Archive for December, 2015

Registration Now Open for 25th Annual Hyman P. Minsky Conference

Michael Stephens | December 17, 2015

25th Minsky Conference Banner

The 2016 Minsky Conference will address whether what appears to be a global economic slowdown will jeopardize the implementation and efficiency of Dodd-Frank regulatory reforms, the transition of monetary policy away from zero interest rates, and the “new” normal of fiscal policy, as well as the use of fiscal policies aimed at achieving sustainable growth and full employment. Is economic policy leading to another Minsky moment?

Organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

Levy Economics Institute of Bard College
Annandale-on-Hudson, New York 12504

April 12–13, 2016

The attendance fee is $75 and due upon registration. To register, click here.

Visit the conference website for more information about accommodations and directions to the Levy Institute. (Program details will be posted as they become available.)

A list of participants is below the fold: continue reading…


Applying the Brakes: Four Long and Winding Roads to “Normalcy” for the Fed

Michael Stephens | December 15, 2015

by Daniel Alpert

It is highly likely that this week will see the Federal Reserve’s Open Market Committee elect to increase the Fed Funds policy rate of interest for the first time since June of 2006, and after slashing the rate to the lowest level in history—approaching the so-called zero lower bound.

But the return journey to interest rate policy rate normalcy will be a long and winding one. The ability to influence longer term interest rates, over which the Fed has no direct control, will be even more limited (in fact, after the Fed’s move and any interim market volatility, long term market interest rates are likely to fall if the global economy maintains it present trend).

Yet it is very clear that the policy makers at the Fed are quite anxious to regain the control over monetary policy that they very much lack at the zero lower bound—if only to be able to do something when a new recession emerges.

Here, then, are the four routes that the Fed may choose to head down in order to achieve interest rate normalization, and my opinion of how effective (or ineffective) each policy is likely to be if implemented.


The Policy Rates—Fed Funds and the Discount Rate

How it Works:
The Federal Reserve Banks are the banks to the banking industry. When a bank is short of liquidity (generally overnight) it can obtain loans from the Fed, based on the quality of its balance sheet and/or the pledge of specific assets (discounting). The Fed sets a target rate for each of these policy rates and, in normal times, these rates often act as a benchmark for banks’ own short term lending to clients, as banks lend at a margin to their own cost of funding.

Effectiveness in Current Environment:
When lending activity is brisk, and bank liquidity is tighter, the Fed Funds rate (and, to a far lesser extent, the discount rate, as discounting is far less common) can have a substantial impact on market interest rates. But today, banks are awash in surplus liquidity. Even if a bank needs an overnight injection of liquidity, it can easily find that from another bank, happy to lend the money rather than leave it idle. The banking system in the aggregate has over $2 trillion of excess reserves (vs. mandatory reserves), most of which is on deposit at the Fed itself. So raising the Fed Funds rate will have no real effectiveness other than psychological.


Paying Banks Interest on Bank Reserves

How it Works:
Prior to the financial crisis, whatever small amounts (less than $200 billion) that the banking industry had on deposit at the Fed earned no interest. In the distress of the crisis, in one of the many ways that the Fed bailed out the banking system, the Fed commenced paying interest on reserves at 25bps per annum. In theory, of course, paying interest to banks to have their funds sit idle is contractionary. But income was far more important to banks in the crisis and reserves were building at a frantic pace relative to lending opportunities. If the Fed were to tighten by increasing interest paid on reserves, it could – in theory – slow (or raise the cost of) market lending.

Effectiveness in Current Environment:
Here we get into a “through the looking glass” sort of policy world. Why, with the economy less than robust, would the Fed want to discourage or limit bank lending in the first place? Yet, the whole purpose of monetary tightening is to do exactly that in order to lessen the chance of the economy overheating in the future (as well as, at the zero bound at which we now find ourselves, to enable the Fed to regain control of monetary levers). But here too there is a problem in assuming that such a move would be effective. There simply isn’t a lot of loan demand by creditworthy borrowers. Sure, there are plenty of non-creditworthy borrowers out there who would love to have money, but lending to them is (at least post-financial crisis) not the business of banking. So paying more interest on reserves (while certainly welcome by the banks) is unlikely to force up market rates all that much.


Reverse Repurchase Agreements

How it Works:
As most everyone knows, the Fed was on a five-year-plus buying binge to acquire U.S. Treasury and Mortgage Backed Bond Securities, beginning in 2009. It now owns trillions of dollars of government debt and government-guaranteed debt. The easiest way to force interest rates higher (which would be traumatic at this time) would be to simply dump those securities back into the market (see next slide). Instead, the Fed can pull money (cash) out of the system by “borrowing” against the securities it holds on a short term basis to banks and non-banks with excess cash. As it offers more of these securities for overnight or short term “repo” it would at some point push the rates it pays on the repo contract higher, because it will reduce the availability of excess cash laying around

Effectiveness in Current Environment:
At this time, reverse repos constitute the Fed’s greatest hope for managing interest rate policy. They have the advantage of being flexible and very reversible if things go downhill in the economy. The NY Fed’s open market operations unit can offer fewer or more repo contracts each day to adjust market interest rates. Furthermore, since the Fed owns securities of varying maturities, it can play up and down the yield curve, in theory. The problem is, this has never been done before in scale and no one knows how it will really play out, or—of greater importance, perhaps—how the market will work to “game” the Fed’s repo activity in order to better profit from it.


“Quantitative Tightening”

How it Works:
As alluded to above, the Fed—in theory—could simply sell back to the market the enormous volume of government securities it acquired post-financial crisis. This would be a blunt instrument of the highest order. If they sell enough securities, it would push interest rates higher by draining cash from the system.

