Modern Money, Financial Reform, and the Euro Experiment—an Interview with Randall Wray

Michael Stephens | March 28, 2015

Below is the wide-ranging interview L. Randall Wray gave to EKO – Público TV in Spain as part of the launch of the Spanish edition of his Modern Money Primer (questions in Spanish):

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Public Banking and Boom Bust Boom

L. Randall Wray | March 24, 2015

While in Spain for the launch of my Modern Money Primer in Spanish, I gave a long interview for Public Television. Parts of that interview are interspersed in this segment on public banking. My interview is in English (with Spanish subtitles), while the rest is in Spanish. Other portions of my interview will be broadcast later.

The Boom Bust Boom movie on Minsky will be released next month. Watch for it. I do not know how widely it will be distributed, but it is well worth seeing. Here’s a nice piece from The Guardian:

To Move Beyond Boom and Bust, We Need a New Theory of Capitalism

By Paul Mason, The Guardian UK

23 March 15

his is the year that economics might, if we are lucky, turn a corner. There’s a deluge of calls for change in the way it is taught in universities. There’s a global conference at the Organisation for Economic Co-operation and Development in Paris, where the giants of radical economics – including Greek finance minister Yanis Varoufakis – will get their biggest ever mainstream platform. And there’s a film where a star of Monty Python talks to a puppet of Hyman Minsky.

Terry Jones’s documentary film Boom Bust Boom hits the cinemas this month. Using puppetry and talking heads (including mine), Jones is trying to popularise the work of Minsky, a US economist who died in 1996 but whose name has become for ever associated with the Lehman Brothers crash. Terrified analysts labelled it the “Minsky moment”.

Minsky’s genius was to show that financially complex capitalism is inherently unstable. Under conditions of stability, firms, banks and households will, over time, move from a position where their income pays off their debt, to one where it can only meet the interest payments on it. Finally, as instability rises, and central banks respond by expanding the supply of money, people end up borrowing just to pay back interest. The price of shares, homes and commodities rockets. Bust becomes inevitable.

This logical and coherent prediction was laughed at until it came true. Mainstream economics had convinced itself that capitalism tends towards equilibrium; and that any shocks must be external. It did so by reducing economic thought to the construction of abstract models, which perfectly describe the system 95% of the time, but break down during critical events.

In the aftermath of the crisis – which threatens some countries with a phase of stagnation lasting decades – Minsky’s insight has been acknowledged. But his supporters face a problem. The mainstream has a model; the radicals do not. The mainstream theory is “good enough” to run a business, a finance ministry or a central bank – as long as you are prepared, in practice, to ignore that theory when faced with crises.

Read the rest here.

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Greek Debt, German History, and the Moral High Ground

Michael Stephens | March 19, 2015

Dimitri Papadimitriou takes on the assumption that European leaders demanding the continuation of large fiscal surpluses from Greece can claim the moral high ground. The economics behind these demands are unrealistic, and the insistence on full debt repayment is both immoral and imprudent—not to mention deaf to the lessons of history:

“Greece’s government and people have indulged in excesses and corruption; now it is time to pay the price.” The argument for full repayment of Greece’s debt is well known, easily understood, and widely accepted, particularly in Germany. Sacrifice, austerity and repayment are righteous, fair, and just.

That view is coloring this and next week’s coming meetings between Greece and its international lenders, and with European leaders. A revision of Greece’s debt terms has not been on the agenda.

European leadership insists that repayment is possible, and that Greece’s economy will take off, if only Greeks are willing to bite the bullet and economize. The quasi-religious ground under the wishful thinking on economic growth is that with deep financial pain comes high moral ground.

Exactly the opposite case makes far more sense …

[…]

In the aftermath of [World War II], Germany was the beneficiary of the largest debt restructuring deal in history. Today, German leaders have positioned themselves as the moral gatekeepers of justice in Europe, with a firm stance against any debt forgiveness. …

Continue reading: “Greek Debt: Do the Right Thing” (HuffPo)

Related: The Greek Public Debt Problem

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The State of Labor, New Models of Organizing, and the Future of Work

Michael Stephens | March 18, 2015

The Levy Institute and SEIU 775 are cosponsoring a labor workshop at Bard College on April 20th. The workshop, which is free and open to the public, will focus on three major themes, each corresponding to a panel: The State of the American Labor Movement, The Future of Work, and New Models of Organizing and Worker Power.

