• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

If Greece Was California...

Tyler Durden's picture




 

For all its rhetoric, the current situation in the Eurozone should be very familiar to most Americans: after all it is merely a Federalist organization just missing one key feature: Federalism. At least for now. Whether Europe will succeed in reversing 20 centuries of nationalist pride, a multitude of languages, religions, cultures, histories, and superficial solidarity and friendliness covering generations of broad-based enmity, blood feuds and hatred, which is precisely what will be required (because the monetary union was merely half of the game) remains to be seen. It is likely that the stock market will force this resolution sooner than most expect. Then the question becomes: will Europe truly become the United States of Europe. And if so, what would the current Greek travails look like if they were transplanted to the state of California: another place which may soon be in dire need of a bailout. Luckily Jefferies' David Zervos has performed just the thought experiment: "let's assume the European monetary system structure was in place in the US. And then imagine that a US "member state" were to head towards a bankruptcy or a restructuring of its debts - for example California." The results are below.

Separation of Bank and State

The Euro monetary system is flawed. It is a system that was cobbled together for political purposes; and sadly it was set up in such a way that each member state retained significant sovereign powers - most importantly the ability to exit the system and default on debts in times of stress. There is virtually NO federal power in the Union, as witnessed by the complete breakdown of the Maastrict and Lisbon treaties. In fact, what we are seeing today is that the structure of the monetary system is so poorly designed, it actually creates perverse fiscal linkages across member states that incentivize strategic default and exit. Our new leader of the Greek revolt - Mr CHEpras - has figured this one out. And in turn he is holding Angie hostage as we head into June 17th!

To better understand these flaws in the Eurosystem let's assume the European monetary system structure was in place in the US. And then imagine that a US "member state" were to head towards a bankruptcy or a restructuring of its debts - for example California.

So let's suppose California promised its citizens huge pensions, free health care, all you can eat baklava at beachside state parks, subsidized education, retirement at age 45, all you can drink ouzo in town squares and paid 2 week vacations during retirement. And then assume the authorities never came after anyone who didn't pay property, sales or income taxes.

Now it's probably safe to further assume that the suckers who had bought California municipal debt in the past (because it had a zero risk weight), would quickly figure out that the state finances were unsustainable. In turn, these investors would dump the debt and crash the system into crisis.

So what would happen next in our US member state financial crisis? Well, the California governor would head to the US Congress to ask for money - a bailout. Although there is a "no bailout" clause in the US constitution, it would be over run by political forces as California would be deemed systemically important. The bailout would be granted and future reforms would be exhanged for current cash. The other states would not want to pay unless California reformed its profligate policies. But the prospect of no free baklava and ouzo then sends the Californians to the streets - rioting, looting and protesting ensue.

The agreed reforms by the Governor then fail to pass the state legislature. And as the bailout money slows to a trickle. The fed up Californians finally elect a militant left wing radical, Alexis (aka Alec) Baldwin, to lead them out of this mess!

When Alexis gets into office, the US officials in DC worry. They cut off all the Californian banks from funding at the Fed. But luckily, the "Central Bank of California" has an Emergency Liquidity Assistance program. This gives the member state central bank access to uncollaterized lending from the Fed - the dollars and the ouzo keep flowing. But the Central Bank of California starts to run a huge deficit with the other US regional central banks in the Fed's Target2 system. As the crisis deepens, retail depositors start to question the credit quality of the California banks; and everyone starts to worry that the Fed might turn off the ELA for the Central Bank of California. In turn they worry that California banks will not be able to access dollars. The depositors in California banks then start to pull their funds, and send them to internet banks based in "safe" shale gas towns up in North Dakota. Because in this imaginary world there is no FDIC insurance and resolution authority (just like in Europe), the California banks can only go to the Central Bank of California for dollars, who in turn continue to lend dollars to an insolvent banking system to pay out depositors. In order to reassure depositors, California might announce a deposit guarantee program - but with the state's credit rating is at CCC, the guarantee does nothing to stem the deposit outflow.

In this nightmare monetary structure, with regional central banks, ELA, Target2 and no FDIC, the prospect of a state default FORCES a bank default. The banks automatically fall when the state goes into financial turmoil because of the financial structure. A bank run is the only equilibrium in this system.

There is sadly no separation of member state financials state and bank financials in the European financial system. So what's the end game in our little US example above? Well, after the Californians take all the their dollars out of the California banks, Alexis realizes that if the central bank of California, along with the state and the banks default, the citizens will still have their dollar wealth preserved and the state could start all over again by issuing new dollars with Mr Baldwin's picture on them (or maybe Che's picture). This California competitive devaluation/default would then leave a multi-trillion dollar hole in the Fed balance sheet and the rest of the more responsible US states would have to pick up the tab. So Alexis goes back to Washington to threaten exit unless the ouzo and baklava keep coming. And here we sit in the current battle in Europe!

