Merchant of Venice Redux

July 4th, 2011
in Op Ed

Shylock by Guest Author Andrew Butter

What Worked in 1923 Germany would Taste Better than a Pound of Greek Flesh

As the bankers queue up to get served their pound of flesh, which is all that’s currently on offer, it’s hard not to notice the striking similarities between the Greece of today and Germany in 1923. Then Germany owed billions thanks to a treaty that was made in a French-speaking country along with an offer that couldn’t be refused, back then Versailles, this time Maastricht.

Follow up:

Back then government employees were demanding their wages, unions were on strike, the coffers were empty, and the government of the day chose to inflate away the problem. That is one of the options presented to Greece today; they can leave the Euro, default on the debts, and inflate away the cost of the commitments made by previous governments to unions, pensioners, and government employees.

There are two other alternatives; the first is austerity, although it’s getting harder to do the austerity thing these days, now that it’s considered politically incorrect to shoot at rioters with live ammunition, which wasn’t an issue in 1923. The other way is to sell up the assets of the country; which was an idea the French came up with when they occupied the industrial heartland of Germany in order to convince them to “honor their obligations”.

From Wikipedia:

By 1923, the Weimar Republic could no longer afford the reparations payments required by the Versailles Treaty, and on some payments. In response, French and Belgian troops occupied the Ruhr region, Germany's most productive industrial region at the time, taking control of most mining and manufacturing companies. Strikes were called, and passive resistance was encouraged which lasted eight months, further damaging the economy and increasing the expense of imports. This infuriated the French, who began to kill and exile protestors in the region.

Outside of the detail that French and German bankers can’t occupy the tourist hot-spots of Greece and kill any protestors who object, there are two problems with collecting proxies for collateral that was never offered. First the Greek state postal system probably has a negative NPV, and the Acropolis, well I know it would look great as an anchor attraction in a theme park in Düsseldorf, but you can’t be serious!!

The second is that in any case the full resources of the joke which passes for the fragmented European “defense” capability is currently engaged doing, I’m not quite sure what, or for what objective, in Libya. Although, it must be said, Germany elected not to participate in that Charlie Foxtrot…so perhaps they were saving themselves up for a spot of asset-stripping?

Everyone knows the story of hyperinflation in the Weimar Republic. Not so many know how Germany was transformed from basket-case to embark on seven “Golden Years” that lasted until the 1929 US Stock-market Crash.

In the chaos that followed the stock-market crash Hitler saw his chance to seize power; by then Germany was strong enough to go to war against the whole world. To understand how that was done you have to understand the flaw in the New-World-Order financial system.

The Flaw

When Alan Greenspan got interrogated by Congress, just after all the excitement of financial Armageddon was really starting and what seems like many-many years ago; he famously said, “We found a flaw”.

He was talking about a flaw in Econ-101 and the base-assumptions about how high-finance works (as in the stuff you smoke), which provided the base-foundation for “inflation-targeting”, “affordability”, and all the other nonsense that is still endlessly regurgitated by PhD economists.

What he didn’t say was what the flaw was.

Well it’s not a new idea, and it’s not complicated. It’s the same “flaw” that the Merchant of Venice got hammered by, which is that you can’t eat a pound of a man’s flesh, and you can’t cut out that flesh without spilling blood.

That wasn’t a new idea then either, in Islam it says something along the lines that it is dirty to profit from someone else’s misfortune, and that’s not just in the eyes of your fellow man, it’s in the eyes of God too.

Zero Sum Financial Bubbles

Financial Bubbles are all about profiting from someone else’s misfortune, that’s because they are zero-sum. In aggregate no wealth is created; for everyone who wins, someone else must loose; hence the mantra that used to be rolled out as a clever in-joke on Wall Street, “The value of something is what you can sell it for to someone dumber than you”.

If you read the history of how the financial crisis in America was engineered, right at the beginning there was this idea about the Four “C’s”. The idea there was you could forget about the minimum price you could reasonably expect to sell the assets that were put up as collateral for a loan, at some indeterminate time in the future (the first “C”), so long as you retained the option to cut out a pound of flesh.

In the build-up to the housing bubble the threat was trashing people’s credit scores; which was a threat as harsh as cutting out a pound of a man’s flesh, because the New World Order is engineered to make sure that you can’t live without your credit score.

So every time a mortgage was written the banks insisted on a valuation of the collateral, but that valuation was only required to deliver an opinion on how much the bank might reasonably expect to get from the sale of that collateral, on the day on the transaction (mark-to-market). No opinion was sought on the minimum price the collateral might reasonably be expected to sell for at some point in the future; which is what International Valuation Standards calls “Other than market value”.

The reality is that the only purpose served by the valuation, was to make sure that the buyer was not colluding with the seller to bump the price up so the buyer could get a bigger mortgage. That’s one of the other “C’s”.

Sure, it’s harder to work out Other Than Market Value than mark-to-market, and yes indeed, there are 101 ways to shoot yourself in the foot; that’s why they call it Econ-101.

In that scenario it was easy to pretend that Black is White, so that writing a 125% LTV mortgage to an unemployed drug addict, was not just plain stupid.

Story Telling

Many years ago I used to work now and then on Toxic Asset assembly lines, mainly as a freelance hired hand for Credit Suisse. My job was the “story-teller”, I was the guy who convinced the rating agencies (who weren’t very hard to convince) that the forward cash flow for the AAA tranche gave a DSCR (debt-service coverage ratio) bigger than 1.2 and that the LTV (loan to value) of the underlying collateral (mark-to-market), was less than 70%.  I never had a problem with the LTV; all eyes were always on the DSCR.

The reality was that no one cared so long as there was a good story line, and the legal work on the “Pound of Flesh” clause had been done properly.

