From the 2008 Crash to the Rise of Populism

In the latest The Rest Is Politics podcast, Rory Stewart and Alastair Campbell had Yanis Varoufakis as a guest.

Varoufakis is charismatic, articulate, quick, funny, and very good at weaving complex economic arguments into simple moral stories. He often speaks as if the fog has lifted, everything is obvious, and everyone else is either confused, cowardly, compromised, or secretly agrees with him.

The episode presented him, implicitly at least, as a well-meaning Cassandra: the economist who warned Europe that austerity would fail, was ignored by unimaginative technocrats, and was later proved right. Ok, there is some truth in that. The Greek bailout architecture was flawed. Greece’s debt dynamics were unsustainable. Austerity in a collapsing economy was destructive. Even the IMF later acknowledged serious failures in the original Greek programme, including delayed debt restructuring, over-optimistic assumptions, and inadequate attention to the politics of adjustment.

But that is only one part of the story.

The real question is not simply whether Varoufakis was right about austerity and the creditors were wrong. The harder question is whether his own strategy in 2015 was credible, responsible, and safe for the Greek people. Greece was insolvent and illiquid without official support. There were no easy solutions.

There is a serious tension between Varoufakis the co-author of A Modest Proposal for Resolving the Eurozone Crisis and Varoufakis the finance minister in 2015.

The earlier proposal, written with Stuart Holland and James Galbraith, was a serious eurozone reform plan. It called for bank recapitalisation through European mechanisms, limited debt conversion, investment-led recovery through the EIB and EIF, and emergency social solidarity measures. It was Keynesian in spirit, but institutionally cautious. It tried to work through existing European institutions and avoided presenting itself as a Grexit manual.

Varoufakis argued convincingly that the eurozone had created a dangerous structure: monetary union without proper fiscal union, national banking crises tied to sovereign debt crises, and creditor discipline without sufficient investment or democratic accountability. Much of what was in that proposal made sense.

But once in office, his posture changed. The 2015 strategy he actually pursued was much more confrontational. It relied on outright rejecting the old bailout logic, threatening default, and forcing Europe to choose between accepting debt restructuring or risking Greek collapse. That strategy might have had more leverage in 2010 or 2011, when European banks were far more exposed to Greece and the eurozone firewalls were weaker. By 2015, the wider euro-area financial system had been largely protected. Greek default would still have been serious, but the immediate damage would have fallen mainly on Greece itself.

That is a key point the interview did not pursue. Varoufakis appears to have treated Grexit, or at least Greek default, as a threat the creditors would not dare allow. By 2015, they were actually much more willing to call the bluff.

Being right about the dangers of debt and austerity does not make brinkmanship with Greek banks, pensions, deposits, imports, and salaries a responsible strategy. It was clear to everyone that some fiscal adjustment was unavoidable. The easily defensible criticism of the creditor programme is that the timing, scale, composition, and lack of early debt restructuring made the adjustment far more destructive than it needed to be.

The interview should have pressed him on the obvious questions. What exactly was the fallback plan if the banks collapsed? How would a parallel payment system have operated? How would pensioners have been paid? How would medicines and imports have been protected? How would deposits have been defended? Was this a credible Plan B, or a way of making rupture sound more controlled than it really was?

Rory and Alastair should also have challenged his claim that people such as Lagarde and Draghi agreed with him. Many serious economists and officials eventually accepted that Greek debt was unsustainable and that Europe’s austerity-heavy approach was badly designed. But accepting the need for debt relief is not the same as endorsing Varoufakis’s tactics, his reading of creditor incentives, or his Plan B. He often turns partial vindication on debt sustainability into much broader vindication of his overall conduct.

In conversation, Varoufakis can often sound pragmatic and common-sensical. But his writings and politics point to a more radical political agenda. He is not merely arguing for reforms, higher taxes and better regulation of capitalism. He has described himself as a Marxist of sorts, has said that capitalism and democracy are structurally incompatible, developed a theory of “technofeudalism,” and proposed radical changes to corporate ownership, finance, digital platforms, and money. One can agree or disagree with that agenda, but it should have been made more visible.

