Financial Instability and the Reregulation of Financial Institutions and Markets

In 2008, the Ford Foundation awarded the Levy Economics Institute of Bard College a multiyear grant to conduct research on the nature and dynamics of the crisis in the US subprime mortgage market, and to generate a new regulatory framework to address it. This project is administered by the Institute's Monetary Policy and Financial Structure program under the supervision of Jan Kregel. Its analytical framework is based on the work of the late financial economist Hyman Minsky, a Levy Distinguished Scholar who considered financial crises an endemic, permanent internal process of any capitalist system. From this point of view, the current crisis is not a peculiar event but rather a natural response of financial markets to a period of relative stability and innovations in risk management.

One of the main drawbacks of the current regulatory framework is that it was designed for a financial architecture that no longer exists. The main sources of private sector financing are not commercial or investment banks but rather private investment vehicles such as hedge funds and sovereign wealth funds. Most of these vehicles are highly leveraged, via securitized loans obtained from financial holding companies, making the ultimate risk holders difficult to identify. It also means that they cross multiple lines of regulatory jurisdiction as well as national borders—as evidenced by how quickly the US subprime crisis became a systemic, global one. The recent Dodd-Frank financial reform bill does little to address these issues, nor does it sufficiently expand consumer protections.

The challenge is to design regulations that are compatible across different countries and regimes while preventing regulatory arbitrage and ensuring client protection. An important focus of the Ford-Levy Institute Project is extending Minsky's framework to an analysis of the ad hoc regulatory responses to the subprime crisis and the formal government proposals that arose from it. The ultimate goal is a cohesive program of reforms of the financial architecture and associated regulatory reforms at both the national and international levels.

Recent Minsky Conferences on the State of the US and World Economies have been held under the aegis of the Ford-Levy Institute Project at the Foundation's New York headquarters, providing a forum for the presentation of project outcomes as well as discussion of the application of Minsky's financial fragility approach to the analysis of market regulation and supervision. These presentations, as well as public policy briefs and other publications related to the project, are available on our website. The global Implications of reregulation have also been approached through research collaboration and links to a number of associated Ford projects throughout Europe, Asia, and Latin America. This work is ongoing, and we will continue to expand our global research network.

In 2010, The Hyman P. Minsky Summer Seminar was instituted as part of the Ford-Levy Institute Project. This weeklong annual program of training and analysis is designed for young finance professionals in the public and private sectors, and graduate-level scholars engaged in research on these issues.


Related Publications

  • Conference Audio | April 2015

  • In the Media | April 2014
    By Robert Feinberg
    MoneyNews, April 22, 2014. All Rights Reserved.

    Charles Evans, president of the Federal Reserve Bank of Chicago and a leading dove of the Federal Open Market Committee (FOMC), delivered a speech April 9 titled "Monetary Goals and Strategy" to the 23rd annual Hyman Minsky Conference, which is sponsored by the Levy Institute of Bard College and held at the National Press Club in Washington. 

    With the exception of me, the modest-sized audience was composed of liberals who follow economic policy very closely and believe that governmental authorities should tinker constantly with the economy in order to improve its performance and the distribution of income. 

    The conference honors Minsky as one of the earliest exponents of this view, who propagated it articulately from the earliest years of the permanent and ongoing financial crisis.

    Chicago has traditionally been a hotbed of conservative and even hard money economics, especially at the University of Chicago. However, the Chicago Fed under Evans has placed itself firmly in the dovish camp on monetary policy, and in 2015 Evans will rotate into a voting seat on the FOMC, so that he can back his sentiments with a vote. Evans has taught at the University of Chicago, University of Michigan and University of South Carolina, and he received degrees in economics from the University of Virginia and Carnegie-Mellon University, which is a stronghold of conservative monetary scholarship.

    What makes Evans' speech especially significant is that he poses a scholarly challenge to conservative advocates of a monetary rule, particularly in circumstances where the economy has performed so poorly that the federal funds rate has already dropped to the bottom, and he contends that under these conditions, even Milton Friedman would agree that the FOMC should take an aggressive stance in order to keep the economy from slipping into a zone of negative inflation that could cripple economic growth for decades. 

    The speech was divided into four parts. First, Evans reviewed the "Three Big Events in Fed History," in his order of importance: 1) The Great Depression (1929 to 1938); 2) The Great Inflation (1965 to 1980); and The Treasury Accord (1951). He defended the independence of the Fed, but accepted in a serious way, not just rhetorically, that with the independence must go accountability.

    Second, Evans laid out a three-part strategy for achieving the goals the FOMC has set out during the long term. 

    Third, he used bulls-eye charts to demonstrate that the Fed has missed both its employment and inflation targets. 

    And finally, he lamented the inability to stimulate the economy by adjusting the federal funds rate once it has reached its lower bound. 

    He concluded by advocating that the Fed adopt more aggressive policies now to stimulate growth, even at the risk of exceeding the 2 percent inflation target for some time after the employment target has been reached. 

    He criticized as "timid" the stance of most of his colleagues who argue for a slow glide path to the target so as not to risk touching off another bout of inflation.

    (Archived video can be found here. A copy of the speech can be found here.) 
  • Cosponsored by the Levy Economics Institute of Bard College and MINDS – Multidisciplinary Institute for Development and Strategies, with support from the Ford Foundation

    Everest Rio Hotel
    Rio de Janeiro, Brazil
    September 26–27, 2013

    This conference was organized as part of the Levy Institute’s global research agenda and in conjunction with the Ford Foundation Project on Financial Instability, which draws on Hyman Minsky's extensive work on the structure of financial governance and the role of the state. Among the key topics addressed: designing a financial structure to promote investment in emerging markets; the challenges to global growth posed by continuing austerity measures; the impact of the credit crunch on economic and financial markets; and the larger effects of tight fiscal policy as it relates to the United States, the eurozone, and the BRIC countries. 

  • In the Media | April 2014
    The Bond Buyer, April 11, 2014. All Rights Reserved.

    Federal Reserve Governor Daniel Tarullo said the central bank shouldn't raise interest rates "preemptively" on a belief the recession cut the supply of ready labor in the economy. "We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure," Tarullo said today in remarks prepared for a speech in Washington. "We should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years." Tarullo, the central bank's longest-serving governor, backed a March 19 statement in which the Federal Open Market Committee said it will keep the main interest rate below normal long-run levels while attempting to meet its mandate for full employment and stable prices. In a wide-ranging speech, Tarullo cited slower productivity growth, the smaller share of national income accruing to workers, rising inequality and decreasing economic mobility as "serious challenges" for the U.S. economy. Monetary policy, by focusing on the full-employment component of the dual mandate, can "provide a modest countervailing factor to income inequality trends by leading to higher wages at the bottom rungs of the wage scale," Tarullo, 61, said at the 23rd Annual Hyman P. Minsky Conference in Washington. The Fed governor rebuffed concerns about near-term inflation from wages, noting that even as the unemployment rate has fallen to 6.7 percent in March from 7.5 percent in the same month a year earlier, "one sees only the earliest signs of a much-needed, broader wage recovery." "Compensation increases have been running at the historically low level of just over 2 percent annual rates since the onset of the Great Recession, with concomitantly lower real wage gains," Tarullo said. The reasons for that lag in wage gains are not clear, he said. "The issue of how much structural damage has been suffered by the labor market is of less immediate concern today in shaping monetary policy than it might have been had we experienced a period of rapid growth during the recovery," Tarullo said at the event, organized by the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y. 
  • In the Media | April 2014
    By Denis MacShane
    The OMFIF Commentary, April 11, 2014. All Rights Reserved.

    The normal duty of central bankers (especially in Europe) is to denounce inflation as the work of the devil and call for labour market flexibility as a barely disguised code for reducing wages.

    But a gathering of academic economists at the annual Minsky Conference this week in Washington heard an impassioned plea from one of America’s top central bankers that it was time to increase wages and let inflation rise again.

    Charles Evans is president of the Federal Reserve Bank in Chicago, where he has worked much of his professional life, in addition to stints as an economics professor and author of heavyweight academic articles on monetary policy.

    Evans, currently a non-voter, is among the more dovish members of the Federal Open Market Committee. In his paper at the Bard College Levy Institute’s Minsky Conference, commemorating the work of depression-fighting economist Hyman Minsky, Evans said the US economy now needed a serious boost in wages to help business demand.

    Evans used moderate, cautious language. However, the message was clear: Deflation and low wages are the new dragons to be slain.

    ‘Low wage increases are symptomatic of weak income growth and low aggregate demand. Stronger wage growth would likely result in more customers walking through the doors of business establishments and leading to stronger sales, more hiring and capacity expansion,’ Evans said.

    He suggested a target wage growth figure of 3.5%, which he argued ‘is sustainable without building inflation pressures.’ This compares with the current range of 2-2.25 in compensation growth, coinciding with labour’s historically low share of national income.

    Evans is right to underscore the dramatic change in the amount of US added value that goes to employees. Until 1975, wages normally accounted for more than 50% of American GDP, but this fell to 43.5% by 2012.

    Evans said fears about inflation which have hovered over monetary policy-making since the 1970s have been exaggerated. Evans argued: ‘No one can doubt that we [the Fed] are undershooting our 2% [inflation] target. Total personal consumption expenditure (PCE) prices rose just 0.9% over the past 12 months; that is a substantial and serious miss.’

    ‘Below-target inflation’, said Evans, ‘is a worldwide phenomenon and it is difficult to be confident that all policy-makers around the world have fully taken its challenge on board. Persistent below-target inflation is very costly, especially when it is accompanied by debt overhang, substantial resource slack and weak growth.’

    'Despite current low rates, I still often hear people say that higher inflation is just around the corner. I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation. Many times, the strongest concerns are expressed by folks who said the same thing back in 2009 and then in 2010.’

    Denis MacShane is former UK Minister for Europe and a member of the OMFIF Advisory Board. He was a speaker on European politics at the Minksy Conference.
  • In the Media | April 2014
    By Joseph Lawler
    Washington Examiner, April 11, 2014. All Rights Reserved.

    The so-called "Great Moderation" of low economic volatility between the mid-1980s and the financial crisis of 2008 was not as great as it seemed, and the future likely won't be as pleasant, according to President Obama's top economic adviser.

    Jason Furman, the chairman of the Council of Economic Advisers, said in a speech in Washington on Thursday that “the Great Recession certainly does reveal serious limitations of the concept of a great moderation,” and that the U.S. economy shouldn't be expected to return to a pattern of relatively smooth growth now that the banking crisis is in the past.

    The "Great Moderation" was a term coined by economists James Stock, another current member of the CEA, and Mark Watson in a 20003 paper. It was meant to describe the decline in volatility in macroeconomic indicators such as gross domestic product growth and inflation since Federal Reserve Chairman Paul Volcker brought the high inflation rates of the 1960s and '70s to an end.

    In 2004, Ben Bernanke, then a Fed governor under Chairman Alan Greenspan, popularized the term in a speech that attributed the smoothing out of the business cycle to better monetary policy by the Fed -- although Bernanke also acknowledged that luck may also have played a significant role, and that luck might run out in the future.
       

    Furman, however, suggested that improvements in the private sector and in the government's management of fiscal and monetary policy may not have reduced the risks of severe recessions, but rather pushed the risks out to the tails of the risk distribution. In other words, economic shocks might be rarer, but more dangerous. While the U.S. did not suffer a deep recession in the late '80s and '90s, it was due for one eventually.

