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Wednesday, May 9, 2012

A Rigid Refusal to Renegotiate: Blaming the Greeks

As Greek party leaders struggled to put together a government in May 2012 after a splintering election, a major (and contentious) issue was whether to demand a renegotiation of the bailout agreement. Alexis Tsipras, leader of the Coalition of the Radical Left known as Syriza (which made large gains in the election), was declaring the agreement null and void given the mandate implied by the gains made on the far right and left (both being opposed to the austerity program). The New York Times reports that Tsipras believed he “had changed the debate to the point that the formerly dominant parties that had signed the loan agreement were . . .  indicating they might agree to demand it be renegotiated.” Tsipras’s statements were enough to prompt a firm Nein! from Angela Merkel in Berlin and a related “tightening of the screws” from the committee of the European Financial Stability Facility.

On May 9, 2012, after a “lively discussion” among finance officials from the 17 states of the E.U. that use the euro, the E.U.’s European Council of Ministers (of the euro states) decided to withhold $1.3 billion from a $6.8 billion tranche scheduled for release on the next day. The Greek party leaders doubtless got the point: the spigot would be turned off were the agreement renounced by Greece.

It was not as if going back to the table was unheard of in the history of the E.U. The decision to treat the latest agreement as non-negotiable can thus be viewed as arbitrary. That it was the fresh input of the Greek people that had prompted new demands in Greece that the agreement be renegotiated makes the arbitrariness particularly suspect in terms of democratic legitimacy.

The strategy being pursued by the German officials was to make it seem like the decision to shut off the spigot, which would cause Greece to default and presumably have to give up the euro currency, was entirely that of the Greek party leaders. “We want Greece to stay in the euro zone, but whether Greece stays in the euro zone is in Greece’s hands, and it’s now a decision to be taken in Greece,” the German foreign minister, Guido Westerwelle, said in Brussels. However, the question actually rested as much on the German decision whether or not to renegotiate as on the Greek decision whether or not to do so. In other words, it takes two to tangle. For one side to act as if its hands are tied when they are not is disingenuous.

“One thing is clear,” Mr. Westerwelle said, “we stand by our promise to help. But that also means that the agreed reforms are implemented in Greece. If for whatever reason, which I’m not expecting, and which I expressly hope not, if Greece ends its reform course, then I don’t see that the next tranches can be paid.”  Actually, the next tranches could be paid—meaning it would be possible. Treating what is actually a matter of discretion (i.e., the decision on whether to renegotiate) as one of impossibility is also disingenuous and logically flawed. Westerwelle was intentionally ignoring the possibility that the E.U.’s promise to help could extend beyond the last agreement—meaning that the promise could extend to include renegotiations—additional talks justified by the fresh input from the Greek electorate.

To be sure, a lot of posturing on both sides was undoubtedly going on. My point is that the artificiality of the “donor” intransigence ought to be recognized and thus held to be invalid, or at the very least as less than honest. A decision not to renegotiate is a decision nonetheless. As such, it should be owned up to by those officials making it rather than “exported” to the Greeks as if they had made it. False or artificial rigidity is an ugly thing that reflects on the character of those foisting it on a democratic populous.

Source: Rachel Donadio and Niki Kitsantonis, “Continuing Leadership Deadlock in Greece as Its Lenders Watch and Wait,” The New York Times, May 9, 2012. http://www.nytimes.com/2012/05/10/world/europe/new-elections-appear-likely-in-greece.html?pagewanted=1&_r=1&ref=world

Sen. Lugar and the Socialists

In a stunning upset, Indiana's Treasurer, Richard Mourdock, beat incumbant veteran U.S. Senator Richard Lugar by 22 percent (61-39%) in the Republican primary in 2012. Even though Lugar's 36 years of experience in the U.S. Senate had seasoned him into a statesman on foreign policy, the Tea-Party-backed Mourdock was able to portray Lugar as out of touch and as too willing to compromise with Democrats in the Senate. Mourdock would have no intention of extending any hand across the aisle. Moreover, he demonstrated in his primary victory speech a lack of knowledge concerning the world.

