Kregel on the Vulture Funds

Michael Stephens | September 28, 2015

Jan Kregel, the Levy Institute’s director of research, was recently interviewed by the Buenos Aires Herald regarding Argentina’s economic prospects and its ongoing situation with the “vulture funds.”

On Argentina’s policy challenges:

So there are no alternatives to devaluation?

Argentina has one net advantage. As a result of the vulture funds it’s relatively insulated from the global crisis. Now it has a decision to make on how it is going to respond. China and Brazil didn’t have a choice but Argentina does. There has to be an exchange rate adjustment and it will be difficult because everybody else is doing the same thing. You can do it on a gradual basis but you would be doing it in a non-gradual context, taking the real as an example.

The government claims that a devaluation isn’t necessary and can be replaced by a larger consumption thanks to counter cyclical measures. Do you agree?

If you continue to go counter-current, that means the exchange rate will remain low. The country has a big opportunity to do import substitution due to the global context. Now is the moment to support domestic industry. The question is if you do that by increasing consumption or by more direct policies to stimulate manufacturing industries. You should first do the second, that will then boost consumption.

Argentina saw huge economic growth in the first years of Kirchnerism but now the economy has slowed down. What are the reasons for that?

When I was working at the UN, I used to come to Argentina and present reports at the Economy Ministry. The first question I asked officials is how long they thought Argentina could grow at eight percent. Usually the response was, why I thought that was a problem. Everybody actually believed that eight percent was something that could go on forever—that’s the reason behind Argentina’s current situation. Still, Argentina survived the world economic crisis much better than any other developing country.

And on the vulture funds:

Can the legal conflict with the holdouts be solved?

The most reasonable thing is to do nothing and let it sit there. The current US administration doesn’t support the claims of US investors and if the issue would go to any other court it is unlikely that it would be resolved. If you want to change something you just have to wait for the people who did it to die. Griesa is not very young and eventually has to retire.

Read the entire interview here.


Endogenous Financial Fragility in Brazil: Does Brazil’s National Development Bank Reduce External Fragility?

Michael Stephens | September 22, 2015

by Felipe Rezende


The creation of new sources of financing and funding are at the center of discussions to promote real capital development in Brazil. It has been suggested that access to capital markets and long-term investors are a possible solution to the dilemma faced by Brazil’s increasing financing requirements (such as infrastructure investment and mortgage lending needs) and the limited access to long-term funding in the country. Policy initiatives were implemented aimed at the development of long-term financing to lengthen the maturity of fixed income instruments (Rezende 2015a). Though average maturity has lengthened over the past 10 years and credit has soared, banks’ credit portfolios still concentrate on short maturities (with the exception of the state-owned banks including Caixa Economica Federal [CEF] and the Brazilian Development Bank [BNDES]).

While there was widespread agreement that public banks, and BNDES in particular, played an important stabilizing role to deal with the consequences of the 2007-2008 global financial crisis, there is, however, less agreement on BNDES’ current role (de Bolle). BNDES has been subject to a range of criticisms, such as crowding out private sector bank lending, and it is said to be hampering the development of the local capital market (Rezende 2015). It is commonly believed that “development banks and other institutions in Latin America tend to replace markets rather than address collective action failures that lead to market incompleteness.” (de Bolle 2015). In particular, critics of Brazil’s national development bank have argued that large companies can borrow from private international capital markets and the bank extends credit to companies that have access to domestic capital markets.

Much of the policy discussion has been misplaced. Though the conventional belief assumes that capital markets are efficient and produce an optimal allocation of capital, this view is not supported by evidence. Free and competitive international capital markets have repeatedly failed to produce an optimal allocation of capital and privatized free-market banking systems have failed to assess risks properly thus misallocating resources (Kregel 1998, Wray 2011). Moreover, access to international capital markets has been based on the false premise of lack of domestic savings. As I have argued elsewhere (Rezende 2015) rather than justifying the existence of public banks —and BNDES in particular, based on market failures (Garcia 2011) — an effective answer to this question requires a theory of financial instability. continue reading…


Reactions to S&P Downgrade: S&P Analyst Confirms There Is No Solvency Issue

Michael Stephens | September 17, 2015

by Felipe Rezende

In previous posts (see here and here), I discussed Standard & Poor’s (S&P) downgrade of Brazil’s long-term foreign currency sovereign credit rating to junk status, that is, to ‘BB+’ from ‘BBB-‘, and its decision to downgrade Brazil’s local currency debt to a single notch above “junk” status.

