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Guest Post: The Greek Tragedy And Great Depression Lessons Not Learned
By Nomi Prins
The Greek Tragedy And Great Depression Lessons Not Learned
Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots.
Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds.
Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just want to protect their bets and not wait around for Greece to really stabilize for repayment.
Prior to the Great Depression, the Greek economy experienced years of growth, a healthy commercial activity spree, and like today, a stark increase in (less-leveraged) bank loans to finance it. When the Depression struck, banks and local businesses faced unpayable loans and declining asset values. (Stop me when this sounds familiar).
Credit constricted immediately, choking internal economic activity. In 1928, the Greek Drachma was tied to the gold standard, but pegged to the British pound. When Britain devalued its pound in 1931, the Greek government responded by raising public investments and pegging the Drachma to the US dollar.
But by early 1932, central bank reserves had fallen so much that they only backed 40% of Greek bonds. Even without the slow drip of rating agency downgrades to highlight this leveraged debt situation (which is nothing compared to say, today’s US reserves vs. debt leverage), the lack of reserves caused foreign speculators to fleece the Drachma/dollar exchange rate. Bond yields blew out. Borrowing costs shot up.
So in March 1932, the League of Nation’s (the precursor bank bailout entity to the ECB/IMF) agreed to provide a loan to service Greece’s debt in return for – wait for it - austerity measures. Unlike today, the government said ‘hell no.’ Instead, in April, 1932, it floated the Drachma - which devalued quickly. It also declared a public debt moratorium, and increased infrastructure spending to strengthen its economy. It negotiated repayment terms with creditors for overdue interest. By 1934, agriculture and industrial production rose, the currency was more stable, employment increased, and the budget balanced.
The situation is different now. Though national Greek banks registered relatively few domestic loan losses in 2009 ( a fact unrecognized by the bailout supporters), they did begin taking losses in their trading books due to various international bets. Their borrowing and margin costs rose sharply and quickly with each rating downgrade which increased their trade losses, and kept them from extending or renegotiating loans locally, which caused more economic pain for the population.
Greece would have been better off, had it not suffered a rapid series of downgrades and been pulverized by subsequent hot-money flight and pressure. Despite a clear warning from the Central Bank of Greece in late 2009 (when Greece was critical, but breathing) that it could sustain its costs if they didn’t rise egregiously, Moody’s (and later others) cut Greece’s sovereign debt rating from A1 to A2 in December, 2009. From that point on, the international banking community went into ravage mode, fast.
Moody's cut Greece’s debt again, to A3 in April, 2010, to Ba1 (junk) in June, 2010, and to B1 in March, 2011. Three months later, Greece’s rating was cut to Caa1. By September, 2011 the six biggest Greek banks were downgraded to Caa2, a smidge above default levels, crushing national credit flow to the population.
When any country is downgraded from single A to junk within 18 months, it has to issue more expensive debt to stay even, which by definition, makes the credit-worthiness of its bonds decline. As in any country, Greece's banks are big buyers of its government bonds. They also use those bonds as collateral for other borrowing and trades - with each other – and with international banks.
As Greek banks weakened and borrowing costs soared, their ability to buy Greek bonds from their own government diminished, which weakened the value of government debt. Circularly, Greek banks took further hits for holding the devalued Greek bonds and thus become weaker - further reducing their ability to sustain local needs.
That is why the Greek government wants to bolster its now junk-rated banks (in addition to the money that banks are getting directly from bailout-for-austerity loans) and foreign ones, at the cost of hurting the population. But since the economy (even at its healthiest level ever) can’t sustain its bailout borrowing costs (as opposed to its operating costs which would have been payable without the increased rates and bailout principle mixed in), this is an unstoppable downward spiral.
Greece’s GDP has contracted 13% (by 7% in the last quarter of 2011) from a late 2008 record high. (By comparison, the United Kingdom’s GDP has fallen by 20% in the same period, and though its unemployment rate has risen, its borrowing costs remain manageably low, making it cheaper to sustain its banks.) Greece’s savings rate at 7.5% is at three decade lows (but still higher than that of the US).
Meanwhile, Greece’s debt to GDP ratio is 160%. (It hovered around 100% from 1994 through 2008.) The unemployment rate at 20.9%, and the youth unemployment rate at 48%, has doubled since January 2008. There is nothing to indicate it won’t keep rising.
Money continues fleeing Greek banks, bonds, and stocks, as citizens try to preserve what they can, and foreign speculators play a game of chicken with bailout providers. The Greek stock market stands at just one-fifth of its January 2008 level. Ten year government bond yields are at 33%, compared to 5% just two years ago.
The speed and intensity of Greece’s decline reflects nothing short of an international mafia-style hit.
