Ponzi Austerity: Interviewed on the Keiser Report

Max Keiser and Stacy Herbert interviewed me, on the Keiser Report, on my notion of Ponzi Austerity, with particular reference to Spain, Ireland and Greece. Watch the video below and let me know what you think. But before you watch it, allow me to state one disagreement of mine with Max and Stacy’s interpretation. Max (in particular) suggested that, by shifting debt around (between the EFSF, the ECB, insolvent states such as Greece and Spain etc.), some ECB bankers or functionaries were profiting. I do not believe they were. Take for instance what happened last month: Greece borrowed 4.2 billion euros from the EFSF so as immediately to pass it on to the ECB so as to redeem Greek government bonds that the ECB had previously purchased in a failed attempt to shore up their price. This new loan boosted Greece’s debt substantially but netted the ECB a profit of around 840 million (courtesy of the 20% discount at which the ECB had purchased these bonds). That’s all true and accurate. But it is incorrect that ECB bankers pocketed that 840 million. Who did? No one! It was lost inside the ECB’s balance sheet! Without a trace. So, the situation is worse than Max assumes. For if some unscrupulous characters in the ECB were to profit from Greece’s pain (or Spain’s), at least there would be a logic (however sinister) to what they are doing. But there is none! All that we witness is organised madness, guided by an ideological commitment to an unworkable status quo! Now, enjoy the video. And keep your comments coming.

34 Comments

  • I will watch the video tomorrow but “But it is incorrect that ECB bankers pocketed that 840 million. Who did? No one! It was lost inside the ECB’s balance sheet!” is not exactly true i think.
    The ECB passes its profits to NCBs based on the capital key of each one.Thus if ECB netted a profit of 840,its NCBs that pocketed it,which probably also passed these profits to their governments since most (if not all of them) CBs share or pass their profits to their gvts.
    You probably remember that ECB refused a haircut on its Greek bonds.It refused even a haircut that would allow it to break even (regarding its greek bond holdings) (even though as it has already been discussed in your 2 previous posts,currency issuers dont really suffer actual losses).Instead it said that it would pass the profits to the NCBs and then it would be up to the governments to decide whether they want to send these profits to Greece so that the final outcome would be equal to a haircut. So this money is not “lost” at all.

  • Yes, saw the interview live. It’s good that you’re drawing international attention to the illogic of eurozone central banking activities; loved the comment about Papademos 🙂

    There is a problem with the Keiser report, which probably endears it to many Greeks — which is that they tend toward conspiracy theory and financial gain as primary explanations for almost everything. In that sense, they are no better than rational expectations theorists. The reality is far more bizarre, and indicates the important of transparency and simplicity in constructing any system. Engineers know this; it seems that bankers, economists and politicians live in a medieval world that has yet to discover rationality.

    The great irony is that the Germans think they are the very embodiment of rationality, yet continue with and even exacerbate this nonsense.

    • I agree with you, the only thing that i don’t like in the keiser report is that, the false dicotomy between good and evil, this thought is so deep in the mind of general people. We need to have a hero and a bad guy, but in human history the most awful things are made by stupidity, not by evil. There’s only stupidity.

    • Guest (xenos) ,leofromhell

      I would say that i am a little bit of the conspiracy junkie of this blog ,but i do not just believe what i hear or see.

      Stupidity for what happens is indeed the true problem.
      But for what ever reason ,it gives birth to evil.

      And here is a good source for the psychopaths that rule us.

      http://ponerology.com/

    • @Demetri

      I too am very sceptical of most of what I hear and read. Sometimes, conspiracy theories do have validity; often they do not. I see little point in making assumptions about the world, when there is no evidence to support those assumptions or explanations.

      Scepticism is healthy; conspiracy theory is paranoid. We need to develop explanations that make sense, rather than insisting that we know in advance what is happening.

  • Max doesn’t understand how public-sector bureaucracies operate. They do not attempt to take risks and earn profits from those risks. They don’t try to “con” people. They develop policies with certain goals and then implement the policies to achieve the goals. I assume that they justified the Greek debt prepayment with some sort of policy.

