Moralising about Greece

Much of the moralising about the crisis seems to miss a couple of points.

First, the parties to the struggle over resources (that’s all this is) are not single people.  But they are often discussed as though they were.  They are, in fact, coalitions of representatives of multitudes of individuals, looking out for themselves, constrained by the fact that the multitudes they represent are also looking out for themselves.  That is surely true on both sides.

And these coalitions of representatives know that the other party is trying to get all they can, and that neither can commit.  And that they are probably going to confront the same struggle again with the same adversary.  And possibly with others.  The representatives themselves are also locked in games with their electorates, struggling to convince that they can commit and deliver, and at the same time preserve as much room for discretion as possible.

Seen like this, moralising about the parties strikes me as highly inaccurate.  Not least, somewhat pointless.  What will it change?  Are the moralisers hoping to change a few million minds?  Or wave away all the interlocking struggles on either side of the negotiation?  Good luck with that.

[Added later:  Incidentally, this argument applies as much to those against Syriza as for it, who personify the complex systems that produce Greek political system, Greek tax collection/evasion, or inefficient Greek public services, and divine laziness or untrustworthiness.  And therefore see the crisis as comeuppance.  Not so.  These malfunctions are just uncooperative equilibria, nothing more.]

Second, suppose we adopt a moral position regarding the crisis.

The proposition seems to be that we would have a better world if the creditors made a large one-off transfer to the Greeks.  But, hang on.  If we could find some way to wrestle these resources from the hands of the creditors, would we really transfer money to the Greeks?  The Greek economy is suffering terribly.  But marginal utilities are probably a lot higher in the dozens of other countries with a lower GDP per head.  Why not forgive some debt elsewhere?

If the argument were about righting wrongs – adopting, for the moment, the lazy personification of complex multitudes of limited commitment games that such moral judgements require- I am sure we can find a few other financial wrongs that afflicted poorer nations.

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Syriza and the SNP playbook

There’s an echo in Syriza’s presentation of the options to the Greek people in the SNP’s approach to the independence referendum in September 2014.

The SNP campaigned promising a plan A of keeping Sterling, (because they knew the Scots were afraid of the unknown alternatives), yet having full sovereignty over fiscal policy.  All other UK parties announced that this would not be conceded.

The SNP revealed no plan B, on the basis that they insisted it would be in the interests of the  Rest of UK [RUK] to grant continued membership.  This was a pretty astonishing claim.  Given the unfolding of the Eurozone crisis, caused by a combination of independent fiscal policies and a common monetary policy, just what the SNP were asking for, it is pretty plausible that the RUK parties claim that Sterling membership would not be on offer was real, and not a ploy.

So Syriza are campaigning promising Euro membership, which they know is popular in Greece, safe deposits, but a rejection of terms offered by the creditors.  Yet without the creditors (probably even with them) deposits are nothing like safe.  And without the creditors, the governments’ financing needs cannot be met any other way than either starving those dependent on the public sector, and many others, or printing their own currency.   Syriza are offering something it is not in their power to offer, because the creditors won’t agree to it.

Just like with the SNP, Syriza try to portray their own demands as in the interests of the creditors themselves.  And they have done this month after month in spite of the creditors’ resistance.  And in spite of the fears of contagion on which Syriza’s argument that giving in is wise for the creditors  depends, not being realised.  Just as with the SNP, Syriza reveal no plan B in case their demands are not met.  Just as in the indyref, therefore, voters can’t gauge the benefits of supporting their representatives in pursuit of plan A, since they don’t know what they will actually get by pursuing it.

A genuine vote in the independence referendum depended on the Scots seeing through the SNPs rhetoric on complex matters of macro and finance.  Who knows whether they did or not.  Likewise, a genuine vote on Sunday depends on the Greeks understanding the likely consequences of a yes or a no.

As I watch events unfold, it’s particularly sad to see the emphasis placed by Syriza on the referendum being the ultimate expression of democracy.   When the consequences of the different votes are not explained properly, and in fact are actively concealed, the vote can’t be said to be an informed one.  That is a very poor expression of democracy from its inventors.

