Thursday, July 16, 2015

Comments on Greece

Many comments on Greece have been morality plays of one sort or another but the most solid technical analysis comes from Warren Mosler:
[context: Greek debt reduction] 

As suspected, he’s was in it over his head.
My response would be to let the banks remain open with circumstances limiting withdrawals to available liquidity. Liquidity might come from earnings on assets, asset sales, and new deposits. The banks would be free, by mutual agreement, to issue IOU’s to depositors who didn’t want to wait for actual euro. The govt might issue IOU’s if it ran out of cash for operating expenses. To ‘seize control of the Bank of Greece from the ECB’ is nonsensical, as there’s nothing there but a computer with a spreadsheet. It would not give Greece the ability to clear funds outside of Greek member banks that are on that spreadsheet. Haircuts to bonds issued to the ECB and reducing Greek debt would also be meaningless in this context.
Mosler's point is that Greek needs to run larger deficits so it can address it's aggregate demand shortage. Debt reduction does not help this as it fundamentally still has Greece in a position to need surpluses, or too small deficits. So even if Greece had gotten it's haircut, it really would not have helped.

This aggregate demand manage is the prerogative (and responsibility) of any currency issuer, but Greece may not have anyone who knows how to set up a currency, and it certainly does not have anyone who knows how to run a fiat currency correctly. This is why Greece was talking about "seizing banks" when all it needed to do was issue IOUs (like California did briefly during it's budget crises).

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