Not Without Precedent

Extroverts don’t understand introverts. That’s what that 1964 movie Zorba the Greek was about – the earthy and impulsive and direct Zorba, played by Anthony Quinn, a Mexican by the way, finally gets the uptight prissy Brit, played by Alan Bates, to loosen up and live life, damn it! This seems to involve a whole lot of male line-dancing to strange bouzouki music in odd tempos, but one can imagine the mirror-opposite movie. That would be the movie where the Brit, a man of discretion and honor, gets the free-spirited Greek to get a grip, and get a job, and get serious about one’s responsibilities in this hard and cruel world – kind of like what the Germans are now trying with the Greeks on economic issues. That was never going to go well.

In fact, last week, at the end of June, Greece hit the wall – they missed a large minimum payment due on their massive debt owed to the IMF and the more sober and responsible nations in the Eurozone. They just didn’t have the money. They had done everything they’d been told to do as a condition of those loans. They had slashed government spending so the government did next to nothing for its citizens, they reduced or eliminated expensive pensions that had kept the elderly from starving, they raised taxes on anyone who was still making money, and particularly those who had skipped paying taxes for far too long – and after all that things were worse than ever. Unemployment was at twenty-five percent, youth unemployment at fifty percent, and the economy was dead, not recovering. Five years of austerity hadn’t made things better, and it certainly hadn’t generated the growth necessary to start replying the loans. The Greek government struck a deal with European officials in February to extend its repayment program for four months, but the two sides failed to agree on what Greece must do to raise revenue and cut spending if it wants access to the remaining rescue loans – and then they stopped talking altogether.

That was the impasse. Greek Prime Minister Alexis Tsipras and his Syriza party won election in January on promises to scrap the bailout agreement. You can’t raise revenue, by growing the economy, and cut spending, shutting down they economy, at the same time. That’s nuts. Greece needs some stimulus, some spending to goose its economy, not an order from Berlin to shut everything down, and then, somehow, find new funds to pay everyone on time, in full. Cut us some slack here – that was Tsipras’ position. You’ll get your money. That’s not how they see things in Berlin. Portugal and Ireland got bailouts too – rescue loads. Bend the rules for Greece and they’ll want to be let off the hook too. Where will it end? Besides, austerity generates prosperity, doesn’t it?

Alexis Tsipras doesn’t believe that. That’s why the Greek people elected him – five years of austerity have made things worse by the day. They don’t believe that either. They’ll have no more of that nonsense – and to prove that, Tsipras called a referendum on the issue, on the latest bailout offer. They’ll say no to more and even more severe austerity for a few euros to keep the lights on. Enough is enough. It’s time to renegotiate the terms of these loans.

The European Commission and the European Central Bank and the IMF, the Troika as their called, and Angela Merkel, were fine with that. The Greek people will do the right thing. They know what’s what. They know the bitter medicine will make them all better in the morning. And then they’ll toss this young pretty-boy socialist troublemaker out on his ear. Europe will be rid of that fool. Greece elected the wrong guy.

It didn’t work out that way:

Greece lurched into uncharted territory and an uncertain future in Europe’s common currency Sunday after voters overwhelmingly rejected demands by international creditors for more austerity measures in exchange for a bailout of its bankrupt economy.

Results showed about 61 percent voted “no,” compared with 39 percent for “yes,” with 100 percent of the vote counted. The referendum — Greece’s first in more than four decades — came amid severe restrictions on financial transactions in the country, imposed last week to stem a bank run that accelerated after the vote was called.

Thousands of jubilant government supporters celebrated in Syntagma Square in front of Parliament, waving Greek flags and chanting “No, no, no!”…

It was a decisive victory for Prime Minister Alexis Tsipras, who had gambled the future of his 5-month-old coalition government — and his country — in an all-or-nothing game of brinkmanship with Greece’s creditors from other European countries that use the euro currency, the International Monetary Fund and the European Central Bank.

“Today we celebrate the victory of democracy,” Tsipras said in a televised address to the nation, describing Sunday as “a bright day in the history of Europe.”

“We proved even in the most difficult circumstances that democracy won’t be blackmailed,” he said.

