In his book, Understanding Modern Money, Randall Wray wrote that the way the eurozone was structured would likely cause a financial crisis.
That was in 1998.
Wray, a professor of economics at UMKC, is just one of a handful of economists who predicted the current crisis in the eurozone (the countries in the European Union that use the euro as currency).
A recent BloombergBusiness article named nine people who, years ago, foresaw the Greek debt crisis. Wray and two of his colleagues from UMKC’s economics department — Stephanie Bell Kelton and Mathew Forstater — are on that list.
UMKC’s economics department has been called “unconventional,” “crazy” and more. It's become known all over the world for its approach to economics. “The Kansas City Approach,” which is now dubbed “The Modern Money Theory Approach,” has roots there.
While Wray didn't specifically name Greece back in 1998, he anticipated problems like the financial troubles in Greece.
"Really, any country could be in Greece’s situation today," he said. "It happened to be Greece, but it could just as well have been Germany. When the EMU (the Economic and Monetary Union for the eurozone) first started, Germany was called 'the sick man of Europe.' It was the one with the big budget deficits and the very slow growth. So, the problem was in the way that the euro was set up."
According to Wray, the biggest problem is how the eurozone separates its monetary and fiscal policies.
In America, he said, we have a central bank (the Federal Reserve) and the U.S. Treasury (also known as Uncle Sam). We have both a national monetary policy and a national fiscal policy.
The central bank is responsible for setting the interest rate and for bailing out financial institutions if they get in trouble, he said.
And Uncle Sam uses the Treasury — when the crisis hit here, President Obama got a fiscal stimulus package through Congress in 2009 that allowed Uncle Sam to spend about $800 billion for two years.
“That helped to get the economy going again,” Wray said. “We had a very deep recession, but we did not have another Great Depression like we had in the 1930s — which is what would have happened without Uncle Sam."
Europe has the European Central Bank, which is the equivalent of the Fed and sets the interest rates for all of its member countries.
However, the eurozone didn’t create an equivalent of Uncle Sam. The individual member nations are responsible for its own fiscal policy.
“There is no Uncle Fritz,” he said.
“It would be as if we told the State of Missouri, ‘You’re responsible for all the spending in the State of Missouri. So when a crisis hits, you have to deal with the increased unemployment, with the increased need for social spending with any kind of fiscal stimulation. We will not help you,'" he said. "That’s exactly what happened.”
One thing that Wray and his colleagues predicted was that when countries joined the EMU within the euro-using area, some countries will have trade surpluses and others will run trade deficits. The ones with trade deficits will have bigger budget deficit problems.
Greece runs a trade deficit — it imports more than it exports (its main export is tourism). And Germany is a big trade surplus country — "Chinese-levels of surplus," Wray said. It's then impossible for Greece to balance its government's budgets because it runs a trade deficit against Germany.
“We didn’t name which countries were going to turn out to be the trade deficit countries, but we said the ones that do are going to be the big budget deficits,” he said. “And eventually, the markets are going to attack them and shut them down, which is what happened.”
Wray and his colleagues follow the heterodox approach to economics. Wray calls it “a more general approach to the study of economics and social science.”
It isn't taught much in the United States, he added.
The orthodox approach is what most Americans study. The main difference is that orthodox economists believe that supply and demand will determine the price — that governments shouldn’t get involved with the economy — and that if you leave the markets alone, the price will reach an equilibrium price.
Orthodox critics say that the heterodox approach isn’t rigorous mathematics.
“We don’t have nice models, we use plain English, we write in words rather than in symbols,” Wray said.
He contends that the orthodox economists didn't predict the global financial crisis — and that they even helped cause it.
"Even in spring of 2007, which is when the crisis was starting, none of them saw it coming,” he said.
“The orthodox economists were the ones who deregulated Wall Street and let Wall Street get engaged in all of the activities that eventually caused the worst economic disaster since the 1930s — not just for the United States, but for the world as a whole.”
As for a financial forecast, Wray thinks that we're working our way toward another "very serious financial crisis."
He cited the steps that President Roosevelt took after the economy crashed in 1929. Roosevelt and his government completely reformed the financial system, Wray said. They shut all the banks down and only allowed the healthier ones to reopen. They also clamped down on Wall Street and tightly constrained it for decades.
As a result, the economy came out of World War II strong and robust, and the United States had no financial crises for a whole generation.
"This time, we did not reform Wall Street at all. They are back to doing most of the things they were doing in 2006," he said.
"We should have used the opportunity of the crisis to get some real reforms and real constraints on the financial system. We didn't do that."
