Federal Reserve Chairman Ben Bernanke is widely acknowledged as an expert on the Great Depression and the policy errors that led to it that intensified the economic and social misery.
Monument Securities Chief Economist Stephen Lewis has been looking at how the Fed boss may be viewing the Greek rescue package given his expertise in this area.
“He has identified debt liquidation as the mechanism that drove a downward spiral in world economic activity eighty years ago,” Lewis said. “This is why he has been so anxious to limit any fall in US private debt, while tolerant of a massive offsetting expansion in US public debt.”
Bernanke has indicated his preference for a gradualist approach on cutting US public debt “over time,” Lewis said.
And Bernanke would be taking a very close look at the “gold bloc” that operated in Europe in the 1930s after the US pulled out of the gold standard in 1933, he said.
“Initially, the gold bloc comprised France, Belgium, the Netherlands, Switzerland, Poland and, in spirit at least, Italy,” he said. “The only policy available to these countries, whenever they suffered capital outflows, was deflation. Eventually, economic and social strains within the bloc became so serious that France, which was the nation exercising political leadership, effectively brought the arrangement to an end in 1936 by going off the gold standard.”
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“The IMF could not insist on a Greek devaluation because that would have been tantamount to Greece’s leaving the euro zone,” Lewis said. “If the euro zone started shedding members, it would at least bring the euro arrangements into question. A Greek debt restructuring was also ruled out.”
“If Greece’s creditors had been obliged to take a hit, where would that have left the creditors of other euro zone countries with relatively large government deficits?” he asked. “The risk would have been that a debt restructuring would have increased the virulence of the contagion from Greece and, ultimately, would have generated extreme uncertainty over the future of the euro currency.”
And there are wide concerns that Greek voters will not accept the austerity measures imposed by the IMF/EU plan.
“There can be little wonder that the bailout finds little favor with Greek popular opinion,” Lewis said. “It must be obvious to Greek citizens that its terms pay scant regard to their future prosperity, which is being sacrificed in an increasingly forlorn hope of preserving a stable currency for the use of citizens in other member-states.”
“Since most Greeks appear to think their government’s debts were incurred in the first place as a result of the nefarious activities of a ruling elite, the chances of their settling down to fulfil the terms of the bailout seem remote at best,” he said.
Tower of Babel
Germany, where a crucial regional election takes place over the weekend has been blamed by many for making the situation worse but Lewis jumps to the defence of Chancellor Angela Merkel and her government.
“German intransigence is held to blame for the draconian terms of the IMF/EU rescue,” Lewis said. “In truth, though, Germany is just as much a victim of these attempts to shore up the euro as is Greece, and a victim with a stronger claim to innocence.”
“Potential bailout operations to underpin the euro seem likely to cost Germany far more than the €8.4 billion demand now on the table,” he said.
“The guilty men are the eurocrats who stubbornly refuse to recognise that their fanciful construction is collapsing like a Tower of Babel.”