Archive for June, 2013

Germany and the Euro: Paragon or Parasite?

Jörg Bibow | June 28, 2013

The French and German governments recently issued a joint statement titled “Together for a stronger Europe of Stability and Growth.” The communiqué emphasizes strengthened policy coordination and the use of indicators in establishing a common assessment of economic conditions in the currency union as a whole, member states, and particular markets. The new push for deeper policy coordination is intended to prevent future crises by identifying early on any incipient imbalances that might point toward fresh troubles ahead. Overall, the initiative aims at making the European economy more resilient and competitive.

Such an exercise begs the question of what should be the benchmark and underlying model in the envisioned common assessment. In this regard, Germany has sharpened its diplomatic skill-set, and is keen to have France on its side at the launching platform. For at some point the benchmark will need to be spelled out. While today’s German authorities may not wish to say so all too loudly, it is clear that they view Germany as the model to follow for its crisis-stricken euro partners. So it was left to Angela Merkel’s predecessor, Gerhard Schröder, to be a little more suggestive in a recent op-ed in The Financial Times titled “France should copy Germany’s reforms to thrive.” Referring to the experiences with Germany’s Agenda 2010 reforms of 2003-5, which apparently took a few years beyond Mr. Schröder’s chancellorship to bear fruit, the former German chancellor closes charmingly with the words: “I am confident that our friends in Paris will act accordingly.”

For it is France in particular who has come under immense pressure of late to finally do the right thing to get its ailing economy back on track. The right thing being to do the German thing of course: to embark on allegedly growth-friendly fiscal consolidation together with supposedly growth-boosting structural reform. Legend has it that this strategy restored Germany’s competitiveness and provided the foundation for the country’s miraculous resurrection from the depressing status as the “sick man of the euro” only so very few years ago. But is Germany really the model of excellence or perfection when it comes to the optimal economic management of the eurozone economy? continue reading…


Euro Crisis Sees Reloading Of Germany’s Current Account Surplus

Jörg Bibow | June 26, 2013

Who is running the largest current account surplus in the world? China? Saudi Arabia? Both wrong! These are only the number two and three countries. China had a record $420bn surplus in 2008, but that imbalance has more than halved since. As a share of GDP China’s external imbalance is down from ten to two-and-a-half percent since the global crisis — evidence of a remarkable rebalancing. The oil price would need to be significantly higher still to make Saudi Arabia the number one.

So for 2012 the number one prize actually goes to: Germany! The world champion of 2012 ran up a current account surplus of almost $240bn. At a rocking seven percent of GDP, that’s just slightly below Germany’s pre-crisis record of almost $250bn in U.S. dollar terms. In euro terms 2012 actually set a new record for Germany. And that is an interesting part of the whole story, as the euro has depreciated by some 20 percent from its peak against the U.S. dollar.

Bibow_Levy Blog_Current Account 1

Back in the 2000s, the euro appreciated very strongly against the U.S. dollar (as well as in real effective terms) between 2002 and the summer of 2008. Euro appreciation cut Germany off from benefiting even more from the record global boom of the 2000s. However, somehow Germany, then also known as the “sick man of the euro,” managed to run up gigantic regional current account surpluses, both vis-à-vis its euro partners and vis-à-vis the larger European Union (of 27 member states). At its pre-global crisis peak Europe was the primary source of Germany’s current account surpluses. Don’t miss then what a remarkable re-loading and re-sourcing of German external surpluses has occurred since then. continue reading…


Fed Tapering and Bullard’s Dissent

Michael Stephens | June 20, 2013


Here’s what’s new from yesterday’s FOMC statement and Bernanke’s press conference:  the Fed has indicated that asset purchases (QE) will end when unemployment hits 7 percent.  (Note that that’s different from the point at which the Fed will begin considering raising short-term interest rates — previously linked to a threshold of 6.5 percent unemployment.)

Commentators have pointed out that the Fed seems to be basing its expectations — that asset purchases will begin “tapering” this year and end by next year — on some fairly optimistic economic forecasts (this is a recurring issue).  There are also a lot of questions as to what’s motivating these signals of a less expansionary stance, given that inflation is too low by the Fed’s own measure.  “Frankly,” Yves Smith writes, “the real issue seems to be that the Fed has gotten itchy about ending QE.  Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures.”