S&P hosted a conference call on Monday morning to explain its downgrade of Brazil’s credit rating (you can view the video webcast replay here). During the conference call I had the opportunity to ask a couple of questions.  My first question, to S&P analyst Lisa Schineller, at around the 41:53 minute mark, was the following:

Question: “Are there solvency risks associated with Brazil’s local currency debt? Brazil issues its own currency.”

[Lisa Schineller]: “We would not say there are solvency risks, we rate, for both local currency and foreign currency, our ratings are continuum. Yes, we lowered both ratings, we are by no means thinking about a solvency issue here and risks there. There is less policy flexibility at hand, these ratings for the local currency BBB- is still in the investment grade category and the foreign currency is at the high end of the speculative grade category. I think this is an important point to highlight. There is this increase in the stress in the economy, in the policy execution, but it is very different than talking a solvency issue.”

That is, as the S&P analyst confirmed, there are no solvency risks. In its sovereign ratings methodology S&P looks at “sovereign government’s willingness and ability to service its debt on time and in full.” Standard & Poor’s sovereign rating is:

A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery). (Lisa Schineller)

As I explained in my previous posts (see here and here), there is no credit risk in obligations denominated in the domestic currency, that is, the risk of payments not being made on government debt denominated in Reais is zero. Why? Because Brazil’s local currency debt outstanding promise to pay Reais and the federal government is the monopoly issuer of currency (Rezende 2009).

My second question to Lisa Schineller, at around the 52:05 minute mark, was the following:

Question: What is the sovereign’s ability and willingness to its service financial obligations to nonofficial (commercial) creditors for a country that has more assets denominated in foreign currency than debt? The government can pay all of its obligations in foreign currency. continue reading…


Credit Rating Agencies and Brazil: Why the S&P’s Rating of Brazil’s Sovereign Debt Is Nonsense

Michael Stephens | September 13, 2015

by Felipe Rezende

So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’.

First, what are sovereign debt ratings? Standard & Poor’s sovereign rating is defined as follows:

A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery).

So the ratings are related to “a sovereign’s ability and willingness to service financial obligations to nonofficial (commercial) creditors.”

What does this tell us? To begin with, credit rating agencies have repeatedly been wrong. The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple-A rating to toxic subprime mortgage-backed securities are now downgrading Brazil’s sovereign debt. As the FCIC report pointed out, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011)

After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign currency debt (figure 2). Brazil’s public sector can pay all of its long-term financial obligations denominated in foreign currency. Moreover, Brazil’s federal government can never become insolvent on obligations denominated in its own currency (note that since 1999 Brazil maintains a floating exchange rate regime, which increases domestic policy space). continue reading…


Levy MS Program Now Accepting Applications for Fall 2016

Michael Stephens | September 10, 2015


The Levy Economics Institute Master of Science in Economic Theory and Policy is a two-year degree program that emphasizes theoretical and empirical aspects of economic policy analysis through specialization in one of five key research areas: macroeconomic theory, policy, and modeling; monetary policy and financial structure; distribution of income, wealth, and well-being; gender equality and time poverty; and employment and labor markets. Headed by Levy Institute Research Director Jan Kregel, the MS program draws on the expertise of Institute scholars as well as selected Bard faculty.

Application deadlines for Fall 2016 are November 15 for Early Decision and January 15 for Regular Decision. Scholarships are available. For more information, visit the Levy MS website; to apply, go to

The Levy Institute welcomes two new senior scholars, both of whom have also joined the faculty of the Levy MS program:
Fernando J. Cardim de Carvalho
Senior Scholar Fernando J. Cardim de Carvalho is emeritus professor of economics at the Federal University of Rio de Janeiro. He has worked as a consultant to the Central Bank of Brazil and the Brazilian National Bank for Economic and Social Development, among other institutions, and is the author, most recently, of Liquidity Preference and Monetary Economies.
John F. Henry
Senior Scholar John F. Henry is professor emeritus, California State University, Sacramento, where he taught economics from 1970 to 2004. He also lectures at the University of Missouri–Kansas City. Henry’s research interests include the history of economic thought, economic history, and political economy, and he has published widely in the academic press.
Fernando Rios-Avila
Research Scholar Fernando Rios-Avila, who joined the Institute in 2013, is also new to the MS faculty this year. His research spans labor economics and applied microeconomics as well as development economics, poverty, and inequality.


Binzagr Institute Inaugural Conference: Sustainable Full Employment and Transformational Technologies

Michael Stephens | September 9, 2015

The Binzagr Institute for Sustainable Prosperity is holding its inaugural conference — Provisioning and Prosperity: Sustainable Full Employment and Transformational Technologies  — October 2nd-3rd at Denison University. For those who cannot attend, the event will be livestreamed (and questions can be posed via Facebook and Twitter @BinzagrInfo).

