(That provided, of course, the perfect opportunity for George Osborne, the British chancellor, to sneak a hedge-fund manager onto the Bank of England monetary policy committee. Just in case there was any doubt, that the hedge-funds not only control British politics (they finance the Conservative Party), but in effect also now help to set interest rates. Well, hedgies, like lefties, like low interest rates, so we can guess that on balance then that this will be good for the economy, although opinions vary.)
So back to our James Bond story. Why do we get to know about it the way we did? And what was in it for the main protagonists. How did they, or will they, benefit?
Let us first look at the big storyteller himself, Yanis Varoufakis. Then at the hedge-funds and investment managers, and finally, what is in it for Greece?
Varoufakis generally does not like explaining anything without a big story. Current account imbalances are bad for the world? Greek mythology is used to explain the concepts. The Global Minotaur America running large trade and budget deficits and thus consuming output from all over the world, as the Minotaur did when it devoured human sacrifices. In a new book (only available in German so far) Time fo Change: How I explain economics to my daughter, he again employs examples from the ancient Greeks: Achilles would not have traded in his sword for money. That was his life. But we are living in a market economy now. And Greeks are about to sell everything they have, as the relentless march of capitalism has brought one of the weaker economies to its knees. An inevitability by the system.
So, if you are already know the economics of his arguments, you might still want to read the books to learn something about Greek mythology.
In the interview with investment managers, Varoufakis used a different tack. He knew that these metaphors are old, so he put together the following narrative: hacking into government computers, copy secret code from offices controlled by foreign powers, turn tax system into banking system by plugging in lap-top and giving everybody PIN at the touch of a button.
The hedge-funds lapped it up. They might not know Greek mythology, but they certainly know James Bond. “This is truly shocking, Yanis” said Norman Lamont with empathy, as he he was the only other ex-finance minister in the meeting who knows exactly what it is like to be taken for a ride and driven into virtual bankruptcy by dark foreign financial powers (in his case George Soros, who forced former chancellor Norman Lamont to abandon its exchange rate peg to the Euro pre-decessor Ecu.).
Now, my view on this is that Varoufakis wants us to know all this, and leaked the tapes to Kathimerini. His news management is first class. If he has learned anything in the last few months, it is how to handle the media with aplomb. That is why the other finance managers in Europe wanted him out, as he had the better stories as well as the better economics. The journalists are flummoxed. One German one e-mailed him with a request for an interview, Varoufakis said no, but he would write an article, which a couple of hours later was there to be included into the next edition of the paper. The journalist was impressed (it will take months to get anything out of Schaeuble), as was the editor, who mentioned it in a TV talk show in Germany. Varoufakis knows that if you control the news, you control the agenda. And that is what he is trying to do here.
As previously nobody took notice of his plan B, take over central bank, issue parallel currency and default on the ECB debt. He told us what it was in the New Statesman interview. The currency system idea, he claimed yesterday in the FT, was discussed at this hand-over to Tsakalotos. We discussed here previously what it means to have the power to run the central bank. (Greece could be like Montenegro, have the Euro as currency but be outside the Eurozone.) But we dismissed the currency idea as not having been there. Varoufakis tells us we were wrong. And in effect the plan for a parallel currency system is a good one. It will be used as a stand-by system just in case the ECB shuts the banking system down. The transactions would run on the backbone of the tax system. And I bet his ECB default plan is a good one, too. We come to that later.
Just imagine the Greek banking system shuts down completely, pending re-structuring. Greece could credit every taxpayer in Greece 500 Euro, and even though the banks will not work, every financial transaction can take place via the new system. Afterwards, that advance from the government, that tax credit which would be needed if banks closed, could in time be repaid from taxes. Companies could, of course, get bigger tax credits. An ingenious solution. And entirely feasible. If Varoufakis had just told us about that, nobody might still not have taken any notice, now add a bit of glamour and panache: Hack system, no control over my own ministry, as soon as these words are uttered everybody sits up and listens.
The previous Machiavelli of news-management, the combative Alastair Campbell, the spin-doctor for the Blair government, would have been impressed. Compared to Varoufakis, if my theory is correct, Campbell looks like the PR department of the local girl-scouts group.
