Saturday, August 11, 2012

Master-Mind meets Master-Race

I treasure The Economist as a product of superior British intellectualism coupled with high-class and distinguished humor. Truly an example of Master-Mind! And I am certainly aware that the Germans have done many things over the last 150 years which allow the conclusion that they might consider themselves from time to time as a Master-Race.

Regrettably, the latest issue of The Economist has a cover story which prompted me to think that Master-Mind is telling Master-Race what to do. A devilish combination!

The Economist published The Merkel Memorandum. In it, the authors suggest that Angela Merkel would be imprudent not to consider Plan B; a plan which encompasses an orderly Euro-exit for Greece.

Master-Mind meets Master-Race!

The Memorandum is quite interesting. It incorporates ideas of Roger Bootle who recently won the Lord-Wolfson-Prize for the best proposal for a Greek Euro-exit. I mean, just the idea that some bored member of the House of Lords would get his kicks out of the idea, sort of between tea and port wine, to hand out a prize for the intellectual exercise of Euro-exit scenarios is worth pondering from a social science standpoint. Does he not have better things to do with his time and with his superior education? And with his inherited money?

If one were really interested in a constructive approach to a possible Greek Euro-exit, one wouldn't have to go overboard and start a public competition for ideas. For a lot less money, one could take a flight to Buenos Aires and get the practical opinions of Argentines about an issue like that.

The sheer intellectual arrogance of this! Master-Mind is thinking what Master-Race should do. Who is at issue here? Master-Mind or Master-Race? Or, permit me the question, could it be that Greece is at issue here? Any idea what the Greeks would want to do or what's best for Greece? Not in this article by The Economist for sure!

Intellectual superiority here or there. Have the Brits not taken a lesson from their past that they do not necessarily have the best track record when it comes to determining Greece's future from tea rooms in White Hall?

I would suggest that if it ever came to a Euro-exit on the part of Greece, it should be absolutely irrelevant for the Greeks to consider what the effects might be in London, Paris, Brussel, Frankfurt or even NYC for that matter. The only thing which should matter to Greeks is what the effects are on Greece!

I mean, just the idea that one would sell as a top-story the breaking news that there should be such a thing as a Plan B! I would have thought that everyone from day 1 of the crisis (by that, I mean early 2010 and even before the first rescue package) would have had plans B, C, D etc. in his pocket before going to a meeting. That goes for EU-elites as well as for Greek leadership. Or could it be that they pursued a strategy of not even preparing for alternatives until those are forced upon them by force majeure? What would they have done if one day a giant bank run had started? (it still could!).

One major reason that we are where we are today is that, quite possibly, everone involved behaved a bit like well-meaning boyscouts: "We will save the Euro; period!"

Professionals, when in crises, go to meetings prepared. They have with them evaluations of all possible alternatives. When asked by journalists what the meeting will be about, they don't make silly comments like: "We will save the Euro at all cost!" They matter-of-factly say to the press: "We have a crisis at our hands and we will evaluate all alternatives to get out of it. That could be a debt rescheduling; ongoing financing or even a Euro-exit. Any more questions?"

At issue here is (or should be!) what is best for Greece. If it is keeping Greece in the Euro, put a price tag to it from the Greek standpoint. If it is Greece's leaving the Euro, put a price tag to that from the Greek standpoint. Evaluate the pro's and con's and take a decision.

Technically, a Euro-exit on the part of Greece is no rocket science: one declares a bank holiday for up to one week to get all the necessary legislation passed. Part of that legislation would be to convert all domestic contracts from Euro into a new Drachma at, say, 1:1 and to freeze bank deposits (with only minimal withdrawals for personal use).

There would only be a logistical problem: how to get new Drachma-cash into the hands of people but that should not be as complicated like planning a landing on Mars. If nothing else, one prints Drachma-checks for a while (there presently is a large market of post-dated checks in Greece).

Greece is presently dealing with a multitude of foreign currencies, like the British Pound, the USD and --- the Euro. All a new Drachma would be is the introduction of a new local currency. The Euro would not disappear! Instead, it would remain one of the foreign currencies which continue to work as they have done before! If people want to continue dealing in a foreign currency like the Euro (perhaps because they have so much Euro-cash), let them do it! Argentines dealt with USD-cash even though the local currency was denominated in pesos.

