MMT Summit: A Debate on How to Get Out of the Euro

Posted on by

MoneyPileFlickrepSos.deMEDIA ROOTS — The current Global Recession, which like the Hurricane Katrina disaster, is largely manmade due to poor planning and political will refusing to respond adequately.  Italians seem to be ahead of the curve with their response by convening a summit on political economics.  Despite a media blackout, over 2,000 Italians packed into a basketball stadium for the first annual grassroots Summit Modern Money Theory 2012 in Rimini, Italy in February.  Such a summit on MMT by the Occupy Movement would go far toward increasing our financial and political economics literacy, as a contribution to the various Occupy Movement teach-ins and workshops on political economy toward greater financial literacy, particularly on May DayGuns and Butter has been broadcasting weekly programmes, featuring highlights from the three-day long event.  At Media Roots, we’ve featured the entire series on the MMT Summit

Perhaps, your Econ 101 experience was like mine; as soon as I got any big ideas, my professor would start dissing ‘command‘ economies and start going on about ‘free market‘ economies.  Yet, Dr. Michael Hudson reminds us, “The important thing to realise is that every economy is planned.  The question is:  Who is going to do the planning?”  Dr. Hudson joins his colleagues Dr. Stephanie Kelton, Dr. William K. Black, and Marshall Auerback for the relevant discussion on ‘How to Get Out of the Euro.’  If the banks do the planning, there will be austerity and pain, the people will suffer and lose rights and dignity.  If “government, on behalf of Main Street” does the planning “to help long-term growth, to help employment,” then the people stand a fighting chance.  MMT explains how this can be done.  (Please see transcript below.)



GUNS AND BUTTER — “There is an alternative, even under the screwed up EU structure that exists now.  The European Central Bank, as the de facto issuer of currency, could act like a sovereign.  It could provide the funds to provide the recovery.  And the ECB knows that it has this capacity.  THEY DON’T WANT TO USE THE CAPACITY TO HELP THE PEOPLE OF EUROPE. 

“There is an alternative, even under their screwed up system; and they refuse to use it.  And [Mario] Graghi, in his Wall Street Journal interview, two days ago made this explicit where he said, ‘The European model is dead’—the social model.  And that he wanted the private sector, the banks, to discipline the governments.”

Bonnie Faulkner (c. 1:24)“I’m Bonnie Faulkner.  Today on Guns and Butter:  Marshall Auerback, Michael Hudson, William K. Black, and Stephanie Kelton from the first economic summit on Modern Money Theory in Rimini, Italy in February of 2012.  Today’s show:  ‘A Debate on How to Get Out of the Euro.’

“We begin with economist and portfolio strategist Marshall Auerback.  Marshall Auerback is currently a portfolio strategist with Madison Street partners, a Denver-based investment management group.  He is a fellow with the Economists for Peace and Security.  And a research associate for the Levy Institute.  He is a frequent contributor to New Economic Perspectives.”

Marshall Auerback (c. 2:12):  “I’ve been asked to say a few words on the possibility of Italy leaving the Eurozone.  I want to stress that this is not necessarily the first option.  I think, in fact, this is a last resort, that should be taken with great care and when all other options have been exhausted.  I say this because there are no easy options available to you.  And I don’t think we’d be honest if we sugar-coated this.  So, this is a political judgment, that you, the Italian people, will have to make.  It would be presumptuous of me, as a foreigner to advise you on what course of action to take.  So, I’m just going to give a very few specific options as to what would be entailed if Italy were to leave the euro.  I have a little paper called ‘Exiting the Euro.’ [Snickers

(c. 3:16)  “Okay, so this is what would have to happen, first of all.  To exit the euro for a nation to regain its currency sovereignty.  Here are the following changes, that would have to occur.  First of all, you would have to reintroduce a new currency or the old lira under monopoly issue.  Within this currency the national government could purchase anything that was for sale in that currency, including domestic unemployed labour at the same time the central bank, the bank of Italy, would receive a refund of the capital it had contributed to the European Central Bank and it would also recede back all of the foreign currency reserves that it had moved over to the EU system.  The nation’s central bank would then regain control of monetary policy, which means that it and not the bond market could set interest rates along the yield curve and add to banks reserves if necessary. 

