MMT and the New New Deal

L. Randall Wray | November 20, 2015

Yesterday, Senator Bernie Sanders gave an important speech in which he invoked President Roosevelt’s “Second Bill of Rights” in defense of his platform. As Bernie rightly pointed out, all of Roosevelt’s New Deal social programs to which we have become accustomed were tagged as “socialism”—just as pundits are branding Bernie’s proposals as dangerous socialist ideas. You can see Bernie’s prepared remarks here.

Just before Bernie’s speech, I was asked to do an interview with Alex Jensen, on TBS eFM’s “This Morning” English radio program in Seoul, Korea. I was sent a list of questions and jotted down very brief responses. Unfortunately, in our radio interview we were only able to get through a few of these. You can listen to the interview here (“1119 Issue Today with Professor L.R. Wray”).

As you will see, in addition to the subject of MMT and its critics, we talked about the platform of Senator Sanders and why his proposals have caught the imagination of the US population.

Here are some of the questions and my brief (written) answers. continue reading…


Can Public Money Creation Work? Some Answers from Canadian History

Michael Stephens | November 13, 2015

by Josh Ryan-Collins

The theoretical and policy arguments for monetary reform are becoming more accepted by economists and establishment figures. The financial crisis blew apart the idea that deregulated private money creation by commercial banks leads to more efficient outcomes and allocation of capital, as has been noted by Martin Wolf of the Financial Times and Lord Adair Turner, amongst others. Yet there are few examples of how public money creation – and its variants – can support economic growth without causing negative side effects, not least inflation.

Is monetary financing inflationary?In a new working paper, I examine the case of the Bank of Canada (the Canadian central bank) in the 1935-1975 period, perhaps the most interesting example of public money creation in the 20th century in the English speaking world. Throughout this period the Bank of Canada engaged in significant direct or indirect monetary financing of government debt. In other words, the central bank created new money that was credited to the government’s account either via purchase of government bonds or direct lending. On average, about one-fifth of government debt was financed and held by the central bank, with all interest returning to the state (Figure 1).

Figure 1: Monetary financing and consumer price inflation in Canada, 1935-2012[1]

JRC_Fig 1

This monetary financing supported the Canadian state to recover from the Great Depression, fight World War II, enable post-war reconstruction and, in the 30 years following the war, enjoy the longest period of economic growth and high employment in its history. The Bank also created one of the worlds’ largest industrial development banks for the financing of small and medium sized enterprises (SMEs), eventually providing a quarter of all loans to SMEs, again funded via public money creation.

It is a remarkable story and one few economists or economic historians have examined. Even more remarkable is the fact that this vast monetisation program did not prove to be inflationary. continue reading…


New Book on EU Financial Regulation

Michael Stephens | November 11, 2015

A new volume on EU financial regulation edited by Rainer Kattel, Jan Kregel, and Mario Tonveronachi:


Have past and more recent regulatory changes contributed to increased financial stability in the European Union (EU), or have they improved the efficiency of individual banks and national financial systems within the EU? Edited by Rainer Kattel, Tallinn University of Technology, Director of Research Jan Kregel, and Mario Tonveronachi, University of Siena, this volume offers a comparative overview of how financial regulations have evolved in various European countries since the introduction of the single European market in 1986. The collection includes a number of country studies (France, Germany, Italy, Spain, Estonia, Hungary, Slovenia) that analyze the domestic financial regulatory structure at the beginning of the period, how the EU directives have been introduced into domestic legislation, and their impact on the financial structure of the economy. Other contributions examine regulatory changes in the UK and Nordic countries, and in postcrisis America.

You can read an excerpt (which includes the Introduction and part of Chapter 2) at Routledge.

Table of contents below the fold: continue reading…


25th Annual Minsky Conference Returns to Blithewood

Michael Stephens | November 10, 2015

The 2016 Minsky conference will be held here at Blithewood mansion, home of the Levy Institute. Barney Frank will be among the keynote speakers:

Will the Global Economic Environment Constrain US Growth and Employment?

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

Levy Economics Institute of Bard College
Annandale-on-Hudson, New York 12504

April 12–13, 2016

The 2016 Minsky Conference will address whether what appears to be a global economic slowdown will jeopardize the implementation and efficiency of Dodd-Frank regulatory reforms, the transition of monetary policy away from zero interest rates, and the “new” normal of fiscal policy, as well as the use of fiscal policies aimed at achieving sustainable growth and full employment.


continue reading…


“Why Minsky Matters” Now Available

Michael Stephens | November 4, 2015

“Hyman Minsky is the most important economist since Keynes, yet it’s virtually impossible to find any books about him.”

That’s from Michael Pettis’s blurb for Randy Wray’s new book Why Minsky Matters, which is now shipping:

Minsky Matters Cover

Hyman Minsky’s name has appeared in the popular press a lot more since the financial crisis, but often without much more elaboration of his ideas than a paragraph noting (to the bewilderment of non-economists) that his economic research stands out because of the way in which it takes into account the significance of the financial sector and the possibility of financial crises.

And as Wray points out, reading Minsky can be a challenge (though one you won’t regret embracing: you can browse through the digital archive of his papers here). This book is a guided tour of Minsky’s work, covering everything from his views on the inherent instability of the financial dynamics of capitalism to his work on poverty and full employment policies.

The book’s introduction is available for download (pdf), and Arnold Kling (who declares himself “not completely converted”) just posted a nice review.


Is a “Bad Bank” Model the Solution to Greece’s Credit Crunch?

Michael Stephens | October 30, 2015

Dimitri Papadimitriou and new Levy Institute Research Associate Emilios Avgouleas write about one of the obstacles to recovery of the Greek economy: the absence of credit expansion in connection with still-troubled Greek banks.

Beyond deposit flight and the ongoing recession, Papadimitriou and Avgouleas argue that the botched recapitalization of Greek banks can also be blamed for the failure to alleviate this liquidity crunch. As the next round approaches, they warn that past recapitalization efforts did not follow internationally-tested best practices:

The decision by creditors to allow the old, now minority, shareholders and incumbent management to retain effective control of Greek banks is highly questionable. This rather unusual governance approach in a post-rescue period meant that the Greek banking system did not benefit from any cleanup efforts, especially in light of the interlocking and privileged relationships some bankers enjoy with Greek political, media, and economic interests.

In addition, they stress that effective recapitalization requires some attempt to restructure loan portfolios: an attempt to deal with the significant — and still growing — share of loans falling into the “nonperforming” category (NPLs). This chart showing the growth of NPLs (from a strategic analysis by Papadimitriou, Michalis Nikiforos, and Gennaro Zezza), gives you a sense of the debt-deflation trap in which Greece is stuck:

Greece_Nonperforming Loans

In order to clear the way for Greek banks to return to making loans, Avgouleas and Papadimitriou propose the creation of a “bad bank” that would take on the NPLs, with government guarantees currently extended to Greek banks withdrawn and applied instead to the bad bank fund.

Under this scheme, Greek borrowers would be offered an effective way to restructure their borderline loans while banks could avoid writing off all NPLs, with significant consequences for their balance sheets, and instead have the loans objectively valued and transferred to the bad bank. In addition, creditors would not have to face an unduly inflated Greek bank rescue bill, and the investment that Greek taxpayers have made and will make in the banking sector would not be entirely wiped out. Sound bank recapitalization with concurrent avoidance of any creditor bail-in—which under the current circumstances would prove catastrophic—and implementation of robust and sensible corporate governance changes could help the Greek banking sector return to financial health.

The complete analysis can be found in their newly released policy note (pdf).


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…