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.