Archive for February, 2014

On German Public Opinion and Illusory ECB Power

Jörg Bibow | February 26, 2014

After taking a short breather in late January-early February, the markets now seem to be back in “happy mode.” Whether the news on the economic recovery is good or bad doesn’t really matter. The current convention is that growth acceleration is under way.

That emerging markets had become key drivers of global growth was yesterday’s story, today they don’t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon – as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what.

Curiously, not even the long-awaited ruling by Germany’s constitutional court on the ECB’s “outright monetary transactions” (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB’s supposedly all-powerful weapon meant to bolster the earlier “whatever it takes” promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. “So what?”, Mr. Market shrugged his shoulders.

The Financial Times’ Ralph Atkins reports of a banker who was even making fun of those “crimson-roped weirdos in Karlsruhe.” For apparently Karlsruhe does not matter anymore to the fate of the euro, only Frankfurt does, especially now that they have sent the case off to the European Court of Justice. The ECB is seemingly safe now to deploy its miraculous weaponry, or do anything it likes, it might even seem. Wondering whether the markets may be either deluded or wise and prescient in ignoring the ruling, Mr. Atkins seems to come down with the verdict that “Karlsruhe fallout highlights power of ECB.”

But just how powerful is the ECB, really? continue reading…


Seeing “It” Coming: An Interview on the Global Financial Crisis and Euroland’s Fatal Flaw

L. Randall Wray | February 20, 2014

I recently did an interview for the magazine “Synchrona Themata” (“Contemporary Issues”). The interview, which will appear in Greek, was conducted by Christos Pierros, doctoral student at the University of Athens Doctoral Program in Economics (UADPhilEcon). What follows is the English transcript:

What do you think went wrong in 2008? Why was standard macro theory unable to predict such an event?

This was a collapse of what Hyman Minsky called “Money Manager Capitalism.” In many ways it was similar to the 1929 collapse of “Finance Capitalism” that led to the Great Depression. MMC and FC share several common characteristics. First, the dominant approach of economists and policy makers in the 1920s and in the 2000s was one of “laissez faire”—that is, a worship of free markets. Importantly, that meant that finance was “freed” from regulation and supervision. Second, in both cases we lived in an era of globalization—with both goods and finance crossing borders fairly freely. That ensured that when crisis hit, it would spread around the world. Third, finance dominated over industry. Our economy in both cases was “financialized”—with finance sucking 40 percent of all corporate profits out of the economy. To say that “finance ran amuck” is an understatement. To say that our economies were completely taken over by “blood sucking vampire squids of Wall Street” is only a slight exaggeration.

Standard macro theory either thinks all these are “good” trends, or ignores them. That is why—as the Queen of England remarked—none of these economists saw the crisis coming.

Do you believe that by using other tools of analysis (another methodology) one could have seen it coming? If yes, which type of analysis would that be?

Certainly. Many of us saw the crisis coming. The three approaches that made it possible to understand what was going on were: a) Minsky’s financial instability approach; b) Wynne Godley’s sectoral balance approach; and c) Modern Money Theory—which actually builds upon the approaches of Minsky and Godley. All of those working in these approaches “saw it coming.”

Just very briefly, those following Minsky could see that financial institutions were engaged in highly risky practices that would eventually cause liquidity and solvency problems. Those following Godley knew that government budgets were too tight—including the governments of the USA, Spain, and Ireland. By the same token, private sector households and firms had taken on far too much debt. That was particularly true of homebuyers in the USA, in the UK, and in Spain. And those following MMT knew that Euroland was designed to fail; by disconnecting fiscal policy from currency sovereignty, the EMU ensured that the first serious downturn or financial crisis would threaten the very existence of the European Union.

Do you see any shift in the paradigm of economics taking place? If yes, towards which direction? continue reading…


The Problem of Unemployment in Greece

Rania Antonopoulos | February 12, 2014

(The following is an extended version of a piece that originally appeared in Greek in Kathimerini.)

The responses to unemployment by the last three governments in Greece have been characterized by sloppy proposals and an insignificant amount of funds in relation to the size of the problem. Regardless of whether there were political considerations behind it (or not), the recent announcement of the Prime Minister highlights, unfortunately, a relentless continuation of a lack of understanding of reality.

The Prime Minister recently (on January 29) told us that unemployment is a “sneaky enemy” and proceeded to announce measures to tackle the problem. He also indicated that “we do not promise things we cannot do, and we say no to populism and fine words.” The goal of the proposed measures, we heard, is to create 440,000 “work opportunities,” of which 240,000 will target the unemployed 15-24 years of age with no prior work experience. The announced measures totaling 1.4 billion euros will be financed by funds from the National Strategic Reference Framework (NSRF), social funds from the EU, and are classified into three pillars.