But now it gets complicated:

Tsipras called the referendum last weekend, saying a “no” vote would strengthen his hand to negotiate a better deal for his country. His government has said it believes it would be possible to conclude within 48 hours.

But European officials and most of Greece’s opposition parties painted the referendum as one of whether the country kept using the euro currency – even though that was not the convoluted question asked on the ballot. Opinion polls Friday showed that 74 percent or more want their country to remain in the euro.

“Given the unfavorable conditions last week, you have made a very brave choice,” Tsipras told Greeks in his address. “But I am aware that the mandate you gave me is not a mandate for rupture.” He said he would seek to negotiate a viable solution with the country’s creditors.

How European officials react to the referendum result will be critical for the country, and a Eurozone summit was called for Tuesday evening to discuss the situation.

They’ll talk, but a new deal with creditors, if a tad easier now, isn’t going to be easy:

German Chancellor Angela Merkel and French President Francois Hollande spoke to each other Sunday night and agreed “that the vote of the Greek people must be respected,” Merkel’s office said.

The referendum result was “very regrettable for the future of Greece,” said Jeroen Dijsselbloem, head of the Eurozone finance ministers’ meeting known as the Eurogroup, which also will meet Tuesday.

Dijsselbloem, who is finance minister for the Netherlands, had been a steadfast opponent of Greece as it sought better conditions during five months of bailout talks.

“For recovery of the Greek economy, difficult measures and reforms are inevitable,” he said. “We will now wait for the initiatives of the Greek authorities.”

Sigmar Gabriel – Germany’s vice chancellor and economic minister – told a German newspaper the Greek government was leading its people “onto a path of bitter austerity and hopelessness.”

That’s not how they see things in Athens:

Yiannis Gkovesis, 26, waved a large Greek flag in the capital’s main square with supporters of the “no” vote.

“We don’t want austerity measures anymore. This has been happening for the last five years and it has driven so many into poverty, we simply can’t take any more austerity,” Gkovesis said.

Constantinos Papanikolas, 73, who also clutched a Greek flag, said the result meant “a fresh start, a new page for Greece and for Europe, which has condemned its people to poverty.”

Opposition conservative New Democracy lawmaker Vangelis Meimarakis said he was expecting Tsipras to keep his pledge for a quick deal. “If we don’t have an agreement within 48 hours as the prime minister promised, then we are being led to a tragedy,” he said.

Ah well, they’re used to tragedy. They invented it. But the economist Jared Bernstein sees no tragedy here:

One important and, amid the hurly burly of the past few days, overlooked clue that this more optimistic path may now be open is a new International Monetary Fund analysis that finally recognizes the limited ability of Greece to repay all of its outstanding debts and even more important, its inability to grow its way out of this mess unless a significant portion of the debt is restructured. For the record, that’s what [finance minister Yanis] Varoufakis has been saying for months and others among us have been saying for years. And contrary to her economic minister, according to John Cassidy, German Chancellor Angela Merkel and “many European leaders” share that recognition.

None of which, to be clear, lets the Greeks off the hook regarding necessary fiscal reforms regarding spending and revenue collection – but there’s fundamental math at play here that says that if your debt grows faster than your economy, your debt burden will unsustainably expand. Because of austerity and the absence of debt forgiveness, that has been the story of Greece and its creditors.

That story must change. In recent months, the Greeks and their creditors have been stuck in a mode that should remind you of the adage that neurotic behavior is when you keep doing the same thing that isn’t working, hoping the results will be different next time.

But don’t get too cheery:

Of course, it’s also possible that everyone will snap back to their old ways, which will quickly lead to cascading defaults, a Greek exit from the Eurozone, and a period of great upheaval as the Greeks reintroduce their own currency.

Even that path, however, with all its inherent disruption, could still prove to ultimately be less painful than the current one for the Greek people. A big shortcoming of much of the analysis in recent days is the absence of the essential “compared to what” question, where “what” is the status quo of depression-level unemployment and caps on ATM withdrawals.

Even if much of the financial media underweighted that question, a surprising large share of Greek voters did not.

