Archive for November, 2011

Is the ECB Powerless to Rescue Europe, or Just Unwilling?

Michael Stephens | November 11, 2011

1) Marshall Auerback, at New Economic Perspectives, digs into the issue of whether the ECB is legally permitted to engage in the sort of “lender of last resort” activities that many think are key to mitigating this crisis:

The notion that it cannot act as lender of last resort is disingenuous:  The ECB does have the legal mandate under its “financial stability” mandate which was provided under the Treaty of Maastricht.  True it is fair to say that the whole Treaty of Maastricht is full of ambiguity.  The institutional policy framework within which the euro has been introduced and operates (Article 11 of Protocol on the Statute of the European System of Central Banks (ESCB) and of the European Central Bank) has several key elements.  One notable feature of the operation of the ESCB is the apparent absence of the lender of last resort facility, which is an issue raised by the WSJ today, and which Draghi uses to justify his inaction.  But it’s not as clear-cut as suggested: The Protocols under which the ECB is established enables, but does not require, the ECB to act as a lender of last resort.

Proof that the ECB exploits these ambiguities when it suits them is evident in its bond buying program.  The ECB articles say it cannot buy government bonds in the primary market. And this rule was once used as an excuse not to backstop national government bonds at all.  But this changed in early 2010, when it began to buy them in the secondary market.  The ECB also has a mandate to maintain financial stability.  It is buying government bonds in the secondary market under the financial stability mandate.  And it could continue to do so, or so one might argue that it could.  True there is now great disagreement about this within the ECB.  It has been turned over to the legal department, which itself is in disagreement, which ultimately suggests that this is a political judgement, and politics is what is driving Italy (and soon France) toward the brink.

Read the rest here.

2) Brad Plumer of the Washington Post runs down the reasons (with rejoinders from Paul De Grauwe) why the ECB might be unwilling to step in as lender of last resort (hint: the words “inflation” and “moral hazard” come up a lot).


“Posh Cambridge Forecaster” Sees Through the Euro

Michael Stephens | November 10, 2011

Here is another flattering mention of Wynne Godley‘s prescient writings on the euro, this time from John Cassidy’s blog at the New Yorker. (Cassidy sat in on the Keynes side of this week’s “Keynes vs. Hayek” debate.)

Many of Godley’s publications at the Levy Institute (“haven for heterodox thought,” as Cassidy calls it), including his early observations about the exponential growth in private debt that marked the Greenspan economy, can be found here.

Gennaro Zezza, together with Marc Lavoie, is also putting together a new book featuring Wynne Godley’s writings (The Stock-Flow Consistent Approach: Selected Writings of Wynne Godley).  It will be released in early 2012:

This book is the intellectual legacy of Wynne Godley, the famous British economist who was the head of the Department of Applied Economics at the University of Cambridge for nearly 20 years, after having been deputy director of the Economic section at the UK Treasury. These selected writings are useful not only as a summary of the evolution of Godley’s analysis, but also equip economists with new tools for the achievement of sustainable economic growth. Professor Godley’s work always originated from puzzles in the real world economy, rather than from curiosities in economic models, and his work has retained its practicality; the stock-flow models have proved to be effective in predicting recent recessions. These essays present Godley’s challenge to accepted wisdom in the field of macroeconomic modelling, which, in his opinion, did not reflect the economics that he had learned by working on practical matters for the Treasury in the 1960s. Godley developed post-Keynesian traditions and created models which fully integrate theory with the financial system and real demand and output.


Minsky and the Economics Profession

Michael Stephens | November 9, 2011

There’s an interesting (and unsettling) section of Martin Mayer’s presentation at the Minsky Conference that I’ll quote at length in which he talks about the reception of Hyman Minsky’s work.  Add this to the growing “what’s wrong with the economics profession?” folder:

I have found my own explanation, rather a disturbing one, for Hy’s relative obscurity despite the importance and intrinsic interest of his work. Several people, some of whom consider themselves followers of Hy, have noted to me that there isn’t much published work, which is nonsense: there is a lot of published work. But relatively little of it is in the economic journals. It’s in the peer-review journals.