More information on registration and conference themes can be found here. See below for the list of speakers:

Jan Kregel*, Advisory Board Member, Binzagr Institute
William A. Darity, Jr.*, Professor of Economics, Duke University
Stephanie Kelton*, Chief Economist, U.S. Senate Budget Committee
Julianne Malveaux*, Advisory Board Member, Binzagr Institute
L. Randall Wray, Professor of Economics, University of Missouri – Kansas City
Mathew Forstater, Research Director, Binzagr Institute
Fadhel Kaboub, President, Binzagr Institute
Ahmed Soliman, Research Scholar, Binzagr Institute
Scott Fullwiler, Research Scholar, Binzagr Institute
Pavlina Tcherneva, Research Scholar, Binzagr Institute
Ellen Brown, Research Scholar, Binzagr Institute
R. Paul Herman, Founder and CEO, HIP Investor
Robert W. Parenteau, Research Fellow, Binzagr Institute
Elsadig Elsheikh, Director, Global Justice Program: Haas Institute (UC-Berkeley)
Marco Vangelisti, Research Fellow, Binzagr Institute
Raúl Carrillo, Research Fellow, Binzagr Institute
Shama Azad, Research Fellow, Binzagr Institute
Natalie Brown, Research Assistant, Binzagr Institute
Aqdas Afzal, Research Assistant, Binzagr Institute

* invited (to be confirmed)


Euroland Has No Plan B: It Needs an Urgent Recovery Plan

Jörg Bibow | September 8, 2015

At last, the eurozone economy appears to be experiencing some kind of recovery. GDP started growing again in the spring of 2013, following seven quarters of decline, with domestic demand shrinking for even nine consecutive quarters between 2011 and 2013. Today, it is conceivable that within a year or so the eurozone might recoup its pre-crisis level of GDP, perhaps marking the end of a “lost decade.”

But it is too soon to declare victory and become complacent. The eurozone remains fragile and the recovery uneven. Having primarily relied on export demand for its meagre growth since 2010, developments in China and elsewhere in the emerging world are posing an acute threat. More recently home-grown demand benefited from peculiar tailwinds that are temporary in nature. It is unclear at this point whether these forces will merge into a stronger self-sustaining recovery, while the likelihood of renewed and spreading political instability along the way keeps rising. It seems unwise, in fact hazardous, not to have a plan B ready at hand should growth falter once again.

Bibow_Plan B_Fig 1

Figure 1 shows index values for GDP, gross capital formation, final consumption, exports, and imports, all relative to their respective levels in the first quarter of 2008. Remarkably, only exports have seen some real recovery. Gross capital formation, on the other hand, remains stuck at a severely depressed level to this day, while final consumption is only slightly ahead of its pre-crisis peak. Clearly, the eurozone owes it largely to the rest of the world that it has not sunk into even deeper depression.

The gaping external imbalance that has built up since the crisis quantifies the extent to which the eurozone has weakened and undermined the global recovery in recent years. Its soaring external surplus has required other countries to “over-spend” accordingly. As numerous over-spenders appear overstretched at this point, the eurozone’s external imbalance also signifies its own vulnerability to a deteriorating global environment. In a way, the ongoing deterioration in the global environment also reflects the fact that the driving forces of global growth have come full circle, and seem exhausted and spent today – unlikely to fire up again any time soon. continue reading…


Second Edition of the Modern Money Primer

Michael Stephens | September 7, 2015

The second edition of L. Randall Wray’s Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, an updated and expanded version with new chapters on tax policy and inflation, is now available for order and will be released September 23rd:

Modern Money Theory Primer_2nd edition

“This book synthesizes the key principles of Modern Money Theory, exploring macro accounting, monetary and fiscal policy, currency regimes and exchange rates in developed and developing nations. Randall Wray addresses the pressing issue of how misunderstandings about the nature of money have caused the current global financial meltdown, and provides fresh ideas about how policymakers around the world should address the continued weaknesses in their economies.”


Is Economic Inequality Immoral?

Michael Stephens |

Harry Frankfurt, whose formal concept of “bullshit” is indispensable to both professional and everyday life, recently published an article for Bloomberg View arguing that (1) economic (income and wealth) inequality is, in and of itself, morally insignificant and (2) “egalitarianism” (being concerned about economic inequality in and of itself) is harmful. The article is an excerpt from a book he has coming out at the end of the month.

