Archive for December, 2011

Debating a Eurozone Exit Strategy

Michael Stephens | December 2, 2011

Yanis Varoufakis has an interesting exchange with Warren Mosler and Philip Pilkington, responding to their thoughts on the ideal path for a nation intending on breaking away from the euro.  The Mosler-Pilkington “plan” (clearly gunning for the Wolfson Prize) is basically this:  (1) the government in question starts using the new national currency as a means of payment (paying public salaries, etc.); (2) the government announces that tax payments must be made in that currency.  The merit of this approach, they say, is that it is “hands off”:

Should the government of a given country announce an exit from the Eurozone and then freeze bank accounts and force conversion there would be chaos. The citizens of the country would run on the banks and desperately try to hold as many euro cash notes as possible in anticipation that they would be more valuable than the new currency. Under the above plan, however, citizens’ bank accounts would be left alone. It would be up to them to convert their euros into the new currency at a floating exchange rate set by the market. They would, of course, have to seek out the currency any time they have to pay taxes and so would sell goods and services denominated in the new currency. This ‘monetises’ the economy in the new currency while at the same time helping to establish the market value of said currency.

Varoufakis, with a nod to his Levy Institute policy note “A Modest Proposal,” suggests that it’s not too late to save the eurozone project.  Although jumping ship in the manner they describe might end up being necessary at some point, says Varoufakis, Mosler and Pilkington are underestimating the severity of the fallout from a euro exit (for the country jumping ship, and for the countries remaining in the boat).  Here’s a taste, from Varoufakis:  continue reading…


Time to Demand Transparency and Accountability at the Fed

L. Randall Wray | December 1, 2011

In its continuing series on the Fed’s bail-out of Wall Street, Bloomberg estimates that the banks got a $13 billion hand-out from the Fed’s easy lending terms.

Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy. So instead, banks mostly bought Treasuries and played the yield curve—earning more on Treasuries than they had to pay the Fed. The $13 billion subsidy directly created by the ZIRP (Fed’s zero interest rate policy) directly created $13 billion of extra profits that Wall Street could then use to reward the same genius CEOs that created the crisis. Nice synergy.

The same Bloomberg article reports that the bail-out itself cost $7.77 trillion—a lucky string of sevens if you happen to be in the top 1% and work on Wall Street. This is based on the secret Fed documents that Senator Sanders managed to force Bernanke to release—25,000 pages worth. I do not know how Bloomberg came up with that number. The true number is almost four times bigger–$29 trillion based on careful analysis done at UMKC. In any event, 7 trillion is a big enough number to raise eyebrows. It is more than 10 times the Treasury department’s $700 billion TARP program that Paulson managed to get out of Congress (after holding a loaded gun to his head and threatening to blow his brains out if Congress didn’t give him the money with no strings attached; Congress wouldn’t blink so he had to come back on hands and knees). But it is not just the size that is shocking—it is that the measly little $700 billion was subject to Congressional approval and oversight, while the Fed’s bail-out (whether $7.77 trillion or the more likely figure of $29 trillion) not only was never approved, nor overseen by Congress, but it actually took an act of Congress to get the Fed to fess up to its largess.

(Read the rest here)