Can anyone in the US imagine ever designing a system so fundamentally flawed? Its insane! Without some form of FDIC insurance and national banking resolution authority, the European Monetary System will surely tear itself to shreds. In fact, as the Target2 imbalances rise, it is clear that Germany is already being placed on the hook for Greek deposits and other peripheral deposits. The system has de facto insurance and no one in the south is even paying a fee for it. Crazy!

In the last couple days I have spent a bit of time trying to find any legal construct which would allow the ELA to be turned off for a member country. I can't. It doesn't mean it won't be done (as the Irish were threatened with this 18 months ago), but we are entering the twilight zone of the ECB legal department. Who knows what happens next?

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Sun, 05/27/2012 - 18:44 | 2467854 devo
devo's picture

It should be if Greece were California.

Sun, 05/27/2012 - 18:45 | 2467856 Colombian Gringo
Colombian Gringo's picture

Yep.

Sun, 05/27/2012 - 18:47 | 2467863 SilverTree
SilverTree's picture

If I wanted America to fail...

Sun, 05/27/2012 - 19:08 | 2467908 nmewn
nmewn's picture

...what would I do different?

Sun, 05/27/2012 - 19:12 | 2467918 Hulk
Hulk's picture

Absolutely nothing...

Sun, 05/27/2012 - 21:14 | 2468202 markmotive
markmotive's picture

Greece is Cali and Cali is America.

Welcome to the land where nothing's free.

Cue Niall Ferguson: Austerity vs. Stimulus http://www.planbeconomics.com/2012/05/27/niall-ferguson-austerity-vs-stimulus/

Mon, 05/28/2012 - 02:32 | 2468593 Oh regional Indian
Oh regional Indian's picture

Every truth-seeker here should study this web-site in and out.

Then sit-back and re-examine all of the foundation stones of your belief-systems.

The ensuing cog-diss will be the darkest before dawn, I assure you.

http://realitybloger.wordpress.com/2012/05/25/california-government-hides-billions-from-taxpayers/

good luck. Seriously, it's all a scam.

ori

Key Word CAFR

Mon, 05/28/2012 - 03:34 | 2468617 The Big Ching-aso
The Big Ching-aso's picture

 

 

All I know is that it's getting so bad in California San Francisco is issuing I.O.U.B.J.'s.

Sun, 05/27/2012 - 19:13 | 2467920 knukles
knukles's picture

Fuck all nothing.

Sun, 05/27/2012 - 20:21 | 2468085 Spitzer
Spitzer's picture

The auther is a fuckin fool

Sun, 05/27/2012 - 20:44 | 2468133 Troll Magnet
Troll Magnet's picture

obamney would never allow california to fail. too much money...holy shit, is teh gays gettin' married?!

Sun, 05/27/2012 - 20:57 | 2468159 sessinpo
sessinpo's picture

That could have been said about Greece and it was by certain Europeans. At some point, entities become to big to bail out as Greece is. The truth is, there was little to gain by keeping Greece in the game. It became a politican and economic headache not worth the billions. To much money. Not much money in a bankrupt state.

Sun, 05/27/2012 - 23:41 | 2468433 Augustus
Augustus's picture

The married Gay Life is so much simpler.  They have no worries about the future of their children.  Spend it Now or Never has so much more appeal.

Sun, 05/27/2012 - 21:55 | 2468262 BlueCollaredOne
BlueCollaredOne's picture

Don't know if you're trying to be ironic or not. Author is spelled this way. Spitzer is the man though, it's a shame the public can't accept the fact that some men just like hookers. I'm sure some bankers would be in jail if they could.

Sun, 05/27/2012 - 22:21 | 2468302 Ahmeexnal
Ahmeexnal's picture

Even Jesus Christ surrounded himself with hookers.

Many say he married one.

Sun, 05/27/2012 - 23:11 | 2468376 Ahmeexnal
Ahmeexnal's picture

T.J. Hooker.

How could a cop series with a name like that become the most succesful role for James Tiberius Kirk?

Mon, 05/28/2012 - 04:57 | 2468651 The Alarmist
The Alarmist's picture

You are really giving short-shrift to Denny Crane! IMHO, that was his finest role, and he looked like he enjoyed doing it.

Mon, 05/28/2012 - 00:20 | 2468490 prole
prole's picture

Show me the ZHer who complained of Spritzer's dalliance with his courtesan?

I believe our scorn is earned by the fact that the POS hypocrite jailed and ruined other men and women for  participating in the same flesh trade as the fake lying two-faced politician himself.

