The Greek Tragedy and Great Depression lessons not learned

Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots.

Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds.

Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just  want to protect their bets and not wait around for Greece to really stabilize for repayment.

Prior to the Great Depression, the Greek economy experienced years of growth, a healthy commercial activity spree, and like today, a stark increase in (less-leveraged) bank loans to finance it. When the Depression struck, banks and local businesses faced unpayable loans and declining asset values.  (Stop me when this sounds familiar).

Credit constricted immediately, choking internal economic activity.  In 1928, the Greek Drachma was tied to the gold standard, but pegged to the British pound. When Britain devalued its pound in 1931, the Greek government responded by raising public investments and pegging the Drachma to the US dollar.

But by early 1932, central bank reserves had fallen so much that they only backed 40% of Greek bonds. Even without the slow drip of rating agency downgrades to highlight this leveraged debt situation (which is nothing compared to say, today’s US reserves vs. debt leverage), the lack of reserves caused foreign speculators to fleece the Drachma/dollar exchange rate. Bond yields blew out. Borrowing costs shot up.  

So in March 1932, the League of Nation’s (the precursor bank bailout entity to the ECB/IMF) agreed to provide a loan to service Greece’s debt in return for – wait for it - austerity measures. Unlike today, the government said ‘hell no.’ Instead, in April, 1932, it floated the Drachma - which devalued quickly. It also declared a public debt moratorium, and increased infrastructure spending to strengthen its economy. It negotiated repayment terms with creditors for overdue interest.  By 1934, agriculture and industrial production rose, the currency was more stable, employment increased, and the budget balanced.

The situation is different now. Though national Greek banks registered relatively few domestic loan losses in 2009 ( a fact unrecognized by the bailout supporters), they did begin taking losses in their trading books due to various international bets. Their borrowing and margin costs rose sharply and quickly with each rating downgrade which increased their trade losses, and kept them from extending or renegotiating loans locally, which caused more economic pain for the population.

Greece would have been better off, had it not suffered a rapid series of downgrades and been pulverized by subsequent hot-money flight and pressure. Despite a clear warning from the Central Bank of Greece in late 2009 (when Greece was critical, but breathing) that it could sustain its costs if they didn’t rise egregiously, Moody’s (and later others) cut Greece’s sovereign debt rating from A1 to A2 in December, 2009.  From that point on, the international banking community went into ravage mode, fast.

Moody's cut Greece’s debt again, to A3 in April, 2010, to Ba1 (junk) in June, 2010, and to B1 in March, 2011. Three months later, Greece’s rating was cut to Caa1. By September, 2011 the six biggest Greek banks were downgraded to Caa2, a smidge above default levels, crushing national credit flow to the population.

When any country is downgraded from single A to junk within 18 months, it has to issue more expensive debt to stay even, which by definition, makes the credit-worthiness of its bonds decline.  As in any country, Greece's banks are big buyers of its government bonds. They also use those bonds as collateral for other borrowing  and trades - with each other – and with  international banks.

As Greek banks weakened and borrowing costs soared, their ability to buy Greek bonds from their own government diminished, which weakened the value of government debt. Circularly, Greek banks took further hits for holding the devalued Greek bonds and thus become weaker - further reducing their ability to sustain local needs.

That is why the Greek government wants to bolster its now junk-rated banks (in addition to the money that banks are getting directly from bailout-for-austerity loans) and foreign ones, at the cost of hurting the population.  But since the economy (even at its healthiest level ever) can’t sustain its bailout borrowing costs (as opposed to its operating costs which would have been payable without the increased rates and bailout principle mixed in), this is an unstoppable downward spiral.

Greece’s GDP has contracted 13% (by 7% in the last quarter of 2011) from a late 2008 record high. (By comparison, the United Kingdom’s GDP has fallen by 20% in the same period, and though its unemployment rate has risen, its borrowing costs remain manageably low, making it cheaper to sustain its banks.) Greece’s savings rate at 7.5% is at three decade lows (but still higher than that of the US).