And of course the other economist, the one with the Nobel Prize, Paul Krugman, had to have his say about this:

Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief.

Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.

But the campaign of bullying – the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office – was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.

But they weren’t making sense:

The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients – and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap.

The real question now is how Greece can remain in the euro, or if it even should:

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with IOUs, which will de facto be a parallel currency – and which might soon turn into the new drachma.

Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika – the institutions representing creditor interests – refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue – let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move – after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits?

Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not – but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

This is a mess, but these things happen. People vote. Sunday, July 5, 2015, and Tuesday, November 8, 1932 – three years after the stock market crash of 1929, two years after the waves of runs on the banks and the collapse of most of them, at the rock bottom of the Great Depression, we elected Franklin Delano Roosevelt, who promised recovery with a New Deal for the American people, in a landslide. Herbert Hoover never had a chance. He wasn’t going to solve anything. It was time to rethink things, and events that summer sunk Hoover.

It was the deaths of veterans in the Bonus Army thing:

The Bonus Army was the popular name of an assemblage of some 43,000 marchers – 17,000 World War I veterans, their families, and affiliated groups – who gathered in Washington, D.C., in the spring and summer of 1932 to demand cash-payment redemption of their service certificates. Its organizers called it the Bonus Expeditionary Force to echo the name of World War I’s American Expeditionary Forces, while the media called it the Bonus March. It was led by Walter W. Waters, a former army sergeant.

Many of the war veterans had been out of work since the beginning of the Great Depression. The World War Adjusted Compensation Act of 1924 had awarded them bonuses in the form of certificates they could not redeem until 1945. Each service certificate, issued to a qualified veteran soldier, bore a face value equal to the soldier’s promised payment plus compound interest. The principal demand of the Bonus Army was the immediate cash payment of their certificates.

Things were awful. Unemployment was nearing twenty-five percent. These guys had gone to war for their country. They won that war – and 1945 was a long way off. Could the terms of this deal be renegotiated? Could the folks with the money cut them some slack?

No – one must not spend money willy-nilly – but this was an embarrassment for Hoover. On July 28, his attorney general ordered the veterans removed from all government property. Washington police shot and killed two of them, so Hoover ordered the army to clear the campsites. Army Chief of Staff General Douglas MacArthur commanded the infantry and cavalry in that operation, supported by six tanks. The Bonus Army marchers with their wives and children were driven out, and their shelters and belongings burned, and there’s this odd detail:

At 4:45 p.m., commanded by Gen. Douglas MacArthur, the 12th Infantry Regiment, Fort Howard, Maryland, and the 3rd Cavalry Regiment, supported by six battle tanks commanded by Maj. George S. Patton, formed in Pennsylvania Avenue while thousands of civil service employees left work to line the street and watch. The Bonus Marchers, believing the troops were marching in their honor, cheered the troops until Patton ordered the cavalry to charge them – an action which prompted the spectators to yell, “Shame! Shame!”

After the cavalry charged, the infantry, with fixed bayonets and tear gas entered the camps, evicting veterans, families, and camp followers. The veterans fled across the Anacostia River to their largest camp, and President Hoover ordered the assault stopped. However, Gen. MacArthur ignored the president and ordered a new attack. MacArthur explained his actions by saying that he thought that the Bonus March was an attempt to overthrow the U.S. government. Fifty-five veterans were injured and 135 arrested. A veteran’s wife miscarried. …

During the military operation, Major Dwight D. Eisenhower – later the 34th president of the United States – served as one of MacArthur’s junior aides. Believing it wrong for the Army’s highest-ranking officer to lead an action against fellow American war veterans, he strongly advised MacArthur against taking any public role: “I told that dumb son-of-a-bitch not to go down there,” he said later. “I told him it was no place for the Chief of Staff.”

This is our iconic moment when fiscal responsibility, and the demands of austerity for the good of the nation, met the desperate needs of our fellow citizens, good people all, face to face. Then we voted about that. Hoover was gone, so what just happened in Greece is nothing new – and by the way, a second smaller Bonus March in 1933 at the start of the Roosevelt administration was defused in May when FDR offered many of them jobs with the Civilian Conservation Corps – most of them accepted – and in 1936, Congress overrode Roosevelt’s veto and paid the veterans their bonus nine years early. Even FDR had his flirtations with austerity.

