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Interview with Y. Stournaras – Συνέντευξη με τον Γ. Στουρνάρα from Re-public on Vimeo.


Pavlos Hatzopoulos: Mr Stournaras, many analysts talk about the end of liberalism. Joseph Stiglitz made an analogy between the fall of the Berlin wall and its meaning for the end or “death” of communism, and the global financial crisis and its connection with the presumed “death” of liberalism. My question is, do you agree or disagree with this analogy?


Yannis Stournaras: I fundamentally agree with that, but there are a few exceptions. What happened recently marked the end of the theory that markets, and especially bank, financial markets, can be self-regulating. This, I believe, has come to an end, and what the crisis indeed marks is the complete triumph of Keynes’s ideas on economy. Yet, to my mind, it by no means marks the return to an old form of statism, that is, we welcome the idea of a better state, a watchdog state, a social state, but certainly not a state as entrepreneur.


P.H.: In what way, would you say, that liberalism is “dying”? Is it the end of an ideology, a value system on the basis of which a global financial system has been constructed?


Yannis Stournaras: I will use a quote from my new book. It is actually taken from a book by the British historian E. H. Carr who passed away some years ago. That book was published in 1961 under the title “What is History” and constitutes a benchmark book for historians, for the methodology of history. It is from that book that I picked this remarkable phrase which totally answers your question. So, as Carr put it: it is a shame that two of the biggest brains of the British political economy, Adam Smith and Karl Marx, were wrong about two fundamental judgments. Adam Smith, on one hand, believed that all the problems of society would be solved by the “Invisible Hand”; Karl Marx, on the other hand, believed that they would be solved by the “Dictatorship of the Proletariat”. Well, I think this says it all. We need realism and realism demands that we must neither be on the side of Adam Smith’s “Invisible Hand’’ nor of Karl Max’s ‘Dictatorship of the Proletariat”. Those systems were tested and failed; what happened recently was indeed their tombstone. Besides, this is also what Greenspan admitted when called by the Congress to give his opinion. The man said: “I was wrong, I was mistaken; I’ve been going on for forty years or more believing in the capacity of markets, especially bank and financial markets, for self-regulation”. What more do we need than the confession of someone who was once among the people entrusted to protect this mechanism?


Greenspan, of course, deserves the blame for advocating the loosening of the Glass-Steagall Act, this wise legislation established after the 1929 crash. Back in the ‘80s and ‘90s, Greenspan was among the proponents of the loosening of this legislation, which eventually has led us to this unfortunate position. However, the crisis is not only linked to the loosening of longstanding supervision rules, but also to other factors, one being the gigantism of the banks, the fact that, in the lack of corporate governance, banks turned into casinos. The role of the banks is to take deposits and turn them into loans. Many of them, however, were taking deposits and invested them in composite products; in essence, they were taking bets. That was unacceptable.


P.H.: Can you elaborate a bit on the significance of the Glass-Steagall Act and the change of legislation?


Yannis Stournaras:Well, if banks turn away from their fundamental role, that is to transform deposits, people’s savings, into loans for the development of businesses, and instead get heavily involved in speculative activities, then problems are created in the markets. Problems arise because, as you may realize, speculation has no limits, and as a result, pyramids are created which then blow up like bubbles. This whole process is thoroughly analyzed by a renowned economist who also passed away, Charles Kindleberger, in one of his books published in 1978, a book with the very eloquent title “Manias, Panics and Crashes”. These three words explain how in the course of two hundred years of capitalism, economic cycles and crashes are attributed to a buying mania for shares and bonds, which in turn is possibly triggered by a positive development, technological or other. People then flock to buy until asset prices reach irrational levels and it is at that moment that they all start selling like crazy. This is what creates a crash. This is what creates panic, at first, and then destruction. Unfortunately, capitalism failed to correct this anarchic, non-linear aspect of the system. There is a need for supervision. If Greenspan is to blame then, this is for his firm belief in the self-regulation capacity of the banks and their ability to assess the risk properly. But this they failed to do, the risk was not assessed properly.


