Tuesday, January 23, 2018

Book Review: Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America by Danielle DiMartino Booth

Harsh critics of the Federal Reserve come to their views from different perspectives. There are the libertarians, such as Ron Paul who wrote the 2009 book, End the Fed; there are the hard money types who are critical of fiat money; and there are those on the left who view the Fed as part of a capitalist conspiracy to enrich the financiers and impoverish the working class. Most of the people espousing such views seem to have a rather fragile grasp of how a modern economy and its banking system work. At times, even some prominent economists seem confused about the mechanics of the monetary and banking system, as I discovered early in my career while studying Eurodollars.
Most people only have a dim understanding, if that, about the nuts and bolts of monetary policy.   Moreover, it is a subject of vehement debate among economists and policymakers on how to formulate the correct monetary policy in the face of different economic conditions. If you ask Paul Krugman what the Fed should do, you’ll get one answer; if you ask John Taylor or Martin Feldstein, most of the time, you’ll get a different answer.
There is no reason to believe that Danielle DiMartino Booth, a former Federal Reserve Bank of Dallas employee, does not understand the mechanical aspects of monetary policy, but her ability to make a cogent monetary policy argument is lacking based on the evidence in her book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America. The book’s title is perhaps hyperbolic; she is not advocating to end the Fed but to reform it. Among her suggestions: redraw the Federal Reserve Bank District lines so that they “better reflect America’s economic powerhouses,” such as California; reduce the terms of Federal Reserve governors to five years; give all Federal Reserve Bank presidents a permanent vote on the Federal Open Market Committee (“FOMC”); and “slash the Fed’s bloated Research Department.” Of course, none of this is likely to happen, and the idea of the Federal Reserve Bank presidents able to outvote the governors (there are seven governors when the Board is at full strength and twelve presidents, of which five have a vote at any one time on the FOMC) is particularly problematic. The Federal Reserve Bank presidents are not federal government employees, nor are they appointed by the U.S. President. (They are though approved by the Federal Reserve Board.) Having representatives of the private sector directly involved in deciding on government policy with respect to interest rates and the money supply raises, it has been noticed, Constitutional questions which so far have been ignored or dismissed by courts for lack of standing of potential litigants. But the issue would be more vigorously debated if the FOMC were to outvote the governors, especially if that happened often. But Booth’s proposal is not going anywhere, and the FOMC will likely continue to operate as it has without significant challenge.
Booth believes that the Fed under Greenspan, Bernanke, and Yellen has been too loose, and she is particularly critical of the quantitative easing programs. While she argues that this has had terrible effects, she is not clear what these effects are or why she thinks this. A perusal of FOMC transcripts shows that a man she clearly admires and for whom she worked, Federal Reserve Bank of Dallas President Richard Fisher, was continually worried about QE causing inflation. He has been wrong, a fact that Booth does not discuss. One can argue that QE has not been that effective, since large increases in the Federal Reserve’s balance sheet did not lead to large increases in the money supply (M2), but given the aversion of Congress to do more than it did in providing fiscal stimulus, what choice did the Fed have but to do what it could? One senses that Booth is not in favor of fiscal stimulus because of fear of federal deficits. A tighter monetary policy and less federal spending would have been a disastrous combination of policies to counter the Great Recession.
At one point, Booth blames Fed policy for income inequality. She does not explain how she thinks monetary policy plays a role in that. Part of the problem is that she seems to think monetary policy is all that matters when it comes to economic policy. Tax policy, regulation, fiscal policy, international trade agreements, and various government programs all have their role, which she generally ignores. As for growing income inequality, there is no consensus among economists why this is occurring. For example, there was a focus on this issue at the IMF-sponsored seminars at its recent annual meeting. It was clear from those seminars that there is confusion among economists as to the causes of growing income inequality, which is not just a U.S. issue.
Booth is on firmer ground when she criticizes Federal Reserve supervision of financial institutions. It has at times not been as rigorous as it should be, and the Fed missed and did not address the increasingly risky behavior taking place in the buildup to the financial crisis. Other regulators, such as the Office of the Comptroller of the Currency and the SEC, also did not use their authority to address the increasing risks.
With respect to regulation, Booth makes a major factual error early in the book when she states that collateralized debt obligations (“CDOs”) were not regulated because they were derivatives. In fact, CDOs are securities over which the SEC has jurisdiction. It is true that derivatives, such as credit default swaps, are not securities and these instruments prior to the enactment of the Dodd-Frank legislation, were not directly regulated; however, many of the financial institutions making markets in or using these derivatives were regulated. The SEC should have used its regulatory authority to address the inflated credit ratings of some of the tranches of CDOs, and the bank regulators should have used their regulatory authority to rein in the banks. Also, the Fed should have used its authority on mortgage lending to address the abuses that were occurring, but Greenspan famously rejected doing so.
While I am highly critical of this book, it is fun to read. The author writes well, and her criticism of Fed culture which tends to suppress ideas that do not coincide with the internal consensus likely has some merit. Her recounting of her experience working at the Dallas Fed are interesting, though she does go overboard in her criticism of economists who have Ph.Ds. I think she does have a point about the consensus culture of the Fed (though it may be exaggerated for effect) based on my years of working at the U.S. Treasury, which included working with Fed staff, but I also think Fed economists were right in rejecting her ideas as well as those of Richard Fisher. 
Finally, there is a useful debate about whether and how the Fed should react to asset bubbles. A particularly egregious failure of the Fed was not to recognize that a housing bubble, partly fueled by reckless mortgage lending, was occurring before the financial crisis. It was obvious, if the severe fallout that would occur when the bubble burst was not. At the time, Fed economists minimized what was happening and argued that any local, frothy housing markets did not pose severe risks to the U.S. economy. Examining this failure as well as considering the Fed’s responsibilities concerning asset bubbles when inflation is contained is worthwhile. Unfortunately, this book does not do that. Though the Fed did some things that I would criticize to pull the country out of the Great Recession, overall, I would give the Fed high marks. Booth would not. The main problem with Fed policy was prior to the financial crisis, and the groupthink that Booth criticizes contributed to that.

