importers yes. Debtors not necessarily. As long as the german financial sector destroys FX as quickly as exporters bring it home, the system is in a curious form of balance.
        Considering the latest deeds of german state banks, german private exports are not a problem now.
        You may be right in 3-5 years but then the world will most certainly have changed already.
        One could make the argument though that most of german finance lost US dollars and most exports went to Eurozone so far. But guess what – when the IMF and Brussels run out of money or political support in creditor countries, they will have to write down these loans to PIGS-lands too. Balance here again.
        This is more a form of german stupidity than maliciousness. Greeks will keep their Mercedes and London RE. HRE will show Greek loan on book, worth zero. So German taxpayer did Daimler vendor financing and got screwed.

        1. Greg


          If you are a net importer you will have to run either a govt budget deifcit OR a private domestic deficit. It cant be any other way.

      2. A. Gouveia


        but I think it is a mistake to thonk the coin has only two sides: if Germany starts to decrease its competitiveness on purpose (I supose they could make a law to raise wages blindly), and Greece stays the same, they will both lose to China, US, Japan, etc., which in fact are more openly playing beggar-thy-neighbor as they manipulate the currency.

        I recall only 40% of GER exports being intra-EU (or Greek imports, not sure).

        1. Yves Smith Post author

          The issue is not competitiveness, it’s the trade balance. Consuming more would do the trick.

          1. john alt

            Most of us know how to make money in our little part of the market. Most of us think we understand how markets and the larger economy work based on that knowledge. Almost no one has an incentive to take the time to sit back and look at what the global economy really is and what money and goods do in it.

            Almost everyone who is paid to do this got to be paid to do it because they were part of some component in some market that was making a bunch of money and as a result bring all sorts of unconscious bias to what they are looking at.

            Almost everyone wants this to be a morality tale that legitimates their personal experience or chastises their enemies. If it is a morality tale at all it is that globalization has connected us all vastly more than we have a common framework to understand and act on and that more than ever we sink or swim together. I would almost hope that ECB runs the “free market” experiment on the EU to finally prove conclusively that debt deflationary spirals are fatal to the capital base.

            But the morality of consigning 300,000,000 people to this folly is appalling and the speed with which old animosities re-ignite is frightening. I joked last week about calling in NATO air strikes on the ECB to try to prevent the EU from becoming a financial Yugoslavia, but the incipient violence and real vitriol growing on all sides robs the joke of its humor.

      3. Tortoise

        There are numerous and imaginative ways to balance payments. If Greece could accommodate 3 million more tourists per year, plus become home to one million retired Europeans, plus keep inside the country more of the profits from shipping (all these goals are quite possible to achieve), THEN Greece would have a better balance of payments than Germany, notwithstanding Germany’s exporting prowess. The failure of a political model is the problem; Greece is not the innocent victim of an accounting identity.

        It is becoming clear that the political rhetoric in Greece is influenced by a Marxist party (the KKE) that takes only 8% of the popular vote and yet dominates the discussion. It is the last party on earth that still venerates Stalin and believes that the Katyn massacre was perpetrated by the Nazis. Greece will go through some rough times, and it is not due to the relatively mild reforms attempted by the current government. Perhaps we are watching the (unnecessarily violent) collapse of the last soviet economy in Europe: the Greek public sector and the government supported economy.

  6. alex black

    I’m late to the show and didn’t get a program, so I want to make sure I’ve got the players straight, so:

    Greece = AIG

    EU banks = Goldman Sachs, et. al.

    Most of Europe = Paulson, begging on his knees

    Merkel = Pelosi, being begged, except Merkel has a brain

    Greek citizens = US citizens, screwed over, but with better vacation time, and more rioting skills

    German citizens = US citizens with bigger balls and an upcoming vote that they will NOT waste.

    Have I got it right? Can I sit down now and watch the show with y’all?

    1. Hubert

      Brilliant Alex.

      Only a few variations / additions:

      Greek citizens = US citizens, screwed over, but with better vacation time, and more rioting skill – and without an IRS, ruining an OPC (Other Peoples Currency)

      German citizens = US citizen who will foot the bill but neither had a vote on Hanks coup d´état nor transparency on the FEDs machinations.

      ECB = The FED that will blink (too late but before hyperinflation).

      1. alex black

        ECB = FED that will blink.

        Would this be the same ECB that just announced it would accept all paper from Greek banks as collateral, regardless of agency rating?

        No blink yet, but yeah, it’s still early….

    2. skippy

      Between your antics and Yves: bourgeois distaste for taking to the streets…I’ll never get off the floor today.

      Skippy…American exceptionalism at its best…eh.

  7. IF

    It was pretentious to price Greek risk at the same level as German. Both countries are making sure right now this won’t happen too soon again. Well, maybe a lesson to banks to be more careful in the future?

    Germans believe it is worth to work for very few Euros. This is the flip side of a strong and stable currency. As long as they keep believing this, just like the Chinese, they can hold up this illusion indefinitely. The Greek and club med are not in the position to suspend disbelief as long. There will be damage in Europe. But I see more problems coming via the strong dollar. Once the Chinese and Germans focus their attention to the sole remaining superpower unemployment in the US will go through the roof as well. The US elites with money printing ability for foreign goods won’t have a problem with that.

  8. Capricorn

    On the simple, practical level, this “bailout” looks to be a non-starter. Greece’s government has committed to give up Greece’s laid-back (lazy?), no-cares lifestyle, and that is just not going to happen. You can’t change a culture by decree.

    So, if Greece’s attempted austerity measures are going to fail, what, then, is Plan “B”? And how much worse is the situation going to be before we get to looking at Plan “B”?

    The best solution all around may be for Greece to exit the EU, and suffer the direct results of its’ lifestyle, rather than become a burden on the rest of the EU. It also gives Greece the additional option of devaluing its’ currency, an option that the Greek people may well prefer.

    That would also give other EU members facing financial difficulties a clear option – clean up their finances or leave the EU.

    1. alex black

      I think Plan B is “Go to your room and wait until your father gets home, young man!”

      Which begs the question, “Who’s your Daddy?”

