Archive for September, 2012

“It’s Just Made Up Money”

Michael Stephens | September 20, 2012

Kevin Drum has excised another section of the now-famous leaked fundraiser video, and this time the GOP challenger is holding forth on quantitative easing and other subjects. Drum picks on Romney’s specific claim that the government is buying three-quarters of US treasury debt, but there’s something in this quotation that’s more fundamentally off:

We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.

The problem here is that Romney’s “fantasy” world, in which the government “makes up” money, is just a roughly accurate description of fiat money.  And if you’re rooting around in the text of Obama’s American Recovery and Reinvestment Act for the dastardly provision that created this new “feeyat” money thing, don’t waste your time—it’s been around for a long, long time.  If you’re interested in the actual history of money, as opposed to the “we used to have real money before January 2009″ version, this working paper gives a nice rundown of the anthropological and historical material and lays out the economic policy upshot.

Whether it’s buying three-quarters of new treasury debt or a tiny fraction, the Fed is always using “made up money.”  And in theory (which is to say, aside from the various legal obstacles placed in its way), the Fed can buy as much US treasury debt as it wants, because it can never exhaust its ability to “make up” more money.  Don’t believe me?  Ask Alan Greenspan:

To the extent that there’s a real policy limit to this, it’s not that the Fed will somehow run out of money, but that at some point, when the economy is closer to running at full capacity, buying US debt to keep interest rates low could lead to inflation.  But inflation, for now and the near future, just isn’t a significant problem.  (On the contrary, the current challenge is to figure out how to get more of it.)

There are plenty of things to worry about in our current economic situation.  Unemployment would be pretty close to the top of the list.  Fiat money should not be.


The Collapse of a Nation

Michael Stephens | September 19, 2012

We’re seeing a lot of “is the euro crisis over?” stories pop up in the press lately (or rather, again).  The sensible responses are “no” and “which euro crisis?”

Presumably, this burst of enthusiasm derives in part from Mario Draghi’s announcement to (sort of) commit to (sort of) unlimited bond purchases.  But even if you think, optimistic reader that you are, that this will (sort of) rein in the periphery’s galloping borrowing costs and forestall an immediate breakup of the eurozone (at least until next month), that would just leave us with a slightly smaller pile of crises—including a crippling growth crisis.

For Greece in particular, to declare its crisis “over” requires a serious dose of lowered expectations:

The unemployment rate currently stands at 23.5 percent, wages and salaries have shrunk by as much as 30 percent, a series of pension cuts has been implemented (the latest proposal is to cut up to 600 euros per month from individual pension checks!), hospital operating expenses have been reduced by half, and the education budget has been hit so hard that many schools throughout the country operated without heating oil last winter.

If you want to know what it looks like when a national crisis isn’t over, read more here.


A Flock of Panics and Crises

Michael Stephens | September 18, 2012

For those who haven’t seen it already, US News and World Report did a brief piece a short while ago on Minsky’s approach to financial instability.  After running through a list of recent financial panics and crises, Chris Gay notes that from a certain theoretical perspective, this wasn’t supposed to happen.  “This sort of blood-curdling free-fall is supposed to be a once-in-a-lifetime event, like the transit of Venus or a federal budget surplus.  How is it,” he asks, “that someone who was in high school when Justin Bieber was in Pampers has already experienced half a dozen of them? Either we need to redefine ‘crash’ or someone owes you some lifetimes.”  Black swans were once thought by European ornithologists to be rare, until they discovered a number of the birds in Australia.  By contrast, the assumption that financial panics and crises are rare has stuck around, despite more than enough experience with the economic equivalent of black feathers.

In Minsky’s view, financial crises are a normal part of the functioning of this economic system; they are not some deus ex machina that arrives from without to push the system off-balance.  Digesting this way of looking at the stability of our economic system won’t just affect whether we’re surprised when the next panic or crisis comes crashing down on our heads, but also, as Jan Kregel and Dimitri Papadimitriou explain, how we approach financial regulation:

As Minsky emphasized, you cannot adequately design regulations that increase the stability of financial markets if you do not have a theory of financial instability. If the “normal” precludes instability, except as a random ad hoc event, regulation will always be dealing with ad hoc events that are unlikely to occur again. As a result, the regulations will be powerless to prevent future instability. What is required is a theory in which financial instability is a normal occurrence in the system.

For more, the Levy Institute ebook Beyond the Minsky Moment lays out the implications of Minsky’s approach for how we should understand the roots of the recent meltdown and why we can neither settle for Dodd-Frank nor go back to Glass-Steagall. (epub, pdf)


Do the Personal Characteristics of the Prime Minister Affect Economic Growth?

Lekha Chakraborty | September 17, 2012

by Lekha Chakraborty

India has recently turned to a debate over the effect of the Prime Minister’s personal characteristics on the country’s growth and development outcomes. Do political leaders’ personal characteristics affect economic growth? It is an elusive empirical question.

One of the most robust findings of a recent treatment of this topic is that leaders do matter for economic growth and, in particular, more educated leaders generate higher growth. The paper, titled “Do Educated Leaders Matter?,” appeared in The Economic Journal in 2011, by Timothy Besley of the London School of Economics and co-authored by Jose G. Montalvo and Marta Reynal-Querol. They examined this issue in a new context of how the educational attainment of a political leader affects a country’s economic growth during the leader’s tenure in office. The study also finds a strong negative effect on growth of a random exit of the Prime Minister from his office.  “[I]ntelligence is central to the Platonic view of leadership,” they write, “so the idea that more educated citizens could be better leaders would come as no surprise.” This finding naturally leads us to the question of who should be appointed as Prime Minister. In India, we currently find a well-educated technocrat in that position.

