Nouriel Roubini's Global EconoMonitor

Berlin Is Ignoring the Lessons of the 1930s

From the Financial Times (originally published on June 8, 2012):

Is it one minute to midnight in Europe?

We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid.

We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.

We have warned for more than three years that continental Europe needs to clean up its banks’ woeful balance sheets. Next to nothing has been done. In the meantime, a silent run on the banks of the eurozone periphery has been under way for two years now: cross-border, interbank and wholesale funding has rolled off and been substituted with European Central Bank financing; and “smart money” – large uninsured deposits of wealthy individuals – has quietly departed Greek and other “Club Med” banks.

But now the public is finally losing faith and the silent run may spread to smaller insured deposits. Indeed, if Greece were to leave the eurozone, a deposit freeze would occur and euro deposits would be converted into new drachmas: so a euro in a Greek bank really is not equivalent to a euro in a German bank. Greeks have withdrawn more than €700m from their banks in the past month.

More worryingly, there was also a surge in withdrawals from some Spanish banks last month. The government’s bungled bailout of Bankia has only heightened public anxiety. On a recent visit to Barcelona, one of us was repeatedly asked if it was safe to leave money in a Spanish bank. This kind of process is potentially explosive. What today is a leisurely “bank jog” could easily become a sprint for the exits. In the event of a Greek exit, rational people would ask: who is next?

The way out of this crisis seems clear. First, there needs to be a programme of direct recapitalisation – via preferred non-voting shares – of eurozone banks, in the periphery and the core, by the European Financial Stability Facility and its successor, the European Stability Mechanism.

The current approach of recapitalising the banks by the sovereigns borrowing from domestic bond markets – and/or the EFSF – has been a disaster in Ireland and Greece: it has led to a surge of public debt and made the sovereign even more insolvent while making banks more risky as an increasing amount of the debt is in their hands.

Second, to avoid a run on eurozone banks – a certainty in the case of a Greek exit and likely in any case – an EU-wide system of deposit insurance needs to be created.

To reduce moral hazard (and the equity and credit risk taken by eurozone taxpayers), several additional measures should also be implemented.

The deposit insurance scheme has to be funded by appropriate bank levies: this could be a financial transaction tax or, better, a charge on all bank liabilities.

There needs to be a bank resolution scheme in which unsecured creditors of banks – both junior and senior – would take a hit before taxpayer money is used.

Measures to limit the size of banks to avoid the too-big-to-fail problem need to be taken.

We also favour an EU-wide system of supervision and regulation.

It is true that European-wide deposit insurance will not work if there is a continued risk of a country leaving the eurozone. Guaranteeing deposits in euros would be expensive as the departing country would need to convert all euro claims into a national currency, which would swiftly depreciate against the euro. On the other hand, a deposit insurance scheme that holds only if a country doesn’t leave will be incapable of stopping a bank run. So, more needs to be done to reduce the probability of eurozone exits.

Structural reforms that boost productivity growth should be accelerated. And economic growth needs to be jump-started. The policies to achieve this include further monetary easing by the ECB, a weaker euro, some fiscal stimulus in the core, more bottleneck-reducing and supply-stimulating infrastructure spending in the periphery (preferably with some kind of “golden rule” for public investment), and wage increases above productivity in the core to boost income and consumption.

Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualisation.

There are currently a number of different proposals for eurozone bonds. Among them, the German Council of Economic Advisers’ proposal for a European redemption fund is to be preferred – not because it is optimal but because it is the only one that can assuage German concerns about taking on too much credit risk.

The ERF is a temporary programme that does not lead to permanent eurozone bonds. It is supported by appropriate collateral and seniority for the fund and has strong conditionality. The main risk is that any proposal acceptable to Germany would imply such a loss of sovereignty over fiscal policy that it would be unacceptable to the periphery, particularly Italy and Spain. Giving up some sovereignty is inevitable. However, there is a difference between federalism and “neo-colonialism” – as a senior figure put it to us at a meeting of the Nicolas Berggruen Institute in Rome.

Until recently, the German position has been relentlessly negative on all such proposals. We understand German concerns about moral hazard. Putting German taxpayers’ money on the line will be hard to justify if meaningful reforms do not materialise on the periphery. But such reforms are bound to take time. Structural reform of the German labour market was hardly an overnight success. By contrast, the European banking crisis is a real hazard that could escalate in days.

Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of a eurozone break-up would be astronomically high – for themselves as much as anyone.

After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the eurozone remains the destination for 42 per cent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.

Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union. But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.

56 Responses to “Berlin Is Ignoring the Lessons of the 1930s”

Bruce McGillisJuly 2nd, 2012 at 10:58 pm

1. Unless Europe, USA and others are able to greatly expand national consumerism / expand national money circulation, the situation will only get worse. Nations are in trouble because consumerism has diminished and continues to diminish. High quality products causes less consumerism / less wasting. Excessive efficiency reduces purchasing power. These "are" the root causes the world finds itself in today. Western nations are being forced to revert to internal national production. Rejigging banking is not the remedy. Regards Bruce McGillis Penticton Canada.

strangeJune 11th, 2012 at 6:09 pm

Has it started again? Germany is responsible for the EU? Though people never wanted the country being member of the EU, people never wanted to see breaking the non-bail out rule.
I would say the argumentation has went way too far to be called honest. The whole process is as dishonest as the EU construct and the bureaucrats in Brussels.