 

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Transfer unions and contagion

Whether or not partial or whole Grexit prompts contagion will depend on the forces in favour of a transfer union amongst the remaining members.  Syriza has been talking up the risks of contagion, describing it as a near certainty, because this was its main bargaining chip in seeking easier terms from the creditors.  Unfortunately for them, so far at least, all the data that has come out has pointed to there being no run on other sovereigns.  This implies that markets think that the forces in favour of the risk mutualisation required for calling the markets’ bluff (that would take place on the ECB balance sheet) are healthy.

This might seem surprising, since one way of looking at the current impasse is that the Greeks are asking for terms that might have existed if there were a transfer union in place beforehand.  And the creditors are objecting, because from their perspective they did not sign up to a transfer union.

However, as Chris Giles pointed out when he circulated my last blog post, it may be easier to engage in transfer union behaviour [transfer unity?] once the outlying or dissenting former club member is out of the picture.  The previous reluctance fades because the new core membership worry less that they will end up on the wrong side of the union, since, ex ante, all of them look more similar.  The new members start to resemble Rawls’ hypothetical individuals in the original position, less sure who it is who will be unfortunate enough to have to dip into the pot they are proposing to fund together.

The other force propelling this kind of integration is, of course, the realisation that the current difficulties were caused by not having it in the first place.  It doesn’t seem cut and dry that this would be a force for togetherness.  The lesson might be that it is either all or nothing as far as the transfer union goes.  In which case enough might choose ‘nothing’ to cause disintegration.  But, so far at least, this is not what is being concluded by investors, and that does not augur well for Syriza’s current strategy.

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Reversible? Move along, nothing to see here.

Coeure’s comments that a Greek exit from the eurozone can ‘no longer be excluded’ is exciting much comment, and shock that it contrasts with previous declarations that euro membership was irreversible.

I don’t know why anyone took the irreversibility so seriously.

In an ideal world,  institutions would persist only so long as the costs of change exceed the benefits.  In democracies, their endurance is related to the length of time a consensus prevails that the alternatives would be worse.  Sometimes institutions cling on anyway.  Sometimes those that should endure don’t.

Why could it ever have been credible to suggest that there was no possible contingency when the costs of Greece, or some other country leaving could never be less than the benefits, for all those concerned?  The costs and benefit calculus can change.  Or perceptions of them.  Or they could change for particular groups that have a decisive interest and agency.

And again another idea circulates that without that irreversibility, the euro is no more.  To repeat a point I’ve made a few times, there is no reason it has to be so.

The eurozone may be taken to be a set of rules about how to do monetary, financial stability and fiscal policy.  The expectation that those rules will govern the policies of surviving members may in fact become more entrenched by separation from a former member that either could or would not abide by them.  In fact, far from this being a hypothetical, as I have just put it, it’s quite likely to be part of the motivation for why the creditors behave as they do.

 

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Greece

Some disorganised thoughts about what is going on.

It baffles me why Krugman/Paul Mason and others on Twitter view the referendum as logical, or a masterstroke.  It will be a referendum on an out of date document.  That was not even current at the time of the end of the negotiations.  It’s called on a complex set of questions and issues that it’s normally the purpose of elected representatives to decide.  And Tsipras is continuing to insist that it isn’t about exiting the Euro, obscuring the consequences of a ‘No’ for the Greek people.  This probably should not be surprising, since it’s an echo of the ‘have your cake and eat it’ platform on which they stood, which emphasised the paramount importance of staying in the Euro, and cancelling debt and austerity.  Which were not obviously achievable.

If the referendum was a genuine tactic to help deliver or shape an agreement, why call it so late, after the program has expired?   And this after months of having it revealed to them that other peripheral spreads were not widening, and would therefore be forecast not to react to capital controls/bank holidays, etc..  [‘Threatening to cut my nose off to spite my face doesn’t seem to be working, so I’ll actually go ahead and slice and that will really show them!’].

