Can a Euro Treasury End the Crisis?

Michael Stephens | August 14, 2014

Dimitri Papadimitriou introduces Jörg Bibow’s plan for the creation of a Euro Treasury:

It was only a matter of time until the euro area was hit with the kind of crisis from which it is still struggling to recover—this was understood well in advance, by many at the Levy Institute and elsewhere. The problem has always stemmed from a structural weakness in the design of the currency union: member-states gave up control over their own currencies but retained responsibility for fiscal policy. This situation rendered them subject to sovereign debt runs—which occurred when the fallout from a banking crisis fell squarely on euro area national treasuries—of the sort that countries controlling their own currencies do not face.

As we have pointed out previously, member-states are in some ways in the same situation as US states, which are forced to cut back when the economy contracts—that is to say, at the very moment when expanded public spending is required to place a floor under the economic collapse. But US states have the benefit of a treasury at the federal level that can spend without the same sovereign debt concerns (which the US federal government did, briefly, before succumbing in 2010 to a misguided notion of “fiscal responsibility,” not to mention congressional obstruction). The eurozone member-states, however, do not have the benefit of this treasury–central bank combination at the level of the central government—a lacuna Jörg Bibow addresses with the proposal outlined in this policy brief.

One challenge for “United States of Europe” or “complete the union”-type plans is their political toxicity, but Bibow has tailored his Euro Treasury plan so as to minimize the political vulnerabilities (this is not a transfer union) while preserving the principal benefit: ending the divorce between monetary and fiscal powers in the euro area. continue reading…

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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.

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It’s Official: Too Big to Fail Is Alive and Well

L. Randall Wray | August 6, 2014

Thank heaven for Tom Hoenig, the only proven-honest central banker we’ve got. Yes, I know he’s moved on from the KC Fed to serve as Vice Chairman of the FDIC. He actually might do a lot more good over there, anyway.

In recent months, we’ve heard how Wall Street’s Blood-sucking Vampire Squids have reformed themselves. They no longer pose any danger to our economy. They’ve written “living wills” that describe how they’ll safely bury themselves without Uncle Sam’s help next time they implode.

You see, it doesn’t matter that they remain big—indeed, the biggest behemoths are much bigger than they were before they caused the last Global Financial Crisis. They are no longer “too big to fail” because they’ve all got plans to unwind their dangerous positions when stuff hits the fan.

This is very important to Wall Street and Washington because Dodd-Frank requires downsizing and simplification of the Vampire Squids if they remain a threat.

Big financial institutions that are highly interconnected can cause a relatively small problem with one bank’s assets to snowball into a national and international crisis that forces Uncle Sam to intervene to bail-out the miscreants.

We know that the biggest half-dozen US banks are huge and have highly interconnected balance sheets. We know they have legacy garbage on their balance sheets, and they are creating massive quantities of new trashy assets every day they remain open.

That’s their business model. They love that model because it enriches a handful of top management at each institution. As Bill Black says, these are run as control frauds—their motto is “Frauds R Us.” Nearly every day one of them gets caught red-handed in yet another fraud. They pay peanuts in fines and go about their fraudulent business. Nice work if you can get it.

So it is critical that each of these demonstrate it has a way to disconnect its balance sheet from the others as it oversees its own demise. Otherwise, these institutions would have to be downsized and their frauds curtailed.

As expected, most government officials have been congratulating themselves and Wall Street’s “finest” for the “heckuva job, Brownie” they’ve been doing in writing those living wills. continue reading…

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Greece: A Nation for Sale and the Death of Democracy

C. J. Polychroniou | August 2, 2014

When the European Union (EU) and the International Monetary Fund (IMF) came to Greece’s rescue in May 2010 with a 110 billion euro bailout loan in order to avoid the default of a eurozone member state (a second bailout loan worth 130 billion euros was activated in March 2012), the intentions of the rescue plan were multifold. First, the EU-IMF duo (with the IMF in the role of junior partner) wanted to protect the interests of the foreign banks and the financial institutions that had loaned Greece billions of euros. Greece’s gross foreign debt amounted to over 410 billion euros by the end of 2009, so a default would have led to substantial losses for foreign banks and bondholders, but also to the collapse of the Greek banking system itself, as the European Central Bank (ECB) would be obliged in such an event to refuse to fund Greek banks.