diatoo1June 11th, 2012 at 7:32 pm

All these proposals may or may not save the Euro. But almost all the risks involved can finally end up as cost for Germany. To follow these proposals Germany must deliver upfront without knowing whether the periphery will deliver its structural reforms later and whether we will get sort of a European union, so as to make the Euro viable. Nobody knows which costs can be more astronomical for Germany: to take over all risks of almost the total rest of the Euro zone or to let it go its way. If we could be sure that we get a united Euro zone for taking all risks then it would be worth while. But without being sure to get that it would be irresponsible of the German government.

bubblesandbustsJune 11th, 2012 at 9:04 pm

Good points. The proposals here, frequently touted by others, assume that a United States of Europe is the only option and a desired one at that. The reality is that Europe needs to determine if it truly desires a political union or not. If so, the above proposals are good ideas. If not, current half-measures, bailouts and loans will prove more costly down the road when the monetary union ends than a current break-up. The key is ending the euro currency, while protecting free trade and labor mobility (

GeneJune 15th, 2012 at 10:43 pm

But the European Union doesn't only offer free trade and labor mobility to it's members. It offers zero percent risk of currency fluctuations for it's member states as well, which increases the amount of business that can be achieved throughout the union. The main beneficiaries of the European Union were Germany and France with a decreased cost to export to most of Europe and buy supplies to manufacture goods at a decreased price as well. The European Union is exactly what helped Germany grow their exports these recent years. I think that Keynes was right to note that Germany is the heart of the European economy in "The Peace of Versailles". Germans might make it seem like its Greece's, Spain's, or Italy's individual problems but these economic crises will hurt Germany as well just like any venom the economic downturn will make it's way to the heart (Germany) it just takes some time. After the hyperinflation that Germany experienced it too under Hitler began to spend it's way out of the darkest economic times it had seen with projects like the Autobahn and the production of Germany's war machine. Let's not repeat the same mistakes and experience dark economic times, political upheaval, and major wars.

buzzJune 11th, 2012 at 8:34 pm

I can't accept the premise that Nazism was the result of failing to make such minor tweaks comparable to direct ESM lending to banks and a Europe-wide deposit insurance scheme. We need to stay focused on the issue in front of us, which is how to revive dynamic growth. My vote is for more write-offs, less propping up zombies.

fredJune 11th, 2012 at 10:06 pm

bad solution.

the preservation of the euro at any price is not worth it. you preserve the perverse distortions that led to this mess. closer political union is not possible, not in any democratic way, the countries are just too different, folks in new york can easily find out what politicians in dallas are saying, not the same for folks in the eu….romania…it might as well be china for all anyone cares, these are different peoples, and without a national culture, or even language, there is no democratic mandate for anything. Even with a unified language and effectively culture, the us and canada remain apart, the us and uk are closer together than many eu states are with one another. The entire project and premise of the eu was flawed to begin with, going further down that flawed path and making it even more permanent is simply the wrong path to take.

Per KurowskiJune 12th, 2012 at 12:37 am

Niall Ferguson and Nouriel Roubini fail themselves when not including the necessity of dismantling bank regulations that had the regulators playing risk managers handing out discriminating risk-weights which determined the final capital requirements for banks.

Had for instance a German bank, when lending to Greece, been required to hold the same 8 percent in capital it needed when lending to a German unrated small business, instead of a paltry 1.6 percent, implying an authorized leverage of 62.5 to 1, you can be sure that Greece would never have been able to borrow as much as it did.

How sad Europe is still being analyzed by looking at the facts using the wrong hypothesis… and therefore its crisis has not yet been fully understood.

Lloyd HartJune 12th, 2012 at 3:40 am

My dear Mr. Roubini, the ultra conservative idiots in Germany, Great Britain and America are not ignoring history, they are attempting to deliberately repeat it. Austerity is about the deliberate destruction of the social compact in Europe so that the conservatives can wipe the books clean with war and the recolonization of the global south where all the resources are. Pretending that fascist, racist Americans and Europeans are simply making mistakes is to turn away from the lessons of history. The American and British oligarchs financed the Nazis into existence for the very purpose of destroying the European economy, destroying the Soviet Union and wiping out the European Jews, trade unionists, communists, socialists, anarchists and homosexuals and then rebuilding Europe under the complete control of the U.S.. But the Nazis failed to capture the Russian oil fields and refineries and the Americans had no choice to play along with the Soviets in defeating the Nazis. The American's plan of the Nazis capturing the Russian oils fields and then handing them over to American and British forces backfired into the Russians capturing and then holding eastern Europe. Not even Henry Ford's wet dream of wiping out the Jews was fulfilled.

EconomartJune 12th, 2012 at 5:48 am

Here is a solution to the Greek problem. If anyone can find the flaw, I shall be more than happy to give him or her $50,000. I am just tired of doing this.


The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation's currency, is nil.

Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by simple arithmetic.

The community is the source of the government's funds. The government taxes the community to pay for public services provided by the government.

Cost of public services is $10 million.

Scenario 1: The government taxes $10 million.

Community finances: minus $10 million from community bank accounts for government expenditures.
No community government debt, no community government IOU.

Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

Community finances: minus $10 million from community bank accounts for government expenditures.
Community government debt: $10 million;
Community government bond: $10 million.

At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

The value of all community government debts when combined with all community government IOUs or bonds is zero for the community. It is the same $0 combined worth whether the community pays its taxes immediately or never pays them at all.

So if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community any more than taxation would have. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

Whatever financial benefit taxation possesses is nullified by the fact that borrowing instead of taxation places no greater financial burden on the community.

However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public debt.

Gary Marshall

Paul BerkowitzJune 13th, 2012 at 11:24 am

This analysis assumes public expenditures carry commensurate economic value. Reality is quite different. Most public expenditures are pure waste.