Meanwhile, Greece’s debt to GDP ratio is 160%. (It hovered around 100% from 1994 through 2008.) The unemployment rate at 20.9%, and the youth unemployment rate at 48%, has doubled since January 2008. There is nothing to indicate it won’t keep rising.

Money continues fleeing Greek banks, bonds, and stocks, as citizens try to preserve what they can, and foreign speculators play a game of chicken with bailout providers. The Greek stock market stands at just one-fifth of its January 2008 level. Ten year government bond yields are at 33%, compared to 5% just two years ago.

The speed and intensity of Greece’s decline reflects nothing short of an international mafia-style hit.

The majority of Greek workers didn’t break the government’s back, even if a very small subset strained it. Further, the more bailout measures forced on Greece, the more its economy will be ravaged to repay them.  After four rounds of austerity, nationwide protests, $110 billion Euros in IMF and ECB bailouts, escalating interest rates driving borrowing costs higher and choking credit, a downgrade to junk, a Prime Minister replacement, and now another big bailout, Greece’s tragedy is just beginning.

Yet lessons from the Great Depression exist. By floating the Drachma (the equivalent of leaving the Euro), negotiating individually with creditors (telling banks to back off), and increasing internal public focus (the opposite of what's going on now) Greece was able to stabilize more quickly than larger European countries. It’s not entirely too late to try again: but it requires the currently unimaginable: a political will that is population – rather than bank – oriented.

Too Big to Fail or Too Stupid to Stop - Screw banks/not people

This morning, amidst news of Moodys cutting Greece's debt rating to Caa1, I came across a phrase I wish I'd thought of first, reading through a friend's morning commentary. The phrase? "Too Stupid to Stop". 

According to Bill Blain, Senior Director at Newedge in London, and self-professed Euro skeptic, "'Too Stupid to Stop' is based on politicians behaving as rational maximisers of their electoral objectives." He was referring to the real reason behind all the bank-demanded bailout loans for austerity measures throughout Europe.

In the United States, that mantra can be extended to include appointed officials, like Treasury Secretary, Tim Geithner (still not admitting our record debt increase came directly from the $4 trillion worth of Treasury issuance and other forms of assistance extended to our banking system since late 2008, as we endure his stomach-churning 'show-begging' to the GOP for a debt cap raise) and Fed Chairman, Ben Bernanke (ditto). It also, of course, applies to congress people whose political survival depends on corporate and bank contributions and financial support, the ones that believe the Dodd-Frank bill changes anything.

Rather than considering how governments have systematically done, and continue to do, the wrong (as in immoral, unfair, and uneconomically sound) thing by trying to preserve banks, any politicians possessing the ability to think independently (an oxymoron, I know) should be asking themselves instead, how clever they could be about closing them down. Take a cue from Iceland.

But, the 'Too Stupid to Stop" behavior, prevents this from occurring. 

Bill and I used to work together at Bear Stearns in London during the 1990s, before the Euro came into being. Then, arguments in favor of its inception were more about how it would lead to a 'much-needed' consolidation of political-economic control, rather than an engendering of widespread economic well-being to more European citizens, which didn't even enter the realm of political discussion.

Fifteen years, marked by global currency crises, a US recession caused by energy and telecommunications fraud, a bank fostered global Depression, and a persistent strategy to gouge citizens to pay for the sins of bankers, later -  nothing has changed.

What Greece should do is default. Not as a sign of economic weakness, but as a sign of protective strength befitting the notion of Democracy that the country is credited for having brought to the world. Default as an act of much-needed financial defiance and independence from the insatiability of banks.

Last year, Greece's bailout was fashioned in order to make foreign banks and their investors 'whole' on their investments in Greece. It had zero to do with strengthening Greece's local economy or its citizens' financial futures. Indeed, it was designed to further trash the Greek economy, to chain the country to untenable loan conditions that required selling assets at discount prices to pay off new and old debt, while callously condemning its population to decreased average wages and increased unemployment rates, particularly amongst the nation's youth.