That was in the air. Hoover’s treasury secretary, Andrew Mellon, who had been treasury secretary for Harding and Coolidge, too, was one of these fiscally serious people:

Herbert Hoover, in memoirs published decades later, wrote that Mellon advised him as President to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” Hoover claimed credit for disregarding this advice and intervening in the market, though with little success.

There is no corroboration that Mellon ever said such a thing, but it sounds right somehow. Republicans still say such things and the successful nations of Europe just said that to Greece. Mellon was one of the richest men in America back then. Those doing well can say such things. We got tired of hearing it. The Greeks just got tired of hearing it. This was not without precedent. This has been going on a long time.

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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2 Responses to Not Without Precedent

  1. Rick says:

    Two somewhat unrelated things.

    – – – – – – – – – –

    First, from the “Oddities of History Department”:

    … and in 1936, Congress overrode [President Franklin] Roosevelt’s veto and paid the veterans their bonus nine years early. Even FDR had his flirtations with austerity.

    Yeah, there’s seemingly historical irony in the fact that Herbert Hoover’s apparent mistreatment of the Bonus Marchers contributed to his losing the election to Roosevelt, and yet, FDR later also refuses to let the veterans cash in their bonuses early, but this may be because there are well-known truths about FDR that turn out to just not to be so true.

    For one thing, you’d think the champion of the little guy, who famously used government money to spend us out of the depression — and a reputed follower of John Maynard Keynes, a man who notably said that “it is ‘better to disappoint the rentier’ than to inflict pain on working-class families” — wouldn’t allow that Bonus stuff to ever happen — but you’d be wrong. FDR’s ideas of how to fix the Great Depression aren’t quite what we today think they were.

    Take his campaign for his first term as president as an example:

    Economist Marriner Eccles observed that “given later developments, the campaign speeches often read like a giant misprint, in which Roosevelt and Hoover speak each other’s lines.” Roosevelt denounced Hoover’s failures to restore prosperity or halt the downward slide, and he ridiculed Hoover’s huge deficits. Roosevelt campaigned on the Democratic platform advocating “immediate and drastic reductions of all public expenditures”…

    Yes, that’s what it says: promising massive spending cuts and ridiculing deficits!

    And when it comes to all of that once he gets into office:

    Roosevelt tried to keep his campaign promise by cutting the federal budget — including a reduction in military spending from $752 million in 1932 to $531 million in 1934 and a 40% cut in spending on veterans’ benefits — by removing 500,000 veterans and widows from the pension rolls and reducing benefits for the remainder, as well as cutting the salaries of federal employees and reducing spending on research and education.

    But, the veterans were well organized and strongly protested; most benefits were restored or increased by 1934, but FDR vetoed their efforts to get a cash bonus. The benefit cuts also did not last. In June 1933 Roosevelt restored $50 million in pension payments, and Congress added another $46 million more. Veterans groups such as the American Legion and the Veterans of Foreign Wars won their campaign to transform their benefits from payments due in 1945 to immediate cash when Congress overrode the President’s veto and passed the Bonus Act in January 1936.

    It pumped sums equal to 2% of the GDP into the consumer economy and had a major stimulus effect.

    It did? One has to wonder if that last part, about how those bonuses he had wanted to quash eventually boosted the economy, took him by surprise, since the truth was that — despite conventional wisdom today — FDR was not really a Keynesian.

    True enough, he was able to get his Congress to authorize huge public programs, such as the CCC and the WPA, but he continued to believe in balanced budgets, and he never did adopt deficit spending, which Keynes had urged upon him in correspondence, and even a private meeting:

    In late 1933, Keynes was persuaded by [old FDR friend] Felix Frankfurter to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other. However, according to [Keynes’ biographer Robert] Skidelsky, the consensus is that Keynes’s efforts only began to have a more than marginal influence on US economic policy after 1939.”