EconomartJune 13th, 2012 at 10:27 pm

Hello Paul,

This has nothing to do with public expenditures. It only has to do with how the government fills up its money bag, not how it empties it. There is no benefit to using Taxation to fund public expenditures as the cost of borrowing is nil for a nation. Adding to both the nation's assets and liabilities in the act of borrowing to fund public expenditures leaves the nation's finances unchanged.

You argue that in the present, government obligations or Treasuries have no value. Well, many people will differ with you on that point, otherwise they wouldn't purchase them.

However, I would argue that your point is premature. With full government borrowing, the government is completely dependent upon the public for funds. How do you treat your banker? Far better than I bet you treat someone forced to hand you money.

With the abolition of Taxation the government will be forced to justify its expenditures. Any hint of corruption or squander, investigations will be quickly made and the culprit discovered and ousted and perhaps jailed.

And do realize that there will be no further tax or regulatory constraints on the productivity and income of the nation. All that worthy activity now unprofitable will then become profitable.

What a different world it would be.

Gary Marshall

HermannJune 15th, 2012 at 4:09 pm

Dear Gary Marshall,
2 flaws in your theorie:
# you precise yourself: credit must be used "to fund worthy public expenditures": This ist the weak spot: the borrowing of administration is taking precious credit from the economy. Mostly this credit is dissipated for paying running costs, sometimes even for paying the interest of the already existing debt. How to make sure that gouvernement is attributing the borrowed money "to worthy… expenditures"?
# you don't speak of the fact that credits are limited in time and that if you connot repay, you have to renogiated them – mostly on worse terms (higher interest.) And that in doing so governement looses control of community fiscality to its creditors. (Greece, Spain)

EconomartJune 17th, 2012 at 9:06 pm

Hello Hermann,

You do not seem to realize that Taxation is abolished. As there will be no taxation, all that money formerly paid as taxes will enter the credit markets, one way or the other.

With the abolition of Taxation, government expenditures should decline drastically because the government can no longer take the money and do as it pleases. They have to convince their perpetual and petulant bankers to lend. If expenditures go to waste and corruption, onerous and unnecessary regulation, subsidies to favoured industries and friends, very few shall lend. Without lenders a government shall collapse.

Also with the abolition of Taxation, much productive and worthy economic activity presently squelched by high taxes will proceed. People and businesses shall conduct their affairs without having to consider fees or penalties on income and investment.

Banks and generally businesses renegotiate with their great and growing lenders all the time. So why not Government? As I said, whatever the government borrows for expenditures and interest on the debt creates a debt in the amount borrowed and an asset in the resident bondholder's newly acquired financial instrument.

Yes, you are exactly correct. The government will be beholden to its creditors. Commit financial malfeasance or illegality, squander money, and investigations will immediately follow with heads rolling all over the place. How much better a situation in public finance thence than what we observe these days.

Government will only borrow from resident citizens. If a community requires a worthy public project funded by that community, then it should receive funding. If not feasible, then none will lend for that project.

Its pretty simple.

I hope that answers your objections.

Gary Marshall

IntriguedJune 18th, 2012 at 4:02 am

A few thoughts come immediately to mind…

1. Corruption, waste and malfeasance occur in business all the time and they must answer to creditors and shareholders who, on average, are involved and more critical. Elimination of taxation doesn't mean the elimination of corruption. But it could make the economic fallout of such an event more damaging to an economy.

2. A government run purely on borrowing that is funded by its constituents leaves it vulnerable. Namely to financial institutions (particularly ones judged too big to fail) and businesses. Such entities would have potentially greater leverage on regulatory matters. Financial institutions have plenty of places to park their money. And forcing financial institutions or businesses to buy debt is like a tax. So, businesses, financial markets and citizens could refuse to buy debt if a government enforces policies it/they don't like. This would lead to a change in governments (in a democracy) more sympathetic to businesses or financial firms or, to a likely lesser degree, the people. With taxation, influencing and lobbying and pandering do occur but we still pay taxes. A government cannot be held hostage financially so easily as it could in your proposal.

3. Any inability to create or enforce common regulations due to my second point makes a country potentially more vulnerable to economic and political instability.

4. A country that is less stable may experience a greater number of recessions and more severe recessions.

5. How does a government help stimulate a shrinking economy when it is only borrowing domestically? If the answer is it shouldn't engage in such Keynesian policies then explain why recessions would not be deeper due to a negative feedback loop of wealth destruction leaving fewer funds to buy government debt. Again investors have many global fixed income options and I can't imagine a democratic government in your proposed system situation could really enact capital controls.

6. In such an economy there is a greater temptation to produce inflation in order to maintain or reduce the debt to GDP ratio.

7. How does a country institute such a change? It becomes increasingly harder the larger the public sector is within an economy. The potential dislocations would be huge, particularly if the debt to GDP ratio is significant.

I am eager to hear your responses.

EconomartJune 18th, 2012 at 5:24 am

Hello Intrigued,

Only resident citizens would be able to lend money to the government, under any such form like a large pension fund or individually. So there will be no financial institutions involved or involved only by way of managing a pension fund.

Eliminating Taxation will not eliminate waste and corruption, but there will be far greater controls exerted over any violations or violators. Those responsible will be investigated and punished. So things will be very different.

The money of the people is perpetually held hostage by those people and corrupting forces that will take it by force of law and spend it as it please them. Without that measure and coercion, money will be borrowed when justified through public finance cost and benefit analysis. Any malfeasance, see the above paragraph. There will be far greater stability within the nation as a result because the people will have direct control over the nation's finances. And the laws and public expenditures will reflect this comparatively benign influence.

