Ford to City: Drop Dead

I recently tweeted:  “Receivership is better than Grexit for Greece, hence Tsipras; but worse for Europe, hence Schauble.”  That’s the headline.  Here is the explication.

On Greece, I have been trying to understand how rational people (on both sides) wound up with such an unworkable solution.  It seems to me that in the end Tsipras made a calculation that Grexit was the worst outcome, or at least an outcome over which he was unprepared/unwilling to preside, given the debt overhang.  Schauble made the opposite calculation that receivership was the worst outcome, or at least an outcome over which he was unprepared/unwilling to preside, given the debt overhang.  So Schauble made the alternative to Grexit as unattractive as possible, hoping that Tsipras would turn it down, but Tsipras took it anyway because he felt he had no other choice.

The result is that no one is happy with the outcome.  Certainly not Greece, but also not Brussels.  Greece does not want Brussels to be running their country, and neither does Brussels, but that is what the solution entails.

I leave aside the question of where the debt overhang came from, since it is now a fact on the ground.  But I agree with those who say that the original lenders (private banks in France and Germany mostly) got bailed out by Europe, which now seems to want Greece to pay the bill.  It makes no economic sense.  Debts that cannot be repaid will not be repaid, and markets will only begin to work again when this economic reality is embraced.

In all this I am inspired somewhat by the experience of my hometown New York, which had its own financial crisis in 1975.  Initially the federal government refused to help.  The local paper had a famous headline “Ford to City:  Drop Dead”.  Here is a good account of what happened after that.  I urge everyone to click on the link and read it.

The New York experience suggests to me the importance of finding, or creating, some institutional structure in between Greece and Brussels that can serve as a credible receiver, credible to both Greece and Brussels.  In the case of New York, that receiver was the Emergency Financial Control Board, created by New York State (not the Federal government).   This is the key.  What analogue could be created for Greece and Europe?

8 comments on “Ford to City: Drop Dead

  1. Sorry but in my view the issue of finding a receiver just belittles the problem. This is a coup and the destruction of democracy which should not be tolerated. Maybe you are trying to help the Greeks but can you really justify handing a country over to more unelected bureaucrats presiding over the dismemberment of their economy?

    The real issue is much greater and involves the faulty structure of the Eurozone. If the Greeks exit the euro and restore their own currency, their economy will likely recover, just as did those of Argentina and Iceland who also experienced catastrophic financial crises. The problem is not Greece; the problem is the euro, which required weaker countries to hand over sovereign powers to bond vigilantes and technocrats representing powerful financial interests.

    For another view, read the following article:

    A Greek exit could not be more costly than the current path

    “But in 1998, the Sun newspaper had a different public enemy No. 1 – Oskar Lafontaine.

    All was explained in this ‘Saturday profile” in the British Independent (November 28, 1998) – The Saturday Profile: Oskar Lafontaine: Europe’s most dangerous man?.

    The Murdoch press (the Sun) had been raving on about “Gallic-Teutonic monsters” for some time as the spectre of Europe was seen to be a basic threat to British independence. Lafontaine encapsulated that threat.

    Most recently, Lafontaine gave an interview to the Magazine section of Der Spiegel (29/2015), which carried the title noted above – Der Euro ist gescheitert.

    He said the the Euro is a step backwards in the path to European integration. The people of Europe are not moving closer together but are, instead, becoming more estranged from each other. He cited the rise of extreme right groups, like the National Front in France as a dangerous trend.

    He said the crucial error in the formation of the monetary union was not to have first, created a political union. Without a truly European government with fiscal authority, the common currency could not operate effectively.

    He says that is what is now patently obvious. With wages flat and growth in Germany being driven by a mercantlist export mania, the neighbouring nations such as France and Italy are slowly losing their industrial market shares. He also said that the German model cannot be the basis for a European agreement.

    It is not the first time he has said this. Back in May 2013, he referred to the monetary union as the “catastrophic euro” (Source).

    At that point he called for the EMU to be abandoned. He said that the way the monetary union had unfolded was “leading to disaster” and “unemployment has reached a level that puts democratic structures ever more in doubt”.

    He particularly though that “Germany’s strong-handed tactics in carrying out internal devaluations in Spain, Portugal, and Greece” were generating catastrophic effects.

    In terms of domestic wage freezes in Germany, he considered these were just a “self-serving” strategy “to improve their own export niche”.

    He said:

    The Germans have not yet realized that southern Europe, including France, will be forced by their current misery to fight back against German hegemony sooner or later …

    Hubris and nemesis!

    more at http://bilbo.economicoutlook.net/blog/?p=31357

    • Perry Mehrling on said:

      It is clear that Germany is not a credible receiver. One way to think about the last five years is that Germany has been de facto the receiver. Now it is time for someone else to have a chance, presumably France. I suppose that France was hoping that the IMF, as part of the Troika, would do the trick for them, but we have seen how that worked out. Now I think it is crucial to get the IMF out of the picture completely, to make clear that this is an internal problem of European governance.

      • A problem of governance or of debt leverage and financial conquest?

