Thursday, March 11, 2010

Greece hit by strikes, riots over austerity plan

Serious violence is erupting in the streets of Athens as people protest forced austerity measures being imposed upon them. The very fabric of society is unraveling and it is getting uglier by the day.

For what reason?

For some arbitrary deficit target that is being imposed by bureaucrats in Brussels? Is this sufficient cause to destroy a society?

See how irrational this is? The leaders of Greece are forcing terrible conditions on the citizens of their own country because of something that is totally arbitrary. As a result there is violence, the loss of jobs and people going without the means to support themselves.

This is nothing short of tyranny, but it's a self-imposed tyranny. Greece can escape from its troubles in a heartbeat, by simply exiting the euro and becoming a currency issuer once again. Yet ego, shame and all other kinds of negative and irrational emotions and self-imposed limitations will not allow this to happen. Instead, Greece has chosen a path that will devolve into total chaos and anarchy.

The United States faces similar turmoil, not because the U.S. is no longer a currency issuer, it is, but because it is embracing policies based upon ignorance and limitation. By forcing ourselves to adhere to some arbitrary and meaningless standard about deficits we allow millions of people to remain unemployed, perhaps without food or with the loss of their homes and places of residence. It's a form of tyranny.

Chaos of the order seen in Greece may not happen in the U.S. because there are so many layers of police and law enforcement in this country. However, a police state could be imposed if things get bad enough and it is certainly heading in that direction. You simply can't have millions and millions of people unemployed and not expect them to rise up in protest at some point. Especially when speculative finance capitalists have free rein to loot the nation's assets and wealth.


Ramanan said...

Hi Mike,

If people like John B Taylor exist, it is impossible to make any progress. Look at what he has to say - absolute disgrace.

Mike Sandifer said...


Excellent points, but what about the costs and time it may take to change currencies now?

Even if the costs and time to change are significant, maybe it'd be a good idea if the PIIGS countries announced they are exiting the EMU. They can then devalue to avoid years of deflation and fiscal austerity measures.

It's funny how the market attacks Spain which ran surpluses before '08. Its' just another reason running surpluses makes no sense whatsoever. The market won't even always credit you when you need it most.

Jay Jonah said...

Interesting post Mike. I find it a bit incredulous that you explain the Greek political violence as almost a natural reaction of the population.

Greece has suffered from violence and terrorism for decades, a continuous process originating in the guerilla war where the Stalin-backed Communists nearly seized power in the post-Nazi era.

So when these same Communists seize the Finance Ministry as they did the other day it's not simply a spontaneous outburst of popular anger.

On the rest of your analysis and solution of leaving the Euro I completely agree. The Brusselcrats
are driving Greece into the hands of the extremists and terrorists with their insane "austerity" measures.

Matt Franko said...

Great to see you over here again!

Is this Taylor the one who created the Taylor rule? Its all coming from Hoover Inst. at Stanford. They are living in the past.

Ramanan, pertaining to that EMF thread that you and jkh were going back and Forth on: jkh said: "I think the operational relationship between the NCB’s and the ECB is the most difficult to figure out."

I think why it is hard to figure out is that there may not be such a relationship per se. I have no operational experience, but I have read the General Document a few times and based on some other observations, I dont think the ECB has any operational aspects/functions in a way similar to how the Fed&FRBNY operates via an Open market Desk with a trading floor, accounts and so forth. (Mr Sack's group at the FRBNY)

ie when someone would say "the country has an account at the ECB" I dont think that may be technically accurate, ie no one may have an account at the "ECB". The NCBs seem to act semi-autonomously and they report to the "ECB" and the EC"B" numbers are just an amalgamation of the totals of the NCB numbers. (I think this is why the EU is having to establish a brand new "Fund" (I read: "real bank"), the so-called EMF, to act as a lender of last resort because the "ECB" is really not a "bank" in how we would normally think of one, ie they cant lend anybody anything, nor do they transact with anybody directly.) Reserves (2%! max) may be handled entirely within the Countries via the NCBs and the Banks HQd in that Country. the ECB may be closer to the US FOMC than a "bank". The ECB seems to just set the policy rates and the NCBs make it happen within their jurisdictions.