Monday, December 11, 2017

Book Recommendation: Nothing to Envy: Ordinary Lives in North Korea by Barbara Demick

I recently read Nothing to Envy: Ordinary Lives in North Korea, a 2009 book by Barbara Demick. It focuses on six defectors and is a harrowing account of daily life in North Korea, especially during the devastating famine of the 1990s. The book is well-written and reads like a novel. The author states that she modeled the book Hiroshima by John Hersey, who was a professor of hers at Yale. 
This book is not a political analysis of the current problems the world has with North Korea. It is, however, a devastating portrait of life under a totalitarian regime. The author does not offer much hope that this regime will end soon. Reading Demick's book is a reminder that totalitarianism is not something that only occurred in the past. It is also a stark reminder of the power of propaganda, especially when information is controlled.
The control of information by the North Korean government and its chaperoned visits for journalists makes reporting on North Korea extraordinarily difficult. The author therefore chose to interview defectors. This prompts the criticism that defectors have biases which skews their accounts of life in North Korea. However, Demick seems to have chosen well the six defectors whose stories she recounts. One woman in particular was a true believer in the North Korea regime and only changes her mind during the famine and then, even more so,  after being tricked by her daughter into defecting to South Korea. 
The recounting of the famine of the 1990s is particularly disturbing and detailed. Most readers will probably not have been aware of the extent of the devastation and deaths it caused.
As for unifying the Korean peninsula, there would be difficulties. The two Koreas have grown apart, and the costs to South Korea would be enormous. The economic disparities between the two Koreas is much greater than the differences between West and East Germany prior to unification. Also, the hardships of living in North Korea has caused there to be noticeable differences in the physical appearance of those living in the North and the South.
In an afterword written in 2015, Demick writes: “North Korea watchers debate whether conditions inside the country are getting better or worse, or even changing at all. What is not in doubt is that the government still goes to great lengths to deceive foreign visitors.” It is perhaps time for Demick or some other journalist to write a new book about North Korea.

