How it all started in Greece and how it will spread to France; unless Europe changes course

Interviewed in the London office of  UNITE (the trades union):


  • Yani, we (both academics and non-academics) are looking forward for your lecture in the University of Groningen…

  • Yep, the ESFS is another toxic, and most important, ineffective instrument designed to continue the forced policy of protracted default, serving banks, hedge funds, investors and the class of rich people, regardless the lasting consequences for the majority of the population.

    I do not know whether the below hit the news channels in Greece, it made my jaw drop on the desk in an instant.

    Jussi Halla-aho, chairman of the parliamentary administration committee, and an MP for the populist True Finns party:

    “What Greece needs at this particular point in time is a military junta that would not have to worry about its popularity and could use tanks to enforce some order among strikers and rioters,” Source: Helsinki Times September 14th

    • My Dear Chris,

      The link you provide us with is a bunch of crap, sorry to say that. The keynesian multiplier effect is a serious thing, one of the rare concept that enables us to call economics a science – Reagan stimulus was PURELY keynesian, by the way – and to deny its existence is just negationism. Well, you also probably think that too much money is going to bring inflation… Have you at least notice that the genius who talks all this rubbish has worked for funds and banks ? Where do you think his interest is ?

    • My Dear TL,

      you misunderstood my reason for placing the link. Perhaps this comment which I placed today on iTulip will help you understand my reasoning.

      Stockman is a honed well known player in the FIRE economy; yet, here he is coming out to tell us all about what has gone wrong over the last few years. As I see it, this is a classic example of what we here in the UK describe as “Nothing to do with me Gov!, must have fallen of the back of a lorry”.

      Stockman is distancing himself from the Shit about to hit the fan. But in so trying, he also exposes the deep fault in the overall thinking that has constructed a building called “Capitalism” that has no strong foundation built from equity capital. ALL his “Capital” is borrowed money. ALL of it.

      He never once talks about equity; it does not exist in his imagination; he has no idea in point of fact as to what ACTUALLY happened. Blind! Blind as a bat.

      On the other hand, what this does tell us; is also trying to cover up the true situation. He describes debt as a proportion of GDP, Gross Domestic Product; not as a level of leverage on the original capital input….. and as you can see, that brings me right back to where I started. He has no concept of the need for underlying equity capital. In his mind, he can and does; move “figures on a screen” from one place to another, without any relationship to the reality.

      How much underlying equity capital today underpins the GDP figures? Does anyone know of an accurate figure?

      David Stockman is trying to place the blame on anyone but himself. He is not the first, nor will he be the last. What everyone on the outside must do is challenge these people; make them recognise that they cannot just step out and suggest it was “Nothing to do with me Gov!”

      Note for EJ; Perhaps this set of questions and answers will make a very useful starting point to get at the true; underlying facts about where all this debt, called capital, has come from. Where it originated, where it now resides, (it is quite impossible for it to have been bought at par when it is the result of leverage of, to quote Mervyn King in his Banking: From Bagehot to Basil and back again, speech,…/speech455.pdf

      “For almost a century after Bagehot wrote Lombard Street, the size of the banking sector in the UK, relative to GDP, was broadly stable at around 50%. But, over the past fifty years, bank balance sheets have grown so fast that today they are over five times annual GDP. The size of the US banking industry has grown from around 20% in Bagehot’s time to around 100% of GDP today. And, until recently, the true scale of balance sheets was understated by these figures because banks were allowed to put exposures to entities such as special purpose vehicles off balance sheet.

      Surprisingly, such an extraordinary rate of expansion has been accompanied by increasing concentration: the largest institutions have expanded the most. Table 1 shows that the asset holdings of the top ten banks in the UK amount to over 450% of GDP, with RBS, Barclays and HSBC each individually having assets in excess of UK GDP. Table 2 shows that in the US, the top ten banks amount to over 60% of GDP, six times larger than the top ten fifty years ago. Bank of America today accounts for the same proportion of the US banking system as all of the top 10 banks put together in 1960.

      While banks’ balance sheets have exploded, so have the risks associated with those balance sheets. Bagehot would have been used to banks with leverage ratios (total assets, or liabilities, to capital) of around six to one. But capital ratios have declined and leverage has risen. Immediately prior to the crisis, leverage in the banking system of the industrialised world had increased to astronomical levels. Simple leverage ratios of close to 50 or more could be found in the US, UK, and the continent of Europe, driven in part by the expansion of trading books (Brennan, Haldane and Madouros, 2010).