In a nation in which the government must borrow, interest rates will be a major factor in deciding whether to proceed with a project. As interest rates are at a maximum when the economy thrives and a minimum when the economy slows, government expenditure will be at a maximum when the economy has slowed and a minimum when the economy thrives. This will counter the tendency of government expenditures to rise to a maximum with a thriving economy and to fall to a minimum in a receding economy. So your analysis is incorrect.

Point 5 is also dealt with in the above paragraph.

No one is enacting capital controls. It is only ensuring that lenders be resident US citizens. If resident US citizens should buy other nations' securities, then perhaps such controls could be relaxed somewhat.

Inflation is caused by government creating money through borrowing without purpose. If government cannot create money without purpose, proviso number uno, there will be no inflation. There will be ups and downs in prices caused by market conditions, but there will no longer be general price rises, and far more likely general price falls.

The whole system is based upon a program of creating more assets than liabilities just as any individual, firm, or corporation. It is not a GDP issue. Its a wealth issue, though I would certainly expect the growth in GDP to far outpace accruing liabilities. If a corporation, through borrowing, can create assets twice the size or more of its accruing liabilities, would you not invest in that companies stock or buy its paper? And what if this corporation were a nation? Would you not act similarly?

There are always major changes and shocks that strike an economy. Look at what is happening in Europe with its moribund socialist empire. Without taxation, there will be far less need for government workers and far greater need for private sector workers, just like after WW2. It will cause problems initially, but once done, the whole enterprise will move along far more smoothly than what can be seen today with the scourge of Taxation.

I hope this answers your questions.

Gary Marshall

EconomartJune 18th, 2012 at 5:26 am

Hello Intrigued,

I did respond to your questions and a message popped up informing me that it must be approved by the site moderator before appearing. If it does not appear tomorrow, I shall have to respond again.

EconomartJune 18th, 2012 at 5:40 am

I shall just say that the abolition of Taxation will greatly purge the current system of most of the corruption and squander. The little that remains is not expected to be much of an issue as long as it is dealt with, and it will be dealt with, swiftly and sharply.

Governments will only borrow from resident citizens, individually or through managed pension funds. With so many lenders and the large numbers involved, it is highly doubtful that some agglomeration of lenders could force through privileged laws and regulations. Even if possible, it would only be a shade of that perpetrated in the current system riddled with influence peddling and personal enrichment of government officials and leaders.

Without such squander and corruption and with such control over state finances, a nation will be far more stable and far wealthier. It is doubtful that one would ever find the conditions that now prevail in Greece.

The interest rate will determine whether a worthy project proceeds. As interest rates will be at a maximum in a thriving economy and at a minimum in a receding economy, government expenditures will be highest in a receding economy and lowest in a thriving economy. This should help to counter the current inclination of government to spend and borrow in a thriving economy and the opposite in a receding economy.

Governments produce inflation by creating money without purpose. As the system of borrowing wherein government must justify its expenditures, will counter and check this tendency, inflation will always be a novelty.

How does a nation switch from a public sector economy to a private sector economy. Well it happened after WW2. And it is about to happen to Europe whether they like it or not. There will be some big changes. But without Taxation to consider, things should move along far more smoothly.

Gary Marshall

Charles N. SteeleJune 15th, 2012 at 4:53 pm

Is there any limit, then, to the amount government can borrow in this fashion? Your argument seems to boil down to the point that Greece can get out of this mess by borrowing domestically. You're suggesting, too, that taxation can be avoided…so how is the domestic borrowing to be repaid? And if that's in doubt, why would domestic lenders particpate?

Who cares whether the accounting balances to zero regardless? Certainly not the individual Greeks being asked to finance this, either through default or taxation.

EconomartJune 17th, 2012 at 9:23 pm

Hello Charles,

I ask this question in response: How does a bank obtain funds for additional loans? It borrows large sums and lends large sums, indefinitely. It rarely pays back depositors and lowers its aggregate borrowings, which grow over time. It lives on the slim margins between the rate at which money is borrowed at and which it is subsequently loaned at. This is rated a success.

So if a bank can do it, and many corporations, always borrowing greater sums for larger investments, why not a nation?

In short, the loans shall never be repaid, nor the accruing interest. So we have an endlessly growing amount of aggregate liabilities.

Does the fact that a man or firm carries debt automatically translate to financial disaster?

We do not know because we have no idea what the assets this man or firm carries against those accruing liabilities. Once known, we shall have the information to judge.

The question now becomes, does the nation hold assets to satisfy its creditors of the security of its loan?

Well, the nation will hold bonds in the amount of the debts and accruing interest. So if Taxation were abolished, then the nation would be no better or worse off if it chose to borrow instead of Tax. The nation would incur debts for public expenditures just as it would receive assets in the form of government securities and promised interest. Its a wash.

I shall go further. With Taxation abolished, government expenditures will decline drastically. No more favoritism. No more squander. No more corruption. No more vote buying subsidies. No heavy, harmful, and unneeded regulation. Government expenditure will come with a capital charge. And if a project generates returns greater than the charge, fine. If not, then the project is shelved.

Secondly, there is no deterrent on the accumulation of wealth or on productivity. All that worthy activity currently impeded by high taxation and unneeded regulation will disappear, sending growth surging.

These 2 primary factors will come into play and create massive increases in the nation's assets. I conservatively estimate the creation of $2 in the nation's assets, held by its citizens, for every $1 invested by the nation's agent, the Government.

