Naked Capitalism: “We are in the business of making trouble”
This year’s political drama in Greece stands out as perhaps the least-understood, worst-reported major story of 2015.
Greece is mired in debt, and locked into the Euro monetary system, which means Greece’s political destiny is in the hands of the European Central Bank, the IMF and the powerful nations that dominate the Eurozone, Germany and France —and not in the hands of Greece’s “demos,” its voting public.
The implications of Greece’s political-financial struggles are huge—we could be seeing the beginning of the end of not only the Euro monetary union, but also the half-baked EU political union as well. We could also see a more globalized unraveling, but thanks to the financial world’s intentionally shady machinations, we won’t know until we know. Greece is also a major ideological battleground between a re-emerging and more radicalized western Left—Syriza—and entrenched neoliberalism, which has dominated the political ecosystem for the past few decades. The outcome could affect the fate of a lot of fledgling neo-leftist politics across the globe, and in the West in particular.
Finance stories are always complicated and by design murky—add in the layers of EU politics, and you have a story that can only be told by someone with deep finance knowledge, a grasp of the larger political and cultural inputs, and the rare ability to translate it all into vivid, sharp-tongued, and aggressively readable prose.
Which is why you should be following Yves Smith’s great finance blog, NakedCapitalism.com. Yves Smith is the nom de plume of Susan Webber, a 35-year veteran of the financial world at firms ranging from McKinsey and Goldman Sachs to Sumitomo Bank. Her blog has been highly regarded from its inception in late 2006, earning Top 25 ranking in Time magazine and CNBC and plaudits from Wired; regular appearances on the Bill Moyers Show and Harry Shearer’s Le Show, and praise from the likes of economist Nouriel Roubini. Yves Smith is the author of ECONned, a merciless takedown of the economics profession and its relevance to finance, and is a Harvard grad who spent her formative years in quite a few American small towns as a “paper mill brat.”
NakedCapitalism is a living refutation to the meme that “blogging is dead”—hers is alive and vital, and always featuring a range of voices from around the world of finance and politics. One of her closest collaborators, Lambert Strether, runs the Correntewire.com blog. Other longtime collaborators at NakedCapitalism include journalist David Dayen; Ed Harrison at Credit Writedowns; economist Michael Hudson; political strategist Matt Stoller; and a bevy of guest writers and human inputs, including your humble interviewer. [Full Disclosure: I have written for Naked Capitalism, and am an unabashed fan of Yves Smith’s prose and person.]
Q: At what point did Naked Capitalism focus intensely on covering the Greece story?
At the end of January, when Syriza took office. We decided to focus on the negotiating dynamics. That's an area where we have some perspective, plus we thought it would be useful in that it would put us in a better position to make informed readings on progress and possible outcomes of the negotiations.
Q: The Greece austerity story is a complex one, too complex for most media, old and new. So to the extent that it even gets covered here, it tends to get framed as a facile Good Guys vs Bad Guys story. Depending on your politics, either Greeks are Innocent Victims of Evil German Imperialists; or Greeks are lazy Mediterranean welfare queens shaking down honest hard-working Protestants. You’ve approached the story from a finance angle, from someone who knows finance — which means something much more nuanced. Has framing the Greece story been a big problem for you and your audience?
Yes, absolutely, and that's been something we've struggled with as it became obvious to us that the Greek government was taking a disastrously poor approach to the talks. The outcome Syriza managed to achieve was a greater triumph for the pro-austerity camp than the austerity pushers ever could have engineered on their own. Had Syriza simply given the creditors everything they asked for when they assumed control of the government, they would have conceded less and done less damage to the economy — meaning ordinary citizens — than Syriza has in fact done, and will do, in the months and years ahead.
