Notes From Underground: A Well Respected Man About Town

The fact that today is GROUNDHOG DAY means that we have to keep discussing Greece again and again. The alarms sound over the demands of Syriza’s and its leader Alexis Tsipras and his efforts to craft a NEW DEAL for Greece in relation to its creditors. Any debt or interest rate relief Mr. Tsipras can attain from the TROIKA would allow his ruling party to declare victory and also provide a template for renegotiation of all previous austerity measures to which European debt plagued nations agreed. (I am not making a qualitative judgment about the Greek restructuring but just raising the issue of the great uncertainty it will cause in currency and bond markets.)

Last Thursday, Bank of England Governor Mark Carney laid out his ideas on how to help alleviate the problems facing the EU and a possible Greek Exit from the euro. The bottom line for Mr. Carney is that Europe needs a harmonized fiscal authority and a basic “transfer union” in which the more financially secure members would provide financial support for the debt burdened (a more robust political union). There is nothing new in Carney’s proposal but it takes on importance because of his dual role as BOE Governor and Chairman of the BIS Financial Stability Board, which operates under the auspices of the G20. Carney’s views are similar to what George Soros has been championing for several years: A single European Treasury with the ability to issue a EUROBOND rather than relying on each individual nation’s credit status.

Thomas Mayer, an influential voice in German banking and financial circles fired back at Governor Carney in Friday’s Financial Times with an opinion piece, “Carney Is Wrong About How To Solve Europe’s Problems.” Mayer’s challenge to Carney’s suggestion is to rehash the recent history of Greece’s fiscal malfeasance. (Merkel’s political response seen through the the enforcement of the original Maastricht Accord.) Chancellor Merkel attempted to prevent Greece from leaving the Euro in 2012 because of the potential issue of insolvency on other peripheral nations and the damage to the entire European financial system. Invoking the strictures of Maastricht has not worked because

“… countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transferring economic resources between eurozone members, which politicians have refused to allow through fiscal mechanisms they control. This is Germany’s worst nightmare.”

A voice from Germany’s power establishment openly admonishes a powerful central banker in a very public forum. The resolution of the Greek debt drama has awoken the spirits of past Presidents of the Bundesbank.If the traditional hard money crowd prevails the battle for European solvency will be an ongoing debate and provide great volatility for investors.

The battle for Europe’s financial heart is front and center. The main thrust has been and will be whether the good Bavarian Burghers are willing to finance the EU economy. Remember, they have never been asked directly about bankrolling the EU project. (It’s what another German financial heavyweight, Otmar Issing, referred to as “taxation without representation”.) Be prepared for a long period of continued volatility caused by EU politics over debt restructurings. Dutch Finance Minister Jeroen Dijsselbloem once proclaimed the Cyprus bank bail-in a template for future resolution of bankrupt EU financial institutions. One wonders if a Greek debt restructuring would become the template for the heavily indebted Spanish and Italian governments and their struggles against the strictures of fiscal austerity. There are so many KINKS in the entire European project.

***Tonight, at 9:30 p.m. CST, the Reserve Bank of Australia announces its interest rate decision. The bank is expected to leave the overnight rate at 2.5%. However, recent economic weakness and low capital expenditure in the mining sector may lead the RBA to cut rates by 25 basis points. If the RBA does cut rates, watch the Aussie/Kiwi cross for genuine market sentiment. If the Aussie strengthens versus the KIWI it will be a sign that the RBNZ is way behind the market and will have to initiate some proactive monetary policy.

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10 Responses to “Notes From Underground: A Well Respected Man About Town”

  1. asherz Says:

    There are two workers. One gets up at 5am and is at his factory job by 7am. He works hard all day except for a 15 minute lunch break. At the end of the day he has produced 150 widgets.
    The second worker puts his 8 am alarm on snooze and gets out of bed at 9. He gets to his factory job at 11. He is a great kibbitzer and all his co-workers love his jokes and stories. A two hour lunch break topped off with a generous helping of ouzo finds our worker a bit woozy and sleepy when he gets back to his spot on the factory floor. There are 3 widgets in his basket when he leaves early, not feeling too well.
    Who is happier? I can’t answer that question.
    The Eurozone is an idea that is a result of two terrible world wars. But it can’t work economically. All the templates for solving the solvency problems are missing the point.

  2. jromeo21 Says:

    Nice call Yra…

  3. Kevin Says:

    Hi Yra
    I found John Hempton’s article on Greek debt provided a good “left field” view (appropriate given Syriza’s origins).