The flyer for the event, including the schedule and list of participants, is below (click to enlarge; download pdf here):

Bard Labor Workshop_Flyer p1

Bard Labor Workshop_Flyer p2crop

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The Plunging Euro and Its Muddled Cheerleaders

Jörg Bibow | March 16, 2015

Greg Ip had a couple of pieces on currency wars and gyrations in the Wall Street Journal last week (here and here), essentially arguing that talk about currency warfare is much beside the point and that exchange rate gyrations are merely benevolent side-effects of monetary policies that will inevitably make the whole world better off. The Financial Times had an editorial on the ECB’s QE and the euro plunge that ran along the same lines, bluntly declaring that “any criticism from outside the eurozone that the fall in the single currency will kick off a global currency war [was] misplaced.” And Bloomberg summed it all up by proclaiming that the whole currency war talk is a “load of baloney,” fearing that the currency war nonsense talk might lead to trade restrictions, which would do real harm.

While the Financial Times sees no cause for alarm at all it seems, Greg Ip’s alarm bells would only go off if China were to retaliate by weakening the renminbi.

So there appears to be a consensus that all is currently for the best in all possible currency worlds. As ever so often, the consensus may be seriously off track here.

Consider Greg Ip’s main point, which is that monetary easing cannot do any harm by weakening a currency because it simply forces other central banks to follow suit, which eases the global monetary stance, which is all for the good. Well, the argument fails to distinguish situations in which all countries share common monetary policy requirements from situations in which that is not the case. The former kind of situation prevailed right after the Lehman bankruptcy, when the Federal Reserve’s easing provided the scope for a global monetary easing. This benevolent alignment didn’t last very long, however, as the U.S. monetary stance proved to be excessively easy for numerous countries in the emerging world — countries that may today be held back by the financial fragilities that were created at that time. Fast forward, recovery in the U.S. appears to be leading the world economy today, creating the opposite kind of challenges. So is the Federal Reserve prodding everyone else to tighten too, to the benefit of the world? Or are the ECB’s QE adventures prodding the Federal Reserve to change course, to the benefit of the world and the U.S.? If neither is the case, will the resulting exchange rate gyrations really benefit the wider world — unless China devalues its currency, that is?

The new consensus overlooks that it matters to the global economy whether important countries are mainly driven by domestic demand growth or mainly freeload on net exports.

The evolution of current account imbalances and contributions of net exports to GDP growth in the key countries featured in talks about currency wars is revealing.

The U.S. had persistent negative net exports GDP growth contributions and a rising current account deficit prior to the crisis of 2008-09. The crisis then halved the U.S. current account deficit. And post-crisis QE and dollar depreciation saw U.S. domestic demand growth stimulate (disappointingly meager) U.S. GDP growth while net exports made a broadly neutral contribution as the U.S. current account deficit was contained overall. Suffice to mention that U.S. energy production was an important swing factor in this outcome. The U.S. non-energy external balance has deteriorated with the U.S. recovery.

Japan ran huge current account surpluses prior to the crisis. As the favored carry-trade currency, the yen was cheap at the time. When crisis struck, the yen appreciated sharply at first, and Japan’s current account imbalance has since disappeared as net exports made negative GDP growth contributions in the last four years. More recently, the yen’s appreciation was partly reversed by means of QE starting in 2013 when the Japanese authorities also initiated a program to stimulate domestic demand.

The eurozone had a broadly balanced external position prior to the global crisis. Internally, however, diverging competitiveness positions led to huge imbalances, which then imploded. As the eurozone authorities’ policy response suffocated domestic demand, positive GDP growth contributions from net exports were the currency union’s only lifeline. The eurozone has a surging current account surplus, the biggest in the world today, with Germany and the Netherlands as the lead stars.

It is true that China had by far the biggest current account surplus prior to the global crisis. But China has also gone through by far the biggest rebalancing since. China’s current account surplus halved in absolute terms; in relative terms it plunged from 10 percent of GDP to roughly 2 percent within a short period of time. In fact, the country has experienced quite persistent negative GDP growth contributions from net exports since the crisis.

In essence, in the years since the global crisis, China was the number one global growth engine, while the eurozone was the world’s outstanding drag on growth, undermining a proper recovery. Germany’s bilateral trade and current account balances vis-à-vis China are in surplus today.

The latest monetary policy initiatives and currency gyrations should be read against this background. The consensus suggests that euro devaluation through the ECB’s belated QE is just fine, a measure for the general good of the world. Apparently the plunging euro is not designed to augment and sustain the eurozone’s freeloading on external growth; it is not the mechanism by which the eurozone exports its homemade mess to innocent bystanders. By contrast, as Greg Ip states explicitly, if the Chinese authorities were to devalue the renminbi, that could be seen as beggar-they-neighbor policy, an attempt to steal demand from their trading partners. Apparently, China is obliged to provide positive growth stimuli to the global economy and must not try to contain the damage that eurozone freeloading has on its development.

