It’s Not About Greece Any More

By Peter Boone and Simon Johnson

The Greek “rescue” package announced last weekend is dramatic, unprecedented, and far from enough to stabilize the eurozone. 

The Greek government and the European Union (EU) leadership, prodded by the International Monetary Fund (IMF), are finally becoming realistic about the dire economic situation in Greece.  They have abandoned previous rounds of optimistic forecasts and have now admitted to a profoundly worse situation.  This new program calls for a total of 11% of GDP in terms of “fiscal adjustments” (i.e., reduction in the budget deficit; now meaning government spending cuts mostly) in 2010, 4.3% in 2011, and 2% in 2012 and 2013.  The total debt to GDP ratio peaks at 149% in 2012-13 before starting a gentle glide path back down to sanity.

This new program is honest enough to show why it is unlikely to succeed.  Daniel Gros, an eminent economist on euro zone issues based in Brussels, has argued that for each 1% of GDP decline in Greek government spending, total demand in the country falls by 2.5% of GDP.  If the government reduces spending by 15% of GDP – the initial shock to demand could be well over 30% of GDP.  Obviously this simple rule does not work with such large numbers, but it illustrates that Greece is likely to experience a very sharp recession – and there is substantial uncertainty around how bad the economy will get.  The program announced last weekend assumes Greek GDP falls by 4% this year, then by another 2.6% in 2011, before recovering to positive growth in 2012 and beyond. 

Such figures seem extremely optimistic, particularly in face of the civil unrest now sweeping Greece and the deep hostility expressed towards Greece in some north European policy circles. 

The pattern of growth is critical because, under this program, Greece needs to soon grow out of its debt problem.  Greece’s debt/GDP ratio will be a debilitating 145% of GDP at end 2011.  If we put more realistic growth figures into the IMF forecast for Greece’s economy, e.g., with GDP declining 12% to end 2011, then the debt/GDP ratio may reach 155%.   At these levels, with a 5% real interest rate and no growth, the country needs a primary surplus at 8% of GDP to keep the debt/GDP ratio stable.  They will be nowhere near that level.  The IMF program has Greece running a primary budget deficit of around 1% of GDP in that year, and that assumes a path for Greek growth that can only be regarded as an “upside scenario”. 

The politics of these implied budget surpluses remain brutal.  Since most Greek debt is held abroad, roughly 80% of the budget savings the Greek government makes go straight to Germans, French and other foreign debt holders (mostly banks).  If growth turns out poorly, will the Greeks be prepared for ever tougher austerity to pay the Germans?  Even if everything goes well, Greek citizens seem unlikely to welcome this version of their “new normal”.

Last week the European leadership panicked – very late in the day – when they realized that the euro zone itself was at risk of a meltdown.  If the euro zone proves unwilling to protect a member like Greece from default, then bond investors will run from Portugal and Spain also – if you doubt this, study carefully the interlocking debt picture published recently in the New York Times.  Higher yields on government debt would have caused concerns about potential bank runs in these nations, and then spread to more nations in Europe. 

When there is such a “run” it is not clear where it stops.  In the hazy distance, Belgium, France, Austria and many others were potentially at risk.  Even the Germans cannot afford to bail out those nations.

Slapped in the face by this ugly scenario, the Europeans decided to throw everything they and the IMF had at bailing out Greece.   The program as announced has only a small chance of preventing eventual Greek bankruptcy, but it may still slow or avert a dangerous spiral downward – and enormous collateral damage – in the rest of Europe. 

The IMF floated in some fashion an alternative scenario with a debt restructuring, but this was rejected by both the European Union and the Greek authorities.  This is not a surprise – leading European policymakers are completely unprepared for broader problems that would follow a Greek “restructuring”, because markets would immediately mark down the debt (i.e., increase the yields) for Portugal, Spain, Ireland, and even Italy.  The fear and panic in the face of this would be unparalleled in modern times: When the Greeks pay only 50% on the face value of their debt, what should expect from the Portuguese and Spanish?  It all becomes arbitrary, including which countries are dragged down.  Someone has to decide who should be defended and at what cost, and the European structures are completely unsuited to this kind of tough decision-making under pressure. 

In the extreme downside scenario, Germany is the only obvious safe haven within the eurozone, so its government bond yields would collapse while other governments face sharply rising yields.  The eurozone would likely not hold together.

There is still a narrow escape path, without immediate debt default and the chaos that would produce:

1.  Talk down the euro – moving towards parity with the US dollar would help lift growth across the eurozone.

2.  As the euro falls, bond yields will rise on the eurozone periphery.  This will create episodes of panic.  Enough short-term financing must be in place to support the rollover of government debt.

3.  Once the euro has fallen a great deal, announce the ECB will support the euro at those levels (i.e., prevent appreciation, with G20 tacit agreement), and also support the peripheral eurozone nations viewed as solvent by buying their bonds whenever markets are chaotic. 

4. At that stage, but not before, the eurozone leadership needs to push weaker governments to restructure – that will include Greece and perhaps also Portugal?  Hopefully, in this scenario Spain can muddle through.

5. European banks should be recapitalized as necessary and have most of their management replaced.  This is a massive failure of euro groupthink – including most notably at the political level – but there is no question that bank executives have not behaved responsibly in a long while and should be replaced en masse. 

To the extent possible, some of the ensuing losses should be shared with bank creditors.  But be careful what you wish for – the bankers are powerful for a reason; they have built vital yet fragile structures at the heart of our economies.  Dismantle with care.

An edited version of this post appears this morning on the NYT’s Economix and is used here with permission.  If you wish to republish the entire article, please contact the New York Times.

114 thoughts on “It’s Not About Greece Any More

  1. 3. Once the euro has fallen a great deal, announce the ECB will support the euro at those levels (i.e., prevent appreciation, with G20 tacit agreement), and also support the peripheral eurozone nations viewed as solvent by buying their bonds whenever markets are chaotic.

    Don’t think they are allowed do this under the current treaty framework.

  2. Someone intelligent can correct me on this, but if it does become necessary to bailout of more eurozone countries, will the EU face familiar choice of back-breaking fiscal austerity at the fiscal centre (Germany etc.) or printing euros at the ECB, leading to a devaluation and a massive transfer of wealth from savers to borrowers (people, firms, government, nations)?

  3. I don’t think I have EVER disagreed with you MORE than I do here Professor Johnson.

    You say the European Union is “finally becoming realistic about the dire economic situation in Greece”. REALLY!?!?!?! You mean allowing yourself to get sucked into the gigantic whirlpool is “realistic”???? I don’t think so…. It seems to me Hugh Hendry has pretty much hit the nail on the head. Hendry has hit the nail extremely accurately. And I would add, I don’t even like Hugh Hendry. Germany is making a HUGE mistake here, a mistake Germany will deeply regret, and one America will deeply regret when we get stuck with the IMF bill.

    This also gets back to French banks saving their own skin , it has nothing to do with France giving a whiff about the people in Greece. I found this over at Tyler Durden’s Zerohedge blog and frankly I think this video explains the situation pretty well.

  4. Somebody is running with the I Claudius Plan: “Let all the poisons that lurk in the mud hatch out”

  5. “To the extent possible, some of the ensuing losses should be shared with bank creditors. But be careful what you wish for – the bankers are powerful for a reason; they have built vital yet fragile structures at the heart of our economies. Dismantle with care.”

    I’m starting to believe this notion is a fiction (fear) perpetuated by banks. I say dismantle them crudely, capitalize small depositor banks, and only let the big banks back in the “system” when they see their folly and share their losses.

    The governments are more powerful than anyone is giving them credit for. It just hasn’t been applied yet because the people haven’t pushed hard enough. Greece is a testing ground. If the banks save themselves on the backs of the debtors, the system remains for the next unravel in two months.

  6. “There is still a narrow escape path, without immediate debt default and the chaos that would produce:”

    Prevent immediate debt default, perhaps. Even then, I’m skeptical. The narrow escape path requires that the markets give European governments the benefit of the doubt (that is, they believe the govts are credible). Yet Europe has badly bungled everything to date, which means the markets aren’t going to believe govts that try to talk down anything. They’ll (correctly) see it as cheap talk, with no commitment – which means the EU (or the ECB) is going to need to do something real, rather than just hope that everything takes care of itself so they don’t have to risk their precious <2% price growth target.

