Commentary: Warren Mosler has a plan but no takers
By Darrell Delamaide
May 8 (MarketWatch) — If youre ever tempted to think the euro zone has turned the corner and is on the right track, go have a chat with Warren Mosler and hell set you straight.
The former hedge-fund manager and an original proponent of what has come to be known as modern monetary theory gave a talk recently at a wealth management conference in Zurich that took a pessimistic view of the euro righting itself on its current path.
The European slow-motion train wreck will continue until theres recognition that deficits need to be larger, Mosler said at the conclusion of his analysis. The continuing efforts at deficit reduction will continue to make things worse.
Mosler suggested several measures that could turn around the situation in the euro zone, though he acknowledged there is little chance they will be adopted.
The euro authorities need to accept that deficits should be allowed to go up to 8% of gross domestic product, instead of the current 3%, as the only way to create the monetary conditions for full employment and economic growth.
The European Central Bank should make a policy rate of 0% permanent. The ECB, as the source of the euro zones fiat money, should guarantee the debt of all euro countries and guarantee deposit insurance for all euro-zone banks, which would entail taking over bank supervision.
Individual countries in the euro zone, like individual states in the U.S., are trapped in a procyclical monetary and fiscal environment. Because they have no sovereign currency, they must reduce spending in a downturn.
In the U.S., the federal government can operate countercyclically, by running a sufficiently large deficit to provide net savings to the private sector. The ECB is the only institution in the euro zone that does not have revenue constraints and could play a countercyclical role.
Because money is a public monopoly, when the monopolist restricts supply by not running a sufficient deficit, it creates excess capacity in the economy, as evidenced by high unemployment.
Mosler says the deficit can result from lower taxes or increased government spending, whatever your politics prefers. But policies aimed at reducing the deficit are doomed to keep an economy depressed.
And theres more. All successful currency unions include fiscal transfers, Mosler said. In Canada, this is written into the constitution and in the U.S. it is achieved through the federal budget.
In Europe, this would mean that some authority like an empowered European Parliament would direct government spending to the areas with the highest unemployment.
Clearly all of this is well beyond what Europe is currently capable of doing, and the leaders in power have implicitly or explicitly rejected all of these potential fixes.
The reality is, Mosler noted, that there is no political support for higher deficits, no political support for leaving the euro, and beyond reducing deficits the only remaining fixes are taxes on depositors and bondholders like those seen in Cyprus and Greece.
Mosler, who currently manages offshore funds and produces sports cars on the side, says his views, which have been taken up and elaborated by a post-Keynesian school of economics, are based on his experience as a money manager.
And, he adds, he has a substantial following of asset managers for his ideas because these are people who are paid to get it right.
The current stopgap measures proposed by the ECB notably the putative outright monetary transactions to bail out a country under certain conditions, which has yet to be used have a dubious legal basis and are so much smoke and mirrors, Mosler said.
In this Zurich talk, Mosler did not draw any further conclusions regarding his pessimistic view of the euros current course, but a website devoted to Mosler Economics in Italy, where MMT has a considerable following, spells out what it could mean in a post called 10 reasons to return to the lira.
These reasons include the ability to lower taxes, allow the government to pay off debts to the private sector and implement a works program to provide employment and improve the public infrastructure. Read the post (in Italian).
Lest this all seem like so much pie in the sky, keep in mind that the forces that gave the protest movement of Beppe Grillo a quarter of the vote in Italys recent election will only grow as continued austerity deepens Europes recession.
So remain optimistic if you like, but youve been warned.