Surely Dr. Schäuble and Germany’s export industry can only applaud the new consensus. Never mind the shallow double standards on which it rests. Or do we all begin to adopt the kind of logic that prevails in Dr. Schäubles “parallel universe”* — making it yet another German export success?

 

* Back in September 2013, Dr. Schäuble famously suggested (see my comment) that critics of the brilliant eurozone crisis management undertaken under his stewardship were living in a “parallel universe where well-established economic principles no longer apply.” Eurozone crisis management has been so brilliant that the world now enjoys its fruits at a super-competitive euro exchange rate. Bravo! More cheerleading please.

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Beyond the Debt Negotiations: Greece’s New Deal?

Michael Stephens | March 10, 2015

The negotiations over Greece’s public debt and the terms of its bailout agreement have understandably taken center stage. Behind all the twists and turns, the key consideration is that even if the public debt could be repaid through continuing with austerity policies — and there is little reason to believe it can — it would still be a mistake, for both moral and pragmatic reasons. But dealing with Greek debt and the impossible terms of the agreement signed by the previous government is just the first step in dealing with Greece’s needless humanitarian crisis.

As noted, our own Rania Antonopoulos, senior scholar and director of the Levy Institute’s Gender Equality and the Economy program, has joined the new Syriza government as Deputy Minister of Labor. Particularly germane to her new role in helping to combat unemployment, Antonopoulos has done extensive research on direct job creation policies for Greece, featuring estimates of the macroeconomic and employment payoffs and the fiscal impact, as well as work on setting up systems of monitoring and evaluation.

At the last Minsky conference in Athens, she spoke about the necessity for a targeted job guarantee or employer-of-last-resort proposal in the context of the perilous state of the Greek labor market, including discussion of the scale of the program, estimated macroeconomic outcomes, and potential financing:

Antonopoulos was also recently interviewed by Deutsche Welle on the subject of this targeted direct job creation policy (the whole interview can be found here):

Have Greece’s existing job support programs been successful?

The problem with the existing programs is that they focus on reskilling. They offer a maximum of two months or 80 hours of pay support, with the intention of helping people get some initial work experience.

But the main problem in Greece is lack of aggregate demand and consequent lack of jobs, not lack of skills. In fact, large numbers of highly qualified professionals have been leaving the country. And 80 hours isn’t enough to learn a new professional skill anyway. Also, the agencies managing the retraining programs ate up 75 percent of the available budget. Only 25 percent went to the unemployed as wages.

What kind of jobs do you envision creating?

We’ll work with local communities and initiatives to identify socially useful jobs. A key aim is to match people’s existing skills with socially needed tasks. We also want to stimulate economic activities that move in the direction of the new government’s development priorities.

Those priorities include renewable energy and sustainable fisheries, cooperative structures for locally produced food, organic farming… Plenty of initiatives have sprung up, but they need some support. The unemployed people trying to make them happen would be very happy to have wage support until they become sustainable independent businesses.

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Wray: What’s Wrong with the Euro Setup?

Michael Stephens |

In this March 7th presentation, L. Randall Wray argues that the central problem in the EMU is not profligate peripheral nations, trade imbalances, or insufficient “structural reform.” The fundamental issue, which can best be framed through an understanding of money, is a flawed setup — the EMU is designed to fail.

La Asociación de Economía Crítica, ATTAC, Econonuestra y FUHEM Ecosocial le invitan a la sesión “Teoría monetaria moderna: ¿Austeridad presupuestaria frente a déficits públicos?”:

See also “Euroland’s Original Sin

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Spain’s Proposal for a Job Guarantee

L. Randall Wray | March 5, 2015

Yesterday I participated in a press conference and gave the first of a series of lectures in Madrid on MMT and the Job Guarantee. At the press conference, Alberto Garzón announced his party’s plan to create a million jobs in a targeted JG: “IU plantea un plan de 9.600 millones para crear un millón de empleos en un año

Alberto and his brother, Eduardo, are well-versed in MMT. He emphasized that the barrier to full employment is not technical but political. If the political will exists, full employment can be achieved and sustained. MMT shows the way to understanding the policy options that are available to sovereign government.

The newspaper article summarized some of the points I made, arguing that we should no longer see the finances of a government as similar to those of a household:

Por su parte, Randall Wray, que ha estado presente en la presentación de la propuesta, ha rechazado las teorías que equiparan el funcionamiento del Estado con el de una familia, ya que el primero puede emitir su propia moneda y no puede quedarse sin dinero, por lo que sus opciones de gasto e inversión son diferentes y la austeridad no es la única salida posible.

