It's Not About Greece Anymore … The Greek "rescue" package announced last weekend is dramatic, unprecedented and far from enough to stabilize the euro zone. The Greek government and the European Union leadership, prodded by the International Monetary Fund, are finally becoming realistic about the dire economic situation in Greece. They have abandoned previous rounds of optimistic forecasts and have now admitted to a profoundly worse situation. This new program calls for "fiscal adjustments" – cuts to the fiscal deficit, mostly through spending cuts … This new program is honest enough to show why it is unlikely to succeed. Daniel Gros, an eminent economist on euro zone issues who is based in Brussels, has argued that for each 1 percent of GDP. decline in Greek government spending, total demand in the country falls by 2.5 percent of GDP. If the government reduces spending by 15 percent of GDP. – the initial shock to demand could be well over 30 percent of GDP. Obviously this simple rule does not work with such large numbers, but it illustrates that Greece is likely to experience a very sharp recession – and there is substantial uncertainty around how bad the economy will get. The program announced last weekend assumes the Greek GDP. falls by 4 percent this year, then by another 2.6 percent in 2011, before recovering to positive growth in 2012 and beyond. – New York Times/Simon Johnson & Peter Boone
Dominant Social Theme: Something must be done?
Free-Market Analysis: Simon Johnson is the co-author of this article excerpted above (as well as several other recent ones appearing in the New York Times) seeking to figure out ways that the EU can salvage Greece, the PIGS and the euro itself. We've been keeping track of Johnson on and off for a while, ever since we commented on a prominent piece of his appearing in a major monthly magazine last year.
In this article, we want to review some of Johnson's more recent writing. We'll use his writing, in part, to show how even the alternative media can occasionally miss the bigger picture. This is actually an important issue from our point of view. Heck, who can depend on the mainstream media these days? Johnson's article for the Atlantic Magazine (in 2009) – The Quiet Coup – created quite a stir. A passionate and yet reasonable polemic, it set the Internet abuzz for weeks. Many in the alternative media were stirred by it. But we didn't like the article; we thought it was sly. You can read our take on the article here: The Quiet Coup.
In simplest terms, Johnson used the prestigious platform of Atlantic magazine to accuse Wall Street of organizing a quiet coup to take over the US government. He called Wall Street a "financial oligarchy" and then demanded that people of good will in the US government "stay tough" and crack down on the Street. (We wondered then as now whom did he want to do the cracking down – Barney Frank? Nancy Pelosi? Chris Dodd?)
Anyway, the article hit the Internet hard. People seemed to believe Johnson had encapsulated something very special. There was much commentary about it. Here's what we wrote at the time: "This article is so good! It is evidently written (or at least edited) by a top mind, one of the best the current monetary elite has to offer. Passionate, icily devious, so clever that one could argue it contains a higher level of sophistry than anything that has been written so far to mislead non-financial American 'thought leaders' about what is going on."
Yes, we didn't like it, but who are we? The article burnished the reputation of Johnson as a writer and commentator. We well remember the reception Johnson got at various alternative media sites, even ones that we'd previously pegged for being somewhat free-market-oriented. The alternative press, we realized then, obviously distrusted Wall Street so much it was willing to give Johnson – a former chief IMF economist – the benefit of the doubt.
But we were dismayed. In fact, as we try to point out regularly – and pointed out then – the problem is NOT Wall Street. The problem is Mercantilism, the intersection between government and private enterprise. Wall Street, on its own, bereft of regulation and government pull would gradually recede as a prominent monetary factor.
