Back to the 1930s?

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I did a Google search for “paymaster Germany.” I got over 34,000 hits. They refer mostly to the Eurozone crisis over Greek government debt, and the German government’s willingness to tax Germans in order to keep bailing out the Greek government.

I got the phrase from a pro-gold standard German economist, Paul C. Martin. He wrote a book with this title in 1991. Its subtitle is as relevant today as it was two decades ago: “Thus they dissipate our money.” When he wrote “they,” he meant “German politicians.” The phrase has stuck. It is correctly being applied to the on-going program of the Merkel government to provide fresh injections of government money – taxpayers’ money – into the Greek government, so that the government can pay 70% per annum to investors.

We are told that German voters oppose these bailouts. But the voters have no clout. The big German and French banks that loaded up on Greek government bonds are at risk of huge losses, and the bankers have the upper hand with Angela Merkel. When publicly speaking about further Greek bailouts, “her lips say ‘no, no’ but her eyes say ‘yes, yes.'”


Americans saw a similar capitulation of Congress to the big banks in the fall of 2008. The big banks wanted a $700 billion bailout from the government. It was called TARP: Troubled Asset Relief Plan. The bankers enlisted Treasury Secretary Hank “Goldman Sachs” Paulson to make their case to Congress.

Paulson was a master salesman. He told the leaders in Congress that a banking collapse was just around the corner. Congress just had to pass TARP.

House Minority Leader John Boehner bought it: hook, line, and sinker. He delivered his deservedly famous “mud sandwich” speech to the House of Representatives on September 29. This was an eloquent call by a senior politician to vote against the express wishes of the voters. Emails against the TARP bailout were running ten-to-one against the bill, but Boehner pleaded with his fellow House members to vote for TARP.

“These are the votes . . . these are the votes . . . that your constituents sent you here to decide on their behalf.”

The words “on their behalf,” really meant “against their express wishes.” The words meant this: “Congress knows what’s good for the voters: a $700 billion line of credit for the big banks.”

I have posted the video of his speech, along with a marvelous music video, “I Want Some TARP,” here.


The modern bank run is not like the runs of the early 1930s, where depositors lined up in front of a bank to withdraw their money in cash. It is much more subtle. Big depositors refuse to roll over their short-term deposits. There is no long line. There is simply a memo: “We do not intend to roll over our existing account. Please wire our funds to our home bank.” No, muss, no fuss – except inside the meeting room of the bank that receives the memo.

There is a major problem. The home bank of the investment fund that sent the memo may have received a similar memo from another investment fund. There is an international daisy chain of debt among the big banks. No one knows which banks will be left standing. Think “Wachovia.”

The threat facing the European Union (EU), the European Central Bank (ECB), and the European Monetary Union (EMU) is the European Daisy Chain (EDC). Greece is the weakest link in this daisy chain of debt. When Greece defaults – it is not “if” – the daisy chain will be broken. Big banks will find that their Greek bonds are dead instruments. There will be no more interest payments. There will be no market to unload these now-worthless IOUs onto some other even more stupid bankers.

Investment fund managers will take note of the dilemma of specific big banks. They will send the memos.

The dominoes will begin to fall. Think “Credit Anstalt Bank, 1931.”

The threat is the refusal to roll over the debt. This means a refusal to inject replacement credit.

Mrs. Merkel could decide to do nothing. The voters want her to do nothing “on their behalf.” But Mrs. Merkel by now has grown used to eating mud sandwiches. She has to eat them ever-more regularly.

One group of critics of the on-going bailouts says that the money would be better spent by bailing out specific banks that get in trouble after Greece defaults. Why roll over Greek debt, which only postpones the day of reckoning, when the money would get more bang for the buck by being supplied to specific banks?

The reason is politics. When Greece defaults, the government will get away with it, the same way that the government of Iceland got away with it.

The Portuguese government will get the message. So will the government of Italy. (By the way, the ultimate rollover in Western Europe over the last 65 years has been the government of Italy.)

The voters in PIIGS countries will finally grasp economic reality, namely, that the EU is a toothless tiger. The bureaucrats in Brussels have no meaningful sanctions that they can impose, other than expulsion from the EU. But expulsion would trigger a loss of faith in the Grand Experiment of treaty-based political unification. This has been the dream of the New World Order ever since at least 1919: the Versailles Peace Conference and the League of Nations.

When Greece defaults, the EU will then face this problem. How can membership in the EMU be maintained if no negative sanctions are imposed for pulling out of the EMU? The only meaningful negative sanction is expulsion from the EU. But what threat is that? Only one negative sanction would have any impact: blocked access to the markets of the EU nations. In short, the only meaningful negative sanction is an economic trade war in Western Europe.

Think “Smoot-Hawley, 1930.”

This would be, as John Mauldin titled his book, the endgame. If a trade war begins among major nations anywhere on earth, the entire post-World War II experiment in free trade could come crashing down. That would create a nightmare scenario. There would be a major worldwide recession. It would last for as long as the trade barriers did. Government budget deficits would not go to the moon. They already have done that. They would go to Mars.

Mrs. Merkel is standing at the edge of the abyss. It is both a political abyss and a financial abyss. She has only limited funds. She has only limited time. Her coalition government has the look of a 1958 DeSoto in Cuba. She does not know what will happen if she steadfastly refuses to supply any more government funds to the sinkhole that is the Greek government. Her options are limited: go/no go. This means roll over or refuse to roll over. She keeps rolling over.

Her lips say “no, no,” but her eyes say “yes, yes.”


In recent weeks, the mainstream financial media have posted stories about the looming Greek default and its negative effects. There are major economic analysts who say that the break-up of the European Monetary Union could come within weeks. This is serious language. It reminds me of Hank Paulson in September 2008. “Oh, woe! Oh, woe! So, sign on the dotted line.”