    Furman illustrated the point with two charts. Looking at deviations in one-year GDP growth from the long-term average, he noted, it appears that there was a Great Moderation, briefly interrupted by the 2007-2009 recession:
     
    But looking at the deviations in 10-year GDP growth from the average, it's a different story. Volatility in economic growth spiked and hasn't returned to normal.
    Furman concluded that it "would be foolish to be complacent and fully assume that in the deeper, lower frequency sense there ever was a genuine 'Great Moderation,' let alone that it has returned and renders further policy steps unnecessary."

    He proposed four measures for further stabilizing the economy in the future, including automatic fiscal stabilizers to even out government spending and taxing in boom times and downturns, reducing income inequality, improving coordination among countries and promoting financial stability.

    Notably, Furman drew special attention to housing finance as a component of financial stability. Although the Obama administration for the most part has left the issue of what should be done with bailed-out government-sponsored mortgage businesses Fannie Mae and Freddie Mac to Congress, Furman did signal support for a bill that Democratic and Republican senators on the Senate Banking Committee have introduced.

    The committee "is making promising bipartisan progress and the administration looks forward to continuing to work with Congress to forge a new private housing finance system that better serves current and future generations of Americans," he said.

    The event at which Furman was speaking, hosted by the Levy Economics Institute, was named after Hyman Minsky, an American economist whose worked focused on financial crises and their relationship to economic downturns. 
  • In the Media | April 2014
    NDTV, April 10, 2014. All Rights Reserved.

    Washington (Reuters | Update)
    :

    The Federal Reserve will likely wait at least six months after ending a bond-buying program before raising interest rates, and will only act that quickly "if things really go well," a top US central banker said on Wednesday.

    "It could be six, it could be 16 months," Chicago Fed President Charles Evans told reporters on the sidelines of a Levy Economics Institute forum.

    Last month, Fed Chair Janet Yellen put the wait at "around six months" depending on the economy. Her comment undercut stocks and bonds and prompted economists to revise forecasts. Traders and Wall Street economists now expect the first rate hike to come around the middle of next year.

    "If I had my druthers, I'd want more accommodation and I'd push it into 2016," Evans said of the first rate hike, but "the actual, most likely case I think is probably late 2015."

    The Fed has kept rates near zero since the depths of the recession in late 2008, and has bought some $3 trillion in bonds to help lower US borrowing costs. It has reduced its bond-buying and expects to wind it down by the fall.

    Evans said the current pace of reducing the bond purchases, $10 billion at each Fed policy meeting, is "reasonable" and takes the Fed "into the October timeframe" for shelving the program.

    "I am confident that, depending on how the economic circumstances come out, we'll keep interest rates low for quite some period of time," he said.

    WOULD WELCOME ECB EASING Evans, a vocal policy dove, has long worried that the Fed has been too timid in its efforts to lower employment and raise inflation toward the central bank's targets.

    "We're in a very low inflation global environment," he said. "The eurozone well below 1 per cent and Japan has been very low for a long period of time, and I'm worried that there's something more afoot" than just the US or eurozone experience.

    Asked about a possible further easing of policy by the European Central Bank, he said: "Yes I think that would be quite welcome," adding he would welcome "all actions that help generate stronger world growth."

    A fellow dove at the central bank, Minneapolis Fed President Narayana Kocherlakota, has proposed lowering the interest rate the Fed pays banks on excess reserves. The aim would be to provide more accommodation and boost inflation from just above 1 per cent currently.

    Asked about this idea, Evans said he was willing to look at the possibility, but noted that the Fed's policy-setting Federal Open Market Committee has long considered it and has not acted. 
  • In the Media | April 2014
    By Jonathan Spicer
    Manorama Online, April 10, 2014. All Rights Reserved.

    WASHINGTON (Reuters) – The Federal Reserve will likely wait at least six months after ending a bond-buying program before raising interest rates, and will only act that quickly "if things really go well," a top U.S. central banker said on Wednesday.

    "It could be six, it could be 16 months," Chicago Fed President Charles Evans told reporters on the sidelines of a Levy Economics Institute forum.

    Last month, Fed Chair Janet Yellen put the wait at "around six months" depending on the economy. Her comment undercut stocks and bonds and prompted economists to revise forecasts. Traders and Wall Street economists now expect the first rate hike to come around the middle of next year.

    "If I had my druthers, I'd want more accommodation and I'd push it into 2016," Evans said of the first rate hike, but "the actual, most likely case I think is probably late 2015."

    The Fed has kept rates near zero since the depths of the recession in late 2008, and has bought some $3 trillion in bonds to help lower U.S. borrowing costs. It has reduced its bond-buying and expects to wind it down by the fall.

    Evans said the current pace of reducing the bond purchases, $10 billion at each Fed policy meeting, is "reasonable" and takes the Fed "into the October timeframe" for shelving the program.

    "I am confident that, depending on how the economic circumstances come out, we'll keep interest rates low for quite some period of time," he said.

    WOULD WELCOME ECB EASING
    Evans, a vocal policy dove, has long worried that the Fed has been too timid in its efforts to lower employment and raise inflation toward the central bank's targets.

    "We're in a very low inflation global environment," he said. "The eurozone well below 1 percent and Japan has been very low for a long period of time, and I'm worried that there's something more afoot" than just the U.S. or eurozone experience.

    Asked about a possible further easing of policy by the European Central Bank, he said: "Yes I think that would be quite welcome," adding he would welcome "all actions that help generate stronger world growth."

    A fellow dove at the central bank, Minneapolis Fed President Narayana Kocherlakota, has proposed lowering the interest rate the Fed pays banks on excess reserves. The aim would be to provide more accommodation and boost inflation from just above 1 percent currently.

    Asked about this idea, Evans said he was willing to look at the possibility, but noted that the Fed's policy-setting Federal Open Market Committee has long considered it and has not acted.
  • In the Media | April 2014
    Morningstar Advisor, April 10, 2014. All Rights Reserved.

    WASHINGTON (MarketWatch) -- The U.S. economy, aided by the Federal Reserve's easy monetary-policy stance, is beginning to look healthier, Federal Reserve Gov. Daniel Tarullo said Wednesday. "While we've not had certainly the pace and pervasiveness of the recovery that we wanted, the unconventional monetary policy have been critical in supporting the moderate recovery we have had, which I think now is looking reasonably well-rounded going forward, and I think that is reflected in the fairly wide expectation growth is going to be picking up over the course of this year," Tarullo said at a conference organized by the Levy Institute of Bard College. Tarullo sounded in no hurry to end the Fed's easy policy stance. He said the Fed "should not rush to act preemptively" in anticipation of inflationary pressures. Tarullo's comments were noteworthy because he rarely speaks about monetary policy -- rather, most of his speeches deal with financial-stability issues given his role as the central bank's point-man on strengthening regulation in the wake of the financial crisis.
  • In the Media | April 2014
    By Ann Saphir
    Reuters, April 10, 2014. All Rights Reserved.

    (Reuters) – Wall Street bond dealers began anticipating an earlier first interest-rate hike from the Federal Reserve after last month's policy meeting, according to the results of a poll by the New York Fed released on Thursday.

    That was exactly what Fed policymakers had feared would happen after the central bank published fresh forecasts on interest rates that appeared to map out a more aggressive cycle of rate hikes than previously expected, minutes of the meeting released Wednesday showed.

    Dealers who changed their expectations said they did so because of forecasts, and "several pointed to comments made by (Fed) Chair (Janet Yellen) during her press conference," according to the poll, which asked dealers about their rate hike expectations both before and after the Fed's March 18-19 meeting.

    At the policy-setting meeting, central bank officials made a widely expected reduction in their bond-buying stimulus and decided to jettison a set of numerical guideposts they were using to help the public anticipate when they would finally raise rates.

    The Fed said the change in its rate hike guidance did not point to a shift in policy intentions, but new rate forecasts from the current 16 Fed policymakers suggested the federal funds rate would end 2016 at 2.25 percent, a half percentage point above Fed officials' projections in December.

    Adding to the perception of a slightly more hawkish Fed, the Fed said it would wait a "considerable time" following the end of its bond-buying program before finally raising interest rates, a period of time that Yellen in her press conference suggested could be "around six months."

    As of March 24, dealers saw a 29 percent chance of a first rate hike in the first half of 2015, up from 24 percent before the March meeting, the poll showed.

    Both before and after polls showed dealers attached a 30 percent probability to a rate rise in the second half.

    Fed officials have since gone to great pains to point out any rate hike decisions will depend on the state of the economy.

    "It could be six, it could be 16 months," Chicago Fed President Charles Evans told reporters on the sidelines of a Levy Economics Institute forum on Wednesday.
  • In the Media | April 2014
    MNI | Deutsche Börse Group, April 9, 2014. All Rights Reserved.

    * Chicago Federal Reserve Bank President Charles Evans Wednesday accused the central bank of being "timid" in its attempts to spur faster economic growth, saying the Fed has been "less aggressive" than called for despite being nowhere its employment and inflation goals. In remarks prepared for delivery at the Levy Institute's Hyman Minsky conference, Evans warned that the tentative approach to bolstering the economic recovery could leave it susceptible to unforeseen shocks, and called instead for the Fed to keep most of its ultra-easy monetary policy in place "for some time." "Generally, the evidence points to a still weak labor market. We still have some ways to go to reach our employment mandate," said Evans, who will vote on the policymaking Federal Open Market Committee in 2015.

    * Speaking to reporters after his speech, Evans said it would be appropriate for the central bank to hold off raising interest rates until 2016, citing his concerns about the low inflation environment. However, "the actual, most likely case, I think it's probably late 2015." He said he thinks "it's important to remind everybody that we have strong accommodation in place and we need to leave in place in order to do the job that it's intended to do," he said.    
  • In the Media | April 2014
    By Jonathan Spicer
    MSN Money, April 9, 2014. All Rights Reserved.

    WASHINGTON, April 9 (Reuters) – The Federal Reserve will likely wait at least six months after ending a bond-buying program before raising interest rates, and will only act that quickly "if things really go well," a top U.S. central banker said on Wednesday.

    "It could be six, it could be 16 months," Chicago Fed President Charles Evans told reporters on the sidelines of a Levy Economics Institute forum.

    Last month, Fed Chair Janet Yellen put the wait at "around six months" depending on the economy. Her comment undercut stocks and bonds and prompted economists to revise forecasts. Traders and Wall Street economists now expect the first rate hike to come around the middle of next year.

    "If I had my druthers, I'd want more accommodation and I'd push it into 2016," Evans said of the first rate hike, but "the actual, most likely case I think is probably late 2015."

    The Fed has kept rates near zero since the depths of the recession in late 2008, and has bought some $3 trillion in bonds to help lower U.S. borrowing costs. It has reduced its bond-buying and expects to wind it down by the fall.

    Evans said the current pace of reducing the bond purchases, $10 billion at each Fed policy meeting, is "reasonable" and takes the Fed "into the October timeframe" for shelving the program.

    "I am confident that, depending on how the economic circumstances come out, we'll keep interest rates low for quite some period of time," he said.

     

    Would Welcome ECB Easing
    Evans, a vocal policy dove, has long worried that the Fed has been too timid in its efforts to lower employment and raise inflation toward the central bank's targets.

    "We're in a very low inflation global environment," he said. "The eurozone well below 1 percent and Japan has been very low for a long period of time, and I'm worried that there's something more afoot" than just the U.S. or eurozone experience.

    Asked about a possible further easing of policy by the European Central Bank, he said: "Yes I think that would be quite welcome," adding he would welcome "all actions that help generate stronger world growth."

    A fellow dove at the central bank, Minneapolis Fed President Narayana Kocherlakota, has proposed lowering the interest rate the Fed pays banks on excess reserves. The aim would be to provide more accommodation and boost inflation from just above 1 percent currently.

    Asked about this idea, Evans said he was willing to look at the possibility, but noted that the Fed's policy-setting Federal Open Market Committee has long considered it and has not acted. 

