Interview with Randall Wray about Greece’s Debt Crisis

1.Goldman Sachs created financial instruments to hide European government debt and Greece is one of its first victims in the eurozone. In a recent article of yours, co-written with Marshall Auerback, you argue that Wall Street firms should not only be held accountable for such practices, but war should be declared on them. How can a small nation like Greece declare war on Wall Street’s financial institutions?

Wray: Of course the best strategy would be a coordinated investigation by all Euro member nations to get to the bottom of the financial manipulation perpetrated by these institutions on European soil. As we said, investigators should invade the offices and secure all files, internal memos, and emails. This is the only way to find out which laws have been broken and to prosecute guilty parties. In our article we focused on recent revelations about Goldman, but it is likely that other behemoth financial institutions, including some European banks, have engaged in similar practices.

Beyond that, it is important to send a message to these institutions that “business as usual” will not be permitted any longer. It is no stretch to say that the fate of European Union is in question. These institutions are testing whether they can bring down Greece. If they are permitted to do so, there is absolutely no doubt that they will set their sights on the next victim—Portugal, Italy, or Spain. It is not just that they helped to hide debt. They are placing bets on default, driving up credit default swap (CDS) prices, inducing credit down-grades, and hence raising finance costs. None of the Euro nations would be able to survive this onslaught—not even Germany.

This is why we have used the term “war” to describe the nature of this conflict. No country should sit idly by and allow financial institutions to bring it down. If Greece cannot secure the support of other Euro nations, it will have to unilaterally declare war on those institutions operating on its soil—those actively engaged in undermining its economy.

1.Why isn’t the Obama administration doing something about Wall street’s manipulation and destruction of the world’s economies?

Wray: That is of course a difficult question to answer because it is not possible to get inside the heads of administration officials. We can only look at this from the outside, and from the outside it stinks of scandal. I am beginning to think that this will go down in history as one of the worst scandals the US has ever seen. The triggering event will be seen as the AIG bailout—in which the NYFed led by Timothy Geithner gave billions of dollars to AIG that it funneled to counterparties like Goldman to pay off CDSs at one hundred cents on the dollar. There was and is absolutely no justification for that action. But far worse is the cover-up, in which the Fed and Treasury are still engaged. It is always the cover-up that brings down administrations. This one looks like it ranks with a Watergate cover-up. I repeat that we do not have the facts, so the appearances might be incorrect. But that is all the more reason for the Obama administration to come clean. It must release all internal documents, and all emails, and account for every dollar spent. It must name names and it must then prosecute all fraud—even if that goes right to the top of the Treasury and Fed.

2.How do you explain the hysteria against Greece by major European financial newspapers?

Wray: There is of course always some sensationalism in the press. And Greece looks on the surface like an easy victim. And there is some residual belief that “Mediterranean nations” need more discipline (I have lived in Italy and am aware that even some Italians welcomed the Euro on the belief that it would discipline their own government). But leaving all that to the side, this story of Greece has elements that are sure to grab the attention of the press. A “profligate” government that spends well beyond its means. Shady backroom deals with huge Wall Street firms who help to hide debt and deceive the public as well as the rest of Euroland. And then a turn-coat Goldman that bets against its client (a normal practice at Goldman). The government now proposes austerity, and the population predictably reacts against cuts to pay and services. Civil unrest always makes headlines.

I think there is probably also a fear that they may be next. When bullies beat up a hapless child on the schoolyard, a crowd circles and cheers them on—in the fear that one of them might be next. I repeat, no Euro country is safe. So there is no doubt some perversity in the financial press’s attack on Greece, a sort of marveling at how easy it is to bring down a nation and an uneasy recognition that a similar fate awaits their own.

Greece’s real problem is the set up of the Euro, it is not due to failings of national character. In a sense, the arbitrary unfairness of this is what makes the story so much more exciting for the press.

3.What’s your assessment of the Greek government’s fiscal austerity program?

Wray: It will fail. Austerity eliminates any possibility of growth, imposes deflationary pressures, reduces tax revenues, and results in a growing budget deficit. An estimated 40% of Greece’s GDP is already unrecorded, and more activity will go underground to escape taxes. Add to the mix the fact that with the major exception of China, the entire globe is in deep recession that is likely to last many years. That means there is no hope for Greece to export its way out of this predicament. Wages are falling all across Euroland (13 out of 24 nations had falling wages last year, and more will this year), so no matter how much pressure the government can put on wages, it will not be able to significantly lower wages relative to European wages. Some have remarked that Greece is the next Latvia—which is trying to use austerity to become the lowest cost country. It will not work—it is a competitive race to the bottom. No one wins such a race.

4.Aside from Greece seceding from the EE and defaulting on its euro debt, what other options may have been available to the government other than the austere fiscal measures it introduced last week?

Wray: Seceding is, I think, a last resort. It would be quite costly. If Greece does secede then of course it should default on its debt and reinstate its own sovereign currency. In the short run it will be painful; in the long run it would be the correct strategy only if there is no hope for changing fiscal arrangements in Euroland.
Some have argued that stronger Euro nations might bail out Greece. I do not think that will happen, for reasons discussed above. Greece is only the first victim. The stronger nations might take over Greece’s debt, but then they would need to take over Portugal’s, then Italy’s, then Spain’s. That is not possible as markets would then attack Germany and France.

So here is the best course of action. The ECB will purchase government debt of all Euro member nations with a view to settling markets, bringing down risk spreads, and reducing interest payments by governments. It will also provide an emergency package of fiscal stimulus equal to one trillion euros distributed among all Euro nations on a per capita basis. Individual governments will decide how to spend the euros. Finally, the configuration of Euroland will be changed to increase the fiscal authority of the European Parliament, to provide funding equal to ten or fifteen percent of Euroland GDP (up from less than 1% today). Some of this funding would be managed from the center, but most would be distributed among member nations.

This would help to resolve the main problem faced by Euronations—and the real cause of Greece’s current crisis. The set-up was flawed from the very beginning. The individual nations gave up sovereign fiscal power when they joined the Euro. All of the focus has been on setting up the ECB, and surrender of monetary policy to the center. This was a neoliberal policy—to put economic power in the hands of an independent authority whose one mission was to fight inflation. But there was never a countervailing fiscal authority, responsible for maintaining full employment and robust economic growth. Individual nations could not really fill the gap, because markets would punish deficits—just as they are now doing to Greece. It is time to throw out the neoliberal agenda and to reformulate the union along more sensible lines.