Archive for January, 2012

Hudson: The Neo-Rentier Economy

Michael Stephens | January 31, 2012

Michael Hudson is giving a talk titled “The Road to Debt Deflation, Debt Peonage, and Neofeudalism” at the Levy Institute on Friday, February 10 at 2:00 p.m.

Hudson is a research associate at the Levy Institute and a financial analyst and president of the Institute for the Study of Long Term Economic Trends. He is distinguished research professor of economics at the University of Missouri–Kansas City and an honorary professor of economics at Huazhong University of Science and Technology, Wuhan, China.

The abstract for the presentation is below the fold. continue reading…


The Fetish for Liquidity (and Reform of the Financial System)

L. Randall Wray | January 27, 2012

In his General Theory, J.M. Keynes argued that substandard growth, financial instability, and unemployment are caused by the fetish for liquidity. The desire for a liquid position is anti-social because there is no such thing as liquidity in the aggregate. The stock market makes ownership liquid for the individual “investor” but since all the equities must be held by someone, my decision to sell-out depends on your willingness to buy-in.

I can recall about 15 years ago when the data on the financial sector’s indebtedness began to show growth much faster than GDP, reading about 125% of national income by 2006—on a scale similar to nonfinancial private sector indebtedness (households plus nonfinancial sector firms). I must admit I focused on the latter while dismissing the leveraging in the financial sector. After all, that all nets to zero: it is just one financial institution owing another. Who cares?

Well, with the benefit of twenty-twenty hindsight, we all should have cared. Big time. There were many causes of the Global Financial Collapse that began in late 2007: rising inequality and stagnant wages, a real estate and commodities bubble, household indebtedness, and what Hyman Minsky called the rise of “money manager capitalism”. All of these matter—and I think Minsky’s analysis is by far the most cogent. Indeed, the financial layering and leveraging that helped to increase the financial sector’s indebtedness, as well as its share of value added and of corporate profits, is one element of Minsky’s focus on money managers. I don’t want to go into all of that right now. What I want to do instead is to focus quite narrowly on liquidity in the financial sector.

So here’s the deal. What happened is that the financial sector taken as a whole moved into extremely short-term finance of positions in assets. This is a huge topic and is related to the transformation of investment banking partnerships that had a long-term interest in the well-being of their clients to publicly-held, pump-and-dump enterprises whose only interest was the well-being of top management.

It also is related to the rise of shadow banks that appeared to offer deposit-like liabilities but without the protection of FDIC. And it is related to the Greenspan “put” and the Bernanke “great moderation” that appeared to guarantee that all financial practices—no matter how crazily risky—would be backstopped by Uncle Sam.

And it is related to very low overnight interest rate targets by the Fed (through to 2004) that made short-term finance extremely cheap relative to longer-term finance.

All of this encouraged financial institutions to rely on insanely short short-term finance.  Read the rest here.


Is the labor market still stuck at its “new normal”?

Greg Hannsgen | January 26, 2012

The Bureau of Labor Statistics (BLS) noted on its website yesterday that in 2011, “annual totals for [layoff] events and initial claims were at their lowest levels since 2007.” Nonetheless, today’s report that the Fed open-market committee plans to keep short-term interest rates low until late 2014 reminds us of the obvious but unfortunate fact that the current slump in employment growth is continuing.

Appearing at the top of this post is a chart showing monthly Bureau of Labor Statistics (BLS) figures on new hiring, which remains very slow. Last week, in citing similar data, Ed Lazaer argued that “If jobs are scarce and wages are flat or falling, decent increases in the gross domestic product or the stock market are almost irrelevant” (WSJ link here). One should not forget that the last official recession began in December 2007—well over four years ago. (National Bureau of Economic Research recession dates are indicated with grey shading in the figure above.)  Such dates are somewhat arbitrary. To take another example, the BLS’s broadest labor underutilization rate still stood at 15.2 percent as of last month, down only modestly from 16.6 percent the previous December.


Breaking Up Bank of America?

Michael Stephens | January 25, 2012

Speaking of too big to fail, a petition organized by Public Citizen has been sent to the Federal Reserve and Financial Stability Oversight Council (FSOC) calling for the break up of Bank of America.  The petition identifies BofA, given its size and fragility, as a threat to the US financial system.  It cites a recent NYU study that ranks the financial institution as posing the greatest systemic risk among US firms, based on capital shortfall.  Public Citizen also argues that Bank of America is simply too large and too interconnected to be regulated effectively.