  • In the Media | April 2014
    By Brain Odion-Esene
    MNI | Deutsche Börse Group, April 9, 2014. All Rights Reserved.

    WASHINGTON (MNI) -–Chicago Federal Reserve Bank President Charles Evans Wednesday accused the central bank of being "timid" in its attempts to spur faster economic growth, saying the Fed has been "less aggressive" than called for despite being nowhere its employment and inflation goals.

    In remarks prepared for delivery at the Levy Institute's Hyman Minsky conference, Evans warned that the tentative approach to bolstering the economic recovery could leave it susceptible to unforeseen shocks, and called instead for the Fed to keep most of its ultra-easy monetary policy in place "for some time."

    "Generally, the evidence points to a still weak labor market. We still have some ways to go to reach our employment mandate," said Evans, who will vote on the policymaking Federal Open Market Committee in 2015.

    As for the Fed's price stability mandate, he said he sees an economy that points to below-target inflation for several years, which underscores the need for easy policy.

    "Given today's unacceptably low inflation environment and the wealth of inflation indicators that point to continued below-target inflation, I think we need continued strongly accommodative monetary policy to get inflation back up to 2% within a reasonable time frame," he said.

    Instead, "the FOMC has been less aggressive than the policy loss function calls for," Evans said, arguing that "in the current circumstances, accountability and optimal policy mean we should be maintaining a large degree of accommodation for some time."

    "It certainly seems that the fallout from the financial crisis and persistent headwinds holding back economic activity are consistent with the equilibrium real interest rate being lower than usual today," he added.

    Evans said actions that place the FOMC "on a slow glide path" toward its targets undermine the credibility of the Fed's vow to meet its mandates in a timely fashion.

    "Timid policies would also increase the risk of progress being stymied along the way by adverse shocks that might hit before policy gaps are closed," he said. "The surest and quickest way to reach our objectives is to be aggressive."

    This also means the FOMC should be open to the idea of overshooting its targets in a manageable fashion.

    "Such risks are optimal if the outcome of our policy actions implies smaller average deviations from our targets over the medium term. We should be willing to undertake such policies and clearly communicate our willingness to do so," Evans said.

    Making his case for why the economy still needs continued, aggressive monetary policy, Evans said March's 6.7% unemployment rate is still well above the 5.25% percent rate that he considers to be the longer-run normal. As the jobless rate continues to decline, he stressed the importance of assessing a wide range of labor market data "to better gauge the overall health of the labor market."

    These would include quit rates, layoffs and a variety of wage measures, as well as broader measures of unemployment that include discouraged workers and those who would like to work more hours.

    Evans also argued that the decline in the labor participation rate in recent months cannot be ascribed solely to changing population demographics and other factors outside the Fed's control. The end of extended unemployment insurance benefits, among other things, has also likely decreased the natural rate of unemployment, meaning that "the decline in the unemployment rate likely overstates to some degree the reduction of slack in the labor market over the past year."

    On the inflation front, Evans noted that the United States is not the only country struggling with below-target inflation, and that "it is difficult to be confident that all policymakers around the world have fully taken its challenge onboard."

    "Persistent below-target inflation is very costly, especially when it is accompanied by debt overhang, substantial resource slack, and weak growth," he added.

    Given the low inflation environment, Evans said he is "somewhat exasperated" by those who constantly warn that higher inflation "is just around the corner."

    For one thing, he argued that unless there is an unexpected, and positive, shock to the global economy, commodity prices are unlikely to fuel a strong increase in inflation.

    To those worried about the inflationary risks posed by the Fed's swollen balance sheet and the massive amounts of excess bank reserves, Evans countered that banks so far have not been lending these reserves nearly enough to generate big increases in broad monetary aggregates.

    Even if lending did pick up, he added, "Dramatically higher bank lending would surely be associated with higher loan demand and a generally stronger economy. Strong growth and diminishing resource slack would be part of this story, and a rising rate environment would be a natural force diminishing the rising inflation pressures."

    The slow rate of wage growth is another cause for concern, Evans said, as it is "symptomatic of weak income growth and low aggregate demand."

    "At today's 2% to 2.25% compensation growth rates and labor's historically low share of national income, there is substantial room for stronger wage growth without inflation pressures building," he said.
  • In the Media | April 2014
    By Brai Odion-Esene
    MNI | Deutsche Börse Group, April 9, 2014. All Rights Reserved.

    WASHINGTON (MNI) – Federal Reserve Board Gov. Daniel Tarullo Wednesday night argued that monetary policy can play an important role in helping the nation's long-term unemployment, saying the Fed right now should not be overly concerned with how much of the slow pace of job creation is due to structural factors outside its control.

    "The very accommodative monetary policy of the past five years has contributed significantly to the extended, moderate recoveries of gross domestic product (GDP) and employment," Tarullo said in remarks prepared for the Levy Economics Institute's Hyman Minsky Conference.

    And to underline that he does not favor tightening monetary policy anytime soon, Tarullo said because of the modest growth in place for several years, "it seems less likely that we will experience a growth spurt in the next couple of years that would engender concerns about rapid wage pressures and changes in inflation expectations."

    Voicing his concerns about slow U.S. productivity growth, widening income inequality, and long-term unemployment, Tarullo stressed that while monetary policy "cannot be the only, or even the principal," tool in counteracting these longer-term trends, "that is not to say it is irrelevant."

    "Monetary policies directed toward achieving the statutory dual mandate of maximum employment and price stability can help reduce underemployment associated with low aggregate demand," he added, a statement that echoes Fed Chair Janet Yellen's commitment to tackling the nation's jobs crisis.

    "To the degree that monetary policy can prevent cyclical phenomena such as high unemployment and low investment from becoming entrenched, it might be able to improve somewhat the potential growth rate of the economy over the medium term," he said.

    Appointed to the Fed board by President Barack Obama in 2009, Tarullo has a permanent vote on the Fed's policymaking Federal Open Market Committee.

    Yellen said she still sees "considerable slack" in the labor market in a March 31 speech, and Tarullo said reducing labor market slack can help lay the foundation "for a more sustained, self-reinforcing cycle of stronger aggregate demand, increased production, renewed investment, and productivity gains."

    "Similarly, a stronger labor market can provide a modest countervailing factor to income inequality trends by leading to higher wages at the bottom rungs of the wage scale," he said.

    There is uncertainty among both Fed officials and economists regarding how much the high unemployment is due to cyclical factors like low demand, or more structural issues such as a skills mismatch between jobseekers and would-be employers.

    Tarullo argued that there is not "as sharp a demarcation between cyclical and structural problems as is sometimes suggested," as "by promoting maximum employment in a stable inflation environment around the FOMC target rate, monetary policy can help set the stage for a vibrant and dynamic economy."

    Still, Tarullo advised the FOMC to proceed pragmatically in crafting policy.

    "We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure that would place at risk maintenance of the FOMC's stated inflation target (which, of course, we are currently not meeting on the downside)," he said. "But we should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years."

    "In this regard, the issue of how much structural damage has been suffered by the labor market is of less immediate concern today in shaping monetary policy than it might have been had we experienced a period of rapid growth during the recovery," he said.

    Outside of actions being taken by the Fed, Tarullo also called on fiscal policymakers to also take a more forceful approach in helping the economy.
    "A pro-investment policy agenda by the government could help address some of our nation's long-term challenges by promoting investment in human capital, particularly for those who have seen their share of the economic pie shrink, and by encouraging research and development and other capital investments that increase the productive capacity of the nation," he said.
  • In the Media | April 2014
    By Craig Torres
    Bloomberg Businessweek, April 9, 2014. All Rights Reserved.

    Federal Reserve Governor Daniel Tarullo said the central bank shouldn’t raise interest rates “preemptively” on a belief the recession cut the supply of ready labor in the economy.

    “We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure,” Tarullo said today in remarks prepared for a speech in Washington. “We should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years.”

    Tarullo, the central bank’s longest-serving governor, backed a March 19 statement in which the Federal Open Market Committee said it will keep the main interest rate below normal long-run levels while attempting to meet its mandate for full employment and stable prices.

    In a wide-ranging speech, Tarullo cited slower productivity growth, the smaller share of national income accruing to workers, rising inequality and decreasing economic mobility as “serious challenges” for the U.S. economy.

    Monetary policy, by focusing on the full-employment component of the dual mandate, can “provide a modest countervailing factor to income inequality trends by leading to higher wages at the bottom rungs of the wage scale,” Tarullo, 61, said at the 23rd Annual Hyman P. Minsky Conference in Washington.

    The Fed governor rebuffed concerns about near-term inflation from wages, noting that even as the unemployment rate has fallen to 6.7 percent in March from 7.5 percent in the same month a year earlier, “one sees only the earliest signs of a much-needed, broader wage recovery.”

    Low Gains
    “Compensation increases have been running at the historically low level of just over 2 percent annual rates since the onset of the Great Recession, with concomitantly lower real wage gains,” Tarullo said. The reasons for that lag in wage gains are not clear, he said.

    “The issue of how much structural damage has been suffered by the labor market is of less immediate concern today in shaping monetary policy than it might have been had we experienced a period of rapid growth during the recovery,” Tarullo said at the event, organized by the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York.
  • In the Media | April 2014
    By Jonathan Spicer
    Reuters, April 9, 2014. All Rights Reserved.

    (Reuters) -–The Federal Reserve will likely wait at least six months after ending a bond-buying program before raising interest rates, and will only act that quickly "if things really go well," a top U.S. central banker said on Wednesday.

    "It could be six, it could be 16 months," Chicago Fed President Charles Evans told reporters on the sidelines of a Levy Economics Institute forum.

    Last month, Fed Chair Janet Yellen put the wait at "around six months" depending on theeconomy. Her comment undercut stocks and bonds and prompted economists to revise forecasts. Traders and Wall Street economists now expect the first rate hike to come around the middle of next year.

    "If I had my druthers, I'd want more accommodation and I'd push it into 2016," Evans said of the first rate hike, but "the actual, most likely case I think is probably late 2015."

    The Fed has kept rates near zero since the depths of the recession in late 2008, and has bought some $3 trillion in bonds to help lower U.S. borrowing costs. It has reduced its bond-buying and expects to wind it down by the fall.

    Evans said the current pace of reducing the bond purchases, $10 billion at each Fed policy meeting, is "reasonable" and takes the Fed "into the October timeframe" for shelving the program.

    "I am confident that, depending on how the economic circumstances come out, we'll keep interest rates low for quite some period of time," he said.

    Would Welcome ECB Easing
    Evans, a vocal policy dove, has long worried that the Fed has been too timid in its efforts to lower employment and raise inflation toward the central bank's targets.

    "We're in a very low inflation global environment," he said. "The euro zone well below 1 percent and Japan has been very low for a long period of time, and I'm worried that there's something more afoot" than just the U.S. or euro zone experience.

    Asked about a possible further easing of policy by the European Central Bank, he said: "Yes I think that would be quite welcome," adding he would welcome "all actions that help generate stronger world growth."

    A fellow dove at the central bank, Minneapolis Fed President Narayana Kocherlakota, has proposed lowering the interest rate the Fed pays banks on excess reserves. The aim would be to provide more accommodation and boost inflation from just above 1 percent currently.

    Asked about this idea, Evans said he was willing to look at the possibility, but noted that the Fed's policy-setting Federal Open Market Committee has long considered it and has not acted.
  • In the Media | April 2014
    By Victoria MacGrane
    The Wall Street Journal, April 9, 2014. All Rights Reserved.

    Federal Reserve Governor Daniel Tarullo on Wednesday said policy makers should proceed cautiously in judging when inflationary pressures are building in the economy, given uncertainty that surrounds just how much slack remains in the labor market.