Lest we forget, let me review the key text of the original proposal, which Congress refused to pass.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

If Congress had passed that version, it would indeed have been “Section 8.”

Every time Merkel meets with Sarkozy in one of their “no, no, yes, yes” liaisons, European stock markets rise. There is some vague language about another round of bailouts. Investors rush in to buy, buy, buy. Yet there is no one, other than Greek politicians, who says exactly how the latest debt rollover can lead to a permanent solution of the Greek debt crisis. Fund managers have to know that these German bailouts cannot go on forever, yet their lust to avoid missing quarterly financial profit targets leads them to buy shares.

The fund managers are not rewarded to produce long-term capital gains. Warren Buffett is; no one else is. So, they cannot resist buying whenever Merkel and Sarkozy emerge from their tryst to tell the world that they are willing to let Germany bail out the Greek bond market one more time.

This is great political theater. The French banks are regarded as the most vulnerable to a Greek default. At the same time, France does not have the reserves, either political or financial, to bear the burden of the rollovers. Sarkozy is like some aging gigolo who is getting paid to show up.

On September 14, Moody’s Investors Services downgraded two large French banks and placed a third bank on review. This is why Sarkozy keeps after Merkel to fork over the money for Greece.

The funds’ memos to major banks regarding the funds’ refusal to roll over their short-term loans can go out at any time. No one wants to be the first fund to trigger a banking panic. But no one wants to be left holding the bag. This is why predictions regarding the day of reckoning are highly speculative. The major decisions will not be made by banks. They will be made by fund managers with large deposits at banks. The bankers are just sitting there, hoping for the best.

The bankers can get hit from two sides: (1) the Greek government, (2) the large depositors. They have no control over either. Their only hope is that Merkel will pony up more money, and the ECB’s German representatives will not get enough votes on the board to keep the ECB from buying more Greek bonds directly or accepting bank IOUs with Greek bonds as collateral.

Merkel has shown that she will eat mud sandwiches for as long as she is in office. She is willing to sacrifice the next election for the sake of the Greek bond market. She is nervous about thumbing her nose at the voters, but she and her party’s members in the national government are willing to defy the voters for the sake of the EU, the ECB, and the big banks.

Germany will remain paymaster for the entire European banking system until the German voters finally rise up and throw out the Christian Democrats. But will those parties that replace them be any less subservient to the EU? The leftist parties in Germany are officially more internationalist than the Christian Democrats.

My guess is that Greek voters will force the Greek government to default before Germany’s politicians cease subsidizing the Greek government. I think the voters in Germany will eat their share of fiscal mud sandwiches until the voters of Europe’s basket case nation finally decide that Iceland is the prudent model, not Ireland.


When Paul C. Martin wrote Paymaster Germany two decades ago, there was far less awareness of the nature of the influence of the big banks in German politics than there is today. Throughout Europe, voters are becoming aware of the enormous stupidity of the senior managers of the largest banks. The bankers’ aura of expertise has worn off.

A quarter century ago, there was a recurring character in the British sitcom, Yes, Minister: Sir Desmond. He was a banker, and he was a dolt. He was funny then. He is scary now. Here is a delightful segment with Sir Desmond.

The Sir Desmonds of the world are members of the most influential special-interest group in European politics. Growing numbers of voters are beginning to recognize this in Western Europe. In Germany, the power of the bankers is evident every time Merkel meets with Sarkozy.

Germany is not alone in this increased awareness. There is far more awareness in the United States today because of Ron Paul’s run for the nomination in 2007. The big banks are under far more scrutiny. So are central banks.

This is good for politics, but it is nowhere near enough to reverse the long-term control over politics by the interests of the largest banks. We hear a few disparaging words about the Federal Reserve System from Rick Perry and Michelle Bachmann, but none from Obama, and none from the senior political leaders in Washington.

John Boehner ate his mud sandwich in full public view. He became a shill for Paulson. While I do not think he will do this again, the fact remains that Congress still refuses to place the General Accountability Office in charge of accounting over the Federal Reserve. The mainstream media dismiss criticism of the FED as the work of fringe candidates and fringe groups. This is not likely to change between now and the elections of 2012.

I think it will change by 2016.

The banking cartel is under attack from the grass roots. Its enforcing agent, the Federal Reserve System, is under attack as never before. The FED is on the defensive. Bernanke is the most rhetorically inept FED chairman since G. William Miller. He is an academic. He does not respond well to criticism. He honed his verbal skills in the one-way communications world of the university classroom. His speeches are term papers, footnotes and all.

In my experience, the most boring economist of my era was Paul McCracken. He was Nixon’s chairman of the Council on Economic Advisors, 1969-71. The Wall Street Journal had him write a column in the early 1970s. I have never read anything as boring as those columns. I use him as the standard: 100 on the McCracken Index of Boredom. Bernanke consistently comes in at 86 to 88.

His lack of charisma puts him at a disadvantage. The spotlight is a threat to him. It wasn’t for Greenspan and Volcker.


Germany is the paymaster of Western Europe. The German government bails out Greece in order to hold together an international political partial union that supposedly helps German exporters. No doubt it does help German exporters, but at the expense of German voters. It takes Keynesian fiscal interventions to hold together Europe’s free trade zone today. It is a mixed free trade zone, just as all modern economies are mixed economies.

The threat today is that the subsidies from Germany will not save the Eurozone from a Greek default. The system then could disintegrate, leading to trade wars.

Free trade is a great idea, from across the street to across the ocean. But when it is achieved through central banking and political subsidies to trade deficit nations, it will come to an untimely end. Then the latent political forces favoring import-cutting mercantilism – close the borders – may come into power once again, as they did in the 1930s.

That is the endgame. It ends badly.

September 17, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North