Micah Hauptman explains that the break up and reorganization could be carried out under the authority given to the Fed and FSOC under section 121 of the Dodd-Frank Act (if a financial institution is determined to pose a “grave threat”).  The petition argues that taking action now under section 121 is preferable to attempting an orderly liquidation in the midst of a crisis:

If the Agencies do not use section 121 in advance of financial distress at a firm that poses a grave threat to U.S. financial stability, they risk undermining other critical Dodd-Frank Act provisions. Many Dodd-Frank Act provisions related to systemic risk would be far easier to implement if systemically important institutions were smaller and less complex. One of the most critical is the orderly liquidation authority in Title II.

If a large, systemically dangerous institution such as Bank of America were to fail, regulators would have only one course of action—to attempt orderly liquidation. To permit the institution to fail without intervening would result in financial disaster; to bail it out would sharply contradict the Dodd-Frank Act’s express policy of “protect[ing] the American taxpayer by ending bailouts.” But the Dodd-Frank Act’s orderly liquidation procedures are untested and could prove difficult to implement in practice, particularly with respect to the largest and most complex institutions such as Bank of America.

One potential problem with the orderly liquidation authority is that U.S. officials lack jurisdiction over extraterritorial entities and therefore may be unable to put globally significant institutions through resolution. Currently, there are no existing international agreements regarding the resolution of a domestic institution’s entities that operate in foreign countries. Without such agreements in advance, regulators would need to try to reach agreements, potentially requiring changes in the laws of multiple countries, in the midst of a crisis.

You can read the petition here and a related letter, signed by economists, legal scholars, and various public interest groups, here.


Minsky in the News

Thorvald Grung Moe |

The Financial Times has been running a series for some time on “Capitalism in Crisis.” In yesterday’s paper Martin Wolf provided a summary of the discussion and proposed “Seven ways to fix the system’s flaws.” The first and most important task, he notes, is to manage macro instability. In this regard, he pays homage to the late Hyman Minsky and notes that

… his masterpiece, Stabilizing an Unstable Economy, provided incomparably the best account of why this theory (of a stable capitalist economy) is wrong. Periods of stability and prosperity sow the seeds of their downfall. The leveraging of returns, principally by borrowing, is then viewed as a certain route to wealth. Those engaged in the financial system create – and profit greatly from – such leverage. When people underestimate perils, as they do in good times, leverage explodes.

What is the answer to macro instability? According to Martin Wolf, the first answer is to recognize that crisis is inherent in free-market capitalism. Second, macroprudential policies matter, including restrictions on leverage and better capital buffers in banks. And finally, governments, including central banks, have a role to play in stabilizing the economy after a crisis.

As for the financial system, Wolf wants “to protect finance from the economy and the economy from finance” by building bigger shock absorbers in the form of better capital buffers and less leverage. There should be no more “too big to fail.”

Wolf notes at the end of his article the close links between wealth and politics, but his suggestion to partially fund political parties and elections will not solve this problem, even though it may represent a good start. The crisis has shown that the links between finance and politics are deeply entrenched both in the US and Europe, and unless deep structural reforms are enforced, the problem of TBTF is not likely to go away.

The increased recognition of Minsky’s outstanding theories is indeed welcome, especially by Martin Wolf (who also has become somewhat of a Godley follower in his analysis of the current global crisis). But whereas his diagnosis of the global financial crisis is largely in line with Minsky’s financial instability hypothesis, his policy advice falls short of what Minsky would have prescribed. continue reading…


Another view on “policy pragmatism” in mainstream economics

Greg Hannsgen | January 24, 2012

Paul Krugman—orthodox economist? Heterodox economist? Pragmatic economist? New Keynesian economist? Michael Stephens recently commented on an article in the Economist that discussed MMT, as well as two other non-mainstream schools of macroeconomic thought. The article contrasted the three relatively unfamiliar and unorthodox approaches with “[m]ainstream figures such as Paul Krugman and Greg Mankiw[, who] have commanded large online audiences for years.”

As Michael points out,

If you step back, what’s slightly unsatisfactory about [describing Krugman simply as a mainstream economist] is that Krugman is, right now, more in tune with the policy preferences of two-thirds of these “doctrines on the edge of economics” than he is with the reigning fiscal or monetary policy stance of the US government. 