Monday, November 27, 2017

The Consumer Financial Protection Bureau Leadership Dispute

Today (November 27, 2017 the Consumer Financial Protection Bureau (“CFPB”) has two persons claiming to be the Acting Director. One is a career civil servant, Leandra English. She had been chief of staff to the previous director, Richard Cordray. He promoted her to be Deputy Director on Friday before abruptly resigning. She rests her claim on a provision of the statute creating the CFPB. Following that on Friday, the White House announced that President Trump had appointed Mick Mulvaney, the OMB Director, to be Acting Director of the CFPB (he is not leaving his OMB position). The White House and the Office of Legal Counsel of the Justice Department argue that the Federal Vacancies Reform Act of 1998 provides the President the authority to do this, no matter what the specific statute creating the CFPB says. The General Counsel of the CFPB, Mary McLeod, issued a memo to CFPB staff on Sunday stating she agrees with the Justice Department opinion and that staff should consider Mulvaney the Acting Director. Also, on Sunday, English filed a lawsuit against President Trump and Mulvaney in the U.S. District Court of the District of Columbia claiming that they were attempting to deprive her of her rightful position at the agency. 
Those wanting to read legal arguments and opinions about who is right in this dispute need to go elsewhere. What I want to do in this post is to raise some issues and questions that I do not think have been adequately focused on in news reports about this dispute.
First, there is some mystery about what Cordray and English are thinking.
·       Why did Cordray suddenly move up his resignation date one week and announce his departure and the appointment of English on the day after Thanksgiving (a holiday for many but not for the federal government)?

·       Why did Cordray not prepare the way for English to assume the Acting Director position by assuring himself that she would have the support of the CFPB General Counsel. Mary McLeod was appointed by Cordray; if he had discussed this with her and found he disagreed with her opinion, he could have appointed someone else General Counsel before he left. While his departure was abrupt, it was in the works for some time, and, in any case, he would have had to leave next year when his term expires.

·       What do Cordray and English hope to accomplish by this dispute? After all, Trump can nominate someone to his liking to head the agency, and barring someone clearly unqualified, the Republican-controlled Senate will vote to approve the choice. That person can undo whatever actions a temporary director has taken and much else besides.

·       Prior to Friday, the acting Deputy Director of the CFPB had been David Silberman. Why had Cordray not acted in the past to remove the “acting” from his title? One possible explanation for choosing English over Silberman is that Silberman had no appetite for the inevitable legal dispute. Silberman is still at his job at the CFPB as Associate Director for Research, Markets, and Regulation. No matter how the current legal dispute is resolved, English will almost certainly not be an employee of the CFPB in a few months. Perhaps she was willing to take on this thankless role because she planned to leave or retire from the federal government in any case.
These issues indicate that there is much about this bizarre episode that is not in the public domain. Probably some staffers at the CFPB know what it is, but there are likely few, if any, reporters who have cultivated sources at the agency sufficient to get leads as to what is really going on.
As for the Trump Administration, there is some mystery too.
·       Why did they choose to wage this high-profile fight, since they will in a relatively short time be able to get their own person in as Director of the CFPB? What is it they hope to accomplish by this maneuver?

·       Their legal case is not a slam dunk. They may prevail in court, but, if they lose, they may have established a precedent that could prove troublesome for them and successive Administrations. Why do they think this legal dispute is worth having the courts resolve over this particular agency, since their risk of losing is hardly minimal?

·       Politically, the Democrats will naturally claim that this shows that the Administration sides with banks and not the consumer. The Administration’s action highlights the role of this agency, including going after Wells Fargo and its establishment of accounts for its customers that they did not ask for or want. If the Administration wants to ease up on banks, it would seem politically expedient to do this quietly, not nosily as they are now doing. What does the Administration hope to gain by making all this noise?
Perhaps, the Administration is being politically incompetent, which, given its record so far, is not a surprise. But the questions about Cordray suggest that there is something going on that has not been made public. I am curious what it is we don’t know about this bizarre situation. 

