Wednesday, August 5, 2015


How fun.  It was great to see today on the op ed page of the WSJ, a piece by Andrew Atkeson of UCLA and John Cochrane Of Stanford's Hoover Institute.  The subject?  Why a banking fix in Greece.  I quote from the second paragraph: 

Greece's banking crisis revealed the main structural problem of the Eurozone: A currency union must isolate banks from sovereign debt...Europe must open its nation-based banking system and recognize that sovereign debt is risky and stop letting countries use national banks to fund national deficits.

I couldn't have said it better myself...well, actually I could and I have.  Unfortunately, Andy and Johnny get all caught up in nonsense about which they are wrong anyway as to where and how Greeks can deposit money out side of Greece and start babbling about how the Euros should recapitalize Greek banks as FDR did in 1933 and move on to the Spanish and Italians and all will be well in a short period of time.  In a nutshell, they point out the problem with academics; most are clueless as to the workings of the world.

There is probably a multiple of the former total prior primary capitalization of the Greek banking system, owned by Greek citizens sitting somewhere outside of Greece.  We're talking BILLIONS of Euros, guys.  Citizens of southern Europe have always hedged their bets; that's just the way they have always lived as the stability of financial systems and especially of governments has dictated this way of life.  The mere recapitalization of a system by the Eurozone will not move a penny back to Greece.  The restoration of confidence will...after an appropriate period of time..with new management and higher incentives (better than average returns to the depositor) and a business plan of commercial banking not deficit financing.  There is plenty of money around for that exercise.  Indeed, it was already attempted as witnessed by the American financier Wilbur Ross reportedly having invested somewhere in the neighborhood of $1.5 billion in the Bank of Athens which he is about to lose unless something very wrong is cooked up.  Mr. Ross' timing was awful and his advice worse, but if at first you don't will not be as costly the next time as there will be no illusions about the bail-out of Greece.  Yes, Toto, there will be a write-down of some sort.

But the guys have it right as to the change of rules regarding sovereign lending.  And change they must unless...and this is a real issue...the template of European government since the end of WW II does not change.  As Frau Merkel has stated, Euroland is responsible for 50% of welfare spending in the world today, a hint perhaps at agreement with Ms. Thatcher who memorably remarked that eventually you run out of other people's money.  In fact, change is in the air.  In Spain and even in Italy, work rule changes are underway.  More and more politicians are prepared to run on reducing the safety net and in Greece Mr. Tsapris remarked just last week that it didn't seem to make sense to pay people not to work in reference to Greek laws that make it possible for workers in certain professions to retire below the age of 60 with full benefits.

I make no moral or value judgement on any of this but it certainly seems to make sense.  What I think will be as equally important if labor and social reforms advance is the acknowledgement as to what banks should NOT be doing as we have discussed.  Nevertheless, governmental financing will still be required which will undoubtedly result in the far more rapid development of a European Capital Market which has been sorely lacking.  Ironically, the continued presence of the Euro which has been the cause of so much mischief might be one of the greatest advantages to sound governmental financing throughout the zone.  Unlike the United States which can always print it's way out of financial default  (at a cost to be sure), Euro-participating countries will not have that luxury, and when the debt holders are taxpayers and voters there might well be a perceived requirement for fiscal sensibility that goes a bit further than the vault of the local politically connected bank.  The Euros could start running banks like banks again.  Goodness, what might come of that.

So it is good that our two heroes of today did call attention to this most important issue and even if they didn't get it all right they are to be congratulated for the effort.  Get the banks out of the deficit financing business and get management who want to be bankers not quasi-politicians into the running of the system.  Restructure the Greek banks with private money, not taxpayer money.  It is available.  And don't over-regulate them (remember, following regulations contributed mightily to the problems) while making very clear that it is the job of central banks to contribute liquidity but not solvency support.  Who knows, it might even work.

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