That was an extraordinarily unpopular message, particularly since we came to that conclusion early. Even though the new government had a sound economic critique, they were inexcusably naive, even presumptuous, about the interests of the parties on the other side of the table, what their constraints were, and even basics of conduct, like the need to operate (or at least appear to operate) in good faith. The fact that the Troika [ed: European Commission, European Central Bank, IMF] has been abusive does not absolve Syriza of gross incompetence and dereliction of its duties to its voters, particularly since it positioned itself as out to improve general welfare and get relief from austerity.
Even though we focus on finance and economics, we see our real mission as promoting critical thinking. We got a very big dose of how hard it is to do that when a cool-headed assessment is at odds with deeply-internalized frameworks and cognitive biases. You mentioned the good guy/bad guy frame. Here you have a German who could be a stand-in for Dr. Strangelove in the form of German finance minister Wolfgang Schauble, up against the plucky Greeks, the young prime minister Alex Tsipras and the charismatically macho yet also very articulate Greek finance minister Yanis Varoufakis. It's a no brainer how people who are new to this story and aren't deeply invested in the German "rules must be obeyed" worldview will react.
Moreover, Americans really did not want to hear something we warned about from the very outset, that Greece was unlikely to prevail unless they got the support of other influential players, either the US or the European left. But in February, the Obama Administration signaled that it was leaning toward the lenders, and it made it even more clear over time that its position was that Greece needed to bend, not the other way around. On top of this, the European left is weak and was missing in action while Syriza's fight was on. The media took up fantasies about Russia riding to Syriza's rescue, but Putin is too crafty to take on a mess like this. If there were anything to be gained, he knew he could get it cheaper later, with far less geopolitical hassle as conditions in Greece worsen (which they will under continued austerity).
But my audience was very resistant to hearing the "Greece has only terrible options" message. They've seen too many action movies, read too many novels where the protagonist plays out the Joseph Campbell hero's journey archetype. They projected onto Syriza their desire for someone to take on the austerity bullies, even though Syriza's MPs were largely bourgeois, with a very high representation of academics with no experience in governing. Syriza's efforts were tantamount to a group of grad students armed only with rifles making a frontal attack on a Panzer unit.
And Syriza wasn't even walking its brave talk. Despite its noisy PR about being anti-austerity, the finance minister Yanis Varoufakis offered in February that Greece would always run a primary surplus. That means one thing: continued austerity. So in the end, all the Greek government was really negotiating was not the end of austerity, despite its pretenses otherwise — but rather, shifting the burden to fall more on the wealthy, and to perhaps alleviate the intensity of austerity somewhat. Those are worthy goals; but they’re not what Syriza campaigned on. And what is tragic is that Syriza should have been able to achieve those limited ends, had Syriza’s leaders been more competent in negotiating, rather than deluding themselves that they had a nuclear weapon in their “threat” to default.
Q: How has your coverage of the Greece story affected your blog’s traffic, audience, business? Also, why did you decide to turn off your comments, after all these years? You had probably the most intelligent and well-monitored comments section of any blog, though it was always infested with a certain amount of PR trolls, you made them work at least. What happened?
We've had good gains in traffic, which is the opposite of what you expect to see on the Web as spring goes into summer. Despite the persistent pushback by Syriza fans, we are the only site providing consistent, in-depth analysis on Greece. Although the live blogs at the Guardian and the Telegraph did a great job of compiling the breaking news (and there was a ton of it!), they weren't sorting the signal out from the noise. That where sites like ours come in.
We haven't eliminated comments. We only enable them on our news wraps (our daily Links feature, which launches at 7:00 AM Eastern, and our every-weekday 2:00 PM Water Cooler), on original reporting (we've done a lot on private equity and are starting to dig into IT problems in financial firms, which is an unrecognized systemic risk), and on cross posts when the author requests it. We've been widely recognized as having one of the best comments section among financial blogs. But this is a site run by all of 1.3 people: me, our regular writer and fellow admin Lambert Strether, and some very talented guest writers. The caliber of the comments section was the result of a lot of effort by Lambert and me, both in enforcing standards (as in moderating and blacklisting individuals who do not comply with our written policies) and taking part in the discussions in comments. But that comes at the expense of writing new posts.