    2. Owe Jessen

      Well, plan A seems to be to buy enough time for an orderly restructuring of Greek government debt, and an orderly reduction of the budget, without inflicting too much pain with regard to GDP growth. As has been shown, the problem is the huge primary deficit (budget balance before interest payments), less so than the cost of existing debt, so even a default would not help that much. By eliminating the need for Greece to go to market for about 2 years, it gets a chance to accomplish a restructuring of the budget with some time for all parties to figure out the burden sharing. The alternative would have been a disorderly default now through a sudden stop for Greece refinancing itself in the market, with the need to cut 10% out of its budget NOW. Plan B of course would be a change of European treaties, allowing EMU member states to cut misbehaving countries out of the union within the 2 years, and if Greece should be unable to change its ways, to let them exit EMU.

      1. Capricorn

        Owe, I think the point of the bailout is to avoid restructuring of Greece’s debt, restructuring which would involve creditors loosing money.

  9. Bas

    Yves, since you once again prove unable to think for yourself, please read this Guardian article on the supposed Greek “mass social unrest”.

    You do not understand Europe and the eurozone. You are embarassing yourself and economists like me, who have in the past stood up for your blog and even your book (which I would have recommended for my university course on the financial crisis, were it not for your “views” on this issue).

    I won’t attempt to correct the many inanities and platitudes with which you disqualify yourself once again as a serious commentator on the eurozone. But get this: The euro is here to stay. The Eurozone will stick together whatever it takes.

    Exporting eurocountries have deeper pockets than the US, UK, Japan and all fellow traveling speculators taken together. If they run out, the ECB has a lot more room for de facto QE, as it is doing right now with Greek bonds.

    We all know sovereign debt servicing for Western countries has become a zero sum game. Yet trying to ramp up problems in the Eurozone to deflect investor’s attention from the real danger – gilts and treasuries – by using this giant anglosaxon marketing tool called the internet, will only work for so long. The anglophones will lose this battle, and with it their credibility. Just as you already have.

    1. alex black

      “The Anglophones will lose this battle.”

      Are Anglophones those cool red booths in London? I like those….

    2. DownSouth


      Who to believe: the sanguine portrayal you favor, or the more pessimistic picture Yves paints.

      Well here’s the latest news:

      Three people died and four others were trapped when a fire bomb hit a bank in central Athens, the Greek fire brigade told CNN. The victims, two women and a man, were bank employees, they said.

      You seem to believe that burying your head in the sand and pretending that these problems don’t exist will somehow, magically, make them disappear.

      I would also counsel some Biblical wisdom here:

      You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye.
      –Matthew 7:5

      I’m not at all saying this is an accurate reflection of the current situation. I think it’s more like the plank in your own eye and the plank in your brother’s eye. But isn’t that the picture Yves has been painting all along? I don’t see any evidence that Yves has tried to sugar-coat the situation in the US.

    3. bystander

      Strange mix of right about the trivia and horribly wrong about the big picture there, Bas.

      Yves often replays dire-sounding media reports about signs of strain in Europe, and ignores indignant feedback from possibly better informed but also evidently partisan locals. See earlier posts on Spain’s economy, which eventually made poor old Charles Butler’s head blow off; there was also one about demos in Spain that got some pushback in the comments. And I expect there are other examples. So you have some sort of a point; the reality is that one can’t deduce very much about a national mood from demos except via long trusted videos of lots and lots of demonstrators. And Spain is weird.

      Everything else you have to say about NC’s European coverage is either illogical or substanceless, however. Look at this bit again:

      “You are embarrassing yourself and economists like me, who have in the past stood up for your blog and even your book (which I would have recommended for my university course on the financial crisis, were it not for your “views” on this issue).”

      Is that right? Yves’s reporting on Europe somehow invalidates ECONned? How does that work? Something of a departure from academic rigour there, methinks. Or this:

      “I won’t attempt to correct the many inanities and platitudes with which you disqualify yourself once again as a serious commentator on the eurozone.”

      This bit just looks like huffing and puffing (and, again, what about NC’s analysis of the US economy – is that invalidated too?). It might have been worth the effort of putting up a few counterarguments, given your concern about credibility. The article wasn’t *that* long; are you actually interested in the truth coming out, or not?

      “But get this: The euro is here to stay. The Eurozone will stick together whatever it takes.

      Exporting eurocountries have deeper pockets than the US, UK, Japan and all fellow traveling speculators taken together. If they run out, the ECB has a lot more room for de facto QE, as it is doing right now with Greek bonds.”

      At least you are making a forecast here with a definite outcome. Me, I’m content to sit back and see how this pans out. I’m backing Yves et al BTW – not sure what kind of trainwreck is coming, nor how fast, but it’s on its way. Perhaps, though, you’d like to tell me how the prospect of de facto QE affects the EUR/USD exchange rate, MTM losses on Greek and other Euro bonds, and the appetite of non-Euro investors for Euro debt, and whether those factors are likely to have any bearing on the durability of the Eurozone, which you simply assert.

      “trying to ramp up problems in the Eurozone to deflect investor’s attention from the real danger – gilts and treasuries – by using this giant anglosaxon marketing tool called the internet, will only work for so long. The anglophones will lose this battle, and with it their credibility. Just as you already have.”

      Probably worth trying a little harder to distinguish yourself from other shooters of messengers here. I’m not sure exactly what Yves’ Playbook of Doom is but if you think it doesn’t include Sterling and Dollars you really haven’t been paying attention. A first rate Sterling crisis could be next week’s story, or next year’s; at some point though it will happen, via a run or devaluation; how much austerity the Brits get remains to be seen, but it could be a hefty dose. Dollars – later, and a very different sort of crisis, one assumes.

      But this week’s story, the subject of the post above, is the Euro.

      Though painting Yves as an agent of an Anglo-Saxon political-financial conspiracy has some comedy value(if you like racist jokes), I don’t think you meant it as a joke, but as a slur.

      It may be a strain, but you could try crowbarring into your head the idea that the line coming out of NC is that both Anglo-Saxons and Europeans are getting their economics and political institutions completely wrong. That’s my tip. Hope it helps.

      1. goinsouth

        Could you be any more wrong about the situation in Greece?

