Tags: Mosler | Greek | Default | Crisis | euro

Mosler: Greek Default Not Logical Path Out of Crisis

Friday, 30 Sep 2011 04:49 PM

By Forrest Jones and Kathleen Walter

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Letting Greece default won't end Europe's crisis and won't allow Germany and other core nations to brush themselves off and move merrily on their way, says Warren Mosler, principal and co-founder of AVM, an international bond firm with 30 years of experience in Europe and author of the 2010 book, “The 7 Deadly Innocent Frauds of Economic Policy.”

In fact, it will do the opposite. It will cost money and rattle key export markets for Germany and other countries targeting European periphery countries.

Greece has run up debts and may default and exit the euro, yet many in wealthier nations such as Germany oppose bailouts for Greece and other debt-ridden Mediterranean nations.

They also have opposed backing euro-wide bonds, which basically shores up the Greek economy via the financial backing of the Greece's richer northern neighbors.

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However, allowing the European Central Bank to play a role in Greece's economic reform will not put the load on German, French and other taxpayers, Mosler says.

"It's a question if a bailout now is good for Germany and France but not so good for Greece, because if Greece is allowed to default, then their debt goes away. They are agreeing to wipe out their debt and it reduces their payments," he said in an exclusive Newsmax.TV interview.

"But if they fund Greece, and don't allow them to default, then Greece has to continue to make these payments. So the whole dynamic has changed from doing Greece a favor to disciplining Greece by not allowing them to default."

That makes default, arguably, less imminent.
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"I would think the odds are shifting to the endgame where Greece doesn't default, where at the end of the day Greece is forced though the austerity measures to run a primary balance or primary surplus, the interest payments will largely wind up with up with the European Central Bank, who is buying Greek debt in the marketplace," Mosler says.

Furthermore, the logic that applies to keeping Greece in the eurozone applies to the other nations such as Italy.

"It used to be if Germany, France and the others bailed out Greece, and then suddenly they have to bail out Ireland, Portugal, Spain and Italy, they could never have the capacity to do that. It's now understood that there is no limit, no nominal limit to the check that the European Central Bank can write," Mosler says.

Plus, Europe can expect no side effects of such Central Bank involvement.

"It will not weaken the euro, it will not cause inflation and it will not increase total spending in the region. In fact it will help reduce total spending in the region because the European Central Bank imposes terms and conditions when it intervenes."

Should Greece default, however, Europe would feel the pain, but it shouldn't be too bad in the United States, Mosler says.

Yes, regulators would have to react.

"The FDIC would have to decide how they would want to respond to a drop in equity. Would they want the banks to raise more capital? Would they give them time to do it?"

But they wouldn't have to react too much.

"They don't need to shut the banks down, it doesn't need to be disruptive to the real economy."

Turning to the United States and President Barack Obama's economic policies, Mosler says the president is on the right track by running deficits, but adds he's doing a poor job of explaining the rationale behind his policies.

Or he just doesn't understand it.
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"The policies have helped, but he doesn't understand why so he's been unable to defend them properly and the media has been unable to address the concerns of the critics of why they haven't helped."

The problem, is budget deficits are not big enough, Mosler says.

"What a budget deficit does is it adds exactly that much savings and income to the private sector. So when the government spends more than it taxes, somebody has those dollars in their account somewhere. You can see it in the numbers to the penny. When the deficit is $1.5 trillion, nominal savings — what's called net financial assets — goes up by $1.5 trillion to the penny."

"You can see that savings have gone up in the last three years and everybody talks about how Americans are saving, and they think it's some behavioral thing, because they are scared. It's not. It's the deficit."

During the years when the government ran a surplus of hundreds of billions, savings were down hundreds of billions the same number to the penny, and everybody was talking about behavioral changes.

"It's just not true," Mosler says.

"The administration doesn't understand this, so they've been unable to explain what the deficit spending has done and why it has supported the economy," he said.

"The reason we haven't had the double-dip recession the last two years that everyone was forecasting is because the budget deficit of 8.5 percent is supporting incomes and savings at levels sufficient for us to muddle through with low growth — not strong enough to bring unemployment down but not so low to be recession. And that continues right now."

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