Specifically, the first pillar sets a target to recruit 114,000 unemployed for the private sector; an initiative that essentially subsidizes wages and social security contributions for businesses that hire unemployed who are up to 29 years old and some who are unemployed between the ages of 30 and 60. The second pillar concerns 240,000 young persons. This program will provide work experience and training for all unemployed up to 24 years old who have no prior work experience. These unemployed will also go to private companies for some time, or participate in vocational training centers (VTC) to improve their skills in order to find their first job, or both. The third pillar concentrates on hiring 90,000 unemployed from households that have no employed person, who will work in community service projects in the public sector and local government.

Assuming that strict rules are in place, with dedicated control mechanisms that will guarantee non-replacement of existing positions in the private and public sector (really, is there a sufficient number of public sector inspectors for this task?), prima facie, it all sounds positive and leads to the conclusion that at last the Prime Minister himself has publicly accepted his responsibility toward the citizens that have been left without a job. But appearances can be deceiving.

Let’s start with the obvious. continue reading…


SAPRIN and the Greek Experiment

Michael Stephens | February 11, 2014

From C. J. Polychroniou’s latest policy note:

[I]n 2001, a three-year, multi-country study by the Structural Adjustment Participatory Review International Network (SAPRIN), prepared in cooperation with the World Bank, national governments, and civil society organizations, offered a damning indictment of the policies of structural adjustment reform pursued by the IMF and the World Bank in third world countries. Here is a partial summary of the organization’s findings […]:

“The intransigence of international policymakers as they continue their prescription of structural adjustment policies is expanding poverty, inequality and insecurity around the world. These polarizing measures are in turn increasing tensions among different social strata, fueling extremist movements and delegitimizing democratic political systems. Their effects, particularly on the poor, are so profound and pervasive that no amount of targeted social investments can begin to address the social crises that they have engendered.” (SAPRIN 2001, 24) […]

The structural adjustment programs in Greece, combined with the policies of austerity, are producing results that fit the patterns outlined in the SAPRIN study like a glove. No doubt, this is part of the reason why the IMF was invited to participate in Europe’s rescue schemes: the Fund’s technical expertise in advancing the neoliberal agenda, which has been fully embraced by the EU at least since the Maastricht Treaty, carries more than three decades of experience.


A Euro Treasury? An Interview with Jörg Bibow

Michael Stephens | February 10, 2014

(The following is the translation of an interview that appeared in Sunday’s Eleftherotypia. C. J. Polychroniou talks to Jörg Bibow about the latter’s proposal for a Euro Treasury and how it represents a viable solution to the eurozone crisis — a crisis that is very much ongoing, Bibow explains.)


CJP: A number of economists, including yourself, maintain that the eurozone crisis remains unresolved, yet the financial markets are calm. Is this a case of seeing the glass half empty rather than half full?

JB: Sure, if you are a believer in the efficient market theory you might conclude that things are just fine. Well, I don’t. Does anyone remember that the markets were also in a state of bliss in the years leading up to the crises in the US and Europe? As serious economists such as Keynes and Minsky well understood, financial markets are subject to conventional behavior and prone to instability. The current convention appears to be that Mr. Draghi’s famous “whatever it takes” promise is insurance enough that really bad stuff is not going to happen. Fine, but how powerful is Mr. Draghi, really? At some point the markets might wake up and wonder what it would actually take to fix the situation and how Mr. Draghi might possibly deliver on that. Complacency can turn into another full-blown scare in no time. And the reason to be scared is the fact that the euro is still not on any sound footing. Serious regime flaws are still in place. The eurozone economy may have stopped shrinking, largely owing to growth in the rest of the world, but that alone does not fill up the glass. Unemployment is stuck at mind-bogglingly high levels. Indebtedness continues rising. Prospects for any real recovery are grim. Ultimately, what will convince countries to stay with the euro as the euro comes to symbolize impoverishment rather than prosperity?

CJP: Many critics of the current eurozone architecture maintain that a transfer union is the only way to address imbalances and keep the euro alive. What you have proposed, however, is a “Euro Treasury” scheme which is designed not to be a transfer union. First, what’s wrong with having a transfer union?

JB: A transfer union features more or less automatic support from currently richer and stronger members to partners that are currently poorer and weaker. An element of transfer union was part of the EU and euro project from the beginning, the EU structural and cohesion funds. The US monetary union includes a far more extensive transfer union than that to be sure. Unfortunately, the euro crisis has greatly increased resistance against moving in that direction. Moreover, the troika rescue programs are erroneously interpreted as transfers – when in fact they were bailouts of creditor countries’ banks and meant more debts rather than any gifts for euro crisis countries, allegedly the beneficiaries. I see nothing wrong with a US-style transfer union for Europe in the long run. My “Euro Treasury” plan simply acknowledges that that is not a short-run option. Therefore, my Euro Treasury would pool fiscal resources and issue common euro bonds. But the benefits would be equally spread, with no transfers from rich to poor.