  • With all respect to your economic analysis, dear professor Varoufakis, I completely disagree with your political advice.

    You are asking Greece to initiate a war when she is not at all prepared for war, either materially or mentally. It is an economic war, and we do not have the hidden resources of the 1821 revolution either of gold hidden in the cisterns or of a realization of the oppression to the extent of a revolution. People are still floating along, with family solidarity which is still strong in Greece and the help of the weather, so I hope they will not be seduced by the sirens calling for war.

    The human cost will be unbelievable as it was during the last 20 century wars we went into, either in 1918 which brought the millions dead and the disaster, or in 1940 which brought the death of hundreds of thousands from hunger ( http://www.3comma14.gr/pi/?survey=7933 ). We are not at all prepared even to put food on the table, having most of the population in cities and towns .

    This is not a chess game, we are in a spiral which we can break only by breaking ourselves. As you say the situation is unsustainable. Let us treat the debt as monopoly game money . The time to talk revolution is when they come for the gold and resources, not when the monopoly papers are shifted around. By that time, by your analysis, some other bigger country will destroy the euro, and we will find ourselves at the outskirts of the trouble with our faculties intact and it is then we should repudiate whatever needs to be repudiated.

  • I really enjoyed the show – I think you help keep Max from spinning out over the top. I’m not an economist at all; however, it was always clear to me that insisting on more debt was no way to reduce debt.

    But perhaps you can tell me, where does the money go? Our personal finances were affected by the tech bubble in early 2000; of course the 2008 crash also impacted our savings (what was left after 2000). But I’ve never been able to understand what happens when the markets lose trillions of dollars.

    Thanks.

  • Yianni..I am of the view that PONZI schemes permeating the current economic environment is responsible for the dire sate of the global economy. What I would like to pick your brains on however is the notion of what I call Healthy Quantitative Easing i.e. instead of giving the money to the banks, give it to the public in an attempt reduce household debt and at the same time make sure that you squeeze banks’ wealth. A brief analysis of this view is as follows:
    Banking sector’s profits are limited while they can only finance investment or consumption. They can only make huge amounts of money by throwing us into a PONZI scheme i.e. gambling on rising prices, Given that money is endogenous, all is required is a willing borrower on the other side, asset prices go up, more individuals are lured in and so on, a bubble is created.
    What should we do to get out of this mess?
    We have to reduce the level of debt as well as the wealth of the financial sector without penalizing people who have purchased the goods of the financial sector i.e. assets, loans etc. So we need quantitative easing for the public; you give it to the public and say that if you are in debt you must pay your debt down. If you are not in debt, here is cash.
    The banks would find many of their loans paid off, their cash reserves would rise, their income earning components would fall; they might be illiquid rather than insolvent.
    People with debt would have less debt whilst people without debt would have more cash to spend, less income from bonds but more cash, would reduce the power of the financial sector over night. That would create unemployment in the financial sector but thats ok, it is not the end of the world!
    IN anticipation of your response!!!

    • @ Costas

      Quote:
      ‘We have to reduce the level of debt

      as well as the wealth of the financial sector without penalizing people who have purchased the goods of the financial sector i.e. assets, loans etc.

      So we need quantitative easing for the public;

      you give it to the public and say that if you are in debt you must pay your debt down.

      If you are not in debt, here is cash.’

      I’m always taken aback by how even seemingly sophisticated commentators are ignorant about the true nature of money.

      Of course, mainstream and centre-left economists don’t help much by never really discussing and exposing the issue.

      No debt, my dear Costas, means *no money*.

      Our money *is* debt (95-97% of the ‘broad’ money supply is debt).

      Money gets created as debt with a simple accounting entry when commercial banks extend loans (mortgages and the like).

      Yes, commercial banks conjure money into existence when they extend loans, you read right.

      Money gets ‘uncreated’ when the capital component of these loans is being paid back.

      If no new loans are extended, the money supply shrinks and there is less money around for everybody.

      That’s when economists start to sound serious and talk of a ‘liquidity crisis’, or a ‘credit crunch’ etc etc.