    But by 1939, especially with WWII already starting in Europe, it was too late to test whether Keynes’ belief that peacetime deficit spending and large-scale government borrowing in a bad economy might have cut that Great Depression down to a blip on the charts.

    Although we can guess that it’s possible FDR didn’t really understand what Keynes was trying to say, particularly concerning the “Multiplier Effect”, as evidenced in this later recollection by Frances Perkins, Roosevelt’s secretary of labor, of that 1934 meeting:

    Roosevelt told me afterward, “I saw your friend Keynes. He left a whole rigmarole of figures. He must be a mathematician rather than a political economist.”

    It was true that Keynes had delivered himself of a mathematical approach to the problems of national income, public and private expenditure, purchasing power, and the fine points of his formula. Coming to my office after his interview with Roosevelt, Keynes repeated his admiration for the actions Roosevelt had taken, but said cautiously that he had “supposed the President was more literate, economically speaking.” He pointed out once more that a dollar spent on relief by the government was a dollar given to the grocer, by the grocer to the wholesaler, and by the wholesaler to the farmer, in payment of supplies. With one dollar paid out for relief or public works or anything else, you have created four dollars’ worth of national income.

    I wish he had been as concrete when he talked to Roosevelt, instead of treating him as though he belonged to the higher echelons of economic knowledge.

    This sort of lines up with that famous observation of Oliver Wendell Holmes, years after a meeting with FDR:

    “A second class intellect. But a first class temperament.”

    – – – – – – – – – –

    But secondly, to change the subject here at the end, I want to say that I myself am very happy about the Greeks voting “no”, and I’m glad to see the Dow didn’t take that huge dive everybody was predicting it would take because of it. Maybe things aren’t as dire as everyone thinks.

    And it’s not that I know where this is headed — which could be a renegotiation with the lenders, or maybe Greece leaving the Euro, and maybe lots of chaos resulting from that — but the truth is, they’re already in hell, and how many more rings of hell do we expect them to have to climb down before they hit bottom?

    I find it incredible that those who insist the Greeks are being petulant in all this don’t recognize what the lenders are demanding here; before any more loans are approved, Greece must adopt policies that will destroy their economy even more, put even more people out of work, starve even more people, and make it absolutely impossible for them to ever replay.

    And I heard a hint of something disturbing this morning on TV in the background — that Greek leaders may be looking for ways to become more friendly with Russia. Yep, that would make sense. If you’re starving to death and your so-called friends are ignoring you, you’d consider any port in a storm.

    But something I haven’t heard anybody discuss, to date — although that may soon change — is for the United States to get involved, in a big way.

    First, it would be a good idea for us to approach the EU and the IMF (and maybe Germany, behind the scenes) to try to convince everybody over there they need to drop the austerity demands, since that’s obviously not been working. And secondly, drop the hint to them that if they don’t help Greece out of this mess, we will start considering helping them ourselves, with loan guarantees that carry no austerity demands — and maybe even suggesting that they do the opposite of being austere, which is they get their government to spend more money!

    Of course, yeah, I know what you’re thinking: How is Obama ever going to convince the Republicans to go along with this? That won’t be easy, but I suggest he lean heavily on the argument that, if we don’t, Putin will!

    Rick

  2. Russell says:

    Thanks for the excellent deep dive into our own history on the subject. Have to love the pix in the tweet showing Greek minister signing the document giving Germany a 50 percent reduction on its debt in 1945. The Germans are in NO position to lecture other nations on fiscal stability. We forget the reason Berlin was deliberately divided into four sectors by the allies. It was to prevent Germany from ever getting big enough to again start a World War. The division of Germany into East and West was the product of The Cold War. And the job of restoring East Germany after the fall of the Soviet Union rightly belonged to West Germany. An achievement to be sure, but no less their duty as a nation. The Germans are refusing to give as good as they got after WW II. They cannot be allowed to lay on Greece– or Spain or Portugal or Italy — the equivalent of The Treaty of Versailles after WW I.

    In the meantime, I’m pouring a bourbon and drinking to Alexander Hamilton. And to think today’s “conservatives” really want to go back to the Articles of Confederation.

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