(c. 4:28)  “Okay, now, here’s where it gets more complicated.  There is clearly some existing sovereign debt that is denominated in euros.  This is a short-term problem because the nation that wanted to exit Italy for example would now have to deal with a foreign currency debt problem.  Now, to some extent, some of the transfers back to the central banking system from the ECB would help to offset the euro exposure upon exit from the euro.  But I’m not going to lie to you; it would be part of a painful adjustment process.  And you may have to default.  You would, at that point, have to enter into a negotiated settlement, whereby the creditors accepted your local currency or nothing. 

(c. 5:26)  “Okay, so, this, I think, is the key issue:  Now, some say that the financial markets would make it very difficult to exit.  They talk about, for example, the dreaded rating agencies would mark you down in the event of a default and force higher rates on local debtMy response to that is that they’re doing that anyway. [Snickers]  What else is new? [Laughs] [Audience Applause]

“I would also add that we have been downgraded in the United States and our borrowing costs have actually gone lower since that time of that downgrade.  These are the same organisations, that were calling toxic subprime mortgages ‘AAA’ as recently as 2007. [Applause]  I think even Mr. Berlusconi has more credibility than the credit rating agencies.

(c. 6:30)  “Now, we would all stress that it’s very important to retain currency sovereignty.  But it doesn’t give you carte blanche to do whatever you want.  When we talk about the pursuit of public purpose, which we do a lot in MMT., we are discussing ways that the government will spend, so that it promotes employment.  At a very minimum, jobs in a public sector Job Guarantee programme for those, that are currently unemployed, so that we can generate real output growth.  The government has to use its newly found fiscal freedom to advance public purpose and not to waste public spending on unproductive pursuits.  So, what do I mean by unproductive pursuits?  Well, obviously, major handouts to zombie banks counts as an unproductive use of government money.  You want to give money, as we like to say in America, to Main Street, rather than Wall Street.

(c. 7:38)  “Now, there are clearly going to be practical issues involved in changing back to the lira.  First of all, you’d have to amend the computer codes.  But you’ve had some experience with that.  You all remember the Y2K bug.  A lot of hard work had to be done to insure that we did not have a meltdown in our computer system. 

“So, how do we support the new lira?  Well, the Italian government would have to announce that it will begin taxing exclusively in the new currency, in the new lira.  And it will also announce that it will make all payments, going forward, in the new lira, not in euros.  That’s the main thing.  The government can now provision itself and continue to function on a sustainable basis.  So, what will be the value of the new lira?  Well, that’s where the markets do come into play.  The new currency will be allowed to float.  The exchange will be determined between willing buyers and sellers at market prices.  Now, as I said about the existing euro debt, that will be a subject of negotiation.  But now the leverage rests with the government, not with the markets.  It can be a long process.  Argentina is still negotiating and litigating claims from the time when it depegged its currency in 2001.  That hasn’t stopped Argentina from growing or functioning as a real economy.  Same thing in Russia; the rouble collapsed in 1998 against the dollar.  The banking system was highly disrupted.  The capital markets did not function for a number of months, but today we still have a rouble.  We still have a Russian banking system.  Russia has survived. 

“And the other question is what to about euro bank deposits and euro bank deposit loans.  Well, for now they remain in place.  There is nothing to stop Italy, ordinary Italians from using euros or having euro deposits.  Just like there’s nothing stopping you from having dollar deposits or British pound deposits.  Panama has decided to dollarize.  Nothing that the United States has done prevents Panama from continuing to use the dollar.  Okay, so here is, I think, where the Job Guarantee programme, that Stephanie [Kelton] has discussed, is extremely important.  I think it’s absolutely essential this be one of the first programmes that’s introduced by the government because the first thing you want to do is to insure there is minimal unemployment. [Applause]

(c. 10:32)  “And for any given size government taxes should be adjusted to insure that the labour force, that works for that wage, be kept to a minimum.  So, as low taxes as possible.  Remember your taxes are no longer funding your spending; you have fiscal freedom.  Now, there is some talk about tax evasion.  How do you enforce a tax?  Personally, I think that this problem is overstated in Italy.  But I think you can maximise compliance by introducing a tax on land, a national real estate tax.  Obviously, it’s much more difficult to avoid.  You can’t move land around.  So, it seems to me that’s an effective way to collect taxes.  Compliance would be maximised because if the tax isn’t paid, then the state can simply sell the property at auction.  Everybody contributes, either, as an owner of the property or the renter, as the owner’s costs would ultimately be passed through to the renters. 