      No debt means no money, as simple as that.

      And we rely absolutely, utterly, on commercial banks for the creation of money.
      (To economists: don’t start discussing how banks simply ‘transmit’ money in their role as financial intermediaries and it is only the central bank that creates money.
      This is semantics meant to obfuscate the simple fact that, at the end of the day, we rely on commercial banks for our entire money supply.
      Period.)

      Yes, that’s how bad and interlocked the current system is.

      If you are puzzled by all this, have a look at the excellent ‘Money as debt’ documentary.

    • @acrobaticus. You probably think that what you have posted as a reply is an wow!!! analysis. This is rather a standard textbook analysis that first year undergraduate students are taught by incompetent lecturers who are unable to imagine that the entire economic system is far from ERGODIC. You probably do not even know what the word means but that’s ok. You can look it up in wikipedia….In any case, you have totally missed my point in what I argued in my earlier post. Stick to documentaries…They are very educational!!!!!!!!

    • acrobaticus

      The fact that all money is debt is highly misleading when put in by certain points of view.

      The first thing this phrase does not highlight is that we’re not all indebted at the same time.
      Similarly, not the same people are always the ones that are indebted at the same time.

      Furthermore, loans will never be repaid at the same time so there will never come a day where there is no money left in the economy.
      The main problem that arises though,is that at times of recessions as the one we are experiencing lately, people want to delever – pay down debt or in other words the non-government sector desires increased levels of net saving.This can lead to negative credit expansion and then its the government’s job to step in and offset that by increasing gvt spending, a situation that up to a point happens automatically but its most definitely not enough (meaning the automatic stabilization is not enough).

      As for the governments,apart from the malfunctioning and misdesigned euro,any other government that is able to issue its own fiat free floating currency can always spend as much as needed.The “debt” that comes with deficit spending is purely an accounting matter and nothing more.No government is in danger of defaulting in its debt obligations as long as they are denominated in its own currency.
      So in reality not all money is actual debt.Governments have the ability to inject non financial assets in the economy.
      I have seen both “money as debt” and “zeitgeist” and although they raise interesting issues,they get several things wrong.

      PS.Im not trying to prove that banks are “good” the way they exist now,in any way, but thats really a whole different matter.

    • I am glad you can spell the word ergodic Costas.
      You are an economist I would guess, as you seem to like to mention flashy terms in a pretentious way to make what is in essence a social science (and Keynes understood this) sound more scientific.

      Yes, documentaries can be very educational indeed.
      If your highness allows people to get educated using various means that is.
      Or maybe you should let us know which media you approve of for education Costas?

      In any case, you are right that I isolated a part of your post for my purposes.
      And I’m not answering your point, merely using one small part of it.

      You wrote:
      ‘We have to reduce the level of debt’

      Reducing the level of debt in an economy reduces the broad money supply – the economy shrinks and you get a recession.
      Period.
      Spare us your obfuscation regarding this please.

  • I agree with Crossover’s statement that in essence the 840 ml. profit of ECB will increase the dividend payment NCBs receive in proportion to their shareholding in ECB.
    But I also think, if I’m permitted to interpret Yanis, that what he means by saying this amount is lost in ECB’s balance shee(i)t without trace is this: the individual entries in ECB’s accounts are so huge that trying to locate its footprints is just like searching for a needle in straw!
    In any case, the tragedy of ECB business in this respect is that it tights the death rope around Greek citizens’ neck so marginally as to complete its suffocating endeavor. It’s a shame for a non profit organization to make money out of people’s misery. But after all what else could you expect from a CB that by its charter is committed to implement price stability policies at any cost.
    Now is the time to change ECB’s objectives to those of the FED.

    • “But I also think, if I’m permitted to interpret Yanis, that what he means by saying this amount is lost in ECB’s balance shee(i)t without trace is this: the individual entries in ECB’s accounts are so huge that trying to locate its footprints is just like searching for a needle in straw!”