Esto hace plausible el trabajo garantizado, que ya se aplicó de alguna manera en los años 30 del siglo XX en Estados Unidos con el ‘New Deal’ de Franklin D. Roosevelt, pero también en Argentina y, más recientemente, en la India, que incluso ha “incluido en su Constitución el derecho al trabajo”, que la Declaración Universal de los Derechos Humanos de la ONU también recoge.

La diferencia con este tipo de propuestas aplicadas hasta la fecha en otros países –”Casi todos los que tienen un paro inferior al 2%”, según el profesor estadounidense– es que la ambición de IU es que sea “universal y permanente”, y que no se desactive una vez superada la crisis.

Many other links to yesterday’s events are here.

A universal and permanent Job Gurantee will make full employment a reality.

garzon_wray_JG

I’ll report more on MMT in Spain tomorrow.

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The 24th Annual Minsky Conference

Michael Stephens |

Is Financial Reregulation Holding Back Finance for the Global Recovery?

Organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

The National Press Club
Washington, D.C.
April 15–16, 2015

The 2015 Minsky Conference will address, among other issues, the design, flaws, and current status of the Dodd-Frank Wall Street Reform Act, including implementation of the operating procedures necessary to curtail systemic risk and prevent future crises; the insistence on fiscal austerity exemplified by the recent pronouncements of the new Congress; the sustainability of the US economic recovery; monetary policy revisions and central bank independence; the deflationary pressures associated with the ongoing eurozone debt crisis and their implications for the global economy; strategies for promoting an inclusive economy and a more equitable income distribution; and regulatory challenges for emerging market economies.

To register, please click here.

Participants

Lakshman Achuthan
Co-Founder and Chief Operations Officer, Economic Cycle Research Institute

Daniel Alpert
Managing Partner, Westwood Capital, LLC

Robert J. Barbera
Co-director, Center for Financial Economics, The Johns Hopkins University

Lael Brainard*
Member, Board of Governors of the Federal Reserve System

James Bullard
President, Federal Reserve Bank of St. Louis

Vítor Constâncio
Vice President, European Central Bank

Scott Fullwiler
Professor of Economics and James A. Leach Chair in Banking and Monetary Economics, Wartburg College

Michael Greenberger
Professor, School of Law, and Director, Center for Health and Homeland Security, The University of Maryland

Bruce Greenwald
Robert Heilbrunn Professor of Finance and Asset Management, Columbia University

Thomas Hoenig
Vice Chairman, Federal Deposit Insurance Corporation

Jan Kregel
Senior Scholar, Levy Institute, and Professor, Tallinn University of Technology

Paul McCulley

Perry Mehrling
Professor of Economics, Barnard College

Patricia Mosser
Deputy Director, Research and Analysis Center, Office of Financial Research, US Department of the Treasury

Dimitri B. Papadimitriou
President, Levy Institute

D. Nathan Sheets*
Under Secretary for International Affairs, US Department of the Treasury

Gillian Tett*
US Managing Editor, Financial Times

Paul Tucker
Senior Fellow, Harvard Business School

Éric Tymoigne
Research Associate, Levy Institute, and Professor of Economics, Lewis & Clark College

Elizabeth Warren
US Senator (D-MA)

Maxine Waters*
US Representative (D-CA, 43)

L. Randall Wray
Senior Scholar, Levy Institute, and Professor, University of Missouri–Kansas City

* Invited

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Bitcoin and the Rules of Finance

Michael Stephens | March 3, 2015

Levy Research Associate Éric Tymoigne contributed to a debate in the Wall Street Journal over the viability of bitcoin and other cryptocurrencies. Here’s Éric:

Bitcoins are an odd sort of commodity. They are not financial instruments. The value fluctuates widely, in line with changing views regarding the overall usefulness of the bitcoin payment system and the speculative manias surrounding such views. There is no financial logic behind bitcoins’ face value. In other words, if you like to gamble, this is a perfect asset. If you are looking for an alternative monetary instrument, look elsewhere.

The bitcoin system has two components: the means of payment themselves, and an online ledger, called the block chain, which is a record of all bitcoins that have been created and who holds them. The ledger is the main innovation. It provides an open, decentralized, fast, cheap and supposedly secure means of completing transactions.

But as an alleged alternative currency, bitcoin is unacceptable. Its volatility and lack of liquidity pose risks far beyond most traditional currencies.

Read the WSJ debate and the rest of Tymoigne’s contribution here: “Do Cryptocurrencies Such as Bitcoin Have a Future?

See also Tymoigne’s earlier posts at New Economic Perspectives:

The Fair Price of a Bitcoin is Zero

Bitcoin System: Some Additional Problems

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