The most important person in Minsky’s career was Bernard Shull, who has also been at a lot of these meetings, and I talked to him the other day. . . . He was a young member of the research staff at the Philadelphia Fed when he read Hy’s original article on central banks and the money market in 1957. Shull moved onto the Board of Governors to conduct a study on how the discount window actually operated and how it should operate. It was through working on that study that Hy developed the financial instability hypothesis, which was published originally in detail as a Federal Reserve document. Hy’s important work for the Ford Foundation-sponsored Commission on Money and Credit was published as part of the report of the Commission on Money and Credit. His late and long and important article on finance and profits was published by the Joint Economic Committee of Congress. Other major papers appeared in Festschriften and textbooks.

In the world of the economics profession, these things don’t count. Efforts to explain problems to people who might be able to do something about them are hobbies for the professor. The real work, and what he is expected to turn out, is this goddamn gelatinous stuff with its borders of mathematics that gets published in the professional journals. It may be that Hy’s increasing salience will do something about that. There was only one Hy Minsky. Natura il fece, e poi ruppe la stampa. But other lone wolves may get more attention in the future because the economics world finally awakened to the importance of Hyman Minsky, and thus the importance of publications that are not right down the standard track. We hope so.


Minsky Conference Proceedings

Michael Stephens |

The 20th Annual Hyman P. Minsky Conference, organized by the Levy Institute with support from the Ford Foundation, featured a broad range of speakers, including Gary Gensler (CFTC Chairman—occasioning some interesting back-and-forth in Q&A regarding commodities speculation), Paul McCulley, Andrew Sheng, Phil Angelides, Charles Plosser, Gary Gorton, Charles Evans, Vitor Constancio (Vice President of the ECB), Sheila Blair (head of the FDIC), Martin Mayer (who is apparently writing a biography of Minsky), and more.  The proceedings, including Q&A sessions, can be found here; select audio can be accessed here.

There’s a lot of good material to mine, but I’d like to highlight one particular session:  “Financial Journalism and Financial Reform: What’s Missing from the Headlines?” (the title explains itself), moderated by John Cassidy of the New Yorker and featuring Jeff Madrick, Joe Nocera, Steve Randy Waldman, and Francesco Guerrera (see “Session 2” for the audio).  There’s a great quotation from Steve Randy Waldman here:  “Goldman Sachs is just an off-balance sheet special purpose vehicle of the United States government.  Lloyd Blankfein is either a civil servant or a government contractor.  It’s just [that] his pay is out of line.”

The context is a discussion (starting at the 9:50 mark of Waldman’s presentation) that jumps off from this Minsky quotation: “financial reform needs to confront the public nature of much that is private.”  Waldman argues that while financial writers talk about the heads of the big six banks as though they were captains of private industry, their institutions ought to be treated as pseudo-government entities (just as Citibank ultimately had to stand behind its SIVs, which were supposed to be legally distinct, the US government ultimately has to stand behind the big banks in cases of insolvency).


Two Ways to Fix the Eurozone

Michael Stephens | November 8, 2011

Among the (many) obstacles to working out a solution to the crisis in the eurozone is resistance to schemes that involve debt buyouts, national guarantees, mutual insurance, and fiscal transfers.  Stuart Holland has a new one-pager and policy note in which he suggests a twin-track strategy for solving the crisis that does not rely on any of the above.

His recommended strategies revolve around using the EIF (European Investment Fund) as an issuer of eurobonds, and having member-states with at-risk bonds convert a share of them, through enhanced cooperation, into EU bonds (allowing, for instance, Germany, the Netherlands, Austria, and Finland to keep their own bonds).  According to Holland, neither of these strategies would require ratification by national parliaments or an alteration of the EU treaty.  The one-pager builds on an earlier policy note by Holland and Yanis Varoufakis, “A Modest Proposal for Overcoming the Euro Crisis.”

Read Holland’s one-pager here and the elaborated policy note version here.


“Being right matters”

Michael Stephens |

At Pragmatic Capitalist, Cullen Roche writes about the “eerily prescient” predictions regarding the euro made by Modern Money Theorists and economists looking at sectoral balances.  Roche quotes from Randall Wray’s Understanding Modern Money (see in particular p. 91ff), a paper by Stephanie Kelton (Bell), and a Wynne Godley article written in 1997 (“Curried Emu — the meal that fails to nourish,” Observer, Aug. 31).  From Godley:

If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under ‘conditions of extreme emergency.’ … The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

See also Godley’s earlier piece (1992) in the London Review of Books, “Maastricht and All That“:

I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority. The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government. Yet there would simply have to be a system of institutions which fulfils all those functions at a Community level which are at present exercised by the central governments of individual member countries.

