Galbraith, Stiglitz and Soros on resisting the inevitability of the Greek debt crisis

I would love to have gone to the Institute of New Economic Thinking (INET) conference in Cambridge, but the timing was wrong for me.  The effort, sponsored by George Soros, is a much needed collaboration of ideas to help prevent a crisis like the one we are now experiencing.

Marshall Auerback reported yesterday on some ideas by Perry Mehrling. This was the first highlight of the goings-on in Cambridge to hit the blogosphere. Since I couldn’t go to the conference, perhaps I will have the opportunity to highlight more of the goings-on in Cambridge as the reports become available.

However, for now, it is Greece which is on everyone’s mind. I’ve said my piece on this, so let’s see what some of the INET leaders are saying. Bloomberg News is at the conference. Yesterday they asked a number of the speakers for their views on the now critical state the sovereign debt crisis in Greece has reached.

Below are three videos of James Galbraith, Joseph Stiglitz and George Soros giving their opinion of what is at stake.  Bloomberg finishes this off with a fourth interview with Armored Wolf’s John Brynjolfsson back in the US.

Let’s start with Soros as he is the sponsor of the event in Cambridge. He says Greece cannot survive unless the Germans agree to loans at a concessionary rate of interest. Trying to shoehorn a bailout into a market rate would kick the can down the road (see Greece And The Potential Upside In An IMF Rescue).



Galbraith points out that the euro zone acts as a unit with current account surpluses on the one side being met by deficits on the other.  I have said that this financial sector imbalance must be tackled internally unless the Eurozone attempts to shift problems caused by sclerotic growth at its core externally by running a large external surplus (see Spain’s debt woes and Germany’s intransigence lead to double dip).



Stiglitz starts by reiterating Soros’ point, namely that Greece is so indebted there is no way it can prevent an eventual default unless it receives lending at a concessionary rate. But he sees this whole affair as "sad for Europe" as it demonstrates a lack of "solidarity" in Europe in the face of economic turmoil. Stiglitz points out that the U.S. federal system works in part because of automatic fiscal transfers, something that Europe has on a national level but not on a European level (see The Eurozone is unworkable in its present state).

Stiglitz says something else I find interesting. He suggests it is Germany which is the free rider here – that Spain and Greece would have seen their exchange rates adjust without the Euro such that the build up of external imbalances would never have reached this scale.  I think that is certainly true.  Moreover, I would add that Spain and Greece would also have run more restrictive monetary policies at the end of the last decade as well.



Those are the ideas from Cambridge. I would sum them up as : Greece may be a clunker now but it could be Greece Lightning if policy is done right.

John Brynjolfsson has a different view and points to the politics of the situation. As I have intimated in the past, the political problem is that Greece has run large fiscal deficits in good times and bad. This isn’t a situation like in Spain where the government balance was in surplus during the last decade. Nor is it one like in Ireland where the government has unilaterally undertaken severe austerity measures. Greece is a special case of poor fiscal management. So the political brinksmanship is an attempt to extract enough pain from Greece to reduce moral hazard going forward, but without collapsing the euro system and the eurozone economies.

That said, Brynjolfsson points out that the situation in Ireland’s banking sector is still very dire (see The €22bn question: Should Ireland’s largest corporate failure be put to the sword or saved? from the Irish Independent). So, it’s not like Spain and Ireland have smooth sailing ahead either.  He sees the market’s Friday rally as a technical rally more than based on anything fundamental. In his view, the lenders to Greece are going to have to take losses. It’s called market discipline.

But, in the main, market discipline is not where we are headed. Instead, it is all bailouts all the time. Brynjolfsson makes a lot of points near the end of his five minutes about the distortionary effects of bailouts that I have made in the past. The problem in Japan has been an unwillingness to take credit writedowns and to instead flood the system with easy money. This only props up marginal companies, misallocates resources and lowers productivity and the incentive to invest in capital (see Japan: stimulus without reform leads to a policy cul de sac).

Moreover, policy makers in the U.S. or Japan who are giving out the easy money are pushing on a string. Lenders won’t lend and borrowers won’t borrow in an balance sheet recession. Instead, what happens in a global financial system without capital controls is that the money ends up blowing up asset bubbles that pop in a destabilizing way. This is exactly what we see happening right now, one reason I am less sanguine about commodities or China medium-term than is Brynjolfsson.

  1. praxis22 says

    I think this is a game of political brinkmanship, who blinks first is anyone’s guess, but I suspect if there is no deal by the time Asia opens on Sunday it’s going to get a lot worse.

    IMO this is just Lehman all over again, the question is what’s happening to Merrill, etc.

    It will be interesting to watch if nothing else.

    1. Edward Harrison says

      You’re right about the brinksmanship. People want to stop the moral hazard but know a default is devastating, so these factors are driving the political side of the negotiations. In short, how can we extract enough pain from Greece to reduce moral hazard going forward without collapsing the euro system or our economies? This is a tough one because the euro system is flawed and there is no opportunity to remedy those flows in a positive way at this juncture.

      So, we have to sit tight until Monday. I’m hoping for some Greece lightning of some sort, but I wouldn’t be surprised to see no deal too.

  2. Professor Pinch says

    It seems to me Soros would rather see a Euro devaluation event than a sovereign default event. Because to me, the currency will have to be devauled if Greece is given a subsidized loan as he suggests. There will be pain one way or another, it’s just a matter of picking your poison.

    I also think he’s flat-out wrong. In the end, Greece’s economy is already heading down this path anyway. Why not just get it done and over with to start the necessary re-building/re-tooling of fiscal policy and governance? It will only be more painful the longer they put this off.

    Great post, btw. Really enjoy reading your blog.

  3. charles says

    A view from Europe: Simon Johnson has estimated the financing need for Greece at 150 billion euros, and the Europeans are discussing a package of 25 billion to be made public tomorrow. As praxiz22 rightly puts it, this will go down as a house of cards, since there is no FED, no TARP, and the exposure of European international banks to the PIIGS ( sorry for the acronym ) at 1,5 trillion dollars. So Greece will default,
    Portugal or Spain to follow, the down spiral had to be addressed much earlier imho. The head of the IMF was in Cambridge this afternoon, while the European Finance ministers are in an emergency meeting in Brussels, which started Thursday night….

    1. Edward Harrison says

      Wolfgang Munchau has a good piece out today in which he says the bailout the Europeans have proposed solves the immediate liquidity problems (as it did for US banks in 2008 and last year). But he anticipates solvency problems will assert themselves again in 2011. This seems about right. Greece’s problem is more than liquidity.

  4. dansecrest says

    Excellent subject and commentary. Thank you!

    1. Edward Harrison says

      Dan, thanks.

Comments are closed.

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