And there is more to it. There is an issue of corporate governance and an issue of supervision. Furthermore, there is an issue of transparency and definitely an issue of honesty on the part of bank officers. To put it simply, when one grants loans to people knowing that they would never be able to pay these loans off, just to prove oneself efficient and worthy of a bonus, and then invest them in bonds, take them out of the balance sheet and pass them on to organizations of the so-called “shadow banking system” which are not supervised by the authorities, then there is clearly an issue of honesty. Of course, one may argue that greed is in human nature. True, but there are limits to it.


P.H.: In an attempt to theorise the interpretation you just gave us on the crisis, I would argue that it is essentially based on a distinction between real and virtual economy. I’d like to ask you if you consider such a distinction valid, if you believe that the answers to the crisis can be given on the basis of such a distinction. In other words, if you believe in the regulation of virtual economy, its connection with real economy, or conversely that technologies, including the technology used to manage the economic system and its the evolution of this technology have rendered this distinction useless, or at least non-visible.


Yannis Stournaras:There is an uncontested fact, that too many composite products were born. The creation of these composite, complex products is connected with what Stiglitz had argued about asymmetric information. Incidentally, I am glad that Stiglitz’s name came up in our discussion and that you mentioned him earlier, as he used to be my professor in Oxford and a good friend, someone we all admire for his contribution to the economic theory and policy. He has been talking about asymmetric information since 1978, when he was teaching us. Well, with the creation of composite products, the concept of asymmetric information fully materialized: when banks were selling structured bonds to Greek social security funds without providing detailed information on their performance – and even if they did provide information, it was still extremely difficult to assess the performance of such bonds – because the latter would be linked by means of non linear rules to derivatives, that is to two, three, four, or at times even more variables, which in turn would depend on other variables, thus generating a complex mathematical model impossible to solve. To give you a simple example, a bank officer working in the IT department of a major British bank once mentioned to me that he had worked on the pricing of such a bond during an entire weekend, and still the system had failed to determine its value. From this example you can imagine the lack of transparency and symmetric information.


Many buyers had no clue what they had purchased. Krugman compared derivative products with sausages which looked all appetizing, yet were stuffed with no matter what. And one could only tell after tasting them that the meat had gone bad. This is what it was all about in simple words. The complexity of such products was indescribable. Now, what happened in reality is that the shadow banking system created values that were ten to twenty times up the ones in real economy. In this sense, you’re right. What we find out now is that the turnover or the profit of the banking system as well as the shadow banking system, the latter operating beyond control of all kinds, including control exerted by central banks, and being based in off-shore countries, is part of a virtual economy which is two to three times the size of the “real economy”, that is the “real” GDP. All these derivatives created values which then collapsed like a house of cards. From these values, however, many earned their bonuses, they made money during the past ten years or so.


P.H.: We must however admit hat some countries encountering problems in the development of real economy, such as Iceland, played this game with the intention to use it as an instrument of their own development. In other words, these products and the development of the financial system in this virtual dimension produced real benefits…


Yannis Stournaras: Sure it did; this entire system yielded profits, it has dividends. Iceland is a small country and few people were sharing dividends, so that we eventually came to consider Iceland a model country. The international investment community has made mistakes. It glorified Iceland just like it had earlier done with Argentina, which had conformed to the rules of the International Monetary Fund and was considered a model country. At first, we gave our blessing for the peso-dollar rate of one to one and later on, when it proved that Argentina lacked the fundamentals to comply with this rule and went bankrupt, we all admitted it had made mistakes. Therefore, my conclusion is that the so-called fundamentals, distortions and imbalances, have an important role to play. One must not forget that no matter how well an economy is growing, distortions and imbalances growing in parallel, if not smoothed out on the initiative of the government, will at some point be corrected violently, in a way that the necessary adjustment will be felt like an uneven burden on the shoulders of the rich and the poor. Nemesis will come at some point. It happened now just like it had happened in the past. “Bubbles” don’t get blown up forever, they eventually burst, the effects being felt most strongly on those who have nothing to do with them, that is the innocent ones like most people are.


P.H.: You talked about issues of transparency, asymmetric information… Who can really control those “bubbles” and how? Are there any lessons learned from the crisis regarding the role of various bodies in the exertion of control?


