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Tuesday, March 09, 2010

Gnomes of Athens and the Atlas of the Ruhr

It's everybody's fault but ours:

"Unprincipled speculators are making billions every day by betting on a Greek default," said Mr Papandreou, who met US Secretary of State Hillary Clinton in Washington on Monday.

"That is why Europe and America must say 'enough is enough' to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system - not to mention the human consequences of lost jobs, foreclosed homes, and decimated pensions," he added.

Strangely the Canadian dollar seems untroubled by speculators. Perhaps speculators as a class just really like Canadians? We are a lovely bunch after all. Or might speculation on Greek debt have something to do with Greece's finances looking like a dog's breakfast? Blaming the money markets is a time honoured tradition. For much of the 20th century the British government, for reasons of national prestige, tried to prop up the value of the pound sterling versus the US dollar. Trying to maintain a pre-World War One valuation, when Britain was a net creditor, well into the 1930s, by which time it was a net debtor. The change in status meant that instead of receiving dividend and interest payments from abroad, the British were now paying vast sums to finance their war debt, mostly to Americans. 

This change in money flows placed a strong downward pressure on the pound, which the Treasury was obliged to prop up through purchasing, and the quasi-private Bank of England by keeping interest rates unusually high. The game could be sustained for only so long before either the Treasury ran out of money, or the Bank was forced to lower rates for domestic reasons. As a result periodic devaluations continued until the early 1970s, with the collapse of Bretton Woods. During one of the perennial sterling crises of the 1950s, the then Shadow Chancellor, Harold Wilson, quipped: "it was the end of an era, and all the financiers, all the little gnomes in Zürich and other financial centres, had begun to make their dispensations in regard to sterling." The "gnomes of Zürich" became all purpose villains for British officialdom then on. It was never the country's shoddy finances, its outdated industries or high tax rates, it was always the evil speculators. It was a politically useful bit of scapegoating. 

Few people understand what speculators do, except that it involves lots of math and they make lots of money, without producing anything of obvious tangible value. Speculation, however, is vital to a modern economy. By spotting arbitrage opportunities speculators help keep markets efficient. They are constantly testing to see if something is truly worth the current market price. In effect, they are keeping everyone honest and on their toes, a sort of checks and balance system for large and highly liquid markets. Whether it's bond market vigilantes in the 1980s, George Soros forcing the pound out of the ERM in 1992, or today Greek debt being discounted like month old feta, it's an important part of keeping a market economy healthy. In many ways global financial markets are the only real check on the power of large national governments, their electorates benefiting greatly by spending their children's inheritance. The Greeks are being taken to task for their fiscal incontinence, and like schoolchildren they are blaming their teacher for the punishment they are about to receive. In one sense, however, the Greeks are not completely to blame for their actions. 

They have been given license to misbehave for decades, along with the other PIGS economies, by the ultimate financiers of the European project, Germany. Just as Quebec's over generous welfare state is subsidized by Ontario and Alberta, so the hyper productive German worker has underwritten the profligacy of southern Europe. The success of both Canada's equalization programs, and the EUs literally innumerable wealth transfer schemes, rested upon moral blackmail. In the case of Quebec it was blaming English Canada for its relative backwardness up until the 1960s, and the subsequent threats of declaring independence. For Germany the situation is more obvious and painful, the guilt of two World Wars and the Holocaust. The 1940s may seem like ancient history to North Americans, but Europeans have long memories, especially when they're trying to extort money out someone else:

Mr Pangalos made the remarks during a wide-ranging BBC interview about Greece's financial difficulties.

"They [the Nazis] took away the Greek gold that was in the Bank of Greece, they took away the Greek money and they never gave it back," he said.

Germany has rejected the allegations, describing them as "not helpful".

Germany has been one of the harshest critics of Greece since it announced that its budget deficit was four times the eurozone limits.

Yeap. The Nazis stole a lot of stuff from a lot of people, but after three generations even the less resourceful among us are capable of muddling through, without going on the international dole. The Germans are understandably miffed. Even Teutonic patience has a limit and being blamed for the sins of not only your fathers, but your great-grandfathers as well, looks less like asking for justice and more like glorified mooching. If Europe is going to end its sclerosis it will have to be Germany that acts, the rest of the continent benefiting too much from the status quo. The German Atlas needs to shrug. Telling the Greeks where to go with their junk bonds, and decades old guilt trips, would be a wunderbar start.

Posted by Richard Anderson on March 9, 2010 | Permalink

Comments

Are you honestly comparing Canadian suffering from Nazis to Greek suffering? WOW!!