Book Review: “A First-Class Catastrophe: The Road to Black Monday, The Worst Day in Wall Street History” by Diana B. Henriques

On October 19, 1987, the stock market crashed, with the Dow falling by 22.6%. I remember the day well; I was a speaker at a conference on new, proposed government security market regulations in New York at which senior SEC officials also spoke. At each break, the news about how much the market had fallen got progressively worse. Most of the conference attendees remained, since they were for the most part accountants and compliance officials at Wall Street firms, but the SEC officials started disappearing.  When I returned to Treasury the next day, my colleagues joked that I must have given one hell of a speech the previous day.
Diana Henriques has written a book about this stock market crash, which has been eclipsed by more significant, subsequent events. She argues that we failed to learn the lessons from the crash and that the regulatory laxity that led up to it was not corrected. The book has earned some praise, and it is obvious that a great deal of research went into it. While reading it, I was reminded of events I had not thought about for quite some time.
Nevertheless, the book is frustrating to read. The author, perhaps not wanting all her research to go to waste, discusses a lot of financial events and disputes without drawing a clear link to the ostensible subject of the book, the 1987 stock market crash.
An example of this is the aforementioned government securities market regulation, a subject I was very involved with as a Treasury official both while the Government Securities Act (“GSA”) of 1986 was being written and considered by Congress and during the writing of regulations (I wrote the capital rules mandated by the legislation). It is hard to see what the problems in the government securities repo market, which led to the enactment of the GSA and which the book discusses, had to do with the stock market crash. Also, annoyingly she criticizes the GSA as a weak measure. In fact, it has been a success by bringing regulation to firms which had not been previously regulated and likely causing other firms which did not for whatever reason want to face regulatory scrutiny to close up shop. The author is also wrong in saying that “the whole statute would expire in five years unless Congress renewed it.” What expired was Treasury’s rulemaking authority, not the legislation nor the regulations that had been previously issued. Because of the Salomon Brothers Treasury auction bidding scandal, Treasury’s authority did lapse. However, Treasury’s response to the Salomon Brothers episode, including promptly alerting the SEC when we had discovered what had happened, was appropriate. In the end, the Treasury’s authority was renewed and the GSA was strengthened in certain areas.
It would be a real stretch, though, to argue that all this has anything to do with the stock market crash. The author seems to think that this is evidence of regulatory laxity, which it isn’t, and that regulatory laxity led to the crash. 
The book also discusses over-the-counter (“OTC”) derivatives. Whether or not the Commodity Exchange Act (“CEA,” the statute the CFTC administers) applied to OTC derivatives was hotly debated among the futures exchanges, investment and commercial banking firms, the Treasury Department, the banking regulators, the SEC, the CFTC, and Congressional committees. The law was unclear, and the legal debate was motivated by both policy positions and turf interests. What the author misses is that certain OTC derivatives, those that were arguably futures, would not have been subject to CFTC regulation if the CEA applied but would be illegal contracts without the CFTC having any ability to change that. The universe of potentially illegal contracts was narrowed with amendments to the CEA as time went on. But, again, what does any of this have to do with the stock market crash? 
Henriques is more on point when she discusses stock index futures. Clearly, portfolio insurance using stock index futures played a significant role in the stock market crash. Stock index futures were and are subject to regulation by the CFTC; while the stock market itself is of course subject to SEC regulation. I have long thought it would be preferable for the two agencies to be merged, but I am not at all certain that a merged agency would have prevented the crash. What triggered the panic on October 19 is unclear. One can argue that the stock market had been overvalued prior to that date in 1987 and a needed correction was in order (if not such a quick one). It is hard to see how regulators would address an overheated market, and it is even harder to see regulators, whatever agencies are involved, taking regulatory actions to make a market fall. 
Given all the financial market issues the book discusses, the lack of any discussion of the eventual legislative proposal of the Treasury Department in the George H.W. Bush Administration is mystifying. The Treasury advocated that stock index futures regulation be transferred from the CFTC to the SEC. Quite a bit of effort was made to push this proposal in Congress, and the SEC was naturally on board. It failed, because the policy arguments against it were strong as were the opponents to this proposal. The problem with the policy is that all exchange-traded futures contracts, no matter the underlying “commodity,” share basic similarities, are traded on the same exchanges, and are cleared and netted by the same clearinghouses. Having different regulations issued by a different agency would have unnecessarily complicated regulatory compliance and burdens. The futures exchanges were naturally opposed. It would have made more sense to propose merging the two agencies, but that was (and still is) politically impossible. Henriques could have usefully discussed this issue in depth.
Finally, there is a reason that the stock market crash of 1987 has receded from memory. The feared collapse of the economy did not happen. While it is true that it took some time for the market top in 1987 to be reached again, the stock market did recover. In short, while the crash highlighted market vulnerabilities and regulatory shortcomings, the book makes too much of this event. Yes, it was scary, but its significance pales to what later happened in 2008.   
As for regulation, while I do not agree with some of her criticisms of regulation and wish she had studied the facts more closely, I agree that the regulatory structure could be improved. A major failure of Dodd-Frank was the lack of rationalizing the regulatory structure to make it more effective. There are too many banking regulators, and the somewhat arbitrary division of responsibilities between the SEC and the CFTC does not make much sense. 
The author could have usefully discussed various proposals to address the regulatory structure and also could have addressed what I have observed in more than one agency to be a serious problem – regulatory capture. There is no easy solution to regulatory capture, but I submit that it is more of a problem when there are competing regulators who focus on one type of financial institution.
The book is well-written, and the stories told are interesting. However, for those with some knowledge of what the book discusses, it is in the end disappointing both for its hasty judgements on some issues and for the lack of a coherent and convincing argument about what the market crash signifies and what its implications for policy are going forward.