Yannis Stournaras efinitely. One lesson learned is that the state must exert strict supervision. At times we were dealing with hypocrisy. Some countries – and the names of some foreign ministers, friends from the past, automatically come to mind – which are now among the proponents of monitoring, when told that the off shore status of certain institutions should be abolished, were arguing against on the grounds that such institutions were bringing money in their countries. So, this is also an issue to be addressed. In essence, today’s globalization calls for an international monitoring instrument. This role could be assumed by the International Monetary Fund, which, despite the mistakes made in the past, has now the knowledge and the capacity to do it. On the other hand, there are the interests of various countries. For example, the United States, as its views are reflected in the G-20, is against the state assuming an over-regulatory role, although with the advent of Obama’s government this will probably change.


We clearly need strict surveillance as well as the abolishment of shadow situations of all kinds, either these are called off shore centres or funds outside the control of central banks. It is simply not possible for them to carry out their operations out of control, since they take loans from banks; if banks fail to pay them off, people will end up loosing their savings. Therefore we cannot afford to have funds excepted from supervision. Consequently, an important lesson learned is that we are in need of improved worldwide supervision, coordinated supervision, so as to prevent each and every one regulatory authority acting differently in order to win its respective country a share from economic transactions.


Despite the fact that the crisis itself as well as the steps already taken to confront it have proved the global nature of the economic system, in some cases, hesitation has been expressed over the global dimension of the proposed measures to overcome the crisis. For instance, at the EU level, there is clearly consensus on the development of common crisis prevention mechanisms…


P.H.: The Brown Plan…There is however considerable hesitation over the adoption of common measures. And there we observe the emergence, the importance of the national factor. On this point, I wanted to ask you, how do you see this divergence between the global and the local? What I mean to say is, we are facing the return of the state as a guarantor of stability and crisis resolution, on one hand, and on the other, there are voices like yours, arguing for the development of global systems of control, supervision, guarantee, transparency…


Yannis Stournaras: It is actually an endless negotiation, what you are talking about. There is an endless negotiation under way, to reach a compromise of national and global interests. Since, however, we have opted for globalization, we ought to proceed with global institutions. Many EU leaders have difficulty in accepting this. Yet this is but the logic of the system. We can either choose to accept it, and thus move on with global institutions, or not, and thus get shrunk to the size of our nation-states. This will not happen from one day to another. Of course, leaders play a crucial role… if it wasn’t for Sarkozy… Actually, Sarkozy and Brown, the former with his activism and eagerness for distinction, the latter with his anglo-saxon pragmatic approach that helped him come up with a viable plan, are the ones who mobilized the European leaders. To me, this was positive, despite the initial objections expressed by Ms Merkel. Finally, it proved that Germany was facing a lot more problems with its banks than other countries did. There was a problem of transparency in Germany too. Nonetheless, the logic of the system is such, that forces us to assign responsibilities to global institutions, should we opt for the adoption of effective solutions. It simply cannot be done differently.


P.H.: With respect to the choice and the functioning of such institutions, would you say that the existing ones are adequate?


Yannis Stournaras: The existing institutions are sufficient, they just don’t function effectively. Take, for instance, the International Monetary Fund (IMF). What does IMF mean? The G-7 sets up the agenda of its managing board. So, it is ultimately the member-states that make decisions. The IMF’s influential role has been downgraded during the past few years, due to its own mistakes; tragic mistakes which led to depreciations which should not have occurred and so forth. Notwithstanding its flaws, the IMF is a powerful mechanism still in place drawing public money; it could well have an active role to play. It was established after WWII, following a lengthy negotiation. Why not activate it, or the International Bank, or the Doha Trade Round? The institutions are there. The question is how they are used. And let me argue, at this point, that the big issue is not institutions, but leadership. What the world lacked until now was leadership, global leadership. We all hope that with the advent of Barack Obama this gap will be filled. The truth is that many economists of the social-democratic school, myself included, have high positive expectations of Obama’s Presidency. I hope he won’t let us down.


P.H.: You and other economists of the social-democratic school talk about a new global financial architecture. I think there is a difficulty in describing this new architecture, probably because we are still in the beginning…Many bring out ghosts of the past. I mean, you mentioned Obama: economists expect Obama to lead a new New Deal. In Europe, there is a return to Kaynes. I wonder, is there really a theoretical and political gap concerning the direction we’re heading?


