Disequilibrium Pricing—Greek Euro Crisis
Author(s)
Frederick Betz1,2*
ABSTRACT
Financial instability in Greece began in 2009 when the interest rates on Greek sovereign bonds surged; and this can be graphed in a “price disequilibrium” model. To explain how this came about, we create a systems-dynamics model of the Greek fiscal system. Government fiscal systems are not a kind of a “causal” system, but a “structural-functional” system instead. This approach is in the spirit of the Keynes-Minsky model of a financial market as a “dynamic” of the value of capital assets. Financial bubbles occur from “perceptions”—cognitive “reflexivity” in Soros’ term—as expectations of the future values in a financial market. The Greek government fiscal crisis is a “Minsky moment”, which occurs at a time when traders in a financial market have moved from speculative finance to the unstable reflexivity in Ponzi finance. The governments in Greece had indulged in the dynamics of a budget policy of “Ponzi finance”. Unsound fiscal policy over many years had accumulated a very large and increasing government debt—until bond market “reflexive cognition” triggered the Greek fiscal crisis in 2010. The “reflexive perception” of bond traders was that either the Greek government must “default” or be “bailed out”.
Financial instability in Greece began in 2009 when the interest rates on Greek sovereign bonds surged; and this can be graphed in a “price disequilibrium” model. To explain how this came about, we create a systems-dynamics model of the Greek fiscal system. Government fiscal systems are not a kind of a “causal” system, but a “structural-functional” system instead. This approach is in the spirit of the Keynes-Minsky model of a financial market as a “dynamic” of the value of capital assets. Financial bubbles occur from “perceptions”—cognitive “reflexivity” in Soros’ term—as expectations of the future values in a financial market. The Greek government fiscal crisis is a “Minsky moment”, which occurs at a time when traders in a financial market have moved from speculative finance to the unstable reflexivity in Ponzi finance. The governments in Greece had indulged in the dynamics of a budget policy of “Ponzi finance”. Unsound fiscal policy over many years had accumulated a very large and increasing government debt—until bond market “reflexive cognition” triggered the Greek fiscal crisis in 2010. The “reflexive perception” of bond traders was that either the Greek government must “default” or be “bailed out”.
Cite this paper
Betz, F. (2014) Disequilibrium Pricing—Greek Euro Crisis. Theoretical Economics Letters, 4, 897-909. doi: 10.4236/tel.2014.49113.
Betz, F. (2014) Disequilibrium Pricing—Greek Euro Crisis. Theoretical Economics Letters, 4, 897-909. doi: 10.4236/tel.2014.49113.
References
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[1] Koenig, B. (2009) Fitch Downgrades Greece to A—From A. Bloomberg.
http://www.bloomberg.com/apps/news?pid=munievents&sid=a6Y6T3olWgX0 [2] Smith, H. and Seager, A. (2009) Financial Markets Tumble after Fitch Downgrades Greece’s Credit Rating. The Guardian.http://www.theguardian.com/world/2009/dec/08/ greece-credit-rating-lowest-eurozone [3] McCulley, P. (2007) Teton Remarks.http://web.archive.org/web/20091124124300/http://www. pimco.com/LeftNav/Featured+Market+Commentary/FF/2007/GCBF+August-+September+2007.htm [4] Soros, G. (1988) The Alchemy of Finance. Simon & Schuster, New York. [5] Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money. Harcourt Brace, New York. [6] Minsky, H.P. (1982) Can “It” Happen Again? Essays on Instability and Finance. M.E. Sharpe Inc., New York. [7] Betz, F. (2014) Disequilibrium Pricing Theory. Theoretical Economics Letters, 4, 60-67. [8] Radzicki, M.J. and Taylor, R.A. (1997) Introduction to System Dynamics: A Systems Approach to Understanding Complex Policy Issues. US Department of Energy. http://www.systemdynamics.org/DL-IntroSysDyn/start.htm [9] Betz, F. (2013) Macro and Micro-Economic Policies in Financial Crises: Argentina 2000 and South Korea 1998. Business and Management Research, 2. www.sciedu.ca/bmr [10] BBC News (2012) Greece Austerity: How Far Still to Go? http://www.bbc.com/news/world-europe-18511963 [11] Inman, P. (2012) Primary Greek Tax Evaders Are the Professional Classes. The Guardian.
http://www.theguardian.com/world/2012/sep/09/greece-tax-evasion-professional-classes?CMP=twt_gu [12] Nikolaos, A., Morse, A. and Tsoutsoura, M. (2010) Tax Evasion Across Industries: Soft Credit Evidence from Greece. Chicago Booth Paper No. 12-25, University of Chicago, Chicago. http://ssrn.com/abstract=2109500 [13] Economist (2010) Southern Europe Will Have Trouble Increasing Its Tax Take. The Economist.
http://www.economist.com/node/16792848 [14] Schneider, F. (2008) The Shadow Economy in Europe. Johannes Kepler Universitat Lintz, Linz.
http://www.visaeurope.fr/media/images/shadow-economywhitepaper-58-8752.pdf [15] Lowen, M. (2012) Greek Journalist Costas Vaxevanis on Trial over Bank List. BBC News.
http://www.bbc.com/news/world-europe-20163430 [16] BBC News (2012) Greek Bank List Editor Costas Vaxevanis Acquitted.
http://www.bbc.com/news/world-europe-20172516 [17] Forrester, J. (1961) Industrial Dynamics. Pegasus Communications, Waltham.