    Even if this happens without an implosion, we STILL have the price level / productivity imbalance between North and South, particularly with several sources of southern revenue (leisure, travel) dried up, and excessively generous pension plans and bloated govt payrolls (including the greek military due to the Turkish "threat"). The debt level is far too high for Greece to repay it through austerity, and any attempt is perceived by Greek locals as an infringement of Germany on domestic politics (giving populists the advantage, just like in LatAm thirty years ago).

    Best option – Greece separates from the Euro, debt is converted to local currency, Greece obtains a modest IMF loan of hard currency in exchange for moderate austerity measures (including pension and govt. wage cuts), Greece devalues aggressively to rebuild exports. IMF loan must be in installments with specific goal posts – if Greece fails to hit goal posts, then they are left to internal funding only.

    Alternatively, since the IMF is just a way for Germany to avoid paying anything, the US could fund Greece through the ExIm bank to purchase US exports only (and Germany can fund Greek purchases of German exports, and same with other countries who want to sell to Greece).

    For Greece to recover, three things need to happen:

    Primary deficit (that is, deficit before interest payments) must come down to the point that it can be financed domestically; aka, they have to live within their means

    Separation from Euro and massive currency depreciation to realign price/wage level

    Reduction of the debt – mere restructuring of duration will not work since bond markets are forward looking; depreciation can help achieve this, and depreciation should be significant enough that domestic savers do not have incentive to flee the currency even more.

    The sad part isn't Greece – Greece had this coming. The sad part is Spain. Spain should NOT be in this position, except for the ECB's egomaniacal mismanagement of their currency.

    The Ortho Method – Once and Done

  7. Having had to give up on Americans for the time being, I hope the people of Greece will refuse to let themselves be crucified on austerity and odious debt in order to bail out the German and French banks (and let their own scofflaw rich get away with refusal to pay modest taxes; the $30 billion a year the “Greek government refuses to collect would go a long way toward covering the alleged debt, but of course the Greek kleptocracy doesn’t want to pay for its own crimes any more than the American elites).

    Meanwhile will the German taxpayers let themselves be fleeced again to have their wealth laundered through Greece to bail out the German and French banks? They’re in the same position as the American taxpayer and the AIG laundering. Let’s hope they respond like free human beings and not craven sheep.

    What’s happening in Europe today is another iteration of the US in September 2008. Again the people have the opportunity to stand firm against these monumental crimes and force the criminal knot to start unraveling.

    It has to start somewhere, one of these days. The system is unsustainable, and the staggering zombie must fall. It would be a positive sign for the future if the people took matters into their own hands instead of passively waiting for the collapse to come of its own weight.

  8. More moral hazard. Banks never have to account for their bad investments, including in Greece. It will be interesting to see if our Euro friends, seemingly more anti-big bank than US, will enact #5.

  9. I don´t know what the solution to Europe should be. But the Greek citzens should be demanding a reestructuring of the debt (on the wrost possible conditions for creditors) and the reintroduction of the Dracma. This would give then 1 or 2 years of hell, but a path towards recovery later on. I think that at some point they will see it that way and then what the European elite think is impossible will become inevitable…

  10. I get the sense that the market upheavals are being downplayed by governments and information media.

  11. Far-fetched, I think your video caught some important answers for us all…

    Very good and informative video Ted-K. It does raise the point for Professor Johnson to answer in greater depth.

    I still contend, and I was told it can crash markets and seize countries from our fellow blogger friends on on my discussion of the “Coase Theorem” by economist George Stigler and the more serious of the two that I bring of the brother to this theorem of “Oppression”.

    I found Professor Johnson number crunching long with StatGuy showing a possible very slight narrow gate. The real questions are still though very much present and this is the theorems as I presented that are the concern for all to still take heed and brain storm upon.

    As all remember, I am an economist and student, wrapping up my final thesis and soon to hopefully be published book.

    Developing many graphs and those pesky formulas that have to have a universal order to work for generally accepted and measurable metrics for all others to be able to duplicate I give my hats off to my notable contemporaries.

    My final thesis, as you have read and bears repeating is, “The Oppression Theorem 21st Century”.

    I can imagine as my professors sat back and said, “Wow, timely when they started seeing the results. When they started seeing the depth of relationships and then countries failing, then they said I had a book.

    I am looking forward in trying to teach all our younger minds, and hopefully, our older ones; there are many other levels of finance and economics, but to know how to apply them are the critical important factors.

    For one, the pegs of the graphs are of the scales showing the contractions of econometrics bringing what is no longer the game of social results seen in Greece and now Spain and other countries to be considered coincidences.

    These results of watching bond auctions and then putting ratings to other factors bring a result of revealing the true pressures of the extensions of credit and the liar’s debts mounting as seems the sliding scale for the formula.

    These and the many other leveraged debts along with the CDO(s) are continuing to be uncovered as pealing away an onion that has gone rotten. To add to the metric pressure of contractual debt to deflationary and hyper-inflationary pressures seen by the added continued open printing presses of all the Central Banks and with the extended carry trade and low extended interest rate environment the world is within at the moment further invites the depth to these measurements.

    Far-fetched; these thoughts then of, “Oppression Theorem” are living and breathing first within Greece through Austerity measures due through consumption and the decay within the social order to push the natural acceptance of “Social Mass Confinement” of mass benefits and social programs and the very condition of what drives the dream of life’s oyster of ones very security.

    Confinement through economic growth of the other to survive on the ability of each other for the veracious need to consume and grow that trait to such levels that create the prison and walls that are invisible at first to the naked eye of the world.

    Capitalism’s, Socialism’s, and the true oppression of Communism’s all converge to the melting pot of striping away the soul of the human spirit. A human spirit stripped away through the very nature of wanting it all at a price.

    The human spirit of dignity through social systems; human conditions of confinement socially as then set by governments or other systems and then taken away by contraction of forces; as if the devil sets the temptation of these forces himself.

    The devil or whatever it may be or you want to call it; is always within the fiber and the fine print of the choices presented us throughout history. It/He meshes It/Himself to the contracts to deceive what is to be considered quite norm.

    They/He sets these needs and dreams of having it all as the greatest of temptations. Then, when all are not looking as seen sometimes in commercials, they take it away as it was not really there or read the fine print.

    The temptations folks are to gather all to the table of longing and reaching that would be, called “The American Dream”. A dream not just born here within American history, but in other places, starting from the beginning of time and spanning the globe, they may call it different but nevertheless the same meaning.

    The forces of these Dreams; having it all in a real sense, convey Living in ones means or not. It can truly bring the test of society and social order with ethics, moral, morale conflict with Evil against Good, Conserve against Waist and ultimately life over a society of death.

    Without these properly balanced, it causes eventually a social calculative and economic shift between, rich and poor. The courage to adapt to change, but a fear to know and an ability then for the adaption in still able to be able to be giving or sharing with our neighbor.

    This is the stumbling block that has lit the Oppression and the decay process to become at play within this world today.

    These decays do lead for only a small glimpse within the marks of history, a period of prosperity for the lower rungs of a mass of populations throughout history to enjoy for moments, property as areas of large groups of society.

    In the long math calculations this can not hold these large numbers if not kept to higher social orders of standards of ethics, morals, and morale, and due to separation of these conditions, there will be no middle class rung within society futures but only Rich and Poor. So the middle class tread with this warning.

    The theorem gives this signal that seems a population of generation Y, X and unknown (Z), life style of the easiest roads or lifestyle will be the one first sought or traveled.

    The pure metric force of contraction must invariable take it all away because the balance of every book does seem always keep its counts somehow of what allows all life to exist in ultimate harmony.

    These thoughts are not as Far-fetched as I wish they were. It takes us all to get to know what is important in our lives, and to try to cut back in what do I need items. Can I live without it items. The more we learn to live with less stuff, the better in the end we may tend to be. Try to live within our means and down size now, before someone else does it for you.

    This is a lesson as tremors are seen prior to the big Earth Quakes or large Natural Disasters. In this case, these circumstances have to do with the very nature of the human conditions of what makes up the social order of life changes and begs then to differ with and put the challenge out to the minds of the media and the academia community as the challenge.