The majority of Greek workers didn’t break the government’s back, even if a very small subset strained it. Further, the more bailout measures forced on Greece, the more its economy will be ravaged to repay them. After four rounds of austerity, nationwide protests, $110 billion Euros in IMF and ECB bailouts, escalating interest rates driving borrowing costs higher and choking credit, a downgrade to junk, a Prime Minister replacement, and now another big bailout, Greece’s tragedy is just beginning.
Yet lessons from the Great Depression exist. By floating the Drachma (the equivalent of leaving the Euro), negotiating individually with creditors (telling banks to back off), and increasing internal public focus (the opposite of what's going on now) Greece was able to stabilize more quickly than larger European countries. It’s not entirely too late to try again: but it requires the currently unimaginable: a political will that is population – rather than bank – oriented.
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Let’s play!
Let free the Tyler Durden in you!
Tomorrow(02/24) everyone tweets ‘’Greece Defaults’’ on twitter at exactly 10:03 (ET).
It’s time to see how bad the Algos will react to this storm of tweets.
Respond to this message saying you are IN!
Ok, I'll Tweet it, FuckBook it, and even shout it loud - just for case
But I thought the lesson of the Great Depression was that the only answer to every economic question was to print more money...
http://azizonomics.com/2012/02/23/the-gold-standard/
All of this is nonsense. You forget about those "populations" that lent money to the Greek "state". You always mention "the banks" - that's entirely hilarious and even more non-sensical because Greek bonds first and foremost were retailed to all kinds of people in the Netherlands, Germany and Finland etc... who found themselves being robbed of their savings by a class of corrupt Greek politicians whom even their own "population" does not trust at all and wishes them straight to hell... The Banks? Ha, they sold their positions or wrote them off. This is about the elderly and others in the rest of Europe who lost a lot of money! I know a few cases from work... Its incredible! I always read those "poor Greek"... Right! Pay your debt and stop fooling around! Same goes for the US here! Its been a long day...
... and who sold all this stuff to the people? how are the people to know what a good and safe investment is?
are you a fucking banker?
... and who sold all this stuff to the people? how are the people to know what a good and safe investment is?
Get out of your fucking sandbox and grow up! Try to answer a couple of simple questions: Who emits bonds? Banks? Who is responsible for state-owned debt? Banks, "the people" or politicians? Wake up, idiot!
I don't know where you come from, but in the countries that you mention it's banks and pension funds that "manage" the investments of the people. The people have NO CLUE about any of it.
None of them ever bought Greek bonds, they were sold to them by their banks and pension funds as part of some obscure package, or they were bought by their governments, who obviously were clueless too.
It's the banks, pension funds AND politicians that screwed the people, in The Netherlands, Finland AND Greece!
So when Portugal goes down, you will tell them to just pay their fucking debts? And Spain? And eventually The Netherlands, and the USA? Just pay your fucking debts?
Fucking banker.
What's amazing is that the Greek right wing still thinks that the left is revolting as usual and are not joining hands yet. This time the left is not wrong. I hope that the right wing understands this and joins forces to burn those who are selling the country.
What a pity. What a sad case. You Greeks with the fighting spirit, have been reduced to begging. All Greeks regardless of political affiliations must rise up holding hands and topple them.
Viva la revolution. Vamonos
I like your attitude, Dona with a squiggle.
The Greek government just wants to stay in power, or in parliament.
The people are angry but not quite ready to decide about how to react properly.
Greece has always been manipulated by one or another country. The Brits funded both sides
of the Greek civil war after WW2. The US was behind the junta of 1967-74.
And, Greeks have got used to these periodic crises and often react by going back to their villages.
However, I think that bigger, more confident countries will have people who will not stand for
oppression.
I don't suppose that Italians or Spaniards will come to Greece to swamp the government of Greecee.
But, when the pressure gets put on them, they will react effectively. They have expectations of
comfort, justice and the like. It's what eventually worked in Argentina.
However, it took time for the citizens there to realise that they were once a rich country that had been
ruined by oligarchs, and that there was no end in sight. Then, they found the strength to revolt.
Greece isn't going to revolt. They'll just stop spending, start bartering and wait for this government
to either fall or call default on its own, and exit the Euro, which the Germans are ready for.
derp, this is my only social network
quebecois...
Think it's funny to play with Greek feelings, and fortunes?
That is your response to the serious content of this article.
You write like an agent provacateur. If someone wants cyber warfare, then they don't need to inform you that they are 'IN'.
he started it earlier i think
now, 1.5 hours later, he's still doing it on the new strings
i'm with non_anon~~~L0L!!!
plus, i'm a luddite
I don't follow your logic.
Do you want the ALGO's to react......OR
Do you want us to "tweet"?
I'm in and so is the whole crew here at DKM...