"While Lugar advised in his concession speech not long before that Mourdock would need to work together with lawmakers in the Senate, the new nominee stuck to the belligerent tone he maintained in the campaign, warning that Democrats and socialists were destroying the nation.‘Today we see the Obama White House and we see a Senate chaired by Harry Reid that's doing everything it can -- though perhaps not intentionally -- to turn our dreams, to turn our great national hope and our dream into the nightmare of ever-growing government, to make us that … western European-style nation,’Mourdock said. ‘Just yesterday, France elected a socialist,’ he continued. ‘There are those I'm sure in the administration and in the left side of the Democratic Party that were cheering for that. But we're not going to stand for that in Indiana because the supporters of Barack Obama are not going to win!’”

To be sure, Francois Hollande ran under the Socialist Party banner. However, the “socialist” policies that he had campaigned on were redistributionist rather than advocating that the state own more of the means of production (which is socialism). By redistributionist, I mean that he suggested that la dette that Sarkozy had doubled should not be cut only by austerity (i.e., budget-cuts); rather, the rich should be taxed what they had been taxed before the top tax rate was lowered.  Sound familiar?  Absolutement. But this does not mean that Obama is a socialist for having urged the same policy.

Hollande also campaigned on E.U. policy. Unlike the U.S., the E.U. gives state executives significant power at the federal level. The U.S. Senate was intended to do the same thing in the U.S., but the use of delegates (Senators) rather than the chief executives themselves plus the shift to popular election meant the state governments would have little influence at the federal level. Hence the consequent near-consolidation of power in Washington, D.C. In contrast, at the E.U. level Hollande was in a position fresh from his victory to push for economic stimulus spending to complement the austerity programs in debt-ridden states like Greece, Spain, Portugal and Ireland. Not coincidently, even France suffered a downgrade on its credit rating on account of la dette francaise. Such stimulus is in theory a way out of the downward cycle of austerity-recession that has actually exacerbated Greece’s debt (e.g., more paid out in unemployment benefits, for example). Avoiding this cycle is hardly socialism either. Moreover, balancing stimulus with well-placed spending cuts (i.e., cutting the pork and patronage) is not something to criticism as if it were from a demon.
In short Mourdock may play well to partisans, but his knowledge of Europe (and socialism) is scant. Sadly, knowledge is no friend to a demogogue, and sometimes this doesn’t even matter—particularly if the people are all roiled up and ready for a fight (as in Wisconsin’s recall of Walker and subsequent election). To be sure, compromise is not always good. The two main Greek parties learned that lesson in a state legislative election just days before Lugar’s downfall. However, ignorance is not a good alternative.


Michael McAuliff, “Dick Lugar Loses to Tea Party’s Richard Mourdock in Indiana Republican Senate Primary,” The Huffington Post, May 9, 2012. http://www.huffingtonpost.com/2012/05/08/dick-lugar-richard-mourdock-lugar-loses-indiana-republican-senate-primary_n_1501416.html?ref=topbar

Tuesday, May 8, 2012

Anti-Austerity in Greek Government

The Socialists and then the New Democracy Party told Greeks that sacrifices were necessary to avert default on the state’s debt. This position came at a high political cost on May 6, 2012, when both parties lost seats in the state’s legislative election. “The established parties collapsed — they had too much pressure from Berlin and Brussels and the I.M.F.,” said Nikos Xydakis, an newspaper editor and a political commentator, referring to Greece’s foreign lenders. In other words, the leaders of the two mainstream Greek parties sold out their compatriots, having caved in to ultimatums from Merkel operating at the E.U. level. “In a meeting with President Karolos Papoulias, the leader of the leftist party, Alexis Tsipras, ridiculed the leaders of the two main parties whose coalition lost its majority in the parliamentary elections.” Tsipras added that his party would not be forming a government with either party. The New Democracy Party had been unable to form a government in the wake of the election, so it was then Tsipras’ turn to try.

