Did Greece Crush Keynesianism?

Tyler Durden's picture

In an excellent treatise on sovereign subtleties, Morgan Stanley's Arnaud Mares (the same analyst who nailed the Greek situation long before most others) once again lays out the increasingly bifurcated path that a broken European 'union' may and must take. Most interesting, and highly prescient in our view, is his consideration that the 'private sector involvement' in the restructuring of Greek debt was not only a major policy error but opens the door for the peasantry to finally comprehend that when sovereign debt is not 'risk-free' then fiscal (and monetary) policy can become pro-cyclical.

With the entire Keynesian dogma resting on this very tenet, we think it well worth a read and as he writes:

Pandora’s Box has been opened. Only fiscal integration accompanied by centralized financing of governments can bring about full stabilization of the market in Europe, in our view. The alternative could eventually be a resumption of the run on governments and a wave of public and private defaults.

Bottom line, in attempting to do things half-assed, Europe may have just destroyed the entire credibility of the one primary voodoo economic theory driving global "growth" (or stated better, borrowing from the future) since the beginning of the 20th century.

Which if you ask us, is long overdue.

Some notable quotables:

Why does it matter that government debt is viewed as risk-free:

What matters is not so much that government debt is risk-free as that it is seen as a safe haven. In our view, this is a precondition for governments to be able to use fiscal policy as a macroeconomic stabilisation tool. Indeed, what allows governments to deploy their balance sheet defensively at a time of recession is two properties of public debt, both of which derive from this safe haven status:

The first is practically unlimited access to finance. This is the property that allowed, for instance, governments to support their banking systems in the winter of 2008/09 by guaranteeing bank deposits and bank debt. In essence, what governments were doing in that instance was to lend their superior access to funding to the banks.

The second property, perhaps even more important, is that in a recession or crisis, flight-to-quality flows towards the safe haven lower the relative cost of funding of the governments. As long as this holds true, governments can cost-effectively deploy their balance sheet, borrowing more to supplement a fall in private sector consumption and investment.

And on the bifurcation:

In our view, this means that we are getting ever closer to a bifurcation point, where either of two outcomes must unfold. Either the aforementioned run must resume and eventually lead to a wave of defaults for (even solvent) governments and banks – a scenario we labelled in the past a ‘debt jubilee’; or, governments must reverse the effects of the use of private sector involvement in Greece by ensuring that they – and banks – benefit again from unimpaired access to funding at affordable costs. Intermediate scenarios (such as the ECB buying time by acting as a de facto lender of last resort) are in our view both transitional and costly.

In this context, we do not believe that the implementation of all the measures agreed by European governments on July 21, 2011, in particular as regards the enhanced capability of EFSF, will be fully stabilising.

As we have time and again noted, the EFSF is not enough. In fact, it will never be enough - because it has to be open ended.

The main issue here is the size of EFSF. As mentioned above, its lending capacity is sufficient to provide a fully credible liquidity backstop – effectively a function of lender of last resort – to Greece, Ireland and Portugal. Its current size provides ample reassurance that these three governments can remain funded ad vitam aeternam, providing of course they continue to fully comply with the conditions of their respective adjustment programmes. It does not have the capacity to act as a credible lender of last resort for Spain and Italy and other governments. To the extent that the problem generated by the use of PSI in Greece has been a broadening of contagion towards governments outside the periphery strictly speaking, and a material risk of a run on these governments, then EFSF as it currently stands is effectively obsolete.


The Economic Consequences of Greece

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BaBaBouy's picture

Throw Da Bums Out !!!

MillionDollarBonus_'s picture

One of the reasons that we are in this predicament is that there is a serious lack funding for economic education in public schools. Because Americans are not exposed to enough authentic economic education at a young age, they are increasingly turning to the internet in an attempt to understand the global financial system. I am the first one to admit that Keynesian economists have failed to reach out to the younger community. The internet is alive with arrogant libertarians who believe that they have a better understanding of economics than their superiors, and while Keynesian economists are busy advising world leaders from top academic institutions, they forget that many people have not been exposed to the same level of elite education.

BaBaBouy's picture

... A Buffet Worshipper ...

john39's picture

has to be a form of dry humor.  can't believe that anyone would believe this, or believe that anyone else might believe it.

BaBaBouy's picture

He's Fishing ... for negative votes...

TruthInSunshine's picture

Milliondollarbonus is Hammy Wanger or someone with a similar sense of humor.

I approve of his incredibly thick sarcasm, and always take time out to give him a +1, even if the fractional reserve bankers will ensure that it ultimately becomes a +31 with leverage, and the derivative crowd will ensure that it ends up a +1,311.

spiral_eyes's picture

I find it very hard to believe that anyone downvotes him. He's funny.

Thomas's picture

It was a kneejerk reaction. I am guilty and now must repent. It was funny.

Buckaroo Banzai's picture

It was a first-class, grade-A troll. Plus the handle is quite troll-worthy as well.


Fedophile's picture

Great rant, though most seem to have missed the /sarc.


