patches70 wrote: BigBallinStalin wrote: patches70 wrote:
Let's go back to the beginning, when this crisis with Greece hit mainstream news. If you were a central banker with perfect control over the EU's monetary policy, what would you have done?
What an odd question. Tell me, BBS, if you
were a central banker with perfect control over the EU's monetary policy, what would you have done when the Greek crisis hit the mainstream news?
I've no idea because I don't know what all my possible choices would be.
Don't know the choices? You have "perfect control". I take that to mean if you wanted you could print money and just give it to each and every Greek citizen. You can do anything
that you could possibly imagine.
Now start imagining and tell me what you'd do.
Hint: Don't be unnerved by your inability to come up with a way to solve a problem that has no solution in regards to CB monetary policy. There is only one real solution, nations just have to stop borrowing and spend less than they take in with the excess going to paying down their debts. In fact, any possible solution you could come up with from the CB's point of view will only make matters worse. Unless, of course, the unthinkable were done. Debt forgiveness. Of course, that in itself has certain pitfalls which I'm sure you are aware of.
"Perfect control" meaning I can implement any policy I want, and my policy would somehow be extremely effective. "I don't know what all my possible choices would be" because I don't know enough about monetary policy to make a wise decision, so I can't really answer the question with much credibility.
The problem is that I agree with the Austrian economics viewpoint, which is long-term. However, it's difficult to implement these policies in the short-term and in this scenario because everything is so tightly knit. For example,
(1) Greece receives no bailouts, no adjustments on its interests rates, nothing. And the banks which invested in Greece will eat their own costs (as they should; otherwise, they'll never be capable of learning to be more cautious).
What would happen?
Most likely, the economy in Greece would suffer even more so (and like Fruitcake, I believe this to be true because Greece has yet to hit rock-bottom). If the collapse is beyond the management of their government, then it would reduce the costs for anyone attempting a coup d'etat. It's a possibility of unknown certainty, but is the risk worth it? I'm not sure.
From what I've heard, if Greece goes, then so does the Euro--unless I could somehow kick off Greece from the EU monetary list (i.e. the Greek economy would no longer be based on the Euro--officially).
(2) Greece gets bailed out, and the risks and costs are reduced (significantly? it can't be known with good enough certainty). Then, the principal-agent problem of investors dropping money into bad investments (e.g. Greece) will continue, thus increasing the costs of future potential
problems in the long-run. It also gives the monetary policymakers and politicians more time to "fix" the problem.
The Austrian viewpoint is that the state can't have a monopoly on the legal tender within a country--only the individuals in the market can decide on which currencies to use within any given area. So, the legitimacy of money would be based on voluntary exchanges (as oppose to the use of US dollars in the US, Euros in the EU, etc.). This would likely return to the use of gold and other hard currencies as a medium of exchange. Paper money would be allowed, but then the issue revolves around 100% reserves or allowing fractional reserve banking, which is partially responsible for the magnitude of business cycles. The party which is most responsible for causing business cycles is a central bank and its legal power to adjust the base/real interest rate within its jurisdiction. For an Austrian economy, the real rate of interest would be determined by interactions within the market, and would be based on the knowledge and incentives of non-government agents.
So, if I wanted to implement an Austrian approach to the crisis, I'd do nothing for Greece, yet allow private agents to do whatever they wanted in Greece. Then I'd abolish the ECB in incremental steps to allow people to adopt any legal tender of their choosing.