Greek finance minister Varoufakis got a lot of attention a few months back with this tweet:

FDR, 1936: “They are unanimous in their hate for me; and I welcome their hatred.” A quotation close to my heart (& reality) these days

There are indeed a number of striking similarities between FDR and Syriza.  The one I’ve been thinking about most recently occurred in June 1933. FDR’s representatives had been in Europe trying to negotiate a restoration of fixed exchange rates at the World Monetary Conference.  They were getting close to agreement when FDR issued a shocking statement favoring flexible rates that undercut his representatives and blew apart the conference.  Sound familiar?  FDR took pleasure in outraging the VSPs of his day.  Yes, in temperament Varoufakis is something like FDR.

I’m a big fan of FDR’s policy of devaluation, so why am I not a big fan of Varoufakis?  My critics think it’s all mood affiliation.  Maybe so, but recall that I am also a market monetarist.  And the “market” part refers to the fact that I believe markets provide the best indicator of the likely effect of policy shocks.

In 1933 the Wall Street elite were horrified by FDR’s replacing the gold dollar with a “rubber” dollar, having a flexible value.  And yet US stock prices soared on each and every outrageous statement by FDR, such as when he torpedoed the WMC in late June.  The Greek stock market was closed during the recent vote (and remains closed) but both Greek and European stocks responded negatively to information suggesting that Syriza was unwilling to deal during the month of June, and then rose on hopes for an agreement.  Those contrasting market reactions are probably telling us that there are small but important differences between the US in 1933 and Greece today.

To end on a fair and balanced note:

1.  The market would probably also welcome more European flexibility in striking a deal.

2.  The fact that FDR was right when all the VSPs thought he was wrong should make us cautious about judging the Greek situation.  It’s certainly possible that Varoufakis is right and I am wrong.

PS.  Between mid-April  and mid-July 1933, US stocks were even rising sharply in gold terms, despite rapid depreciation of the US dollar against gold.

Matt Yglesias takes up the challenge I made in a recent post I did on the economic problems in southern Italy:

Everyone likes to visit Southern Europe with its good weather and tasty food, but policy wonks abhor the failure of Greece, Italy, Spain, etc. to achieve anything remotely resembling economic convergence with their chillier neighbors to the north. And while US liberals like to throw the Nordics in the face of small government boosters, Scott Sumner echoed by Tyler Cowen says “I’d have more confidence in progressive ideas if they even had an explanation for the failed welfare states of southern Europe.”

Everyone agrees about Southern Europe

What’s interesting here is that there actually doesn’t seem to be much disagreement about Southern Europe. Sumner references explanations “tied to cultural differences” as the main ones he’s heard — in other words, it’s nothing to do with welfare state design. But he dismisses that as an inadequate response for progressives to offer because those are “conservative explanations.” But Robert“Making Democracy Work: Civic Traditions in Modern Italy” Putnam isn’t a conservative. When I asked Cowen how he explains Southern Europe he pointed to Edward Banfield’s “Moral Basis of a Backward Society”. Francis Fukuyama has also treated the subject well in his recent books “The Origins of Political Order” and“Political Order and Political Decay”.

These authors all stake out somewhat different accounts but there is a broad family resemblance. Southern Europeans are stuck in a dynamic of low trust, excessive localism, and extreme reliance on family networks. There is a lack of impartiality in institutions and an ethic that “doing what’s right for my family” rather than “following the law” is the right thing to do. A country that gives you the mafia rather than a correctly functioning legal system and police services is also not going to give you highly effective schools or job training programs.

I think Yglesias is falling into the trap that often ensnares Paul Krugman, assuming that the accurate view must ipso facto be the liberal view, as liberalism is a reality-based ideology.  Yes, Putnam is not a “conservative”, but his explanation most certainly is a conservative explanation.  To see that more clearly, imagine if Putnam offered a similar explanation for the lower income levels among blacks, Hispanics and Native Americas.  He would be treated as a conservative.  He would be accused of “blaming the victim.”  He might be accused of being a racist.