Thursday, November 9, 2017

Proposed Fee Increases at 17 National Parks

The National Park Service is proposing increasing fees at seventeen national parks. They are:  Acadia National Park, Arches National Park, Bryce Canyon National Park, Canyonlands National Park, Denali National Park, Glacier National Park, Grand Canyon National Park, Grand Teton National Park, Joshua Tree National Park, Mount Rainier National Park, Rocky Mountain National Park, Olympic National Park, Sequoia and Kings Canyon National Park, Shenandoah National Park, Yellowstone National Park, Yosemite National Park, and Zion National Park.

The proposed fee increases are significant. For example, at Shenandoah National Park, the fee per passenger vehicle is currently $25. This would increase to $70 during the peak season (June-October). An annual pass to the park, which currently costs $50, will increase to $75. (More details about the proposed fees for this and the other parks can be found in a NPS pdf document that can be downloaded here.)

Timothy Egan wrote about a week ago why he opposes these fee increases in a column for The New York Times. People who wish to submit comments to the NPS can do so online or by writing a letter. The address for physical letters is in the document linked above. Online submissions can be submitted here. Note that the comment period ends November 23 at 11:59 PM Mountain Time. (For some reason, the NPS chose Thanksgiving Day for the end of the comment period.)

I am opposed to these fee increases. Below is reproduced my comment to the NPS about this.

I write to urge you not to implement this proposal to raise fees for certain national parks but rather to seek other revenue sources for needed maintenance and upkeep for all of the national parks. One of the great assets of our country is its natural beauty, and the U.S. government has acted to conserve some of the most beautiful areas, beginning in 1872 with the establishment of Yellowstone National Park, as national parks for current and future generations. Charging the high fees which the National Park Service is proposing will limit the ability of all except the affluent to visit the national parks to which they apply. The national parks were not established for the enjoyment of just the richest of our citizens. They are owned by all Americans, and pricing should not be so high as to limit the ability of all but the affluent to enjoy the parks.

With respect to the Washington, DC area where I live, it is not at all clear that hiking the fees for Shenandoah National Park will result in much of a revenue increase. It will lead to enforcement issues, since there are ways to access this park without driving on Skyline Drive. Moreover, many may decide to make more excursions to the mountains in George Washington National Forest on the other side of the Shenandoah Valley rather than paying $70 per vehicle to enter Shenandoah National Park.