    You can see plainly the open arrogance of man still even today betting on the pain and the misery with the rating of bonds from Greece and many other States and Countries from around the globe. This is the real deal folks. Just go to the PIMCO fund family run by Bill Gross, (Sorry Bill as you guys are the biggest out there) and you can see their competition and their portfolio of many holdings doing nothing less as many are betting in some form or way upon the debt worthiness of income repayment of debt upon the conversion of the Oppression Theorem to income relationship, as this is the real fact of modern Social collapse in our world of economics today.

    The absence of God or the decay of Social Order is the match that has lit “The Oppression Theorem”. The theorem expresses itself as best example like the consuming fires of a California Wild Fire or massive disaster, as we are seeing now this taking over Greece as the warning flag for all nations including Spain.

    Spain as everyone is waiting for the pin to drop. Is getting ready, or needs the next aerial drop of IMF and world support of bail out to buoy an economy.

    An economy teeters on a metric oppressive government dilemma of selling out the people of the nation. The dilemma of having to look deeply for the Devil is within the fine writing of all the deals and agreements. Deals and agreements of a nation coming to appear to be the rescue by buying and them selling their very souls to the devil himself.

    The headlines will read; and I will wager to say. For how many pieces of silver or gold of the peoples of its nation did they sell themselves out? The poor folks never stood a chance, for the spread of bonds were picked apart like a frenzy of buzzards take their spoils and divided them up amongst themselves and go on to the next flailing flag a waving.

    This is the sign of the times of the great fire sale of many nations led into the state of a nation of Oppressive Debtors ship that many may never get off.

    The question marks being raised for many nations to start asking. Who is next? Who holds the keys to solve or to become even the deeper key metric that causes further crisis of sovereign debts and ratings of collapse Oppression social confinement (Austerity measures is the click word) the ability to pay on those debts.

    When we see these events pick up steam and are changing almost monthly to weekly, we have a global world in collapse and very few answers at that point.

    The match of Oppression Theorem truly is lit now folks, learn what you need to know and know you can make a change to stop the ultimate of failure from occurring.

    I rest my case….

    The solutions still rest with man. The ability for man to invite the creator back fully into union with bringing a consciousness to a higher ethical, moral, and morale of a society that accepts this type of change to upright a ship that has gone aground with social order has been long overdue.

    Far-fetched; Maybe, I Hope Not!

    I can only end this with as I will always end my posts with, “God Bless you all that read and take heed and have learned”…

    James Gornick

  12. Separation from the euro may make economic sense in the medium-long term but it would be hell to manage. Greece would be like Argentina in 2001 but with much worse prospects: 2011 will not be 2003 in terms of world economic growth and it won’t be as easy for Greece to export it’s way out of recession, even with devalued currency. Furthermore a unilateral decision by Greece to abandon the euro and default on debt right now would cause panic in the bond markets with severe reprecussions in the other European economies. Greece is a small country and the greek economy is not and can never be self sufficient. We could face justified hostility and possibly trade embargos from the rest of Europe. The banking system would collapse and would probably have to be nationalized along with large parts of the economy. In short, we could turn into the European version of North Korea.

  13. hope your book is better written than that post. i have no idea what you’re on about.

  14. Why is the solution to the recent US crisis a bailout of the banks and a stimulus bill, while the solution to the Greek crisis is a bailout with austerity measures. Seems to me (and I’ve read a few analysts who agree) austerity will not result in Greece being able to pay off debt, but instead just move that day of reckoning off (analysts seem to vary on the exact date).

    What seems to have worked in the US(??) should work there: bailout the banks that hold Greek debt (but this time get bank equity back don’t just give them money for nothin’), write down the loans and put together a stimulus package for the Greek economy, combined with fair tax package to increase Greek gov’t revenue.

    Guess a big difference is Greece can no longer float bonds, like we in the US have, to fund our bailouts and stimulus?

  15. Simon, U said:

    “There is still a narrow escape path, without immediate debt default and the chaos that would produce:

    Ur list reads like James Bond movie script.

  16. You’re correct that ths would be a mess – but I agree with Stats Guy that it is really the only option. The biggest problem is that what the “bankers” must do in the EU is almost directly opposed to what the politicians must do to remain in power. The German people are not going to support policies that lead to 5,6, 7% inflation rates just to help Greece – and the Greeks are not going to respond favorably to massive social program cuts and retirement age increases which in their view simply “help the Germans.”

    At a fundamental level these countries don’t like each other. Germany is the “invader” to Greece who killed their people and stole their gold 70 years ago, and Greece is “lazy” in the view of the Germans. Regardless of the reality, regardless of what the ECB might want to do in a perfect world, the leaders of those countries are not members of the ECB. As messy as it would be, separation is the “easiest” solution for the politicians, and at the end of the day politics beats economics.

  17. Huge fundamental difference – Greece does not control it’s own currency. The bailouts were essentially paid for by printing extra money. Greece can’t do that.

  18. The situation in Greece is certainly pretty bad, and it can’t be said that European institutions have handled it terribly well. But that said, it should be stressed that Greece is fundamentally not a poor country, nor is it a large country (e.g. as a fraction of the EU economy).

    Hence if Greece has problems handling its debt, this is surely more about what it is willing to pay, not about what it can pay – in other words, this is a question of political economy. And those banks that foolishly lent in large amounts to Greece evidently mis-judged the country’s ‘willingness to pay’, and also misjudged the degree of substitutability between Greek debt and that of other Eurozone members. So a rather painful learning process is now going on, on all sides (after all, in the US the banks know that Californian debt is not the same as that of better managed states).

    Likewise, the small size of Greece makes it hard to understand how financial problems there, however nasty, could threaten the entire Eurozone, as the posting above seems to imply. This doesn’t make any sense, unless we in Europe manage ourselves even more foolishly than I think likely.

    Last, why is a Greek default (or rescheduling, or whatever polite term we wish to use) so terrible. Defaults are not uncommon and countries get over them – sometimes they even learn to avoid default in the future. None of this is very nice for Greece for the next decade or so, but what are the alternatives?

  19. Merkel is today calling for political control of the markets. The corporate world, which the media represents, is muting the coverage of the crisis for obvious reasons. It is best to keep the herd in the dark in these matters.

  20. Gold appears to be the big winner from teh fallout of the Greek bailout, at the time of this post. CNBC’s Larry Kudlow just called gold, “The new reserve currency.”

  21. The problem with deflating the Euro and then holding it there is that it’ll force up inflation in Germany, which gives the Germans the heebie jeebies.

    Wouldn’t the better solution be that Greece leaves the Euro and then defaults (i.e., similar to what the Argentinian’s did in 2002)? It’s a lot of pain in the short term but better to have an end with pain rather than pain without end. The Greek economy isn’t going to competitive even at a dollar / euro parity — it needs to devalue significantly more. A currency which runs completely separately from national government policies and debt levels isn’t sustainable.

    My sense is that this is the first of many cheques being written by the northern Europeans and we’ll soon see that Greece needs a bigger bailout and Portugal, Spain, Italy, Ireland, and maybe even the UK will need help as well.

  22. Your remedy’s numbers 1,2, & 3 are interesting, sharply devalue the Euro. Wouldn’t this be a tremendous positive for German exports? Is that the real objective of the Germans?

  23. Michael Hudson really gets into the entire Euro State monetary collapse in his most recent post on his site.

    He discusses Professor Simon too.

    The pols and financial guru’s of EU have delayed and denied too long. Circumstances do occur with out being convienient to pols. Again we have obvious leadership failure being displayed. They are simply “up to it” to paraphrase a quip Gladstone was fond of.

  24. forgive this naive question, but for bond holders, what is the difference between a “restructuring” and a significant currency devaluation?

  25. April 26, 2010 – Agora – excerpt

    “The cost of servicing Greek debt would skyrocket in inverse proportion to the currency devaluation. Default would become almost inevitable as the government no longer collected tax revenue in euros.”

