A conversation I was privileged to have with John Nash in June 2000 is posted below as a small tribute to a great man.
(The conversation was motivated by a talk John Nash Jr gave in Athens in 2000 entitled IDEAL MONEY. The text of the conversation below was published in 2001 as a chapter in a volume, available only in Greek, entitled Game Theory: A volume dedicated to John Nash, edited by K. Kottaridi and G. Siourounis)
Yanis Varoufakis: Professor Nash, in your talk on Ιδεώδες Χρήμα (Ideal Money, June 2000) at the Old Parliament House in Athens, you commented, in relation to the Eurozone, that membership of a club makes sense only if it is exclusive. (Greeks know this well enough since the earlier consensus among experts that Greece would not be allowed in, made the project of entry into the Eurozone particularly popular here.) Then you strengthened your claim by suggesting that if everyone joins an alliance, the alliance is absurd. But is it? Does a Grand Alliance not gain meaning if its establishment entails unanimous agreement by all members regarding its institutions? Is it not akin to a Grand Bargain over the precise mechanism for distributing gains? (Something like agreeing on the properties a cooperative solution should possess?) And if so, does a Grand Alliance not make sense as a framework for conflict resolution?
John Nash Jr: The words ‘club’ and ‘alliance’ do not have the same meaning. This is why in game theory we use a third word which also differs conceptually from the first two words: ‘coalition’. It is of course true that it is possible to have a coalition between all the nations (or the states) of the world. The Universal Postal Union, with its Berne headquarters, is a good example. Mind you, it would be far fetched to refer to this union as a ‘club’. I am not sure I can recall the precise phrase I used in my talk. Nevertheless, a truly Grand Coalition, that includes ‘everyone’, is an important and natural concept of game theory. It is the means by which an efficient (in the context of Pareto’s definition) agreed resolution to disputes can be imagined following mutual concessions.
Yanis Varoufakis: Regarding your specific proposal (that is, a new Gold Standard based not on Gold but on a basket of suitably weighted material commodities), is your ‘ideal money’ meant as a proxy for transferable utility (such that the outcome of exchanges can become genuinely independent of the way payoffs are calibrated)?
John Nash Jr: The value of effective transferable utility is obvious. However, as far as contemporaneous transactions within the ‘walls’ of a domestic economy are concerned, the transferability of values can be eased equally well by ideal and non-ideal money. But when it comes to inter-temporal, long-term transactions, e.g. mortgages, the difference between ideal money and typical European currencies would be somewhat intense, if not dramatic.

In other words, the so-called Greek crisis is not really about Greece, but about the chance that if Greece does what it clearly must do, namely default, its banking system and everyone else’s will collapse. If that’s the case, we need to fix the banking system, not Greece, and let Greece fix itself.

But can a bank run in relatively tiny Greece represent such a big concern? Yes. Recall the December 2013 banking crisis in Cyprus, whose economy is peanut-sized. The prospect of Cypriot bank runs triggering bank runs throughout the Eurozone sent shivers down European Central Bank chairman, Mario Draghi’s, spine. He quickly came to the rescue. Draghi was not taking a chance, however small, of a massive, collective loss of trust like that triggered by Lehman Brothers’ bankruptcy.

But why is the banking system so fragile? The answer is simple. No other industry in the world operates so deeply in the dark. No other industry provides so little disclosure of what it owes and owns. No other industry has such eye-popping leverage – leverage that is little changed despite Dodd-Frank, Basel III, the Vickers Commission, and other so-called U.S. and international banking reforms. And no other industry engages in such rampant and unabashed deceit, corruption, malfeasance, and political bribery.

Pervasive opacity, extreme leverage, and rarely prosecuted criminality – those are the terrible hallmarks of the world’s Wall Streets. One can’t conceive of a more dangerous way to run any economic sector, let alone one that constitutes a critical public good, namely the financial exchange system.