    Mr. Tarullo placed himself in the camp of Fed Chairwoman Janet Yellen, saying he believes the labor market is still operating well short of its potential and associating himself with her March 31 speech explaining the reasons why.

    Given there is some debate over how to measure labor market slack, “we are well advised to proceed pragmatically,” he said in a dinnertime speech prepared for delivery at a conference organized by the Levy Institute of Bard College.

    He stressed Fed officials should await actual evidence that labor markets had tightened enough to trigger inflationary pressures that could push inflation above the Fed’s 2% inflation target. The Commerce Department’s personal consumption expenditures price index, the Fed’s favored measure of inflation, was up 0.9% in February from a year earlier. The Labor Department’s consumer price index, an alternative measure, was up 1.1%.

    “But we should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years,” he said.

    There is a vigorous debate at the central bank and among economists generally over the extent of remaining slack in the labor market. Minutes from the Fed’s March 18-19 policy meeting released Wednesday showed that while officials generally agreed slack persisted, they disagreed about how much and how well the unemployment rate reflects the degree of slack.

    In her March 31 speech, Ms. Yellen pointed to several factors beyond the jobless rate that suggest the labor market is still quite weak, including the large number of long-term jobless and the seven million Americans who are working part-time but would prefer full-time jobs.

    Mr. Tarullo suggested he’s not worried economic growth will suddenly take off and leave the Fed flat-footed and fighting rising inflation. “The issue of how much structural damage has been suffered by the labor market is of less immediate concern today in shaping monetary policy than it might have been had we experienced a period of rapid growth during the recovery,” he said.

    In light of the economy’s modest performance since the end of the recession, “it seems less likely that we will experience a growth spurt in the next couple of years that would engender concerns about rapid wage pressures and changes in inflation expectations,” Mr. Tarullo said.

    Mr. Tarullo’s comments came within the context of a speech raising concerns about “troubling” long-term trends in the U.S. economy, including falling productivity growth and rising inequality.

    The Fed’s efforts to battle recession help lay the groundwork for a stronger, more dynamic economy, Mr. Tarullo said. “But there are limits to what monetary policy can do in counteracting” the longer-term trends he is worried about.

    Mr. Tarullo said the federal government could address some of the challenges through investment, especially in ways that help “those who have seen their share of the economic pie shrink.” Early childhood education, job training programs, infrastructure and research are areas that could boost the long-term prospects for the U.S. economy, said Mr. Tarullo. 
  • In the Media | April 2014
    By Jonathan Spicer
    The Chicago Tribune, April 9, 2014. All Rights Reserved.

    WASHINGTON (Reuters) - The Federal Reserve will likely wait at least six months after ending a bond-buying program before raising interest rates, and will only act that quickly "if things really go well," a top U.S. central banker said on Wednesday.

    "It could be six, it could be 16 months," Chicago Fed President Charles Evans told reporters on the sidelines of a Levy Economics Institute forum.

    Last month, Fed Chair Janet Yellen put the wait at "around six months" depending on the economy. Her comment undercut stocks and bonds and prompted economists to revise forecasts. Traders and Wall Street economists now expect the first rate hike to come around the middle of next year.

    "If I had my druthers, I'd want more accommodation and I'd push it into 2016," Evans said of the first rate hike, but "the actual, most likely case I think is probably late 2015."

    The Fed has kept rates near zero since the depths of the recession in late 2008, and has bought some $3 trillion in bonds to help lower U.S. borrowing costs. It has reduced its bond-buying and expects to wind it down by the fall.

    Evans said the current pace of reducing the bond purchases, $10 billion at each Fed policy meeting, is "reasonable" and takes the Fed "into the October timeframe" for shelving the program.   "I am confident that, depending on how the economic circumstances come out, we'll keep interest rates low for quite some period of time," he said.
      WOULD WELCOME ECB EASING Evans, a vocal policy dove, has long worried that the Fed has been too timid in its efforts to lower employment and raise inflation toward the central bank's targets.

    "We're in a very low inflation global environment," he said. "The euro zone well below 1 percent and Japan has been very low for a long period of time, and I'm worried that there's something more afoot" than just the U.S. or euro zone experience.

    Asked about a possible further easing of policy by the European Central Bank, he said: "Yes I think that would be quite welcome," adding he would welcome "all actions that help generate stronger world growth."

    A fellow dove at the central bank, Minneapolis Fed President Narayana Kocherlakota, has proposed lowering the interest rate the Fed pays banks on excess reserves. The aim would be to provide more accommodation and boost inflation from just above 1 percent currently.

    Asked about this idea, Evans said he was willing to look at the possibility, but noted that the Fed's policy-setting Federal Open Market Committee has long considered it and has not acted.
  • In the Media | April 2014
    By Greg Robb
    Fox Business, April 9, 2014. All Rights Reserved.

    WASHINGTON –  The U.S. economy, aided by the Federal Reserve's easy monetary-policy stance, is beginning to look healthier, Federal Reserve Gov. Daniel Tarullo said Wednesday. "While we've not had certainly the pace and pervasiveness of the recovery that we wanted, the unconventional monetary policy have been critical in supporting the moderate recovery we have had, which I think now is looking reasonably well-rounded going forward, and I think that is reflected in the fairly wide expectation growth is going to be picking up over the course of this year," Tarullo said at a conference organized by the Levy Institute of Bard College. Tarullo sounded in no hurry to end the Fed's easy policy stance. He said the Fed "should not rush to act preemptively" in anticipation of inflationary pressures. Tarullo's comments were noteworthy because he rarely speaks about monetary policy -- rather, most of his speeches deal with financial-stability issues given his role as the central bank's point-man on strengthening regulation in the wake of the financial crisis.  
  • In the Media | April 2014
    Money News, April 9, 2014. All Rights Reserved.

    Federal Reserve Governor Daniel Tarullo said the central bank shouldn’t raise interest rates “preemptively” on a belief the recession cut the supply of ready labor in the economy.

    “We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure,” Tarullo said Wednesday in remarks prepared for a speech in Washington. “We should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years.”

    Tarullo, the central bank’s longest-serving governor, backed a March 19 statement in which the Federal Open Market Committee said it will keep the main interest rate below normal long-run levels while attempting to meet its mandate for full employment and stable prices.

    In a wide-ranging speech, Tarullo cited slower productivity growth, the smaller share of national income accruing to workers, rising inequality and decreasing economic mobility as “serious challenges” for the U.S. economy.

    Monetary policy, by focusing on the full-employment component of the dual mandate, can “provide a modest countervailing factor to income inequality trends by leading to higher wages at the bottom rungs of the wage scale,” Tarullo, 61, said at the 23rd Annual Hyman P. Minsky Conference in Washington.

    The Fed governor rebuffed concerns about near-term inflation from wages, noting that even as the unemployment rate has fallen to 6.7 percent in March from 7.5 percent in the same month a year earlier, “one sees only the earliest signs of a much-needed, broader wage recovery.”

    Low Gains
    “Compensation increases have been running at the historically low level of just over 2 percent annual rates since the onset of the Great Recession, with concomitantly lower real wage gains,” Tarullo said. The reasons for that lag in wage gains are not clear, he said.

    “The issue of how much structural damage has been suffered by the labor market is of less immediate concern today in shaping monetary policy than it might have been had we experienced a period of rapid growth during the recovery,” Tarullo said at the event, organized by the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York.
  • Public Policy Brief No. 131 | April 2014

    In the context of current debates about the proper form of prudential regulation and proposals for the imposition of liquidity and capital ratios, Senior Scholar Jan Kregel examines Hyman Minsky’s work as a consultant to government agencies exploring financial regulatory reform in the 1960s. As Kregel explains, this often-overlooked early work, a precursor to Minsky’s “financial instability hypothesis”(FIH), serves as yet another useful guide to explaining why regulation and supervision in the lead-up to the 2008 financial crisis were flawed—and why the approach to reregulation after the crisis has been incomplete. 

  • Policy Notes No. 2 | February 2014
    Lessons for the Current Debate on the US Debt Limit
    In 1943, Congress faced unpredictably large war expenditures exceeding the prevailing debt limit. Congressional debates from that time contain an insightful discussion of how the increased expenditures could be financed, dealing with practical and theoretical issues that seem to be missing from current debates. In the '43 debate, Representative Wright Patman proposed that the Treasury should create a nonnegotiable zero interest bond that would be placed directly with the Federal Reserve Banks. As the deadline for raising the US federal government debt limit approaches, Senior Scholar Jan Kregel examines the implications of Patman's proposal. Among the lessons: that the debt can be financed at any rate the government desires without losing control over interest rates as a tool of monetary policy. The problem of financing the debt is not the issue. The question is whether the size of the deficit to be financed is compatible with the stable expansion of the economy. 
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  • In the Media | October 2013
    Agência Brasil
    DCI, 26 Setembro 2013. © 2013 DCI - Diário Comércio Indústria & Serviços. Todos os direitos reservados.

    RIO DE JANEIRO - Batista citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial...

    RIO DE JANEIRO - O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse nesta quinta-feira (26) que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (Será que o Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou.
  • In the Media | September 2013
    Marcos Barbosa
    RBV News, 27 Setembro 2013. © 2012 www.rbvnews.com.br. Todos os Direitos Reservados.

    O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse hoje (26) que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (Será que o Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou. 
  • In the Media | September 2013
    Fator Brasil, 27 Setembro 2013. © Copyright 2006 - 2013 Fator Brasil.

    Rio de Janeiro – O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse no dia 26 de setembro (quinta-feira), que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas. 

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo. 

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute. 

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (Será que o Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.  “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse. 

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou.
  • Conference Audio | September 2013
    Financial Governance after the Crisis
    Cosponsored by the Levy Economics Institute of Bard College and MINDS – Multidisciplinary Institute for Development and Strategies, with support from the Ford Foundation

    This conference was organized as part of the Levy Institute’s global research agenda and in conjunction with the Ford Foundation Project on Financial Instability, which draws on Hyman Minsky's extensive work on the structure of financial governance and the role of the state. Among the key topics addressed: designing a financial structure to promote investment in emerging markets; the challenges to global growth posed by continuing austerity measures; the impact of the credit crunch on economic and financial markets; and the larger effects of tight fiscal policy as it relates to the United States, the eurozone, and the BRIC countries.
  • In the Media | September 2013
    Lucianne Carneiro
    O Globo Econômico, 26 Setembro 2013.  © 1996–2013. Todos direitos reservados a Infoglobo Comunicação e Participações S.A. 

    RIO – Professor da Universidade de Buenos Aires e pesquisador do Centro de Estudos de Estado e de Sociedade (Cedes), Roberto Frenkel afirma que os países emergentes, especialmente na América do Sul, não escaparão de um processo de desvalorização cambial para se ajustar ao novo cenário mundial, com elevação das taxas de juros nos Estados Unidos e menor ritmo de expansão da economia chinesa. A atual situação do câmbio muito apreciado tende a dificultar esse ajuste, com consequências como inflação.

    — Peru, Colômbia, Chile, Brasil e Argentina são alguns dos países que apreciaram demais suas moedas e agora terão que subir o câmbio — diz Frenkel, que está no Rio para participar do seminário “Governança Financeira depois da Crise”, promovido pelo Minds, Instituto Multidisciplinar de Desenvolvimento e Estratégia, em parceria com o Levy Economics Institute.

    Na avaliação de Frenkel, a vulnerabilidade externa dos países sul-americanos recuou e não se deve ver uma crise como no passado. A região não aproveitou integralmente, no entanto, o bom momento da economia mundial nos últimos anos. Crítico às políticas do governo de Cristina Kirchner, Frenkel diz que a Argentina tem um grave desequilíbrio em seu balanço de pagamentos, além de uma inflação “insustentável”.