I am aware that “culture” is the explanation that most thoughtful people on both the left and the right would offer for the economic travails of southern Europe.  But that doesn’t make it a progressive explanation.  Progressive explanations don’t seem to “blame the victim”.  I say, “seem to”, because my views here are at variance to both the left and the right.  Unlike the right I don’t blame people for their culture; to me it’s just something in the air, like weather.  And unlike the left I think culture explains a lot of economic inequities.

Here’s an analogy that might help.  Conservative Republican legislators in Nebraska recently abolished the death penalty in their state.  That doesn’t make opposition to the death penalty the “conservative view” on the death penalty.  Rather those legislators basically adopted the liberal view on the issue.  They basically said “we’ve been wrong for all these years.” If liberals want to say “we’ve been unfair over all these years in characterizing conservatives who point to culture as being racist as being racist if they use cultural explanations for poverty, and we are sorry” that’s fine with me.

PS.  Any commenter who mentions the phrase “No true Scotsman” is hereby required to reread my post 100 times, out loud.

HT:  TravisV

So the Syriza government told voters that a no vote would not mean exiting the euro.  The Europeans would be so impressed by the will of the voters that they would cave in to Syriza’s demands.  No euro exit.  Here’s what happened today:

In the strongest language since the start of the six-month stand-off between the far-left government in Athens and eurozone lenders, EU leaders said the No vote in last Sunday’s referendum had severely constrained their ability to offer Greece aid and warned any new bailout deal would include much tougher terms than those that could have been reached just two weeks ago.

“I am strongly against Grexit but I can’t prevent it unless the Greek government do what they need to do,” said Jean-Claude Juncker, the European Commission president. “We have a Grexit scenario prepared in detail; we have a scenario as far as humanitarian aid is concerned.”

The decision to invite all 28 countries to Brussels to deal with the Greek crisis is unprecedented; since Greece first applied for a bailout five years ago, such euro-related summits have only been attended by heads of governments in the common currency.

Earlier on Tuesday, Greek negotiators had stunned eurozone finance ministers by arriving at their meeting without a revised economic reform proposal.  (emphasis added)

Does it sound like Syriza was telling the truth?  Will the Greeks now negotiate a better deal?  Or did they not even bother presenting an offer because they knew the game is over and Grexit is approaching?  I’m not sure, but within a week we’ll probably know the truth.  My hunch is that a month from now this won’t be viewed as a “victory for democracy.”

Lots of people now understand that the euro was a very serious mistake.  But most still don’t understand just how badly the project was botched. Let’s start with the obvious.  If you are going to launch a grand experiment in monetary policy (like NGDP targeting for instance) you need a back up plan if it fails.  My back up plan would be to return to the previous policy.

But the EU did not provide for any backup plan.  There is no procedure to unwind the eurosystem if it failed.  They simply assumed it would work. They acted like they were 100% certain it would work.  That’s not really a good idea, even if the experts were unanimous that the project would succeed. Experts might be wrong. But in this case it was far worse. Many of the world’s leading experts thought it was a horrible idea, and predicted exactly the sort of disaster that has arisen.

There are probably a few times in my life where I’ve felt that both Paul Krugman and Milton Friedman were wrong about some issue, and that I was right. Maybe I’ve even said I was “sure” they were wrong.  But suppose God put a gun to my head and threatened to fire if Friedman and Krugman were right. Would I still say I was “sure” they were wrong?  The point is so obvious that it really shouldn’t even need making; if leading intellectuals on both sides on the ideological spectrum think an idea is crazy, then policymakers must at least entertain the idea that there is at least a small probability that the idea is indeed crazy. They need a backup plan. The Eurocrats (with the French in the lead) were not willing to entertain this sort of uncertainty.