Rather than telling those banks that were out the money - THEY HAD RISKED to begin with, to take the free-market, s**t happens, hit, all sorts of austerity measures were attached to the $157 billion bailout loan. They hurt citizens immediately in terms of reducing pension and other social-economic benefits, and hurt them ad infinitum by forcing ongoing fire sales of their national assets which resulted in job losses. The same banks on the hook for lending money to Greece during Phase 1 of the massive global leveraged bet gone wrong, demanded repayment for their risk (otherwise their investors would be upset). Now, they have a greater opportunity to scrounge (read: extract fees) for new deals via brokering European and global firms swooping in for fresh kill, amidst the remains of Greece's assets, such as communication and energy infrastructure.

And yet, rather than say - screw you - to the ECB and the IMF, and all the mega-banking conglomerates that signed off and received fees on deals and debt gone wrong, rather than say - you know what? - we owe a debt to OUR CITIZENS, not the banks that bet against them, and we don't like the terms of this arrangement, Greek politicians are saying - screw you citizens. Again.

Greece is set to present a brand new austerity plan on Friday calling for a FASTER pace of privatization, and more tax hikes on its citizens - just to be able to pay off bondholders and the risk incurred by international banks. This won't end well. If Greece does get a second bailout package, everyone will discover that absent a strategy to revive the local economy, the package will incur further pain, and at some point there won't be any national infrastructure left to sell, and unemployment will skyrocket further. A few bondholders will be happy temporarily because they DON'T CARE whether Greece succeeds or the ECB and IMF keeps creating debt to prop debt (like we do here in the US as a matter of economic policy), same difference. A few banks won't have to write down their losses for the same reason, and a few global corporations will have bought some more assets at rock-bottom prices in a country whose citizens won't be able to afford the payments that will be counted upon to price the related securitization deals. And Greece will be screwed even more.

The better plan would be to disband the Too Stupid to Stop mentality. Screw the banks. Sadly, it's a self-fullfilling downward spiral of incompetence - in Greece, Ireland, Portgual, Spain, Italy, and the United States where the Fed is gearing up for some verison of QE3 in the wake, ironically, of Euro-pay-the-banks, indenture-the-citizens, chaos.  

I have a feeling meanwhile, there will be a lot more Greeks protesting in the streets come Friday. 

Income Gap: Like Newton's First Law of Motion

About two weeks ago, the Census Bureau released their Income, Poverty, and Health Insurance Coverage in the United States: 2009 report. The cliff notes:

The poor are getting poorer quicker, and in greater numbers, than ever.

Earlier today, Hope Yen at the Associated Press ran a story noting that income inequality reached a record gap; 14.5 to 1 vs. vs. 1968’s low of 7.7 to 1. (Translation: for every slice of pie a poor person has, someone making over $100,000 has 14.5 slices). Her piece also cited a measure, called the Gini index that shows US income inequality at its widest level since the index began in 1967. The conclusion was examined in a subsequent piece by Timothy Noah who has written an excellent 10-part series on income inequality for Slate, pointing out that one of the measures used was based on adjusted figures, which show the gap getting wider more quickly. 

The sad fact is these figures are growing period. The sadder fact is that though this is nothing new, now, it is taking place in a country that has proven it can create trillions of dollars in a Washington minute, when the banking system needs help, but can't figure out how to create a more equitable economy.

The US poverty rate for 2009 is 14.3 percent, (POB – or post-bailout) up from 13.2 percent in 2008 (PB – pre-bailout). 43 million people lived in poverty in 2009 vs. 39.8 million in 2008. The number of people living in poverty is at a record high. The increase in poverty rates was the highest for Hispanics. The increase for families headed by single-women was higher than for married couples.

In terms of income, things weren’t that different in 2009 vs. 2008. In terms of health insurance, the percent of uninsured and number of people without insurance rose more quickly than ever. The percent rose to a record 16.7% or more than 50 million Americans in 2009 vs. 15.4% or 46 million in 2008. 

Take away all the stats and fancy index names and we’re left with a phenomenon that follows Newton’s First Law of Motion (yeah, that’s fancy too, sorry). A body in motion will remain in motion unless acted upon by an external force. The wealthy will remain holding a greater proportion of the nation's net worth, absent anything to get in their way, while the poor and middle class will continue to get less of the pie.