    Alguns economistas afirmam que a recuperação da economia mundial está forte, outros dizem que o movimento não é sustentável. Qual é a sua avaliação?

    Os Estados Unidos estão se recuperando lentamente. Aliás, é isso que tem provocado o ajuste na política monetária. A Europa, por sua vez, continua na crise, a situação não está resolvida para nenhum país. Houve um incremento do Produto Interno Bruto (PIB, soma dos bens e riquezas de um país), mas a União Europeia vai continuar com sua grande crise. O que se vê de diferente é o ritmo de crescimento econômico dos países emergentes. Os países emergentes continuam crescendo mais rápido que os desenvolvidos, mas a taxa de expansão desacelerou. Aquele ganho mais rápido dos emergentes acabou.

    Países emergentes tiveram um certo alívio quando o Federal Reserve (Fed, o banco central americano) manteve os estímulos à economia na última semana. O que veremos agora?

    A decisão do Federal Reserve (Fed, banco central americano) de manter os estímulos é temporária. É certo que em algum momento as taxas de juros dos Estados Unidos vão subir. Essa perspectiva é bem concreta, mesmo que o Fed diga que vai manter o estímulo. É certo que a política monetária vai mudar. E a China também está mudando seu ritmo de crescimento para permitir a transição de seu modelo de crescimento de uma base de exportações para ser puxado pelo consumo interno. O que vemos é um novo ritmo de crescimento da economia mundial, e é preciso se ajustar a isso.

    Como os emergentes devem ficar nesse cenário?

    O crescimento menor da China afeta principalmente os exportadores de minerais e metais, já que o investimento será menor. E muitos emergentes estão com o câmbio apreciado e terão que se ajustar. A Índia, com um déficit grande em conta corrente e saída de capitais, tem uma situação mais complicada.

    A vulnerabilidade externa dos países da América do Sul está menor?

    A situação hoje na maioria dos países é robusta, existe um endividamento menor e esse ajustamento (ao novo ritmo da economia) não vai gerar crise como no passado. A vulnerabilidade externa foi muito reduzida. Mas o que na verdade se viu é que quase uma década excepcionalmente boa para a economia (entre 2002 e 2012) não foi aproveitada pelos países da América do Sul. A Argentina vive hoje tomada pelo forte populismo. O Brasil, por sua vez, alcançou um crescimento baixo. A região precisa de um crescimento econômico maior, que seja suficiente para alcançar um novo nível de desenvolvimento.

    Como os países da América do Sul terão que lidar com o câmbio?

    O tema central da economia da América do Sul hoje é como lidar com a desvalorização do câmbio neste momento de ajustamento ao novo cenário mundial, que complica a política econômica. Os países da região estão com o câmbio muito apreciado. Os exportadores foram beneficiados pela melhora do preço de exportações. Houve uma desvalorização transitória, mas seguiu-se uma apreciação cambial. Nessa situação de câmbio apreciado, fica mais difícil se ajustar a um novo cenário mundial. Esse ajuste se faz pelo câmbio mais alto. Quanto mais apreciado o câmbio, mais custoso é o ajustamento. E a desvalorização cambial traz consequências como o impacto na inflação e a queda salarial a curto prazo. Peru, Colômbia, Chile, Brasil, Argentina são alguns dos países que apreciaram demais suas moedas e agora terão que subir o câmbio.

    Quais as principais dificuldades hoje da economia argentina?

    Há um problema grave no balanço de pagamentos. Nós estamos perdendo reservas e, por causa do risco político, não temos acesso ao financiamento do mercado externo. E nesse contexto temos um controle forte do câmbio. Há o câmbio paralelo e o fixo, com uma diferença de cerca de 60%. Esse câmbio paralelo é o sintoma do grande desequilíbrio atual. Vamos ter que sair dessa situação.

    É possível esperar um ajuste pelo governo?

    Está claro que o governo de Cristina Kirchner não deve ser reeleito. A dúvida é se esse governo vai fazer esse ajuste antes de sair ou deixar os problemas para o próximo presidente.

    A desvalorização do câmbio deve ter impacto maior na Argentina por causa de uma inflação já elevada?

    A inflação na Argentina está muito distante dos números oficiais, o governo falsifica os dados. É uma situação insustentável. Nós temos uma inflação de 25% ao ano. No Brasil, os economistas estão preocupados com o efeito do câmbio na inflação. Agora imagine o impacto na Argentina. O país vai enfrentar uma aceleração inflacionária grande por causa do câmbio, que terá que passar por uma desvalorização significativa.
  • In the Media | September 2013
    Ana Paula Grabois
    Brasil Econômico, 26 Setembro 2013. © Copyright 2009–2012 Brasil Econômico. Todos os Direitos Reservados.

    Dimitri Papadimitriou defende uma regulação do sistema financeiro mais forte: “A vigente não foi capaz de evitar o colapso de 2008.”

    Pesidente do Instituto Levy Economics, de Nova York, Dimitri Papadimitriou, é um crítico feroz da autorregulação do mercado financeiro. O economista grego, radicado há 45 anos nos Estados Unidos, dirige o instituto que elabora pesquisas sobre os mercados financeiros e sobre o que se pode fazer para evitar crises, como a de 2008. Papadimitriou defende uma regulação financeira mais forte que se antecipe aos choques. "Precisamos re-regular o sistema financeiro. Porque a regulação vigente não foi capaz de evitar o colapso de 2008".

    Em sua primeira visita ao Brasil, para participar da conferência "Governança financeira depois da crise", organizada pelo instituto que preside em parceria com o Instituto Multidisciplinar de Desenvolvimento e Estratégia (Minds), o economista diz que a instabilidade é inexorável ao sistema capitalista. "O aspecto mais importante é como regular esse sistema para prevenir que esse tipo de coisa aconteça de novo. Ou se entende as crises como acasos que ocorrem por choques e que não podem ser regulados", afirma o economista, ao Brasil Econômico, na véspera da conferência, que ocorre hoje e amanhã, no Rio.

    Para o economista, é possível prever eventos que determinam instabilidades futuras, e assim, evitar crises mais complexas. Apesar de governos espalhados pelo mundo defenderem a ampliação dos mecanismos de regulação financeira, Papadimitriou diz que muito pouco foi feito.

    "Desde o colapso de Lehman Brothers, nós ainda não tivemos nenhum progresso para prevenir que isso aconteça de novo", afirma. Parte do progresso quase nulo diz respeito à concentração das transações financeiras mas mãos de um grupo pequeno de grandes bancos. "É mais fácil regular os bancos pequenos porque você sabe o que realmente ele faz. Algumas vezes, é difícil entender o que os grandes bancos fazem e precificar o risco. A tendência desde 2008 é subprecificar os riscos dos bancos".

    Com tantos tipos de transações, entre depósitos, empréstimos, títulos, investimento, derivativos em poucos bancos, a atual estrutura regulatória - seja nos Estados Unidos, na Europa ou na América Latina - é ineficaz. "É preciso saber quem regula e supervisiona quem e o quê", completa.

    Na sua avaliação, os grandes bancos atingidos pela crise e depois ajudados pelo governo americano, como Citibank, JPMorgan e Chase Manhattan, continuam no controle das transações financeiras no mundo, sem avanços na regulação de suas atividades. "As restrições foram incapazes, por exemplo, de controlar questões como o caso da Baleia de Londres. O JP Morgan perdeu US$ 6 bilhões para seus clientes e teve US 1 bilhão de multa. Isso mostra que ainda falta regulação", diz. O escândalo do JP Morgan envolveu operações de alto risco com papeis derivativos.

    O presidente do Levy Economics afirma que num mundo onde as transações financeiras equivalem a 35 vezes o valor do comércio de bens e serviços entre os países, a complexidade das transações aumenta, o que dificulta ainda mais a supervisão do mercado. Papadimitriou defende a modificação das estruturas de regulação no mundo, a começar pelos Estados Unidos. "O grande problema é o lobby dos bancos no Congresso, que querem evitar a regulação. O governo Obama não é muito agressivo em implementar novas regulamentações", complementa.

    Totalmente favorável ao controle de capitais, o economista do instituto de pesquisa ressalta a conexão entre as crises financeiras e a economia real de vários países no ambiente globalizado atual.

    "Wall Street não é isolado da economia real", diz. Uma crise financeira pode aumentar desemprego, retrair o crescimento da atividade econômica de vários países, além de forçar o corte de gastos do governo para evitar déficits de orçamento. "Isso significa menos infraestrutura, menos educação, menos seguridade social", afirma.
  • In the Media | September 2013
    Agência Brasil
    Correio Braziliense, 20 Setembro 2013.

    O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse nesta quinta-feira (26/9) que os fundamentos da economia brasileira estão razoáveis e que o único ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (O Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou. 
  • In the Media | September 2013
    Jornal do Brasil, 26 Setembro 2013. Copyright © 1995-2013 | Todos os direitos reservados

    Paulo Nogueira Batista ressalta que o único ponto que merece atenção são as contas externas

    O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse hoje (26) que os fundamentos da economia brasileira estão razoáveis e que o único ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (O Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou. 
  • In the Media | September 2013
    Vladimir Platonow / Agência Brasil
    Exame, 26 Setembro 2013. Copyright © Editora Abril - Todos os direitos reservados

    Rio de Janeiro – O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse hoje (26) que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta.

    Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (Será que o Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou.
  • In the Media | September 2013
    Vladimir Platonow, Agência Brasil
    Brasil 247, 26 de Setembro de 2013.  © Brasil 247. Todos os direitos reservados.

    Segundo Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, os fundamentos fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa; "no setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta", afirma

    Rio de Janeiro
    – O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse hoje (26) que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (O Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou. 
  • In the Media | September 2013
    Vladimir Platonow / Agência Brasil
    RedeTV, 26 Setembro 2013. Copyright © 2013 - RedeTV! Todos os direitos reservados.

    O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse nesta quinta-feira (26) que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada "Has Brazil blown up" ("Será que o Brasil estragou tudo", em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou. 
  • In the Media | September 2013
    Vladimir Platonow
    Vio Mundo, 26 Setembro 2013. Copyright 2005-2013 - Todos os direitos reservados

    Fundamentos da economia estão razoáveis e país está em recuperação, diz diretor do FMI

    Rio de Janeiro – O diretor executivo do Fundo Monetário Internacional (FMI), Paulo Nogueira Batista, que representa o Brasil e mais dez países no órgão, disse hoje (26) que os fundamentos da economia brasileira estão razoáveis e que o ponto que merece mais atenção são as contas externas.

    “Os [fundamentos] fiscais estão bastante razoáveis, a política monetária também, a regulação do sistema financeiro boa. No setor externo, a deterioração da conta corrente preocupa um pouco, mas as reservas são altas e a entrada de investimentos diretos é alta. Então, eu diria que está razoável. Acho que tem de ficar de olho [nas contas externas], porque não convém ter déficit em conta corrente muito alto. É um ponto preocupante, mas não é alarmante”, avaliou Batista, que frisou estar declarando opinião própria, e não do fundo.

    Batista participou do seminário Governança Financeira Depois da Crise, promovido pelo Multidisciplinary Institute on Development and Strategie (Minds) e o Levy Economics Institute.

    Sobre a reportagem da revista britânica The Economist intitulada Has Brazil blown up? (Será que o Brasil estragou tudo?, em tradução livre), que foi às bancas hoje, questionando se o país fracassou na política econômica atual, depois de ter ido bem nos anos anteriores, Batista acredita que o país está apresentando recuperação progressiva.

