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Greece, Germany and Global Finance

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Regardless of rumors of pending resolution, the crisis in Greece is escalating with capital flight, an imminent government funding shortfall and terms being forced on it by the European North, particularly Germany, that are (1) politically, economically and socially untenable and (2) guaranteed to exacerbate the manufactured economic crisis that the EU claims it wants to resolve. The intransigence of the European North in the face of its clearly failed policies is increasingly punitive and risks rapid decline into regional, and possibly global, crisis. And left largely unsaid, but increasingly in evidence to the European periphery, is that Germany has both benefited from its trade with Greece and through its largest bank, Deutsche Bank, is in some measure responsible for the Greek crisis.

Likely unbeknownst to those with only a passing interest, the political and economic leadership of developed Europe bought into the neo-liberal program all the way and allowed its banks to create property bubbles across the European periphery by massively leveraging themselves in the run-up to financial crisis in 2008. The combination of increased leverage and diminished underwriting and regulatory capital standards by large German, French and U.S. banks in the 2000s is evidence of intentional looting in the terms of economists Akerlof and Romer (often referenced by professor and financial criminologist Bill Black). ‘Loaning’ the Greek state money to replenish bank coffers emptied by looting, to support a trade imbalance that has benefited Germany and that under no configuration of circumstance can be repaid is economic warfare.

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Graph (1) above: despite being in office during the greatest economic crisis since the Great Depression the Obama administration has brought the fewest criminal prosecutions against bankers in modern history. The same is true across Europe where senior bankers were spared while resolution of looted banks was placed on top of the peoples of the periphery. Greek debt undertaken to replenish bank coffers is ‘odious’ in the most basic sense. The George H.W. Bush administration prosecuted twice as many bankers as Barack Obama has for every year in office. Image source: Columbia Journalism Review.

To the point made by Greek Finance Minister Yanis Varoufakis, Greece is a tiny country, population eleven million, hardly worthy of the amount of commentary it has received in the Western press. However, for those with even cursory knowledge of European history, the crisis in Greece has historical ties to the creation of Germany in 1870 through its outsized role in European affairs, to the gold standard abandoned during the Great Depression and to two World Wars. As U.S. President Barack Obama is in the process of demonstrating with the TPP and TTIP ‘trade’ agreements, neo-liberalism is profoundly anti-democratic. The German leadership is demonstrating this tendency as well by dismissing the election of Syriza as subordinate to ‘agreements’ undertaken by previous Greek governments.

Against centuries of imperial history, the center-periphery frame of the EU requires what Charles Kindleberger called a ‘benevolent hegemon’ for political resolution. An example often given is the Marshall Plan that had the U.S. partially rebuild Europe following WWII. Left out is that the Marshall Plan was in large measure an effort to shift Europe away from Russian influence and toward the U.S. in the Cold War. Most people outside (or inside) of the U.S. have little reason to view the U.S. as benevolent. German imperial history up through WWII suggests little prior experience as benevolent hegemon. In fact, while not quite as implausible as the benevolent nature presumed in mainstream economics, there is little to suggest that the requisite benevolent hegemon ever existed. Without one, the economic and political power imbalances of center and periphery make a sustainable currency union extremely unlikely.

The European currency union does have theoretical relation to the gold standard that dissolved in the Great Depression of the 1930s. The gold standard limited the quantity of money created by tying it to the quantity of gold held. Gold had history as money in the development of European banking as direct currency and as claims on it. Both Kindleberger and Karl Polanyi in The Great Transformation provide an historical backdrop of the gold standard, the German relation with ‘hard’ money and its unwinding in the Depression. History aside, gold makes no more sense as money than anything else. The desire of the EU to recreate a pseudo gold standard with the currency union through deference to a ‘natural’ limit on money creation exposes the social nature of the limit that was always there. Abba Lerner explains the potential social role of fiat money here.

Neo-liberalism as the post-mercantilist ‘market’ capitalism that Polanyi describes is ideology that is posed by its proponents as knowledge about the world. The TPP and TTIP trade ‘agreements’ that Mr. Obama is pushing are designed to subordinate civil governance to economic interests, mainly those of multi-national corporations. This is substantially what the German leadership is asserting through the Troika, that Greek (and other peripheral European) civil governance is subordinate to the interests of the currency union as if it were a natural, rather than a social, institution. To reiterate, current Greek circumstance is in part the result of trade imbalances with Germany and in part money borrowed to bail out European banks that engaged in predatory finance against peripheral Europe. And how precisely would German Chancellor Angela Merkel respond to Greek demands that Germany run a current account deficit to boost Greek trade? This isn’t about an honest conversation.