Just put it on the pre-open Plan Of The Day
those who ignore history
Tis like Greece is being turned into a Weimar Republic paying war reparations, except Greece never waged a war. "Banksters", i.e., Western financial elitists, are haughty bourgeois fools who, in blind pursuit of their beloved usury, don't realize the fate they are preparing for themselves (and Israel, America and the U.K. by extension). One need only consider the warnings from Max Keiser of RussiaToday and Iran's PressTV: http://www.youtube.com/watch?v=tOWsSRzSCmM
maybe they don't "believe" in karma or something?
"Lessons learned?" You're kidding, right? Don't you know 'it's different this time'? ... and we're SO much smarter than we were than.
Lessons from the 1930's ... what a quaint idea.
Nomi Bitchez !!!
Other dominos will fall
It has been made clear that leaving the Euro is the equivalent of 'going rogue'. It's like going off grid
Caviar...
Greece is being herded and punished, pour encourager les autres.
The New Feudalists need to stamp their boot on the face of mankind, beginning with Greece, the birthplace of European democracy, before the financial coup d'etat moves onto other territories, in aid of the globalist central bank cartel, and their enriched political pets who are 'only following orders' and obeying the laws...whilst the mass of debt slaves endure this corporatism; the 'new world order' (Brown), the 'third way' (Blair), the 'post democratic age' (Mandelson)...the wish of the Trilateral Commission, and Bilderberg Group.
Just my observation. Carry on...
I always enjoy your insights, friend.
Agree. Feudalism can't be far off. I like your concept of enriched political pets. Someone always has to do the dirty-work
there is talk in Greece about introducing a parallel currency, alongside euro, for internal transactions.....
The irony....(pun intended).... Bringing America Back: Are Infrastructure Jobs Being Shipped to China?The renovation of the Alexander Hamilton Bridge in New York is being overseen by China Construction America, a subsidiary of the China State Construction Engineering Corporation.
In Alaska, they are set to spend millions on foreign materials for the Tanana River Bridge Crossing and would largely fabricate the bridge overseas.
The state of California rejected federal funding for a major portion of the Bay Bridge in order to go with a Chinese company that offered the lowest bid. The move cost Americans almost 3,000 jobs -- jobs that cost the struggling California economy millions of dollars in wages, taxes and potential consumer spending.
http://abcnews.go.com/US/bringing_america_back/american-infrastructure-j...
Shovel ready
calm down everyone, Ben Bernanke is an expert on the Great Depression
whose paying for the bank recapitalization......? the tax payers.....
Ding ding ding!!
As long as there are workers, who have a portion of their income garnished by regulation into retirement funds and then sequestered into bonds by the bank's prop. desks, there will always be bailouts. As long as there are unwary savers, (who by default have their pay automatically deposited into banks, who in turn consider your savings as their assets, to be put at risk in the market by automatically hypothicating those svings into treasury bonds, or their own IOUs), there will always be bailouts. The whole system is a constant balancing act (pun intended) of perception, whereby banks have convinced "savers" that their funds are held in accrued accounts, because of the credit entry into it.
How fast would this Maddoff scheme unfold if everyone was aware that the banks were (it's their business model) placing your savings at risk in the bond markets. Has your bank risked your savings in PIGS bonds?
Have you ever heard of a bank offering a potential saver this deal? "Put your savings in our bank and you can be assured that they will be placed at risk in the credit markets. For that privelege, we will pay you a 2% variable interest rate". How many offers would they get. This kind of offer is forced on many Pay As You Earn tax payers. Talk about an offer you can't refuse!
And yet Economists seem puzzled why the savings rate is close to zero. The bigger wonder is why the savings rate is above zero!
They don't care if it 'works' to keep lending money to Greece and squeezing every drop of life's blood from the people of that country. They do not care about this. Why do people keep thinking that the finance ministers actually believe that what they are doing to Greece is anyway helping Greece to get out of the hole that it's in?
In Ernest Hemingway’s “The Sun Also Rises,” one of the main characters is asked how he went bankrupt. “Two ways,” he responds. “Gradually and then suddenly.”
How is Greece going to compete for capital, for raw materials, for skilled labor and high-powered jobs? Answer: with great difficulty from now on. This isn't a "Crisis" anymore. It's a depresison and a downsizing of the entire economy. Recovery is not an inevitability.
meanwhile in Yemen the absurd becomes insane
SANAA, Yemen (AP) -- Yemenis flocked to the polls across their battered nation Tuesday to vote in a U.S.-backed, single-candidate election meant to instate a new leader to replace the outgoing autocrat.
http://hosted.ap.org/dynamic/stories/M/ML_YEMEN?SITE=AP&SECTION=HOME&TEM...
......And he lost!!!