    “O Brasil passou por uma fase de grande sucesso, era moda e referência. Havia um certo exagero naquela época, até 2011. Agora houve uma reavaliação mais negativa e está indo para o extremo oposto. Acho que o Brasil está crescendo menos do que o esperado, menos do que pode crescer. Na verdade, a desaceleração de 2011 foi desejada e planejada pelo governo brasileiro, porque havia a percepção, correta, de que em 2010 o país estava superaquecendo. Houve medidas deliberadas para desaquecer a economia, isso provocou uma queda na taxa de crescimento, o que não foi surpresa. O que foi uma surpresa negativa foi a dificuldade de se recuperar em 2012 e em 2013. Mas eu creio que agora estamos vivendo uma recuperação mais clara, ainda incipiente, mas os dados estão mostrando que a economia está se reativando”, disse.

    O diretor do FMI citou como dado favorável a força do mercado de trabalho brasileiro, que vem apresentando números positivos, apesar da crise econômica mundial, o que pode sinalizar um início de recuperação. “O mercado de trabalho é uma surpresa positiva nesse período todo. Apesar da desaceleração forte da economia, o mercado de trabalho continua forte. A taxa de desemprego aberta está bastante baixa, os salários continuam crescendo. O desempenho não é tão favorável quanto se esperava, mas eu acho que vem uma recuperação”, acrescentou.
  • In the Media | September 2013
    Lucianne Carneiro
    O Globo Economia, 26 Setembro 2013. © 1996 - 2013. Todos direitos reservados a Infoglobo Comunicação e Participações S.A.

    RIO - O diretor executivo para o Brasil e outros países do Fundo Monetário Internacional, Paulo Nogueira Batista Jr., afirmou nesta quinta-feira que a economia brasileira já está se recuperando e há um exagero da imprensa internacional sobre a situação do Brasil, ao comentar a capa da revista britânica “The Economist”.

    - O Brasil passou por uma fase de grande sucesso, era moda, referência, havia um certo exagero. Agora (a percepção) está indo para o extremo oposto. O Brasil está crescendo menos do que poderia (...), mas agora estamos vendo uma recuperação clara. O desempenho não é tão favorável, mas a recuperação já começou - disse Nogueira Batista, ao participar do seminário “Governança Financeira depois da Crise”, promovido pelo Minds, Instituto Multidisciplinar de Desenvolvimento e Estratégia, em parceria com o Levy Economics Institute e a Fundação Ford.

    Na avaliação do economista, os fundamentos fiscais e a política monetária do Brasil vão bem. Embora a deterioração do déficit em contas correntes preocupe, apontou, as reservas internacionais são elevadas. Na contramão da opinião de Nogueira Batista, o professor da Universidade de Georgetown Albert Keidel afirmou mais cedo, no mesmo evento, que o Brasil tem um nível baixo de reservas internacionais, considerando a ausência de mecanismos de controle de capitais.

    Pressão por melhora nas moedas emergentes
    Nogueira Batista negou que o fim dos estímulos do Federal Reserve (Fed, o banco central americano) à economia vá provocar uma crise nos países emergentes.

    Acho que há muito exagero (sobre a reação dos emergentes ao fim da política do Fed).

    A situação hoje é muito diferente da época da crise asiática. As reservas estão muito mais altas, a situação fiscal teve muita melhora, com a dívida líquida caindo. É claro que a situação não é perfeita, mas acho exagerado dizer que podemos ter uma crise - afirmou o economista, destacando que falava em seu próprio nome e não como diretor do Fundo.

    Nogueira Batista disse que o alívio nos mercados com a decisão do banco central americano não suspender por enquanto seus estímulos já se refletiu em uma pressão de valorização das moedas emergentes, como o real. E que é preciso minimizar esses efeitos.

    - O programa de intervenção do Banco Central lançado no momento de tensão deu impacto para segurar o câmbio, o Brasil está apertando a política monetária. Apesar das capas das revistas, as pessoas veem isso lá fora.

    Em sua apresentação, Nogueira Batista afirmou que os emergentes ganharam espaço na governança global, mas que as mudanças nessa estrutura estão estagnadas desde 2011 e algumas metas no âmbito do Fundo Monetário Internacional (FMI) já passaram dos prazos estabelecidos, como a redistribuição dos votos e das cotas.

    - Após o Lehman Brothers, o G-20 emergiu com um importante fórum de líderes. No âmbito do FMI, fizemos algumas mudanças no sistema de votos. (...) Desde 2011, no entanto, o processo de mudanças na governança global vive uma certa estagnação. A implementação de acordos já assinados, por exemplo, têm sido adiada - disse o economista.

    Ele alertou sobre o risco de “uma tentação” de se voltar ao formato antigo, em que apenas Estados Unidos e europeus tinham peso forte nas decisões internacionais.

    Para combater este retrocesso, defende Paulo Nogueira, é preciso aprofundar ainda mais a cooperação entre os países dos Brics (Brasil, Rússia, Índia, China e África do Sul). Ele ressaltou os avanços tanto na criação de um fundo de reservas internacionais dos países dos Brics - para proteger contra oscilações cambiais e também de um banco de desenvolvimento. O primeiro rascunho do projeto de um fundo de reservas dos Brics será apresentado em uma reunião dos Brics em Washington, em duas semanas.

    O economista lembrou as dificuldades ainda existentes para uma participação maior dos emergentes no Fundo. Em 2011, quando Dominique Strauss-Khan deixou a entidade, os europeus defenderam a candidatura de Christine Lagarde antes mesmo do fim do período de inscrição de candidatos, disse Nogueira Batista.

    Segundo ele, até que se mude a estrutura dos votos no Fundo será difícil conseguir uma candidatura vitoriosa de um país emergentes. Hoje, Estados Unidos, europeus e Japão têm peso de mais de 50% nos votos.

    - Se o cargo de diretor-geral ficar vago em breve, pode ser que tenhamos o mesmo tipo de dificuldades que tivemos em 2011.

    Cálculo da dívida bruta será discutido em outubro
    Sobre o atraso na divulgação de algumas partes do Relatório Artigo IV do FMI sobre o Brasil, Nogueira Batista explicou que o país pediu a revisão de alguns aspectos do documento, como faz todos os anos, mas que a equipe do Fundo está demorando a responder. Sua expectativa é que isso pode ser concluído em breve.

    O relatório é divulgado para os diferentes países e analisa o desempenho macroeconômico das nações. Revisões podem ser pedidas no caso de erros factuais e passagens que podem ser consideradas ambíguas, entre outros aspectos.

    A questão sobre o cálculo da dívida bruta - que foi alterado pelo Brasil, mas vem sendo questionado pelo Fundo - será tratado em outubro, com uma equipe do Ministério da Fazenda que vai ao FMI. 
  • In the Media | September 2013
    Lucianne Carneiro
    Ex-secretário executivo da Fazenda acredita que governo pode trazer a taxa para o centro da meta, de 4,5%, até 2015

    O Globo Economia, 26 Setembro 2013. © 1996 - 2013. Todos direitos reservados a Infoglobo Comunicação e Participações S.A.

    RIO – Na primeira aparição pública no Brasil desde que deixou o governo, o ex-secretário-executivo do Ministério da Fazenda e hoje professor da UFRJ, Nelson Barbosa Filho, afirmou que não existe mais espaço para apreciar o câmbio de maneira a ajudar no controle da inflação. O câmbio se apreciou demais nos últimos anos, segundo ele, e é preciso atingir a meta de inflação mesmo num cenário de taxa de câmbio estável ou até mesmo de depreciação. 

    - Todos os anos em que o Brasil cumpriu a meta da inflação, a taxa de câmbio se apreciou, com exceção do ano passado. O ajuste já começou. Estamos numa fase da economia brasileira de cumprir a meta de inflação sem depender tanto da apreciação cambial. Só que aí fica mais difícil a inflação cair mais rápido - disse Barbosa, ao participar do seminário "Governança Financeira depois da Crise", promovido pelo Minds, Instituto Multidisciplinar de Desenvolvimento e Estratégia, em parceria com o Levy Economics Institute e a Fundação Ford. 

    Sua avaliação é que o cenário com que o governo trabalha de trazer a inflação para 4,5% ao ano, que é o centro da meta, até 2015, é possível. O que vai influenciar esse resultado é a desvalorização cambial e a magnitude de um eventual aumento nos preços de combustíveis. Para Barbosa, a discussão sobre a necessidade de reduzir a atual meta da inflação brasileira só deve ocorrer depois que a taxa for mantida em 4,5% por um ou dois anos. 

    O governo vai trazer a inflação para 4,5% mas talvez leve um pouco mais de tempo porque houve esses choques recentemente. O principal esforço para isso é o aumento da produtividade - apontou. 

    Barbosa defendeu a manutenção do câmbio flutuante no país, lembrando que tanto depreciação quanto apreciação cambial excessiva têm consequências para a economia. A depreciação pressiona a inflação, enquanto a apreciação ajuda no cumprimento mais rápido da meta de inflação, mas prejudica a longo prazo a competitividade da economia. 

    Para o ex-secretário-executivo do Ministério da Fazenda, o câmbio ideal no momento deve variar entre R$ 2,20 e R$ 2,50, embora destaque que essa taxa de câmbio ideal para a economia está em constante mudança:

    - Um câmbio muito apreciado ou muito depreciado é ruim para a economia. Ir para muito abaixo de R$ 2,20 neste momento não é muito recomendável, assim como ficar acima de R$ 2,50 seria muito excessivo comparado com o que aconteceu com outros países.

    O economista, que deixou o governo em junho, disse que embora o país não tenha uma meta de taxa de câmbio, a oscilação cambial tem sido controlada por causa da meta de inflação. Quando a taxa de câmbio é elevada, a inflação também tende a ser elevada. Se a taxa de câmbio é mais baixa, a tendência é de uma inflação menor. 

    Barbosa explicou que existem três alternativas teóricas para reduzir o custo unitário do trabalho e aumentar a competitvidade. A primeira é uma desvalorização interna, com desaceleração do crescimento econômico e redução de salário. A segunda é uma desvalorização externa, com elevação da taxa de câmbio. A terceira é por aumento de produtividade. 

    - Na prática, o ajuste acontece nas três coisas. Na Europa, tem sido um pouco no salário. No Brasil, o que o governo tem tentado fazer é que seja mais na produtividade, para que seja menos via câmbio e desemprego - disse.
  • In the Media | September 2013
    Léa De Luca
    Brasil Econômico, 24 Setembro 2013. © Copyright 2009-2012 Brasil Econômico. Todos os Direitos Reservados.


    Para Leonardo Burlamaqui lobby dessas instituições impede o avanço de uma governança financeira global

    São Paulo - Cinco anos depois da crise financeira internacional, as coisas mudaram muito pouco no mercado financeiro. Para Leonardo Burlamaqui, diretor da Fundação Ford, e Rogério Silveira, diretor executivo do Minds (Instituto multidisciplinar para desenvolvimento e estratégias, na sigla em inglês), a saída para evitar novas crises seria estabelecer uma governança financeira global. Entre as propostas, estão aumentar a regulação (inclusive de funcionamento dos fundos de "hedge"), adotar o controle de entrada de capitais como uma rotina e acabar com os paraísos fiscais, por exemplo.

    Mas a ideia de um novo conjunto de regras para o sistema financeiro global enfrenta dificuldades para avançar e uma das razões, segundo eles, é o forte poder político e econômico das instituições financeiras. "Elas não querem mais regulação. Vivemos uma governança movida pelo lobby dessas instituições. É uma ameaça à democracia", diz Burlamaqui.