We found that we've attracted a lot of newbies who regarded our comments section as a chat board. As a result, we were devoting disproportionate time in fighting a losing battle to keep the comments section at its historical level of quality. I was spending an hour a day on the moderation queue alone. So we've needed to find a way to reduce the load and this seemed to be the best compromise. I hated doing this but I'm already chronically overloaded and there was no other remedy, even with regular readers doing their part to ride herd on the problem cases.
Q: Side question: How has being a woman in the notoriously sexist male-dominated finance industry prepared you for blogging and journalism about finance?
It's never made any difference as far as I can tell. But I'm seasoned and have very solid credentials (Goldman, McKinsey, former head of M&A at Sumitomo Bank when Japan was hot, and 20 years of consulting across a broad range of wholesale securities and banking businesses), and have also managed to carve out a niche. We focus a lot more on policy issues than most finance sites do and as a result, we are widely described as influential, by virtue of having a strong following among financial regulators, Congressional staffers, and journalists.
Where it does make a difference is I seem to get far fewer well-paid speaking gigs than men do. But I am not sure how much of that is due to my gender as opposed to my stance as a critic of Wall Street. The people with money tend not to want to hear from people like me.
Q: Getting back to Greece: how would you explain what’s really going on there to a new audience like Pando’s Silicon Valley/tech audience? How did Greece get into this mess? Whose fault is it?
The Eurozone has a very poorly designed set of institutions and governance arrangements. Its creators knew that the shortcomings would lead to crises, and they believed that those would spur politicians to make "correct" — as in pro-European — decisions, and move to greater political and economic integration. But that hasn't happened. In the critical post-financial crisis period, the two key actors — Angela Merkel and Nicolas Sarkozy — went for cautious, "kick the can down the road" bare minimum responses rather than the bold moves forward that were needed.
Greece was not the only country to suffer. Spain, Ireland, Latvia, and Portugal have also gone through the austerity wringer. Even Italy has not been a net beneficiary of joining the Eurozone. But Greece got it worse by being the most marginal entrant. Institutionally, it is more Third World than European, and was let in for geopolitical reasons. Members of the Eurozone are expected to limit their deficits, and Greece not only exceeded those limits at points (and they were not alone, France and Germany have cheated too) but was also fudging its numbers, at two points with the help of pricey currency swaps provided by Goldman Sachs. From 2004, Eurostat knew there was something wrong with Greece's numbers and would make efforts to get better data, to no avail. In 2010, Greece finally had to 'fess up to how bad things were, and the hole was much bigger than anyone imagined.
One of the things that made the 2010 mess so intractable was that it wasn't just Greece that was in trouble. All of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) were seen as bad credit risks and they were on a path to default. Their bond yields all rose, which meant over time that their funding crises would only get worse. And due to risk-weighting rules in Basel II, banks had very strong incentives to hold sovereign debt, so banks all over Europe held lots of dodgy sovereign bonds.
So what happened in Europe was a more extreme, less well-managed version of how the US responded to the 2008 financial crisis: The banks were rescued, with no meaningful reforms imposed on them, no one going to jail, no resolutions, and the costs of the bailouts were dumped on the public at large. This type of bailout/socializing the costs still continues in the US via the Federal Reserve’s years of transferring money to financiers in the form of negative real interest rates.
The reason the US response was less bad than Europe’s is that we combined it with some fiscal stimulus, albeit not that much. By contrast, Europe has gone for austerity all the way. That's like taking someone who is overweight, has suffered a heart attack and is now in intensive care — and putting them on a stringent new diet. The problem is that countries are not households. If you cut your spending, it's not going to hurt spending levels in your community. By contrast, when a government cuts spending, it's reducing incomes in the community. Those people who get money from the government have to tighten their belts, which in turn cuts the revenue of the places where they spend money, which leads to yet more belt-tightening. The reason austerity fails is that most people forget that the numerator and denominator of the debt to GDP ratio are not independent. When you cut the numerator, by cutting debt, you shrink GDP proportionately more, which makes the debt to GDP ratio worse. That happened in all the countries that tried austerity in Europe (they suffered dramatic falls in GDP and rises in unemployment), with the most dramatic austerity backfire taking place in Greece. One year into the first bailout, Greece was so off in meeting its numbers that they had to start negotiating the so-called "second bailout" that got done in 2012, in which Greece got 100 billion euros of debt relief! If austerity "worked" the way its proponents would have you believe, there would have been no need to redo the deal so quickly. And if the "third bailout" gets done, there will be more debt reductions.
