Warren Mosler eta A Modest Response

A Modest Proposal for Resolving the Eurozone Crisis lana Yanis Varoufakis, Stuardt Holand eta James K. Galbraith-ek idatzi zuten1.

Stuard Holand ezaguna neukan 1980ko hamarkadan2.

James Galbraith John Kenneth Galbraith-en semea da, eta DTM ezagutzen du3.

James Galbraith-ek Warren Mosler-en liburu baten hitzaurrea idatzi du4.

Orain Warren Mosler-ek kritika egin dio A Modest Proposal izeneko lanari5.

(Bill Mitchell-ek lan horri ere kritika egin zion6.)

Garrantzi handiko testuak direlako, jatorrizko bertsioak irakurtzea gomendatzen diot irakurleari.

Hemen zati batzuk besterik ez dira azaltzen. (Mosler-en erantzunak urdinez).

Better understood as a lack of credible deposit insurance, which logically requires that the entity that provides the insurance- the ECB in this case- is responsible for the regulation and supervision of its banks.

Better understood as failure of the ECB to explicitly guarantee national govt bonds against default. It was only when Mario Draghi said the ECB would ‘do what it takes to prevent default of national govt debt’ that spreads narrowed and the national funding crisis faded. And it is only the threat that Greece will be allowed to default that is causing the current Greek funding crisis.

Investment crisis: Lack of investment in Europe threatens its living standards and its international competitiveness.

He doesn’t differentiate between public investment in public infrastructure, vs private investment that responds to prospects for profits.

As Germany alone ran large surpluses after 2000, the resulting trade imbalances ensured that when crisis hit in 2008, the deficit zones would collapse.

How is ‘collapse’ defined here? The funding crisis was a function of ECB policy that presumably would allow member nations to default, as when Draghi said that would not happen that crisis ended.

And the burden of adjustment fell exactly on the deficit zones, which could not bear it.

However, there were and remain alternatives to said ‘adjustments’ including the permission to run larger budget deficits than the current, arbitrary, 3% limit. Note that this ‘remedy’ is never even suggested or seriously discussed.


Four constraints facing Europe presently are: (a) The ECB will not be allowed to monetise sovereigns directly.

Not necessary

There will be no ECB guarantees of debt issues by member-states,

They already said they will do what it takes to prevent default, meaning at maturity and when interest payments are due the ECB will make sure the appropriate accounts are credited. However this policy is discretionary, with threats Greece would be allowed to default.

no ECB purchases of government bonds in the primary market,

Not necessary

no ECB leveraging of the EFSF-ESM to buy sovereign debt from either the primary or secondary markets.

Not necessary


(c) Surplus countries will not consent to ‘jointly and severally’ guaranteed Eurobonds to mutualise debt and deficit countries will resist the loss of sovereignty that would be demanded of them without a properly functioning federal transfer union which Germany, understandably, rejects.

Said eurobonds not necessary for fiscal transfers.


The treaty changes necessary to create a proper European Treasury, with the powers to tax, spend and borrow, cannot, and must not, be held to precede resolution of this crisis.

Nor are they necessary to sustain full employment.


For the time being, we propose that banks in need of recapitalisation from the ESM be turned over to the ESM directly – instead of having the national government borrow on the bank’s behalf.

In need of recapitalization’ is not defined. With credible deposit insurance banks can function in the normal course of business without capital, for example. That means ‘need of capital’ is a political and not an operational matter.

Banks from Cyprus, Greece and Spain would likely fall under this proposal. The ESM, and not the national government, would then restructure, recapitalize and resolve the failing banks dedicating the bulk of its funding capacity to this purpose.

Those banks are necessarily already ‘funded’ via either deposits or central bank credits, unless their equity capital is already negative and not simply below regulatory requirements, as for every asset there is necessarily a liability. And I have not been aware of the banks in question have negative capital accounts.

The Eurozone must eventually become a single banking area with a single banking authority.

Yes, with the provider of deposit insurance, the ECB, also doing the regulation and supervision.


Today the dominant EU view remains that banking union must be completed before the ESM directly recapitalises banks.

Again, I don’t recall the problem being negative bank capital, but merely capital that may fall short of required minimums, in which case not only is no ‘public funding’ is required with regard to capital, but the concept itself is inapplicable as adding public capital doesn’t alter the risk to ‘public funds’


Our proposal is that a national government should have the option of waiving its right to supervise and resolve a failing bank.

This carries extreme moral hazard, as it removes the risk of inadequate supervision from the national govt, and instead rewards lax supervision. Instead that right to supervise and regulate should immediately be transferred to the ECB for the entire national banking system in exchange for ECB deposit insurance.


If a member-state goes into a disorderly default before an ECB-bond issued on its behalf matures, then that ECB-bond payment will be covered by insurance purchased or provided by the ESM.

This can more readily be accomplished by formalizing and making permanent the ‘do what it takes to prevent default’ policy that’s already in place, and it will immediately lower the cost of new securities as well.


Thus OMT’s success in quelling the bond markets is based on a non-credible threat. So far, not one bond has been purchased. This constitutes an open invitation to bond dealers to test the ECB’s resolve at a time of their choosing. It is a temporary fix bound to stop working when circumstances embolden the bond dealers. That may happen when volatility returns to global bond markets once the Federal Reserve and the Bank of Japan begin to curtail their quantitative easing programmes.

There will be no funding issues while ‘do what it takes to prevent default’ policy is in force.


I agree the role of the EIB could be expanded, however the political difficulties are substantial and the time to initial implementation will likely be a year or more- time the EU may not have.