But as Michael well knows, Krugman is hardly alone among neoclassical scholars in most of his policy views. Micheal’s point is true of quite a few mainstream economists right now—they are far more flexible on the policy issues that dominate the agenda today than they are on many other economic issues. This excerpt from a recent essay written by Marc Lavoie may help to illuminate the very significant differences of opinion that distinguish such forward-thinking neoclassicals from numerous heterodox economists around the world:

Paul Krugman (2009) has also made quite a stir by continue reading…


In What Sense Does Government Debt “Burden”?

Michael Stephens | January 23, 2012

Robert Skidelsky runs through and corrects five fallacies about debt that one often hears lazily deployed in the public arena.  His third correction:

…the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

Nick Rowe had a post a couple weeks back on this same topic that might be of interest to some MMTers and Abba Lernerites.  Rowe lays out four different positions on the question of whether or in what sense the national debt imposes a burden on future generations, the first of which (it’s labeled “Abba Lerner”) sounds like it’s supposed to represent functional finance.  Rowe is ultimately dismissive of the functional finance approach, but you’ll find quite a bit of lively discussion in comments and a number of links to the ongoing debate.

For some background reading on functional finance, Thorvald Grung Moe recommends this short piece from 1943 by Abba Lerner himself:  “Functional Finance and the Federal Debt.”  It’s tightly argued and written in a reasonably jargon-free style that’s so rare in economics or public policy writing.

For those who want more of the basics and central contrasts, Mathew Forstater’s primer on deficit “doves,” “hawks,” and “owls” (beginning on p. 6 of this working paper) is a helpful place to start.

Update:  Nick Rowe graciously engages in the comments section below.


Laughter: The New Financial Instability Index

Michael Stephens | January 20, 2012

Phil Izzo of the Wall Street Journal points us to the invaluable work of the people at The Daily Stag Hunt, who tallied the number of times that laughter appears in the transcripts of the Fed’s FOMC meetings.  Peak laughter, as The Daily Stag points out, corresponds nicely with the height of the housing bubble:

If there weren’t a six-year delay on the release of these transcripts, this could be a useful tool for measuring systemic risk.


Deficit Doves and Owls: How to Worry About Healthcare Costs

Michael Stephens |

You may not agree with Alan Blinder when he writes in the Wall Street Journal that the budget deficit should be an issue in the 2012 campaign.  But it certainly will be.  And Blinder deserves kudos for pointing out that there are no immediate or near-term economic problems stemming from US deficit and debt levels:

Myth No. 2 is that America’s deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be “paid for” immediately.

Wrong. Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates. In purchasing-power terms, they are paying the U.S. government to borrow their money!”

Blinder also points out that if you accept the CBO’s long-term budget forecasts (James Galbraith notes some problems with the projections here), then the issue is entirely one of healthcare costs.  Deficit doves and deficit owls (proponents of “functional finance”) will dispute the optimal or sustainable level of long-term deficits, but if you care about the long-term deficit, then you care about government healthcare costs.  And growth of government healthcare costs is largely a function of cost inflation in the private market.  So if you have any interest in the long-term deficit, then you have to have a plan for controlling long-term healthcare costs system-wide.  If you don’t have such a plan, you’re engaged in some other type of project.

If you haven’t seen it already, this is a great utility that’s been linked to over the years, allowing you to see what the US budget deficit would look like if we spent the same amount per capita as other nations.  For the owls, this won’t be a matter of long-term debt and deficits, but of efficiency:  what exactly are we getting by spending more than twice as much, per capita, as other wealthy nations?

Randall Wray and Marshall Auerback put out a Levy Institute policy brief in 2010 on their vision for healthcare reform that featured giving people under 65 the option to “buy in” to Medicare (you will recall that at one point during the health reform battle this provision looked like it might be included in the final bill.  It was ultimately dumped by Joe Lieberman).  Read the policy brief here.


Who Benefits from Failed Eurozone Policies?

Michael Stephens | January 19, 2012

As a counterpoint to the last post on the curious dominance of conservative macro policy ideas in Europe, here is Matías Vernengo getting into the political economy of who benefits from these failed policies and why there seems to be no sense of urgency around the fact that the real economy is broken:

(This is from a Real News Network interview from December, originally highlighted at TripleCrisis)

Also check out Vernengo’s recently released working paper.  Vernengo and his coauthor, Pérez-Caldentey, give a post-Keynesian interpretation of the eurozone crisis that places financial deregulation and the core-periphery imbalances that are inherent in the euro model at center stage.