According to Frankfurt, egalitarianism is loosely based on the belief that “the possession by some of more money than others is morally offensive.” This belief is false, he says, and it leads us astray. Frankfurt suspects that what most of us are really — and justifiably, in his view — reacting to when we express moral reservations about inequality is the potentially abject condition of those lower down the income distribution; not simply because there are others who have more, but rather if those in the lower income or wealth percentiles do not have enough resources to achieve some substantive standard of well-being (“not a relative quantitative discrepancy but an absolute qualitative deficiency”). In other words, it is poverty, or, more broadly, the condition of not having “enough,” that is morally significant, rather than monetary inequality per se:

“Mere differences in the amounts of money people have are not in themselves distressing. We tend to be quite unmoved, after all, by inequalities between those who are very well-to-do and those who are extremely rich. The fact that some people have much less than others is not at all morally disturbing when it is clear that the worse off have plenty.”

Frankfurt goes further: not only is egalitarianism based on a false belief, it is itself morally disorienting. Being overly focused on other people’s incomes — on the mere quantitative relationships between incomes — he argues, interferes with our ability to determine our own substantive economic needs and interests. (“A preoccupation with the condition of others interferes, moreover, with the most basic task on which a person’s selection of monetary goals for himself most decisively depends. It leads a person away from understanding what he himself truly requires in order to pursue his own most authentic needs, interests, and ambitions.”)

From this perspective, it would seem to follow that a great deal of economic research on patterns of income or wealth distribution not only dwells on morally insignificant issues but, to the extent it is motivated by egalitarian concerns or draws public attention to supposedly trivial monetary differences, such work “contributes to the moral disorientation and shallowness of our time.” In fact, if we buy all this, we might even be compelled to say that income distribution research is less significant (and more harmful) than ever these days, since, as those who study the US distribution have pointed out, so much of the action lately is focused on the increasing distance between the top 1 percent and all the rest (or even the top 0.01 percent).

What should we say about this?

First, even if we grant Frankfurt everything he argues for, this would not necessarily require us to disregard economic inequality or do nothing to remedy it. There are other reasons to worry about inequality. There is, for instance, a macroeconomic case. Papadimitriou, Nikiforos, Zezza, and Hannsgen argue that the growing disparity in the US income distribution has been a major contributor to financial instability and threatens the sustainability of economic recovery. There are also normative political reasons for being concerned about excessive amounts of wealth and income being concentrated in the hands of the few. So even if we’re persuaded by Frankfurt, we would have to weigh these other considerations (macroeconomic, political, social, and so on) against the moral harm he believes results from preoccupation with income differences.*

Second, the implications of Frankfurt’s argument are not necessarily as conservative (for lack of a better term) as some might imagine. continue reading…


Folbre on the Consequences of Ignoring Unpaid Work

Michael Stephens | August 31, 2015

Nancy Folbre, who recently joined the Levy Institute roster as senior scholar, was interviewed by Dollars & Sense on the topic of how conventional economics and policymaking deal with (or rather, fail to deal with) household and caring labor:

D&S: What is the practical consequence of not measuring household labor and production? Are economic policies and institutions different, especially in their impact on women, than what they would be if household labor were fully reflected in statistics on total employment or output?

NF: One macroeconomic consequence is a tendency to overstate economic growth when activities shift from an arena in which they are unpaid to one in which they are paid  (all else equal). When mothers of young children enter paid employment, for instance, they reduce the amount of time they engage in unpaid work, but that reduction goes unmeasured. All that is counted is the increase in earnings that results, along with the increase in expenditures on services such as paid childcare.

As a result, rapid increases in women’s labor force participation, such as those typical in the United States between about 1960 and the mid-1990s, tend to boost the rate of growth of GDP. When women’s labor force participation levels out, as it has in the United States since the mid 1990s, the rate of growth of GDP slows down. At least some part of the difference in growth rates over these two periods simply reflects the increased “countability” of women’s work.

Consideration of the microeconomic consequences helps explain this phenomenon. When households collectively supply more labor hours to the market, their market incomes go up. But they have to use a substantial portion of those incomes to purchase substitutes for services they once provided on their own—spending more money on meals away from home (or pre-prepared foods), and child care. So, the increase in their money incomes overstates the improvement in their genuinely disposable income.

A disturbing example of policy relevance emerges from consideration of the changes in public assistance to single mothers implemented in the United States in 1996, which put increased pressure on these mothers to engage in paid employment. Many studies proclaimed the success because market income in many of these families went up. But much of that market income had to be spent paying for services such as child care, because public provision and subsidies fell short.

The rest of the interview is posted here at the Triple Crisis blog.

The LIMTIP (Levy Institute Measure of Time and Income Poverty) team has done extensive empirical work around this sort of framework, in which the time and/or money required to meet household production needs is integrated into an assessment of economic well-being — with the aim of providing a clearer picture of the depth and breadth of poverty in many countries.