Effectiveness in Current Environment:
This method is anathema in the Fed’s current thinking. It could only be reversed by a resumption of quantitative easing and would push interest rates much higher and very rapidly. This is a supply and demand issue. The Fed holds the largest inventory of U.S. government bonds on the planet and if the market believes that inventory is going to be dumped, the price of bonds will plummet, driving interest rates higher and the economy of the U.S., if not the world, into a nose dive.

Daniel Alpert is the Managing Partner of Westwood Capital, LLC and a fellow in economics at The Century Foundation.


Want More – and Better – Jobs? Put Women in Charge

Tamar Khitarishvili | December 10, 2015

I was recently in Tbilisi to participate in a conference that took stock of what we know about the challenges of job creation in the South Caucasus and Western CIS.

While researching gender inequalities in the labour markets of these countries, I searched for evidence on how the challenge of job creation can be overcome without perpetuating gender inequalities in the region, and preferably, by reducing them.

I quickly discovered that there was no simple answer to this question. Nevertheless, I came away with a couple of key insights.

One was that expanding women-owned businesses could be a way to create more and better jobs.

Female-owned businesses not only tend to operate in labour-intensive sectors but – and more surprisingly – they have greater scale economies than male-owned businesses, which means that their performance benefits more from expansion.

Importantly, they tend to hire proportionately more women.

For example, in 2009 in Georgia, almost 60 percent of full-time workers in firms where women were among the owners were female, compared to 31 percent in firms without women owners.

This suggests that if we push for more female-owned businesses, we can create better jobs. It also suggests that private-sector development policies would be more effective if they had stronger gender components.

For example: Would tax breaks for start-ups with their own daycare facilities increase business formation rates?

Secondly, my research further convinced me of the need to tackle the issue of care work, a burden borne mostly by women.

Childcare burdens are a major factor preventing women-owned businesses from expanding and generating wage employment, which we know makes a dramatic difference in empowering them.

Childcare burdens also prevent women from seeking wage employment. Therefore, alleviating childcare constraints can carry us a long way towards expanding women’s economic opportunities.

It helps that, as independent new research finds, the expansion of the childcare sector directly creates more and better jobs for women – as well as for unemployed men. It is heartening that UN organizations are supporting such work.

Most certainly, a comprehensive approach will be needed to tackle the challenge of achieving inclusive job growth in the region and beyond.

Nevertheless, all this tells us that taking a gender lens to employment creation is an important part of the solution.

(cross-posted at UNDP’s Voices from Eurasia)


That Puzzling “Revelation” Politely Called “German Wage Moderation”

Jörg Bibow | December 6, 2015

A few days ago Peter Bofinger, one of Germany’s “wise men,” published an astonishing post titled “German wage moderation and the Eurozone crisis” that appeared on (see here) and Social Europe (see here). The post was astonishing in more than one way. First of all, it seems astonishing that, in late 2015, and not 10 years earlier or so, a wise man from Germany should feel the need to draw attention to the role of German wage moderation in the eurozone crisis. Persistent German wage moderation under the euro is an undeniable fact. How can there be any controversy about it some 20 years after it started?

No less astonishing was the particular occasion that triggered Bofinger’s post. Bofinger responds to a recently published CEPR Policy Insight titled “Rebooting the Eurozone: Step I – agreeing a crisis narrative.” This is an essay by a group of CEPR-related economists attempting to establish what they see as a “crisis narrative” that may be more in accordance with the basic facts about the eurozone crisis (rather than being based on myth or political convenience). In particular, these economists reject the official narrative that is still popular today among some key eurozone authorities, especially Germany’s finance ministry: namely, the “sovereign debt crisis” myth. Their alternative crisis narrative highlights large intra-eurozone capital flows and imbalances and the “sudden stop” event that featured their eventual implosion. Bofinger generally agrees with the proposed alternative crisis narrative but makes the point that something rather important is missing in it: the alternative CEPR crisis narrative pays zero attention to the role of German wage moderation and is therefore “incomplete.” It is indeed astonishing that one of the supposedly leading European economic policy think tanks proposes a crisis narrative, and one supposedly based on the basic facts, but misses the most basic fact of all: that German wages stopped rising under the euro. continue reading…


Review: Minsky Matters and the Next Minsky Moment

Michael Stephens | December 2, 2015

From Edward Chancellor’s review in Reuters Breakingviews of L. Randall Wray’s Why Minsky Matters:

Minsky, who taught economics at the University of Washington in St Louis before ending up at the Levy Institute at Bard College, had little time for conventional economics with its emphasis on equilibrium, rational expectations and the view that money and finance were largely irrelevant: “Nobody ‘up there’ understands American capitalism,” he once contemptuously wrote. […]

When the credit crunch arrived, it provided posthumous support for Minsky’s economic vision. Subprime mortgages were revealed as a classic form of Ponzi finance. Losses of securitized debt cascaded through the financial system, prompting a liquidity crisis, exactly as described in Minsky’s work. The Great Moderation gave way to the Great Recession, and the Lehman bust became known as the ultimate example of a “Minsky moment.”

As a result, the crisis made Minsky something of a household name beyond strictly economic circles. Unfortunately, Minsky in the original isn’t an easy read. “He needs to be translated,” writes Wray, in the preface to “Why Minsky Matters.” As a former teaching assistant of Minsky’s and colleague at the Levy Institute, Wray is perfectly positioned to perform that task. Few people understand Minsky as well as Wray. Written in clear prose, with Minsky’s idiosyncratic ideas and language patiently explained, Wray provides the best general introduction to Minsky’s economics.

Read the whole thing here.