        Where was that Guardian reporter? Ensconced behind some wall in an oligarch’s house?

        Banks on fire. Everything shut down. Police barely able to hold off protesters from getting into Parliament.

        Unfortunately, loss of life.

        1. Bas

          Just as the Guardian reporter, I don’t deny a few thousand unionists, anarchists, hooligans etc can wreak havoc on the streets of Athens. But in a metropolis of 3 million, a few thousand demonstrators are not what I would call mass civil unrest. I was there last week and found the city no more unruly than usual. Protestors, mind you, are a fact of life in this city.

          Writing, as Yves does, that “the populace seeks to shut down the economy”, is utter nonsense. The populace does no such thing. A few unions do. And a few opportunistic groups of anarchists take their chance to, well, anarchize.

          Yet nothing in anglosaxon reporting so far supports the view that a majority, or even a large part of the population is protesting these “austerity measures”. In fact, opinion polls show broad support among “the populace”.

          Whether there is laziness or malice involved in these tendentious comments and reports in anglophone media, I dare not say (though I do know “cui bono”). But from Pritchard-Evans to Martin Wolf, Schadenfreude and anti-european sentiment are disgustingly rampant.

          Lazy or malicious, British and American media, once held in high regard over here, have in the last six months utterly disqualified themselves to the more perceptive European public. Sadly, this now includes Yves.

    4. Yves Smith Post author


      I suggest you learn to read. You attribute things to me that are nowhere in this post or anything I have written.

      There is a general strike on in Greece. That does have an economic impact. And if Greece does not get a rescue, it cannot fund its government deficits in the bond markets. It gets immediate austerity, worse than what it would face with the IMF. The alternative that Auerback and Mosler proposed is not getting any consideration, as much as this is an option.

      Other writers have speculated about a euro breakup, but I have said not such thing here, even thought that is not an impossible outcome. Anyone in the US who in 2007 had said we’d have a $700 billion bailout of the banking system plus the Fed ballooning its balance sheet to what, $3 trillion, would have been treated as insane.

      Extreme outcomes are more likely than you think. That does not mean it is likely nor have I EVER said it is likely.

      Your comments are angry projection and bear at best a dim relationship to what I wrote.

      1. Bas

        Yves, I read: “The eurozone’s fracture lines were bound to be tested in a crisis, but this one has the potential to kick off a new phase of the global financial meltdown”.

        Why? All this talk about Greece being the “sovereign” Lehman is just crazy. A country’s not a bank. And a member of the eurozone can not default without the entire eurozone defaulting. Which is why Greece has been rescued.

        Expelling Greece would probably have required more aid to exposed eurozone banks. Yet it was an option, for successive Greek governments had deceived their eurozone partners. Aided and abetted by our “American allies'” banks, they had been sabotaging the stability pact, not stretching it to match temporary imbalances as other members (including Germany) have done before, and all members are doing now.

        So your contention that Greece and Germany are two sides of the same coin entails that net exporting eurocountries actually need members to cheat in order to sell their goods. Did I read that right?

        1. Yves Smith Post author


          You keep engaging in straw man arguments.

          1. The Eurobanks have a lot of bad debt on their books. All observers say they are much less far in realizing their losses than US banks, and I’ve been very critical of how undercapitalized US banks are. It isn’t clear that all of them are solvent, and banks even in good times are vulnerable to runs

          2. The trigger to the first wave of the crisis (Aug-Sept. 2007) was the collapse of the ABCP market, which led to a spike in Libor. I now have pretty savvy investors expecting a spike in Euribor.

          3. A country that runs chronic current account surpluses REQUIRES trade counterparties that run current account deficits. That means they accumulate debt. It can be private sector or public sector, it really does not matter. Carmen Reinhart and Kenneth Rogoff have found that accumulation of large amounts of private sector debt can also cause financial system instability. This is not about “cheating”, it’s about basic accounting identities. Unless Germany’s surpluses to the rest of the eurozone falls, this problem will persist.

          1. Bas

            Yves, I never denied eurobanks are in a bad position to absorb haircuts on Greek debts. In fact, that’s exactly what I wrote.

            again (and again, and again,) your inane argument about countries with chronic surpluses requiring trading partners to run deficits is a non sequitur for the Greek situation. Some of that balancing is indeed provided for by the stability pact. But the Greeks cooked the books on their external debt.

            Now that may be regular practice in America – and American banks and hedgefunds are as we speak making a killing from the greek mess they created, again in concert with American ratings agencies. But in Europe it is still considered criminal, whether legal or illegal.

            Again, the eurozone’s fiscal position is much, much better than the UK’s or the US’s.

            So what is happening now, is a de facto declaration of war against the euro by the US. Politicians in Europe – even in the formerly Amerophile East – are finally picking up on that fact. The European public will follow.

            When it does, America will have squandered its last remaining goodwill in this world. I, for one, have changed overnight from a convinced Transatlantic European to a firm believer in a multipolar world, with angloscum the last in line for alliances, economic or military.

    5. RagingDebate

      The Euro is toast. Monetary unions without political union never last long. Same now with the global economic system, leadership left the people itself behind. I admire your passion for a unified Europe but we are not calling the shots here Professor.

      I won’t speak for Yves but I thought this article was particularly interesting, because it speaks into human nature, cause and effect. I have found her analysis without bias toward any nation or bloc of nations. While I understand tensions are running high, you seem a bit fickle to me to drop being a fan over one opinion piece. Disengaging in dialogue is no manner of resolving dispute, that leads to war or do you disagree?

  10. DownSouth

    ►Yves: “But Greece is now showing how blinkered this calculus was. No one in the EU officialdom appears to have anticipated that the populace would seek to shut down the economy to protest the austerity measures…”

    This reminds me of something Ralph Ellison wrote. He wrote specifically in regards to “Negroes,” and where he wrote “Negro” or “Negroes,” I have inserted “human,” “human being” or “human beings” to make his writings more universal and more germane to the current situation:

    Many of those who write of…life today seem to assume that as long as their hearts are in the right place they can be as arbitrary as they wish in their formulations… They write as though [human] life exists only in light of their belated regard, and they publish interpretations of [human] experience which would not hold true for their own or for any other form of human life…

    …Prefabricated [human beings] are sketched on sheets of paper and superimposed upon the [human] community; then when someone thrusts his head through the page and yells, “Watch out there, Jack, there’re people living under here,” they are shocked and indignant.
    –Ralph Ellison, “The World and the Jug,” The New Leader, February 3, 1964

    1. goinsouth

      Along those lines, from the BBC account:

      Foreign governments and investors are watching events in Greece with concern.