  26. Who cares if the Eurozone does collapse! The grand ideal was only to set up a “Central Bank” as the (someone convince me that Europe wasn’t trying to sandbag America?) United States. What good has the Federal Reserve done for the american people over the last fifty-years (hypothetical random number?)but put a debt-burden price tag on every household in the hundred thousands range. I’m so happy to be poorer? Thank that you “Central Bank”! Listen-Up…a sovereign countries (republic/democracy) own treasuries currency is all that’s needed ,and let its intrinsic value float ,as in old fashion (trade) bartering,ie.)one apple in exchange for one gratefruit. The “IMF” to the rescue – what hogwash…I say,pure gobbligook! Now that the american people have bailed out the “TBTF” banks in america,they are asked again to bail out Europe. What rubbish is this! The “IMF” gets 17% of it’s funding from the taxpayers to bail out a “Greek”…I don’t think so. What’s $8-$10 Bn. dollars (the political pundits say/preach) from America’s coffers ,when we’ve got people/families sleeping homeless in every city in the country under bridges,or in cars? This is a mis-management crises created by the likes of the big banks…Yes the same ilk that brought to its knees the american consumer.I say let America’s banks bail them out ,and if they refuse – let the chips fall where they will. It will hurt them more than the tapped out consumer in America. JMHO Thanks Simon,and please for America’s sake”Keep on Digging”.

  27. MK, Greece will never control their own currency, whether it is denominated in drachmas or some foreign currency. They have defaulted too many times in the past 200 years to ever be trusted in the international marketplace.

    Hooking up with the Euro was their last chance and they blew it. Google around about Greece’s fiscal position prior to joining the EU and you will see that Greece was using many foreign denominated bonds to fund their government’s expenditures.

    Going forward, there isn’t enough “honest” money in Greece to fund their government. Even if they default and leave the Euro, they will need to borrow from someone. Nobody will willingly take a drachma denominated bond.

    What is happening today is in the best long term interests of the average Greek citizen. They need to take back their polis and clean up their political mess. That means many of their leaders need to see jail time for corruption, black-marketeering or what have you.

    Today, Europe has more pressing problems than worrying about Greek protests.

  28. None for the investors in Greek bonds. The key impact is for the Greek economy. An exit from the Euro and a devaluation of the new local currency would make Greece more competitive in the world. Inflation, especially on imports, would further add demand to the local economy reducing unemployment.

    Longer term removal from the EU would likely increase interest rates on Greek bonds and burden future growth.

    The best case scenario for Europe now is that the restructuring plan is implemented and Greece falls into a moderate recession followed by a decade or more of very slow or stagnant growth.

    Greece doesn’t have a best case scenario… just less worse

  29. Micheal Hudson is a pylon on the road of life. You can steer around him or drive over him. It makes no difference to him. He will pop “right” back up.

    The question Greece needs to ask itself is basically .. going forward, what kind of society does it want? Does it want to help Greeks “grab the brass ring” or does their society become the “great leveler” and try to manage the “lowest common denominator”.

    The Greeks are out of cash. They have hit the wall. They need to figure out how to create a sustainable society for themselves. They can spend some time blaming others, but they can’t lose sight of the big picture. They need to find what they have of value and “exploit” it for the benefit of themselves and the world.

    Huddling in crowds and pointing fingers will only last so long. At some point the best and brightest will leave.

    “You can’t make a silk purse out of a sow’s ear”.

  30. I don’t understand the focus on the primary deficit/surplus. It seems to me looking at the structural budget position would be a great deal more informative than the primary budget position. A few months ago James did a really nice series of posts about how if you net out the decline in tax revenue and other aspects of the budget related to the automatic stabilizers, the discretionary portion of the U.S. budget position really wasn’t very expansionary at all. I suspect that if a similar analysis were done for the Greek budget position, one would find that Greek fiscal policy might plausibly be described as contractionary. Any idea where I could find data on the Greek budget after adjusting for the effect of the automatic stabilizers? Certainly if the Greek government were to implement the kind of austerity plans the German government is calling for, that would constitute a pro-cyclical fiscal position. This is madness and would never be tolerated in the U.S. As for pension and wage cuts, I think it was kyriakos who pointed out that Greek civil servants receive some of the lowest wages in the Eurozone. I don’t know enough about salary figures myself to make an informed decision about whether or not wages and benefit packages should come down, but I do know that forcing large portions of its citizenry into poverty so the Greek government can “live within its means,” is unacceptable.

  31. i was asking about a devaluation of the euro, say down to par with the dollar. of course, most of the greek bond holders live in the eurozone so a devaluation doesn’t affect them directly. but for other countries, suddenly they are getting paid back with less of their own currency.

  32. What would the lobbying interests of ‘high finance’ that the Peterson Institute ostensibly promotes be? ‘Reprogram’ …’blinders’? Is he confusing someone with the ECB? It sounds like someone has an unabashed case of prominence-envy!

  33. And just to head off any criticism of how terrible automatic stabilizers are and how they should most certainly be counted in any measurement of a country’s budget position, let me quote from a recent IMF report I glanced at over at Mark Thoma’s website entitled “Automatic Stabilizers Work, Always and Everywhere.”

    The aim of the research is to put “the current revival of fiscal stabilization policies in a broader perspective by revisiting the contribution of fiscal policy to macroeconomic stability in both industrial and developing economies over the last 40 years.” The authors study 49 industrial and developing countries for which reasonably long time series exist for fiscal data covering the general government. The authors conclude:

    “…automatic stabilizers strongly contribute to output stability regardless of the type of economy (advanced or developing), confirming the effectiveness of timely, predictable and symmetric fiscal impulses in stabilizing output…access of individual consumers to credit appears to exert a stabilizing influence on output and private consumption…more open economies have on average larger governments because automatic stabilizers offer insurance against external shocks … [and that] … output volatility is on average larger in countries with smaller governments, regardless of trade openness…”

    So automatic stabilizers provide a buffer against external fluctuations and smaller policies designed by governments are associated with greater output variability (bigger downward swings in economic growth). Putting a floor under which economic deterioration cannot fall sounds like a good thing to me.

  34. Are we not really witnessing the collapse of the most recent attempt at globalism? There are diverse problems tearing apart unities all over the world. Technical systems needed to survive are fragile and are too complex for social support. The base problem is overpopulation. No amount of technical rearranging will change the fact of excess populations being far to taxing on social systems for the social structures to remain intact.

    Electronics and other high tech systems are hyper fragile and require rigid protections by the state. The owners of these systems understand their power survival depends on their heavy control of the state. The controllers of the corporations own the state or the entire economic fabric they depend on will simply pass away.

    I find it most interesting that so few high finance types are able to cross over to stewardship to preserve their prerogatives . At the end of the day we live in a system that survives only by debtors paying their contracted debt. Every claim on others is directly or indirectly a retail debt where the money system must insure the claim they own can be paid out of generated earnings. The system lacking stewardship has obviously forgotten the ultimate survival ingredient required for their own system to survive. Instead , the system relied on a “magical good” to cure the problem of stewardship of their own system.

    Greece will never pay the claims on it’s state and citizen unless debtors income increases. That seems impossible. It is not like the problem is even new. Piero di Medici faced the same problem nearly six hundred years ago when he called in his banks loans.

    Finance never seems to be able to retain sufficient general knowledge of the art of credit granting to avoid periodic bouts of suicidal behaviour.

    The money has been lost by the bankers and by those that relied on the banking system. Here is the sow’s ear that happens when everyone scurries to unload their loss on others so they emerge intact.

    This time it is different?

  35. Will somebody explain to me what just happened today? Are the credit markets frozen again? I don’t believe the MSM: the Greek problem is weeks old so it must be something else.

  36. Re: @ Brad Thrasher_____Gold is so undervalued its beyond the pale. Everyday the,Great British, “Bank of (London) England” prices the precious commodity at a faux value. It should be priced at $2k +/+,and stay there or go up,period. Its been devalued for so long that the “Grand Master” hoarders are salivating as I write. Such market manipulation makes me laugh?

  37. I just saw something about there being a misprice of Procter& Gamble quoted at $39.87 when the real price was $ 60.18.

    Something very fishy here though. The shorts obviously massively covered here.

    Someone in a big white house must see to it that this one is really looked into. This was a stunning panic. The whole system is again near a nervous breakdown. Treasuries went through the roof.

