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Sunday, 23 October 2011

Governments in Terror of the Markets

The media are at one with European Finance Ministers in asserting that 'the markets' threaten mayhem in the world economy unless the eurozone solves the 'Greek crisis' expeditiously. The deadline for a solution that was to be agreed between the German and French governments has slipped from Saturday to Wednesday, raising the sense of urgency.

In the mean time another 800million Euros have been given to the Greek government to meet immediate obligations [largely owing to west European banks and investing institutions], and a further eight billion have been earmarked for the Greek bailout subject to evidence that the blatantly unco-operative Greek population are actually enforcing the necessary austerity and tax-paying measures that are minimally necessary to meet the government's assurances to their partners in the Eurozone. There is no credible evidence that Greece can go far enough to appear plausibly to bring living standards within the earnings of the economy, year on year. If the Greek state and the Greek banks stop paying interest on their debts, and declare themselves unable to pay in full where debts have to be repaid, then it is asserted that 'the markets' will create problems for the banks that are not being paid what they were owed by the Greeks.

Banks in almost every trading country have lent money to Greeks to fund businesses and to grant mortgages  to households. If they are not being repaid in full, holes will appear in the balance sheets of those lenders. It is taken for granted that 'the markets' will instantly start selling shares of those threatened banks, and withdrawing deposits that were placed with them, as soon as there is clear evidence of an impending Greek default. The argument goes that there will then be a risk of a 'run' on the threatened banks: and conventional wisdom has it that the governments of the banks' home countries will have to take whatever measures are necessary to reassure investors and depositors in the banks that their money is safe. President Sarkozi wants to be able to draw on Germany's assets to give French banks the assurance of unconditional support: and within the eurozone what is available to one country must be available to all. So Germany came once more  under pressure to lead the bail-out of anybody else: otherwise it is asserted that 'the markets' will force a domino-effect collapse of one eurozone economy after another.

It would be much easier - and cheaper - to allow Greece to default on its debts and then to ensure the security of the other Eurozone countries: and that will probably be how the whole issue is ultimately resolved, however much bravado is displayed in the mean time about levying the rest of the zone to continue to prop up Greek corruption and indulgence.

In the received wisdom 'the markets' will require a convincing resolution of the eurozone crisis to be concluded, at the latest by the closure of the forthcoming G20 Meeting, if it cannot be sealed-off by the European leaders on Wednesday. And what can the markets do if they do not consider the solution to be workable or sufficient? On investigation, it immediately becomes apparent that the markets as such never 'do' anything. Actions taken by participants in markets can be supportive or disruptive of government and of EU policies: but it is equally apparent that the full-time market players are ultimately and abjectly dependant on governments. No significant bank or investment house in Europe or the United States of America would be in existence now if they had not been supported by their government and Central Bank in 2008-9. How then could the same firms undermine governments and Central Banks in 2011-12? The conventional responding assumption is that the banks would demand repayment of advances that they had made to banks in the supposedly at-risk countries - Portugal, Spain and Italy are the favoured candidates for this role - and they would sell government bonds from the most-threatened country at ever-declining prices; while they would refuse to buy any new issues of bonds by those governments].

Governments need not roll over in shock at such actions by financial institutions. Governments [or Central Banks acting on their behalf] can freeze or  'demonetise' the cash that institutions get by selling 'distressed' government bonds of named states, and the money they collect from recalling deposits made in their banks, so they cannot make any use of the funds, which would remain inaccessible until governments release them in stabilised circumstances. Governments can react to the threat of sovereign credit being downgraded by the rating agencies by banning any publication of ratings in any context within their territories. They  can suspend banks' licences if their actions threaten to be disruptive of state policy. Governments have a massive range of powers - some of them not yet imagined - which they can use to cajole and if necessary compel institutions to conform with urgently-necessary policy requirements. Econmists will screech that such policies would undermine 'the market': so what value do Economists bring to the debate? They have not helped hitherto.

Governments should ignore threats from market operatives, or market forecasters, or market trends, or market analysts. The government can always freeze transactions across a market or in any part of it; or they can freeze any cache of cash or credit within the system.  Markets and their participants are the government's creatures. They just need the guts to act decisively. Of course there will be an aftermath: but that is in the future and sufficient unto the time is the evil thereof.

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