The nation will be far wealthier with the abolition of all Taxation. And so shall Greece.

I hope that answers your questions.

Gary Marshall

EEBJune 20th, 2012 at 12:22 am

The major problem with this is that those who hold the debt are the rich and those who service the debt are the workers and the poor. The wealth of the rich is the debt of the workers and the poor, but eventually the workers and poor will no longer be able to service the debt and they will default and/ or effective demand in the real economy will collapse due to the extreme inequality in income and wealth distribution; ultimately, the economy must collapse, as the claims of the rich on current output must outstrip the productivity of the workers and the poor at any long- run interest rate acceptable to the banksters and the rich. Of course, this problem is overcome by making the gov't. the community's banker, creating money out of thin air and providing interest- free "loans" to the real economy (see Modern Monetary Theory, or MMT).

EconomartJune 20th, 2012 at 1:18 am

Hello EEB,

Bear in mind, no one is forced to lend. So those that do not have the money to buy government bonds, will not do so. So I do not really understand your point. How will workers and the poor, who do not purchase bonds and who are not taxed, be forced to shoulder the demands of the wealthy?

It can certainly happen in an economy with Taxation, though I think it is rather the wealthy and upper middle class that are forced to shoulder the spending habits of government, but I fail to see how it could happen with Taxation abolished.

You argue that workers will not participate in the purchase of bonds.

There are large pension funds that hold the wealth of so many workers. They are free to buy the bonds like any person. And pension funds are very active in buying up government bonds. So I find your claim is erroneous.

Government expenditure will decline because the government can no longer take the wealth of the nation and do as it pleases. They will have to face their banker every day. And if the government should expend badly or wastefully, the funds needed will just dry up until the government changes its ways.

With a capital charge, government will have to justify its expenditures, unlike what occurs presently. Should the project yield returns surpassing all costs, it shall proceed. Otherwise it shall not.

MMT is a bit of a joke. Government borrowing in such a manner will create gigantic reserves and deprive the money markets of a mechanism to determine the proper interest rate. MMT is practiced in Japan and currently being practiced by the Fed. It leads to no growth and great gobs of inflation. Zimbabwe is the ultimate result.

Gary Marshall

Jack MorganJune 29th, 2012 at 2:04 am

As others have said, the flaw in this theory is that a government has to pay for running costs (welfare, health service, emergency services, civil servants, defence etc) which are by nature uneconomic.

People are happy to buy other government bonds as they are currently, as there is an expectation that future taxation will be used to repay the capital plus interest. If not for taxation, government bonds would be worthless.

With the government not having a sufficient income to cover their expenditures, which is a certainty due to essential uneconomic services, the government will either eventually go bust, or print the cash to repay their debt (which is by definition inflationary, effectively a tax)

Who would willingly lend money to a fundamentally loss making institution? Not me.

EconomartJune 29th, 2012 at 5:45 am

Hello Jack,

The Government is not borrowing any of the funds because the Government is not paying the loans back. it never has and it never will. The government is in deficit to the whole of its expenditure because it does not generate any revenues of its own. When the bill for public expenditures arrives, the government simply hands it to another: the taxpayer.

So to properly examine the subject of public finance, one must do so with the finances of those in mind who actually pay for it: the citizens and firms, which are owned by citizens.

The nation borrows the money. This means all those citizens within it. If public expenditures increase the wealth of those citizens, is the nation not wealthier? If the wealth of the nation actually increases with public borrowing, is the lender not more assured of repayment of his loan?

The government is merely the agent in the transaction. The parties are the borrower, the nation, and the lender, certain citizens within the nation.

As I said, imagine a bank with assets and liabilities. If assets surpass liabilities, then depositors' money is safe. If the opposite, then there is trouble.

In this case, I conservatively estimate an rise in assets for the nation of 2 to 1 over liabilities. That means for every dollar of liabilities incurred, there will be $2 in assets generated.

Would you not invest in such a profitable corporation or bank? I wouldn't hesistate because I know that another lender will easily be substituted for the right interest rate should I decide to put my money elsewhere for a superior return.

I hope this answers your questions.

Gary Marshall

Aegean1972June 12th, 2012 at 6:50 am

Germany failed to "listen" 3 years ago when some were openly saying that what was happening in Greece wasnt a "Greek" problem but a European one. They could have stopped the virus right there, by empowering a big bazooka of 2 trillion. This could have "stopped" the blood thirsty markets and also give Greece and other "Club Med" economies more time to adopt to the new era of austerity. Europe thought it was a Greek problem and decided to punish Greece with hard austerity measures that made it more difficult for Greece to get out of this situation. The result was a hard recession with almost 50% of businesses closing down, the private sector at the brink of collapse, healthcare and medicare collapsed and the masses ready to vote for a leftist/radical gvmnt, that could blow apart all efforts for more euro-unification. And the scary part is that Spain, Portugal, Italy and Cyprus are similar "bombs" just waiting to explode regardless if the austerity recipe is enforced to them or not. Their high unemployment numbers and recession are enough to create political chaos.

No more kicking the can for europe. They either unite or they break apart with nasty divorces.

StevieB54June 12th, 2012 at 8:45 am

"if Greece were to leave the eurozone, a deposit freeze would occur and euro deposits would be converted into new drachmas: so a euro in a Greek bank really is not equivalent to a euro in a German bank"

Not necessarily true. The Greek government could exit the Euro, and do its' business in New Drachma, but leave the Greek people, and there bank accounts in Euro. The government raises taxes and pays its' bills in New Drachma. The folk continue to use the Euro in everyday life. When they pay their taxes, they have to buy New Drachma with their Euros, otherwise they carry on as normal. The Euro in a Greek bank has the same value as the Euro in a German bank, and there is no bank run.