Modern Shylocks

As we speak bankers in Germany and France are lining up in a big long queue to extract their pound of flesh from Greece. And the threat is that if they don’t get it they will trash Greece’s credit score.

And they have every right to do that, both under the Law, and from their perspective, morally, because the core of the belief-system of every atheist is that in a “free market” the law on profiting from other people’s misfortune (or stupidity), is a “Just Law”.


And sure, the behavior (in the past) of the government that racked up those debts was no different from a glazed-eyed drug addict. They lied, they cheated, and when they got the money they blew it buying election-candy and apartments for their mistresses.

Therefore “someone” should be punished. Money was lent, so money should be paid back, with interest; and if not the stupid population which voted that stupid corrupt government into power, in “democratic” elections, should be made to lie down and have pounds of flesh cut out of the part of their chest closest to their hearts, until such a time as they “learn” better.

Sounds like a plan, although I’d be more comfortable with the philosophy of the sanctity of the New-World-Order of democracy, if there was a box you could tick that said “None of The Above”. And then of course there is the stupidity of the bankers that lent the money in the first place, choosing to take the fairy-tale stories that were told to them, at face value.

"Drug" Cartels

This is how that works, all the banks in the world operate a cartel to protect each other, so if you borrow money from a moron in Bank A, and you don’t pay it back, then there is a back-to-back agreement with ALL the other banks in the world, that says they won’t lend you any money, regardless of how perfect your collateral is.

So you can’t go to Bank B to get credit collateralized by the virginity of your six-year-old grand-daughter, or something equally valuable. No first you have to pay Bank A, and then we talk.

If that’s not anti-trust and collusion to make the customers pay more, I don’t know what is? But that’s how the great New-World-Order financial system works, except for one small problem, it doesn’t work.

There’s Got to be a Better Way!

From Wikipedia:

Gustav Stresemann was Reichskanzler for 100 days in 1923, and served as foreign minister from 1923–29, a period of relative stability for the Weimar Republic, known in Germany as Goldene Zwanziger ("Golden Twenties"). Prominent features of this period were a decrease in civil unrest and improved economic conditions.

Stresemann's first move as foreign minister was to issue a new currency, the Rentenmark, to halt the extreme hyperinflation crippling German society and the economy. The currency was based on land and industrial infrastructure, and it restored confidence in the economy. Once the economic situation had stabilized, Stresemann could set about putting a permanent currency in place, called the Reichmark (1924) which again contributed to the growing level of international confidence in the German economy.

The important point there is that the new currency was collateralized by land and by other tangible assets. In the case of Greece, a step away from the abyss would be to issue new debt, collateralized by tangible assets.

But what assets have they got?

And at the Bottom of the Rap Sheet - Tax Evasion

Well Greece’s biggest industry and major source of foreign exchange is it’s tourism industry, which coincidentally also provides the main conduit that Greeks and foreigners investing in Greece use to avoid paying tax, which is one of the reasons Greece got into the mess in the first place.

The way that works is that when you sell a holiday to a German for $2,000 which includes for supply of airport transfers, a nice hotel room with a sea-view, and full board, you “sell” that service and the room to your relative or whatever in Germany for $500 and you cleverly manage to make a small operating loss on your hotel (in Greece), so you don’t pay any tax in Greece.

And you don’t pay much tax in Germany either, because you spend the $1,500 that the Greek tax-man doesn’t know about on the cost of employing your relatives to “market” the holiday in Germany, and then you can slip the nice clean crisp Euro’s back into Greece so that you can live in the style to which you have been accustomed. And it’s not just the Greeks who work that scam, lots of Germans do too.

It’s not hard to stop that. Just impose a tax on hotel rooms, depending on the category, and if the taxes don’t get paid you simply confiscate them and put them into a pool to securitize the debt.

That’s not nice, but someone has to pay taxes, sometime, and a good place to start on that, is to go after the people who can afford to pay them. And for collection, well you could put all the recently retired civil servants on commission.

Related Articles

U.S. and EU Debt Crises Compared by Andrew Butter

Will Greece be Colonized? by Dirk Ehnts

Greece: No Deal Without a National Referendum by Michael Hudson

EU: Politics Financialized, Economies Privatized by Michael Hudson

Could Ireland Follow Iceland? by L. Randall Wray

Bank Capital is Illusory by Raihan Zamil

U.S. Empire – State of the Nation Report by Elliott Morss

The Rough Politics of European Adjustment by Michael Pettis

About the Author

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary research and building econometric models, clients included Bechtel, Unilever, BP, Honda, Emirates Airlines, and Dubai Government.
Split up with partner in 1995 and re-started the firm as ABMC mainly doing strategy, business plans, and valuations of businesses and commercial real estate, initially as a subcontractor for Cushman & Wakefield and later for Moore Stephens. Set up a capability to manage real estate development in Dubai and Abu Dhabi in 2000, typically advised / directed from bare-land to tendering the main construction contract.
Put the unit on ice in 2007 in anticipation of the popping of the Dubai bubble,defensive investment strategies relating to the credit crunch; spent most of 2008 trying to figure out how bubbles work, writing a book called BubbleOmics. Andrew has an MA Cambridge University (Natural Science), and Diploma (Fine Art) Leeds Art College.


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1 comment

  1. roger erickson Email says :

    Fantastically entertaining and witty article, with many useful points and inferences.

    Only problem, the author skips over the greatest asset of all. Human ingenuity, or what statisticians call "return-on-coordination." It's especially ironic to see this disconnect in the case of Greece, birthplace of historically stunning intangible assets. Everyone from Socrates to Archimedes must be laughing in their graves at people capable of seeing only the tangible assets of Greeks.



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