Monday, July 6, 2015

Greek Vote, Warrants & "sofort, unverzüglich"

Greece had a plebiscite for freedom, but the problem with the question posed is it did not reflect the problem faced:  either vote for welfare state directed by Brussels, or one directed locally.  A rather false dilemma, since freedom was not a choice.  They voted "no" to Brussels directed welfare, so now Greece must come up with its own welfare money, but it does not have any money.  So it will issue "California-style IOUs"...  I know what those are, I've been "paid" in those by schools in California.  The correct term is warrant, that is a claim on the State even when the state has no money to pay me.

“If necessary, we will issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago,” said Yanis Varoufakis, the finance minister.
California issued temporary coupons to pay bills to contractors when liquidity seized up after the Lehman crisis in 2008. Mr Varoufakis insists that this is not be a prelude to Grexit but a legal action within the inviolable sanctity of monetary union.

Temporary coupon is an odd thing to call a warrant, but the "coupons" look just like a check but they clearly state "warrant" on the face.   I received those before 2008, I think as early as 2000.  I have never had a warrant not accepted by a bank, I think for two simple reasons:

1. The state can come up with the money eventually.

2. The state can severely punish any bank that refuses to accept a warrant issued by the state.  Of course there is no law a bank must accept a warrant (it is not even a promissory note, since it is not post-dated, and in essence fraudulent, a check on an account with insufficient funds) but banks know better than to insult the state.  And the point is, the states have a million more tricks before there is trouble.

The Greek government issuing "IOU's" is no big deal, California has been doing it for years  (and after Greece overthrew its king in 1967, eventually a UC Berkeley professor became the Prime Minister of Greece, hence the likely fountainhead of Greek political thought.  (Indeed, the economy of California and Greece have interesting similarities.)

There will be no chaos in Greece, since states can go very far indeed before there is rioting.  They already took the big move of bail-in, that is in effect seizing the assets of savers, the lowest hanging fruit.  In Greece, as in USA, once you deposit money with a bank, it belongs to the bank, not you.
Louka Katseli, head of the Hellenic bank Association, said ATM machines will run out of money within hours of the vote. One official say that Eurobank was “flat out of money” late on Sunday, even though Greek depositors have been limited to €60 a day since capital controls were imposed a week ago.
One solution is to simply print more currency.  Little known is each Euro country has its currency contribution noted by a country code on the currency.  What Greece issues starts with a Y, and Greece can print those with abandon, getting the bail-out the ECB currently refuses.
“The first thing we must do is take away the keys to his office. We have to restore stability to the system, with or without the help of the ECB. We have the capacity to print €20 notes,” said one.
It is quite possible for both the Greeks to print all of the currency they want and take the bail-out the ECB refuses (and simply make the rest of europe pay with inflation) and for the ECB to stop accepting Y-code (Greek currency).  Get the popcorn, this could get interesting. Recall, the Iron Curtain fell because a clerk ad-libbed an answer to a question at a press conference.

Here is the real problem:
Yet matters will be decided by handful of people in Berlin, Frankfurt, and Brussels over coming days, with the ECB in the unwelcome position of having to decide by its actions whether or not to bring the crisis to a head.
It will never happen that a handful of people come up with the right combination of moves to fix the problem.  And the vote did not address the problem.  It is the daily decisions of the 11 million people of Greece, trading freely, making dozens of economic decisions each day, that will establish a sound economy (a Greek word, meaning household management).  A handful of people will never get it right.  so there is nothing happening yet that will make a difference.  Deregulation is the key.  Start with banking.

Perhaps the Greeks should ask for their king back, sofort, unverzüglich.  Kings tend to rule better than democrats.

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