Graham CoxJune 12th, 2012 at 9:50 am

Smart point StevieB54
Great article—– Thanks for sharing.

The moral hazard has been intensified from 2007 by not requiring subordinated bank holders to take a hit when the government takes over or effectively does so ( with one or two very minor exceptions) .

As a 'long in tooth' financial economist I find this the most surprising (ie last thing I would have predicted) feature of the last five years. What on earth is the point of junior debt if it doesn't take even a partial hit when things go wrong.

Yes I know insurance companies would be hit, but then support can be directed to where it is needed and only after risk takers in the insurance companies have take their justified hit. The current situation is a European junior debt protection scheme no less dependable than deposit protection. Makes pricing the new new pref shares difficult to say the least as there is in reality a bi-polar future (carry on as is or let them take the full weight of losses.

In retrospect, the best investment advice in 2002 was, incredibly ,' buy all the real estate can get with max debt, despite the overvaluation of the market then, and when the property market starts to fall , sell the property and pile the profits into subordinated bank debt'!

Aegean1972June 12th, 2012 at 1:00 pm

Nuriel Rubini was clear and spot-on once again. He clearly told the Germans (Bild interview) of what needs to be done in order for growth to return to Europe.

Now the question is : Will the Germans listen or will they let Europe crash. They better make up their minds soon with what they want. No more time to kick the can.

Europe needs action. NOW!

AnasteusJune 12th, 2012 at 2:44 pm

The idea of further direct bank support is insane given the obvious fact that gambling banks and irresponsible governments are primarily responsible for the crisis. It makes no sense to pour additional money into black hole. We need see some banks go bankrupt first and to provide a liquidity in order to preserve savings in those banks in such cases. It's not more acceptable to privatize profits and to socialize losses, or in other words, having capitalism for profit taking and socialism for loss management.
I agree with much stronger regulation of banks as they have failed to distribute liquidity taken from central bank to daily businesses. The crisis is much deeper than it may seem at first glance, it's a crisis of the whole monetary and politician system as we know it. From a longer perspective I'm not convinced to keep it alive at all prices. The drug addicition called "easy money" is in fact a desease and as such should be cured, at the moment we've got cold turkey until we take another dose. But the cure itself is painful, as we know. It's simply time to pay the bill, that's all that is to it.

E WulfJune 12th, 2012 at 4:31 pm

Although the approach is properly focused on what has to be done, It is no so clear that Germany have such a 100% control, of the pace of structural reform for all european members.
How advanced are the Greek economy structural reforms? or what about the pace of Spain economy reforms and its priorities .What about Italy own schedule for structural reforms? The speed of these actions are not a matter of German Government ,as long as sovereignity to set the pace of reforms is still in place. Besides , these asymetries affect the real impact of policies designed on the real side (increase in wages, Bottle neck corrections),because each target country is in a different stage of its own reforms and there still dust in the wind.
German responsibility comes to what it is closer to its direct influence:The financial side of the problem (insurance for deposits),and the European Central Bank action ( the euro bonds implementation) which cross over the whole Euro zone area.-
I do think the fear to hiperinflation it is not that much the real concern,(rational people should know the way to control inflationary pressures), as it is to send the wrong signal to those countries with half the job done (structural reforms). However, it is true that Germany leadership is esential to keep the euro alive, and it is valuable a more flexible reaction .

GiannisJune 13th, 2012 at 6:33 am

E Wulf , there have been no structural reforms in Greece what so ever , NONE .The only thing they did was to cut across pensions and wages. All else is business as usual.If we had the intelligence and the will and have done even minimum i am sure europeans would have been more flexible and we would have got many sweeteners . There is no one to do reforms , the same corrupt and stupid politicians are in place and the frightened citizens want a quick fix or someone else to pay .No hope .

KimJune 12th, 2012 at 7:59 pm

I would echo the comment "There needs to be a bank resolution scheme in which unsecured creditors of banks – both junior and senior – would take a hit before taxpayer money is used." It is time to start with market discipline in the banking sector in Europe. Both Spain and Italy (among others) need to recognize that there are huge holes in the banking system and that they need to be recapitalized. This means that shareholders are effectively wiped out and that a large portion of subordinated creditors and some portion of senior creditors (including depositors) are converted to capital (Possibly with another portion converted into subordinated medium term loans to keep the new owners committed to finding a solution). Depositors below the deposit guarantee level would be able to transfer their ownership shares to the deposit insurer at par, but possibly face delays in pulling out funds). After all, the large creditors have been earning equity premiums in the rates charged. New shareholders would have the incentive to hire managers that would protect their investment, bot gamble with the "heads I win, tails I still win and the taxpayer pays the loss" mentality to common today. They will search out profitable lending opportunities since this will be in their best interest — if not, the cycle will repeat.
This can be applied partially based on solvency of individual banks, but should be backed by the threat that it will be imposed on all banks that begin to lose liquidity.

backwardsevolutionJune 13th, 2012 at 7:33 am

Karl Denninger at Market Ticker responds by saying, "Nouriel as completely lost it, as has Niall Ferguson.' His response is a good one; in part, he says:

"The institutions that lent money that cannot be paid back must take their losses. If they cannot, then their stockholders and bondholders must be zeroed, if necessary, to cover depositors, and any alleged "superior" status on derivative instruments must be voided. In short, depositors must be senior to all; the rest of the capital structure falls where it does. And fall it will.