Given the outcome it appears that the ZH audience IQ distribution is back-loaded.

smlbizman's picture

you guys do understand that this guy is the new harry,meth man etc...nobody in their right mind could spout this and believe it...

Iriestx's picture

This is the funniest shit I've read in months.  How much is the White House paying you to post this tripe?

Gene Parmesan's picture

Am I the only one who's seeing half-a-million dollar bonus' (after taxes) posts for what (I think) they are? I mean, their "superiors"? Come on...

Ricky Bobby's picture

Million...   - Latest iteration of the misinformation puppet. Johnny Bravo we miss you.

tekhneek's picture

Shit's pretty boring honestly. Anyone who read Mises or Rothbard knows all they need to know.

This ship's sinking and no amount of education will fix the foundationally broken keynesian theory that fuck faces love so much.

Oh regional Indian's picture

Actually all this shit is pretty boring Tekh. ALl of this intellectual mast your bastion, hold your position, academic non-sense.

All you really need is a well developed enough awareness to know what you want vs. what you need, know how much is enough, do simple math and percentage calculations, know that seasons turn.... that kind of stuff. Like you learn at Walden Pond.

The rest of this is horsepoop. 



slewie the pi-rat's picture

tyler putting up so many pieces you afraid you earlier advertising  won't be noticed?  other than that, great post, zHead!

as for as the "unimportant stuff"  goes i think if people try to focus on the rockefeller international combine,  the rothschild international combine, and let's just throw in the Catholic international combine, too, since some zeroHeads whom i respect have so advised me, are trying to do, we will find that "economists and economics" are just a part of what we may or may not see happening there, depending on whether one's "awareness" has increased since school

in the US, these interest, or parts of them run their puppets via the Council on Foreign Relations, it seems, which has just set up the Super Congo and will now go abt extracting more net worth and wealth from americans for the cfr's designs for the "nation" (corporate + military fascism)

how do these international combines control india?  and what are they trying to do, there?  who are the fascists and how powerful are they? 

mendigo's picture

leaving aside this guy - who i think should be valued for the levity he brings

is it fair to equate whats happening in the global financial system with Keynesian theory or is it simply a case of greed, corruption and incompetence

? keynsian = krugman = bernanke ?

spiral_eyes's picture

bernanke is far more dangerous than krugman. krugman is an old-school keynes/hicks devotee. bernanke is a central-bank-as-a-hedge-fund tentacles-in-every-pie pseudo-keynesian. every bernankean "innovation" brings us one step closer to the edge. krugman might come out with some lunatic alien invasion nonsense, but at bernanke's hedge fund games are way more dangerous than blue beam.

Breaker's picture

"is it fair to equate whats happening in the global financial system with Keynesian theory or is it simply a case of greed, corruption and incompetence. . . . ? keynsian = krugman = bernanke ?"

The later. Our politicians become Keynesian whenever Keynes would recommend lots of spending and large deficits (during bad times). During good times (when Keynes recommends running surpluses), the same politicians spend lots of money and run large deficits.

The conclusion is spending lots of money and running large deficits is the real goal. They are therefore, not Keynesian. They trot out Keynes only when his theories are convenient.

Krugman likewise is not a real Keynesian because he is not out waving his arms and hyperventilating that the government should temper spending and run surpluses during good times. Like the politicians, he approves of lots of spending and deficits all the time.

mendigo's picture

i think your on target there

there's no economic philosophy behind it - they just use references to dead people to confuse the issue

i wish tyler could ven diagram the situation: i.e. you have noble prize winners and you have ivy league graduates (puportedly) and you have criminals and you have bankers and there are alumns of GS and there are leaders in the treasury who can't do their taxes. also it would make a great off-broadway comedy if it weren't so upsetting

Invisible Hand's picture

Isn't this our Fearless Leader's lament? 

"If only you were smart enough to understand me, then you could grasp the essential wonderfulness of my oneness."

The problem is not our understanding of the Keynesians' brillant ideas, the problem is that Keynesian ideas are STUPID.

(Sorry for shouting!)

Koffieshop's picture

What is even more hilarious is that most people (looking at the votes) seem to think he is for real no matter how obvious the sarcasm is.

LowProfile's picture

Running about 5:1, although a few are admitting knee-jerking.

Fedophile's picture

Leson: Most are stupid; even amongst the ZHers

fonestar's picture

"Ignorant Libertarians" and erudite Austrians DO have a better understanding of global economics!!  The more the talking heads on tv try and bash us and reinforce their failed theories the more they just damn themselves in a self reinforcing death-spiral of loss of confidence, dumping & fleeing followed by more propaganda.

AnAnonymous's picture

Best comment so far. Comparing the validity of economic knowledge between Keynesianists, Austrians, libertarians and the rest is like wondering which angel has the thickest/longest penis.

Very funny indeed.

Sneeze's picture

Thats all I need... some socialist ball sucker teacher teaching my kids about money and entitlements.  While they are there they minus well learn all about Al Gore the Climate Messiah and the best way to go about collecting Obama bucks.