                           Alexis Tsipras  and Greek President Papoulias   NYT/Kostas Tsironis
Given the losses of the two major parties that had agreed to the austerity deal, Tsipras told reporters, “The popular verdict clearly renders the bailout deal null.” As one can imagine, this sent the doomsday prognosticators into a tailspin.  Many analysts concluded that Greece was “unlikely to emerge from its current crisis with a government either able or willing to carry out the strict budget-cutting mandates of its foreign lenders.” There were even claims that Greece would not be able to keep the euro as a currency.
The New York Times gave a more measured response, opining that the “political uncertainty injects a new element of unpredictability into the euro zone crisis, possibly casting Greece’s loan agreement with its foreign creditors into doubt, with a requirement pending to cut $15 billion from the budget in June. With the likelihood that a fiercely anti-austerity crowd will dominate the next Greek Parliament, some investors think it is only a matter of time before the country reneges on the promises it made of deep spending cuts and higher taxes to secure the bailout.” Perhaps a more realistic reading would be that the new Greek Parliament would trigger more negotiations at the E.U., where Greek leaders, aided by the then newly-elected Francois Hollande of France, would face off against Angela Merkel of the state of Germany and her allies in other states. Instead of a straight austerity-for-bailout arrangement, some loosening of the austerity element could go along with some stimulus spending for Greece. That would avoid the austerity-recession spiral that had actually exacerbated public debt. However, facing an election in 2013, Merkel was under intense pressure within her state not to subject her taxpayers to additional spending on Greece. Were she to hold the line, Hollande and the anti-austerity coalition in Greece would have to compromise or Greece would not get the next tranche of money—resulting in default (yet not necessarily Greece losing the euro or leaving the E.U.).
Therefore, as the Greek party leaders were trying to put together a government after a splintering electoral result, the prospect of default hinged on whether an anti-austerity government would emerge, and, furthermore, whether the route of compromise would be chosen by the state leaders operating at the E.U. level. As the two main Greek parties learned in the legislative elections, a still political price can be exacted by the voters if the compromise goes too far from what they want. This is true even if the compromise is for the people’s own good. In the case of austerity without stimulus, the people were probably right, given the downward spiral of austerity-recession exascerbating rather than alleviating the debt burden. The matter of Merkel’s compromise is less clear, as it would pit the legitimate desire of Germans not to bailout Greeks for their expansive patronage system (and generous retirement system) against the benefit of stimulus spending diverting Greece (and Spain) from a worsening downward spiral.
If the state officials did not have so much power at the E.U. level, E.U. officials and the E.U. Parliament might have been able to work out an arrangement that is neither a reflection of the interests of the giver states or of the states needing aid. In other words, the E.U. would not be so reliant on the willingness of state officials—whether in Athens or Berlin—to make difficult compromises. The European federal system thus exacerbates the problem-solving due to the emphasis on state rights. While understandable (given the consolidation in the U.S. federal system), enhancing the power of the E.U.’s lower house, its Parliament, and its executive branch, the E.U. Commission, at the expense of the European Council (which represents the state governments) would have facilitated Europe’s handling of its debt crisis. The result of the Greek election can be interpreted as a rejection of a bad arrangement reached due to the hegemonic interests of a particular giver state having too much influence over the good of the whole at the E.U. level.
Rachel Donadio and Niki Kitsantonis, “Greek Leftists Rule Out Coalition with Incumbents,” The New York Times, May 8, 2012. http://www.nytimes.com/2012/05/09/world/europe/radical-left-leader-in-greece-rules-out-coalition-with-losing-incumbents.html?pagewanted=1&_r=1&hp

Monday, May 7, 2012

Merkel’s Fiscal Box

According to the Huffington Post, Germany was ruling out any substantive shift in its approach to Europe's debt crisis despite a rising chorus of opposition to Berlin's austerity policies that reached a crescendo in the elections in Greece and France on May 6, 2012. On the following day, Merkel “rejected the notion that Europe was on the brink of a major policy shift after Socialist Francois Hollande defeated her fellow conservative Nicolas Sarkozy and Greek voters punished ruling parties who slashed spending to secure a foreign bailout. . . . Merkel herself made clear that, while there was scope to discuss tactics, the overall strategy EU leaders committed to by agreeing a compact on fiscal consolidation was ‘not negotiable’.” That seems a bit presumptuous, considering that the “fiscal pact” had yet to be ratified in enough of the states to go into effect.

In terms of German politics, after another bad day for her Christian Democrats (CDU) in a regional election on the same day as the French election, Merkel knew that if she was to win a third term in the next year she could ill afford to ignore German voters' demands that she give no more of their cash away to foreigners. "Germans could end up paying for the Socialist victory in France with more guarantees, more money. And that is not acceptable," one of Merkel’s allies said the day after Hollande’s victoire. "Germany is not here to finance French election promises."

To be sure, Hollande could not expect to step in and unilaterally shift the E.U. policy to tie stimulus spending to the austerity or reduce the latter. However, especially with the austerity crowd on the defensive, he was in a position to muster leaders of other states to sink the “fiscal pack,” which would force Merkel back to the negotiating table. Whether she would compromise in such a scenario is not clear, given the electoral pressure she would be under. As between paralysis in the E.U. or compromise, my money would be on the latter. That would be a clear shift in Merkel’s approach at the E.U. level. It would be for the good, for it is not healthy for a union to be dominated by one state, whether Germany or New York.