    Silveira concorda, mas acredita que, ao menos, a crise de 2008 abriu espaço para discussão, apesar das resistências. "Pode não acontecer de forma orgânica e organizada, mas confio que caminharemos sim para mais regulação", diz. Para ele, a defesa da autorregulação das instituições financeiras, somada ao "mantra" de que a desregulamentação seria benéfica e aumentaria a eficiência do mercado, reduzindo custos de intermediação, foi uma combinação desastrosa. "A ideia de que a desregulamentação tornaria mais eficiente a intermediação na transferência de recursos, de quem poupa para os que investem, mostrou-se equivocada com a crise", diz Silveira. Para ele, a falta de leis não aumentou a eficiência, e pior : aumentou a especulação. "Os bancos não vivem só de intermediação. O que dá dinheiro mesmo é a especulação. E como instituições privadas, visam lucrar mais".

    Burlamaqui lembra que países como Brasil e China, com forte presença dos bancos públicos no sistema - e também leis mais rígidas - foram os que menos sofreram com a crise. "Não adianta querer eliminar os bancos públicos, como fizeram os Estados Unidos. Os bancos privados não tem apetite para fazer o que eles fazem", diz Silveira. Para ele, é urgente resgatar o que chama de "funcionalidade" dos bancos - financiar o sistema produtivo. "No Brasil, apenas um banco fornece recursos de longo prazo para investimentos, que é o BNDES", completa Burlamaqui.

    O diretor da Fundação Ford lembra ainda que até hoje não existe nenhuma entidade global para cuidar da governança financeira. Tanto ele quanto Silveira consideram as regras da terceira fase do acordo de capitais entre bancos, conhecido como Basileia III (cujo objetivo é reforçar o capital das instituições e protegê-las contra crises) são "o mínimo do mínimo necessário". Para ele, o acordo anterior (Basileia II) era "irresponsável, permitia muita margem de manobra". Burlamaqui diz que ao contrário do que defendiam alguns, a globalização financeira foi prejudicial: "Criou-se um cassino em escala global", diz. "Se não for possível estabelecer uma governança financeira global, melhor será promover uma ‘desglobalização' dos mercados", acredita.

    Na próxima quinta-feira, no Rio de Janeiro, Burlamaqui e Silveira farão os discursos de abertura de um evento promovido pelo Minds e o Levy Economics Institute, sobre a governança financeira pós-crise. O evento é parte de um programa patrocinado pela Fundação Ford desde 2006.
  • In the Media | June 2013
    By Dimitri B. Papadimitriou
    The Huffington Post, June 18, 2013. Copyright © 2013 TheHuffingtonPost.com, Inc. All Rights Reserved.

    Remember last summer? The London Whale, that blockbuster adventure thriller, triggered one chill after another as the high-risk action at JPMorgan Chase was revealed. Today, the threats posed by megabanks remain just below the surface—no crisis at the moment—but they’re equally dangerous. A major sequel this year cannot be ruled out.

    Dodd-Frank, the law designed to reform the financial system, had already been on the books for two years when JPMorgan’s troubles surfaced. In an effort to figure out how it failed to prevent massive losses by one of the world’s largest banks, a Senate subcommittee investigated. This spring, it issued its report on the outsize positions taken by the bank’s Chief Investment Office (CIO)—with a lead trader known as ‘the London Whale’—and the department’s subsequent six billion dollar crash.

    The committee detailed a list of concealed high-risk activities, and determined that the CIO’s so-called ‘hedging’ activities were really just disguised propriety trading, that is, volatile, high-profit trades on behalf of the bank itself, rather than on behalf of its customers in return for commissions.

    Levy Economics Institute Senior Scholar Jan Kregel has taken these conclusions a step further, after analyzing the evidence. In a new research paper he makes the case that the primary cause of the bank’s difficulties was not that it engaged in proprietary trading: It was the concealment of this activity through the creation of a ‘shadow bank’, with the express purpose of this hardly-visible bank-within-the-bank being to create profits. What began as a unit to hedge risks—a safeguard—no longer served that purpose. He argues that when megabanks operate across all aspects of finance, this expansion of propriety trading becomes inevitable.

    The solution, Kregel says, is not to prevent hedging, but rather to recognize that it can never be consistently profitable. A true hedging unit only generates profits when a bank’s bets on its primary investments are unexpectedly wrong. The legitimate hedge is expected to run losses most of the time, if the bank’s strategy and credit assessments are accurate. And for this reason, hedging activity should never be funded from customer deposits.

    Did the London Whale revelations result in protections for bank customers—and their federal insurers—from this kind of gambling?

    Dodd-Frank will reach its third anniversary in July. It mandated that Congress write 398 rules. About two-thirds of the deadlines for those rules have been missed. In addition, the hiring of regulators has been stalled in Washington, further undermining implementation of the law.

    One rule that limited trading on derivatives contracts, the kind of activity that led to the London Whale debacle, was successfully challenged in the courts by a finance trade group. Another, the “Volcker Rule,” would require banks to separate consumer lending from speculative trading. It was Dodd-Frank’s most ambitious provision. Bank lobbyists have successfully kept regulators way behind schedule on finalizing it. Last week, an anti-regulatory bill to roll back other restrictions on derivatives trading passed in the House (the same bill was shelved last summer while the spotlight was on the London Whale). These are only a few examples. Attempts to reign in the recklessness are relentlessly dismantled as soon as they’re proposed.

    A new bill to increase capital standards for the biggest banks has also recently surfaced. The requirement that these institutions hold less debt and more assets, sponsored by Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana), would, in addition, limit the federal safety net to only cover traditional banking activities. It faces tough opposition.

    I’ve written before about the limits of Dodd-Frank’s scope, and the fundamental changes we need to make in how we approach financial regulation if it is going to succeed. Kregel’s analysis pinpoints some of the key abuses that urgently need to be addressed. Despite all the obstacles, the responsibility remains to reform banks that are too big to fail, and even, apparently, to regulate.

    Meanwhile, the Senate subcommittee’s report has been forwarded to the Justice Department, where no particular indictments are anticipated. Until our increasingly fragile system is strengthened, expect a remake of the London Whale story. Only the cast and crew will change.
  • One-Pager No. 38 | June 2013
    The recent report by the Senate Permanent Subcommittee on Investigations on the operations of JPMorgan Chase’s Synthetic Credit Portfolio unit—aka the London Whale—has brought renewed attention to the risks of proprietary trading for insured banks, and provides depth to the larger risks inherent in the financial system after Dodd-Frank.  
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  • Working Paper No. 763 | May 2013

    This working paper looks at excess reserves in historical context and analyzes whether they constitute a monetary policy problem for the Federal Reserve System (the “Fed”) or a potentially inflationary problem for the rest of us. Generally, this analysis shows that both absolute and relative sizes of excess reserves are a big problem for the Fed as well as the general public be-cause of their inflationary potential. However, like all contingencies, the timing and extent of the damage that reserve-driven inflation might cause are uncertain. It is even possible today to find articles in both scholarly circles and the popular press arguing either that the inflationary blow-off might never happen or that an increasing tendency toward prolonged deflation is the more probable outcome.

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    Walker F. Todd

  • Public Policy Brief No. 129 | April 2013
    This policy brief by Senior Scholar and Program Director Jan Kregel builds on an earlier analysis (Policy Note 2012/6) of JPMorgan Chase and the actions of the “London Whale,” and what this episode reveals about the larger risks inherent in the financial system. It is clear that the Dodd-Frank Act failed to prevent massive losses by one of the world’s largest banks. This is undeniable evidence that work remains to be done to reform the financial system. Toward this end, Kregel reviews the findings of a recent report by the Senate Permanent Subcommittee on Investigations and expands on the lessons that we can draw from the evolution of the London Whale episode. 

  • Conference Audio | November 2012
    Debt, Deficits, and Unstable Markets

    Organized by the Levy Economics Institute and ECLA of Bard with support from the Ford Foundation, The German Marshall Fund of the United States, and Deutsche Bank AG

    This two-day conference in central Berlin focused on the causes of financial instability and its implications for the global economy. The conference addressed some of the main issues now confronting economic policymakers, including the challenge to global growth resulting from the eurozone debt crisis; the impact of the credit crunch on economic and financial markets; the larger implications of government deficits and debt crises for US, European, and Asian economic policy; and central bank independence and financial reform.

  • Working Paper No. 735 | November 2012

    The Federal Reserve has been criticized for not preventing the risky behavior of large financial companies prior to the financial crisis of 2008–09, for approving mergers that aggravated the “too big to fail” problem, and for its substantial contribution to bailouts when their risk management failed. The Dodd-Frank Act of 2010, in attempting to diminish financial instability and eliminate too-big-to-fail policies, has established a new regulatory framework and laid out new responsibilities for the Federal Reserve. In doing so, it appears to address criticisms of the central bank by constricting its autonomy. The law, however, has also extended the Federal Reserve’s supervisory authority and expanded its capacity to exercise regulatory control over its extended domain. This new authority is in addition to the augmentation of its monetary powers over the past several years.

    This paper reviews and evaluates both constraints imposed on the Federal Reserve by the Dodd-Frank Act and the expansion of Federal Reserve authority. It finds that the constraints are unlikely to have much impact, but the expansion of authority constitutes a significant increase in power and influence. The paper concludes that the expansion of Federal Reserve authority invites questions about the organizational design and governance of the central bank, and its traditional autonomy.

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    Bernard Shull

  • Conference Proceedings | September 2012
    Debt, Deficits, and Financial Instability

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

    The 2012 Minsky conference addressed the ongoing and far-reaching effects of the global financial crisis, including the challenge to global growth represented by the eurozone debt crisis, the impact of the credit crunch on the economic and financial markets outlook, the sustainability of the US economic recovery in the absence of support from monetary and fiscal policy, reregulation of the financial system and the design of a new financial architecture, and the larger implications of the debt crisis for US economic policy—and for the international financial and monetary system as a whole.

  • Working Paper No. 730 | August 2012

    Market economies and command economies have long been differentiated by the presence of alternative choice in the form of diversity. Yet most mainstream economic theory is premised on the existence of uniformity. This paper develops the implications of this contradiction for the theory of prices, income creation, and the analysis of the recent financial crisis, and provides a critique of traditional theory from an institutionalist perspective developed by J. Fagg Foster.

  • Public Policy Brief No. 125 | August 2012
    No Solution for Financial Reform
    Before the law has even been fully implemented, the inadequacies of the regulatory approach underlying the Dodd-Frank Act are becoming more and more apparent. Financial scandal by financial scandal, the realization is hardening that there is a pressing need to search for more robust regulatory alternatives.

    The real challenge for financial reform is to develop a vision for a financial structure that would simplify the system and the activities of financial institutions so that they can be regulated and supervised effectively. Some paths to such simplification, however, are not worth treading. Against the backdrop of renewed present-day interest in the Depression-era “Chicago Plan,” featuring 100 percent reserve backing for deposits, Senior Scholar Jan Kregel turns to Hyman Minsky’s consideration of a similar “narrow banking” proposal in the mid-1990s. For reasons that eventually led Minsky himself to abandon the proposal, as well as reasons developed here by Kregel that have even more pressing relevance in today’s political climate, plans for a narrow banking system are found wanting.

  • Policy Notes No. 9 | August 2012
    The Fix Is In—the Bank of England Did It!
    As the results of the various official investigations spread, it becomes more and more apparent that a large majority of financial institutions engaged in fraudulent manipulation of the benchmark London Interbank Offered Rate (LIBOR) to their own advantage, and that bank management and regulators were unable to effectively monitor the activity of institutions because they were too big to manage and too big to regulate. However, instead of drawing the obvious conclusion—that structural changes are needed to reduce banks to a size that can be effectively regulated, as proposed on numerous occasions by the Levy Economics Institute—discussion in the media and political circles has turned to whether the problem was the result of the failure of central bank officials and government regulators to respond to repeated suggestions of manipulation, and to stop the fraudulent behavior.