  38. Re: @ Jessica____They would like you to believe that. America’s “Multi-National’s de Globalization” proliferater’s are going to have too give up there massive profits that the United States never benefits from,or actually see’s(it just stays in money heaven?). Everything their greed has built offshore is coming home to roost,and not in a good way mind you,…it won’t hurt the average Joe this time. The World is “Throwing-Up all over Europe,period! PS. Does “Program Sells,…sound familiar.

  39. CNBC via Business Insider reports that a Citigroup trader accidentally typed $15 billion rather than $15 million in a sell order. They also report there will be an investigation into P&G and Accenture.

    Business Insider apparently has corroborating sources separate from CNBC.

  40. Jamie, on days like today you’ve got to lay off the coffee and sweets. That caffeine and sugar buzz makes you do things that you normally would not do…

  41. Simon avoids the inconvenience that state guarantees absolutely control runs. His argument is equivalent to the one given by Paulson et al that the USA must immediately do large creditor bailouts or else “the financial system will collapse”.

    He’s arguing securities pricing can force government default. Well, close the markets, then. Ever heard of a bank holiday?

  42. I never thought I would see Karl D. rub elbows with Baseline Scenario. We live in interesting times. Karl’s financial observations are almost as bang on, as those as Simon and James. I think I’ve scared myself.

  43. Given what the Greeks are being forced to do in the way of wage controls, limitations on retirement, a VAT increase from 19 to 23%, and tax increases on top of those wage reductions, I don’t see how the Greek economy can escape a depression. Soon to be followed by the fall of the Papandreou government and a take over by the military to maintain public order.

    The same for Spain by the end of the summer.

  44. Woodrow wrote:

    ” I don’t see how the Greek economy can escape a depression.”

    Great Depression

    “The best-known depression was the Great Depression, which affected most national economies in the world throughout the 1930s. This depression is generally considered to have begun with the Wall Street Crash of 1929, and the crisis quickly spread to other national economies.[5] Between 1929 and 1933, the gross national product of the United States decreased by 33% while the rate of unemployment increased to 25%. The probable causes of the Great Depression include the loose money policies of the Federal Reserve and the misallocation of capital based on easy and inexpensive credit.
    A long-term effect of the Great Depression has been the departure of every major currency from the gold standard.

    Long Depression 1873-96

    Less-known today and much shallower, but longer, than the Great Depression is the Long Depression of 1873–96, which at the time was called the Great Depression.

    Panic of 1837

    The Panic of 1837 was an American financial crisis, built on a speculative real estate market [6]. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in gold and silver coinage. The Panic was followed by a five-year depression[6], with the failure of banks and record high unemployment levels[citation needed].”

  45. My question may reflect ignorance because I am unable to find the details around the proposed bailout.

    Question: Why does the bailout plan leave creditors whole, i.e. repaid at 100 cents on the dollar (euro)?

    Americans preferred arrangements for GM that punished both stock-holder and bond-holder to arrangements for AIG, which made counter-parties whole.

    Even if default is a remote possibly, creditors should have to weigh that against alternatives. The chances of success for Greece increase in proportion to the reduction (as opposed to resheduling) of debt.


  46. Thanks for the info: I knew that blaming the panic solely on the Greek problem sounded phony. This is even scarier than a panic based on real data. (and thanks for Sid the Kid)

  47. Very salient points made. I would like to add that the PIGS are all in trouble and some of this can be laid at the feet of the syndicates that did the refundings with the MDS/CDS included. Small towns in Italy are going under at a fatal rate and Portugal is being squeezed in the same manner..Look to the Syndicates—many headed by our very own IB’s!

    Germany is coming to the table late but what choice is there with the EURO pegged as it is?

  48. agree with you anon…not that there is not pain of disruption, but the big banks have us thinking the are necessary…were slave masters necessary to sustain the slaves? sure if, say the Am slaves had killed all the slave masters and taken possesion of the plantations there would have been disruption but the slaves would be way better off in a few short years, and the really important point is, the whole macro economy would have been much better off – what is more moribund economically than a slave plantation? When former slaves took over SC islands, they made more improvements in one years than all that had happened in 25 years due to them realizing they were in control of their destiny, for better or worth and no one was wasting time whipping people any more….

    We need credit markets, we need trust, but we can get thru democratic institutions as you suggest, we don’t need big banks

    Taking our big banks and the Fed is a passing storm, we can cower in fear of Oz or take on the man behind the curtain…there will be a storm, but it will pass, if we do not face our fears and stand up for our commonwealth, we will never remove these bloated parasites feeding off our lifeblood

  49. agreed, for individuals its called bankruptcy and wherever debt is allowed, default most be allowed also…get it over with Greece, and move on and laugh at the rest of us in a few years

  50. May 6, 2010 – 4:58 pm –

    “The New York Stock Exchange said it did not have any technical issues that would have caused the precipitous drop, and other companies, including Nasdaq said they were reviewing trading during the 2 p.m. to 3 p.m. timeframe, when the plunge occurred. “At this point, we have no evidence that Citi was involved in any erroneous transaction.”

    * My bet, we’ve got Dark Pools doing computer-generated flash trading.

  51. James,

    Easy on the natural stimulants, my man. They can alter the verbo-motor coherence, as you post clearly shows.

  52. THURSDAY, MAY 6, 2010

    After Bell Quick Summary – Cobra’s Market View

    “Well, all charts were messed up, I don’t know how long it will take to make all those charts readable especially the intraday charts. Right now, for sure I can point out “hundreds” of charts arguing for a rebound and perhaps a capitulation bottom, but they’re all based on the principle that “history repeats itself”, I don’t know if they’re of any use for now, as definitely we are MAKING THE HISTORY. I agree what Jason of sentimentrader said in the special intraday report today:

    The typical pattern in cases like this is a very short-term bounce of 1-3 days, then a re-test of the panic low. Even in “successful” retests where the panic marks some kind of washout bottom, the panic low is often violated by a small amount.

    … … this kind of thing almost always results in several large funds being forced to liquidate – this is why we often get the initial rebound, but then more selling pressure. I can’t imagine that doesn’t happen this time too.

    Look at how violently the Carry Trade was unwound right before the market crashed. Something terrible must have happened forcing some big funds to liquid at any cost! I sincerely hope this was just an one day event or the better, an accident.

    But as a trader, I never rely on hope that this time may be different, instead I admit what the charts, cold blooded charts, are telling me that technical damages were done and it will take nobody knows for how long, to recover all those wounds.

    So trade carefully, even if you really really believe this was a capitulation and it’s your once in a life time to retire earlier.”

  53. Bloomberg now carries a piece that NASDAQ will cancel all trades of stocks moving more than 60 % from the lastrade at 2:40 pm or immediately before. NASDAQ has coordinated the decision with all other exchanges.

  54. When gold is ready to go to $2K it will. So, what else is new? Market’s are always being manipulated.

  55. A reintroduction of the Dracma is DOA in the middle of a financial crisis. Though many could be forced to recieve wages, pensions, etc. in local currency, the money would immediately be moved to Euros for savings. This would send the dracma interests rates sky-high and shrink GDP even more. For all intents and purposes, the economy would still be “Euro-ized” but with even more financial chaos. Once you marry a new currency it’s really hard to get a divorce.

  56. He’s know Latka Gravas like the show Taxi or whatever else you guys came up with from kamikaze80., Chanucklehead and alfredo.

    No, this guy hit the cover off the ball today, he predicted a world in panic mode. A almost 1000 thousand point day market drop. What he brings to the table is no longer fiction as I can see why he chose the far-fetched theme fits very well.

    Basically, when you look closer to what he as written, it’s across every TV set and seen on every web-site. Everyone is now talking about this austerity and oppressive social order stuff now along with debt collapse around the world.

    I lost money today, but I am glad I found this blog and know Simon Johnson, James Gornick, James Kwak and the others I have been reading today are showing there are solutions yet for us to embrace.

    You guys better read his piece again, and again…

    He is cutting edge stuff now…

    I think you guys are actually the Latka Gravas or in need of whatever it takes to get the idea of what it’s all about…

    Peace I am out of here

  57. “It’s Not About Greece Any More”

    Fear index hits 1-year high

    May 6, 2010: 5:45 PM ET – excerpt

    NEW YORK ( — “Wall Street’s key volatility measure hit a 1-year high Thursday as stocks plunged and investors worried about a European debt crisis.