Would a backup plan have been difficult to devise?  I can’t imagine why; we already know how easy it was for countries like the US to devalue during the Great Depression.  They would simply have needed to allow for a similar fallback plan.  This would have involved holding onto the old currency when it was withdrawn from circulation, and printing new currency at the normal pace, and putting it into storage for an emergency.  Then there would be a provision that if the country reverted to the old currency, the bonds and bank accounts would automatically be converted over as well.  In that case Greek bonds and bank accounts would have continued to price in devaluation risk, as they did before 2000.  If the euro were a success, then the risk premium would gradually fade away over time.

This sort of fallback plan would have allowed the euro to be unwound in a crisis, in much the same way that Britain and Sweden left the EMS in 1992.  A bit messy, but nothing like the crisis we are now facing.  But the Eurocrats who dreamed up their perfect monetary system were too arrogant to even entertain the prospect of failure.  And now we pay the price for that . . . what’s the Greek word?

Hubris.

Update:  One commenter suggested that my previous post left the impression that I don’t like Greek culture.  Not true.  Although I’ve only visited Greece once, based on my impressions I prefer Greek culture to American culture (yes, that’s a low bar.)  I prefer American attitudes toward capitalism, but overall I prefer Greek culture.  It’s a wonderful country.  Apologies to any Greek readers if my post left a bad impression.

Instant reactions to complex economic shocks are almost always wrong, but that’s never stopped me before.  Much to my surprise, it has been reported that the No votes won by an overwhelming majority.  This means:

1.  The Greek government obviously cannot accept the EU deal, even with minor tweaks.

2.  It’s hard to imagine the EU offering dramatically better terms, although I suppose anything is possible.  The fate of Podemos in Spain depends on whether the EU caves.  If they do, Podemos is the next government of Spain.  If they don’t, Podemos is in deep trouble.  Keep in mind that Eurozone governments are among the major financiers of ISIS.  If they are willing to finance terrorists, is it really so hard to believe they’d cave in and finance communists?

3.  Does the Greek government secretly want to leave the eurozone?  That seems like the most plausible explanation for their erratic behavior, although I can’t be certain.

4.  Even if Syriza secretly wants to leave the eurozone, they clearly prefer to stage-manage things so that it looks like they were pushed out.  And if the Germans secretly want Greece out, they’d prefer to stage-manage things so that it looks like Syriza is to blame.  This may take a while to play out.

5.  Is it possible that Greece will remain in the euro, despite all of this?  In Europe, anything in possible.  Keep in mind that in macroeconomic terms “leaving the euro” means changing to a different medium of account.  As long as the euro is Greece’s medium of account, it’s still in the eurozone in a macroeconomic sense.  It doesn’t really matter whether the Bank of Greece no longer has a seat at the table.  Thus issuing “script” won’t do much to help their labor market recover, unless it takes the form of disguised wage cuts.  (Greece may join its neighbor to the north Montenegro in being a de facto euro member, but not a de jure member.)

6.  Although I would have voted yes no, I certainly wish them well.  Leaving the euro would certainly produce one undeniable benefit—more NGDP! The truly nightmare scenario is that Greece stays in the euro and becomes increasingly statist—a failed state.  In my view leaving the euro with Syriza in charge is worse in the short run, better in the medium run, and worse in the long run (as in Argentina), as compared to a yes vote.

7.  This slightly increases the risk of Brexit, as the eurozone will increasingly resemble a failed project.

8.  European leaders have been saying a no vote means Grexit.  If on Monday they are saying something different, they will look like complete fools.

This is the best one paragraph explanation of what this is all about that I’ve seen so far:

And for those in the euro, exit may not be a palliative. Spain has already improved its competitiveness through wage and price cuts. A euro exit could bring with it populist polices that hurt long-term growth. “You do not leave the euro to become a market-friendly Switzerland. You leave the euro to become Argentina,” says Jesús Fernández-Villaverde of the University of Pennsylvania.

If this spreads across Europe, you could eventually end up with a sort of (non-violent) civil war.  Neoliberal northern Europe against statist southern Europe.  The best way to predict global events over the past 20 years is to assume that countries will have governments that increasingly reflect their cultural characteristics.  Thus as China and Denmark becomes more capitalist, Argentina and Greece becomes more statist.