Mosler: Greek Default Not Logical Path Out of Crisis
By Forrest Jones and Kathleen Walter
September 30 — Letting Greece default won’t end Europe’s crisis and won’t allow Germany and other core nations to brush themselves off and move merrily on their way, says Warren Mosler, principal and co-founder of AVM, an international bond firm with 30 years of experience in Europe and author of the 2010 book, “The 7 Deadly Innocent Frauds of Economic Policy.”
In fact, it will do the opposite. It will cost money and rattle key export markets for Germany and other countries targeting European periphery countries.
Greece has run up debts and may default and exit the euro, yet many in wealthier nations such as Germany oppose bailouts for Greece and other debt-ridden Mediterranean nations.
They also have opposed backing euro-wide bonds, which basically shores up the Greek economy via the financial backing of the Greece’s richer northern neighbors.
However, allowing the European Central Bank to play a role in Greece’s economic reform will not put the load on German, French and other taxpayers, Mosler says.
“It’s a question if a bailout now is good for Germany and France but not so good for Greece, because if Greece is allowed to default, then their debt goes away. They are agreeing to wipe out their debt and it reduces their payments,” he said in an exclusive Newsmax.TV interview.
“But if they fund Greece, and don’t allow them to default, then Greece has to continue to make these payments. So the whole dynamic has changed from doing Greece a favor to disciplining Greece by not allowing them to default.”
That makes default, arguably, less imminent.
“I would think the odds are shifting to the endgame where Greece doesn’t default, where at the end of the day Greece is forced though the austerity measures to run a primary balance or primary surplus, the interest payments will largely wind up with up with the European Central Bank, who is buying Greek debt in the marketplace,” Mosler says.
Furthermore, the logic that applies to keeping Greece in the eurozone applies to the other nations such as Italy.
“It used to be if Germany, France and the others bailed out Greece, and then suddenly they have to bail out Ireland, Portugal, Spain and Italy, they could never have the capacity to do that. It’s now understood that there is no limit, no nominal limit to the check that the European Central Bank can write,” Mosler says.
Plus, Europe can expect no side effects of such Central Bank involvement.
“It will not weaken the euro, it will not cause inflation and it will not increase total spending in the region. In fact it will help reduce total spending in the region because the European Central Bank imposes terms and conditions when it intervenes.”
Should Greece default, however, Europe would feel the pain, but it shouldn’t be too bad in the United States, Mosler says.
Yes, regulators would have to react.
“The FDIC would have to decide how they would want to respond to a drop in equity. Would they want the banks to raise more capital? Would they give them time to do it?”
But they wouldn’t have to react too much.
“They don’t need to shut the banks down, it doesn’t need to be disruptive to the real economy.”
Turning to the United States and President Barack Obama’s economic policies, Mosler says the president is on the right track by running deficits, but adds he’s doing a poor job of explaining the rationale behind his policies.
Or he just doesn’t understand it.
Tag Archives: mosler bonds
Mosler Bonds for the ECB, and reasons why Greece will not be allowed to default
First, The ECB should turn the bonds it buys into Mosler bonds, by requiring the govt of issue to legally state that in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the govt of issue.
The ECB holding Mosler bonds will shift the default option from the issuer to the ECB, as in the case of non payment,
the ECB would have the option to make it’s holdings available for sale to tax payers of that nation to offset their taxes.
Therefore, conversion to Mosler bonds will ensure that the ECB’s holdings of national govt debt are ‘money good’ without regard to external credit ratings, and give the ECB control over the default process.
Second, I see several substantial reasons Greece should not be allowed to default, which center around why it’s in the best interest of Germany for Greece not to default.
Sustaining Greece with ECB purchases of Greek debt costs German tax payers nothing.
The purchases are not inflationary because they are directly tied to reduced Greek spending and increased Greek taxes, which are both deflationary forces for the euro zone.
Funding Greece facilitates the purchase of German exports to Greece.
Funding Greece does not reward Greek bad behavior.
Instead, it exacts a price from Greece for its bad behavior.
With the ECB prospectively owning the majority of Greek debt, and, potentially, Greek Mosler bonds, Greece will be paying interest primarily to the ECB.
The funding of Greece by the ECB carries with it austerity measures that will bring the Greek budget into primary balance.
That means Greek taxes will be approximately equal to Greek govt expenditures, not including interest, which will then be largely payments to the ECB.
So if default is not allowed, the Greek govt spending will be limited to what it taxes, and additional tax revenues will be required as well to pay interest primarily to the ECB.
But if default is facilitated, Greece will still be required to spend only from tax revenues, but the debt forgiveness will mean substantially lower interest payments to the ECB than otherwise.
And while without default, it can be said that the holders of Greek bonds have been bailed out, the euro zone will be considering the following:
The ECB buys Greek bonds at a discount, indicating holders of those bonds have, on average, taken a loss.
The EU in general did not consider the purchase of Greek bonds as bad behavior that is rightly punished with a default.
In fact, it was EU regulation and guidelines that resulted in the initial purchases of Greek bonds by its banking system.
Therefore, I see the main reason Greece will not be allowed to default is that not allowing default serves the further purpose of Germany and the EU by every measure I can think of.
It sustains the transfer of control of fiscal policy to the ECB.
It’s deflationary which helps support the value of the currency.
It provides for an ongoing income stream from Greece to the ECB.
Note, however, that not long ago it was not widely recognized as it now is that the ECB can write the check without nominal limit.
Before the EU leaders recognized that fundamental of monetary operations, Greek default was serious consideration for financial reasons as it was believed the funding of Greece and subsequently the rest of the ‘weaker’ euro zone nations would threaten the entire euro zone’s ability to fund itself.