The Greeks fully understand their potential to gravely damage EU unity and the global built-to-fail, faith-based banking system. Indeed, this is their main negotiating trump card. But blackmailing their partners and abjuring major fiscal reform (required with or without default) is not in Greece’s long-term interest. Nor is it in the interest of other EU members to perpetually police Greece’s fiscal behavior. What’s needed is a way for Greece to default without bringing down the Greek financial system, let alone overall financial exchange

Twist and turn it however you want, Germany’s blatant violations of EMU regulations can no longer be covered up. Those, such as Der Spiegel, stay far from the truth even if they do not lie outright. When will Der Spiegel inform its readers of the simple truth that the Germany’s mercantilist economic model is based on undercutting its trading partners so that it accumulates surpluses while creating deficits and debt everywhere else? When will the ‘truth commission’ of Der Spiegel – seventy people in total – understand that only a deterioration of German competitiveness (through rising wages) and declining surpluses vis-à-vis its trading partners can help to overcome deflation and stimulate economic growth of all countries inside EMU? It does not seem likely that this will happen in the foreseeable future; the collective fear to face the truth is insurmountable.

Another example: in an interview in past week’s printed edition of Der Spiegel, Wolfgang Kauder, the leader of the CDU/CSU party group in the German Bundestag, said: ‘If Greece wants more money from its European partners, it must pass reforms. Perhaps it helps to realise that it is not the European bailout policy that has driven Greece into misery, but the failure of their own elites.’ If someone makes a statement like this, you would expect that any professional journalist would question why only recently the economic policy of the country has led to such despair among the Greek people and, hence, resulted in the election of the ‘left populists’ (Kauder on SYRIZA) into power. If it is indeed the Greek elites who are responsible for the cataclysm in Greece, why is it that the Troika’s infamous memoranda since 2010 (the memoranda of understanding according to the wording of the IMF) literally spell out the policies that a country has to abide by, including the reduction of wages, pensions and social welfare? Mr. Kauder does not deny the truth, but reality itself. The interviewer, however, remained silent.

Mr. Kauder’s statements also constitute a covert attack upon the European Commission and upon Jean-Claude Juncker (this can also be found in the printed edition of Der Spiegel of last week). If Juncker, as is assumed by Der Spiegel, will question the regulations of the Stability Pact, why will he do so? Is it an attempt, as Der Spiegel suggests, to defy the German Chancellor’s leadership? Is there not a grain of truth in the idea that compliance with the Stability Pact amid a prolonged recession is simply absurd? Does the ‘truth commission’ of Der Spiegel really not understand that it is impossible to push for further ‘structural reforms’ given the extreme damages that these policies have already caused? The policies will lead to other leftist parties winning elections, which is something that Der Spiegel obviously does not favour.

A great example of German denial was provided by the former chief economist of the ECB, Jürgen Stark. In the FT (of February 11) he wrote: „The truth is that, in contrast to many eurozone countries, Germany has reliably pursued a prudent economic policy. While others were living beyond their means, Germany avoided excess. These are deep cultural differences and the currency union brings them to light once again.“ Along the same lines, the Süddeutsche Zeitung wrote a few days before: ‘It is often noted that Greek wages fell sharply because of the crisis. But the truth is that labour costs during the first ten years of the euro rose by nearly 20 per cent in Greece, while they decreased in Germany. Although Tsipras’s populism suggests otherwise, the Greeks brought most of their problems upon themselves.’ Mr. Stark and the Süddeutsche Zeitung do not have the luxury of a ‘truth commission’ as Der Spiegel does, but perhaps someone could raise questions about what is wrong with the 20 per cent labour cost increase and what is right about lowering labour costs? A 20 per cent wage increase in ten years time is not a problem in and of itself. There is nothing excessive or irresponsible devastating role in the European Monetary Union. The newly discovered love for what is euphemistically called ‘the truth’ in the German about this, given that wages increase in line with productivity plus the inflation target of 2 per cent set by the ECB.