    “At this point there are just so many issues out there,” he said. “You can pick anything, whether it’s any country in Europe, the oil spill, volcanic ash or Goldman Sachs — the market is having a hard time.”

    Given these lingering fears, Saluzzi said he wouldn’t be surprised if the index continued to climb in the next few weeks, meaning stocks may be in for a rough ride. ”

  58. GDP this GDP that blah, blah, blah, my solidarity goes with the Greek people. There leaders sold them out.

  59. NASDAQ to Cancel Certain Trades

    5/06/2010 06:53:00 PM – by CalculatedRisk

    “Usually I focus more on economics, but …

    Via Reuters:

    Nasdaq Operations said it will cancel all trades executed between 2:40 p.m. to 3 p.m. showing a rise or fall of more than 60 percent from the last trade in that security at 2:40 p.m or immediately prior.

    This needs an explanation …”

    * I think the fear index just increased a notch. Lucy, you’ve got some ‘splainin’ to do!

  60. What happens in places like Spain and Portugal when they find out that Greece pays 50 cents on the dollar but they’re stuck with the full dollar payement? Riots in the streets! So naturally Spanish and Portuguese politicians would demand the same terms. Then it just cascades further down the chain until loaning out in Euros is no longer credible.

  61. NYSE, Nasdaq Cancel Some Trades at Height of Thursday’s Volatility

    Thursday, May 06, 2010 – Fox Business – excerpt

    “The debt woes also rattled the bond markets as the yield on the ten-year note fell to its lowest level since Dec. 2009 amid the flight to safety. Bond prices experienced heavy volatility, mirroring the action on Wall Street

    In my 25 years in the business I have never seen bonds have that type of move in a 20-minute period,” said Tom Digaloma, head of bond trading at Guggenheim Securities.”

  62. What happens when the austerity measures are implemented here? They already are at the city and state level. Will we have the same austerity measures? Will the cuts impact those who got us into this mess of debt at all?

  63. Computer glitch

    “It frequently refers to an error which is not detected at the time it occurs but shows up later in data errors or incorrect human decisions.

    While the fault is usually attributed to the computer hardware, this is often not the case since hardware failures rarely go undetected.”

  64. Karl is a very wise man. He’s the type who’s at the front when things are getting dicey.

  65. Great question. Does anyone have a list of bankrupt American states? How quickly would American cities erupt in violence after austerity measures? Judging by Greece, very quickly.

  66. The German people are not going to support policies that lead to 5,6, 7% inflation rates just to help Greece – and the Greeks are not going to respond favorably to massive social program cuts and retirement age increases which in their view simply “help the Germans.”

    I don’t really understand how helping Greece would lead to inflation rates of 7%. If you’re referring to the nuclear option, or the possibility of the ECB buying greek bonds I doubt that would result in inflation since the greek economy is only 2 percent of the european gdp. If this had to be done for france or german I say yes, that would be a concern. In my opinion if the rules of the ECB allowed the president of the ECB to exercise the so called nuclear option that would scare away the speculators who would leave portugal and spain alone. The president of the ECB is the defacto president of europe and needs more tools to fight the speculators.
    If this led to a lower euro so be it. It certainly would help the european economy in general and the germans understand that what’s good for europe is good for them. that’s where 70% of their exports go.

    Also you’re wrong that these countries don’t like each other. When it comes to money and soccer we let our emotions run high and allow our tribal instincts to kick in, but most europeans are well traveled and educated and can control their tribal instincts perfectly. I come from a country that hates the greeks for defeating us in the euro2004, but now nobody in portugal is complaining about 2 billion euros in aid to greece possibly at our own risk.

  67. We don’t need no stinkin’ bailouts.

    We need debt wipe-outs.

    I’m so sick of all this creditor support. The creditors need to take the hits for their crappy bets. And where there is fraud, prosecute and sue the begeezus out of the culprits.

  68. As for Obama – who opposes Brown-Kaufman – may he eventually land in a place that is too warm for comfort. What a frickin’ traitor to Main Street.

    (Does anyone believe Timmy and Hank have been born again? What a bunch of politico lying crocks of sh@t.)

  69. Everyone, including Mr. Johnson, seems content to buy into the idea that European leaders “blew it”, and are full of free and useless advice.

    Europe, Japan, and much of the rest of the world have been SACKED by the US/UK policy response from the outset – you can only fault Europe for not seeing that the same predatory bank-eat-bank frenzy on Wall Street would quickly hit the sovereign level and the US is shark # 1.

    Greece should pull out of the Euro and default. In fact, all this pretend BS re extending dead debt everywhere is magical thinking designed only to keep
    the world’s worst people at the helm.

  70. It’s not much of a stretch to say that a global depression is foreseeable given all the socialized debt.

  71. True to a point earle.florida. I do appreciate that apart from industrial use, gold is THE measure of our lack of faith in nation states and currency.

    No doubt our lack of faith in our institutions has to peak.

    I remain convinced that we are experiencing a 2nd Gilded Age. The battle lines are clearly drawn. Do we give up our independence for some form of corporate governance; or, do we restore government to deriving its power from The People.

    I hope for the best and prepare for the worst.

  72. Re: @ Peter____Three Centuries of financial markets starting with Europe’s “Merry Old England” there were floor runner’s who would bid/ask (buy/sell) the underlying securities that would move the herd. They would throw fabulous amounts of money in all direction so as not too be singled out,but the motive was to weaken the targeted entity until it sold off big time while all this was happening the buy side was gobbling up all the sales. When the dust clears the underlying security regains its stability, and all is well on the “Dump-Side”,and the unknowing sheep that have been fleeced are no better off than before, except for the fox in the (market) henhouse!

  73. G’day Woodrow,

    I have no idea where the price of gold will peak. I’ve been a buyer and hoarder (Maple Leaf gold coins) since 2003. I’m still a buyer every chance I can afford.

    The fact that the Greeks are in the streets is one sign for hope. The fact they left their pitchforks at home is a sign for despair.

    All the best,

  74. “It was almost like ‘The Twilight Zone.’

    “As of about 6 p.m., all the officials knew was that there had been what one official called “a huge, anomalous, unexplained surge in selling, it looks like in Chicago, at about 2:45.”

    The source remained unknown, but it had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself — until it started to reverse. ”

    Federal officials fielded rumors … But they did not know the truth.”

  75. Greece woes reignite fear among banks

    Thursday, May. 06, 2010 8:42PM EDT – Globe & Mail – excerpt

    “Banks are growing wary of lending to each other again, raising the spectre of another global credit freeze.

    Bankers don’t know the extent of each other’s exposure to dicey credits primarily in Europe, and fear the worsening debt problems will erode the value of government bonds held as collateral. There is added pressure because the credit ratings of the banks themselves tend to be linked to those of their governments.

    “We’re on the brink of getting another lockup in the banking system,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. “I think that’s the next phase of this.

    …More than half the Greek government bonds outstanding are held by French and German banks,”

  76. It’s not about Greece any more. It’s about a global sovereign debt crisis. How long before the United States maxes out its credit cards and can’t borrow more money? We’re running on credit and taking on debt just to pay debt. The interest rates are being kept artificially low to enable the debt machine to keep going. It’s a house of cards. What’s being done to take fraud out of market capitalism? It was mostly due to fraud that the system nearly collapsed. Where are the reforms? Yes, it’s not just about Greece, it’s about fraudulent market capitalism and enabling corrupt governments.

  77. First thank you and sorry you lost money and hopefully not your life savings… LOST MONEY IN THE MARKET

    To you other folks… Who in fact go nameless and are faceless the majority of your posts throughout this blogging community. Some of your posts may be witty at times but cowardly at best when one must hide behind a mask or a blank statement of words that mean really nothing for humanity or this blogging community.

    I have been upfront with my posts and my name is clearly posted and can be researched. This is the true sense of what builds nobility and honor to stand behind in one causes and one words.