To take another example, Rocky Mountain National Park is certainly a beautiful place, but there are other beautiful places in Colorado. The proposed fees will certainly limit the number of visits to Rocky Mountain National Park.

Also, while there may be legal reasons why some national parks do not charge fees, there is no offered public policy reason why vehicles entering Shenandoah National Park should be charged $70 during the peak season while vehicles entering Great Smoky Mountains National Park on the other end of the Blue Ridge Parkway should be charged nothing. Since, according to the proposal, 20 percent of the collected fees at the parks charging a fee will go to other parks, it is not explained why visitors to certain parks should subsidize the financial needs of parks not charging a fee. 

Finally, I note that as a holder of a Senior Pass, I am not directly affected by this proposal. However, I urge you not to implement these proposed fee increases not out of self-interest but because they go against some of the purposes for creating the national parks in the first place. In short, this proposal is bad public policy.

Update (11/21/2017):The NPS has extended the deadline for comments on the fee increase to December 22, 2017 (23:59 Mountain Time). If you care about this, please comment. As the reversal on elephant trophies demonstrates, the Trump Administration is not impervious to criticism of its proposed actions.

Monday, September 11, 2017

A Note on the Latest Debt Limit Legislation

Many of the news articles and commentary on the legislative deal that President Trump made with House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer implies that the new deadline for increasing the debt limit is in December of this year. What the legislation that was enacted actually does, though, is suspend the debt limit until December 9, when the new debt limit will be set at the amount of public debt subject to limit on that date. The Treasury is precluded from borrowing to increase its cash holdings above “normal operating balances” in anticipation of this deadline.
Note though that Treasury has been able to meet its obligations even though the debt limit has been frozen since March 15, the end of the last suspension period. It has been able to free up borrowing room while staying in compliance with the debt limit by the use of “extraordinary measures.” The Treasury described these measures on March 16.
These measures will now be reversed and will be able to be reactivated on December 10 if the Congress has not increased the debt limit. There are a couple of things worth noting about this.
First, this is a relatively new way for Congress to deal with the debt limit. Prior to using the suspension measure, Congress would increase the debt limit by an amount which it estimated would give Treasury the desired time before it needed to come back to Congress for another increase. The suspension method makes it unnecessary to do any estimation of borrowing needs.
Second, the date for which the debt limit needs to be increased to avoid default does not coincide with the date for which the continuing resolution provides funds for government spending. The date for which the legal authority for the government to spend money ends is December 8. If Congress does nothing, there will be a government shutdown in December, but the Treasury will be able to avoid default for some time after that. (An article in Business Insider speculates that Treasury might be able to manage without an increase in the debt limit until next summer.)
This second point has been missed by much of the political commentary on the deal. Contrary to much of the political commentary, the debt limit may not be a political tool for the Democrats at the end of this year, but it may provide them leverage at some point next year.
Of course, the reason the debt limit provides the Democrats with political leverage is that the Republicans do not have the votes, even in the House where there is no filibuster, to pass an increase in or suspension of the debt limit on their own. They need Democratic votes, because there are Freedom Caucus members who will not vote for a debt limit measure without it containing politically unacceptable provisions. In other words, the political tactics of the Freedom Caucus give Congressional Democrats more legislative power than they otherwise would have.

Tuesday, August 8, 2017

Book Review: “Adults in the Room: My Battle with Europe’s Deep Establishment” by Yanis Varoufakis

I recently read the UK version of former Greek finance minister Yanis Varoufakis’s new book: Adults in the Room: My Battle with Europe’s Deep Establishment. The U.S. version will be available for purchase on October 3. It has a different subtitle, apparently to attract American readers: “My Battle with the European and American Deep Establishment.” I assume it is the same book with perhaps some punctuation, spelling, and some words changed to reflect American usage. Also, I should mention that the U.S. title is somewhat misleading since, while U.S. officials play a role in the book, most of it concerns negotiations with European and IMF officials and disagreements among Greek officials. 