The Hedge funds were out of their Greek play long before the writer even imagined writing this article. Collusion at a summer dinner party leads to a bunch of insurance contracts being bought, and then investors notice the spreads, and they begin panicking. They go seeking insurance contracts, which the Hedge funds gladly sell them at a huge profit. This is how it works. It's a momentum play, you panic the market, and profit. We see this all the time on Wall Street, just a legalized ponzi scheme that ends up quite often with a short squeeze when the little greedy guppies jump in on the bigger play. The writer acts like these things don't happen.

The spreads on Greek debt are swinging wildly, and in a month when the Greeks go back to the market to place new debt, you'll see spreads far below what they were recently, and then how are you going to argue that the spreads are just following risk? A lot of hooey.

It's been a long time since Lehman Brothers and finance people have still not come to grips with the fact that the world economy is not horrid because of a garden variety default of a Wall Street player, or even because of default of housing, but instead its because of the bets taken on the failing: CDS.

Posted by: Dan Allen | 2010-03-09 9:55:06 AM


Furthermore, Greece has the lowest private debt of any Eurozone nation. Half as much as the average. It was the state sector that overspent, so at best you can accuse Greeks of having a massively inflated form of workfare. Greece is basically a welfare state. Is that profligacy? is being poor profligacy? Greece, compared to Germany, is very poor. For a long while--well before Euro entry--it sustained its welfare state through profits brought in from external ventures such as shipping and tourism. It was in even worse shape in the early 1990s recession than it is now, but it got out by devaluing, which it isn't allowed to do now.

Some German papers have argued that the Marshall plan took root in Germany but not in genetically inferior Greece. Neglecting the fact that Germany took all the hard currency out of Greece with a horrid punishing loan enacted to allow Germany to occupy Greece, and what they left behind was an internecine fight that saw Communist and Slav countries to the north funding the guerrillas who resisted the Nazis, in the hopes of rending northern Greece into the Communist Bloc. other words, Germany decimated the country, took a huge onerous loan, and was rewarded with the equivalent of $37 billion in today's money (if you look at what the USA paid in relation to GDP). Yes, I know, Germany has a well-oiled and powerful engine, you don't have to remind Greeks of that.

Then there's the matter of Germany giving Greece $33 billion over the years in structural funds. Of course, what isn't noted, is that Greece also bought $170 billion worth of German exports in the last 10 years. How is this high-cost, low-interest thing working out for Germany anyways? I hear their businesses squash the competition, as the strength of an absurdly high Euro doesn't seem to be impacting Germany's export machine. The south part of the Eurozone hears a giant sucking sound however as the economies rely on construction and the like. If Greece had control of its currency, maybe it could address the imbalance, but Germany is keeping a tight fist on monetary policy. Are the Germans are channeling Herbert Hoover?

Lastly, Germany's banks dabbled in credit default swaps, and now they're on the hook. Germans are insulting Greeks looking for bailouts. It's funny, as a US taxpayer, I didn't complain when my tax money went to Germany last year. Over $20 billion came Germany's way because the state-owned bank KfW got into massive trouble with bad investments and bad bets. So the Greek gov't is profligate. But are Germans horrible gamblers who can't pay their debts? Why look to Americans when their banks lost their bets? Why did they go looking for handouts?

Posted by: Dan Allen | 2010-03-09 9:55:51 AM


Speculators are pretty much observers who get to use money to give a thumb up or a thumb down on government economic policies.

They aren't the ones causing the government economic policies.

Posted by: Floyd Looney | 2010-03-09 10:16:16 AM


Dan,

If Greece doesn't like the arrangements in the EU, it can just leave. Then it could have its own currency and do whatever it likes. I doubt that this would do much to solve its problems, however, which is why the Greeks aren't considering it.

Posted by: Dennis | 2010-03-09 12:19:52 PM


Dan:

Explain, please, how Germany's taxpayers should pay for Greece's overly-generous social programs?

One example I hear is Greek retirement age is 58 on full pension.

The EU has no central bank, so it cannot deflate Greece's currency.

No question, the EU will collapse before our eyes in the next few years.

This should be a good warning to governments on both sides of the North American border, to start representing the taxpayers of this country, not a Big Government model which is subservient to Big Labour.

Posted by: set you free | 2010-03-09 1:30:57 PM


"The EU has no central bank"

Huh?

Posted by: Charles | 2010-03-09 2:26:53 PM


We never voted for these "schoolmasters" to impose on us "punishments" for "profligacy". If they insist on violence against people in this way then they should expect violence against them.

Their "punishments" serve to make it more difficult for countries to pay debts... clearly their interest is in harming people and enslaving people and for that they should expect that their evil will be returned to them in due course.

One more time you people make clear your anti-democratic beliefs.

Posted by: The General | 2010-05-17 2:42:08 PM


If nothing else, the title of this thread is fantastic--sheer poetry. :-)

Posted by: Shane Matthews | 2010-05-17 2:50:34 PM



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