One part of the conventional narrative I take issue with is that the European bailouts laundered money through Greece on behalf of French and German banks. While the French and German banks really needed the back-door rescues, in fact, the Greek banking system was one of the biggest beneficiaries [of the rescues]. And the Greek banks were so badly underwater that a failure of the Greek banking system would have wiped out Greek depositors. But it is fair to say that even though Greek banks and Greek depositors were saved too, they were saved at an unfairly high cost.
Q: One of the core intractable problems you have been beating the drum on lately is essentially this: No matter what Greece does, they’re screwed. Austerity is destroying Greece, but a Grexit would be far worse, utterly catastrophic. Why is that? Is there any way out?
It's the IT!
Most commentators, including economists and financial analysts who haven't looked at the practical issues, argue that Greece should leave the Eurozone and go back to the drachma. Yet even after the brutal show of power by the European central bank in forcing a two-week Greek bank holiday, which did tremendous damage to the economy, an overwhelming majority of Greeks still poll as preferring to stay in the Eurozone. And do not forget that the government isn't willing to Grexit either.
These foreign pundits fail to appreciate that the Greeks have a better grip on what the issues are than they do.
Most outsiders mistakenly treat a Grexit as being like a currency depreciation — like what took place in Argentina in the early 2000s when it abandoned a dollar peg. When that happened, Argentina suffered about six to eight months of severe stress and dislocation, including at least a couple of months of real violence. But after that, it showed a good recovery, The reason large currency depreciations are initially very painful is that the price of imports goes up immediately, while it takes a while for potential buyers of the country's suddenly bargain-priced exports to rearrange their purchases and start placing orders in the cheap, devalued-currency country.
A Grexit entails a ton more. First, it entails resolving Greece's entire banking sector. Greece's banks are massively insolvent and are on ECB life support. If Greece leaves the Eurozone, it loses that aid. When Iceland had its (admittedly larger relative to GDP) banking system collapse, it took $5 billion of foreign support for its bank resolutions. Iceland has all of 330,000 people. Greece has 11 million.
Second, unlike Iceland, Greece would have to reintroduce its currency. It took eight years of planning and three years of execution for the introduction of the Euro to go smoothly. Commerce is even more dependent on electronic payments now than it was then. In Iraq, even with the logistical capabilities of the US military and three printing presses running full time, it took over a year to get its new currency distributed. The ATM component is far more burdensome than you'd imagine.
The payment system side is even more complicated. Even though it is 15 years after the Euro was launched, major banks still have mainframes as their big transaction processing engines. And they are still running the same legacy code. And any changes to it are a highly labor intensive process. As one reader explained:
What many of you "it's easy" people fail to understand is that mainframe programming is nothing like today's coding. COBOL, PL/I etc. do not support modern concepts like objects, polymorphism or anything else. Think assembly language with nicer mnemonics. XML ? Hah, there is virtually no such thing for the mainframe. There's no git, no mercurial etc. Virtually none of the tools that exist for Wintel/Linux are available to mainframers. In large organizations there are hugely cumbersome change management processes. Where I am, a simple code change might take a minimum of eight weeks to deploy, and we only have a dozen systems. Actual application changes like envisioned here would take at least six to twelve months for coding and testing, and then another four months for deployment. For large banks, I would expect the timeframes to be even longer because the systems are so critical.