    Far-fetched, think again, the stomach of austerity measures on a wider spectrum are collapsing the betting mans gut for what took the market down today…

    Risky bets on the chance they may be the next to be in line to battle in the streets in the country they may live-in is a frank reality is no longer a far-fetched notion. Governments are wavering under the pressures to repay and this is one of the primary signals, the other is the pure sliding scale of deceit of not knowing who is really next and what are the real truths. Call it liars Poker and this is the biggest game in the world now and the stakes are very high…

    No one really even knows now any more and that’s the real scary thing in all this stuff. Can it be that one lone guy or gal pushed the button for a billion instead of a million. Could a terrorist come in and do the same within our financial networks because of the high speed frequency traders?

    So many more reasons for uncertainties and MA and PA U.S.A and other retired and would be retired are not looking to risk again their last income for Wall-street raiders to say Oops there goes another one, help me American taxpayer, I fallen and I can’t get up… .

    China, along with the Asian Rim and the U.S. and others may be correct in slowing the machine of creating to much credit load and excess G.D.P.growth without the ability of countries to actually pay their debts to maintain such growth projections.

    This would be more in keeping with an acceptable pace of an sustainable recoverable economical global program where severe austerity and Oppressive social systems may be the last choices needed on anyones list.

    Just ideas in why markets react for reasons that involve the human conditions that stern greed and fear. Greed and fear at the heart of every women and man placing their hope through an investment in prosperity and in reverse possibly gambling with the very nature of their soul.

    These are the signs of the times of change. Change for higher morals and Ethics. Morales also. To put God back within our midst and prayer back within our lives. Just suggestions…

    Risky bets seeing the the streets of unrest of Social Oppression at a cost of Sovereign Debt mis-management and a signal of whose next. These are the weeks and months ahead. Most likely years ahead. Time to get a great money manager or someone that does not have greed as their number one priority but will still keep you safe within the market place.

    Remember folks, this is clearly a signal of what freedoms. and future signals are spilling over to American soil as TARP has been used silently behind the scenes to keep many state budgets from going under as the size of the Country of Greece is no larger then some of our states here.

    Far-fetched, Not any more…

    James Gornick “Oppression Theorem Thesis” Continued since Summer 2008 Thoughts

  78. Nouriel Roubini: forget sub-prime mortgages. It’s the sub-prime financial system we need to fix

    04 May 2010 –

    “For the past half century, academic economists, Wall Street traders, and everyone in between have been led astray by fairy tales about the wonders of unregulated markets and the limitless benefits of financial innovation. The crisis dealt a body blow to that belief system, but nothing has replaced it.

    That’s all too evident in the timid reform proposals currently being considered in the United States and other advanced economies. Even though they have suffered the worst financial crisis in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.

    Nothing lasts forever, and crises will always return. But they need not loom so large; they need not overshadow our economic existence.

    If we strengthen the levees that surround our financial system, we can weather crises in the coming years. Though the waters may rise, we will remain dry. But if we fail to prepare for the inevitable hurricanes — if we delude ourselves, thinking that our antiquated defences will never be breached again — we face the prospect of many future floods.”

  79. “A move to break up major Wall Street banks failed Thursday night by a vote of 61 to 33.”

  80. @NKlein

    Please understand I’m not critical of automatic stabilizers in general, but they need to stabilize on the way up and down. And based on what we now know about Greek debt growth during the boom times (which was much higher than was officially reported, courtesy of SquidCo and others), a large part of their primary deficit is structural. They have a massively inadequate tax system, a large underground cash economy, overpaid and overstaffed civil servants, and too generous pensions. When you’re running >3% primary deficit during a boom phase, it’s generally not sustainable.

  81. I ran out of Melatonin.

    Expanding On The Crash Yesterday: NBBO

    Friday, May 7. 2010 – excerpt

    “If The SEC is anything other than a lying sack….., it must force all brokers to HONOR NBBO from yesterday’s trades.

    The definition of NBBO is:

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.

    “Yesterday pulled back a curtain on something that isn’t being talked about anywhere in the mainstream media, but we damn well ought to be, because if those trades could execute outside of NBBO yesterday, they probably can and have on a routine basis every day, to your severe disadvantage.

    You heard it here first.”

  82. Bove: US Banks Are Exposed

    The European debt crisis could quickly spread to US banks, which are heavily exposed to Europe, banking analyst Dick Bove told

    Bove, of Rochdale Securities, released research showing the massive exposure US banks such as JPMorgan Chase, Morgan Stanley and Citigroup have to European debt.

    “There is simply a growing recognition that Greece has got to default,” Bove said. “The riots in the streets showed the decision to repay the debt was not going to be made by the people in Germany, France and Switzerland. It’s going to be made by people in Greece and they’re not going to repay it.

    “Anyone seeing the riots is going to recognize that this government is going to be thrown out,” Bove added. “And anything replacing this government is going to be far more leftist leaning and they’re going to repudiate.”

    Global ramifications could be profound, with major US banks heavily exposed to Greek debt.

    Five companies alone have $2.5 trillion in exposure, with Citigroup at 77.7 percent of the total, Morgan Stanley at 65.6 percent, and JPMorgan Chase at 59.8 percent, according to Bove’s research.

    “What you’re faced with is you simply do not know which countries are solvent, which countries are insolvent,” Bove said. “You do not know who the counterparties are for these insolvent countries, so you run for the hills.”

    Roubini: “Tip of the Iceberg”

    “Despite Thursday’s unexplained surge in selling, stock markets are being driven lower by fears over the global economy and the debt crisis spreading, economist Nouriel Roubini, of RGE Monitor, told CNBC.

    Greece is just the “tip of the iceberg” for the problem of accumulating debt, and it must be solved by raising taxes and cutting spending, if not default will follow, Roubini said.

    “My concern is eventually, not this year, it may spread to Japan and in the US,” he said…”

  83. Generally correct, except for one thing. Before 2008, which was the first bad year for the economy, Greece was running small primary surpluses (max 3,6% of GDP in 2000) / deficits (max 2,6% in 2004) and the Debt / GDP was stable: 94,5% in 1996, 95,7 in 2007. The primary deficit exceeded 3% of GDP for the first time in 2008, which was after the end of the boom phase.

  84. Yes, that’s what everyone thought… (citing Der Speigel)

    “The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

    Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.”

    But before it looks like I’m rapidly anti-Greek, the US has done the exact same thing over the past 8 years, with 2 massive off-balance sheet wars and additional creative accounting.

  85. This is grand scale pump and dump, only this time the tripping points were designed to sell out and short whole State and Sovereign Wealth competitors. Greece was not the actual target, but it tracks back to Dubai’s sudden trigger of defaults just before the business lag of our thanksgiving. The model of burn and churn economics is a descendant of hostile takeovers at corporate levels that took a trip around the world through several whole economies before (Asia/Mexico/South America/Russia and now the process has hit at virtual monetary cold war levels. Greece is just a self-inflicted casualty and perhaps victim in the scenario that involves a petrodollar supremacy and sslapping down the eurodollar before China and Europe become coalition partners in common interest.

    In the meantime :
    What happened last year on March 9, 2009 when the global computer also took a dip just like last week on May 6, 2010 …and somebody came up with the firesale rebound…but we never did find out exactly shy and how and who of that particular computer driven financial windstorm or is it an intensional windfall at flash acquisitions?

    Compare the winners and losers to last year and convince me it is not part of the same apparatus to burn and churn the market !

  86. Stats guy? Any chance you could clarify invariable relationships and correlates when comparing March 9, 2009
    to May 6, 2010? Is this a new system of flash, slash and seize assets by crashing the systemics and working on the predicatble vulnerability of crisis,fear, panic and stop loss macinations?

  87. Bruce Woych wrote:

    “Stats guy? Any chance you could clarify invariable relationships and correlates when comparing March 9, 2009
    to May 6, 2010?”

    The suggestion is that the market decline in March 2009 and the most recent one, were both engineered. The market decline in 2009 appeared to be an orderly sell-off without signs of massive capitulation necessary for a healthy rebound.

    The decline in 2009 corresponded with a drop in the Baltic Dry Index (BDI/shipping traffic) considered a leading indicator.

    Unlike the current situation, the BDI has not yet turned negative, suggesting involvement of Skynet. Something’s hinky.