Somewhat related to this post on the Fed’s historic “reaction function,” here’s Tim Duy’s analysis:

Bernanke continued to deflect attention from the low inflation numbers, describing them as largely transitory, identifying the impact of the sequester on medical payments as a factor.  Here is what I think is going on:  Overall, the Fed has basically a Phillips Curve view of inflation.  Low inflation now is attributable to high unemployment.  Given that unemployment is forecast to fall, and the forecasts are improving such that it is falling faster than anticipated, they anticipate that disinflation will soon be halted.  In other words, right now policy is being driven by the unemployment rate.  The more quickly unemployment is moving to the Fed’s long run target, the more they will reduce accommodation despite low inflation.  At least, that is what it appears.

One interesting wrinkle is that James Bullard dissented from the near-unanimous decision.  According to the official FOMC statement, he “believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”

Normally, you would think of Bullard as a “hawk” (this dove–hawk framework seems to have become less useful in the era of unconventional monetary policy).  In his April speech at the Minsky conference, Bullard warned against unemployment targeting and suggested the Fed ought to focus primarily on price stability (price-level targeting).  The cynic might dismiss this as just a convenient technical excuse for ignoring high unemployment, but Bullard’s dissent suggests that he takes the model quite seriously — which is to say, not just when inflation is above or near the target.  If you want more insight into what might be motivating his vote, here’s the full speech:

Update (6/21):  Bullard explains his dissent (copied below from St. Louis Fed).  Key line:  “to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.” continue reading…


Coming Soon: Another London Whale Shocker?

Dimitri Papadimitriou | June 19, 2013

Remember last summer? The London Whale, that blockbuster adventure thriller, triggered one chill after another as the high-risk action at JPMorgan Chase was revealed. Today, the threats posed by megabanks remain just below the surface — no crisis at the moment — but they’re equally dangerous. A major sequel this year cannot be ruled out.

Dodd-Frank, the law designed to reform the financial system, had already been on the books for two years when JPMorgan’s troubles surfaced. In an effort to figure out how it failed to prevent massive losses by one of the world’s largest banks, a Senate subcommittee investigated. This spring, it issued its report on the outsize positions taken by the bank’s Chief Investment Office (CIO) — with a lead trader known as ‘the London Whale’ — and the department’s subsequent six billion dollar crash.

The committee detailed a list of concealed high-risk activities, and determined that the CIO’s so-called ‘hedging’ activities were really just disguised propriety trading, that is, volatile, high-profit trades on behalf of the bank itself, rather than on behalf of its customers in return for commissions.

Levy Economics Institute Senior Scholar Jan Kregel has taken these conclusions a step further, after analyzing the evidence. In a new research paper he makes the case that the primary cause of the bank’s difficulties was not that it engaged in proprietary trading: It was the concealment of this activity through the creation of a ‘shadow bank’, with the express purpose of this hardly-visible bank-within-the-bank being to create profits. What began as a unit to hedge risks — a safeguard — no longer served that purpose. He argues that when megabanks operate across all aspects of finance, this expansion of propriety trading becomes inevitable.

The solution, Kregel says, is not to prevent hedging, but rather to recognize that it can never be consistently profitable. continue reading…


Galbraith on the Greek Crisis and the “Very Patient and Stubborn Profession”

Michael Stephens | June 18, 2013

Last week, James Galbraith was supposed to be interviewed by ERT, the public broadcaster in Greece.  Events intervened when the Greek government ordered that ERT be shut down, and so instead of sitting for the interview, Galbraith delivered this speech in Thessaloniki in front of a large gathering assembled in response to the closure (ERT defied the directive and continued broadcasting on the internet; yesterday, a Greek court ordered that ERT be put temporarily back on the air).  After noting that the Greek crisis has been going on for five years now, with no sign of progress, Galbraith suggested that it might be time to start reconsidering the policy approach:  “After a certain amount of time, even an economist ought to reconsider their ideas. Most other people would so much more quickly, but we are a very patient and stubborn profession.”


A Fiscal Fallacy?

Greg Hannsgen | June 17, 2013

We have been advocates of the theory that fiscal tightening is threatening economic recovery (last week, for example).

John Taylor objects to the view that fiscal tightness has been the key to the slowness of growth in the recovery.