    The moral indignation at the thought of a default or another bailout (perhaps alluded to in asherz’s allegory above) is misplaced in my view. The ECB ran monetary policy for many years that was inappropriate for the Greek economy (and Spain, Italy etc.). The economy responded to the ECB’s incentives. While no one can claim the Greeks were blameless, the very large majority of the first bailout never entered Greece at all, and was used to roll (extend and pretend) the Greek debt exposures of the ECB and Eurozone banks. The terms of this bailout were justified by the Troika’s growth forecasts – which have been shown to hopelessly misjudge the negative impact of austerity on Greece’s economy. Debt to GDP has gone up not done since the restructuring, despite a positive fiscal balance.

    I would suggest Syriza would be failing the Greek electorate if they do not credibly threaten default in the negotiations (as Hempton’s piece shows they can) and carry out that threat if necessary. The Eurocrats (rotten with convoluted vested interests) will find dealing with someone who means what they say and has a clear electoral mandate a frightening experience.

  4. Sal Says:

    The Greek man says: The tax man’s taken all my dough, and left me in this stately home, lazing on a sunny afternoon.
    The German man says: I believe that you and me last forever, yeah, all day and night time yours leave me never.

  5. Yra Says:

    Kevin–very good add to the discussion.Mark Weisbrot has also written in a similar vein and is worth finding.He is at the at the Center for Economic and Policy Research.He works with dean Baker who did some great research work on the housing and credit fiascoes–before the financial system was deemed vulnerable.Good research is good research regardless from which side of the aisle.As I like to remind people–learned more about understanding capitalism and its shortcomings from the left in Madison who used the work of the Austrians to expose the innate madness of the LDC loans in the 1970’s—learn more from those who want to burn the house down about putting fires out.The state of the world today is nobody reads work from those who are in disagreement with them–it is all about validation of ideas where it should be worthwhile dialectic and discourse—you have made the blog exactly that.

  6. Blacklisted Says:

    The Aussie govt, like the rest of the west that followed the US down the rabbit hole of marked-to-myth levered debt, is showing the same level of desperation to confiscate other people’s money as the EU and US – Whether it’s cops hiding in the woods, red-light camera’s, civil asset forfeitures, or FATCA, make no mistake, the bureaucrats in Brussels, DC, and elsewhere will not stop until they’ve pulled the world into their black hole of debt to save their bacon (so they think).

    Listen to the comments by the Greek Finance Minister, Yanis Varoufakis (; and read the Open Letter by the new Prime Minister, Alexis Tsipras, to German citizens two weeks before the election (; and tell me if it sounds like Greece is now going to borrow more money to pay back what they don’t have? Hopefully, Greece will be the first government to question this entire insane system of borrowing money that nobody intends to pay back, and shine the light on who is the crazy one – the borrower or the lender? I wish we had such truthful and coherent leaders.

    The facts are the numbers on Greece make it impossible for Greece to pay back their debt, and your readers certainly know the intent of austerity is to pay back the banksters, even it kills the Greek people. The bottom line is you cannot get out of an inability to pay borrowed money by borrowing more – and the newly elected govt knows it, and so does the EU, Japan, and the US, even though they will never admit it in public.

    Hopefully, Greece will make the world see that strip-mining a country to pay bond holders with digitized interest-bearing debt is no way to run an economy. If the sociopathic leaders won’t proactively address the needed structural reforms to minimize the hardships, you can be assured that the Invisible Hand will make sure the choices will be made under MUCH more duress.

    Greece should seize this moment to do what we should have done in 2001 and 2008, reset the unsustainable levered debt system by canceling euro-based debt payments, and re-instating the Drachma. Will it be tough for a while? Sure, but it will be over in a few years, versus a few decades like Japan. Like Great Britain, who was the first to recover from the Great Depression by being the first to abandoned the gold standard, Greece would be the first to recover from the sovereign debt Big Bang (

    BTW, you ought to ask Mr. Santelli why he never has interviewed Armstrong.

  7. ShockedToFindGambling Says:

    Yra- IMO, monetary union without political union will not work. At times of economic stress, the goals/needs of the haves and have nots are diametrically opposed.

    Should Europe enter another serious recession in the next year or two, Greece, Italy, Spain, Portugal, Ireland, and probably France will be looking for major handouts from Germany, and I don’t think Germany will accommodate.

    The EC is trying to hold the weaker countries in the monetary union (and Euro), but the better long term option might for those who fail the Maastricht criteria by a certain percentage, to leave the EU.

    The PIIGS should realize that “I wouldn’t want to join a club that would have me as a member.”

  8. Yra Says:

    Shocked–been raising that issue for 5 years and that is why the Rotten Heart of Europe is a must read

  9. Chicken Says:

    Are Bavarian Burghers willing to finance the EU economy?

    I guess the answer lies in a business decision, they’re the majority owner of EU economy, right?

  10. Yra Says:

    Chicken–only some are owners.There in lies the rub of the issue.

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