      Chris Lowe of FTN Financial in New York told the BBC that the US financial community had been shocked by the violent protests.

      “The [US] reaction is that [Greek] people will simply refuse to accept the austerity plan,” he said.

      “If the Greeks are this upset, then maybe we need to worry about the Portuguese and Spanish and Italians being upset with the cuts they’re going to have to make.”

      Hoocoodanode that some people will stand up for themselves?

      Do Americans have a clue?

      1. RagingDebate

        Sure we have a clue! We will try our luck at the voting booth first in 2010 and 2012 as they should and see who can outspend who and reveal whom is in charge. It is our own modern version of civil war as our last one of the physical type was most painful.

        I am an American. I took a debt-induced nap for a long time like most other Americans and paid far less attention to elections which have consequences.

        Now it is our responsibility to clean up our own backyard and violence should always be the last option and only in self-defense if/when government pulls the trigger first.

        1. psychohistorian

          I am not an advocate of violence but would assert that the country has already pulled the trigger in the sense that our ability to reform the system through the ballot box is not going to work fast enough for the problems faced. We can only hope that attitudes among the elected will change to conform to societal demands when the time comes…..certainly not evident in the current set of “reforms”.

  11. DownSouth

    ►Yves: “You can argue that the Greek arrangements were ripe for breakdown, given the country’s chronic fiscal deficits, accommodative posture towards wealthy tax evaders, and acceptance of bribery as a way of doing business. But as dysfunctional as it looks, it functioned nevertheless.”

    Did it “function”? I think you’re making an assumption that has no basis in human nature:

    We propose that multi-individual negotiations result in the emergence of social norms that are collectively enforced… [C]ooperation can be stable in large groups, if noncooperators are punished and if those who do not punish noncooperators are also punished. In fact, they found that any social norm could be stable as long as both those who disobey and those who fail to punish those who disobey are punished.


    In a condition of pervasive distrust—-such as that which exists in many former Easter bloc nations—-strong penalties for fraud and dishonesty may be the only thing that works.
    –Herbert Gintis et al, Moral Sentiments and Material Interests

    1. Edward Lowe

      They key phrase being “we propose.” Meaning: “outside of our contrived experiments with coerced undergraduates built on our idealized assumptions taken selectively from 17th and 18th century English philosophy, we have not actually observed “social norms” nor have we observed their stability or instability in the real world (egads, that would make us anthropologists!).

      1. DownSouth

        Idealized assumptions taken selectively from 17th and 18th century English philosophy?

        Not hardly. It is these very assumptions which Gintis et al are attacking.

        Classical economic theory (the 17th and 18th century English philosophy you speak of) is based on the assumption that 100% human beings are rational egoists. Gintis et al challenge this assumption:

        We believe that—-in view of the importance of strong reciprocity—-mainstream economics as well as the social sciences in general have much to gain by routinely incorporating concerns for strong reciprocity into the analysis. This means that when analyzing an economic or social problem, one should routinely try to derive the implications of the assumption that, in addition to the purely self-interested types, roughly 40 to 50 percent of the people exhibit strongly reciprocal preferences.

        And Gintis et al offer no silver bullets, as classical economists and their begets, who simply assume away any facts that get in the way of their models, do:

        [I]t is extremely difficult to build simple and tractable models of strong reciprocity. The problem is that the explicit modeling of intention-based or type-based strong reciprocity quickly renders these models very complex and difficult to handle.

        The first best solution to the modeling problem would surely be a simple and tractable model of strong reciprocity. However, since this solution is not presently available, there is also a need for simpler models that mimic the outcomes of strong reciprocity models in a wide variety of circumstances but that do not explicitly model strong reciprocity. Such models have been developed by Fehr and Schmidt, and Bolton and Ockenfels. They are based on the assumption that “fair” types dislike an inequitable distribution of economic resources… [I]t is possible in many instances to capture the behavioral predictions of strong reciprocity with simpler models of fairness.

        However, the black-boxing of strong reciprocity via simple fairness models must be done with a background knowledge about the limits of these models. Mindless application of these models may lead to wrong predictions.

        Of course black-boxing never seemed to bother Adam Smith or any other of the classical, neoclassical or Austrian-school economists.

        Here’s the description Gintis et al give of strong reciprocity:

        While the writings of the great political philosophers of the past are usually both penetrating and nuanced on the subject of human behavior, they have come to be interpreted simply as having either assumed that human beings are essentially self-regarding (e.g. Thomas Hobbes and John Locke) or, at least under the right social order, entirely altruistic (e.g., Jean Jacques Rousseau, Karl Marx). In fact, people are often neither self-regarding nor altruistic. Strong reciprocators are conditional cooperators (who behave altruistically as long as others are doing so as well) and altruistic punishers (who apply sanctions to those who behave unfairly according to the prevalent norms of cooperation).


        A particularly important type of social preference is the preference for strong reciprocity. A strongly reciprocal individual responds kindly toward actions that are perceived to be kind and hostily toward actions that are perceived to be hostile. Whether an action is perceived to be kind or hostile depends on the fairness or unfairness of the intention underlying the action. The fairness of the intention, in turn, is determined by the equitability of the payoff distribution (relative to the set of feasible payoff distributions) caused by the action. It is important to emphasize that strong reciprocity is not driven by the expectation of future economic benefit. It is, therefore, fundamentally different from “cooperative” or “retaliatory” behavior in repeated interactions. These behaviors arise because actors expect future economic benefits from their actions. In the case of reciprocity, the actor is responding to friendly or hostile actions even if no economic gains can be expected.