CJP: Exactly, how would the Euro Treasury work? continue reading…


Working Paper Roundup 2/7/2014

Michael Stephens | February 7, 2014

Unions and Economic Performance in Developing Countries: Case Studies from Latin America

Fernando Rios-Avila

The Rational Expectations Hypothesis: An Assessment from Popper’s Philosophy

Iván H. Ayala and Alfonso Palacio-Vera

Integrating Time in Public Policy: Empirical Description of Gender-specific Outcomes and Budgeting

 Lekha S. Chakraborty

Financial Crisis Resolution and Federal Reserve Governance: Economic Thought and Political Realities

Bernard Shull

Options for China in a Dollar Standard World: A Sovereign Currency Approach

L. Randall Wray and Xinhua Liu

Feasible Estimation of Linear Models with N-fixed Effects

Fernando Rios-Avila

A Stock-flow Approach to a General Theory of Pricing

 Philip Pilkington


The 1943 Proposal to Fund Government Debt at Zero Interest Rates

Michael Stephens | February 4, 2014

One thing Jan Kregel’s new policy note makes clear is that congressional debates about raising the debt ceiling were a great deal more enlightening in the 1940s and ’50s. Here is Rep. Wright Patman (D-TX) in 1943 defending his proposal to fund what were expected to be huge wartime expenditures by bypassing the private financial system and placing government debt directly with the Federal Reserve Banks at zero interest rates:

the Government of the United States, under the Constitution, has the power, and it is the duty of the Government, to create all money. The Treasury Department issues both money and bonds. Under the present system it sells the bonds to a bank that creates the money, and then if the bank needs the actual money, the actual printed greenbacks to pay the depositors, the Treasury will furnish that money to the banks to pay the depositors. In that way, the Government farms out the use of its own credit absolutely free.

To Patman, “farming” out the government’s credit in this way was just a direct — and unnecessary — subsidy to private banks: “I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of creating money, paying private bankers for the use of its own money. These private bankers do not hire their own money to the Government; they hire only the Government’s money to the Government, and collect an interest charge annually.” “If money is to be created outright,” he argued, “it should be created by the Government and no interest paid on it.”

As Kregel points out, one of the challenges for Patman’s proposal is that a zero rate on government debt seems to require giving up control over interest rates as a tool of monetary policy. However, Kregel notes that a proposal appearing in a 1946 Federal Reserve annual report (and repeated a number of times until the 1951 Fed-Treasury Accord) offers a solution: with the aid of supplementary required reserves, it would be possible to maintain a zero rate on government bonds while allowing the policy rate to rise. (As Marriner Eccles realized, the use of such policies would also require that fiscal policy play a role in controlling inflation — very much in the vein of Abba Lerner’s functional finance, Kregel observes.)

One of the takeaways from this discussion — beyond the remarkable deterioration of the quality of congressional debate — is that the supposed problem of financing the debt should be getting a lot less attention than it does in today’s deficit and debt ceiling debates. The real question, Kregel stresses, is “whether the size of the deficit to be financed is compatible with the stable expansion of the economy.”

Read Kregel’s policy note: “Wright Patman’s Proposal to Fund Government Debt at Zero Interest Rates: Lessons for the Current Debate on the US Debt Limit


The 23rd Annual Minsky Conference Is Coming to D.C.

Michael Stephens | February 3, 2014

23rd Annual Hyman P. Minsky Conference
Stabilizing Financial Systems for Growth and Full Employment

The National Press Club
Washington, D.C.
April 9–10, 2014

Organized by the Levy Economics Institute with support from the Ford Foundation.

In a context of global uncertainty, with growth and employment well below normal levels, the 2014 Minsky Conference will address both financial reform and prosperity, drawing from Minsky’s work on financial instability and his proposal for achieving full employment. Panels will focus on the design of a new, more robust, and stable financial architecture; fiscal austerity and the sustainability of the US and European economic recovery; central bank independence and financial reform; the larger implications of the eurozone debt crisis for the global economic system; the impact of the return to more traditional US monetary policy on emerging markets and developing economies; improving governance of the social safety net; the institutional shape of the future financial system; strategies for promoting an inclusive economy and more equitable income distribution; and regulatory challenges for emerging-market economies.

Registration is now open.

Participants include:

Anat Admati
Professor of Finance and Economics, Stanford University

Robert Barbera
Co-director, Center for Financial Economics, The Johns Hopkins University

Richard Berner
Director, Office of Financial Research, US Department of the Treasury

Sherrod Brown
US Senator (D-OH)

Willem H. Buiter*
Global Chief Economist, Citi

Vítor Constâncio
Vice President, European Central Bank

William C. Dudley*
President and Chief Executive Officer, Federal Reserve Bank of New York

Charles L. Evans
President and Chief Executive Officer, Federal Reserve Bank of Chicago

Heiner Flassbeck
Director, Division on Globalization and Development Strategies, United Nations Conference on Trade and Development (UNCTAD)

Jason Furman
Chairman, Council of Economic Advisers, Executive Office of the President

continue reading…