(c. 11:40)   “I might probably substantially reduce taxes, such as the VAT because that would penalise the ability to spend.  And it is a very regressive tax. [Applause

“Finally, I would say that all lira bank deposits would be fully insured by the government.  I would not insure euro deposits, but I would insure lira deposits.  Banks would be government regulated and supervised.  They would be prohibited from any secondary market activity, which means no derivatives, no credit default swaps [Applause], no trading against your clients. [ApplauseBankers are there to lend, provide capital for businesses and consumers, so that the economy could grow, not to bet against their consumers, as they do today. [Applause]  And I’d probably include substantial capital buffer requirements, around 15% to 20%.

“Those are just a few specific suggestions I have.  I know we’re going to discuss them in greater detail on the round table, but I thought I’d introduce these now, as there had been considerable demand for this sort of presentation yesterday during the question period.  So, thank you very much.”

Bonnie Faulkner (c. 13:08):  “You’ve been listening to economist and portfolio strategist Marshall Auerback.  We next hear from economist and historian Michael Hudson.  Michael Hudson is a Wall Street financial analyst and distinguished research professor of economics at the University of Missouri, Kansas City.  Today’s show:  ‘A Debate on How to Get Out of the Euro.’  I’m Bonnie Faulkner.  This is Guns and Butter.”

Dr. Michael Hudson“I will be talking about the small aspects.  But I want to talk about the political frame for this about Italy, the way in which it might leave the Eurozone.  I think you should ask why Italy wanted to join to begin with.  I think that it hoped that somehow joining Europe would solve its own domestic problems.  They hoped that Europe would be a civilising influence, helping it solve its political corruption, its tax corruption, its bad financial structure, and, especially, those of its own big banks.  But the fact is Europe is only able to impose financial and fiscal austerity.  No matter what happens, Italy is going to have to solve its own political and banking problems itself.  It’s going to have to deal with its large families and its oligarchy and its predatory finance by itself.  Europe is, obviously, not going to help you because the European Union is on the side of big banking and big finance against you. [Applause]

(c. 15:12)  “So, as you discuss the alternatives to remaining in the euro, I think you have to say that, if you leave, it’s not going to be out of weakness, not out of default, but because you’re living on a principled position.  And you’re leaving, not be leaving the euro, but by your saying, Europe has left the euro. Europe has been captured by the banks.  And you’re saying; here’s how Europe should work.  You, here, can outline a declaration of independence for how a good Europe should work and you will lead the way into Europe, the new Europe, not out of the old, bad Europe. [Applause

(c. 16:04)  “The important thing to realise is that every economy is planned.  The question is:  Who is going to do the planning?  Will it be, as Marshall said, by Main Street, by government on behalf of Main Street to help long-term growth, to help employment?  Or will it be planned by Wall Street or, even worse, by your bankers, which are even worse, even more predatory, even more enjoying evil than I have ever seen on Wall Street.  The bank planning is geared toward austerity, not towards economic advance.    

“Contrary to what the newspapers say, bank planning wants governments to run deficits; the neoliberals want larger deficits than have ever been run before.  And you have seen from Stephanie [Kelton’s] charts that the deficits in the last three years have been enormous into what she called the private sector.  But what was her private sector?  It wasn’t the labour markets.  It wasn’t into industry.  It was bailouts for the bankers.  The private sector, itself, is divided into the financial sector and the host economy of production and consumption.

“So, I think that if you’re issuing or thinking about issuing a declaration of economic independence and political independence and saying what you think Europe should be, the fiscal policy of the European Central Bank, which is the European government, should be replaced by parliament.

(c. 18:01)  “Today’s European Central Bank tells you:  We will tell you about your fiscal policy will be. We central bankers will say what the labour policy will be. We want unemployment. They will say what your central policy will be. That is, stop paying pensions, so that the employers can pay the banks.

What you want is a dependent central bank, a central bank run by government for the people, not for the commercial bankers, that are seeking to replace democracy with oligarchy. [Applause]  A real social democratic government would be a real socialist government.  As Stephanie explained, it would run deficits to reflate the economy.  Countercyclical spending to reflate the economy and restore employment is called hyperinflation by the neoliberals.  Employing Italian labour is called turning Italy into Zimbabwe.  You have to realise the Orwellian doublethink that is used here.  Your policy should be workplace reform, labour security.  And your fiscal policy should be untaxing labour by returning Italy’s tax system to real estate and to wealth off the value added tax, which is the most inefficient, the most costly, tax, onto property and wealth taxes. [Applause]

“And, finally, as to the government spending deficit, if Europe tells you to balance the budget, tell them:  Okay, we’re starting by withdrawing from NATO.  That will put the fear of gawd [Applause], that will put the fear of gawd into their politicians—namely the United States.  So, good luck on your declaration of independence. [Applause]”

Paolo Barnard (c. 20:20):  “What’s gonna happen to my bank account?  What’s gonna happen to my savings?  What’s gonna happen to my shop?  Please answer this, please.  People are asking.  You know?  These are the questions that I’m getting.”

Dr. William K. Black:  “What’s happening now?  What happens right now is that you’ve lost all power.  And they have you completely in their power because of two things and Stephanie [Kelton] has explained them.  You are not allowed to have any policy, that keeps people employed because the bond market will destroy you.  You are not allowed to have the government step in because of the Stability and Growth Pact.  But both of those points of leverage come entirely from the euro.  That’s the only reason they have any power.  If you have a sovereign currency that floats, the bond markets leave you alone and they go attack the people using the euro.  And there is no reason for a Stability and Growth Pact if you’re not on the euro.  That’s the only reason it exists.  It’s because of the euro.  So, it goes away as well.  You refuse to deal with it.

(c. 22:02)  “What Stephanie [Kelton] showed you, in terms of how your shop works, is the creation of There Is No Alternative where they have shrunk and shrunk and shrunk your policy space to take away every alternative.  So, what happens in your shop after you have created and gone back to the lira?  Well, that depends on what else you do, how well you adopt theories of Modern Monetary Theory and similar post-Keynesian thought and put people back to work.  If you put people back to work, then they have money, then they come to your shop and they buy things.  Then you hire workers.  That’s called an economic recovery.  That’s called a government, that actually works for the people and serves the interests of the people. 

“Does it produce inflation?  Well, look at the United States.  Look at Japan.  Japan has a debt-to-GDP ratio twice as large, basically.  It does not have inflation.  It can borrow money for virtually zero.  The United States, after the credit-rating agencies downgraded us can borrow money for very close to zero.  The United States, because it has not adopted austerity, is growing.  I don’t know if the joke will work in Italian; but we say of the Stability and Growth Pact, that it is an oxymoron produced by regular morons.  As Stephanie [Kelton] showed you, it does not produce stability.  It produces recurrent recessions.  And then when they respond to the recession, they make it worse through austerity.  And so it’s not growth, it’s Anti-Growth Pact.  It shrinks the economy instead of having it grow; and there is only one thing left in the policy space.  All of us, simultaneously, must compete for exports. 

“Now, first, that’s impossible because of the fallacy of composition.  But, second, the very effort is what they want.  This is what we’ve been explaining because the effort is—we call it—the road to Bangladesh.  Germans have not been the winners under the Hatz policy.  German workers’ real wages have fallen.  It is only the German bankers and large industrialists who are winners.  And the rest of Europe does not have the productivity levels close to Germany.  So, the only way to compete under this strategy is to have wages one-fourth the wages a German worker would have. 

(c. 25:35)  “So, when we were in Ireland the government strategy is to cut Irish wages, so they could outcompete Portugal.  But if you go to Portugal the strategy is to cut wages, so that you could outcompete Greeks.  And if you go to Greece, the strategy is to cut wages, so that you could outcompete Turkey.  And Turkey’s trying to outcompete China.  And China soon will be trying to outcompete Vietnam.  And, as I say, the bottom line of all of this is you are in Zimbabwe or Bangladesh, not because of hyperinflation, but because of hypercuts in workers’ wages.

(c. 26:26)  “So, to bring it back to your little shop.  If you get rid of the euro and follow the types of strategies that we’re talking about, you have a shop, that makes more money because it has more customers because you and everyone else are paying your workers enough they can actually live and buy things.  So, demand increases.  Employment increases.  Could you cause hyperinflation?  Of course, it is possible to cause hyperinflation.  You have to have intelligent policies.  But you need not have even serious inflation.  Although, frankly, small inflation would be a good thing right now. [Applause]”

Dr. Michael Hudson (c. 27:20)  “Bill talked about German industry running a surplus.  But what happens when Germany runs a surplus?  You get dollars in exchange.  And dollars, as he’s pointed out, are created as a fiat currency to reflate the American economy.  So, on a global scale, Europe is supporting Zimbabwe; it’s supporting the United States and any other country.  This government is creating its own money and running its own deficit.  So, you are plugged into a fiat money system.  But it’s a dollar system with whom you’re running a balance of payment surplus.  So, your austerity and your exports are designed to promote the United States, whose investors come out and buy Siemens.  Siemens is largely owned by U.S. investors now.  Siemens doesn’t pay any German taxes; and I could go right down the line with other German companies.  So, you have to look at this in a global scale:  Your pain is to benefit other countries.  And what you want is your own independence, so that your effots will support yourself. [Applause]”

Bonnie Faulkner (c. 28:49):  “You’ve been listening to lawyer and former bank regulator William K. Black and economist Michael Hudson.  William Black is associate professor of law and economics at the University of Missouri, Kansas City and the author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.

“We next hear from Stephanie Kelton.  Stephanie Kelton is associate professor of economics at the University of Missouri, Kansas City; research scholar at the Levy Economics Institute; and director of graduate student research at the Center for Full Employment and Price Stability.  Today’s show:  ‘A Debate On How to Get Out of the Euro.’  I’m Bonnie Faulkner.  This is Guns and Butter.”

Dr. Stephanie Kelton (c. 29:48):  “The difference with Argentina is that Argentina defaulted.  But it didn’t have to launch a new currency.  It devalued its existing currency.  Okay?  Things in Argentina had gotten very bad under IMF austerity.  And you ended up with a situation where there was, essentially, no electable party.  And that created the conditions, that made an Argentian default and devaluation possible.  What was unimaginable before became possible because things had gotten so dire.  Argentina was close to being a failed state.  But what worked in Argentina was not the default as much as the devaluation.  They devalued their currency by 65% on a trade-weighted average against the rest of the world.  If this happened in southern European countries, I would expect that the whole trade pattern would be a mess, perhaps collapse for a time.  Countries may come out better in the end, but they would come out better in the end with their own currency.  So, it seems to me that the best example is not Argentina for what we’re talking about and what Italy one day might decide to do.  But Slovenia because Slovenia withdrew and launched their own new currency. 

“So, when we were in Ireland, as Bill [Black] mentioned, many, many people asked us what you’re asking us now.  If it were easy, Greece probably would’ve done it by now.  Everybody wants to know how to get out.  Marshall talked about reprogramming the computers.  But there’s no undo button for the euro.  It’s not easy.  And none of us here have ever drafted a blueprint for a country to lay out the steps, that they need to take to withdraw from the currency union and launch their own currency.  So, I don’t know if any of us here can answer the detailed questions you so reasonably have.  But I know someone who can.  I know who drafted the blueprint in Slovenia.  So, why don’t we meet next week, we’ll invite him. [Applause]  I mean I’m joking, but [Applause] you need—for this level of expertise—you need someone other than the five that you’ve got here today I’m afraid.  But it does require a great deal of planning.  As I understand it, the gentleman who drafted the Slovenian withdrawal—Slovenia started planning six months ahead of time getting everything in place, accounts, transitions, decisions about when to convert, bank accounts, debt questions, all of the kinds of issues, that Paolo has raised and, that many of you have raised have been dealt with; and in the recent past.  And we can get answers to the kinds of questions, that you have.  But, unfortunately, I don’t know if any of us here can provide you with adequate answers today.”

Dr. William K. Black (c. 33:50):  “Well, a clarification first. [Applause]  It was not the default, that caused the crisis in Argentina.”

Dr. Stephanie Kelton:  “No, no.”

Dr. William K. Black:  “The economy collapsed because of the lack of default in some ways.”

Dr. Stephanie Kelton:  “No, no.  It was the IMF austerity.”

Dr. William K. Black:  “Right.  And it was the fact that Argentina pegged the peso to the dollar, so it effectively created a euro-like situation.”

Dr. Stephanie Kelton:  “And it ended up with a bailout from the IMF.”

Dr. William K. Black:  “And it ended up with a price because the dollar appreciated, that made it very difficult for Argentina to export.  And, so, Brazil basically destroyed them in terms of the export markets.  And Argentina went from a first-world nation to a third-world nation because of that crisis.  As Stephanie said, it’s then the default and the devaluation and the re-adoption of a sovereign currency, that allowed Argentina recover. 

“But key things:  They did default.  They still can’t borrow on conventional terms.  As Marshall [Auerback] said, they’re still in litigation, but they’ve averaged over 6% growth in for 15 years.  So, yes there are problems.  It’s not easy.  It’s not clean.  But it’s immensely successful.  Alright?

“Stephanie is absolutely right that there are an enormous number of technical steps to transition out of the euro back to a new lira.  Many of you are old enough to remember that there were months of preparation to convert from the lira to the euro.  Right?”

Dr. Stephanie Kelton:  “Years.”

Dr. William K. Black (c. 34:58):  “That money went out before to the banks, and there were educational programmes about how all of it would work, and there are reprogramming issues, and such.  I can tell you, though, that the fundamental question, however, is the one keyed up by Marshall [Auerback].  Italy—first, there’s no one size fits all—Italy is in a position, that if it regains its sovereignty, it can decide:  Do we wish to default or not?  You are not like Greece.  Greece will default.  Ireland will default, unless it continues to be insance.  Portugal will default, unless it continue to be insane.  Italy is a much richer country. 

“If you choose to default it gets messier.  And you have to have a different plan.  You also have to remember it’s a negotiation.  And I would guess most people in this room have negotiated.

“You have to be ready to default.  You don’t go around simply threatening to do it without the ability and the plan on what you’re going to do. [Applause]”

Marshall Auerback (c. 37:29):  “Let me start by saying that most of the things that I suggested this morning were largely based on Warren’s [Mosler’s] proposal.  And I’m not trying to suggest that what Warren and I have suggested wouldn’t really work.  But I would simply suggest that there would be some disruption.  It is operationally feasible, everything, that Warren has suggested.  All we are saying is its not the sort of thing that you could decide on the spur of the moment.  It doesn’t just happen over five minutes.  It does take a degree of planning.  There will be negotiations.  There will be litigation.  It’s very hard to convey that in a blog post.  So, it is doable.  But I think it would be dishonest of us to suggest that it could be done without any kind of adjustments or any kind of economic disruption.” [Applause]”

Dr. Stephanie Kelton (c. 38:31):  “I would also add [Applause]; I know that Marshall [Auerback] and I are both in communication with Warren [Mosler] several times a day.  We know him well.  And we know what his preferred solution to the ongoing solvency crisis is and has always been.  The piece, that Paolo [Barnard] is referring to is a piece, that Warren [Mosler] wrote in response to something that someone sent him saying:  Europeans are looking for a plan for default.  How do you exit the euro?  So, he wrote out his thoughts.  They wanted an exit plan.  And he produced something.  But his preferred plan and the one he continues to push is for the ECB to hold this thing together.

“You know the old joke?  Why did the man rob the bank?  Because that’s where the money is. 

“The solution for Warren [Mosler] has always been simple and painless, unlike a messy default.  Warren [Mosler] has always said the whole problem could be solved in five minutes, if the ECB would simply write the check.  You know why?  Because that’s where the money is.  They can’t come to you—and the Greeks and the Portuguese and the Irish—and impose austerity and crush your economies trying to extract euros from the people to transfer them to the bondholders because the effects are going to destroy the European Union.  The solution is to have the one who creates the money create the money and stop trying to come and get it from the users of the currency. 

“So, Warren’s [Mosler] proposal, Marshall [Auerback], I’ll just give it to you quickly, is for the European Central Bank on an annual basis to make a contribution equal to roughly 10% of the Eurozone’s GDP to give it to every member of the European Monetary Union [EMU].  The funds would be divided on a per capita basis, so that Germany would actually receive the largest payment.  It would, therefore, not be viewed as a bailout.  Everyone gets it, regardless of the size of their deficit or surplus.  And you get it on an annual basis.  It’s a revenue distribution.  It comes from the only entity in the EMU, that can create the euro, provide you with financial resources, that the government can use to run programmes, a Job Guarantee, whatever it is you need here. 

“The thing it deals with immediately is the solvency problem, which is what’s crushing you today.  It gets the bond markets off your back.  It brings interest rates down.  And as that happens, your debts become serviceable, sustainable, and it can be dealt with without a default.”

Bonnie Faulkner (c. 42:07):  “You’re listening to professor and economist Stephanie Kelton; economist and portfolio strategist Marshall Auerback; lawyer, author, and former bank regulator William K. Black; and Wall Street financial analyst and research professor of economics Michael Hudson.  Today’s show:  ‘A Debate On How to Get Out of the Euro.’  I’m Bonie Faulkner.  This is Guns and Butter.”

Dr. William K. Black:  “Warren’s [Mosler] idea is very interesting.  Warren [Mosler] points out that there is an alternative, even under the screwed up EU structure now.  The European Central bank, as the de facto issuer of currency, it could provide the funds to provide the recovery.  And the ECB knows that it has the capacity.  They don’t want to use the capacity to help the people of Europe. [Applause]  There is an alternative, even under their screwed up system, but they refuse to use it.  And [Mario] Draghi, in his Wall Street Journal interview, two days ago made this explicit where he said, ‘The European model is dead’—the social model.  And that he wanted the private sector, the banks, to discipline the governments.

“So, let me turn to Paolo’s [Barnard] question.  What do you do if—and it’s really a question of devaluation and they’re really two questions; one is the Latvian question, though it’s not unique to Latvia.  In Latvia, of course, you could have borrowed in your local currency or you could borrow in the euro.  And the interest rate on mortgages was much lower than the euro.  So, people borrowed in the euro and the local currency lost tremendous value and it was much harder to repay the mortgages.  It happened in Iceland as well. 

(c. 44:27)   “You have a general problem once you go to the lira, if the euro continues to operate as an alternative where you’re exposing your consumers to potential huge currency risk.  And that exposes the banks if it’s your local banks, that are making the loans denominated in euros to substantial credit risk.  So, going forward you might want to say, at least, that Italian banks must issue their mortgages in lira, as opposed to euros.  So, that’s the going-forward question.  And it’s a question for you.  And, again, this is our point.  There are many questions for you.  And Italy has to make its own decisions about how it wants to run its financial system.  There’s no one game plan, that tells you the right way. 

(c. 45:27)  “The second question is what do I do with my mortgage that’s already in euros if we develop a lira and if we decide a la Argentina that we want to devalue?  And Randy’s [Wray] point was:  If this produces massive problems in the ability to repay, then that is a place where the government should step in using the resources, that Modern Monetary Theory makes clear, and other theories make clear, are available to it, if it has a sovereign currency, and deal with the problem instead of letting millions of Italians go bankrupt.  And, yes, that’s very much something that I know we agree with and my guess is there’s a consensus.  And, now, someone who’s actually been in Latvia will probably tell me why I’m wrong about Latvia. 

Dr. Michael Hudson (c. 46:20):  “I was a research director of the Riga Graduate School of Law and senior consultant to the largest political coalition, the Harmony Centre Party there.  Latvia has not devalued its currency against the euro.  It has remained in the euro straightjacket.  The problem that it’s dealing with is exactly what Professor Black has explained.  What do you do if your mortgages are denominated in euros, or sterling, or dollars, and the currency goes down against it? 

“We have solicited the advice of international lawyers and the answer is quite simple.  First, Latvia redenominates all mortgages in its own domestic currency, then it lets the domestic currency float, or devalue.  Any sovereign government can do what President Roosevelt did in the United States in 1933.  Contracts in America had a gold clause, saying that the creditors had a right to collect the value in gold.  President Roosevelt simply said:  We’re America.  We can nullify the gold clause.  And he did it.  And John Maynard Keynes, in London, wrote an article saying President Roosevelt is magnificently right. 

“Latvia and Italy have the same option.  You can nullify the foreign currency clause in your mortgages and your personal loans and your commercial loans. You can simply redenominate all loans in your own currency.  Under international law this can be done.  So, follow the U.S. model and do it. [Applause]”

Dr. Stephanie Kelton (c. 48:16):  “Paolo [Barnard] just asked me to maybe say one more word about Randy’s [Wray] proposal about the mortgages.  It’s not something that we support just here.  It’s also something we support in the U.S.  We also suffer from a very, very serious problem in our mortgage markets where millions of Americans—we use the term under water in their homes; they owe more on the mortgage than the property is worth and I imagine you’re dealing with a very serious problem with that as well.  Marshall [Auerback] and I were looking at the rate of growth of private sector debt in Italy over the last ten years.  And we were comparing the rate of growth of public sector debt to the rate of growth in the private sector debt, looking at Italy from 2000 until 2010.  And what you find is that the public sector debt has actually increased only modestly over that period, while the private sector debt has absolutely exploded.  And, so, mortgage debt is part of that, but it’s not all of that. 

“And what you may need and likely need is what so many countries in the world need; the U.S., certainly, does.  And that is our own debt restructuring, a writedown.  We need a writedown of these debts, so that they become affordable to the people.  They aren’t affordable now.  So, if you were to leave the euro and launch your own currency, those debts would be redenominated; and they would be written down.  And it would be the Italian government’s decision to decide how much to write them down. 

“One of the proposals, that we here in the U.S., that some of the MMT economists have supported is that homes, that are currently underwater, could be purchased at a fair market price by the government and then leased back to the owner over time.  They wouldn’t lose the home.  They wouldn’t have to disrupt their families.  But they would be given an affordable payment.  And they would be allowed to stay in the home and, ultimately, regain ownership of the property, but on terms very different from the ones, that exist today. [Applause]” 

(c. 51:10)  “The only other thing I would point out is that even with the inflation, Argentina has been growing between 6% and 10% every year for the past decade.  That’s a huge difference from what it was doing under the IMF-sponsored programmes of the 1990s.  There is also a large component of commodities-related inflation and that’s in part related, I think, to the financialisation of the commodities complex because you now have Wall Street banks speculating in oil.  They speculate on food prices.  And these have played a major role in helping to create a significant cost-push inflation in the commodities sector.  And this is a question of, again, financial regulation.  It’s not something specific to Argentina. [Applause]

(c. 52:14)  “Marshall, you know, those high-growth rates, that Argentina managed to achieve were a result, in part, from the fact that Argentina defaulted in the context of a booming global economy.  And we sit, today, discussing the possibility of a default in the context of a global economy, that is teetering, I think, on the brink of another recession.  And, so, while the rest of the world helped to lift Argentina up, an exit today wouldn’t have that same benefit.  But with a sovereign currency and MMT and the ability to craft your own economic policies to create full employment at home, to sustain incomes for the Italian people, you can lift yourselves. [Applause]”

Bonnie Faulkner (c. 53:25):  “You’ve been listening to professor and research scholar Stephanie Kelton; economist and portfolio strategist Marshall Auerback; lawyer, author, and former bank regulator William K. Black; and Wall Street financial analyst and research professor of economics Michael Hudson.

“Today’s show has been:  ‘A Debate on How to Get Out of the Euro.’  This debate concluded the first Italian economic summit on Modern Money Theory in Rimini, Italy.  Please visit the University of Missouri, Kansas City, New Economic Perspectives blog at

“Guns and Butter is produced by Bonnie Faulkner and Yara Mako.  To leave comments or order copies of shows, email us at [email protected].  Visit our website at”

Transcript by Felipe Messina for Media Roots and Guns and Butter


Guns and Butter – April 25, 2012 at 1:00pm

Click to listen (or download)

Photo (synopsis) by Flickr user Kevin Dooley

Photo (above) by Flickr user

Leave a Reply


  • From the Front Lines of the War on Austerity
  • Keiser: Global Economic Collapse by 2013?
  • Economist Andrew Gause: How The Fed Will End
  • MMT: Why the USA Is Not Broke

  • Tangentially Speaking: Chris Ryan & Abby Martin
  • Propaganda and the Engineering of Consent for Empire
  • Marxism 101: How Capitalism is Killing Itself with Dr. Richard Wolff
  • Noam Chomsky & Abby Martin: The Empire’s Election Extravaganza
  • Panopticon Fatigue – Life, Sex and Death under the East German Stasi
  • Independent Media and the Cultural Revolution at Zeitgeist Day
  • MLK Jr. – The Uncomfortable Truths History Books Won’t Touch
  • How Words Absolve Pillaging and Mass Murder
  • Journalist Amber Lyon: The War on Drugs is a Human Rights Crisis
  • The Case for Vegetarianism You’ve Never Heard Before
  • Inside the Zeitgeist Revolution with Peter Joseph
  • Modern Money, Public Purpose, and Democracy
  • Can The USA Really Run Out Of Dollars?
  • Turning Pine Sap Into ‘Ever-Green’ Plastics
  • MR Transcript – America’s ‘War On Kids’