Guest Post: Jerry Goldstein is sure of a Greek default, cannot see the eurozone breaking up but can see no way out of the mire either

GUEST POST by Jerry Goldstein, ex City banker and regular correspondent of this blog

I see the probability of Greece defaulting at 1, on a scale of zero to one. But I do not necessarily think this is sufficient to cause a breakup of the eurozone. Whilst a Greek default will cause volatility to spike yet more, I think that such an event is pretty much priced in already.

I was impressed by the logic of the UBS report on the costs to the eurozone of breaking up, relative to those of keeping it together. We have entered so deeply into black swan territory that just about anything could happen. Nevertheless, I do not see a unilateral withdrawal of Germany, the disappearance of the euro, or Spain or Italy defaulting. Having said that, my PhD supervisor at Yale (I hasten to add I never wrote my dissertation) who was a German called Hajo Holborn, and one of the finest of his generation, wrote a little book called “The Political Collapse of Europe” to describe the period 1914 to 1939. I believe we are going through another period of political and economic collapse in which democracy is failing, and I include the US in that as well.

More broadly speaking, I firmly believe Marx was wrong in ascribing primacy to economic life. I think it’s pretty easy to prove politics rules, and what worries me is precisely that, whilst we have been through a period of near financial collapse, which we never really exited from it, there is a political collapse which together with the financial and economic crisis, will tip us into unknown, deeply unpleasant territory.

The secular consequences of such enormous rates of unemployment, especially amongst the young and the long term unemployed, will take maybe more than a generation to work through, and that is probably the most worrying aspect of this mess.

I’ve been through 4-5 major financial crises and downturns in my 45 years as a banker (and ex banker), and they could all be described as basically deriving from unsustainable mispricings or relative levels  in the foreign exchange markets, extreme anomalies in equity or bond prices, stemming from trade flows, irrational exuberance, or loose money supply followed by tightening by central banks (a la Volker in 1980). In  any case, they were pretty easy to understand and the corrections were pretty simple, even if extreme.

This is the first time in my career that I have seen a crisis stemming from a complete collapse of faith in our political institutions, parliaments, leaders, media, financial systems, and relative social equities. I simply see no “fix” in the sense that previous crises were fixed or ameliorated.

So I am profoundly pessimistic.

But for the eurozone to break up, we would really, I think, have to be in Weimar territory, and I do not think we are there yet. However, given that we have nothing but mediocracies in our political life, even if a Roosevelt or Churchill appeared, I doubt that any electorate would follow them. I cannot see what the way out is.


  • Why can’t we accept this as the inevitable shift from nation-states into something new that we still (!) can help mould?

    Whether the move is toward some form of Bobbitt’s market-state has yet to be decided, but what is most certainly the case is that pluralistic democracies and welfare/warfare states cannot survive, except in cases of profoundly disciplined societies (i.e. Nordics).

    It’s no accident that Greece is the first pop-corn to pop. It was the most Soviet of modern w/w states, the one to push both “w”s to their logical extremes, and a typical case of deeply entrenched decentralized dynamics…(culture geography)

    It’s also no accident that Greece was the inventor of city-states. And therein lies the epic opportunity today…C-Ss could form a large part of the “global solution” and Greece has the privilege of being both the first country facing the inevitable nation-state predicament, and also is uniquely endowed with historical links to this most modern, efficient and organic of models.

  • I am surprised by your surprise when declaring that you can find no solution . You are an economist as you declare .

    The problem lies within the realms of justice in a wider sense (and an narrow sense as well – criminal prosecution ) and COMMON sense .

    There is a wide public awareness , massive public access in information resources concerning environmental issues , economic policy issues ,social issues .
    People no more depend on a single speech of a prime minister .

    Bankers are in charge of solving social issues , economic policy issues , environmental issues, political issues ? That was wrong in the first place .
    Their only interest is how to make profit . They only care about economic policies when everything is deadly wrong .

    No surprise that you can not find a solution . You never had one ! The crisis is hardly economical .

    The only viable solution i see is, environmental scientists dealing with environmental problems , politicians caring about how to represent their voters best , economists brain-storming on stimulating growth and people taking care that their democratic rights are preserved and well exercised . There is an imbalance in authority structure !

    It’s completely irrational to rely on bankers or economists to solve any other problem than that of their field .

    There is no credibility or faith in financial market because people upon whom markets react are not stupid anymore . And people need to see applied common sense in order to be reassured . They need to see politicians act upon their interest !