These programmes would be funded by the European Commission using the interest accumulated within the European system of central banks, from TARGET2 imbalances, profits made from government bond transactions and, in the future, other financial transactions or balance sheet stamp duties that the EU is currently considering.

These revenues currently are returned to the member nations and without them compliance with the 3% deficit limit will reduce other spending and/or require additional taxes.


TARGET2 is a technical name for the system of internal accounting of monetary flows between the central banks that make up the European System of Central Banks. In a well balanced Eurozone, where the trade deficit of a member state is financed by a net flow of capital to that same member-state, the liabilities of that state’s central bank to the central banks of other states would just equal its assets.

Not true. Target 2 is about clearing balances that can cause banks to gain or lose liquidity independent of national trade balances.

Such a balanced flow of trade and capital would yield a TARGET2 figure near zero for all member-states.

Again, it’s not trade per se that alters bank liquidity issues.

And that was, more or less, the case throughout the Eurozone before the crisis.

However, the crisis caused major imbalances that were soon reflected in huge TARGET2 imbalances.

The clearing imbalances were caused by lack of credible deposit insurance exacerbated by potential bank failures, not trade per se.

As inflows of capital to the periphery dried up, and capital began to flow in the opposite direction, the central banks of the peripheral countries began to amass large net liabilities and the central banks of the surplus countries equally large net assets.

Yes, but not to confuse capital, which is bank equity/net worth, and liquidity which is the funding of assets and is sometimes casually called ‘capital’ the way ‘money’ is casually called capital.

The Eurozone’s designers had attempted to build a disincentive within the intraEurosystem real-time payments’ system, so as to prevent the build-up of huge liabilities on one side and corresponding assets on the other. This took the form of charging interest on the net liabilities of each national central bank, at an interest rate equal to the ECB’s main refinancing level.

The purpose of this policy rate is to make sure the ECB’s policy rate is the instrument of monetary policy, reflected as the banking system’s cost of funds.

These payments are distributed to the central banks of the surplus member-states, which then pass them on to their government treasury.

In practice, one bank necessarily has a credit balance at the ECB when another has a debit balance, and net debit balances exist to the extent there is actual cash in circulation that banks get in exchange for clearing balances. This keeps the banking system ‘net borrowed’ which provides the ECB with interest income. Additionally buying securities that yield more than deposit rates adds income to the ECB.

Thus the Eurozone was built on the assumption that TARGET2 imbalances would be isolated, idiosyncratic events, to be corrected by national policy action.

The system did not take account of the possibility that there could be fundamental structural asymmetries and a systemic crisis.

Today, the vast TARGET2 imbalances are the monetary tracks of the crisis. They trace the path of the consequent human and social disaster hitting mainly the deficit regions. The increased TARGET2 interest would never have accrued if the crises had not occurred. They accrue only because, for instance, risk averse Spanish and Greek depositors, reasonably enough, transfer their savings to a Frankfurt bank.

Yes, my point exactly, and somewhat counter to what was stated previously. Depositors can shift banks for a variety of reasons, with or without trade differentials.

As a result, under the rules of the TARGET2 system, the central bank of Spain and of Greece have to pay interest to the Bundesbank – to be passed along to the Federal Government in Berlin.

Which then pays interest to its depositors. The ECB profits to the extent it establishes a spread between the rate it lends at vs the rate paid to depositors. That spread is a political decision.

This indirect fiscal boost to the surplus country has no rational or moral basis. Yet the funds are there, and could be used to deflect the social and political danger facing Europe.

There is a strong case to be made that the interest collected from the deficit member-states’ central banks should be channelled to an account that would fund our proposed Emergency Social Solidarity Programme (ESSP). The way I see it, functionally, it is a fiscal transfer, and not that I am against fiscal transfers!

The way I see it, functionally, it is a fiscal transfer, and not that I am against fiscal transfers!

My conclusion is that any improvement in the economy from these modest proposals, and as I’ve qualified above, will likewise be at least as modest. That is, the time and effort to attempt to implement these proposals, again, as qualified, will make little if any progress in fixing the economy as another generation is left to rot on the vine.


6 Ikus Options for Europe – Part 73: http://bilbo.economicoutlook.net/blog/?p=27666.

Hona hemen, ingelesez, Mitchell-ek dioena, laburbilduz: “The aim of the proposal is to ‘resolve the Eurozone crisis’ (…) It is also hard to see how a proposal that involves no fiscal transfers or changes to the Treaty can provide a lasting solution to the mess.

(…) The OMT program thus fails to address the core problem that southern Europe is in depression and the only way out is for budget deficits to expand. The ECB stands ready to buy unlimited government bonds – but only if they have succumbed to a fiscal austerity package that ensures their growth prospects deteriorate even further.”


There is no solvency risk for a consolidated government sector – the central bank and the treasury – that only issues liabilities in its own currency. If it issues liabilities (for example, take on debt) – that is denominated in a foreign currency, then insolvency becomes a possibility. In the case of the Eurozone, where there is no fiscal authority, the pecking order is that the member state treasuries are deemed to guarantee their own national central banks which ‘own’ the ECB and which provide lender of last resort facilities to their own banking systems. No fiscal authority backs the ECB but despite all the legal complexities involved in how the national central banks might carry out their lender of last resort duties, the reality is that the ECB is the ultimate lender of last resort in the EMU.

Utzi erantzuna

Zure e-posta helbidea ez da argitaratuko. Beharrezko eremuak * markatuta daude