In his blog, he states, “As a matter of national income and product accounting, it is true that cuts in state and local government purchases subtract from GDP, but these cuts are mainly an endogenous consequence not an exogenous cause of the weak recovery.

Taylor’s reasoning is that state and local government spending has been constrained by weak tax revenues. This is certainly true.

However, Taylor’s argument seems to imply and rely upon another false dichotomy—variables are either exogenous causes or endogenous outcomes. Is it not more reasonable to say that these reductions in spending at the state and local level are “mainly an endogenous consequence and endogenous cause of the weak recovery”?

(Note for further reading: This scheme of cumulative causation or positive feedback is part of the fiscal trap thesis advanced in a brief I wrote with Dimitri Papadimitriou last summer and fall: especially in a non-sovereign-currency system, spending cuts and slow growth can be part of a vicious cycle or downward spiral. This 2010 Levy Institute brief, among other publications, assessed the extent to which fiscal stimulus of various types can help to break the cycle.)


New Book: The Rise and Fall of Money Manager Capitalism

Michael Stephens |

A new book by the Levy Institute’s Randall Wray and Éric Tymoigne (release date July 31):

The Rise and Fall of Money Manager Capitalism: Minsky’s half century from World War Two to the Great Recession

The book studies the trends that led to the worst financial crisis since the Great Depression, as well as the unfolding of the crisis, in order to provide policy recommendations to improve financial stability. The book starts with changes in monetary policy and income distribution from the 1970s. These changes profoundly modified the foundations of economic growth in the US by destroying the commitment banking model and by decreasing the earning power of households whose consumption has been at the core of the growth process.

The main themes of the book are the changes in the financial structure and income distribution, the collapse of the Ponzi process in 2007, and actual and prospective policy responses. The objective is to show that Minsky’s approach can be used to understand the making and unfolding of the crisis and to draw some policy implications to improve financial stability.

Rise and Fall of Money Manager Capitalism_Cover


End of Week Links

Michael Stephens | June 14, 2013

Boston Fed’s Eric Rosengren on the risk of financial runs and the implications for financial stability*  22nd Annual Minsky Conference (video)

*(Link has changed:  see below the fold of this post for Rosengren video)

Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt  New York Fed

‘Financialization’ as a Cause of Economic Malaise  NY Times

The Cash and I  J. W. Mason

A Blogospheric Taxonomy of the Fiscalist vs Monetarist Debate  FT

The Biggest Economic Mystery of 2013: What’s Up With Inflation?  Atlantic

How Schlubs Get Taken By Wall Street Pros  Forbes

Fiscal Implications of the ECB’s Bond-buying Program VoxEU

continue reading…


Papadimitriou: No End in Sight for Greece’s Economic Crisis (Greek)

Michael Stephens | June 13, 2013

In the context of the IMF’s latest release in its mea culpa series, this time on the problems with the Greek bailout plan (pdf), Dimitri Papadimitriou appeared on Skai TV to discuss the worsening crisis in Greece, the failure of austerity, and the need to renegotiate the bailout deal.  Segment (in Greek) begins at 9:35 mark:


Has There Been a Fiscal Shock in the United States Recently?

Greg Hannsgen | June 12, 2013

Gov spending June 2012

I used a figure like the one above in a talk that I gave at the Eastern Economic Association 39th Annual Conference last month on the topic “Heterodox Shocks.” (The diagram above incorporates data released at the end of last month.) Total government spending in the US, shown in red, continues to fall as a percentage of GDP. Similarly, federal spending is trending downward following a 2009Q2 peak. The effects of the spending sequester, which technically went into effect on March 1, have probably not been fully felt yet in the Q1 data.

My talk was intended only to be a thought-provoking discussion of the concept of shocks in macroeconomics (including policy shocks) and does not contain, say, a complete new economic model. It began with two concrete examples from recent data, including the one above, which may be of some interest to readers who have followed the Institute’s work on the recent move to austerity in US fiscal policy, in this blog and elsewhere on our website. For those interested, a revised working paper version of the conference paper just went online and is available at this link. Finally, this Powerpoint file may be of interest to readers looking for an outline-style summary of the talk and paper, though it contains some additional visual examples and could be described mostly as a pitch for the paper.