Yannis Stournaras:In my view, it is not necessarily bad to return to the Founding Fathers, like Keynes or Roosevelt with the New Deal. Inevitably, we need to adapt their ideas to contemporary circumstances, since at that time, under the Bretton Woods conditions, the movement of capital was not allowed to the extent it is today. For instance, the speculative movement of capital flow is one of the negative aspects of the new system. The entirely free movement of capital has proved to be different than the entirely free movement of goods, services and people. The former entails an element of danger, because capital moves at an amazingly high speed, flows within seconds, is not determined by fundamentals but by purely speculative models. Let me remind you the case of the collapse of the British Pound in 1992: it was not attributed to fundamentals, but rather to a person with enormous economic power who took a position that brought the Bank of England to its knees. Such phenomena must be controlled today. So, we return to the Founding Fathers, whose ideas were democratic and allowed for a compromise between capitalism and democracy.


This is exactly what is needed today. This is also the principle that was brutally violated when the heart of the financial system turned into a casino, mainly in the US, but also in Europe – it has become all the more evident that banks in Europe were not more innocent than the US ones. In sum, the issue of a compromise between capitalism and democracy is again relevant today. The question is what means should we employ to reach such a compromise? No doubt we need modern means, proper to the internationalized system, while taking into account that China constitutes a part of it. We can simply not afford to expect China to lend us 500 million euros, and at the same time not include it in the G-7 or the G-8, and include other countries instead; smaller countries with no influence, countries which might have been quite influential in the past but are nothing, compared to China, today. Therefore, we cannot afford to function using the existing architecture. We definitely need a new, more open, more democratic one. We have to include countries who are playing a key role today and whom we need, that is large surplus countries, like China. Without China, the global economic growth rate would not be 2.5 but -2.5. China is a locomotive. We cannot afford to exclude it from such institutions. We have to learn to live with reality. There seems to exist today, whether we like it or not, a transfer of economic power away from the US, and possibly away from Europe, towards the so-called countries of “authoritarian capitalism”. This, unfortunately, is a reality. And we better include these countries and advise them on how the authoritarian capitalism can become more democratic, should we like to lead the global economic system to a more positive direction.


P.H.: Would you like to elaborate on the concept of democratization in terms of the relationship between the citizens and the state, the citizens and financial institutions, the citizens and international organizations…


Yannis Stournaras:You are raising two questions here: first, transparency and second, the social state. In my forthcoming book, I write mainly about Greece in connection with the search for a new paradigm for development. I basically argue that readjustment is required in terms of the following: first, the aggregate demand, as we consume too much and export too little, second, the strengthening of supply, as our export products are of low technological content and international demand, third, the state of justice and fourth, the social state. The social state and the state of justice are thus integral pillars of a modern democratic economic system.


What I mean to say is that the crisis in Greece is not only a problem of deficits or a problem related to the global financial system, but also a problem of democracy, thus a problem of transparency and a problem in the state of justice. In our country, there is this widespread suspicion that the rich always manage to get away with it, that the justice system is biased and so forth. This situation has to be improved, should we not wish to find ourselves dealing with bigger problems in the future. Also, with regard to the issue of transparency: people tend to have this notion that, for instance, banks always hide something in their books, committees don’t do their job properly and so forth. I wonder, should we then consider granting greater independence to regulatory authorities? For instance, should we consider making them reportable not to ministries but just the Parliament?


This is the kind of proposals I make in my book. Should we consider establishing an institution of permanent general secretaries and ministers in certain ministries? The British public administration system, the best in the world, is based on permanent under secretaries. During the negotiation process for the introduction of the euro, in which I participated in my capacity as member of the EU monetary committee, a compromise of conflicted French and German interests was attained thanks to the efforts of a British civil servant, Sir Nigel Wicks, permanent under secretary of the Treasury. I wonder, should we consider appointing people to senior government posts via inter-party procedures? Should we also consider offering those people contracts of no less than 5 to 7 years of duration which would allow them to accomplish the tasks assigned to them, thus partially freeing the political power from the burden of daily management? Why should it be the duty of the ministers to sign contracts? If we had applied such a system, we would not be coping now with those sick situations which have afflicted the Greek political system, and we would rather be discussing more substantial issues that usually provoke feelings of distress to people.