As regards foreign currency obligations (like the foreign debt denominated in Euros), tough luck for those who hold it. Their borrower no longer has that currency. It now has a local currency instead. A local curreny which is rapidly devaluing and, thus, making those loans much more expensive. If Greece couldn't repay those loans while having the Euro as a currency, it certainly won't repay them with new Drachma! Don't make a lot of fuss over it. Just write the loans off!

Allow me to ask the distinguished The Economist a final question: "Are you familiar with the expression of 'self-fulfilling prophesies'? If yes, why do you engage in such questionable practices?"

Capital markets behave pro-cyclically. That is, they reinforce existing trends with their actions and decisions. Rating agencies do the same. One can now add The Economist to that distinguished group!


  1. Nothing new in the Economist, Bootle wrote it up in the Daily Torygraph weeks ago.

    Surely you don't believe anyone who matters takes any notice of Bootle

    For the record Wolfson is a Life Peer not a Hereditary Peer, he is the CEO of a clothing retail chain. That's not to say he didn't inherit from his father - he too was Conservative life peer, and he was also in the rag trade.

    The mechanics of a return to the drachma are not the main issue, the main issue is that the government and people of Greece would regain their sovereignty and not be buffeted by decisions made in Helsinki, Dublin ... and Berlin, where they don't get to vote.

    A nation state is not just an economy, its a culture, an ethos, a history, a mythology, the stories a parent tells to a child ... The only way the EMU can work is for the nation states to become provincial states - as in Bavaria, Kansas, Alberta, Bihar etc - of that there is no chance, not at least in the foreseeable future.


  2. A very interesting article. The Wolfson prize was awarded to Roger Bootle, a man whose articles published in the London Daily Telegraph show a very limited ability to think. Oxford don he may have been, intelligent, but not imaginative.

    Which is the nub of the problem here. People like Wolfson aren't looking at the problem as it is, they are looking at the problem as they see it. Which you could rightly say is the problem of the eurozone itself. The Germans want one thing - the French another and the Greeks a third and so on. The French economy isn't doing that well, but they have their agriculture. The German economy isn't either, but they have their industrial exports. Greece - well, they have their islands of course and people to tell their tourists what tourists like to hear, be it truth or not.

    A visit to Argentina? Lord Wolfson would have stayed in big hotels and spoken to people who agree with his ideas and come home wondering what the impact of a Greek exit would be on the rest of Europe. The problem is not Lord Wolfson's money, but his inability to imagine anything. He has a circle of friends who comfort each other by reminding each other about the possible consequences of a Grexit. It makes for interesting talk whilst sitting in the grand chairs in their club's library or evening room.

    You go on to say

    "When asked by journalists what the meeting will be about, they don't make silly comments like: "We will save the Euro at all cost!" They matter-of-factly say to the press: "We have a crisis at our hands and we will evaluate all alternatives to get out of it. That could be a debt rescheduling; ongoing financing or even a Euro-exit. Any more questions?" "

    Which is one problem with the media. Those answers will have been given as you say, but that does not sell newspapers, does it? Well not in the US and UK anyway, and they are the important players here it would seem.

    The very real problem for Greece is that it has spent the last fifty years trying to avoid taking any decisions. It has succeeded in this it would seem. Someone pushed them into the eurozone - and they are now having to deal with problems that they never thought they would ever have to face. Outside the eurozone they could have tried the English move: trash your currency. I have grave suspicions that there is a lot we are not being told, now or then - or even about the inception of the EU itself. We still have no accounts audited, do we?

  3. "Capital markets behave pro-cyclically. That is, they reinforce existing trends with their actions and decisions."

    they can do nothing else. Most of the players need "data" to understand what is going on. The problem with data is that it is the result - and not the cause. The cause could be any one of twenty possibilities, the result the same.

    The other problem - aside from market fixers - is that there are sufficient people who on the one hand, will take one thing as a good move, and sufficient who will take the opposite thing as a good move once this has happened. There will come a time when the markets turn this upside down and see different things as bad moves.

    None of which makes the market an effective economic organ. A market is - a market. It is for selling oranges and apples, not speculating on them during the time it takes the fruiterer to hand the apple to the housewife as she hands him the money. We have a situation where the fleas on the dog's tail are now wagging it.

  4. Grexit scenario has 'lost its horror,' Ministor of Economics Roesler says in Germany. Bavarian Söder made similar comments.

    So are they simply telling the truth or are they idiots, that add fuel to the fire? Maybe both.

    1. Francis Fucujiama says. What Greece want in eurozone? As Greek i say what Greece want to be in a union with europeans? We must do samthink to corect this anomaly.