Why is Yellen Supporting the ECB Attack on Greece?

Posted on February 5, 2015 by Yves Smith
As we describe in our earlier post today on Greece, the ECB’s hit job on Greece is an continuation of the destructive and ultimately self-defeating practice of letting the pet needs of banks trump those of governments and social orders. The ECB is willing to turn Greece into a failed state out of what looks like sheer brutality, with the apparent rationalization that punishing Greece will serve pour decourager les autres, meaning the other periphery countries, and potentially even France, that are calling for relief from failed austerity policies.

It isn’t just the Eurozone that is falling into a mire of faltering economic performance out of fealty to misguided economics principles and elite finance. The Eurozone has now joined Japan and most of Asia in a currency war against the US. thanks to its implementation of QE. Roughly one quarter of S&P earnings is from operations in Europe. Many companies are reporting earnings misses due to the impact of the strong dollar, both via making exports less competitive, and from lower profits from operations on the Continent, due both to the surging greenback and to the deterioration of European growth. Given how fixated US companies are on short-term profits, earnings misses are headcount cut futures. Thus the mismanagement of the Eurozone is of direct concern to the US, since our economies have significant interdependencies.

Obama is one of the few national leaders to come out forcefully against the Troika’s efforts to squeeze more out of an already bankrupt Greece. From the Wall Street Journal report on his remarks:

“You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” Mr. Obama said in an interview with CNN’s Fareed Zakaria aired Sunday.

He said Athens needs to restructure its economy to boost its competitiveness, “but it’s very hard to initiate those changes if people’s standards of livings are dropping by 25%. Over time, eventually the political system, the society can’t sustain it.”

Even US investors, who normally take a bank-friendly posture, saw the ECB shellacking of Greece today as putting political expediency over economic realities, as this Bloomberg video demonstrates. And while Greek markets plunged when the Syriza government came in, they also rallied sharply when Finance Minister Yanis Varoufakis offered concrete proposals, such as his debt swaps.

So why is the Fed, whose mandate includes promoting growth, pointedly ignoring Obama’s views and tacitly supporting the ECB? The US central bank actually has significant leverage over the ECB via its dollar swap lines. Those were extended in violation of Congressional approval processes, but Congress has been too supine or inattentive to challenge them. While the swap lines are not presently in use, they are important to the ECB. Withdrawing them over the treatment of Greece and the potential serious downside risk would constitute a serious rebuke and get the ECB’s attention.

Similarly, Congress could challenge the Fed’s authority to have granted the currency swap lines at all, a move it should have taken long ago. There is a good argument to be made that it is unconstitutional to have done so without prior explicit approval from Congress, and no justification for making them “permanent”.

Even worse, the ECB has an almost certain booster in the Board of Governors in the form of Stanley Fischer, who was ECB chief Mario Draghi’s thesis advisor. If Yellen were to be concerned about the dangers of the Troika’s policies towards periphery countries as a danger to global growth, and hence the US, the odds are high that any effort to press the ECB to moderate its course would be influenced, as in checked, by Fischer, or that he would volunteer himself as intermediary, which would serve the same end.

The question of where Fischer’s loyalties truly lie are why Elizabeth Warren only reluctantly supported Fischer’s nomination to the Fed. As with Lazard’s Antoinio Weiss, Warren is concerned that individuals with strong ties to major financial firms and whose careers have made them members of a club of like-minded insiders will reflexively side with their colleagues and former employers. From her remarks on her vote:

In recent years, Wall Street institutions have exerted extraordinary influence in Washington’s corridors of power, but Citi has risen above the others in exercising a tight grip over the Democratic Party’s economic policymaking apparatus. Fischer, after all, is just the latest Citi alumnus to be tapped for a high-level government position. Starting with Robert Rubin – a former Citi CEO – three of the last four Treasury secretaries under Democratic presidents have had Citigroup affiliations before or after their Treasury service. (The fourth was offered, but declined, Citigroup’s CEO position.) Directors of the National Economic Council and Office of Management and Budget, as well as our current U.S. trade representative, also have had strong ties to Citigroup…

But there is danger anytime the key economic positions in our government fall under the control of a single tight-knit group. Old ideas can stay around long after they’re useful, and new ideas don’t get a fair hearing. We learned about the harms of groupthink in economic policymaking the hard way – first with the deregulation of the banking industry in the 1980s and 1990s, followed by the no-strings-attached bank bailouts in the aftermath of the 2008 financial crisis, and most recently with the anemic efforts to help homeowners who were systematically cheated by financial giants.

The power of a tight group of insiders can also echo through the government in subtle ways. No one likes to ignore telephone calls from former colleagues, and no one likes to advance policies that could hurt future employers. Relationships matter, and anyone who doubts that Wall Street’s outsized influence in Washington has watered down our government’s approach toward still-too big-to-fail banks has their eyes deliberately closed.

The ECB’s kneecapping of Greece demonstrates how central banks act as powerful enforcers on behalf of lenders and investors. The ECB operates with no concern that it will be reined in by democratic governments, even as its reckless actions towards Greece threaten not only Syriza but the Spanish and French governments by giving their anti-austerity, and the the case of France’s National Front, rabidly anti-Eurozone parties persuasive talking points. The Rothschilds, who had the power to make or break governments in the 19th century, took care not to abuse their power to avoid rousing opposition and putting their business at risk. The ECB is now operating with a swagger that despite being swathed in bureaucratese, is disturbingly authoritarian. It is time to wake up to the danger to democracies of central bank mission creep. While the Fed is not as far down the path of lack of accountability as the ECB is, the only protection is to insist on checks and more transparency.

Update: Krugman does us the favor of exhibiting precisely the sort of socially destructive insider loyalty that Warren called out. In a post today, Krugman makes the strained argument that because Draghi is clearly a smart man (a Serious Economist and a central banker!), the savage move against Greece has to be more clever than it looks. He argues that it must be to pressure German by showing them that Greece really might leave the Eurozone.

Has Krugman even bothered following the Financial Times, much the less the European press? Even an occasional reading will show that the Germans and to a large measure, the ECB, believe there is no contagion risk of a Greek exit. Moreover, if Krumgan had bothered paying attention, he’d also know that Varoufakis, over years of writing on this topic, is firmly opposed, seeing it as a disaster to Greece. And the markets are confirming that today. While the European equity markets are down, they aren’t seriously so, nor are periphery bond prices ex Greece.

In other words, to justify the EBC’s clearly reckless move, Krugman has gone into 11th dimensional chess mode. With Obama, that messaging by loyalists served as a lame effort to justify his repeated unforced concessions to Republicans and Big Business: surely there is a bigger plan and we plebes simply don’t see the full picture. As we’ve seen again and again, there was no bigger plan with Obama. He governed as a center-right President on economic issues because he is a neoliberal. And Draghi is similarly acting like a thug towards Greece because he thinks crushing Greece, if it comes to that, is necessary to keep the Troika’s doomsday machine on its course.

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