Sunday, 12 July 2015

A Greek Tragedy or A Global Tragedy

I write this in the context of the ongoing dispute between the Greek people and their European Union co-members. Probably more accurately between the recently elected Greek government (Syriza party) and the Troika (European Commission, European Central Bank, and the International Monetary Fund). The Greek people voted in an anti-austerity government but Greek creditors (the Troika) seem to totally discard the will of the Greek people and insist that austerity is the only way forward. However, that is what Greece has suffered under with the previous government and if the information is correct then Greece is worse off and not better off. The austerity experiment as a way out of the economic crisis seems to have failed.

Wren-Lewis (2005) asks whether the Greek government and people are being blackmailed to conform to the wishes of the Troika. The Troika hold all the cards being both the lender of last resort through the European Central Bank to the Greek banking sector, and a party to the negotiations with the Greek government. To add to the confusion, it looks like the Greek government don't have a plan B since it would appear they have never talked to the Greek banking sector about an exit from the Eurozone and the creation of a new Greek currency (Preston 2015).

So how do we describe the Greek situation? Why when a political party puts itself forward as an anti-austerity party does it not have a workable alternative to the current economic blackmail of its creditors? But is this all a problem with the Greek government or is there an more serious underlying issue that needs to be addressed? Is it really a Greek tragedy caused by their unwillingness to change or a global tragedy caused by holding on to a failed economic framing story?

As a supporter of economic reform primarily focused on monetary reform, I lean toward a global tragedy played out in most nations around the world. At the core is the understanding of money and the way that it comes into existence. Positive Money (Ryan-Collins, Greenham, Werner, and Jackson, 2011) contend that banks create money when the create loans. They would argue that this is done out of nothing (ex nihilo). This view seems to be supported by McLeay, Radia, and Thomas (2014A, 2014B) and further reinforced by Jakab and Kumhof (2015). All of these would argue that they are no intermediaries between borrowers and lenders. That is they don't need to have someone who wishes to lend money in order to issue a loan.

Vivian and Spearman (2015) would agree that they are not intermediaries between borrowers and lenders. However, they argue that the loans do not create money out of nothing. The bank acts as an intermediary between a buyer and a seller. Without a bank, the buyer would have to create an IOU which they would give to the seller. If the IOU was then able to be used by the seller to complete other purchases or to pay taxes then it could be argued to be money. Vivian and Spearman argue that this is the role that the bank takes on by creating a deposit in the sellers account and a claim against the buyer. Vivian and Spearman acknowledge that when it comes to government borrowing the mechanism is different. Governments through treasury create bonds which are bought by the central bank and possibly sold on to commercial banks or other investors. However, what is clear is that money is created in order to fund transactions between buyers and sellers or to fund government expenditure. Any countries central bank has the ability to create money either to fund government expenditure or to enable commercial banks to meet their obligation to the deposit holders.

What is also clear to me is that there is a need for new money creation to keep the world economy growing. I accept Vivian and Spearman's argument that money creation is based on the value of the underlying transaction. However, who decides on the value of the transaction and whether that value is reasonable. When it comes to funding government expenditure who really has the decision making power and is it possible that some government expenditure should be seen as what is necessary to maintain the infrastructure for the economy?

If we think about a transaction between seller S and buyer B, they agree on a price and then decides whether to fund that transaction at that value. Does the bank have any impact on the value of that transaction? If they show willingness to fund ever increasing property values because they believe if the buyer defaults, they will be able to recover the lose through the rising value of the underlying property asset then who is to blame if suddenly there is an unwillingness by buyers to keep paying ever inflating prices?

So what is the real problem with our economies and in particular the Greek economy? Is there corruption among the wealthy in that they exploit the system for their own benefit or are we all endeavouring to get an advantage over our neighbour? Why does a nations internal economy grind to a holt simply because of issues around the supply of money? We can argue over the mechanics of the system and whether a government should be allowed to run a deficit but isn't it strange that the resources can be there to meet a real need and we will fail to meet that need because what is missing is money? Or we allow a company to gain a strangle hold over an essential and often natural resource and hold a nation or the world to ransom for access to that resource?

I want to argue that the foundation of our problem is in the framing stories that we use and many of us take for granted. We don't question the idea that a government, country, company, or individual (economic individuals) must live within their means (i.e. their income) but what are the implications of that assumption? Fewer might question the idea that economic units should be able to earn a profit.

If we want to understand the Greek situation, we need to understand the technical mechanisms of the economic system but we also need to understand the framing stories or what we believe about the way an economy should work. Above all, we need to ask whether our framing story is reasonable and what the implications are when we use that framing story to influence the way we use the technical mechanisms of the economic system.

I am not convinced that the Greeks are responsible for the problems that they now face as their economy grinds to a halt. I agree with the view that the Greek government and people are being blackmailed to conform to an austerity message that is destroying the very survival of the country. How would you react when you are pushed back into a corner and given no room to define your own future and direction? Political and democratic power is being taken away from the Greek people and many other nations by economic power.

This isn't simply a Greek tragedy played out before the nations of the world. This is a world tragedy in which we are all players.

References

Jakab, Z., & Kumhof, M. (2015). Banks are not intermediaries of loanable funds - and why thus matters. Retrieved from: http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf

McLeay, M., Radia, A., & Thomas, R. (2014A). Money in the modern economy: an introduction Quarterly Bulletin (Vol. Q1): Bank of England. Retrieved from: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf

McLeay, M., Radia, A., & Thomas, R. (2014B). Money in the modern economy. Quarterly Bulletin (Vol. Q1): Bank of England. Retrieved from: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

Preston, R. (2015) Could euro survive temporary exit of Greece? Retrieved from: http://www.bbc.co.uk/news/business-33497877

Ryan-Collins, J., Greenham, T., Werner, R., & Jackson, A. (2011). Where does money come from? A guide to the UK monetary and banking system. London: New Economics Foundation.

Vivian, R. W., & Spearman, N. (2015). Some clarity on banks as financial intermediaries and money 'creators'. Johannesburg, South Africa: School of Economic and Business Services, University of the Witwatersrand. Retrieved from: http://www.econrsa.org/system/files/publications/working_papers/working_paper_523.pdf

Wren-Lewis, S. (2015), The non-independent ECB. Retrieved from http://mainlymacro.blogspot.co.uk/2015/07/the-non-independent-ecb.html