        1. Edward Lowe

          Sorry Gintis needs to go back to his liberal undergraduate studies:

          Locke from the 2nd Treatise on government:

          i/ The state of nature has a law of nature to govern it, which obliges every one: and reason, which is that law, teaches all mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions …and being furnished with [reason], sharing all in one community of nature, there cannot be supposed any such subordination among us, that may authorize us to destroy one another, as if we were made for one another’s uses, as the inferior ranks of creatures are for our’s. Every one, as he is bound to preserve himself, and not to quit his station willfully, so by the like reason, when his own preservation comes not in competition, ought he, as much as he can, to preserve the rest of mankind, and may not, unless it be to do justice on an offender, take away, or impair the life, or what tends to the preservation of the life, the liberty, health, limb, or goods of another.

          And that all men may be restrained from invading others rights, and from doing hurt to one another, and the law of nature be observed, which willeth the peace and preservation of all mankind, the execution of the law of nature is, in that state, put into every man’s hands, whereby every one has a right to punish the transgressors of that law to such a degree, as may hinder its violation: for the law of nature would, as all other laws that concern men in this world ‘be in vain, if there were no body that in the state of nature had a power to execute that law, and thereby preserve the innocent and restrain offenders. And if any one in the state of nature may punish another for any evil he has done, every one may do so: for in that state of perfect equality, where naturally there is no superiority or jurisdiction of one over another, what any may do in prosecution of that law, every one must needs have a right to do./i

          Sorry Southie, the economists as a rule are still lost somewhere in the 18th century. What’s more, my experience with them professionally is that they are so poorly read that they rarely realize that their brand spanking new fangled inventions are nothing more than another variant of the wheel (lopsided of course, but none the less, just a wheel).

    2. ChrisPacific

      The key term here is “social norm,” which may or may not mean an official law.

      You see this a lot in third world countries, especially those with corrupt or tyrannical governments – you end up with a set of social contracts based on unwritten rules (black markets, “standard” bribes for certain services etc.) which, while technically illegal, still create a stable equilibrium in which everything more or less functions.

      You can even see the same principle at work in the USA in some areas, e.g. the illegal immigrant economy.

  12. charles

    Following up on Bas’s remark, there are indeed reports
    throughout the European press that the ECB, beyond breaking
    its book with the acceptance of ‘junk’ or near junk-rated Greek bonds will have to resort to ‘larger’ Q.E 2.0 ( even
    if the term is not correct, re. what was attempted in the
    U.K or the U.S ) it is de facto rumoured to further extend
    its so-called ‘extraordinary credit and liquidity policies’.
    In fact it has a meeting today wednesday in Lisbon..

  13. Hoi Polloi

    The political “leaders” of this world have, once again, underestimated their utterly wrong decision to bail out the financial predators and let the common people pay the bills. It’s totally unacceptable that the common people and the “Real Economy” is suffering while Wall Cheat is cashing up big bonusses based on imaginary profits and Ponzi schemes.
    This eventually will lead to enormous social unrest which will spread out over the world which will lead to results one can only guess and fear.

    Unless there’s a fundamental change in the finance world, this will lead to WW3.

    1. RagingDebate

      Absolute correct assumption of cause and effect. Hope for the best, prepare for the worst friend. Or as Ben Franklin once said “It is better to have it and not need it than to need it and not have it”.

  14. Yearning to Learn

    But political fights are taking a decidedly parochial, combative tone at precisely the time when it would be best for everyone to take a deep breath and consider how high the stakes really are.

    although the rational part of my brain mostly agrees with this, another part fights this idea strenuously.

    upon introspection, I think I know why. This argument has been used time and time again in order to make people give up their rights or their claims. but then when they do, they find out after resolution that they were taken for a ride.

    we’ve seen this playbook time and time again. govt/finance screws everything up, and then tell the populace that they “need to be reasonable”. The populace are reasonable, and then not too long afterwards they are in the dumpster as the govt/finance guys party it up.

    we just saw this playbook with TARP. “Be reasonable”. “Now is not the time to assign blame”. Blah blah blah. And what happens? God Blankfein et al have record bonuses while the middle and lower classes get crushed again. Not to worry, we plebes get to read in the paper that the economy is better. That is, if we can afford a newspaper.

    The problem is one of trust. Our governments and the financial types have performed in such a way as to lose our trust.

    If I TRUSTED someone then I would take a breath and see how deep the stakes are. But when dealing with a bunch of snakes? Hmm… it’s harder.

    Perhaps they dynamic is NOT:
    (Germany) vs (Greece)

    it is instead:
    (Bankers) vs (German Govt) vs (Greek Govt) vs (Greek/German citizens).

    looked at that way, perhaps the Greek/German populace HAVE taken a deep breath, and are correctly identifying their enemy (bankers and their govt). perhaps then resistance and protests are what one SHOULD do after taking a breath? Or maybe even protesting IS taking a breath? Perhaps the course of Greek “bailout” and staying in the Euro isn’t in the Greek or German citizen’s best interest?

    it seems to me that too many people are falling into the trap that the status quo is the “best option”. The Greek and German citizens are part of the process that will let them decide on this very important question. I see no need for them to rush this through like our TARP.

    1. Edward Lowe

      I think the key term here is that people “trust” government or their contractual partners. But, modern capitalism is inherently untrustworthy! If the goal is to maximize individual return, the system MUST operate on principles of deceit and manipulation, no matter what you or I or anyone else prefers. This is why, historically (at least prior to the modern era), rather extreme controls or handcuffs were placed on businessmen, particularly businessmen who are strangers to the local community. You cannot have it both ways, you cannot promote an essentially ammoral system of profit seeking AND have communities of trust. You either subdue business in order to maintain community integrity or you unleash business and destroy the social basis of community (I would even add to this the ecological basis of the community).

      People love the part of “business unleashed” when going up the bubble (their garages are simply filled with the wonders of industrial production … who gives a flip about the neighbors anyway…I can send my kids to private school with the massive “profits” I am making just sitting in my house).

      But, when the bubble bursts, people realize that their financial “capital” was illusory, and that the piles of industrial crap in their garages have little or no market value … when they turn to their neighbors for support, it turns out that they have not invested in all those little things that build “trust” in the community … meaning they have poor “social capital.”

      Nothing left here but the wailing and gnashing of teeth (and the rebuilding of community, hopefully). While the businessmen (marked gender intended) merely move on to the next “emerging market” for more pillage (and the occasional rape, no doubt).