Noah Barkin and Stephen Brown, “Germany Austerity Policies: Berlin Unmoved by Votes in France, Germany,” The Huffington Post, May 7, 2012. http://www.huffingtonpost.com/2012/05/07/germany-austerity-berlin-unmoved-by-votes_n_1496077.html

Fuld’s Arrogance at Lehman: Systemic Risk

Documents released in May 2012 regarding Dick Fuld at Lehman Brothers prove that he was aware of the high risk involved in holding so much real estate (and related security derivatives). According to the Huffington Post, this means definitively that “the ‘forces-out-of- our-control’ argument we hear from Wall Street leaders is [self-serving] bunk. It is the ill-advised behavior of one banker after another, day in and day out, that leads to the sort of devastating financial crisis we are only now emerging from.”

For instance, at a Lehman board meeting in September 2007, Lehman executives presented a clear summary of the risks. “The initial tremors were felt at the end of 2006,” the board was told, “when the poor loan performance of sub-prime borrowers began to be a cause for concern in the marketplace. This was evidenced by a gradual spread widening in the asset backed index. The market continued to widen as it became apparent that the performance problems in [mortgages were] not going to abate and [were] no longer limited to the sub-prime market but also affecting the Alt-A product.” The Alt-A mortgage category is the next riskiest, after the subprime mortgage category. The board also heard about the two Asset Management hedge funds that went belly-up during the summer of 2007 at Bear Stearns (the CEO, Jim Coyne, missed the final meetings on the funds because he was competing at a bridge tournament in the Midwest and “could not” be disturbed—yes, the arrogance is that bad). While Goldman Sachs was reacting by pulling out of the subprime mortgage derivative market and even hedging with the “Big Short,” at Lehman it was “business as usual.”

In fact, according to McDonald’s book on Lehman Brothers, Fuld actually continued to acquire real estate and mortgage-backed derivatives. The fact that the board had been briefed and still let Fuld go on piling on risk suggests that the board failed to provide accountability on the firm’s management—a principal function of a board. That Fuld was both CEO and Chairman of the Board suggests that at the very least there was a conflict of interest for the board—namely, in being led by the person whom the board was supposed to hold accountable. In other words, the risk to the financial system goes well beyond what happened at Lehman Brothers.

According to the documents, “instead of seeking the capital they so desperately needed, Fuld and Goldfarb [the chief financial office] believed Lehman was an impenetrable fortress. An email exchange between the two managers on whether to take seriously a Chinese bank’s offer to invest in Lehman “descended into a pathetic display of macho arrogance,” according to the Huffington Post. Referring to the offer, Fuld wrote, “Sounds to me like another non-starter. If it’s just about price [and] who is the right partner then tell them NFI.” Goldfarb replied, “Agreed 1000 percent. How do you spell stupidity in Chinese!!!” After a childish exchange on the spelling, Goldfarb admitted that the firm could use a partner, but added: “Any potential investor that would consider BS” -- Bear Stearns -- “in the same breath as LB should go fungoo themselves!!!” Fuld then replied, “I agree we need some help—but the Bros always wins!!” Goldfarb agreed, writing “Absolutely, will and skill always win, and that be us!!!!” Fuld then concluded, “Got it so do u.” Besides the fact that Fuld made $500 million in cash between 2000 and 2007, that such self-aggrandizement could occur so close in time to the demise of a major investment house is astonishing for the sheer blindness involved (to say nothing of arrogance).

The combination of blindness and board-control at the head of a major financial institution suggests not only that our assumptions about the sort of person who occupies the CEO position of a major company are wrong, but also that the systemic risk facing the financial system itself is higher than we think. In other words, we naturally assume the CEOs on Wall Street have sufficient maturity—that they are not unfit as Rupert Murdoch was declared to be in Europe. We assume they can handle the responsibility—not to mention know better than to add too much risk to build an empire. The case of Fuld (and the board he controlled)—as well as the case of Murdoch—suggests that our projections are wrong.