P.H.: With regard to the issue of democratic participation: a counter argument is that casino capitalism is underpinned by some sort of democratic ideology. Citizens are invited to participate in casino capitalism as stakeholders. This ideology projects a fantasy: that we all start with equal opportunities. Of course, this is only so in appearance. Within a system like the one you just described, how is citizen participation applied?


Yannis Stournaras: Your question brings to the fore the issue of the so-called equality of opportunity. It is utterly important and a number one necessity that the modern social state seeks to ensure equal opportunities. And this can only be achieved by providing a high quality public education and health system, as well as equal access to public goods. This is actually half the battle: without equal access to good quality public services, it is not possible to ensure equal opportunities, the latter being the culmination of citizen participation in a modern democracy. At corporate level, to establish immediate democracy cannot be done easily; legislation on limited liability companies (Ltds) does not permit it. For instance, it is the shareholders who appoint the members of the managing board and the board itself does not play such a significant role after all.


So, a key component of the social state is the provision of equal opportunities, meaning, in my view, the provision of very good public services, especially in the sectors of education and health. What ails Greece today lies in education. If one asked me what is the most important economic problem of Greece in the long run, I would say education. Another issue to be put on the table is that of the need for a fair tax system. Without a fair, re-distributive and effective tax system, social justice cannot exist. A third issue is that of the balance among social partners. This can only be achieved by means of ensuring institutionally the existence of collective negotiations. Without them, democracy does not exist. Collective negotiations became a fundamental component of the social state in the period after WWII. To my regret, nowadays I hear voices of even progressive economists asking: “Why should we have negotiations at collective and not at company level?” Can you really grasp the meaning of negotiations at company level? Employees would be left with no power whatsoever. We definitely need the balance inherent in collective negotiations.


To conclude, we need these three things: first, good quality services of education, health, culture and environment, second, a fair and effective tax system and third, the establishment of a guaranteed minimum income. There is no use in allocating ad hoc allowances, i.e. heating allowance and the like…We must plan the introduction of a guaranteed minimum income for all people living in Greece. Now, the question is how we’ll find the money to do it. My proposal would be to cut down on defense expenditure immediately; ideally, following an agreement with Turkey. Turkey also suffers a financial crisis. Greece spends 5% of its GDP on defense expenditure, whereas Austria spends only 0,7%. Clearly, we are not in the favorable position to border countries like Austria, but in Turkey, I assume, there are some sensible men. We must save on defense expenditure and rather invest in education.


P.H.: Most of the measures you described I would argue are hard to implement for various reasons, and most importantly because many of the institutions needed to support such measures are already in crisis. More specifically, you talk about collective negotiations, while at the same time trade unions worldwide are currently undergoing a crisis. You talk about public goods, a concept also in crisis…


Yannis Stournaras:… a crisis brought about by neo-liberalism. The concept of public goods is not in crisis…


P.H.: I meant, a crisis in terms of the trust bestowed upon them by citizens. Fewer people, should they be given a choice, prefer public over private insurance, or public schools for their children over private ones.


Yannis Stournaras: I agree with you. Yet this situation implies the necessity to improve public schools and upgrade the Social Insurance Institute. We must provide a long term solution to problems relating to the social security system, so that people have no fear that they may not get their pensions. Personally, I would suggest the introduction of a very simple measure. I see no need for drastic, urgent measures, but rather the necessity to resolve this problem on a long term basis. What Ms. Petralia did, the merger of the social security funds might as well help towards the direction I am suggesting. In fact, what I say is as simple as that: The average salary should increase higher than the average pension as long as the population gets older, and the population gets older at a rate of more or like 1.9% per year. This means that the same rate must be used to increase the average salary in analogy with the average pension. This is quite feasible, particularly in an environment of high economic growth. Yet this solution is based on a very simple, verifiable rule. It is not as if people are told “you get a pension of 600 euros, this pension will go down to 300 euros from now on”, but rather like “you get a pension of 600 euros, this pension will keep on rising, but its increase rate will never exceed the increase rate of the salary on the basis of which contributions are paid to Social Security for your own pension”.