      Thats true.Although if you consider what a relief it would be (with an even bigger semantic impact than the actual financial impact) if ECB aggreed to take a haircut i cant agree that we are searching for a needle in straw.So i do agree that given ECBs balance sheet size,the profits from the Greek bonds servicing are nothing really,that still doesnt mean that its equally nothing for the Greek side.ECB threw the ball to the 17 governments anyway.Its up to them to decide if they want to return these profits or not.

      After all being an MMT follower myself, i believe that a currency issuer cant be thought of as able to making profits or suffering losses.If one has the unlimited ability to create the money of account the terms profits and losses become irrelevant.Let alone while the given entity is not only a currency issuer but also a not for profit entity.

      “But after all what else could you expect from a CB that by its charter is committed to implement price stability policies at any cost.
      Now is the time to change ECB’s objectives to those of the FED.”

      Totally agree.The ECB needs a dual madate…yesterday.Putting price stability above output and employment,says something about Europe….

    • “Now is the time to change ECB’s objectives to those of the FED.”

      FED is not at all different. It created even more crises in the past.
      All these corporations are the same thing.

      Control-freaks.

    • Control-freaks of people’s lives for the accumulation of wealth and even more control.

      If we want Freedom as a nation we eventually need our own currency. Maybe not immediately but we need it. And this currency must be debt-free government notes.

  • I, on the other hand, in disagreement with Anna, fully agree with what our policy should be. Just Say No!! Unfortunately whoever wins the elections, I don’t think they will have the guts to do it. On the other hand we are really damned if we do and damned if we don’t. The German imposed policy is catastrophic and if not reversed in time will lead to the collapse of Euroland anyway, whatever we mat or may not vote here in Greece. (As I analyse in my blog). What I do wish is for the next government to find a spine in its back and act, for once! in the interest of Greece rather than all those mixed other interests, such as Mr Papademos acting ONLY in what he perceived (as a bad central banker) to be the interests of the ECB.

    • As I said, it is easy to call for breaks (Just Say No!!) when all your eggs are not in the basket, as I see from your profile in your blog. Just like the professor, you can take us or leave us.

      Το τρίτο μέγα όχι ( the third great NO) can only be said by the people committed to stay and see it through, hardships and all. This is not the time.

      Treat the debt as monopoly money, Do the reforms which are necessary to survive on our own, hopefully by the time the euro collapses we might be getting even. Plant potatoes in your balconies ( we import most of our food) and go gather those olives falling for the birds and rats, and then say NO.

    • anna v

      I am here and i say NO.
      I have many problems and i say NO.

      We can hang on.

  • Hi Yani

    Could you please extend your thought on your saying that ”money was lost inside ECB balance sheets”?

    Can’t really say that this is not the case, or that you are exaggerating things but if all these loans / funds / accounts are not properly monitored by those you issue them then we are talking about a ”form of Madness”. Then we are talking about distraught bankers, politicians and in turn lay people whose real money are being converted into a positive feedback Ponzi austerity phantasmagoria which entropy drives it to a horrendous and inevitable ”Big Bang”…Well, it might be true that nobody’s making a profit but this does not necessarily mean that nobody’s benefit from that. Somebody could argue for examble that all those money were not really lost but sacrificed for the maintenance of the current status quo of Germany’s political dominance over Europe, and I think that makes some sense. It seems that not all money are the same…Some money have political auras and especially the electronic ones. I can’t really accept the scenario that ECB is incompetent to properly monitor who owns to whom, failing to keep their accounts duly informed. I believe that since there are very competent to create money out of nothing they are equally good to create nothing out of money when political implications dictates it. There are times where an illusionist appears a rabbit out of an empty hat and some other times where s/he disappears whole buildings…It depends on the audience and how novel the illusionist wants to be. So this is what I guess they are doing but I can’t really make up my mind of their plans and goals.

    What I can see with aporia (taking the word and its meaning from your recent book) is a glowing and deafening red light illuminating by the activation of a self-destructing mechanism which threatens to blow the whole edifice up. No-one knows how much time is left where no-one can exit the building as doors have been sealed for ‘security reasons’, keeping all people inside distraught where de-activation password is known to all but only the Big Boss can really type it in also holding the key information: In reality the Boss knows that this alarm light is not really connected to a ruinous detonating set but it only functions as a fear and ‘noise’ transmitting machine driving all people crazy, boosting their uncertainty and pessimism and at the end sinking them to depression and catatonia.

