Archive for the ‘Financial Crisis’ Category

Galbraith and Skidelsky: The End of Normal and the Future of Work (Video)

Michael Stephens | November 13, 2014

Here are the keynote addresses delivered by James Galbraith (“The End of Normal”) and Robert Skidelsky (“The Future of Work”) at the 12th International Post Keynesian Conference (more videos from the conference can be found here):



A New Book on Money to Please Fans of Minsky and MMT

Greg Hannsgen | August 12, 2014

Opinions heard on the subject of money and the economy often seem uninformed or absurd. For a great book about money and monetary theory, I would strongly recommend Money: The Unauthorized Biography by Felix Martin, a 2014 book from Alfred A. Knopf. This book might just please students of history and finance and others who might already be familiar with one theory or another about the origins of money and ways of managing a monetary system. These and other readers might benefit from a readable account of these theories up to the current time and what they might have to say about the recent financial crisis and its roots in theory and practice.

Martin is critical of mainstream finance as well as orthodox macroeconomics, and friendly to points of view related to Hyman Minsky’s financial fragility hypothesis and other truly monetary forms of economics. The latter were introduced to the civilized world by John Maynard Keynes, Bagehot, Wynne Godley, James Tobin, our own Randy Wray, and others sometimes mentioned in this blog. But as the new book shows, their intellectual roots in monetary thought go deeper into the centuries. Martin’s accounts seems fair all around. I think it will be one of those books that offers almost everyone who reads it something surprising and of interest.  Nonetheless, the book is one of those many signs of widespread recognition that Keynes’s monetary production theory and related points of view offer a vantage point that the mainstream missed, helping to bring on the financial crisis. It is a fascinating and lucid read.

(By the way, the New York Times Book Review ran a favorable review earlier this year in an edition that covered many titles related to the theme of money–some not so good.)

As you may have guessed, I have been doing some reading of new books from a summer trip to my local bookstore and hope to get to more of them in posts in the near future.


Predatory Capitalism and Where to Go from Here

C. J. Polychroniou | July 23, 2014

Contemporary capitalism is characterized by a political economy that revolves around finance capital, is based on a savage form of free market fundamentalism, and thrives on a wave of globalizing processes and global financial networks that have produced global economic oligarchies with the capacity to influence the shaping of policymaking across nations.[1] As such, the landscape of contemporary capitalism is shaped by three interrelated forces: financialization, neoliberalism, and globalization. All three of these elements constitute part of a coherent whole which has given rise to an entity called predatory capitalism.[2]

On the Links between Financialization, Neoliberalism, and Globalization

The three pillars on which contemporary predatory capitalism is structured—financialization, neoliberalism, and globalization—need to be understood on the basis of a structural connectivity model, although it is rather incorrect to reduce one to the other. Let me explain.

The surge of financial capital long predates the current neoliberal era, and the financialization of the economy takes place independently of neoliberalism, although it is greatly enhanced by the weakening of regulatory regimes and the collusion between finance capital and political officials that prevails under the neoliberal order. Neoliberalism, with its emphasis on corporate power, deregulation, the marketization of society, the glorification of profit and the contempt for public goods and values, provides the ideological and political support needed for the financialization of the economy and the undermining of the real economy. Thus, challenging neoliberalism—a task of herculean proportions given than virtually every aspect of the economy and of the world as a whole, from schools to the workplace and from post offices to the IMF, functions today on the basis of neoliberal premises—does not necessarily imply a break with the financialization processes under way in contemporary capitalist economies. Financialization needs to be tackled on its own terms, possibly with alternative finance systems and highly interventionist policies, which include the nationalization of banks, rather than through regulation alone. In any case, what is definitely needed in order to constrain the destructive aspects of financial capitalism is what the late American heterodox economist Hyman Minsky referred to as “big government.” We shall return to Minsky later in the analysis. continue reading…


End of Week Links 6/27/2014

Michael Stephens | June 27, 2014

Ann Pettifor, “Out of thin air — Why banks must be allowed to create money

“In his regular column, Martin Wolf called for private banks to be stripped of their power to create money. Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. … Furthermore, Wolf argues, private commercial banks would only be allowed to: ‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’

Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so. I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s. Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around.”

Related: Jan Kregel, “Minsky and the Narrow Banking Proposal: No Solution for Financial Reform

Jayati Ghosh, “Locking Out Financial Regulation

“This agreement [the Trade in Services Agreement (TISA)] is apparently supposed to be “classified” information – in other words, secret and unknown to the public that will be affected by it – for a full five years after it … enters into force or the negotiations are terminated!

That an international treaty that has binding and enforceable obligations can be treated as secret for five years after it comes into force is not only bizarre but almost unthinkable. The need for such secrecy would be inexplicable even if such agreements were actually in the interests of people whose governments are involved in such negotiations. That secrecy is sought would on its own be reason for concern, but the little that has been leaked out of the state of the negotiations suggests even more reasons for alarm, especially because such a deal would have far-reaching implications for financial stability and adversely affect everyone in the world.”