That's fine. These nations should, at the same time, both enact One Dollar of Capital for all institutions going forward and prosecute all banksters who blow sky high for effectively counterfeiting the currency, because that's exactly what they did. Put them all in prison.'

Roubini then says, "Of course, over time, sound banks that restore capital through earnings would be able to buy back the public preferred shares. So this partial nationalization would be temporary."

Market Ticker responds:

"There is no such thing as a "sound bank" that has lent out more than the sum of its collateral taken against loans and its capital. Such a bank has practiced an effective fraudulent device in that it has issued credit fungible with currency that it knows at the time of issue cannot be repaid in the present tense. It therefore has effectively naked shorted the currency.

This is a pyramid scheme as indefinite exponential growth, for any positive growth rate, is arithmetically impossible. All we are arguing over is when, not if, the scheme will collapse.

Pyramid schemes are broadly illegal and must be prosecuted. If the government will not do so then the government must be replaced with one that will."

Roubini says, "Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualization."

Market Ticker responds:


None of the nations who are in the Euro agreed to this. Committing public frauds for years so as to force someone else to rescue you via "mutualization" and "integration" of political systems is tantamount to the taking of political power by force from the people and giving it to those who are not elected.

This is commonly known as an act of war and is full and fair justification for those who have this imposed upon them to take arms and repeal the literal subversion and replacement by force of their political process."

mumblejumbleJune 13th, 2012 at 7:15 pm

The problem is:
Not only does banking legislation draw a line in lending over a certain extent of collaterals and deposits combined, there is also no such thing as the "sum of collaterals", because this so-called sum is derived from evaluations about lasting market values by way of assessments, which must inherently be speculative by its nature.

douglasJune 13th, 2012 at 2:15 pm

The above, without losing sight of the fact that tinkering iwith the notion of exiting the eurozone or the imposition of a Tobin tax could accelerate a muche feared banking crisis. Weary depositors are already taking preventive measures by converting part of their Euro deposits into gold, or dollars eluding the possibility of the ultimate risk of a forceful conversion into Pesetas, Liras, Drachmas or what have you .

douglasJune 13th, 2012 at 2:42 pm

Last but not least, as the Berlin crisis of the 30s had the ingredient of unpayable reparation payments imposed upon it , Greece´s foreign debt has also the potential long term destructive effect of a reparation payment.
Greece´s foreign debt is unliquifiable just as the Weimar republic´s was in the 30¨s. Back then, its currency collapsed causing hyperinflation while trying to earn extra export income via competitive devaluation. Such a dreadful scenario is latent in Greece and other Med club countries if they chose to exit the Euro zone and play this card.
Hyperinflation brought upon the destruction of democracy in Germany and set the tectonic fores that uleashed WWII.
A Greek Weimar might repeat a similar tagedy if the misery brought upon to its inhabitnats sets massive social migrations and a human tragedy.
East Germany erected high walls around its borders to avoid its people defect. Now, if a consensus on durable and effective financial and fiscal policies are put in place and fast, the risk is that a new Berlin wall might well be reerected, this time all acroos the Alps up North and riht up to the Baltic in order to avoid the massive influx of desperate southern and easterners into Germany and other Northern European countries .

SkirmishJune 13th, 2012 at 6:32 pm

Things are moving now that the French wisely dumped Sarkozy.

Germany has to face up to the fact that it needs Europe and the EZ just as much as the other way round, or do they really want isolation of the north in a free-for-all?

This is a European problem, not a Greek, Spanish, Italian or Irish one, and always has been. It's time to break from the myth that somehow it's all about Germany being asked to support everyone else, or somehow it's nasty eurocrats interfering in markets.

It's also time to step back and realise that, at heart, Europe was never supposed to be just about markets. The invisible hand doesn't care about Europe, and never will, and it won't always be Germany's friend.

mumblejumbleJune 13th, 2012 at 6:41 pm

How is it ever possible to pronounce exports which have to be subsidised a national success for Germany!?

Yes, Germany pays a toll for its intra-EU export supremacy:
Its national ECB-branch is obliged to hand out less money (credits), the more deficit-spending countries at the periphery are sucking from the money supply available EU-wide. It's only because investors shy away from lending to the euro-zone in general that the economy in Germany is by and large alive and kicking – thus, the money of german investors remains in the country.

As a further consequence, assets in Germany and shares from Germany are being bought up with money lend to ECB-branches of economical weaker countries (to a certain extent, naturally).

And Germany pays another toll:
The Euro will lose heavily thanks to deficit-spending and conscient breach of Maastricht-rules. This means that the international purchasing power of Germans and other economically oriented countries will be weaker than necessary. This doesn't just mean less purchasing power for consumers, but also for businesses and industry.
Germany was a longtime loser in terms of groth. It wasn't until the reform progress by Agenda 2010 (with Hartz IV), set in motion by Chancellor Schroeder, that it's economy sprang to life.

Deficit-spending is only justifiable if it's based on investing in productivity, that means, in being able to deliver at lesser expenses – thats' what all our prosperity is about.

princess1960June 13th, 2012 at 9:16 pm

the problem EUZ is for him/her self ..i think leader's needed to see better for what to do to change this situation here is not just GR but all the EUZ ..if there waiting for some magic solution is wrong …this problem there creation and there have to fix ..this is not personal

backwardsevolutionJune 14th, 2012 at 3:38 am

As long as you realize that the bankers are being bailed out, and that you will be left with the bill AND AUSTERITY.

steve from virginiaJune 15th, 2012 at 1:47 am

Mr Roubini hits the nail on the head by repeatedly emphasizing bank runs.