With regard to Godley’s prescience, take a look at this policy note from 2000 on the US economy (“Drowning in Debt“) that discusses the eye-popping rise in private indebtedness (“…it is certainly entirely different from anything that has ever happened before–at least in the United States”).  It’s really worth reading the whole thing (only five pages).


Keynes vs Hayek at the Asia Society

Michael Stephens | November 7, 2011

If you’re in Manhattan or have access to an internet connection tomorrow (Nov. 8), Reuters is sponsoring a Keynes vs. Hayek debate between two teams of economists and writers, including the Levy Institute’s James Galbraith.

“Four Keynesians – economist James Galbraith, son of the high priest of Keynesianism, John K. Galbraith; New Yorker columnist John Cassidy,  Sylvia Nasar, the historian of economic thought and author of Grand Pursuit; Steve Rattner, the architect of Obama’s auto company bail-out – will slug it out with four Hayekians – Economics Nobel Prize-winner Edmund Phelps; Professor Lawrence H. White of George Mason University; Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute; and Stephen Moore of the Wall Street Journal.”

The debate will be hosted at the Asia Society (5:00-7:30 pm) and can be viewed live online here.



Michael Stephens |

Thorvald Grung Moe, Visiting Scholar at the Levy Institute, delivered a lecture last week on fractional reserve banking and the landscape of alternative options.  He ended with a quotation from FDR that’s worth repeating, particularly in the context of the “We Are the 99%” movement and stories like this about a return to business as usual (+10% or so) on Wall Street:

I wish our banking and economists friends would realize the seriousness of the situation from the point of view of the debtor classes – i.e. 90 per cent of the human beings in this country – and think less from the point of view of the 10 per cent who constitute the creditor classes.
(Letter from FDR to Treasury Secretary Woodin, September 30, 1933.  As quoted in Ronnie Phillips, The Chicago Plan and New Deal Banking Reform.)


Minsky Goggles

Michael Stephens | November 4, 2011

“If you’re going to have a model of capitalism, your model must be able to generate a Depression as one of its potential states. …if you can’t model that, you’re not modeling capitalism.”

Via the Institute for New Economic Thinking, Steve Keen explains how Minsky’s work played a foundational role in helping him to see the financial crisis coming:

Later in the video, Keen starts talking about the “holy hell!” moment he had in 2005 when looking at private debt-to-GDP ratios (Keen notes the central role private debt plays in Minsky’s theory).

This (from Randall Wray’s Minsky-inspired policy brief) is the sort of thing he would have been seeing:

Sources: Census Bureau; National Income and Product Accounts
(NIPA); Federal Reserve Flow of Funds Accounts (from 1945)


Tcherneva on Bernanke’s Paradox

Michael Stephens |

The Levy Institute’s Pavlina Tcherneva delivered a campus-wide lecture at Bard College yesterday that discussed the Federal Reserve’s policy actions during the crisis and the future of government stabilization policy.  The lecture also covered some of the themes in her working paper “Bernanke’s Paradox” (written roughly a year ago), which also appeared in the Journal of Post Keynesian Economics.

In the context of noting Bernanke’s increasingly urgent calls for more help from fiscal policy, it’s worth highlighting this portion of the working paper:

The second key implication of Bernanke’s non-orthodox approach to monetary policy is that, not only is fiscal policy effective (something rejected for decades by neoclassical advocates of the Ricardian Equivalence Hypothesis), but it is, in fact, more potent in recessions. This is because the mainstream has finally recognized that the Fed cannot alone and unilaterally rain money on the banking system … More importantly, from Bernanke’s new interpretation of monetary easing, we can extract one interesting new conclusion, namely that the Fed cannot exogenously expand the money supply without government spending. What this means is that, even if the Fed lent against a wide variety of assets, it may be able to prevent a sell-off or to put a floor on these asset prices, but it will not be able to boost aggregate demand. The only way to do this, according to Bernanke, is via a “gift” from government spending, namely through an injection of net financial assets (net wealth) from fiscal operations.

Read the working paper here.