Second, by bailing out Greece, the EU wanted to avoid the risk of negative contagion effects spreading across the euro area. A Greek default would have led to a financial meltdown across the euro area and perhaps to the end of the euro altogether.

Third, with Germany as Europe’s hegemonic power, there was a clear intention to punish Greece for its allegedly “profligate” ways (although it was large inflows of capital from the core countries that financed consumption and rising government spending), and by extension, send out a message to the other “peripheral” nations of the eurozone of the fate awaiting them if they did not put their fiscal house in order.

Fourth, the EU wanted to take the opportunity presented by the debt crisis to turn Greece into a “guinea pig” for the policy prescriptions of a neoliberal Europe. Berlin and Brussels had long ago embraced the main pillars of the Washington Consensus—fiscal austerity, privatization, deregulation and de-statization—and the debt crisis offered a golden opportunity to cut down the Greek public sector to the bare bones and radicalize the domestic labor market with policies that slash wages and benefits and enhance flexibilization and insecurity. continue reading…

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Another Eccles at the Fed?

Greg Hannsgen | July 30, 2014

From time to time, I call attention to solid coverage of the Federal Reserve in the popular press, for example this post, which links to an interesting William Greider profile of Ben Bernanke. Nicholas Lemann profiles the new Fed chair in the July 21 issue of The New Yorker. One of the key themes of the newer article is that Yellen is “the most liberal [Fed chair] since Marriner Eccles,” and an “unrepentant Keynesian.”

The article usefully contrasts Yellen’s policy views with those of orthodox macroeconomics. Yellen identifies as an adherent of the philosophy that government is capable of greatly improving on the outcomes of a modern capitalist system. (For many, this is the essence of what is known as the liberal view in the US political realm. Yellen’s liberalism will matter (1) in financial regulation, and (2) in macro policy, where the Fed is influential.)

Of course,  there are many varieties of liberalism. Here is a perhaps-characteristic Yellen quote from the article, explaining economics as a personal career choice: “What I really liked about economics was that it provided a rigorous, analytical way of thinking about issues that have great impact on people’s lives.  Economics is a subject that really relates to core aspects of human well-being, and there’s a methodology for thinking about these things. This was a very appealing combination to me.”

The quote continues, “Market economies are capable of massive breakdowns that can result in long, devastating periods of high unemployment. And I felt that economists had really learned something about how to address that.”

On the other hand, the article expresses sympathy with the view expressed by Bernanke and others that Keynesian economics  itself (as practiced by most academic economics departments) did not foresee the financial crisis that began about 2008. As readers of this blog know, of course, economists affiliated with the Levy Institute and its Minskyan tradition were among the few who did anticipate a crisis. The article notes that Yellen herself “began to be concerned that there was a dangerous bubble in housing markets” in 2005 and 2006, but quotes her as conceding that she “absolutely did not see it as something that could take the financial system down.”

What about the role of bank money and nominal wages, topics on my own mind with the approach of the International Post Keynesian Conference, which the Levy Institute is partially sponsoring? continue reading…

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The Implications of Flat or Declining Real Wages for Inequality

Michael Stephens | July 24, 2014

by Julie L. Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed, and Fernando Rios-Avila, a research scholar at the Levy Institute

A recent Policy Note published by the Levy Economics Institute of Bard College shows that what we thought had been a decade of essentially flat real wages (since 2002) has actually been a decade of declining real wages. Replicating the second figure in that Policy Note, Chart 1 shows that holding experience (i.e., age) and education fixed at their levels in 1994, real wages per hour are at levels not seen since 1997. In other words, growth in experience and education within the workforce during the past decade has propped up wages.

Chart 1_Actual and Fixed Real Wages

The implication for inequality of this growth in education and experience was only touched on in the Policy Note that Levy published. In this post, we investigate more fully what contribution growth in educational attainment has made to the growth in wage inequality since 1994. continue reading…

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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…

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Wray on Why Money Matters

Michael Stephens | July 21, 2014

Randall Wray did a guest post at FT Alphaville as part of a series devoted to the upcoming Mission-Oriented Finance conference.

In his post, Wray counters the conventional story about the nature and significance of money with an alternate view drawing on Schumpeter’s notion of bankers as the “ephors” of capitalism:

Bank and central bank money creation is limited by rules of thumb, underwriting standards, capital ratios and other imposed constraints. After abandoning the gold standard, there are no physical limits to money creation. We cannot run out of keystroke entries on bank balance sheets.