      1. psychohistorian

        Nicely stated and nuanced perspective.

        How is it not obvious as a nation of people that it is not in our best interests to incentivize corporations to offshore labor so that we have increasing structural and pervasive unemployment? That said, I am not an advocate of trade wars. The bigger reality that is also not discussed is that even with bloated consumption of crap world wide there are still more labor resources than we have consumption to support. So this and imperialistic wars are how we deal with population control in our civilized world? gag!

  15. charcad

    Today’s Balkan body count so far:

    KIA 3 (burned to death in an Athens bank set on fire by arsonists)

    As Greek partisans endlessly point out elsewhere, Greece has the most vibrant economy in the entire Balkans. Exactly so.

    Safety note to Vinny: Don’t delay, evacuate today. This is getting completely out of control. There will be no physical help from the Masters of Mendacity in Brussels and Paris.

    1. charcad

      KIA: 3
      WIA: 12

      “We’ll be on the streets every day, every day! You never win unless you fight,” said 76-year-old Constantinos Doganis, who gets euro345 a month from his farming pension fund.

      One normally looks to the elders of a community to cool down young hotheads. But when the elders themselves are urging the youngsters forward no limits can be assigned to the resulting violence.

  16. /L

    In the late 70s Yugoslavia did as so many others, take the opportunity to get cheep credit when the international real interest rates was negative, then when USA did make a U turn in its monetary policy to fight inflation and interest got sky high usury rates Yugoslavia and many others was in trouble. The “rescue” teams from IMF and WB stepped in to “save” them with the usual recipe, austerity for the people and privatization of their common property. The republics in Yugoslavia had fairly large independence but to implement the IMF/WB measures power had to be centralized the federation, more power to Belgrade to strong arm the republics.

    It ended with a disaster.

    As it stands now Greece, the cradle of European civilization, is no longer a sovereign state. As a euro member it didn’t have much sovereignty but now when IMF and EU/Merkel is stepping in and dictate how Greece should be run their state the remaining parts of sovereignty is stripped away. Greece is only the first in line, there is more to come. The EU-superstate will emerge in the “skillful” hand of the eurocrats?

    1. Spectral

      You are simplifying the events in former Yugoslavia. To be exact I’ll say it: oversimplifying. Otherwise do not and stop to spread lies.

      1. charcad


        An entire library of after-action reports and studies has been written about events in the former Yugoslavia. And these are still not comprehensive. There is no danger that anyone with the least experience of those horrors will oversimplify or minimize them.

        Despite this, I agree with /L. The catastrophe there had its seeds in late 1980s economic distress.

        Do I expect genuine horror to reemerge? Absolutely. The EMU was set up by the same European academics, diplomats and statesmen who were found so lacking by events in the Balkan wars of the 1990s. Rather than preempting events they have been in constant react mode. “Behind the power curve” as used to be said in the American military.

  17. M Morris

    I know this article is supposed to be telling it “like it is”, but lets be really honest about what has just occured with this abomination called a Greek bailout.

    Ordinary Greeks have been condemned to years of vicious austerity only for the sake of political expediency and EU face saving measures. The IMF is also totally discredited because instead of insisting that Greece leave the Euro and go back to the Drachma, devaluation etc…it has aided and abetted the EU political motive which means Greece will suffer all the more.

    Lets be absolutely clear, the EU has bailed out the French and German banks who own the majority of Greek debt, not the people of Greece. They would be afr better off if the default occured.

    Does anyone serious believe that a monetary union based on such political engineering and primary motivation will stand the test of time and markets?

    Say bye to the Euro because it is a nonsense.

  18. purple

    Where will demand come from ?

    China is shutting down lending; Americans are broke; Europe is constrained by the Euro.

  19. MickeyHickey

    I do not see the threat posed by tens of thousands of protestors on the steets of Greece’s large cities. Protesting and resisting change is as old as the rocks and started shortly after Eve bit into the apple. In Europe as in Korea it is a well rehearsed art choreographed according to societally acceptable rules. At times the rabble get over enthusiastic and that leads to property damage, injuries and even death. Greece has an army (not loved or respected) and an efficient police force which acting in concert are quite capable of bringing things under control. The Greek populance are not armed to the teeth like Americans and that limits the damage they can do to themselves and their gov’t. Large numbers acting in concert might topple the Gov’t which would then be replaced by an elected fragmented coalition which would calm the waters for a few years. The large Greek Army which is maintained to protect them from the Turks can be cut to a home defence unit to protect the gov’t from the people. The Turks will have no interest in paying Greek Sovereign debts. The sense of entitlement will adapt to fit the funds available. Hope springs eternal in the human breast and life goes on.

  20. Spectral

    As far as I am concerned body count in Balkan have started 1990. with dissolution of former Yugoslavia. More than 100.000 death and like 3 million of displaced people. And uncounted damage of economy as result of looting, robbery of waring parties.

    This abovementioned is result of action of MMF and WB and the most pronounced actor was German Gov. along with Paris, London, and Washington. I have deep memories of economic hitmen Jeffrey Sachs in role of “advisor” of that time PM. I, also, must admit that I was naive in regards of their intentions. The same sociopath, had had the same role in lotting of Russia and other East European countries. I remember of “Structured Adjustments” and “liberalization” of economy, how they call it euphemistically.

    And of course classic Western media narratives as the cause of the war goes like: “they always hated each other” or “historical animosities muffled during Tito’s dictatorship”. Just as they – Western media journalist, country analysts, strategists, historians, commentators – blame Greeks for laziness, tax evasions and the like.

    Now, while I am not enjoying what I am seeing in Greece, because everything resemble to events in ex Yugoslavia I’m enjoying watching that the crisis knocking at door of villains.

    My only hope is that Greeks will resist what is in essence: imperial and colonial policy implemented trough various mechanism of the EU and IMF. It is politics of Scorched Earth and oppression. My hope is also that Greeks are having conscience of: Who are they dealing with. They must have high conscience that they are dealing with: Unspeakable Evil. One only needs to go to Greece in 70’s and nature of its regime, that same regime was established and supported by same political forces which forcing them now to take “austerity measure”.