One implication from this analysis of human nature or personality is that financial institutions should face a ceiling in terms of size and wealth. We cannot assume that CEO’s have the maturity and good sense to handle ever-increasing amounts of power. Society itself has an interest in seeing to it that the power is limited. Otherwise, “how do you spell stupid in American?” may be what we deserve. Even just in continuing to allow CEOs to chair their own boards, given what we know of Fuld (as well as Murdoch), We the People may deserve the epithet.  

See related essays: "Leadership at Lehman: On the Failure of Richrd Fuld" and
"Lehman's Dick Fuld as the Antagonist in the film, 'Too Big to Fail'"


William Cohan, “Lehman Docs Show Wall Street Arrogance Led to Financial Collapse,” May 7, 2012. http://www.huffingtonpost.com/2012/05/07/lehman-documents-wall-street-collapse_n_1495047.html

Sunday, May 6, 2012

Europeans Vote against Austerity

On May 6, 2012, elections took place in six E.U. states. The most significant in terms of the debt crisis are those of France and Greece. In France, Francois Hollande narrowly beat Nicolas Sarkozy. According to the New York Times, Sarkozy “is the latest of a string of European incumbents, from both the left and the right, to lose in a larger popular revolt against budget-cutting and tax increased during a time of recession and high unemployment.” Hollande said “he intends to give ‘a new direction to Europe,’ demanding that a European Union [amendment] limiting debt be expanded to include measures to produce economic growth.” After midnight, Hollande spoke against austerity to a crowd gathered at the Bastille. To be sure, an anti-Sarkozy-arrogance vote doubtlessly benefitted Hollande. This makes it difficult to treat this (or any other) election as a mandate policywise. Even so, the center of gravity on austerity at the E.U. level had shifted, given the important role of state officials there.
                 François Hollande addressed supporters in Tulle, France.      Philippe Desmazes/Agence France-Presse

Meanwhile, voters in Greece were shifting the political landscape in that state, “bolstering the far left and neo-Nazi right in a wave of protest against the dominant political parties that they blame for the country’s economic collapse.” In other words, the two main parties that had agreed to the austerity/bailout agreement lost ground to other parties—essentially splintering the vote. According to the New York Times, an exit poll “indicated that center-right New Democracy party was in first place with 19 to 20.5 percent of the vote, much less than the 34 percent it won in 2009. But in a major shift, the Socialists, who dominated for decades, won 44 percent of the vote in 2009 and were in power when Greece asked for foreign aid in 2010, appeared to have 13 to 14 percent of the vote, putting them behind the Coalition of the Radical Left, called Syriza, which opposes Greece’s agreement with its foreign lenders. Syriza appeared to be drawing 15.5 to 17 percent of the vote.” New Democracy and the Socialist Party had agreed to the austerity, and they paid a price at the polls.
The shifts in both states undoubtedly provided federal officials (including state officials active at the federal level) with a message: more and more E.U. citizens were opposing the austerity-only approach. Lest it be concluded that Hollande and the Greek legislature trigger a change of E.U. policy, incumbents including Angela Merkel were still a force to be reckoned with. Generally speaking, actual political change occurs in graduate steps rather than all at once after an election. The status quo is never entirely defeated by a few replacements; it takes several elections for a sea-change to gain the upper hand in governmental channels.
Even so, May 6, 2012 suggests that the forces of such change were gaining.  Even if it would take more elections for the austerity-emphasis to be changed, it was already clear that a majority of the people were willing to vote as if they were opposed to the approach.  In relying so much on austerity in their agreement with Greece, state leaders making policy at the E.U. level had gone beyond the center of gravity. In a representative democracy, doing what is right or in the people’s best interest at the expense of popular anger or disapproval has value. However, this leash does not extend very long and it must be tailored to the amount of time until the next election. This is both a disadvantage and advantage of representative democracy: officials cannot get too far from their basis in the popular center of gravity, even if a crisis warrants a long-term solution that is generally unpopular at the grass-roots level.
Steve Erlanger and Nicola Clark, “Hollande Ousts Sarkozy in French Presidential Election,” The New York Times, May 6, 2012. http://www.nytimes.com/2012/05/07/world/europe/hollande-and-sarkozy-in-crucial-runoff-in-france.html?_r=1&hp
Rachel Donadio and Nici Kitsantonis, “Greek Voters Punish 2 Main Parties for Economic Collapse,” The New York Times, May 6, 2012. http://www.nytimes.com/2012/05/07/world/europe/greeks-vote-in-parliamentary-elections.html?hp