This recognition is fundamental to issues surrounding finance. It is also scary.

[...]

It is difficult to find examples of excessive money creation to finance productive uses. Rather, the main problem is that much or even most finance is created to fuel asset price bubbles. And that includes finance created both by our private banking ephors and our central banking ephors.

The biggest challenge facing us today is not the lack of finance, but rather how to push finance to promote both the private and the public interest — through the capital development of our country.

Read the post here.

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Modi’s Budget and the New Macroeconomic Policy Consensus in India

Lekha Chakraborty |

What has struck me about Modi’s maiden budget is not the fiscal arithmetic, but the framework. And while this note confines itself to analyzing the budgetary framework rather than the numbers, it should be noted that the effectiveness of the fiscal arithmetic has gone for a toss with the announcement of token provisions on too many programmes with too little money. The underlying framework of the speech revealed the thematic priorities of the Modi government, which were twofold: (i) growth revival and (ii) macroeconomic stability. This sets the track.

The general budget was simultaneously ensuring “continuity” and “change.” The continuity elements in the budget may be designed to ensure a bipartisan approach in tackling issues of national interest, especially in the case of fiscal consolidation and the “rights-based” public policy decisions (e.g., employer of last resort, food security) of earlier governments. However, the changes suggested in the budget, in terms of monetary framework, are disturbing. continue reading…

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Greece: The Impact of Austerity on Migration

Gennaro Zezza | July 11, 2014

Greece. Population
The chart above documents another striking feature of the impact of the recession on Greece.

The Hellenic Statistical Authority (ElStat) has recently released the new quarterly data on employment and the labor force, which includes a measure of the population aged 15 or more (Table 1). While the series published in the previous release exhibited a stable upward trend (reported in green in the chart), the new estimates show that population peaked at 9.437 million at the end of 2008, and then started declining, reaching 9.296 million in the first quarter of this year, i.e. it went back to its 2004 level. (The reasons for the change in the series are due to ElStat incorporating the latest census data: details are available in the ElStat web site).

As ElStat does not publish an up-to-date measure of net migration, we assume this could be measured by the distance between the pre-crisis population trend and the actual values. We therefore computed a simple linear trend on the 2001-2008 data, which shows that population would have now been at 9.686 million, had the previous trend continued. The difference between this value and the population reported for the first quarter of 2014 is thus approximately 390,000 people (4 percent).
Greece. Population by age group
ElStat makes available the detail by age groups (Table 2), reported in our second chart, which shows that younger Greeks are declining steadily in number – a trend which is common to many developed countries who chose to reduce the average number of kids per family – while the number of older people is steadily increasing – again a trend common to many countries, linked to longer life expectancy. Summing up the 15-29 groups to the 45+ groups, we find that the decline in the younger population accelerated after 2007, compensating the increase in the number of Greeks aged 45 and over, so that the inverted U-shape of the population in our first chart can largely be attributed to the decline in Greek residents aged 30-44, who are now 2.442 million against a peak of 2.544 million at the end of 2008.

We have no complete information to know if this decrease is due to Greeks in this age cohort migrating abroad, or to a smaller number of immigrants. However, the OECD migration database contains some (incomplete) statistics on immigrants by country (the figures largely under-estimate total migration, as some major European countries such as France and Italy do not report any figures to the OECD).

As the next chart shows, and how it should be expected looking at the respective unemployment rates, the main destination of Greek emigrants is Germany, and the number of migrants has almost doubled from 2010 to 2011 (the last available year).
Greece. Emigrants from Oecd database
The other portion of the fall in population is given by migrants to Greece, which have fallen from 65.3 thousands in 2005 to 33.3 thousands in 2010 and 23.2 thousands in 2011.

It is to be expected that migration of Greeks abroad, and the decline in immigrants to Greece, continued on the same paths after 2011, given the size of the unemployment rate in Greece (still at 26.8 percent in March 2014, seasonally adjusted). Using the economists’ jargon, this is another loss of human capital for the Greek economy which will make a recovery more difficult. And, in addition, balance of payments statistics published from the Bank of Greece do not show any improvements in payments made from abroad which could be related to migrants’ remittances: both the compensation of employees received by Greece from abroad, and current transfers to the private sector have actually declined since the beginning of the crisis.

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