What I conclude is either this is incompetence by Syriza, since they did not apprehend the weakness or consequences of this play.  Or it’s a ploy to stiffen their own political position in the next few months.  Syriza is a party with roots in revolution and protest.  If they can create chaos, and pin that on malign foreign conspiracy [aided and abetted by a surprisingly willing commentariat], then they will profit from it.  In this sense, it’s a ploy that follows in a pattern of behaviour since they campaigned for office.

I hope for  a ‘Yes’ vote, even if it will be a symbolic gesture on an out of date document.  It might start some momentum toward the creation of the formation of a more benign and competent administration in Greece.  Though this must be considered a faint hope given the tainted records of New Democracy and PASOK and their leading personalities.

I don’t buy PK’s analysis that since this much pain has been endured, they may as well set off down the path of exit.  Because the Greek economy from here may well not behave like an open economy sticky price, rational expectations model with a flexible exchange rate.  There is much probability on other dynamics and outcomes which these analysis abstract from.  Involving more extreme political economy dysfunction, barter, starvation, hyperinflation tax, and much more.

Some seem to think that all problems would be over once the new currency is created and Greece has control over the printing presses.  But in fact, a new set of problems will have begun.  Sound new fiscal and monetary regimes born out of sovereign insolvency are not going to emerge quickly, if ever.  People will expect the government to try to substitute for lack of market access by using the printing presses, and this will choke off the majority of the fiscal benefits from using them, and could lead to a self-fulfilling and disastrous inflation surge.

In the past I’d forecast in a hand-wavy sort of way that there would be no contagion.  My analysis wasn’t that deep.  But it consisted of this:  i) concluding that Greece would not constitute a lesson for the larger troubled countries like Spain and Italy.  Because if a concerted run on those countries got underway then OMT/QE would be revealed to be bluffs for which there was not the political will to tolerate the risks involved in taking on the markets.  That was true before Greece, and remains so.  ii) concluding that there was no lessons for the smaller troubled countries either.  For those countries by sticking to ‘good’ behaviour [as perceived by ECB etc]  had earned the solidarity necessary for the fiscal risks involved in saving them to be undertaken by the larger more liquid cousins in the union.  This is still my forecast.

A caveat is that this is a description of healthy game-theoretic fundamentals.  Or rather, fundamentals not altered by Grexit.  So, it doesn’t follow that there is no probability of contagion, just as it does not follow that there can be no run on healthy bank.  Contagion to other peripheral sovereigns would get going anyway, even if I see it right, if enough people see things differently and decide to forecast that there will be contagion, or foreast that others will forecast that they will forecast that….

Much was made before this week of the disastrous consequences of Grexit for the sanctity of the ‘irreversible’ nature of Euro membership.  I always felt this was greatly overdone, and made forecasts of a Troika climbdown [doing whatever it took to bring Syriza round] unsound.  Because a the benefits of – the liquidity services conferred by – a currency do not flow solely or even primarily from a membership list  They flow from the nature [and the expected durability of] the rules that membership implies.  The Troika could relatively easily have preserved [and might still do] the original membership list.  But they clearly had a mind that the usefulness of the currency involved not changing the rules by too much in order to do that.

Many of the rules stink, of course.  (I hope Eurozone countries accelerate at least a Banking Union, if not a full fiscal transfer union, and surrender as much individual fiscal sovereignty as possible.  I wish the ECB’s mandates could be tightened up, to relieve it of the discretion it has over ELA and other matters; and so that it’s monetary policy mandate is more properly under the control of the committee of fiscal authorities).  But we should not be surprised at the attempt to stick by them.

 

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Surfacing how much Underground there is in the new BoE blog

Simon Wren Lewis joins in the celebration of the Bank of England’s new blog for staff.  But I think he can be read as going a bit too far in divining a message – and discernible dissent – in one of the first posts, by Haberis, Masolo and Reinold.

