Tuesday, October 18, 2011

Mr. Soros has all the answers!

One thing is to listen to Mr. Soros whose claim to fame is that he once successfully speculated against the British Empire (under no circumstances do I wish to play down the intellectual brilliance of this Hungarian emigré).

Another thing would be to dream how Valery Giscard d’Estaing and Helmut Schmidt would handle the crisis if these 2 leaders were today leading the EU. Their claim to fame is that they knew what they were doing and that they were leaders. Here is my guess what they might do.

1) Solve the problems at their source. Solve the banking problem directly with the banks (and not via Greece) and solve the Greek problem directly in Greece (a 2-prong strategy: get the budget in order but at the same time invest in the economy).
2) Have the banks write-down the value of their sovereign risk assets to realistic market values (via decree or whatever). Most banks would wipe out much of their capital & reserves when doing that. Allow these “bankrupt banks” to come to their governments and politely ask for help. Offer them the help by replenishing their equity & reserves with public funds, taking ownership in the process. All of this with a view towards eventually selling the public stake again in the future with a profit.
3) Should the banks cry “foul play” because their shareholders are being partially disowned, d’Estaing/Schmidt would probably explain to the banks what capitalism is all about; period.
4) They would then tell the banks to reschedule their sovereign risk loans now that write-downs have been made and losses have been taken. They should reschedule them is such a way that Greece has “breathing space” but not too much breathing space with the risk of dropping reforms.
5) They would tell the banks and Greece that, from now on, the EU would only finance the Greek budget deficit in agreed upon amounts. If Greece needed more money to finance capital flight or other things, she would need to look for that money elsewhere.
6) And then they would offer Greece “real help” instead of giving her money to repay the banks. That help could consist of: EU task forces assisting Greece in building up an efficient public administration (this would be a project for several years); developing an economic development plan for the Greek economy; arranging for investment funds to finance productive growth (instead of artificial consumption growth) in Greece; etc. etc.

Greece has never become at least a somewhat industrialized economy, much less a knowledge-based economy. Someone suggested that Greece could jump over the age of industrialization and move on directly into the age of a knowledge-based economy. Fine with me if that works. But then there has to be a plausible economic development with that as its goal.

Some fatalist suggested that Greece could never accomplish any of this because she does not have any natural resources and that she is basically condemned to the role of a poor agricultural economy. How many natural resources did the Japanese economy have when it started its economic conquest of the West back in the 1970s? The most important capital of a society are not its natural resources. If you have them, it makes things a lot easier. But the most important capital of a society is its human capital. When that human capital is developed (educated; and Greeks have a high level of education); when it is put to good use; and when that human capital has the strong will to accomplish something — then a society can accomplish practically everything.

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