says that the solution is for the ECB (and by extension, Germany) to completely repudiate everything they have done so far, and go in completely the opposite direction.
If they do use overwhelming financial force and guarantee everything (and convince everyone that the guarantee is permanent), that at least has a chance of convincing the people in the rest of the periphery that they wouldn't be crazy to leave their money in a non-German bank.
But if they do this, doesn't that completely change the assumptions underlying our entire discussion? I thought we were assuming that the ECB would not do anything like this (at least, not within the next several months), which is why we are talking about whether Greece will leave the euro.
Greece is not Iceland. Iceland had its own currency. Iceland was not going to have contagion to its neighbors and elsewhere. There was not the same kind of massive incentive to get one's money the hell out of the country, with the same kind of spreading contagion to several other massive economies.
It would be like the FDIC (and all other similar forms of insurance) disappearing overnight. Followed by the president telling everyone that a good portion of the banks in the country are insolvent, and people with such banks might get at most 50 cents on the dollar. Followed by a speech by Mexico and Canada and Japan's leaders, telling their citizens that if the US economy contracts below a certain amount, they will kill their own FDIC equivalent and drastically reduce the balance of all savings accounts. And on and on.
Furthermore, either I'm not understanding Randall Wray's proposal, or it makes no sense. He is proposing that the government switch to the drachma for taxing and spending, but to leave all Euro balances in Greek banks as is. Does he realize that the second the ECB stops funneling money directly to Greek banks (or to Greek banks through the bank of Greece), all banks in Greece will immediately be insolvent? They are relying on massive loans from Europe just for daily liquidity! There wouldn't be any euro balances left (beyond the tiny fraction the banks kept in reserve, which would have been long pulled out). Greek banks cannot print/keystroke euros.
That's why any Greek exit would involve converting all bank balances to drachmas (which means all contracts have to somehow be immediately redenominated in drachmas). Furthermore, private international contracts with counterparties in other European nations would end up redenominated in... what? Drachmas (resulting in counterparties being paid massively less than they thought, causing many of them to go insolvent)? Left in Euros (causing the Greek party in the contract to be unable to pay, causing a private default, with essentially the same effect)?
Not only would this destroy Greece's economy far more than it is now. And not only would this cause massive economic damange to anyone economically connected to Greece. It is exactly these effects that will be convincing everyone else to get their euros into German banks while they still can (absent a 180 turnaround by Germany, with a convincing ECB financial bazooka and a complete pivot from right wing austerity policy). Absent that bazooka, everything above happens in some of Europe's biggest economies, and the contagion continues.
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