The Bank Underground compares two simulations of the distribution of inflation, one where the effective lower bound of 0.5 per cent constrains policy, and one where there is no constraint on monetary policy, and highlights the increased probability of deflation in the former relative to the latter.  Simon says ‘The blog does not discuss the policy implications, but they are pretty obvious.’  And goes on to explain that these implications are that, faced with such a risk when you are constrained, you should be overshooting the inflation target in the most likely scenario.

Simon clarified on Twitter that he didn’t intend this reading of his words, but, I think some might read him as saying ‘see how subversive the new blog is: they are allowing staff to communicate that they think the MPC should be overshooting the target’.

But there is nothing in the post to tell what the staff think is the most likely simulation.  The MPC have said on a few occasions that they ‘have the tools’ necessary to deal with the current conjuncture, which implies that they think they are unconstrained.  [Assertions that I think are hard to substantiate btw].  And the staff are careful not to contradict this message.  I suppose that the very fact that the constrained simulation is there at all might be interpreted as some sort of oblique hint.

The weighty issue of what one can and cannot read into a Wren-Lewis text aside, I’d give the Bank a ‘could do better’ mark for transparency on this post.

You can see that the senior management have gone with it because they think that by leading with a potentially sensitive topic they are signalling that this is going to be a forum for dissent and free thinking.

However, the very boldness of this signal of intent is contradicted somewhat by the editorial decision to ensure that the authors are silent about the main point.  That being, of course:  are the MPC to be thought of as constrained, contrary to how they describe themselves?  And is their distribution of future inflation given what they have in mind for their instruments too deflation-heavy or not?

[If it isn’t already obvious from the above, I don’t blame the authors for these things at all].

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BoE cultural revolution: staff blog and uncensored working papers

Today is a big day for the Bank of England.

A staff blog, ‘BankUnderground‘, with connotations of radicalism that will be tough to live up to.   And a relaunch of their working paper series, now emphasised to be a Staff Working Paper Series to mark the fact that these will not be censored for conformity with BoE policy lines.

Both of these seemed impossible even a few years ago, it being enough to suggest these things for one to be branded as naively failing to grasp the business risks, or the importance of cherishing continuity.

For those of us who scrambled over the wall to the outside world to escape the constraints the Bank imposed, it feels slightly disorientating to watch the BoE getting on with a revolution, and with scarcely more fuss than it organised the universal ‘One Bank’ screensaver.

I managed researchers who struggled with the task of self-censorship at the idea-formation stage.  I managed others who were more oblivious, and ended up careering with their mildly critical texts into the implacable opposition of the Press/Governor’s office.  And still others who had oblique technical papers about macro prudential policy blocked from appearing at an obscure conference by the current Chief Economist.  And, in a short stint in the Governor’s Office myself – lest you think my hands are entirely clean – I was responsible for pulping one working paper whose subversive vector autoregressive econometrics had somehow eluded the eyes thus far cast over it.

All changed.  Most of the old gamekeepers have left, and those that haven’t are now turned into poachers by Mark Carney’s different perspective on transparency and openness.

It’s early days, of course.  We will have to see whether, when there is something really at stake for the institution, these outlets reveal anything of substance about staff-policy-committee discord.   Or how the BoE manage work that appears to contradict not just its own views, but those of its HMT principals.  And Mr Carney has only 3/5 of his time left, so there is also a risk that he will be seen as the Gorbachev of Bank of England Sovietism.  A brief period of happy glasnost before the next regime closes in.

However, I am more optimistic.  Rather unscientifically, I conjecture that openness and transparency in Western institutions has a way of being hard to reverse.  And that this is also a reflection of a generational phenomenon.  It would be inconceivable today that the Bank’s internal performance criteria for young analysts include, as they did in the 1980s, ‘manner and bearing’.  Likewise, future generations will not believe that once upon a time the BoE working papers were so closely vetted that the disclaimer ‘these are not the views of the BoE nor the MPC…’ was a routine contradiction.

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