– Depositors are exiting banks because the banks are insolvent.

– People are exiting countries because the countries are insolvent.

– People are exiting the euro because it is a sub-prime lending instrument, the entire euro-zone is also insolvent. The run is slow because the transmission channels are inundated: ordinary havens — Swiss francs and the UK — are either 'unfriendly' or have similar solvency issues to the eurozone..

Deposit guarantees will do nothing to effect the runs. What would the guarantee be? Dollars for euros? Gold for euros? There aren't enough reserves within the euro system, The ECB cannot create sufficient reserves b/c there is diminished collateral. Unsecured lending by the central bank(s) is THE big reason for the runs in the first place. There is no monetary backstop in the eurozone, no credible lender of last resort. Only a fool — or someone with too large a position to liquidate — would hold euros any longer than necessary.

Consider that any bank run is self-amplifying.

Europe's REAL problem is energy and energy cost. Cheap crude gave Europe the illusion of success as the cost to finance fuel imports was low. The higher price since 2004 has required countries to take on larger amounts of debt: the use of the fuels does not provide a return sufficient to pay for the fuel or service the debts. At bottom Europe is completely bankrupt.

– It needs stringent energy conservation as first-principle.

– Europe needs to end the flow of hard currency overseas.

– Europe needs to restructure its economy away from waste, Europe is on the way to being automobile-free. Development and finance are obsolete. Europe must cut military expenditures as well.

If none of these things are managed voluntarily all will be forced upon the Europeans by way of events. There is no way out of the current situation: energy conservation by other means.

Rassegna web: dalla Grecia al QE III passando attraverso lo spettro della deflazione « Trading WarriorsJune 17th, 2012 at 12:41 pm

[…] Ecco un’interessante lezione di storia scritta dal duo Nouriel Roubini e Niall Ferguson. La Germania non sembra avere imparato nulla dalla sua storia, affermano gli autori, o piuttosto sembra tenere a mente soltanto il dramma degli anni Venti (gli anni dell’iperinflazione, nel periodo della Repubblica di Weimar) piuttosto che la tragedia degli anni Trenta, quando la politica deflazionista dei governi che precedettero l’avvento di Hitler, portò il paese alla catastrofe del nazismo. L’intervento si sviluppa su due piani paralleli intrecciando la discussione storica alla riflessione sui compiti e sul ruolo della Bce. (su […]

DoofJune 19th, 2012 at 5:37 pm

It's Europe and the world that has not learned the lesson of the 1930's – the isolation and persecution of Germany as the villan which will drive the Germans to drastic measures of response. That's the true lesson of the 1930's.

Weekly Round Up June 20 – 2012 | Connect the DotsJune 20th, 2012 at 2:38 pm

[…] Berlin Is Ignoring the Lessons of the 1930s – Nouriel Rubini & Niall Ferguson. “We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid. We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history.“ […]

anand srivastavaJune 27th, 2012 at 9:00 am

Just perhaps Germany remembers the 1920's with a bigger dread than the 1930s. This is why they don't want to print Euros. They also don't want to lend so much that they can't coverup with produce. It is already known that any money pumped into bankrupt European nation will only go down the drain.

What is the solution for the bankrupt nations? Get rid of the minimum wage ceilings. Get rid of impediments to businesses. Make production competitive with the rest of the world not just Germany. Learn that businesses are not inherently evil. Prevent monopoly, don't kill the small businessman, by making so many laws that only the larger businesses can survive. Don't just think about the labor, also think about the businessman.

princess1960July 3rd, 2012 at 7:58 am

yes consumnisme down because people and busisness small or big doesn't make enymore export (product) or machine ..unemployment is higher with what? but and for people or busissneses have debit i think is scary to make big investes untill the political system will fix (this is very important)..there have to know how to work to use the money …how to trust……the world is in truble (true or arificial)…so noone rich investor don't like to lose..(the poor is difficult to be rich …the rich is difficult to be poor ) between two is more eazy for the poor to stay how is than rich to change position ..(i hop you understand what i mean)… ..because this unaccaptble situation to looooooos every think who 's have ..and to try to make the people = …make me feel unimportant for my self ..(and even i don't have ) for example …..from the begining of this life we have unbalace..THIS IS GOOD. (all what i write try to see diffrent) don't think i am out of topic
thank you

Guil SilveiraJuly 22nd, 2012 at 3:37 am

The article as a whole seems feasible , but "Wage increases above productivity in the Eurozone" ? Does this Nouriel Roubini have an idea of what he is saying ? Back to study, Roubini… mainly economics, history and math… please…

KathyJuly 23rd, 2012 at 10:12 pm

The proposals are all so rational, however, what seems to be unfolding is an inside view of how irrationality takes hold in situations perceived as "us or them," as is the case in the Eurozone.

I think what IS actually happening shows us our limitations as human groups. It is proving impossible to collaborate when collaboration is needed. Humans seem to need to experience destruction before they can act rationally. The U.S. was able to act because we are one country, albiet different culturally from region to region.

It's a noble effort on the part of Mr. Roubini to spell it all out, and he is so often right. But to convince Germany to bail out eveyone, well, that would be near miraculous.

Why not add an element of psychological analysis to your proposals? I would like to see some contribution from the Harvard negotiations team (those who wrote "Getting to Yes") because that is what is needed, substantial help in dealing with the human issues which is creating all the resistance to solving this enormous dilemma.

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