Similarly, those ATMs and point-of-sale terminals? Those are run by fragmented providers. Those networks have grown up over a 40-year period. Even if Greece moves quickly, they depend on parties outside their control to make changes in a coordinated manner.
One expert who has lots of big bank mainframe experience estimates that it would take three years to convert to drachma processing. We've spoken to people who are in—or have been in—senior IT roles at TBTF [Too Big To Fail] banks and they agree with this reading. Greece's new drachma payment system will need to be up to international standards before it would be permitted to connect to existing international payment systems. Countries that have not made the grade, like the Vatican, do not get waivers. So even if Greece can kluge together some sort of domestic system in six months or a year, that does not solve its international payments problems.
18% of Greece's economy is tourism. You can pretty much kiss that goodbye with no ability to use ATMs to get cash and no ability to use credit cards in Greece. Greece is not self-sufficient in food, petroleum, or pharmaceuticals. No working payments system means no imports, unless Greek importers take their drachma across the border, dump them in bank accounts (assuming those banks will even accept drachma to open accounts — recall that they have to make systems changes to accommodate taking drachma) and do transfers from there, or take cash to the offices of suppliers. That was actually occurring during the bank holiday. Some large importers were flying to London to pay suppliers in cash.
It would be tacky for Greece to have a famine, so the Eurocrats would probably arrange for humanitarian aid. But how independent is Greece if it needs food aid? It will have only traded one form of dependency for another, and at huge cost.
Thus the most likely outcome of a Grexit is that Greece becomes a failed state.
Q: Your political sympathies lie with Syriza or at least Syriza’s end of the spectrum, but you’ve been highly critical — merciless, brutally honest — of how they’ve governed. Explain why. What has Syriza done wrong, and what could they have done better? (Related: Syriza promised it could reverse austerity but remain in the Eurozone. Did they betray voters? Did voters betray themselves with Syriza as enablers? Or is it something else?)
Syriza promised contradictory things: ending austerity, and staying in the Eurozone. Eurozone policies, particularly in the post-crisis era, are about squeezing labor.
It's hardly unusual for politicians to lie, but they normally don't tell such big lies on matters of paramount importance to voters. Admittedly, Syriza's leaders were all novices, and they appear to have genuinely believed that they could persuade Europe's leaders to change course. But as members of both right and left wing factions in Syriza recognized by the end of February, after a month of negotiating to reach an interim deal to extend the bailout, the Troika and Eurozone countries were unreceptive to Greece's "look, austerity won't work and you'll just lose more money if you keep it up" pitch. Yet [Prime Minister] Tsipras and [Finance Minister] Varoufakis refused to change course. They exhibited the Einstein definition of insanity: continuing to do the same thing, and expecting different results.
Moreover, Syriza has not lived up to its populist, anti-oligarch branding. It passed a 200 million euro humanitarian aid bill in March, yet as of May was still taking applications and has yet to disburse all the funds. Yet favored interests like the union for the state electricity utility, DEO, still has its pensions getting a subsidy of 600 million euros while other pensions are being cut. Despite massive tax evasion, Syriza has not brought any new criminal tax evasion cases. What it has done is change the members of the panels that hear those cases from judges to union reps. Similarly, during its election campaign, Syriza promised to go after oligarchs and identified an obvious target: owners of media licenses. Yet it failed to take action once it took office.
Q: Many people are now blaming German politicians— Angela Merkel, Schauble. Is this really the politicians’ fault? Aren’t they fronting for banks? Why is no one talking about the banks here? And which banks should we be talking about?
The Germans are not so much fronting for the banks as fronting for a status quo that works for German business interests: exporters as well as banks. Like Syriza, Germany also wants contradictory things: it wants to continue to run large trade surpluses but not finance its trade partners, nor does it want to allow for fiscal transfers to help buffer the incomes of countries that run trade deficits with Germany.
