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Forbes: Now, part of making that happen is the word “leadership.” Where in the world is leadership in Europe, where somebody steps up and says, “Hey, let’s get realistic about this and restructure”? And, as you say, have a pro-growth strategy so the borrower can maybe pay you back.
Rhodes: Well, I think they’ve wasted 18 months because it was very apparent right after Papandreou became the prime minister [of Greece] at the end of 2009 that they had a major problem with the books. And they took until May – the EU and the IMF – to come up with a program. By then, the markets were becoming very concerned. And today the markets, as you know so well, operate in nanoseconds. It’s not like it was in the early 1980s when we dealt with the Latin American debt crisis. You can’t fool the markets. So the markets started to move against not only Greece, but other countries. And I kept warning the policy makers about contagion.
This is a word we learned in Latin America, relearned again in Asia in the financial crisis in 1997-’98, and the European policy makers didn’t buy off on it.
Forbes: Sort of a domino theory.
Rhodes: Exactly. Pretty soon we had both Ireland and Portugal, with the attempt to try and ring-fence Spain. And a few weeks ago you saw the problems in Italy. So I think that finally forced the politicians, the heads of state in Europe, to get together and put together some program. But a lot of time was wasted. Paul Volcker taught me that early on in the debt crisis when he ran the Federal Reserve – that the clock is always running against you.
Forbes: You look at Greece, which is still all austerity – they talk about privatization, but it’s one thing to say it and quite another to make it happen. Why don’t they put in a flat tax, as their neighbors like Albania and Bulgaria have done, which makes tax collecting very easy?
Rhodes: Well, I think that’s something that they definitely ought to look at, because the present system isn’t working. People aren’t paying taxes. And it’s now been aggravated by three years of negative growth. So I think this is something they definitely ought to take a look at.
As far as privatization, they have to move on it, because otherwise this program that they had this big battle over a few weeks ago with the parliament in Athens won’t work.
Forbes: Just one little story, I was in Greece a month ago and there was a conference. And they had the minister from Poland, which has done a very successful privatization in the last two years – 500 companies, including several billion-dollar ones.
Rhodes: Right.
Forbes: He was there. He outlined what they did, fascinating, and then he, in exasperation, said, “Why isn’t anyone from the Greek Government here talking to us on how we did it?” What they can learn – making something like that work – gets to your point. Let me ask a broader question. First, on Britain: Yes, they’re doing austerity, but they’ve also been, except for a little bit on the corporate side, raising taxes as well. Are they making sort of the same mistake? Too much austerity, not enough room for growth?
Rhodes: Well, they’ve got to get some growth. And as you know, they had minimal growth –
Forbes: Yeah. You need a microscope.
Rhodes: 0.02% this last quarter. And I think for that program to succeed, they’ve got to make some changes there because there’s no doubt they’ve got to reduce the deficit.
Forbes: Right.
Rhodes: But at the same time that they reduce the deficit, they’ve got to make sure they get growth. So now the pressure is going to be on the Bank of England again to do a quantitative easing. And of course inflation is 4+% and the Bank of England doesn’t want to do it. They’ve got to come up with some formula where they can reduce the deficit over time, but also get some growth.
Forbes: This leads to a broader question, and that is: Why are banks always buying government debt?
Rhodes: I think that’s a good question. Because they basically think it’s safe.
Forbes: They should read your book.
Rhodes: Exactly. One of the things, again, Paul Volker taught me, he said, “You know, Bill, the problem with bankers is they have a big crisis, they manage to get through it, and then within ten years, it’s back on them.” And of course what I always say is, “With investment bankers it’s usually five years.”
I think part of that was one of the reasons, actually, that I wrote the book – so that you have the lessons learned the hard way, Latin America, Asia, and other areas. Turkey, all these other areas. And when we have these problems, we learn from them. The learning lesson is hard because Europeans didn’t want to be compared with the Latin Americans or the Asians. And here in the United States, we’re sitting with our own big problem.
Forbes: Do you think the Basel Accords have anything to do with it – in terms of, now that they try to rate your capital that government, it’s always AAA or near AAA, so they did more than they would have if they weren’t under those pressures?
Rhodes: Well, actually, I think it’s even more than that, Steve, because the head of the Basel Committee will tell you that these are the minimal standards vis a vis capital. In other words, they’re saying this is a base, and if your individual country wants to add onto that, they can do so. And I think we’re going from a situation here where people felt the supervisors and regulators didn’t utilize the laws on the books three years ago in the great recession, to now they want all of this new regulation and additional capital and we’ve got to be very careful we don’t cut off lending.
So I think you’ve got to be reasonable. What you want is regulation, but smart regulation, not excess regulation. And that is properly implemented by the supervisor. That’s what you need – not just stacks and stacks of regulation and increasing capital, capital, capital.
Source: forbes.com
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