Kevin Drumm's Crazy Uncle Ivan theory of Finance and Trade
In covering the Greek tragedy that is the Greek tragedy, Kevin Drumm espouses what I like to call the "Crazy Uncle Ivan" theory of finance and trade. It's a popular mix of Mercantilism and Keynesianism which explains how rather than being the villain of this tragedy, Greece is actually the tragic hero.
Kevin quotes the German view of the situation:
Here is the the Crazy Uncle Ivan theory:
1) Your crazy Uncle Ivan loses his job.
2) You let him crash with you for a few weeks.
3) Ivan still can't find a job, so you decide to "rent" your spare bedroom to him.
4) Ivan has no cash, so he gives you "IOUs", promising to pay you in 10 years.
5) You and the wive put these IOUs in your safe deposit box.
6) Thinking that you now have some savings, you decide to save less for retirement. WOOT! The economy gains from your spending
7) After a few years, Ivan moves out
8) Ten years later, Ivan says he can't pay you
9) Ivan is struggling, so you decide you are going to cut his debt is half, but as a measure of good will, Ivan has to sell his new car, buy a used car, and use proceeds to help pay debt. Additionally, he's going to pay you $50 each month.
10) Ivan agrees, sells the car, hands you some of the proceeds
11) 2 years later, Ivan decides that he doesn't like paying you, and he doesn't like driving a used car, so he buys a new car and demands new loan terms.
12) Given that you have no legal recourse, you do the only thing you can. You tell Ivan to fuck himself- he can forget about loaning money from you or anyone in your family ever again.
A normal person would look at this and conclude that Ivan is the villain here, or if not a "villain" at least an irresponsible relation. He took advantage of your easy credit, staying in your home essentially rent-free, then decided he'd rather consume than pay off his debts to you. This example shows that the IOUs Ivan writes are worthless. You've given Ivan shelter and sacrificed your well-being in return for empty promises.
Under the Crazy Uncle Ivan theory of trade, the villain here is not Ivan, but rather you! You should never have loaned him the money so cheaply, and you profited from him living in your apartment.
This is one part Mercantilism, one part Keynesianism.
The goal of a Mercantilist is to hand over goods in return for money, and preventing the return of money to the other side. This is long since discredited. As the Mercantilists found, money is worthless unless it can be converted into goods**. With Ivan, we can see this directly- you've let him stay on your couch for years, but have no way of collecting any compensation. Kevin's claims about Greece are similar- Germany handed over years worth of goods & services, but never collected anything in return, except worthless IOUs.
Keynesianism adds another element to the Ivan theory. Drumm claims that Germany profited by simply holding the worthless IOUs. This is point 6. In our example it's clear that all the "boost" was in fact just the opposite, as you now find yourself deep in a savings hole, and 10 years closer to retirement. But even if we believe in Keynesianism, I think Kevin is wrong here. Even Keynes only held that spending is positive only during recessions. Maybe he's arguing the opposite, complaining that Greece was spending too much during the boom? No one forced Greece to spend- in fact, Germany adopted specific policies against deficit spending in the EU to prevent just this sort of crisis. It's true Germany didn't enforce this, but it seems like deficit spending is still Greece's responsibility and has nothing to do with ECB interest rates.
So in short the CUI theory:
1) Loan money to CUI
2) CUI consumes your goods/services
3) CUI can't pay loans
4) You are villain, not CUI.
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*It's true that the original debt was not primarily held by German taxpayers, who stepped-in to fill the breach and prevent bank failures. I suppose an argument could be made that Greece was under duress when it agreed to the new loan terms. There are 2 problems with this. First, the new loan terms were EXTREMELY generous. Lots of forgiven debt, low interest rates, long terms. I've seen estimates that the terms amounted to a 30-40% haircut for the debt holders (not even accounting for the fact that Greece may turn out not to pay the debt at all!). Second, if Germany hadn't stepped in and had instead just nationalized it's own banks, would Kevin not be complaining? Would Greece be any better off?
**The classic example of this failing is Spain c. 1600. The control of Gold and Silver mines in the New World, led to a huge influx of bullion into Spain. However, Mercantilist policies prevented Spain from actually spending this bullion outside of Spain. The net result was inflation as more and more Gold chased the same number of goods.