Not to mention your whole argument is flawed when you realize how much debt young American's carry on their exorbitant student loans going to con-job universities and buying Che Guevara shirts.


StychoKiller's picture

One of the best books on personal finance (for children of all ages!):

"Uncommon Cents - Benjamin Franklin's Secrets to Achieving Personal Financial Success", ISBN: 0-939817-06-3, by Lynn G. Robbins

Byte Me's picture


You sir, give the term "Professional Twat" a bad name. Twats actually perform a useful function.

The problem with Keynesian economics is simple -- the deficits never get paid down because it's always expedient to kick the can. Thereby, Keynesianism ain't really Keynesianism in it's currently referred to context.

Out of interest, just when is the happy day for you and your girlfriend Krugman??

LawsofPhysics's picture

"Labor day jubilee" - ahh, wouldn't that be nice?

tekhneek's picture

Given the employment numbers, we might just call it "Day" soon.

TruthInSunshine's picture

I'm more of a Hayek kind of guy, but in fairness to Keynes, his assertions have been so bastardized by the likes of the Paul 'Let's Have An Alien Invasion' Krugmans of the world, that Keynes often gets static from things he would never have endorsed, and I think Keynes himself wouldn't recognize much of the economic theory that he's been posthumously "credited" with.

As just one example, I give you Exhibit A (Krugman is endorsing a window where higher than FOMC targeted inflation levels should be tolerated; here's what Keynes had to say as to inflation's pernicious effects):


J.M. Keynes on inflation in The Economic Consequences of the Peace (p. 235-6):

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”


Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Dr. Engali's picture

I'm cerainly no Keynesian but he does get distorted. Keyneseins seem to forget that according to Keynes governments should cut back and conserve,save during boom times so that they have the mean to spend during the lean times. The Keynesians of today believe that governments should grow and spend during boom and bust times.

Ricky Bobby's picture

When has a government ever cut back voluntarily?

flacon's picture


Keynes had a truly warped demented mind because he understood the damage that his ideas would cause: . .Why Governements try to control prices, by Keynes . "A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money might have stood for, has been dissipated once and for all. . This sentiment is supported by the various legal regulations with which the Governments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender. Thus the force of law preserves a measure of immediate purchasing power over some commodities and the force of sentiment and custom maintains, especially amongst peasants, a willingness to hoard paper which is really worthless... . If, however, a government refrains from regulations and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer." . John Maynard Keynes, Economic Consequences of the Peace, NY, 1920, p. 239-40


TruthInSunshine's picture

While I read this excerpt to be supportive of price controls, which history tells us inevitably lead to shortages (if I can dig silver out of my backyard for $5 an ounce, but government tells me I can't sell it for more than $5) that damage output and the economy intermediate and long term, it seems to mesh with Keynes' views that inflation is an economic hazard, if even for the wrong reasons (he's arguing against fair market pricing that a normal demand/supply curve would bring about).

In other words, Keynes seems to be confusing inflation (debasement of currency) with price. While modern day central banks play with price via use of inflation (and deflation) depending on what the banker class cries out for, they are not at all the same thing.

falak pema's picture

Hey don't blame the doctor (Keynes) who diagnoses savings in boom times and the patient ( government) who goes on a spending binge the moment the economy rolls and the gravy train derails immediately, as every body and his son, grandson and grand mother, wants a dip in the honey pot. That's not the fault of the doctor! 

Human nature has to obey the laws of nature, checks and balances,summer and winter,  or suffer the consequences straigth off the cliff!

TruthInSunshine's picture

In more modern parlance, the problem that arises anytime government is allowed to spend money, is that the money that they're spending is OPM.

OPM is a moral hazard.

OPM is why short term profit seekers so recklessly destroy other peoples' retirement accounts.

OPM is why we tend to order filet mignon and a $14 glass of wine when on a business expensed lunch, but stick to a sirloin (or hamburger) and beer on our own tab.

OPM is why we drink the entire open bar at weddings, in an attempt to get the price we paid for the gift back, and then some.

Clint Liquor's picture

Which is exactly why Keynesian Economics is flawed. It ignores Human nature. Politicians never have nor ever will save for a rainy day. They know when it rains they can always demand more. Keynes gave Bankers and Politicians what they wanted: An Economic Theory that allowed them to steal the fortunes of future generations.

Dr. Engali's picture

I agree with you there. I am a firm believer in the Austrian school of thought. I am just pointing out the distortion in his ideas.

AnAnonymous's picture

Ah, another knowledgeable in human nature US citizen.

It is rather funny how US citizens love to claim they know human nature. Really part of US citizenism.

So playing the US citizen here, a bit of cheap propaganda: but isnt ignoring human nature an element of human nature, with the consequence that they have not ignored human nature?

Typical US citizen answer to be expected: "I have not understood a simple word of what you've said. You might have a valid point. Only wished I could understand it"

takinthehighway's picture

"No one ever went broke underestimating the intelligence of the American public." - H. L. Mencken

Clint Liquor's picture

Ah, another condesending prick with no contribution.