Alastair could have challenged him from the centre-left: yes, austerity was destructive; yes, Greece needed debt relief; yes, the eurozone was badly designed. But why risk a banking collapse without a durable majority, a credible coalition in Europe, and a tested administrative plan?

Rory could have challenged him from the centre-right: if you talk about parallel liquidity, fiscal money, or a public payment system that can be converted into a new drachma, why would depositors keep their money in Greek banks? Why would investors trust the state? How do you protect contracts, pensions, small businesses, and property rights during such uncertainty?

The Greek crisis was complicated, divisive, and deeply damaging. Varoufakis wasn't simply one brave economist facing a room full of cruel technocrats, as he likes to present himself. The important story here is about weak leverage, institutional constraints, political miscalculation, bank runs, default risk, and the dangers of turning economic theory into negotiating theatre.

The missed opportunity in this episode was that Rory and Alastair seemed too impressed by the performance and not sceptical enough of the narrative.

Being right about austerity is not a license to gamble with rupture.

Maybe they'll push him more in a future episode.

Curb the banks? The government has propped them up at every opportunity

Source: the Guardian. Monday 24 January 2011 21.00 GMT
Author: George Monbiot

Here's the story of how Cameron and Osborne secretly tried and failed to kill tougher European rules on bankers' bonuses.

It's bonus season, the time of year when bankers show us what they really believe. As soon as they get their money, they spend much of it on land and houses. They know that these are safer investments than the assets in which they trade. If they trash the economy again, they at least will survive.

This year the frenzy will be almost as bad as ever. But it could have been worse. Here is the story, revealed by a leaked document, of how our government covertly tried – and failed – to kill tougher European rules on bankers' bonuses, and how the chancellor of the exchequer appears to have misled parliament.

Before I explain what the government did, let me remind you of a few of the statements the Conservatives made about bonuses while in opposition. In February 2009, David Cameron announced: "Where the taxpayer owns a large stake in a bank, we are saying that no employee should be paid a bonus of over £2,000." Stephen Hester, the chief executive of RBS – 84% owned by the taxpayer – is now said to be lining up a bonus of around £2.5m.

In October 2009, George Osborne announced that he was calling on the Treasury to stop retail banks "paying out profits in significant cash bonuses. Full stop." Bob Diamond, the chief executive of Barclays, is due to make around £8m this year, half of which is likely to be cash.

In April 2010, a Tory policy paper observed: "News that bank bonuses this year are expected to total £7bn shows that Gordon Brown's claim to have ended the era of the big bonus was ridiculous." Bank bonuses in 2011 are expected to total £7bn.

A fortnight ago, a Downing Street spokesman admitted that the government would, after all, make no attempt to limit the size of bonuses. This much we knew. But what the leaked document shows is that even as the government claimed to be seeking strong international rules to curb the bonus frenzy, it was secretly lobbying to prevent them from being passed. The document is, or should be, big news, but so far it has been covered in just one place: Tribune magazine, where the freelance reporter Ben Fox broke the story.

As Cameron pointed out before he took office, the UK's bonus culture "encouraged short-term risk-taking instead of rewarding the long-term interests of shareholders and the public." This risk-taking helped cause the financial crash. The EU wanted to prevent it from happening again, by reducing the incentive to chase short-term gains. It hoped to update the Capital Requirements Directive, to ensure that bankers could take only a small part of their bonus as an immediate cash payment. The rest of the bonus would be a mixture of cash and shares, held over for up to five years. If, during that time, the bank did worse than expected, some of the promised money would be clawed back.

This would force bankers to think about the future as well as the present. The European draft proposed that no more than 30% of smaller bonuses and no more than 20% of larger ones could be paid upfront in cash. The British government had other ideas.

The leaked document, which was passed to a socialist-group MEP, lays out the UK Treasury's negotiating position. It reveals that "throughout the negotiation and implementation of the Directive, we have supported an interpretation that limits upfront cash to 40% of a total bonus". The European parliament's proposal – for a 20% limit – would, the UK claimed, "have a significant impact on the European financial services sector's international competitiveness." The Treasury, the document shows, also contested the plan to impose a minimum period for deferring the rest of the bonus payment. "Some may argue," the leaked document conceded, "that we are supporting a position that is less onerous on bank pay than other European legislators."