    1. DownSouth

      I agree wholeheartedly.

      We´ve seen this same movie so many times—-in Latin America, in parts of Asia, in the former Soviet bloc, and now in Greece, soon to be followed by Spain, Portugal, Italy and Ireland, and then on to even bigger conquests.

      But the everyday person in Berlin, Washington, Paris or London should also be up in arms, for she surely is the next victim, as Hannah Arendt so eloquently observed:

      To substitute violence for power can bring victory, but the price is very high; for it is not only paid by the vanquished, it is also paid by the victor in terms of his own power. This is especially true when the victor happens to enjoy domestically the blessings of constitutional government. Henry Steele Commager is entirely right: “If we subvert world order and destroy world peace we must inevitably subvert and destroy our own political institutions first.” The much-feared boomerang effect of the “government of subject races” (Lord Cromer) on the home government during the imperialist era meant that rule by violence in faraway lands would end by affecting the government of England, that the last “subject race” would be the English themselves.
      –Hannah Arendt, Crises of the Republic

      Nestor Kirchner expressed a similar sentiment in a speech to the Summit of the Americas back in 2005:

      Neoliberalism is a deathtrap, a deathtrap that first ensnares the weak, but sooner or later, in one form or another, also arrives to the strong.

    2. charcad

      As far as I am concerned body count in Balkan have started 1990. with dissolution of former Yugoslavia. More than 100.000 death and like 3 million of displaced people. And uncounted damage of economy as result of looting, robbery of waring parties.

      Sure. But we do have to draw lines someplace. Otherwise we could reach back and include casualties from the post WWII Greek communist uprisings, or the 1960s era of military juntas.

      And speaking of former Yugoslavia…it is far from obvious to me the current settlements in Bosnia, Kosovo and Macedonia that are the basis of “peace” will necessarily hold. The foundation of all three was the supposed cornucopia of prosperity the EU would deliver as a result of “peace”. Well, the delivery truck is stuck in the mud these days.

      I was alluding to this when I commented that Greece has the strongest economy in the area.

  21. Costard

    It seems to me that class warfare and a sense of injustice are natural consequences of bailouts. It’s not just the (very necessary) austerity measures themselves causing protest, but who bears the cost of them as a result of the fact that default and debt destruction have been disallowed.

    The market will be blamed, per usual. Even though the real motivation for protecting banks is the governmental liabilities in the event of bank failure. Regimes worldwide have sold insurance policies on deposits, and depositors have taken them on their word and banked wherever returns are best. What was designed to prevent bank runs has succeeded so remarkably well that, now, even with the ship sinking depositors won’t run, and a bailout becomes a necessary cost-saving measure for government.

    This workers vs. bankers/interests hypothetical is so played out, that it would be funny were it not being pushed by vested “workers” looking to protect what they gained by greed and votes rather than their day’s sweat.

    If a “lost decade” occurs, look to the real culprit – not austerity measures but a national economy so code-bound and laced with entitlements that no growth is possible outside of foreign injections and inflationary bubbles. Same story in Latin America. Blaming the IMF is about as reasonable (and predictable) as blaming the debt collector. For ideologues, convenience is the better part of causation.

    1. Jimbo

      Costard, depositers haven’t taken Greek banks at their word, and many are withdrawing deposits and either taking Euros home, or transferring their Euro deposits to other banks in the EU. If Greece abandons the Euro, as many believe, deposits will be simply converted into the new currency, at a substantial loss. First mover advantage applies, as it did in Argentina a decade ago. Those who withdrew first got dollars, those who believed the government that all dollar deposits were secure, got taken.

  22. reprobate

    Spoken like someone who thinks labor has no power. So what happens when government and private sector employees refuse to do their jobs as a means of protest? There aren’t enough policemen and guns to turn Greece into a work camp. You really have not thought this through, now have you? Greece is not at that level of protest yet, but the idea that the populace is not ultimately in the driver’s seat is wrongheaded.

  23. Hugh

    Great post. There is a recurrent pattern in all this. We look at the math and see that doesn’t work. We look at the political leaderships and see they don’t work either. Then we see a succession of solutions announced. “Mission Accomplished.” Victory is proclaimed, and then it is proclaimed again, and then again. How many times now have we heard “Problem solved!” with regard to Greece? Each time this happens I have two reactions. The first is to wonder what the most recent deal will do. Will it be enough for a substantial delay in the sh*t hitting the fan or will it even amount to a muddle through? The second is to remind myself of what a real solution needs to incorporate and that is a Europe-wide deal: the triad of Germany, the Benelux, and France, the PIIGS, the UK, and Eastern Europe. What Europe needs is a continental solution. I don’t see this happening because to be blunt their political classes suck as badly as ours do.

  24. PDC

    “people will spend time and effort to punish cheaters, even if they wind up worse off as a result”
    If I may add a corollary: big cheaters will probably escape punishment, but a few satisfactory scapegoats must be found in order to structure people’s rage.
    Personally, I think that the roots of Greece’s problems are so tangled that it doesn’t make sense to single out one major cause, being it political corruption, mediterranean laziness, financial speculation, stiffened currency, competitive disadvantage in industrial production.
    And I don’t think that simplistic approaches, like “let them default and go their merry way out of Euro” will do any good either to Greece or to the other EU countries.
    What is needed here is a strategy to find a reasonable equilibrium in the inflow/outflow of goods, services and money…

  25. /L

    The former Chinese foreign minister and first Premier Zhou Enlai once asked about the impact of the French Revolution he replied: “too early to tell “.

    The aristocracy and rulers around Europe was deeply shaken by the events in France and was suddenly willing to negotiate and talked their own potential revolutionaries in to compromises. Maybe time for the Europeans to finish of that half measure.

    Which reminds me of something Michael Hudson said about Europe:

    … the class war is still so vicious there and Europe is never really emerged from feudalism, there is still an aristocracy, there is still an subservient to inherited wealth, ah…whenever I go to Europe I’m so glad that I’m born an American, because I never experience here this kind of sucking up qualities to wealth and to birth and in heritage you find over there.