This state-market tension can be seen in the bailouts of Wall Street, including large German and French banks, which market forces would have put out of business in 2008. After George W. Bush left office ‘free-trade’ proponent Barack Obama took over as Bailer-Outer in Chief. Why would someone who purports to be a ‘free-trader’ support consequence-free government intervention to save capitalist enterprises that made bad decisions and destroyed ‘their’ businesses? To claim that banking serves a ‘special’ role is to apply ‘exogenous’ criteria to market relations. And in history, the IMF, the organization that nearly single-handedly kept neo-liberalism alive during its years in the economic wilderness, made shutting down corrupt, extractive banks the first order of business when it was ‘dealing’ with peripheral countries.

According to ex-Fed Chair Ben Bernanke and researchers at the St. Louis Fed (top link above), European bank demand for U.S. financial assets contributed substantially to the housing boom – bust in the U.S. by creating demand for engineered, and implausible, ‘high quality’ Mortgage-Backed Securities. Special treatment given to Eurozone sovereign debt, including that of the periphery, under European banking regulations allowed European banks to lever up in order to buy U.S. assets. This resulted in actual bank leverage that became a multiple of nominal leverage. Regulatory ‘arbitrage’ that produced short term profits, a global property bubble, and ultimately economic and financial crashes, ties the ongoing economic weakness in the Eurozone to private debt and then to public (sovereign) debt.

This history is important because its places global finance, Wall Street, at the center of economic problems that appear disparate in their individual dimensions. It also creates policy paradox because Mr. Bernanke, Barack Obama and European leaders have been central to reviving what Mr. Bernanke clearly understood to be ‘over banking’ in his ex-post analysis (link above). Evidence that this is still happening, too much money chasing too few ‘quality’ assets, can be seen in renewed property bubbles in New York, London, Singapore and Hong Kong and in financial asset valuations that are above all but the bubble levels of recent experience. And the European periphery, Detroit, parts of Chicago, etc.— the American periphery, are evidence of what happens when bankers go wild.

This is what the monetary Keynesians— advocates of QE (Quantitative Easing), don’t appear to understand. If global banking had been effectively re-regulated QE could possibly be argued to be economically beneficial. But Herr Bernanke’s ‘portfolio balance channel,’ the financial diffusion process that produces bubbles by ‘underpricing’ risk when overdone, becomes a global finance bomb with the ‘lemon socialism’ of TBTF (too-big-to-fail) guarantees. Conversely, when this lemon socialism finds its way onto the public balance sheet, as it has in Greece, the Troika has a moral obligation to make the Greek people whole. As things stand, lowlife hedge fund managers are buying bulk properties in the periphery at fire-sale prices to rent back to the people who used to ‘own’ them. We are witnessing the creation of global financial serfdom.

In the U.S. the political theater of the absurd finds Mr. Obama’s soon to depart Attorney General Eric Holder publicly pronouncing that his staff has been given 90 days to decide whether or not to bring charges against bankers for their crimes in the run-up to the financial crisis six full years after Mr. Obama entered office. Warnings about the statute of limitations running out on certain types of crimes were being shouted from the rooftops in 2009 and 2010 when Mr. Holder was repeatedly putting out fraudulent prosecution numbers in an effort to get political cover for official inaction. The problem is that many of the fraudulent transactions took place well before 2008. Arguable interpretations of financial fraud laws suggest that there is still time for some prosecutions. Janitors and the clerical staff of major banks are on notice.

I’ve been putting forward the ‘gross flows’ view since the BIS (Bank of International Settlements) developed it in 2011 and was unaware until recently that Mr. Bernanke had endorsed it (‘Ben Bernanke’ link above) shortly thereafter. This makes his subsequent policies all the more reckless and begs the basic question of who the Fed works for? (I know, I know, but I’m trying to give readers with good intentions an out). This isn’t a conspiracy theory— Mr. Bernanke analyzed what had happened and he felt comfortable enough with his analysis to make causal assignment. He then spent his remaining years at the Fed reconstituting the cause. There either will or won’t be another crisis directly related to this reconstitution. But for the Greek people, the last one never went away.

Rob Urie is an artist and political economist. His book Zen Economics is written and awaiting publication. A sampling of Rob’s art can be found here.

 

 

 

 

 

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Rob Urie is an artist and political economist. His book Zen Economics is published by CounterPunch Books.

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