Yanis Varoufakis writes that many of his counterparts agreed that the austerity measures imposed on Greece were counterproductive, but were not willing to say that publicly. The reason is that too much austerity slows growth, and therefore the ability to pay down the country’s external debt. Moreover, in support of his negotiating stance, Varoufakis says he was not willing to play the hypocritical game of his predecessors and Greece’s creditors, which at this point, were the European Union, the European Central Bank, and the IMF.  He calls it “extend and pretend.” The loans the so-called troika (the above-named creditors) made to Greece were essentially used to service the debt and refund maturing debt. The money was not Greece’s to spend on development. But the debt burden did not go down; actually it increased as a percentage of Greek’s GNP, as growth rates became negative. Because of this, Varoufakis argues, Greece was essentially always having to take orders from the troika, because there was no way out of the debt. 

Another problem is that Greece could not devalue its currency because it had joined the Eurozone, and consequently did not have a helpful central bank. In fact, as Varoufakis says, Greece’s adopting the euro was a mistake, but he contends that it does not follow that Greece should exit the euro and establish its own currency. The pain would be too great. However, Varoufakis was prepared to do that if he could not get debt relief of some sort from the troika. It was not his preferred outcome. 

Varoufakis is surprisingly somewhat sympathetic to his chief antagonist, Wolfgang Schäuble, the formidable German finance minister. At one point, in a private meeting, he asked Schäuble whether he would sign the agreement the Eurogroup, which is composed of the finance ministers of the Eurozone countries, was pressing him to sign if he were in Varoufakis’s position. Schäuble said no, because it would hurt the Greek people, but he had no real solution for the impasse the two were in. Schäuble’s preferred solution was for Greece to leave the Eurozone and for Germany and likely other European countries providing substantial financial resources to ease the transition. Varoufakis was willing to discuss this, but Schäuble could not, because he did not have the authority to propose this from German Chancellor Angela Merkel.

Ultimately, Varoufakis was not able to pursue his negotiating strategy to the end, which included setting up a parallel payment system using the Greek tax authority and threatening to haircut the bonds governed by Greek law held by the ECB, which would cause the ECB legal problems with some of its other activities. The Greek prime minister, Alexis Tsipras, decided on holding a referendum on whether to accept the terms of the troika for a new loan. In Varoufakis’ telling, Tsipras and others in his cabinet were hoping for an affirmative vote in order to have an excuse to accept the terms. The Greek voters, though, provided a convincing no in the referendum. The Greek government then decided to ignore the voters and proceeded to accept the troika’s terms. Varoufakis resigned as finance minister.
There is a lot of interesting detail in the book. One that particularly stands out to an American reader concerns a telephone call between Varoufakis and Jeffrey Sachs, an American economist who, among others, was providing advice to Varoufakis. In the call, Varoufakis told Sachs that he thought “Alexis means it this time. The next payment to the IMF will not be made [if the troika did not “release some liquidity].”  A half hour after the phone call ended, Sachs called Varoufakis back, “laughing uncontrollably. ‘You will not believe this, Yanis…Five minutes after we hung up, I received a call from the [US] National Security Council. They asked me if I thought you meant what you said! I told them that you did mean it and that, if they want to avert a default to the IMF, they’d better knock some sense into the Europeans.’” As Varoufakis comments, it is amazing that U.S. officials were this brazen in admitting that they were tapping Varoufakis’s phone.
Varoufakis’s book is more candid, some would say indiscreet, than most books by senior government officials. He does not hold back in this criticisms of many of his counterparts in European governments and in the Greek government. He does have some nice things to say about Emmanuel Macron, then French economic minister and now the President of France. However, Macron, while sympathetic to what Varoufakis was trying to do, could not convince then French President François Hollande to be more helpful.
Future writers about this period, especially the government and international officials involved in the Greek debt negotiations, will have to address Varoufakis’s narrative and analysis. When they do, we may have a more complete understanding of what happened. In the meantime, those interested in Greece, international monetary affairs, or the future of the European project should read this engrossing and well-written book.