Under the heading "Line to take", the document proposed that the government should claim that it has "led the way in implementing G20 principles and doesn't believe that the EU should go further than what was agreed by the G20". It argued that "the only consistent option" is to drop the "minimum retention conditions". I'm publishing the leaked document in full on my website.

In December the UK proposals were defeated, and the tougher rules on bankers' bonuses were adopted by the European parliament. But here's the kicker. On 11 January 2011, the chancellor, George Osborne, made the following statement to the House of Commons. "… on 1 January this year we introduced the most stringent code of practice of any financial centre in the world. For the first time, there will be a strict limit on the amount of bonus payable in upfront cash. Also for the first time, there will be a requirement that 50% of bonuses be paid in shares or other non-cash instruments, which bank employees will not be allowed to sell on for an appropriate period."

In other words, Osborne is claiming credit for the very policies his government tried to squash. He is also wrong to claim that the UK's is the most stringent code of practice. It is in fact the minimum possible implementation of the EU directive (for example, under the UK interpretation, bonuses aren't classified as "large" until they reach £500,000). The rules are mandatory, and they came into force in all member states on 1 January. It seems to me that Osborne misled parliament.

As for the claim in the leaked document that the tougher rules would damage the sector's competitiveness, such restraints will do the opposite, as Cameron and Osborne both acknowledged while in opposition. They defend the banks against their bosses' greed.

The Treasury made the following statement when I asked if it had tried to water down the directive. "This accusation is wrong. The updated code is tougher than last year's … for the biggest risk-taking employees, the amount they can take upfront in cash has been halved from 40% to 20%." Yes, but what it failed to add is that this happened despite its best efforts. The deception continues.

The prime minister and the chancellor have been playing a double game. They claimed they wanted to tame the banks. In reality, they were protecting them. They never meant to address the economic polarisation of this country, or to check the incentives which caused the last crash. Their intention was always to pamper the rich and to make the poor pay for their follies. As the leaked document shows, the Conservatives are ready to risk the whole economy to help the filthy rich get richer.

Rethinking capitalism

Plenty to think about in this fascinating talk by Richard Wolff.
Some alternatives to the current economic model are laid on the table.

Greece in turmoil

A bill introducing reforms in the public and private sectors was due to be passed through Parliament late last night, just hours after Prime Minister George Papandreou’s meetings with opposition party leaders highlighted the lack of consensus on the changes being undertaken by the government.

Papandreou’s efforts to build consensus between party leaders proved largely unsuccessful. All three of the leaders he met – Aleka Papariga of the Communist Party, Giorgos Karatzeferis of Popular Orthodox Rally (LAOS) and Antonis Samaras of New Democracy – said they found little or no common ground with the government. “There was no consensus on anything,” said Papariga. “We think that the real battle will start now because the workers will realize that there is no point in negotiating over how much they are going to lose.”

Samaras said ND would continue to support any “common sense” measures, underlining that the conservatives had voted for 33 of the government’s bills. But he added that “consensus is complicity.” Samaras said he was opposed to the bypassing of collective contracts as that would lead to “medieval working conditions.”

The announcement of the new measures affecting working conditions sparked violent riots in Athens.

The next economic crash

This is a summary of the main points raised by Will Hutton in his critique of the handling of the financial crisis by British authorities. The full article is available on the Guardian website.

After the crisis there were cries of 'never again'. But the glacial pace of reform leaves us all in imminent danger

It was the biggest bank bail out in British history, and it came with scarcely believable costs. A trillion pounds of tax-payer support; a trillion pounds of lost output. After a disaster of this magnitude you might have expected some collective soul-searching by both banks and government. There has been far too little. Instead we risk a repeat – our banking system is as disconnected from real wealth generation as ever.

The return to business as usual – bonuses, trading in derivatives, the organising of banking as an exercise in which money is made from money – is breathtaking and depressing. And so, given the recent buoyant profit figures reported by our banks, is the easy money.