We’re talking about really simple rules here. And since you mentioned trust before, let me suggest that we definitely need to establish institutions with a view to restoring trust. If I admire the Scandinavian model, this is mainly the reason why: it provides for institutions built upon trust; citizens trust one another thanks to the existence of everlasting institutions. I simply refuse to accept that here in Greece such things are impossible to happen. Of course they can happen. To give you an example: when I first chaired the Council of Economic Experts in 1994, many renowned economists would come to me and say: “Why care about the euro” – it was actually ecu at the time – “when in Greece inflation is impossible to fall below 10 or 12%?” Well, in one and a half year it fell. So, it is rather a matter of good policy, proper intervention. I am myself a Keynesian economist and firmly believe in the power of central governments to reverse situations. I am thus optimistic and refuse to place myself among the Cassandras. If one thing has become evident, this is that all governments agree on the necessity for Keynesian-type rescue packages.


P.H.: In Greece, would the pursue of such solutions call for the reform of the Greek General Confederation of Labour (GSEE) or perhaps a totally new Confederation? Besides lack of trust, many of the institutions and the players necessary to participate in the establishment of this new architecture, cling to an outdated notion of what this international financial system is.


Yannis Stournaras: The Greek General Confederation of Labour (GSEE) must put substantial issues on the agenda and take a position about them, so that we no longer have to speak the wooden language of the past. If GSEE becomes more pragmatic and perhaps more representative, I assume that it will manage to attract more people, because workers may well use trade union protection. I mean, we have to educate people and GSEE can play a key role in this. I strongly believe in the role played by social partners. I even argue in my book that a significant measure towards institutional adjustment is changing the way the economic policy is implemented.


Today, the economic policy is implemented on a very short term basis. We do not know where we are heading within the next ten years and, unfortunately, policy planning and implementation in connection with key issues, such as social security, education, water management and energy, requires at least a ten-year approach. So, we could possibly be inspired by the partnership approach adopted in Ireland, where a ten-year plan is submitted for debate among social partners who, by giving their consent, commit themselves to implement it. It is like the government saying: “These are our proposals. Do you wish to suggest otherwise? Do you wish to take part in the formulation of this policy plan?”. This way, the government makes social partners a stakeholder in the formulation of the economic policy. If we decide to proceed to a reform of institutions in this direction, people will respond. The following example is quite relevant: no one believed that, by means of employing a consistent economic policy, we would manage to enter the eurozone. Not even our European partners believed it. When I first went to Brussels as the chairperson of the Council of Economic Experts, many of my friends from the UK, then working at the Treasury, the Bank of England etc., were asking me: “What are you doing here?”. In other words: “Does Greece wish to enter?”. They were taken aback. And in six-year time, when I was leaving, they would come to me and say: “You were so right”. Everything can happen. I hope that my forthcoming book which I have co-authored with Maria Albani, will be a contribution to a, hopefully, constructive dialogue on such matters.


P.H.: Is it likely that we are also experiencing a redefinition of the public good today? That even the financial system has come to be considered a public good?


Yannis Stournaras: The payment system is a public good today indeed. It is the heart of economy, it plays a strategic role. This does not mean that we should nationalize it, but rather that we have to supervise it properly. And the reason why we should not nationalize has to do with the reasons behind the failure of actually existing socialism: the state is unable to function should it nationalizes everything. The incentives mechanism ceases to function. What we need now is a balance between incentives, on one hand, and supervision on the other. To sum up, the payment system is clearly a public good. This is why central banks exist and this is why global supervision authorities should exist, if not the coordination of all central banks. The payment system is a public good whose collapse might lead to the collapse of social states and economies. This is why states intervened to save it.


P.H.: Is Keynes the economist of the 21st century?


Yannis Stournaras: Yes, definitely. And, you know, history did not give him justice at the end, in the sense that as a UK negotiator at Bretton Woods, he had failed. He went there with a mandate like “we gave blood, let Americans give money”. And that did not happen.

Special issue: interviews on the crisis
Tags: economic crisis, social democracy, Yannis Stournaras

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