  • I think that the longer the sand-pile remains without a serious avalanche, the more unpredictable the earthquake will be, in terms of timing, locale, direction and severity.

  • I am still dreaming of people-states ,
    enterpreneur directed investments and
    ready made small business templates to support individuals and according to the economic cycle

  • Yanis,

    It seems to me the “resolution” of the triple Eurozone crisis your Modest Proposal addresses, namely 1) banking crisis; 2) sovereign debt crisis; 3) structural trade/investment imbalances; will be as follows.

    1) Banks will be recapitalised by the beefed-up EFSF, barring a successful court challenge in Germany on grounds of “fiscal transfer by the back door”.

    2) The Eurozone will become what Willem Buiter called “a default union”.

    3) The imbalances will persist (the initially leaked references to a “Marshall Plan”, as you know, were dropped from the final Council declaration on July 21) and will blow up in exactly the same way at the end of the next business cyclebubble, whenever that may be (we’re going to have a Depression before that business cycle gets going).

    As Jerry Goldstein says, this is a political crisis. If there were any political chance of a positive outcome the crisis would never have reached its current stage. All that economists can do is write The Economic Consequences of [political idiocy du jour].

  • I understand the skepticism and the pessimism. Being 45 years in the markets as Jerry says, is enough to have leaved many and have heard more black swans than most of us. Ιs the 3rd war coming? Will it knock us down or it will just put us all out of our sound environments in pursuit of the new global equilibrium? Instead of being pessimistic I am excited, myself, in pursuit of the new facts and balances. ..!!
    Well…, reality can be tough and having a child, I am actually very much scared as well. But I am optimistic that the new balance will be on a higher level. The transition is what scares me the most. It may be difficult to see the way out of this mess, but I am sure there is one.
    I am tempted to ask the opinion of Jerry and the bloggers as to if this is just an accidental global lack of politicians with leadership and vision in combination with the 2008 crisis, or this is the intrinsic inability of the current system to cope up with the new facts of the global economical and political environment, as it has evolved over the last years. Is there a voice, in the second case, suggesting the restructuring of the system and in which sense?
    And a final one, Jerry is it possible that we may be approaching Weimar with increasing speed, and thus no matter how far it may be, Europe may go there at no time, once the chain reaction starts? I see few obstacles to this especially with the level of the politicians that you describe.

  • One makes analytical errors when separating the political sphere from the economic. One must instead take an approach that is one of political economy.

    In economic (and financial) crisis, increasing attention is given to attempts to manage and eventually reverse the crisis by way of State action. The credibility and legitimacy of State actions is thus increasingly linked to developments of the crisis. The economic crisis then also becomes a political crisis . . . a crisis of legitimacy.

    Jurgen Habermas spelled this out in a dense, thin book, ‘Legitimation Crisis.’ As burdens on the State to resolve the crisis increase, so do threats to it’s legitimacy should those efforts fail in stemming the crisis. That is where we are now. Because the State and economy are increasingly coupled, their fate is thoroughly linked to one another.

  • Another thought: the crisis now takes the shape of both a private capital/finance crisis and a sovereign debt crisis. The two are linked, and the resolution (as opposed to solution) necessarily involves both as the crisis deepens. Neither can come to the rescue of the later. Crisis managers are themselves in a crisis, all the greater their effort to bring about a solution, that more obvious their failure.

    As of very recently one increasingly finds the blame being placed on politicians and political institutions for failure to end the crisis and to thus perpetuate it. But the crisis can be traced back to a neo-liberal global economy developed over the last 30 years in which government was ideologically perceived (even as governments accommodated that perception) that ‘free’ markets were necessary ensure global free trade, global expansion, all tightly coupled with perceptions of liberal democracy, etc. So the problem with politicians and political institutions didn’t begin just recently, nor should one ignore the structural contradictions inherent in the global economy itself. Pointing the finger at politicians and political institutional failures runs the risk of ignoring these more rooted structural contradictions.

  • There is too much crossborder debt. Write off old debts. Start from as clean paper as possible. It will kill a few banks, but who cares except the bankers and the shareholders. But they are too few and too small in the grand picture.
    There was an old Jewish custom that debts lagging over 50 years were written off because they created anomalies. Even in the greek orthodox church’s standard prayer says “kai afes iimin ta ofelimata imon, os ke imis afieme tous ofiletes imon…”, which is exactly this, “forget the old debts, eliminate the accounting anomaly and start again. It costs less than trying to preserve a false expectation that the market will fulfill aging obligations. Especially when these obligations involve “money” that was never existing in the first place…