In a further bizarre move, the European Commission was forced to deny that they are not in charge of the tax authority in Greece. If that were true, that would be virtually the only government department over which the Troika have no control. Troika inspectors arrived just this week to take hold of the reins again. Because that seems to be what the Greeks signed up to on the 13th of July.
But talking about the controversies is good, as now everybody will talk about the new payment system, and what that could do. Varoufakis says that now there are high treason charges against him. Previously nobody cared. Varoufakis does not like to be scape-goated for the situation in Greece, and will make sure that everyone will have heard of his plan B in the end.
The hedge-funds and investment managers
The 80 or so listeners to the meeting, which was strictly confidential, as organiser David Marsh reminded everyone, “Do not profit from or broadcast what you have heard, this is not the BBC”. Now this tape has reached greater notoriety than any BBC program ever could have garnered, and the investors were there, of course, only to profit from what they have heard. David Marsh, will know that money can be made from early information about currency intentions. He wrote about it in a book, as that was what happened previously under the ECU peg.
Clearly the hedge fund managers wanted Varoufakis to say, our plan is for a Grexit on the week-end of 15th December, or something like that. So that they could have bought Euro, which would then appreciate. And then be ready to pounce on Greek assets, once Greece has devalued. Varoufakis clearly could not tell them anything about that, but they might have wanted to see whether there would have been any clues. I think they will have been disappointed. Because although there is a way to implement a parallel currency, there is no government plan to do so.
The Greek economy
Now, it really helps if proposals such as Varoufakis ideas get further discussion. Yesterday in the FT Varoufakis gave us some further details, and indeed, the ideas of using tax credit as money, as that it is what it boils down to, were discussed. Clearly, as any newspaper comments, sometimes things get off track somewhat, but here is my comment to get everybody to focus again, and it worked.
Obviously the lynch mob is out. Nobody is commenting on the article. Are people too thick to understand it? This is the FT, guys, try to understand what Varoufakis is trying to tell you here.
Maybe we can stick to the issue here. Is this system as proposed a good payment system to allow the crediting of tax credits, as proposed above?
Undoubtedly it is.
Then, what does that actually mean? It means that the government has the means to influence the output of the economy by means of tax credits. Issue tax credits, people can use them to pay taxes, and have their Euro for spending purposes.
Alternatively, people could use tax credits to buy goods and services directly, if shops were to accept them. That is where the payment system comes in handy. Smartphones and citizens cards could be used to pay in the shops.
Will that not lead to increased government debt? No, tax credits do not count as debt.
So increasing output, without increasing debt. Great idea. GDP growth in Greece will take off. Can all be done without changing the currency of Euro, can all be done while sticking to the austerity plan.
What is there not to like?
A good discussion ensued, and that is important as you want to know whether the ideas work.
And as they are pretty close to my ideas, I automatically got some feed-back for what I have said here on the various options for parallel currencies. Feed-back I have not yet had here, so that was good.
The Greek government has come out and said that the proposals of Varoufakis were not official policy. That is correct. But they will have to look at them in detail and will consider them.
There is now the opportunity to discuss various parallel currency ideas again.
The discussion will not happen in the big media houses of Greece, they see this as an opportunity to kick Varoufakis.
So now the last bit. Apart from parallel currency and independent central bank, Varoufakis had the strategy to default on the ECB. What would happen if ECB loans to Greece were defaulted upon? Now, previously we said that the justified fear was that the ECB would then close the Greek banks down completely. So the Greece government default on the ECB, and the ECB in turn cancels the ELA arrangement allowing Greek banks liquidity.
But let us think about it again. If Greece took full control over the central bank, the ECB could not close the banks any more. In turn, if Greece wanted to, it could now have its Central Bank default on the liabilities to the ECB. That is 120bn.
The Greek Central Bank could then in turn release the Greek banks of their 120bn of liabilities. The Greek banks would be the best capitalised banks in the world. The Greek banking crisis would be over in a flash. That is a viable solution, and Thomas Mayer, the former chief economist for Deutsche Bank talked about it a few weeks ago.
So, it is all a very credible, the plan B of Greece. Other aces can be played at any time, of course, in case Greece gets sick of austerity.
But Greece has to embrace that parallel currency idea and make it into a detailed plan, to be able to discuss it in public, implement it, and eventually issue it.