The truth about all of this is that the inflationary use of the word truth in Germany comes on top of the complete denial of Germany’s media only serves to distract attention away from the manifest failure of German economic and financial policies and their devastating consequences. However, he media’s new love affair with ‘the truth’ does not fall out of the sky. Now that the left is in power in Greece, the myths about German innocence and Greek irresponsibility need to be intensified.

The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of more than €80 billion in emergency liquidity, which exceeds the Greek central bank’s €41 billion in recoverable assets. With Greece’s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.

Rumor has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralized is wearing thin, given that, in many cases, the collateral has a rating below BBB-, thus falling short of investment grade.

If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

In other words, thanks largely to the ECB, the Greek government would be able to secure a far more favorable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. And if Greece exits, a large share of the acquired resources measured by the TARGET balances and the cash that has been printed would turn into an endowment gift for an independent future.

Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.

Debt-ridden Greece is not making a scheduled repayment on an IMF loan Friday. Three things to keep in mind about the apparent snub:

1.Greece is NOT in default . . .

The Friday payment was to be the first of four installments to be paid over the course of June. Greece says it will combine all of those payments into one and give the IMF that larger sum on June 30, the last day of the month. Rules followed by the IMF -- the Washington-based International Monetary Fund -- technically allow such a maneuver, if it's within the same month.
Friday's bill was for 300 million euros; the tab by month's end will be in the neighborhood of 1.6 billion euros -- or about $1.8 billion. More payments are due further down the road, coupled with the flow of more cash designed to help Greece attain financial stability.

2.. . . Yet

Greece sure did wait a while to tell not just the IMF, but also its partners across the European community and jittery investors around the world, of its plans. On Thursday, just a few hours before the government announced its end-of-the-month payment strategy, IMF chief Christine Lagarde told a a roomful of reporters she was "confident" the Friday payment was on track.
And lumping payments together is a practically unheard of option. The Independent of Britain cites the IMF as saying Zambia is the only country to invoke the rule in the past. That was in the early 1980s, the newspaper said -- and Zambia later defaulted.
Another snag: The IMF and other creditors, notably the European Central Bank and the European Commission, say Greece must cut back on services and raise taxes. Of this proposal, the deputy social security minister of Greece -- which has endured five years of austerity measures -- proclaims: "It will never pass."

3.The EU isn't enjoying this one little bit

The bailout brouhaha carries high stakes. In Greece, there's open talk of leaving the European community -- and ditching the euro -- rather than submit to demands of more austerity. A default could spell the end of ECB involvement in Greek banks, which could throw the Greek economy in a downward spiral.
As the administration of Prime Minister Alexis Tsipras sees it, the rest of Europe and the IMF have Greece under their collective thumb through harsh financing terms. Greek officials have complained that the overwhelming portion of aid coming into the country the past few years has gone to pay off loans owed to banks in countries such as France and Germany.

Tsipras assumed office in January after his radical-left Syriza party campaigned on an anti-bailout agenda. His finance minister, Yanis Varoufakis, is especially outspoken, saying in a documentary that aired in March that "clever people in Brussels, Frankfurt and Berlin" knew in 2010 that the bailout terms were too stringent and that Greece could never repay its loans.

By: Tanya Talaga Global Economics Reporter, Published on Tue Jun 02 2015

To the dismay of its European creditors, Greece announced earlier this month that it was rehiring 4,000 cleaners, school support staff and civil servants who lost their jobs due to austerity cuts.

A defiant Greek Finance Minister Yanis Varoufakis defended the move, reminding lenders that perhaps the nation of 11 million has a different idea of what constitutes “reform.”

The rehiring was cheered in the streets of Athens but Europe was aghast. Greece did exactly the opposite of what the troika of lenders — the European Central Bank, the International Monetary Fund and the European Commission — wanted, namely real pension reform, reducing the size of government and spending cuts.

No doubt, Brussels felt the slap.

But they probably knew it was coming.