Spritzer is the epitome of government: "Rules for thee, not for me" I condemn him to the lowest circle of the inferno

Mon, 05/28/2012 - 05:00 | 2468525 Harlequin001
Harlequin001's picture

Shouldn't you be dead by now?

What happened to the 'if I can't live free I'd rather die' bullshit you were complaining about?

yeah, suuure you would... evidently you're full of it, hypocrite.

So you condemn him to 'the lowest circle of the inferno' for.... wait for it... paying for sex, the oldest game in the history of mankind.

Do me a fucking favour... Prole, that's obviously an anagram of thick fucking twat.

Mon, 05/28/2012 - 11:01 | 2469257 prole
prole's picture

You are the hypocrite and the proof is you are an open liar and defending the hypocrite Spritzer.

I did not complain of his whoring at all, yet you straw man me as such? You are a liar and you use lies to score small talking point hits on me. Go ahead and lie your character shows.

And why should I be dead? Maybe I'll live for a thousand years.

Read my post liar, and you will note I condemn him to Hell for hypocricy, and for lying and bearing false witness against his ZH neighbor I'll toss you in with him.

Go back and read all my posts on ZH and see if I ever comdemn anyone for whoring, or even mildly complain? I think it should be legal you dolt, but Statists like you and Spritzer lock men and women up for the flesh trade. Probably just another hobby you share with your co-religionist Spritzer

Mon, 05/28/2012 - 12:14 | 2469427 Harlequin001
Harlequin001's picture

Woah there hoss. Spitzer, his name is Spitzer. If you're going to have a go at someone you should at least be able to get some basic facts right, and his name would be a good start that way at least we know we're both singing from the same fucking song sheet eh. What you're referring to is a soft drink.

'why should I be dead? you said if you can't be free, which you clearly feel you aren't that you'd die, yet here you are gobbing off at a good man with your I'm-holier-than-thou-attitude for doing nothing more than what is clearly legal in most parts of the civilised world' Stop point scoring, it just makes you look like what you are, a prick. You make up these statements as you go along without any intention of justifying or keeping to any of them. You said if you can't be free, you'd die, and we can all tell from your incessent fucking whining that you aren't, yet here you still are, ever the hypocrite.  

Every time you type a word I know you just reneged on a deal. Now if you wouldn't mind going doing what you said you'd do and topping yourself for us, slave boy I'm sure the world will be a much better, and much quieter place. and we won't all need to wade waist deep through your bullshit anymore either. You lied, pure and simple, you make false statements on a daily basis to whatever suits your whim, and it's no good denying it now. You lied. You're still here therefore you lied. Clearly you have a problem with the English language but maybe I can help. '...for  participating in the same flesh trade as the fake lying two-faced politician himself" - sounds pretty clear to me.

This bit, however, does not ...'lying and bearing false witness against his ZH neighbor' honestly, what the fuck are you talking about? I only restate back to you the bullshit you said to me and everyone else.

And as for this, 'Maybe I'll live for a thousand years.' you truly are a fucking nut job. I give up!

Mon, 05/28/2012 - 02:27 | 2468584 BlueCollaredOne
BlueCollaredOne's picture

Seriously?

This isn't a forum for people to try and display spectacular vernicular (It rhymed) They are missing you here. http://www.thepoetsanctuary.net/

Spitzer vindicated himself when he appeared in the documentary "The Inside Job"

Fuck you

Sun, 05/27/2012 - 21:24 | 2468220 Freddie
Freddie's picture

Callie-PORN-ia is Greece.

Sun, 05/27/2012 - 19:13 | 2467919 WmMcK
WmMcK's picture

Greece:California::Germany:________ NH?

Sun, 05/27/2012 - 19:23 | 2467945 Manthong
Manthong's picture

It's just a good thing for us that the people in Texas don't mind picking up the tab for the Governor Moonbeam and Mexifornia.

Sun, 05/27/2012 - 22:36 | 2468221 AssFire
AssFire's picture

Oh, we mind...In fact; we feel Germany's pain.

 

Mon, 05/28/2012 - 02:11 | 2468580 Manthong
Manthong's picture

Comparatively, the good news for Texas is that while Spain will cost Germany more than Greece, Illinois will cost Texas less than California.

                    So cheer up!   : )

 

Sun, 05/27/2012 - 19:24 | 2467946 TJ00
TJ00's picture

New SAT question

Greece is to the EU what California is to the _______.

Sun, 05/27/2012 - 20:02 | 2468055 dougngen
dougngen's picture

+10

 

Sun, 05/27/2012 - 20:15 | 2468074 jekyll island
jekyll island's picture

California is MUCH larger than Greece, much more important economically.  And just as screwed, faceplant IPO aside.  