I could be wrong but either way I think it would be good to run that thread out to conclusion over there so we all and Warren (who has that Eurozone proposal out and was briefly asked about it at his CNBC apearance then they cut him off) can speak from a more enlightened position.

I think the answer to jkh's original question: 'Helicopter drops are fiscal so what is the accounting in the Eurosystem?', Will take us there. Ill try to add (my limited) value where I can if you two can keep it going.


googleheim said...

1. Tea partiers like Gov Rick Perry abhorr running a deficit if they were lucky to be in an oil state during the recent run up on oil prices due to the insider weighthing of the commodities by GS and MS investment bankers. He says that bailing out the banks was a disaster ??? Not bailing out more ( like the auto ind ) was the disaster.

2. As for Greece, they need to be allowed to run up deficits to make the EU stronger - Mike Norman Theory of Capacity prevails again !

Why ? because Greece lacks assets like that of the Northern EU countries - if they allow Greece to create assets by deficit spending then Greece will make the entire EU stronger and make the EURO justify itself.

And just like Mike points out, they are not being allowed to work the double ledger system and make Greece grow more by having a better appetite of economic kind.

So by restricting Greece, the EU is being counter productive to itself.

Mike Norman said...


Greece has been calm for decades. You cannot ascribe this to the "same Communists," nor can you say it's a part of the same movement. That being said, I welcome your points.

Mike Norman said...


The market won't credit you because for the most part it is dominated by large pools of capital that are deployed by people who know nothing. Only in the very long term do true fundamentals rule and as Keynes said, "In the long term we're all dead." My problem is that I keep preaching about things that can only come to fruition in the long term. It's a waste of time and energy. I should be a momentum trader like everyone else.

Mike Norman said...


It's very much in vogue to quote Friedman, however, even Friedman admitted near the end of his life that his own ideas lacked the basis to be embraced to the degree that they had. Taylor is a professor at Stanford, you know, the school that gave us Arthur Laffer. What more can I say?

googleheim said...

Mike Norman :

check out the "long now foundation" which is all against the "faster cheaper forever" mentality

Mike Norman said...


And you're right, it's impossible to make progress. Progress requires the expenditure of energy, which in today's world means money. "Our side" cannot possibly win this debate because no one, save perhaps Warren Mosler, is willing to put up any money to disseminate these ideas broadly in a well-crafted markeing campaign that can challenge the fallacious arguments of the other side. And Warren is not a billionaire. Writing academic articles on blogs will not do it.

Ramanan said...


Yes he is the same Taylor. Seems very adamant about his ideologies, when the fact is that economies around the world are in their respective governments' life-support system.

You have raised valid points about the ECB and balance sheets becoming aggregated. I think the ECB generally doesn't intervene but it does so sometimes which makes it difficult. Probably as you say, the media reports are technically incorrect and they just instruct the NCBs to carry out operations. It makes it a bit more interesting! You may find this interesting - posted it at Warren's blog as well “Payment systems in the euro area” It may give an idea of who all have accounts at places.

Matt Franko said...


I may be moving into the if you cant beat 'em, join 'em camp...

do you think it would be possible to perhaps arbitrage the general publics/general investing communities overvaluing of the credit risk of the US Treasury?

ie if they really believe the US is a bad credit risk due to their misunderstandings, maybe you could take advantage of that in a trade?

I know you have spoken about buying after a potential future UST credit downgrade by the ratings agencies.

Mike Norman said...


The obvious trade is shorting U.S. Treasuries just as John Paulson and other hegde fund biggies are doing. Their logic is wrong, however, they are big enough to cause enough of a wave to get others involved, too. And, ironically, the Fed will probably accomodate them by acquiescing to demands that they "exit the stimulus." It still could be a tricky affair, though. I understand that more money was lost shorting Japanese Gov't bonds (JGBs) than any single trade. It was a financial "widow maker."

bubbleRefuge said...

Another trade is possibly shorting gold due to the fact that schiffofiles, inflatinistas, et al think that the fed injecting excess reserves into the system will cause inflation at 10% unemployment.

Matt Franko said...