J. W. Mason, “Where Do Interest Rates Come From?

“What determines the level of interest rates? It seems like a simple question, but I don’t think economics — orthodox or heterodox — has an adequate answer.”

Noah Smith, “What I learned in econ grad school

“… this was back before the financial crisis, at the tail end of the unfortunately named “Great Moderation.” When the big crisis happened, I quickly realized that nothing I had learned in my first-year course could help me explain what I was seeing on the news. Given my dim view of the standards of verification and usefulness to which the theories I knew had been subjected, I was not surprised.”

Eric Schliesser, “Milton Piketty

“Piketty is the true heir of Milton Friedman. This claim might seem perverse if one focuses on policy. But if one looks at (a) methodology, and, crucially, (b) the conception of what economics might be about, ultimately, then Piketty’s book is an attempt to return economics to an approach that was never really dominant, but that can be book-ended between Adam Smith’s Digression on Silver (or Hume’s population essay) and Friedman’s (1963) Monetary History.”


“Who Is Minsky and Why Should We Care?”

Michael Stephens | June 25, 2014

These two interview segments, with Marshall Auerback and Edward Harrison (at 23mins), feature some basic discussion of Hyman Minsky and his view of financial crises:



Inequality, Unsustainable Debt, and the Next Crisis

Michael Stephens | June 18, 2014

In The Guardian, Dimitri Papadimitriou warns that the combined forces of persistent inequality, shrinking government budgets, and the US trade deficit are setting the stage for another private-debt-driven financial crisis:

Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn’t going to be propelled by an export bonanza, or by a government investment boom.

It will have to be driven by spending. Even a limping recovery like the one we’re nursing along today depends on domestic demand – consumer spending not just by the wealthy, but by everyone else.

We believe that Americans will keep consuming at the same ever-rising rates of past decades, during good times and bad. But for the vast majority, wages and wealth aren’t going up, so we’re anticipating that the majority of Americans – the 90% – will once again do what was done before: borrow, and then borrow more.


The more – proportionally – that the top 10% has prospered, saved and invested (naturally, the gains found their way into the financial markets), the more the bottom 90% has borrowed.

Look at the record of how these phenomena have travelled in lockstep. In the first three decades after the second world war, the income of the 90% rose at the same pace as its consumption. But after the mid-1970s, a gap formed – the trend lines on earning and outlays spread apart. Spending continued apace. Real income, meanwhile, stagnated. It was lower in 2012 than it had been forty years earlier. That ever-increasing gap between income and consumption has been filled by borrowing.

Papadimitriou also points out that corporations, which pulled back after the recession, are once again increasing their debt (this began in 2010), and the expectation is for non-financial corporations to add some $4 trillion in debt between now and 2017.

If these debt-fuelled spending dynamics (on the part of corporations and the bottom 90 percent households) don’t come to pass, then we’re looking at a period of low growth and high unemployment–“secular stagnation”–instead.

There are a number of lessons here, but I’d like to highlight two, in case they aren’t obvious. First, even if you aren’t persuaded that income inequality needs to be addressed for reasons of fairness, then financial stability concerns alone should suffice. Second, in the absence of some impending export boom, continuing to reduce the budget deficit at a record pace is the height of recklessness.

Read the Guardian piece for more. The underlying macroeconomic research comes from the Levy Institute’s most recent strategic analysis: “Is Rising Inequality a Hindrance to the US Economic Recovery?


Bubbles and Piketty: An Interview with L. Randall Wray

Michael Stephens | May 29, 2014

L. Randall Wray appeared on Thom Hartmann’s radio show yesterday for a lengthy and wide-ranging interview:


Phillips Curve Still Alive for Compensation?

Greg Hannsgen | May 13, 2014


On reading a recent post by Ed Dolan at Economonitor with some evidence of the lack of a strong Phillips relationship for consumer-price inflation in US data, it occurred to me to try a measure of total compensation per hour with recent data. The wage relationship estimated over all available quarters, using averaged monthly observations for the civilian unemployment rate, is shown above, with a scatter plot and an estimated regression line. Like the relationship estimated by Dolan, the regression line above suffers from a rather loose fit (constant: 6.87; slope coefficient: -.29; R-squared = .02). A complete explanation of inflation is complicated and of course also involves other costs, including raw materials such as fuel. The latter costs are subject of course to “cost-push”-type inflation at times, as are wages. Exchange rates of course affect these costs.

A time series graph below displays both series over the entire sample period, 1948q1 to 2014q1. As some have observed, the exceedingly high unemployment rates of the post-financial-crisis era (blue line) have resulted in very weak or negative compensation growth rates (red line). The latter are not adjusted for inflation in the figures, since we are focusing on nominal data in this post.  The downward trend in nominal wage growth in the right side of the figure (red line) helps to explain recent declines in the so-called wage share, which measures the fraction of national income going to labor costs. (However, see this New York Times article for some evidence that falling unemployment is beginning to bring some inflation-adjusted wage growth to parts of the US.)

wage-Phillips time series

By the way, if inflation were to become a large problem (and it seems well-contained now), non-recessionary methods exist to try to alleviate it. Even where the Phillips-curve relationship is strong, the human costs of using it to combat inflation are usually very high, given the existence of alternative policies that could perhaps be given a try in the US.