Sun, 05/27/2012 - 20:23 | 2468095 Spitzer
Spitzer's picture

California is the biggest state in the dollar bloc and Greece is the smallest state in the Euro bloc. There you go...

Sun, 05/27/2012 - 20:59 | 2468166 sessinpo
sessinpo's picture

And if TPTB can't and aren't willing to continue playing with Greece, how long will they throw money in a bigger hole?

Sun, 05/27/2012 - 21:07 | 2468184 goldfish1
goldfish1's picture

Answer: Diebold bails them out.

Polls: Greek's pro-austerity parties gaining  sure sure

http://www.guardian.co.uk/world/feedarticle/10261438

Sun, 05/27/2012 - 21:34 | 2468236 Spitzer
Spitzer's picture

Eventually they go bankrupt like Iceland and greek bond holders get shafted. That doesn't mean the Euro currency is doomed.

Sun, 05/27/2012 - 22:25 | 2468304 Ahmeexnal
Ahmeexnal's picture

Greek bond holders have already been shafted.

And the euro was doomed from it's inception.

Only a matter of days until fraulein Merkel's charred remains are found near the entrance of her bunker.

Mon, 05/28/2012 - 00:36 | 2468516 Spitzer
Spitzer's picture

And the euro was doomed from it's inception.

Its no coincidence that the US lost control of the gold market months after the Euro was introduced. Notice what the price of oil has done since the Euro came out ?

Bond holders are shafted and the Euro is still worth more then the USD.

Mon, 05/28/2012 - 02:06 | 2468572 Tom Green Swedish
Tom Green Swedish's picture

Markets are retarded. All stock basically move in lock step (besides ones with low volume, and dividends), because the bankers commditized stocks and they all move the same way except for higher and lower prices from the mean (beta).  Its really quite dull.  How is the Euro worth more than the USD?  Can you get more from a Euro than a dollar?  Who gives a crap about money besides women?  You all act like a bunch of little whores crying over money.

Sun, 05/27/2012 - 23:23 | 2468404 jekyll island
jekyll island's picture

That is baked in all ready.  No fiat currency is ever doomed, until it is.  California going the way of Greece would capsize the economy.  It would be 2008-2009 on steroids. 

Mon, 05/28/2012 - 00:04 | 2468465 Weimin
Weimin's picture

Exactly! and worst case eurozone would just let Greece go and live with the (manageable) consequences and Greece will suffer big time. the US on the other hand is very unlikely to kick Cali out for the right reasons.

Mon, 05/28/2012 - 02:40 | 2468598 ChickenTikka
ChickenTikka's picture

Istanbul was Constantinople.

Greece was never California.

If I were Tyler Durden then I wouldnt care about grammar.

Sun, 05/27/2012 - 18:48 | 2467858 Tom Green Swedish
Tom Green Swedish's picture

Greece, Facebook, Politicians and Bankers suck. Gold, Silver and Oil are cool. I'm a Zerohedger.

Sun, 05/27/2012 - 18:47 | 2467860 Colombian Gringo
Colombian Gringo's picture

If greece were california, instead of lubricants, they would use Tziki sauce before performing backside sodomy.

Mon, 05/28/2012 - 00:01 | 2468462 Augustus
Augustus's picture

Tziki sauce with jalapenos if used in California sodomy.

Sun, 05/27/2012 - 18:47 | 2467862 ThisIsBob
ThisIsBob's picture

Actually Greece is Dallas-Ft. Worth (economy size) with a stock market capitalization smaller than Facebook.

Sun, 05/27/2012 - 18:49 | 2467867 Mark123
Mark123's picture

You seem to suggest that deposit insurance is a great thing?  All it has done in USA is to lull the public into ignoring the problems in their banking system and making the problem all that bigger.

 

I think in the long run Europe will be in better shape that the USA because they will have to fess up sooner and deal with REAL issues. 

Sun, 05/27/2012 - 19:13 | 2467921 narnia
narnia's picture

These clowns are doubling down on big government. They aren't close to facing the music. Neither are Americans. The people controlling the guns are no where near giving up either. I don't see any winners here.

Sun, 05/27/2012 - 19:15 | 2467924 Joe The Plumber
Joe The Plumber's picture

In the long run european demographics are worse than the usa

Europe will not be recognizable in 200 years as it becomes the Western Caliphate

Sun, 05/27/2012 - 19:19 | 2467938 Joe The Plumber
Joe The Plumber's picture

As one example Spain was populated by eastern european visigoths among other early roman peoples and the original native populations now are small isolated and live mostly in mountainous rwgions.

Huge population transfers abound in european history. Nothing more to say

Sun, 05/27/2012 - 23:20 | 2468395 takinthehighway
takinthehighway's picture

Anyone who has ever played Risk knows the truth of your statement.

Do NOT follow this link or you will be banned from the site!