The Saud /CIA money line...plays on...
and who is the "PayMaster" of S&P and Moody's [let's just forget Fitch for now] ? the Bilderberg Consortium, wholly owned by Rothschild's
*[McGraw-Hill Co. & Warren the Tax Cheat? are just pawns]
jmo
The Greeks are still buying submarines.
http://www.americanhellenic.org/news/2010-07-10.php
They bought them in 2006 but refused to pay citing technical provlems
Yeah, like we do, when we buy Chinese crap at Wal-Mart and it breaks after 3 uses, and return for cash back or 3 MORE uses (a replacement) (6 total will get the job done).
Who TF wants to pay for crap that doesn't work.
"Plus, banks have more power now than they did then to call the shots."
Iceland showed the world just how much "power" banks actually have. Too bad Greece hasn't learned a thing or two yet from Iceland.
Iceland has a population of 317,500 - how much could they (the country) owe?
If it's millions per person, Goldman would be working their magic - otherwise, chump change.
Greece, a horse of a different colour - 10 million tax paying units if you can harness them.
Iceland was asked by the banks to do an Irish move: to bail out their uttlerly reckless hyperleveraged banks with state's bonds
they rightfully refused, the same way as the Irish should have done, IMHO
Iceland still has their "normal" debt and is still seeking to enter the eurozone
this just to remind where the fault lines in this conflict lie
hey, thxz nomi. +++ as alwayz!
The speed and intensity of Greece’s decline reflects nothing short of an international mafia-style hit.
well, the urban legend dept has it that the books were fudged to enter the EU; but the last year has been so weird, and now, the lehmanesque "acceleration"
“They hired the money, didn’t they?” 1922 Calvin Coolidge
During much of the 1920s in Europe there were deep recessions linked to debt. A fair number of players were involved and a slew of accommodations were attempted to resolve these debt issues. But it had one overriding and intractable element: The French owed U.S. banks huge sums related to World War I borrowing that they couldn’t replay unless Germany, which owed huge sums to France in the form of reparations mandated by the Treaty of Versailles, serviced this debt.
Lenders didn’t want to lose money here by virtue of not being paid and thought they had a moral as well as a legal right to get it all — a view summed up neatly by Calvin Coolidge’s unforgettable phrase,
What is happening to Greece is what Western banks have long done to African states - it is simply that Global Impoverishment is moving into the Northern hemisphere from the tip of Wurope like a form of Reverse Renaissance
We need a new paradigm: From TBTF ==> TSFM [Too Small for Mischief].
OR, for us, TBTFW (too big to fuck with) - might make a great bumper sticker:
The People = TBTFW - vote Ron Paul
So the problem isn't that the Greeks leveraged a shaky economy, rather it is that the fools who lent the money expected a greater risk-premium as it became increasingly clear that risk was on the rise, and that only happened because evil ratings agencies dared to pull back the curtain.
Yeah, thinking like that is why the western world is screwed.
BTW, back in the "good old days" of GD 1.0, they actually let banks fail. We might need another ten or twenty years of hindsight to tell if that approach worked better than the path we are on, but I will hazard that the ultimate socialisation of the losses and the resulting mal-investment by the masterminds running the show will leave the vast majority of us no better off in relative terms than the average person coming out of GD 1.0 ... let's just hope they don't grasp the "need" for a WWIII for #WinningTheFuture.
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Greece, a victim of the rating agencies, of the international finance, Nomi Prins give us a break. How can such a poor populist rethoric be reported by ZH? How can Nomi Prins deserve to be quoted by ZH?
How can such silly, meaningless rhetorical questions be posted in the comments section?
I got one:
you just tripped into this website, didn't you Mario?
There's always vicitimising going on in international finance, both ways. But to sit there and tell me that
Greece isn't being "victimised"(made a scapegoat to scare all the other PIIGS), then you're the better
part of a fool.
So, Greece got more loans that it could handle. Show me a country that hasn't done that.
The banking game has changed, and the banks are now attacking countries, with the aid of the EU.
It's the mother of all conspiracies.
What's the difference between the 1930s and now? I'll tell you. None. The 1930s ended in a Global War and so will this decade.
"They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around."
Yes, it will, but only in the very long run. For years it will cause a severe downturn, even depression like conditions. It's a junkie coming off a borrowed money high. But it is the only way to actually stop the cycle.
And that must be combined with an end to "bailouts" and the banks who loaned Greece money getting what they so richly deserve - nothing. This is to prevent the further waste of money on a hopeless situation and to ensure that it won't happen again by allowing those who should get bitten, the banks, to be bitten.
Every country must spend no more than what it brings in in taxes except in time of national emergency such as a defensive war for survival. PERIOD. It's no different than a family living within its means to avoid crushing debt or bankruptcy in the long run.