Minsky and Financial Reform’s “Never Ending” Struggle

Michael Stephens | April 18, 2014

In a new policy brief, Jan Kregel looks at a lesser-known, early period of Minsky’s work on financial reform. In the ’60s, Minsky was a consultant to a number of government agencies, including the Federal Reserve, on issues related to financial regulation. In this context, he came up with a new approach to bank examination, which he called “cash-flow based.” The new approach evaluated bank liquidity, not as an innate feature of a particular class of assets, but as a function of the balance sheet of the institutions under examination, the markets for those assets, the state of the macroeconomy and the financial system as a whole, and much else. In fact, as Kregel explains, what Minsky was after here was related to an early form of what we now call “macroprudential regulation.”

The evolution of Minsky’s thought on this approach to bank examination is interesting enough in itself, but it’s also a reflection of Minsky’s broader thinking about financial regulation and reform. Minsky developed his regulatory proposals in the ’60s and ’70s with an eye to what was to become his well-known “financial instability hypothesis,” which is to say, his proposals were informed by a theory of endogenous financial instability: a theory in which financial crises are not only possible, but are to be expected; generated as a result of the “normal” functioning of the financial system. Without such a theory, as Kregel points out, it’s hard to formulate effective regulation:

As Minsky was fond of pointing out, the bedrock of mainstream theory is a system of self-adjusting equilibrium that provides little scope for the discussion of a systemic crisis, since, in this theory, one could not occur. It was thus extremely difficult to formulate prudential regulations to respond to a financial crisis if one could only occur as the result of random, external shocks, or what Alan Greenspan would consider idiosyncratic, nonrational (fraudulent) behavior. The only basis for regulation would be to concentrate on the eradication of the disruptive behavior of bad actors or mismanaged financial institutions. From this initial presumption, the formulation of regulations and supervisory procedures required the assessment of the activities of individual banks—without any reference to their relations with other institutions or the overall environment in which they functioned.

One consequence of being informed by a proper theory of financial instability, Minsky maintained, is that regulation has to be responsive to innovations in the financial system; innovations that are often reactions to new regulatory frameworks. What this calls for, then, is not just the right set of rules, whether your preferred model is Glass-Steagall or something else, but also an adaptive, “dynamic” framework that’s attuned to the evolution of the financial system. This is from the preface:

the challenge for reform is not just the proper formulation and implementation of specific rules, but the development of an approach that is sensitive to the potential of actors in the financial system to adapt and innovate, creating new practices that threaten the stability of the system in ways that may not become apparent until the next crisis hits. Financial regulation and examination procedures need to be constantly reassessed in order to avoid becoming obsolete. And in that sense, as Minsky recognized, “the quest to get money and finance right may be a never ending struggle.”

There’s a lot more here, including Kregel’s take on the ongoing debates about imposing specific capital and liquidity ratios on financial institutions:

While the imposition of minimum liquidity and capital ratios is an improvement over the prior risk-based approach, such target ratios are not macroprudential regulations in Minsky’s sense. Similarly, stress tests of banks’ capital positions are applied to banks individually, rather than in a systemic interaction. Neither approach to macroprudential regulation takes into account the dynamic macro factors that impact the bank’s position-making assets and liabilities and the secondary markets in which they trade, or the ongoing institutional and policy changes that are a natural part of the economic system.

Download it here: “Minsky and Dynamic Macroprudential Regulation


A Minsky Moment on the BBC

Michael Stephens | April 1, 2014

For those of you who haven’t seen it already, Duncan Weldon did a feature on Hyman Minsky for the BBC last week, including this short article and a 30-minute piece for BBC radio.

In the radio segment, Adair Turner says this about Minsky’s contribution and his departure from the mainstream (a description of the pre-crisis orthodoxy which is probably baffling to many unfamiliar with the field):

“The dominant strain of modern economics had assumed, before the crisis, that you could largely ignore the details of the financial system and banks in particular. The phrase that was used was that finance was simply a sort of veil through which relationships between savers and borrowers passed and it didn’t have an influence, and at the … core of Minsky’s analysis is the fact that financing contracts and banks in particular have a crucial influence.”

Weldon devotes a great deal of the program to the “financial instability hypothesis,” for which Minsky is, perhaps, best known, but Minsky also offered an approach to re-regulating the financial system that makes his work as useful as a prescription for a more stable capitalism as it is as a diagnosis of financial crises. (The Levy Institute’s short ebook, Beyond the Minsky Moment (pdf), includes a survey of Minsky’s views about how to reconstitute the financial structure and explains why Dodd-Frank falls well short. The Minsky archive has also been digitized to provide access to many of Minsky’s unpublished papers and notes.)

The annual conference inspired by Minsky’s work will be held at the National Press Club in Washington, DC next week.