  88. That’s not about the primary deficit. Greece paid 13 billion euro in interest in 2009 alone, that’s 5% of GDP. With a debt to GDP close to 100% throughout the decade, a large part of the deficits you’re talking about were interest payments. The eurostat numbers my links point to have been revised and include the reviews mentioned in the naked capitalism post.

    You can read about the controversial financial audit that revised the greek numbers in 2004 here:,_2004

    The wikipedia article gives a good summary of the events of that time. I’ll just copy a couple of paragraphs here:

    “It appeared that the Greek government accounts were falsified (Eurostat diplomatically avoids this word), mostly by “postponing” accounting for huge military expenses, since at least 1997. It was reported that if the true deficit figures were known, Greece would have not joined the European monetary union. This argument was technically not correct, as it was based on calculation of the corrected deficits employing the newer ESA95 methodology; however, when calculated with the ESA79 methodology, in force at the time of the Greek application, even according to the revised numbers Greece had met the deficit criterion for its reference year of 1999 and thus, since the remaining criteria had also been met, was properly accepted into the Eurozone; ESA79 was also the methodology employed to calculate the deficits of all other Eurozone members at the time of their applications. After the 2007 Greek GDP revision, no official ESA95 calculation was presented for the 1999 budget deficit, while the 2006 budget deficit was below 3%.
    Several arguments have been expressed about the implications of the audit. Some commentators talked about data falsification. Others, though, held a completely different viewpoint. “Irregularities” (the word falsification never officially used) in deficit reporting were also revealed for other Eurozone members, most notably Italy and Portugal, with significant revisions imposed. Also, there were arguments about massive “creative accounting” employed by many states in order to meet the deficit criterion for entry into the Eurozone. Even the practice of one-off measures by so many states has been criticised, since in several cases their deficits rose back over 3% soon after the reference year, while big economies like Germany and France seem to defy the rules for years. Last but not least, changes in accounting method often seriously affected the deficit numbers (Spain and Portugal had, like Greece, marginally exceeded 3% in their reference year for entry, when their deficit was revised according to ESA95). It was argued that New Democracy government simply miscalculated the consequences of its actions, which brought a strong reaction by Eurostat – stronger than that for other violators.”

    EU beaurocrats have overplayed the “greek statistics” thing to hide their own responsibilities. In truth there was neither monitoring nor enforcement of regulations, which is one of the reasons we’re here now. And a more general point: there was a lot of politics involved in the creation of the EMU. As many political analysts point out european leaders were looking for a way to promote european integration through a monetary union and labelled anti-european the economists that warned about the dangers. And now everyone wants to pretend it’s all about falsified numbers. Just like it was all about black guys who took mortgages they couldn’t afford…

  89. btw I’ve read enough of your comments and posts to know you’re not anti-greek at all. Your criticisms are generally spot-on.

    The funny thing is that there was nothing secret about those GS swap deals at the time. In fact the then finance minister was praised for his savviness in the local pro-government press. Financial wizardry was very fashionable at the time and, after all, it wasn’t against the law or anything. Just a clever use of financial innovation…

  90. I was using Greece and Germany as proxies for the southern / northern Europe issue. The rescue package just announced is wonderful – until the bond market punishes the entire EU for taking on another TRILLON dollars of debt – and that’s just to plug current leaks. Unless the entire EU can grow faster than it has shown a capacity to grow since the industrial revolution, the borrowing will come home to roost, which means very high interest rates and corrospondingly high inflation to counter those rates. When this happens, what will the German politicians (or French or Austrian etc.) tell their people? “I screwed up” or ” the unelected ECB technocrats did this to us, lets either get out of the Euro, or let Spain, Portugal etc. get out”

    You’re right that the head of the ECB is the defacto President of Europe, but the citizen’s of Europe didn’t elect him, and the actual elected officials of Europe have to answer to the people at some point. Even in the US we’re calling for “Auditing” the Fed, as a cover for the pols inability to do anything meaningful – but at least we elected the people who appointed most of the Fed. How much representation do you think Spain, Portugal, Greece, Ireland and Cyprus feel they have over the “defacto” president of Europe? Taxation (inflation, rates)without representation, I seem to remeber that causing some annoyance in the past.

  91. If the Eurostat numbers are fully updated, then I would stand corrected – which would shift even more of the blame onto the ECB, since the increase in source of stress would be 90% due to interest and falling tax revenue (both of which are heavily affected by monetary policy). That’s not to say Greece entered 2007 in a great situation, but you would be correct that the Northern EU politicians are using Greece to deflect attention from the de facto bailout of their own banks.

  92. Dr. Frankie and the rest of this community

    I read your remarks along with the other 4 above on James Gornick’s two posts.

    First, I happened to come to this web-site because our professor, which I am attending FAU for my doctorate in economics and finance; made one of our assignments to actually read Mr. Gornick’s writings throughout all of the web-sites on the internet he has posted.

    The reason coming to this web blog is twofold. The assignment has Mr. Gornick showing he had signaled well before many others, as far back as 2007, well before any of the media or any within the blogging communities a concept of what was to occur in Greece and developing for others now around our world due to debt.

    He has been ahead of the curve even when it comes to the likes of those who had written or published books such as “To Big To Fail” by Andrew Ross Sorkin and the host of other books and authors, the topic and subject of a world of economist and central think-tanks, had missed in their formulas.

    Mr. Gornick noticed that you could not keep a credit faucet open endlessly without the balance of an oppressive outcome being the ends of the means being the end no matter what society may it be, Capitalism, Socialism and even the already severe life styles of the oppressive forms of Communisms.

    What spurs Mr. Gornick’s notoriety through many of the Universities as I have learned from a few of my fellow colleges, and to my pleasant surprise, he is now being heard in media areas,and followed in a few countries as you can see when searching the browsers.

    He speaks from his heart, and he actually cares about the human condition. He certainly has a love for the creator as this can turn people either off or on.

    I would try to tell everyone to rise above and allow you to learn, as he has tried to state or allow a line to be drawn in the sand for hope for smarter folks than he to take up the charge and turn our Nation first and then our World around. For us all to recognize as we can through collective learning fiscally responsible Consumer restraint to try to gage growth within economies, we may just turn this corner without the deep austerity measures that are or will be the plan for many if we do not get this right.

    Mr. Gornick has done through many of his writings, stated in his logic of reason. His reason for programs have been to slow the decent and bring a sustainable GDP Credit to debit modifier and allow an Increase Debt blanket relief blanket to ease the pain and despair of what is decay of the human unit.

    He has made an absolute clear statement that all programs of any success are based upon cutting back from the unit their ability as we count as a consumption to consume at a rate of X or Y, their ability to consumer at a debt to credit trigger that clearly triggers system warning before unit fails.

    The very nature that James in his Far-fetched themes clearly has struck oil or gold when the consumer unit needs to be re-taught to live within their means and for countries to relearn to live also within standards was written. The clarity of going to build a standard for the world to build trust to trade against and not go just from central banks wild printing presses of printing currency and promissory notes was a critical statement made by James.

    This statement of what they retain in holdings as once held has gold or whatever was used as precious back in the days of President Nixon, I believe as the last point and time we had such a standard in place was what I had read and stated within his writing.

    The Coase and Oppression Theorem came life in our modern times was brought to vivid color and depth by Mr. Gornick as he has only skimmed the surface as the depths of the math reveals far to many market and country seizing metrics as i had read in another response to one of his post prior in this community. That was a true statement.

    The next time, as James said it nicely, “To you other folks… Who in fact go nameless and are faceless the majority of your posts throughout this blogging community. Some of your posts may be witty at times but cowardly at best when one must hide behind a mask or a blank statement of words that mean really nothing for humanity or this blogging community” (James).

    Indeed these words are very powerful words as they are the ones that give great honor and notability to Mr. Gornick to stand up on the virtues for the cause for humanity and to a community of faceless words while he writes to Professor Simon Johnson or James Kwak or their guest writers of topic subjects.

    James, thank you for taking up the cause, you are an inspiration for moving a concept for minds to come to thought to move towards solutions or to at least pause for a moment and ponder what fate may await if these thoughts you have posed have full merit, then God help us all.



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