Labour delivered the minimum reform it could get away with, subcontracting responsibility to the Financial Services Authority. As the crisis broke in May 2008 it commissioned an inquiry populated entirely by industry insiders, chaired by the now chair of Lloyds, Sir Win Bischoff, to examine how the City could become more internationally competitive. When it reported a year later, it recommended little or no change. The conclusions were tamely accepted by politicians.

The poverty of action is inexcusable. The value of outstanding lending by British banks in all currencies is five times our national output – proportionally greater than any comparable country – and is underpinned by a puny amount of pure equity capital; £1 for every £50 lent. As an internal Bank of England working paper hypothesises, this collective balance sheet structure is so precarious that without substantial and far-reaching reform a second crisis is almost inevitable within 10-25 years. And next time we would be overwhelmed as a country.

Most industries that had undergone such a near-death experience – along with such a high probability of a recurrence – would be taking precautions. Not banking. Instead of building up its reserves aggressively, it is carrying on paying salaries at pre-crash levels.  As it is, £6bn of bonuses were paid out last year. As Springer says, the status quo won. The regulators certainly want more prudence over pay, but the banks play cat and mouse with them, as they always have.

Barclays, RBS and HSBC each boasts more than 1,000 subsidiaries – most of which are secret vehicles created to warehouse lending or direct financial flows in artificial ways, whose purpose, as one official told me off the record, is  to avoid tax or regulation or whose complexity is designed so that in an emergency all a government can do is write a blank bail-out cheque.


The opacity is dramatised by the ongoing multitrillion dollar trading in derivatives – essentially bets on the future prices of financial assets. The justification is that derivatives help buyers and sellers – companies or banks – better to manage risk. Some do. But derivatives are an invitation to speculate. British banks have £1 trillion wrapped up in derivatives – a business that Nouriel Roubini, the economist who predicted the crash, thinks should be as closely regulated as guns because they are no less dangerous.


But progress on financial reform – nationally and internationally – is glacial. Part of the reason is the fiendish complexity that western governments allowed their banks to create, and part is the jealous defence of alleged national banking interests by governments.


The status quo is bad news not just because of the risk of another crash. British banks shamefully neglect enterprise, entrepreneurship, investment and innovation. Only 3% of cumulative net lending in the decade up to the crash went to manufacturing; three quarters went to commercial real estate and residential mortgages. The result – devastated industries and sky-high property prices.


Almost everybody accepts that banks need to carry more capital, except getting international agreement on how much is close to impossible. And banks should indicate how in a crisis they would wind themselves up without costing the taxpayer billions – so-called living wills. The question is how much more should be done.


There should be much more transparency; living wills, for example, should be public documents rather than secret arrangements. So should derivative trading. There should be a great deal more competition. The government, according to the new business secretary Vince Cable, needs to get tough and insist that banks lend to enterprise. Britain needs more banks, transparent banks and safer banks that really contribute to the British economy.

Nobelist J.Stiglitz discusses U.S. Stimulus & Greece's Debt Crisis

Bonus time

After the government helped bail Banks out of their toxic investments with public money it seems like it's still just "business as usual" in the City and Wall Street.

The Guardian reports:

The world's biggest investment banks are expected to pay out more than $65bn (£40bn) in salaries and bonuses in the next two weeks, reinforcing the view that it is business as usual on Wall Street and in the City barely a year since the taxpayer bailout of the banking system.

Despite efforts by Alistair Darling to deter banks from handing out multi-million pound bonuses through the introduction of a 50% windfall tax, City sources believe that the biggest employers will absorb the cost of the tax rather than cut the size of the bonus pools they amass throughout the year.

This will mean that while proceeds from the tax could top £2bn – more than four times the £550m estimated by the chancellor in the pre-budget report – the government will have failed to alter the traditional bonus culture in the City.

Lord Oakeshott, the Liberal Democrat Treasury spokesman, described the size of the potential bonuses as "global greed by banks when global governance has failed". He added: "Britain's bonus tax only toys with the symptoms of the sickness, not its cause. These last few investment banks left standing have state-backed licences to print money so they must pay supertax on their superprofits, not hold taxpayers to ransom."