      And banks resorted to using more short-term, wholesale funding. The average maturity of wholesale funding issued by banks has declined by two thirds in the UK and by around three quarters in the US over the past thirty years – at the same time as reliance on wholesale funding has increased. As a result, they have run a higher degree of maturity mismatch between their long-dated assets and short-term funding. To cap it all, they held a lower proportion of liquid assets on their balance sheets, so they were more exposed if some of the short-term funding dried up. In less than fifty years, the share of highly liquid assets that UK banks hold has declined from around a third of their assets to less than 2% last year (Bank of England, 2009). Banks tested the limits of where the risk-return trade-off was located, in all parts of their operations. As John Kay wrote about his experience on the board of HBoS, the problems began “on the day it was decided that treasury should be a profit centre in its own right rather than an ancillary activity” (Kay, 2008).

      Moreover, the size of the balance sheet is no longer limited by the scale of opportunities to lend to companies or individuals in the real economy. So-called ‘financial engineering’ allows banks to manufacture additional assets without limit. And in the run-up to the crisis, they were aided and abetted in this endeavour by a host of vehicles and funds in the so-called shadow banking system, which in the US grew in gross terms to be larger than the traditional banking sector. This shadow banking system, as well as holding securitised debt and a host of manufactured – or ‘synthetic’ – exposures was also a significant source of funding for the conventional banking system. Money market funds and other similar entities had call liabilities totalling over $7 trillion. And they on lent very significant amounts to banks, both directly and indirectly via chains of transactions.

      This has had two consequences. First, the financial system has become enormously more interconnected. This means that promoting stability of the system as a whole using a regime of regulation of individual institutions is much less likely to be successful than hitherto. Maturity mismatch can grow through chains of transactions – without any significant amount being located in any one institution – a risk described many years ago by Martin Hellwig (Hellwig, 1995).

      Second, although many of these positions net out when the financial system is seen as a whole, gross balance sheets are not restricted by the scale of the real economy and so banks were able to expand at a remarkable pace. So when the crisis began in 2007, uncertainty about where losses would ultimately fall led confidence in banks to seep away. This was obvious through the crisis. Almost no institution was immune from suspicion, the result of the knock-on consequences so eloquently described by Bagehot when he wrote:

      “At first, incipient panic amounts to a kind of vague conversation: Is A. B. as good as he used to be? Has not C. D. lost money? and a thousand such questions. A hundred people are talked about, and a thousand think, ‘Am I talked about, or am I not?’ ‘Is my credit as good as it used to be, or is it less?’ And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. All men of experience, therefore, try to ‘strengthen themselves,’ as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or weeks to come. And if the merchant be a regular customer, a banker does not like to refuse, because if he does he will be said, or may be said, to be in want of money, and so may attract the panic to himself.””

      My reason for bringing in this Mervyn King speech is that there is clearly a mismatch between what each tells us about the overall level of debt floating around the system. Yes, it might be said that I should do the job myself; but my argument is these figures need to come from a totally credible source. So here I challenge not just EJ, but the entire iTulip community; to put together a recognised listing of just how much “leveraged debt” is in circulation. Where it originated, where it is now.

      Without that information, no one can make any real start towards removing it from the system.…………..well-worth-45-mins-of-your-life.?p=210838

  • I am from France, and at the time the French government is doing everything they “can” to avoid losing the AAA. Very good analysis, have you been in touch with french journalists yet ?

    • It looks to me like France and others are doing everything they can that will make them lose AAA. If you sign a EFSF with huge obligations it does not improve improve your credit rating, it worsens it.

    • Hahaha Dutch-Jack you’re obviously right…! My government is a mess I can tell you, it’s very quickly going to lose the AAA, but to be honest the policy I would advise (you can consider I am post-keynesian) would probably have the same effect : borrow a lot, buy many stocks in order to make the stock prices rise sharply, sell to get profits, and then cancel most of our debt, restore full employment, subsidize prices in order to avoid inflation, and why not create a new French money in parallel with the euro. Lovely isn’t it ?

  • Interesting point (8% rise in interest rates). But did the discussion with the finance minister not stop where it ought to start? (On his part, as a politician)

    That is: if 8% rise in interest rates (followed by bankruptcy & IMF collatelars) is the price for sincerity and rationality at the highest level of governance, then shouldn’t the proper discussion (a dire necessity by now) shift on… well, on “what do we do to avoid this 8% damage and at the same time hold the damn discussion”!

    Put it bluntly, what can this minister (and others in his position) do that he (they) is not pursuing? Or is it the case that we are all quite helplessly waiting for the kings and queens of this chess game pay attention to the importance of the pawns, before they speak out (with a plan, even privately to avoid the collaterals, but heading somewhere).

    Being too naive, here?

    Many thanks

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