        Finance as Warfare
        http://michael-hudson.com/2015/06/resisting-financial-conquest/
        >
        > Eurozone financial strategists made it clear that they wanted to make an example of Syriza as a warning to Spain’s Potemos party, and anti-euro parties in Italy and France. The message was supposed to have been, “Avoid our austerity and we will cause chaos. Look at Greece.”
        >
        > But the rest of Europe is interpreting the message in just the opposite way: “Remain in the eurozone and we will only create money to strengthen the financial oligarchy, the 1%. We will insist on budget surpluses (or at least, no deficits) so as to starve the economy of money and credit, forcing it to rely on commercial banks at interest.”
        >
        > Greece has indeed become an example. But it is an example of the horror that the eurozone’s monetarists seek to impose on one economy after another, using debt as a lever to force privatization selloffs at distress prices.
        >
        > In short, finance has shown itself to be the new mode of warfare. Resisting debt leverage and financial conquest is as legal as is resisting military invasion.

  2. Satisch Doré on said:

    Fascinating walk through NYC history, wonder how many are aware? Key lessons imho,

    – the crisis lasted only three years before NYC rebounded

    – “The city kept its part of the bargain in dealing with public employees. City employment fell by 20 percent and work rules were loosened. Wages were reduced and eventual raises were held below the level of inflation. By 1977-78, the city had no short-term debt.”

    In other words the crisis ended only when promises were kept, not new promises, made to be broken, extracted. Ultimately what’s needed is a can-do attitude not a kick-can-do attitude, which is what every unfolding chapter in Greece seems to be about.

    • Perry Mehrling on said:

      Debts that cannot be paid will not be paid, and markets only begin to work when this economic reality is embraced. New York had to embrace it, but so did the creditors.

    • Federal role in NY’s rehabilitation:

      “Adding to the controversies over both congressional and presidential impotence was the question about the looming financial default of New York City. For eight months, the nation’s most populous city, paying the price for attempting to cope with overwhelming economic and social forces, without budgetary discipline, stood at the brink of economic collapse. Only in later months did it become apparent that the New York predicament merely epitomized the problems faced by the nation’s older urban centers. Meanwhile, with default virtually a certainty, those with traditionally rural biases against big-city evils found satisfaction that, at last, the “chickens had come home to roost” because of “misguided liberalism.” Ford, the conservative, Middle American president, assumed the support of that constituency and kept his distance from the situation even as harried local officials searched for ways to avoid fiscal disaster.

      Ford’s position was never a mystery. Yet, when he delivered a stern rebuke to the city on 29 October 1975, promising to veto any “bailout” of the nation’s premier city, the finality of his statement came as a draconian blow. In one of those journalistic feats that convert a political leader’s comments into pungent rhetoric, the New York Daily News reported the president’s position with the headline FORD TO CITY: DROP DEAD . The Ford rationale, of course, was simple: only by his display of firmness would the city tidy its financial house.

      In the days that followed, there was a growing realization that the administration’s position had underestimated how much others throughout the country feared the implications of permitting the collapse of New York City. Vice President Rockefeller openly began to suggest that the government might indeed have to play a role. From within the White House itself came similar signals, especially from Treasury Secretary William Simon.

      Ford held to his stern justification that he was forcing New York to restore its own fiscal viability, but at the same time, his retreat had become inevitable. Within the city, frantic negotiations took place involving all parties, including banks that had funded the city’s short-term securities. Under the pressure, all interested parties came together during additional weeks of negotiations. Drastic reductions were made in the city’s work force. Bankers restructured bond issues. The new Municipal Assistance Corporation was established to sell securities. Union pension funds were committed to their purchase. One near disaster after another was averted in a series of cliff-hanger scenarios.

      Finally, with the city seemingly acting to repair the damage and the broader consequences of a default becoming clearer, Ford changed his stance when he met the press on 26 November. “I have, quite frankly,” he announced, “been surprised that they have come as far as they have.” Ford then asked Congress to approve federal loans to the city on a seasonal basis through 30 June 1978. He covered his own retreat by emphasizing that New York had “bailed itself out.” Finally, by a narrow margin in the House, Congress approved Ford’s request for a seasonal financing act to provide up to $2.3 billion for short-term loans during the next three years at 1 percent above the federal cost of money.

      Read more: http://www.presidentprofiles.com/Kennedy-Bush/Gerald-R-Ford-The-new-york-city-crisis.html#ixzz3fv0VNyEm

  3. Mark Schwarzmann on said:

    The Greek government’s debt can be restructured so that it has a much longer maturity than it has now. This would make debt repayment somewhat more feasible, although the restructuring might be considered as a technical default.

  4. Lee Bertman on said:

    Greek debt may be close to worthless and needs to be mostly forgiven in exchange for making the economy competive, liberalizing its structure. That liberalization will require “adult supervision” perhaps through an outside expert group, not political. No doubt this will be a struggle as entrenched labor, government workers, retirees and some businesses will be painfully impacted.
    This is no the same as the depressing economic measures favored by the IMF and Germany. Constructive economic reform will take years of concerted, disciplined effort. But I believe that it would be the only viable approach rather than kicking the can down the road, or Greek exit from the euro.