The German refusal to resolve these contradictions means it is burning down its export markets through its refusal to provide credit or investment to them. Greece is the first and most dramatic case of how this conflict becomes a test to destruction of the Eurozone as presently constituted.
Germany has blocked even fairly tame, pro-bank and therefore pro-financial stability measures to make Eurozone-level institutions more powerful, like having Eurozone-wide and Eurozone-level funded deposit guarantees. Even worse, by demonizing borrowers and stoking voter hostility against “dirty lazy Greeks” when Greeks actually work more hours than Germans, Merkel and other German leaders have strengthened the already large domestic political obstacles to putting the Eurozone on a sounder, more durable footing.
For the record, the French banks were actually much bigger beneficiaries of the 2010 and 2012 rescues than German banks. But Deutsche Bank was fabulously undercapitalized, and I doubt the Germans wanted big sovereign debt losses to lead analysts to start looking at its financials more critically.
The problem with the discussion now on Greece is in part that there’s a weird illogic: "The French and German banks were bailed out." That's then used to justify having French and German citizens pay to rescue Greece. Needless to say, French and German voters are not exactly on board with that program. And we hear no concrete proposals from the people who are exercised about the bank bailouts about what we should do about banks now (for the record, Naked Capitalism routinely points out that banks get more subsidies than any other industry, including defense contractors, to the point that banks can't properly be viewed as private enterprises. They should be regulated like utilities).
Q: A follow-up: Does Greece have any choices? One thing you learn in a very real-world way from this crisis is that money is a political creation and a political tool, and Greece in that sense has actually no political power. Would creating their own currency give them power? What about something like Bitcoin or a more democratic, populist version of a Bitcoin?
No, no no. Greece needs to be a monetary sovereign and be able to create new currency freely. That is the whole point of a Grexit. You can't do that with Bitcoin. Going to Bitocoin vitiates the one big benefit of a Grexit. Moreover, if you take all the Bitcoin that you can create with the blockchain (21 million), and use the highest price that Bitcoin has ever traded at — it’s just $25.6 billion or 23.2 billion euros. Greece has over 300 billion euros of debt outstanding.
Bitcoin no doubt has its uses, but its boosters err in trying to treat it as a substitute for money. This is a classic error made by technology promoters: they are not sufficiently attentive to user needs and underestimate how much behavioral change is required to adopt their invention. Even when the innovation has clear advantages, those benefits may not be seen as compelling enough by prospective customers to induce them to embrace it. I see Bitcoin as analogous to microwave ovens. For decades, manufacturers tried positioning microwave ovens as substitutes for conventional ovens. Not surprisingly, they got nowhere. Only when they recognized that its benefit to consumers was rapid heating and not general purpose cooking and started designing and marketing devices accordingly, did microwave ovens take off.
Q: Silicon Valley tends to believe that there is a tech solution to every problem, that most seemingly-intractable problems are a result of some “old” structure that can be disrupted and replaced by a new and more dynamic, liberating structure. All cant aside, could you imagine any ways that tech or Silicon Valley could either help Greece in this situation, or what tech could learn from this crisis and apply it somewhere down the road?
The problems are political, institutional, and cultural. Technology solutions are business solutions in a particular garb. The underlying problems have nothing to do with commerce.
Q: A question from one of Pando editors: What role should high growth entrepreneurship play in European economies. It's surging in the UK and Germany and even some quarters France and Italy look pretty good. Meanwhile there's comparatively none in Greece and Spain. Is this part of the problem or could it be part of the solution?
There's no rational reason to invest in deeply depressed economies, which is what you have in Spain and Greece. You have to fix the economies before you have market opportunities that entrepreneurs can serve. Economies that suffer from austerity also suffer from having their talent leave for better opportunities elsewhere. That's happening now in Greece, and it happened in a huge way in Ireland and Latvia.
Q: Lastly, what’s the future for Naked Capitalism?
We are in the business of making trouble. We seem to be doing that more successfully with every passing year.
Read Yves Smith’s troublemaking at NakedCapitalism.com and buy her book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism