There is something eerily symmetrical about the decision by the Greek prime minister, Alexis Tsipras, to call a referendum about what he has described as the 'extortionate ultimatum' of 'strict and humiliating austerity without end' coming from the International Monetary Fund, European Commission and the European Central Bank – the troika.
The country that is the cradle of democracy has decided to ask the people if the financial markets have the right to rule over them. Predictably the response has been a mixture of fury and disbelief. 'You are asking the people what they think? We tell you what to think' is the implicit message.
The great absurdity of modern geo-economics is that the world of money, which is just a human construct, is being treated like a natural force that must be obeyed, much as we have to respect the law of gravity. One might call it the cart-before-the-horse syndrome. Money is supposed to serve us, but increasingly we are becoming servants to those who run it.
Few are being asked to be more servile than the Greeks. When the IMF came in with what is amusingly referred to as its austerity 'plan', the Greek economy was expected to grow at over 2 per cent, unemployment was below 9 per cent and the debt was about 120 per cent of GDP. By 2014, after the 'plan' had taken effect, the country’s economy had shrunk by a quarter, unemployment was over 25 per cent, youth unemployment was over 50 per cent and the debt had risen to over 170 per cent of GDP.
The IMF’s abject failure to provide a sound strategy was hardly a surprise. IMF prescriptions have a long history of failing, and countries that ignore them are often the ones that do surprisingly well. One especially prominent example was the reaction of Malaysian prime Mahathir during the Asian Financial Crisis in 1998. He was roundly criticised for ignoring the IMF prescriptions, instead fixing the currency and imposing capital controls. Malaysia performed best during the crisis and it was later hailed as a master stroke. It is almost a case of the best strategy is to ask the IMF what to do, then do the opposite.
It is not just the IMF and its partners that are not being held to account. The absence of responsibility is even worse with the banks. It was the banks and the wider European financial sector who, by 2010, had recklessly loaned €310 billion to Greece. Since then, the troika has loaned €250 billion to the Greek government, less than 20 per cent of which was used to bail out Greek banks. Sixty per cent of the funds were used to bail out the original debts and the interest from reckless lenders.
One theory is that the reason there is so little concern with a realistic solution for Greece is that the creditors are determined to establish the principle that they can over-lend to a country and force the country to pay by selling public assets and cutting pensions and social services of citizens. The creditor banks then profit by financing the privatisation of public assets to favoured customers.
That may be so, but the general recklessness of the financial sector goes a lot deeper than that. Derivatives, the extraordinary pyramid scheme that the financial sector has created (financial instruments 'derived' from conventional forms of finance; essentially a side bet) continue to spiral. This $700 trillion mountain of gambling money sits above the banking sector.
One of the biggest holders of derivatives is Deutsche Bank, whose derivatives exposure is $54 trillion. As became evident during the Global Financial Crisis, a problem in the 'real' economy can set off cataclysmic repercussions in the very unreal world of derivatives (in 2008 it was mortgage default in the US housing market). It is very likely that it is why the bank lenders to Greece were bailed out by the IMF, ECB and European Commission.
What we are left with is a situation where the extraordinary recklessness of a wealthy elite in the financial markets is blamed instead on those who are anything but wealthy, such as Greek pensioners. But it remains the case that these are only rules that have been invented by the finance sector. Political leaders can also attempt to establish their own rules.
One of the truisms in economics is the so-called trilemma: the argument that it is impossible to have a stable exchange rate, free capital movement and an independent monetary policy. This may be valid, but if Greece does go to the drachma, why should it have a free floating currency? China has created the most spectacular period of wealth creation in the history of the world with a fixed yuan. Mahathir defied the Asian financial crisis by fixing the ringgit. Some control over capital flows might also be desirable when you get money from such irresponsible financial institutions.
If Greece is rejected by the financial elites, it might also want to consider rejecting many of their economic orthodoxies as well. If there is one lesson from the series of debt crises that have plagued weaker countries since the 1970s, it is that solutions only emerge when those country’s leaders stop playing by the rules imposed on them.
David James is a business journalist with a PhD in English literature. He edits Personal Super Investor.
Christine Lagarde image by Shutterstock.