It is the realization that the ECB is the issuer of the currency, and is therefore not revenue constrained, that leads to the conclusion that not allowing Greece to default best serves public purpose.
(as always, feel free to distribute, repost, etc.)
Mosler bonds get their first plug in the Irish media
JOBS CRISIS: Will NewERA really get Ireland back to work?
By Philip Pilkington
Sept 12 (Independent) — Last week President Obama announced a new $450bn stimulus program to promote US job growth and help kickstart the economy. Stirrings from within financial community and commentary from Nobel Laurete Paul Krugman – the two most reliable sources on such matters– indicate that this measure isn’t nearly big enough, but its certainly a step in the right direction.
Meanwhile in Ireland, Minister for State Fergus O’ Dowd announced… well, he announced an announcement. In an interview on Thursday he said that an announcement on the status of the NewERA project – which aims to directly create jobs in Ireland – is ‘imminent’.
So how does the cleverly named NewERA (standing for Economic Recovery Act) add up as a stimulus programme?
The project was originally supposed to be of the order of around €4bn but this figure has recently come under scrutiny from the press who say that senior government ministers indicate that it might be ‘watered down’ due to internal government as well as EU/IMF pressure. Even if the €4bn figure pulls through that’s still only around 2.5% of GDP. That’s less than Obama’s latest offering which, as stated above, is probably insufficient for the US – let alone Ireland, which is in far worse shape.
NewERA is set to be funded through two mechanisms. The first is by raising money by selling off state assets. While all the money from ‘privatisation’ was supposed to go toward paying down government debt, wily negotiators convinced the IMF to slip them a bit on the side to go toward this new investment project.
The second revenue stream is borrowed money from the National Pension Reserve Fund – a fund that has become something of a government piggy-bank since the financial crisis hit in 2008.
The key thing to note is that the NewERA project is that it is not a stimulus package in the typical sense of the term. Stimulus packages are usually implemented by governments using fiscal policy — that is, the government’s ability to create and spend money into the economy. In recessions such stimulus is undertaken by governments running budget deficits.
This means that the government spends money without immediately levying taxes on anyone. This is important as it adds new money into the economy rather than simply taking money out and then recycling it back in. We will return to this very important point in a moment, for now let us take a look at the project itself.
The focus of the project is on infrastructure. To say that such a focus on infrastructure is welcome would be a vast understatement.One of the targets is water infrastructure which, to anyone who has had their water cut off during the cold Irish winter, is of obvious importance.
Another is energy – with a focus on clean, renewable energy – which, given the rising energy prices, will be welcomed by everyone. And finally we have a project to improve broadband access across the country — an extremely important prerequisite to having businesses invest in any given location these days.
Such a focus on infrastructure will also ensure that many of the jobs go to laid-off construction workers. This is the perfect demographic to target as when the housing mania went down the drain so too did many construction jobs, giving rise to high unemployment levels among this group.
Another important aspect to the project is that it will get the debate going on fiscal stimulus. It will also ensure that there is an active government organisation in place to lobby for and help initiate stimulus plans in the future.
This really is one of the most important aspects of the project because, small as it currently is, when the world economy starts getting back on track and international leaders start getting their acts together, we will all (hopefully) have learned our lessons from the last financial crisis and will not rely on asset price bubbles to stimulate — or should I say simulate — economic growth.
This means that governments will have to play an increasingly large role in economies in order to ensure sufficient demand without sending households on any more debt binges. Governments will likely not just have to intervene in terms of regulating banking institutions but also through direct investment to ensure that economic growth continues at a reasonable level without demanding massive private sector indebtedness.
The Japanese, for example, who have been suffering for years after a massive housing and stock bubble burst in 1991, have learned this lesson well. The NewERA project will ensure that there is a precedent for powerful, streamlined government-led investment projects that help-out rather than crowd-out private sector activity. Such projects will be key to stabalising all developed economies in coming decades.
The only issue that can really be taken with the NewERA project is how it’s being funded. Selling off state assets during a slump is never a good idea — “No one would sell assets in this environment,” mumbled one minister in a Dail debate on NewERA this year. And dipping into the National Pension Reserve Fund is a bad habit.
However, the government have little choice and, although this will only provide a very short-term stimulus, it is probably one of the single best economic policies to come out of the current Fine Gael/Labour government so far.
But the obstacles currently faced on spending for the NewERA project will become increasingly apparent as time wears on. When we entered the Euro we gave up our ability to issue currency and with it our ability to spend without revenue constraints – now, as in the case of the NewERA project, we essentially have to make do with what we have.
This will become more and more of a burden in the future as the Irish government gradually learn from the Japanese and come to realise that the only realistic way for households to pay down debt is for the government to increase its spending.
If the Europeans continue to ignore this simple but powerful truth and keep calling for austerity, the Irish will have to do something about this themselves. There are a few options on the table in this regard without dropping out of the eurozone. One is the issuance of ‘Mosler bonds’.
These are government bonds backed with the guarantee that should the government default, the bonds will be accepted to extinguish tax liabilities. There is good reason to believe that these would give the Irish government significant fiscal policy space by driving down yields on bonds as they became a ‘sure thing’ for investors (such a plan would also prevent default).
Other options– such as running a parallel currency – will be discussed by major international figures, including former member of the Bank of England’s Monetary Policy Commitee and leading London School of Economics economist Charles Goodhart, at a conference taking place on the 22nd and 23rd of this month at the Mont Clare Hotel in Dublin.
And a good thing too, as even though all the talk is currently focused elsewhere, this will soon become a pressing national policy concern that people will simply not be able to ignore.
More information on the conference can be found at: http://www.feasta.org/debt-conference or contact info@feasta.org..