If the NCBs really do the operations, then for instance how can a Greek bond auction fail? The way I understand MMT, the Bank of Greece can always do a repo with the Greek Dealer banks to get the dealer banks the reserves to get the Govt bonds sold...the ECB is not involved.
Except perhaps in designating the Greek Govt bonds as "investment grade" or acceptable collateral in the repo or not?...Resp,

TomatoBasil said...

POLICY IN THE EURO AREA" says that "The ECB has recourse to the national central banks for carrying out the operations which form part of the tasks of the Eurosystem" but also that "Open market operations are initiated by the ECB, which also decides on the instrument to be used and on the terms and conditions for its execution."

Ramanan said...


You may be interested in this Section 4-b-1 says that NCBs and ECBs have to grant each other unlimited and uncollateralized loans. So how one looks at the central banks is a matter of convenience and ways of thinking, I guess.

I havent read the whole document -It may have details on some other things as well.

I think the rule is that the Govt Treasuries have to raise bonds in the market to have a positive balance in their NCB account or some such thing. The ECB may not be involved.

Matt Franko said...

'Govt Treasuries have to raise bonds in the market to have a positive balance in their NCB account'

This sounds like "The Treasury cannot have an overdraft in its Fed Reserve account" in the US.

The ECB has published its "repo" schedule thru Oct 2010 herehere. You can see that the ECB has scheduled "full allotment" (unlimited) weekly repos as far out as the schedule goes, and some unlimited Long Term repos (they have a 1 year op at the end of the month that should be interesting.) This means (to me) that The Bank of Greece can provide unlimited funds to the Greek Dealer banks as far as the eye can see, no Greek Govt bond auction can fail operationally (same as here in US). Send message to Santelli @cnbc!

What I suspect is that if you look at the Bank of Greece balance sheet herehere, on the Asset side line items 5.1 and 5.2 (Main and Long Term Repos) those amounts roll up (along with other country NCBs amounts) into the ECB reported amounts for MRO and LTRO reported by the ECB here here.

If this is correct, the only thing that could queer this set up is if the ECB/S&P would downgrade Greek Govt debt as "junk" and decree that a Greek Dealer bank could not use Greek Gov debt as collateral in a repo with its own Greek NCB. A non-operational self imposed constraint similar to that of in the US the Congress has to raise the "debt ceiling" technically to authorize the sale of the new Treasuries.

So both in EMU and US, perhaps there is only a self-imposed constraint at work (operationally this is a "perpetual motion machine" in both cases). The US's is driven by ignorant political perception (debt to grandchildren), in EMU at its core it may be driven by ignorant fears of inflation (see ECB cartoon featuring "Inflation Monster" here).

IF this is the way it works over there it may not be 100% accurate to say that a European country is like a US State. (as you could look at it operationally as though the Country's Treasuries/NCBs are currency issuers in a sense)

Again I may be misinterpreting something. Resp,

Ramanan said...

Hi Matt,

Thanks for the video link - funny how they think what they think - finally they end up being Monetarists.

Yes, the US is different from the Euro, since in the latter there are poltical tensions between states as far as fiscal policies are concerned and it is explicit in the Maastrich Treaty. Will look at the balance sheets carefully. Thanks for the repo schedule too.

Did you actually add up all the balance sheet ? Yes I think so too that the ECB is like the FOMC. However, I think it itself enters the markets sometimes Page 8 says that ECB can do it but rarely

Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB itself.

I think all of what you say makes sense to me - questions on default etc. I think the only thing that could happen is countries will be forced to cut down on spending because of political pressures (already happening), not because of any operational issues and that will be bad for everyone who has adpoted the Euro.

Matt Franko said...

I did not addup the balance sheets as I cannot find weekly NCB balance sheet updates that are timely...I suspect that they feel the ECB does that for them in the weekly ECB report so they dont promote the data.

I think the Dealers that bought at the recent Greek govt bond auction (6%! with usual over subscribed just like US) are going to make out like bandits! Maybe thats why the Greeks shut out the US based banks from participating...too profitable to share! they fabricated the CDS story to demonize the US Dealers to give them political cover to shut them out. They will make billions when the Greek debt yield spreads narrow, they can even repo them for a year while they wait! Oh to be a banker! Resp,

Michael said...

you were wrong

you should say your sorry