    1. xct

      You are naive! The Americans have their Aristocracy in spades, it’s just more subtle. Why do you think, for example, that the ruling class is made exclusively of people graduating from a handful of universities? Why can’t great scholars from other universities never obtain a teaching postition in the Yvy League? And the legacy thing: the bright bulb “W.” graduated from Yale! Try to live in the US for a while and you’ll discover that it’s just the Other-U-K.

  26. ray l love

    I have never been a fan of the IMF, the WTO, or of the World Bank. But I think it is worth mentioning that the international community has only a limited amount of cheap capital and… an even more limited amount of influence over the political situation in a troubled nation such as Greece. There is far more ‘austerity’ in the world than what can be eliminated within the limits of the discounted capital available and so ultimately there is a question of where ‘austerity’ might do the most good.

    I understand that the MMT folks believe that the limits on cheap capital are merely political but, if that were in fact true, and if we were to allow that assumption to be employed, there is still the consideration of moral hazard and the need for Greece to reform its society. And the protests, as tragic as they may be, are precisely what must occur to apply the necessary pressure on the Greek Government if the illicit flow of funds, into the hidden accounts of wealthy Greeks, is to be stemmed. The international community, in an effort to keep corrupt democracies from abusing their access to international credit markets, has little else… other than ‘austerity’ measures and so the protests are a destructive but necessary way of applying pressure on the Greek democracy. Because, regardless of whether limits exist or not in regards to bail-out funding there are limits to how much corruption that can be tolerated because corruption upsets the balance of power, and, democracies must maintain a certain amount of balance if they are to remain equitable and free of exploitation.

    Greece, like many other democracies (USA especially), may well be a harbinger of what is a type of collective tyranny that exists at a point of democratic evolution when too much power exists among the upper-classes due to a larger percentage of the population being on the beneficial end of this demographic shift. At some point for example, if too many voters are benefiting from corruption it becomes very unlikely that a politician who vows to end corruption will be elected and from then on… the problem becomes intractable without exogenous pressure.

    That said, I am willing to accept that the IMF may have learned from its mistakes in the past, and… other than the unfortunate deaths and injuries caused by the unrest, the austerity measures seem to be causing the desired affects and I suspect that Greece and the World will be better off as a result.

  27. Allen C

    Either the ECB extends the folly by engaging in QE or the deadbeats leave or Germany leaves. There are no pretty choices when you run out of money!

  28. dearieme

    The euro was a triumph of wishful thinking over critical thinking. These are the tears it ends in.

  29. craazyman

    What would Pericles do?

    He’d probably organize through willpower and shamepower some council of debauched aristocrat pederasts by browbeating them with his, reportedly by Plutcarch, huge forehead, convincing them that if they sublimated their lusts into a creative force for something larger than themselves (measured top to bottom, not at the belly) then they might have a brief stab at fullfillment before they took their spin around Hades, or whatever the Greeks called it. And he’d probably suck some of that unpaid tax money back into the public purse. Maybe he’d have a statue of a few of them built, but probably not, more likely a building somewhere, where their heroic and idealized faces would be carved into marble for tourists to gaze upon, and where the Greek citizenry could bond into a renewed social compact, not through physical visitation, but through a form of mental telepathy, empowered not by any particular effort or form of will, but by a sense of relief that someone had the vision, the grace, the power and the integrity, to reclaim the spirit of the land from the graveyard into which it was sinking, and remind them of who and what they are, or what they could be, if they would only apply reason and revelation, as all real thought requires to be whole. Sincerely yours, DT Tremens, Assistant Professor of Mental Dentistry, Medical College of Magonia

  30. steelhead23

    Yves, this string is sooo interesting. At the end of your post you said: “But political fights are taking a decidedly parochial, combative tone at precisely the time when it would be best for everyone to take a deep breath and consider how high the stakes really are.”

    Of course, you are right – but even a cursory tour through the comments displays a level of parochialism I have seldom seen. It is clear that a number of Europeans follow you quite closely and are willing to slander you wildly should you besmirch their group identity, even unintentionally (or even cosmicly). You should thank your lucky stars you are free to write a blog and its the European bankers and politicos that need to wiggle a route through this maze of anger, hurt feelings, and paternalism to arrive at something truly workable. Oh yeah, it also has to solve Greece’s little problem. If anything, this list of fevered comments suggests that the EU and the euro are in serious danger. The euro would do well to end the year at par with bucky.

  31. psychohistorian

    Thanks for the posting Yves. If we continue with the train wreck narrative then your postings are like the cosmic version of the engineer’s thoughts two seconds before impact.

    Maybe a better context for your postings are as chronologer of the beginnings of The Great Economic War…..resulting in deciding which of the wealthy get to abuse the remaining world resources.

  32. Paul Tioxon

    Temple University Hospital Nurses Union just wrapped up a strike. One of the biggest contentions was to take away the payment of college tuition for children of the nurses. Not only at Temple, but for other universities as well. There was more money involved, the usual pittance, but medical benefits and education seem to be an ongoing battle in the local strikes in Philadelphia. Why does this matter? The people who are organized know what is going on and the unions transmit political intel on the corporations and their intentions towards them as employees. The mass transit union for SEPTA, also had a recent strike in the last year. It shut down, in the middle of the night with no forewarning to the public, who showed up in the morning, expecting to be taken to work. It did not happen. Very few riders liked the unions after that, but the unionn got more, not less. When you watch the middle class car dealers of Saturn, Chrysler, and other GM outlets get their heads handed to them, and watch the people who go out on strike get more money and a preservation of their benefits, the rest of the workers, oops sorry, THE MIDDLE CLASS, show their resentment towards those who in this kind of economy should be glad they have a job at all. They do not seem to do much of anything to protect themselves. Being a worker, I am so sorry, a member of the MIDDLE CLASS, does not seem to pay with diminished economic capacity masquerading as austerity cuts due to the iron laws of economics, probably as compelling as the 2nd law of thermodynamics. The Greeks seem to get it as they demonstrate the political law of rule or ruin works two ways. The W-2 crowd, how does that sound?, in the USA are going to have to do more than show up looking like colonial reenactors while they pay to see Sarah Palin call the Democrats bad names. Power does not come from being a total sucker.

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