It is only the massive regulatory structure of Washington plus central banking, fiscal strategy etc. that gives Wall Street and other major financial centers their clout. A really free market would soon strip away their seemingly extraordinary power. Johnson didn't write about this, however, and now, in three or four recent articles that we've read of his in the New York Times, he has revealed a far more nuanced coloration in our opinion. Here's something from a recent Times article of his entitled Can Europe Save Itself (late April):
When Jean-Claude Trichet (head of the European Central Bank) and Dominique Strauss-Kahn (head of the International Monetary Fund) rushed to Berlin this week to meet Chancellor Angela Merkel and the German Parliament, the moment was eerily reminiscent of September 2008 — when then-Treasury Secretary Henry Paulson stormed up to the United States Congress, demanding $700 billion in relief for the largest American banks. …
The underlying problem is the rule for printing money. In the euro zone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks "repo" them (i.e., borrow using these bonds as collateral) at the European Central Bank in return for fresh euros. The commercial banks make a profit because the European Central Bank charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels. …
If this awful but unfortunately plausible scenario comes about, there is a clear solution. (Unfortunately, it is also anathema to Mr. Trichet and Ms. Merkel, and thus unlikely to be discussed seriously until it is too late.) This solution is the standard package that comes to all emerging markets in crisis: a very sharp fall in the euro, restructuring of euro zone fiscal/monetary rules to make them compatible with financial stability, and major external liquidity support — not because Europe has an external payments problem, but because this is the only way to provide credible budget support that softens the blow of the needed austerity programs.
You see? He's not so tough after all. For Johnson, as for many authoritarian apologists, central banking itself is never to blame. If an economy is going off the rails it is only because it hasn't been managed properly. "The underlying problem is the rule for printing money," he writes with his co-author. And then he goes ahead and proposes a new monetary solution for the EU that includes "major external liquidity support." More money printing in other words. The rule was wrong. Not printing money from nothing. That's OK if you get the rule right.
Johnson was feted for his article in the Atlantic – mostly because it bashed Wall Street. But it turns out that he still believes in the overt and endless printing of money as the solution to any economic problem. He wants to tear down Wall Street (fine with us) but he wants to salvage the EU. And the feting of Johnson, as we pointed out at the beginning of this article is part of a larger weakness of the alternative press (granted of course that it is not monolithic). If you press the right buttons – and play to the alternative press's suspicions – your writing may receive widespread play on hard-money sites, free-market sites, etc.
Johnson was tough on Wall Street, so his article played well in the alternative press (and the mainstream press as well). But recently we've noticed another spot of what we consider color blindness in the alternative press. Many of its top writers, apparently (and we could name names but we won't) – even the free-market oriented ones – have a great deal of difficulty believing the power elite can ever make a mistake. (Of course, they can get it wrong, but that's a different matter.)
The recent problems with the EU are a good example. If Greece is presenting a problem, for instance, then there must be a reason. The elite must have meant to sacrifice it – in order to loot Greece and then the rest of the EU as well. We don't believe it's that clear-cut. We don't believe the power-elite wants the EU to collapse. The elite may taken advantage of the chaos, may have expected it and may profit it from it as well. But from our perspective, when it comes to sustaining a long-running promotion, the power elite is having a bad time of it, plain and simple.
No, we do not believe that the Anglo-American elite, in particular, participated in building up the EU for 50 years only to kick it to the curb. Likewise, we have a hard time believing that the American Federal Reserve is going to come to the total rescue of the EU. Through the IMF, and perhaps other mechanisms, the American Fed can provide a certain level of liquidity. But we don't see how it can bail out the full spectrum of countries (and banks) that are currently in jeopardy.
Simon Johnson was feted by the alternative press because he appealed to a certain alternative-media viewpoint – that Wall Street was the font of all evil. This is a sort of prejudice, in our estimation, rather than reality. Now, with Greece collapsing, and with the EU itself in danger of disintegrating, there are those in the alternative media that are perhaps once again succumbing to preconceived notions. In this case that there is some sort of master plan – that the EU is basically a 50-year-old power-elite sting, a trap that has now been sprung. We suggest a simpler conclusion: Sometimes a rose is just a rose. Sometimes the power elite slips up and (in its greed) over-reaches.
We think the power elite is struggling. We write about this regularly. The Internet has proved a terrible challenge. And partially as a result, the elite's faux-monetary system is compromised; its promotions, generally, are weakening; and people around the world are waking up. In a recent media interview with Russia Today, the insightful, free-market analyst Gerald Celente said much the same thing. He said a revolution (hopefully a civil one) was brewing, and that these are still, in fact, early days. The whole intricate elite program of the 20th century was collapsing, he indicated. We wish more would voice similar opinions.