With the recent controversial article by Simon Denyer, the New Delhi bureau chief of the Washington Post, the focus on the potential personal impact of the Prime Minister on reform policies or economic growth has reached its peak.   continue reading…


Eccles on How to End the Crisis

Thorvald Grung Moe | September 14, 2012

Marriner Eccles was Chairman of the Federal Reserve under President Franklin D. Roosevelt. This note consists of excerpts from an address he gave to the US Senate Committee on Finance in 1933, before he was called to Washington for public service by FDR. The original address contained in the Congressional Records has been reduced from over thirty pages (including questions and answers) to only three pages here that contain his essential message. Some parts have been slightly modified to fit the current time and crisis. Additions or alteration to the text has been marked by square brackets. All original figures used by Eccles in the address have been inflated by a factor of 16.4, according to the official US CPI index.

In the mad confusion and fear brought about by our present disordered economies, we need bold and courageous leadership more than at any other time in our history. The orthodox capitalistic system of uncontrolled individualism, with its free competition, will no longer serve our purpose. We can only survive and function under a modified capitalistic system controlled and regulated from the top by government.

The proposals I offer are all intended to bring about, by Government action, an increase of purchasing power on the part of all the people, resulting in an immediate and increasing volume in all lines of business with consequent diminution of unemployment and distress and gradual restoration of our national income. When this is accomplished, and not before, can the Government hope to balance its budget and our people regain their standard of living. continue reading…


Again, Unconventional Wins Out

Greg Hannsgen | September 13, 2012

Who would have expected extreme thinking from central bankers? That is the theme of some coverage in the financial press over the past few weeks. For example, the Financial Times takes note that “a growing chorus of economists is saying central banks should take more radical steps, including buying assets other than government bonds.”

Some, if not all, of these steps are not so radical from a broad historical perspective. Following the recent bankers’ brainstorming session in Jackson Hole, Wyoming, Fed Chairman Ben Bernanke was said to be pondering various possibilities including (1) QE (quantitative easing) 3, (2) a lowering of the interest rate paid on banks’ reserve accounts at the Fed, (3) an extension until 2015 of the Fed’s low-interest-rate precommitment, and perhaps in the longer term, (4) adopting nominal GDP targeting, as endorsed, for example, by George Soros in a recent opinion piece on the eurozone and Germany in particular.

Today, the Fed announced that it would adopt options (1) and (3), purchasing $40 billion in mortgage-backed debt each month for an indefinite period and predicting that the federal funds rate would remain near zero through mid-2015 (see news article for more details).

Most of the measures being contemplated are portrayed as more radical than they actually are, in my view. For example, most of the actions being pondered by the Fed could not match the impact of the approximately $500 billion “fiscal cliff” due in January, or even the “fiscal clifflet,” the Economist’s phrase for the portion of the cliff that actually winds up going into effect, once the current Congress gets its last chance to pass legislation.  As a blog at that publication’s site puts it,

Even if the Bush tax cuts are extended and the sequester delayed, a huge amount of fiscal drag remains in place. They include the expiration of the payroll tax cut, the expiration of extended unemployment insurance benefits, imposition of a new 3.8% Medicare investment tax on the wealthy, and the bite to discretionary spending embedded in the Budget Control Act and prior continuing resolutions.

One novel and potentially effective Fed approach would be the monetary “helicopter drop” recently discussed in the full-page FT article and a recent column in the same newspaper. The idea would be for the central bank (the Fed in the US case) to send money to individuals, through direct deposits in Americans’ bank accounts or by distributing currency via the banking system. continue reading…


Fourth Annual Minsky Summer Seminar

Michael Stephens | September 12, 2012

The Levy Economics Institute of Bard College will hold its fourth annual Hyman P. Minsky Summer Seminar in June 2013.  The Summer Seminar provides a rigorous discussion of both the theoretical and the applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial crisis.  It is of particular interest to graduate students, recent graduates, and those at the beginning of their academic or professional career.

The 2013 Seminar program will be organized by Jan Kregel, Dimitri B. Papadimitriou, and L. Randall Wray, and the teaching staff will include well-known economists concentrating on and expanding Minsky’s work.

Registration information can be found here.


Money and the Public Purpose at Columbia

Michael Stephens | September 10, 2012

Columbia University is hosting a seminar series on “Money and the Public Purpose.”  The seminar, open to the public, begins this week and features a number of Levy Institute scholars.  From the overview:

Modern Money and Public Purpose is an eight-part, interdisciplinary seminar series held at Columbia Law School over the 2012-2013 academic year. The series aims to present new perspectives and progressive policy proposals on a range of contemporary issues facing the U.S. and global macroeconomy. Seminars will feature a mix of academics and practitioners on topics ranging from the history of debt and money and the structure of the financial system to economic human rights for the 21st century.

Tomorrow’s session features Randall Wray and Michael Hudson on “The Historical Evolution of Money and Debt.”

Full schedule here.  Background reading here.