Kevin quotes the German view of the situation:
"In Germany especially, the fear is that providing new loans to Greece without extracting more spending cuts represents a fateful step toward a so-called transfer union, with wealthier nations providing handouts to Greece and other weaker countries."The facts on the ground are quite clear. Greece does in fact want German money, and there is really no way for Kevin and the liberal intelligentsia to deny this. But perhaps if we step back, we can still blame Germany:
But so far Europe has done next to nothing for Greece. They've made lots of loans, but mainly so that Greece could pay back its debt to shaky European banks*. It's been every bit as disingenuous and self-interested as all the cheap loans those banks made to Greece in the first place so that Germans and others could enjoy access to cheap Greek products during the aughts. They enjoyed the boom from those loans and supported it with monetary policy that favored Germany but overheated Greeece[sic], and then when the economy went sour they set monetary policy continent-wide to favor Germany yet again, not the folks they'd been shoveling money too all those years.
Here is the the Crazy Uncle Ivan theory:
1) Your crazy Uncle Ivan loses his job.
2) You let him crash with you for a few weeks.
3) Ivan still can't find a job, so you decide to "rent" your spare bedroom to him.
4) Ivan has no cash, so he gives you "IOUs", promising to pay you in 10 years.
5) You and the wive put these IOUs in your safe deposit box.
6) Thinking that you now have some savings, you decide to save less for retirement. WOOT! The economy gains from your spending
7) After a few years, Ivan moves out
8) Ten years later, Ivan says he can't pay you
9) Ivan is struggling, so you decide you are going to cut his debt is half, but as a measure of good will, Ivan has to sell his new car, buy a used car, and use proceeds to help pay debt. Additionally, he's going to pay you $50 each month.
10) Ivan agrees, sells the car, hands you some of the proceeds
11) 2 years later, Ivan decides that he doesn't like paying you, and he doesn't like driving a used car, so he buys a new car and demands new loan terms.
12) Given that you have no legal recourse, you do the only thing you can. You tell Ivan to fuck himself- he can forget about loaning money from you or anyone in your family ever again.
A normal person would look at this and conclude that Ivan is the villain here, or if not a "villain" at least an irresponsible relation. He took advantage of your easy credit, staying in your home essentially rent-free, then decided he'd rather consume than pay off his debts to you. This example shows that the IOUs Ivan writes are worthless. You've given Ivan shelter and sacrificed your well-being in return for empty promises.
Under the Crazy Uncle Ivan theory of trade, the villain here is not Ivan, but rather you! You should never have loaned him the money so cheaply, and you profited from him living in your apartment.
This is one part Mercantilism, one part Keynesianism.
The goal of a Mercantilist is to hand over goods in return for money, and preventing the return of money to the other side. This is long since discredited. As the Mercantilists found, money is worthless unless it can be converted into goods**. With Ivan, we can see this directly- you've let him stay on your couch for years, but have no way of collecting any compensation. Kevin's claims about Greece are similar- Germany handed over years worth of goods & services, but never collected anything in return, except worthless IOUs.
Keynesianism adds another element to the Ivan theory. Drumm claims that Germany profited by simply holding the worthless IOUs. This is point 6. In our example it's clear that all the "boost" was in fact just the opposite, as you now find yourself deep in a savings hole, and 10 years closer to retirement. But even if we believe in Keynesianism, I think Kevin is wrong here. Even Keynes only held that spending is positive only during recessions. Maybe he's arguing the opposite, complaining that Greece was spending too much during the boom? No one forced Greece to spend- in fact, Germany adopted specific policies against deficit spending in the EU to prevent just this sort of crisis. It's true Germany didn't enforce this, but it seems like deficit spending is still Greece's responsibility and has nothing to do with ECB interest rates.
So in short the CUI theory:
1) Loan money to CUI
2) CUI consumes your goods/services
3) CUI can't pay loans
4) You are villain, not CUI.
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*It's true that the original debt was not primarily held by German taxpayers, who stepped-in to fill the breach and prevent bank failures. I suppose an argument could be made that Greece was under duress when it agreed to the new loan terms. There are 2 problems with this. First, the new loan terms were EXTREMELY generous. Lots of forgiven debt, low interest rates, long terms. I've seen estimates that the terms amounted to a 30-40% haircut for the debt holders (not even accounting for the fact that Greece may turn out not to pay the debt at all!). Second, if Germany hadn't stepped in and had instead just nationalized it's own banks, would Kevin not be complaining? Would Greece be any better off?
**The classic example of this failing is Spain c. 1600. The control of Gold and Silver mines in the New World, led to a huge influx of bullion into Spain. However, Mercantilist policies prevented Spain from actually spending this bullion outside of Spain. The net result was inflation as more and more Gold chased the same number of goods.
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