    So somebody has to speak to the Boss, as in reality there is nothing to fear of…

  • “….or let it go to hell!”

    I’ll choose that one.
    I am a mean person right now. Everybody should feel the pain and wake up.

    Our pain for our assets. Period.

  • I am told the Greek State was poor on collecting taxes and borrowed to fund its policies. They also entered the Euro fraudulently; hiding indebtedness. But the German answer serves only financial capitalism. Its not a question of “goodies” and “baddies.” It’s more to do with whom the State serves. I was born in 1953; saw the advent of the Thatcher-Reagan deal and dominance of the “Washington Perspective. I would argue Governments have ceased to be brokers between competing interests. Unregulated financial capitalism has bust the system chasing highly profitable financial products rather providing capital for investment for industry. Large scale production has moved to countries providing cheaper labour. Austerity means unending impoverishment and we cannot look to Government for policies to break the downward spiral; they serve the elite.
    There are ways of helping the 99%:- QE for investment and supporting individual debt, public works, relaxing inflation targets, taxing financial transactions but all these involve redistribution from the 1%. Will it happen? I fear not. Historically, the wealthy few have always worn the blinkers of short term gain. Positive change is rare and usually follows cataclysms. My advice to the Greek people? Look what happened in Iceland when it went bust. Be governed by a State which serves your interests and if that means leaving the Euro then so be it. There is no way out of this mess while we serve the interests of international finance.

    • Really? I’m told the US/UK parasitic ponzi cesspools are about to spill out all over in your own backyards.
      I’d buckle your seat belt Dorothy, coz Kansas… is going bye bye…

  • Really enjoyed your comments Yanis, you make it all so easy to understand, whereas, sometimes Max and Stacy can get bogged down in detail, yet their hearts are in the right places. After reading the comments above, I’m horrified, when you can actually blame someone for your predicament, it gives you a target and a possible solution, but when no one can be proved to wear the blame and it’s all based on stupidity, I can see the EEC imploding, and, like I heard on the news, Germany won’t be unscathed in this.

    Very interesting interview, I always enjoy your comments on the Max’s show, I’m an older woman from New Zealand, we’re all crossing our fingers here, but no doubt the implosion of the Euro, etc, will affect us as well.
    Poor Greece, you deserve better than what you got.

  • Σιγα ρε Γιαννη… Ρε ας τους πουστηδες να χτυπιουνται – να δειτε σε λιγο τι εχουν να παθουν οι “δανειστες” και βασανιστες μας!

    If you think Spain, Greece and Europe have problems with – shock! horror! – up to 1 trillion Euros in bank re-capitalisation, you’ll soon see what the REAL problem is – and it’s right under their noses.
    Just go to page 131!
    http://www.sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf

    http://demonocracy.info/infographics/usa/us_debt/us_debt.html

    Hang on to your luggnutts! It’s time for an overhaul!
    http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

    Any one see the movie “Trading Places”?

  • Yanis is right. No one at ECB profited personally. The goal of the ECB is now becominig clear – put Europe’s banks/financial industry in charge of EVERYTHING, kill democracy as much feasible, and saddle taxpayers with the bill. For a long time I thought the neoliberal agenda was simply to crush labor and transfer taxpayers’ money into the hands of banks. That may have been ECB/Bundesbank initial plan, but their deliberately escalating the crisis and obfuscating the reasons for it are now visible for all to see. The agenda is to create a completely un-democratic rule by bankers over the whole Euro area.

    • David

      Exactly. And then the world.
      This has been going on for years.
      Now six generations in a manipulative system ,people are convinced that these crises are natural. They are natural in the system but the system is controlled. They believe no alternatives exist.

      And yet again there are so many historical examples of debt-free money.
      Even today there are places debt-free money exist.

      It is so easy to just believe propaganda and find a scapegoat to blame.

      People must WAKE UP or else FREEDOM is endangered.

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