    Just as the “hedging” losses at JPMorgan Chase have been characterized as the result of misbehavior on the part of some misguided individual traders, leaving top bank management without culpability, politicians and the media are now questioning whether government officials condoned, or even encouraged, manipulation of the LIBOR rate, virtually ignoring the banks’ blatant abuse of principles of good banking practice. Just as in the case of JPMorgan, the only response has been to remove the responsible individuals, rather than questioning the structure and size of the financial institutions that made managing and policing this activity so difficult. Again, the rotten apples have been removed without anyone noticing that it is the barrel that is the cause of the problem. But in the current scandal, the ad hominem culpability has been extended to central bank officials in the UK and the United States.

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  • In the Media | July 2012
    By Dimitri B. Papadimitriou

    Huffington Post Business, July 22, 2012. © 2012 TheHuffingtonPost.com, Inc. "The Huffington Post” is a registered trademark of TheHuffingtonPost.com, Inc. All rights reserved.

    There's a sad truth about the fate of financial regulation: It's almost certain to be outmoded by the time it's introduced. This was as true of Glass-Steagall in 1933 as it is of Dodd-Frank today.

    This month we begin the third year since the Dodd-Frank Wall Street reform act passed, with the struggle over its shape ongoing. It's a still-unmolded toddler, and already on the fast track to fossilization. Does the most ambitious finance legislation in decades carry the DNA to successfully cope with the next crisis? In a word, no.

    The take-away from this challenge doesn't have to be cynicism, inaction, or laissez-faire tirades. To be ready for the next shock rather than the last one, though, we need to reset our thinking.

    Dodd-Frank is based on the idea that financial markets are normally stable, with the exception of the occasional alarming "event." The New Deal's Glass-Steagall Act and the Clinton-era Gramm-Leach-Bliley "Modernization" shared those assumptions. All of these efforts were conceived as system-wide overhauls. In reality, though, they were designed only to remedy random, ad hoc crises; shocks like the 2008 meltdown, sometimes called "Minsky Moments."

    Ironically, the late economist Hyman Minsky actually believed that these "moments" were anything but. At the Levy Institute, we share his view that instability is central to the genome of modern finance.

    In other words, it's normal for the boat to keep rocking. The increasingly risky practices that fuel danger and instability are still being rewarded, and the absence of penalties for losses continues. The shocks will keep coming.

    And each new threat to stability is destined to be different than the last. Dodd-Frank aims to identify the most vulnerable institutions and practices. That approach is too brittle to contain the disastrous effects of risks that are always morphing. Even constructive aspects of the Act could have perverse consequences, unless the rules are subject to sophisticated re-examination as the finance world develops.

    Banks carry an urge -- maybe it's a genetic imperative? -- to evolve in a way that maximizes revenue. We're always witnessing how quickly markets create newer, riskier, and more profitable instruments. Credit default swaps aren't the only example, of course; look at the whole range of off-balance-sheet special purpose vehicles. It's the very nature of modern finance to transform its structure in response to the prevailing regulation, and to evade it successfully.

    Under Dodd-Frank, banks will function more-or-less as they did in the past.

    Their enormous size and multi-function operations -- the business model that underlies the latest crisis -- will be subject only to a series of cosmetic changes. The act's most significant measure, the Volcker Rule, continues to be diluted, and many of its other regulations are tied up in delays.

    Instead of fundamental changes that would cushion our fragile system from shocks, Dodd-Frank's centerpiece is a limit on the use of public funds to rescue failing banks. By enabling rapid dissolutions, it aims to avoid a repeat of 2008, when the Lehman Brothers bankruptcy virtually froze capital markets. It's also an understandable response to TARP, which recapitalized insolvent financial institutions at a great cost, while allowing failing households to fall into foreclosure.

    But limiting taxpayer exposure to the next bank breakdown is not the same as preventing a system-wide collapse. Tweaks to Dodd-Frank aren't a solution. Glass-Steagall contained features worth preserving, but reviving the law -- outdated then; infeasible now -- won't help. Neither will blaming Gramm-Leach-Bliley which, profound as it was, merely reflected the new status quo of its day. It institutionalized the changes that had already emerged in the markets.

    We need banks that can earn competitive rates of return while they focus not on big risks, but on financing capital development. Reforms that promote enterprise and industry over speculation will have to be as innovative, flexible, opportunistic and plastic as the markets they aim to improve.

    Regulators could begin by breaking banks down into smaller units. A bank holding company structure with numerous types of subsidiaries, each one subject to strict limitations on the type of permitted activities, would be a valuable deterrent to risky behavior. Restrictions on size and function would allow a reasonable shot at understanding esoteric subsidiaries, and a chance to react quickly to mutations.

    As Dodd-Frank reaches its second anniversary, it faces both the limitations of its scope and the disheartening obstacles to its implementation. Will we really wait for the next, inevitable crisis before we start to develop adaptable reforms? In a word, probably.

  • Policy Notes No. 6 | June 2012
    What a Hedge Gone Awry at JPMorgan Chase Tells Us about What's Wrong with Dodd-Frank

    What can we learn from JPMorgan Chase’s recent self-proclaimed “stupidity” in attempting to hedge the bank’s global risk position? Clearly, the description of the bank’s trading as “sloppy” and reflecting ”bad judgment” was designed to prevent the press reports of large losses from being used to justify the introduction of more stringent regulation of large, multifunction financial institutions. But the lessons to be drawn are not to be found in the specifics of the hedges that were put on to protect the bank from an anticipated decline in the value of its corporate bond holdings, or in any of its other global portfolio hedging activities. The first lesson is this: despite their acumen in avoiding the worst excesses of the subprime crisis, the bank’s top managers did not have a good idea of its exposure, which serves as evidence that the bank was “too big to manage.” And if it was too big to manage, it was clearly too big to regulate effectively.

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  • Working Paper No. 716 | April 2012
    A Minskyan Approach

    This paper presents a method to capture the growth of financial fragility within a country and across countries. This is done by focusing on housing finance in the United States, the United Kingdom, and France. Following the theoretical framework developed by Hyman P. Minsky, the paper focuses on the risk of amplification of shock via a debt deflation instead of the risk of a shock per se. Thus, instead of focusing on credit risk, for example, financial fragility is defined in relation to the means used to service debts, given credit risk and all other sources of shocks. The greater the expected reliance on capital gains and debt refinancing to meet debt commitments, the greater the financial fragility, and so the higher the risk of debt deflation induced by a shock if no government intervention occurs. In the context of housing finance, this implies that the growth of subprime lending was not by itself a source of financial fragility; instead, it was the change in the underwriting methods in all sectors of the mortgage markets that created a financial situation favorable to the emergence of a debt deflation. Stated alternatively, when nonprime and prime mortgage lending moved to asset-based lending instead of income-based lending, the financial fragility of the economy grew rapidly.

  • Conference Audio | April 2012
    Debt, Deficits, and Financial Instability

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

    In April 2012, leading policymakers, economists, and analysts will gather at the New York headquarters of the Ford Foundation to take part in the Levy Institute’s 21st Annual Hyman P. Minsky Conference. This conference will address, among other issues, the challenge to global growth represented by the eurozone debt crisis; the impact of the credit crunch on the economic and financial markets outlook; the sustainability of the US economic recovery in the absence of support from monetary and fiscal policy; reregulation of the financial system and the design of a new financial architecture; and the larger implications of the debt crisis for US economic policy, and for the international financial and monetary system as a whole.

  • Book Series | April 2012
    This eBook traces the roots of the 2008 financial meltdown to the structural and regulatory changes leading from the 1933 Glass-Steagall Act to the 1999 Financial Services Modernization Act, and on through to the subprime-triggered crash. It evaluates the regulatory reactions to the global financial crisis—most notably, the 2010 Dodd-Frank Act—and, with the help of Minsky’s work, sketches a way forward in terms of stabilizing the financial system and providing for the capital development of the economy.
    The book explains how money manager capitalism set the stage for the outbreak of the systemic crisis and debt deflation through which we are still living. And it explains that, despite calls for a return to Glass-Steagall, we cannot turn back the clock. Minsky’s blueprint for a more stable structure is smaller banks and the restoration of relationship banking. Modifying and extending his idea for creating a bank holding company would preserve some of the features of Glass-Steagall. 

  • This monograph is part of the Institute’s research program on Financial Instability and the Reregulation of Financial Institutions and Markets, funded by the Ford Foundation. Its purpose is to investigate the causes and development of the recent financial crisis from the point of view of the late financial economist and Levy Distinguished Scholar Hyman Minsky, and to propose “a thorough, integrated approach to our economic problems.”

    The monograph draws on Minsky’s work on financial regulation to assess the efficacy of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in response to the 2008 subprime crisis and subsequent deep recession. Some two years after its adoption, the implementation of Dodd-Frank is still far from complete. And despite the fact that a principal objective of this legislation was to remove the threat of taxpayer bailouts for banks deemed “too big to fail,” the financial system is now more concentrated than ever and the largest banks even larger. As economic recovery seems somewhat more assured and most financial institutions have regrouped sufficiently to repay the governmental support they received, the specific rules and regulations required to make Dodd-Frank operational are facing increasing resistance from both the financial services industry and from within the US judicial system.

    This suggests that the Dodd-Frank legislation may be too extensive, too complicated, and too concerned with eliminating past abuses to ever be fully implemented, much less met with compliance. Indeed, it has been called a veritable paradise for regulatory arbitrage. The result has been a call for a more fundamental review of the extant financial legislation, with some suggesting a return to a regulatory framework closer to Glass-Steagall’s separation of institutions by function—a cornerstone of Minsky’s extensive work on regulation in the 1990s. For Minsky, the goal of any systemic reform was to ensure that the basic objectives of the financial system—to support the capital development of the economy and to provide a safe and secure payments system—were met. Whether the Dodd-Frank Act can fulfill this aspect of its brief remains an open question.

  • Public Policy Brief No. 123 | April 2012

    The extraordinary scope and magnitude of the financial crisis of 2007–09 required an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort (LOLR) function. In an attempt to stabilize financial markets during the worst financial crisis since the Great Crash of 1929, the Fed engaged in loans, guarantees, and outright purchases of financial assets that were not only unprecedented, but cumulatively amounted to over twice current US GDP as well. the purpose of this brief is to provide a descriptive account of the Fed's response to the recent crisis—to delineate the essential characteristics and logistical specifics of the veritable "alphabet soup" of LOLR machinery rolled out to save the world financial system. It represents the most comprehensive investigation of the raw data to date, one that draws on three discrete measures: the peak outstanding commitment at a given point in time; the total peak flow of commitments (loans plus asset purchases), which helps identify periods of maximum financial system distress; and, finally, the total amouunt of loans and asset purchases made between January 2007 and March 2012. This third number, which is a cumulative measure, reveals that the total Fed response exceeded $29 trillion. Providing this account from such varying angles is a necessary first step in any attempt to fully understand the actions of the central bank in this critical period—and a prerequisite for thinking about how to shape policy for future crises.

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    Associated Program:
    Author(s):
    James Andrew Felkerson

  • Working Paper No. 709 | February 2012
    Motives, Countermeasures, and the Dodd-Frank Response

    Government forbearance, support, and bailouts of banks and other financial institutions deemed “too big to fail” (TBTF) are widely recognized as encouraging large companies to take excessive risk, placing smaller ones at a competitive disadvantage and influencing banks in general to grow inefficiently to a “protected” size and complexity. During periods of financial stress, with bailouts under way, government officials have promised “never again.” During periods of financial stability and economic growth, they have sanctioned large-bank growth by merger and ignored the ongoing competitive imbalance.

    Repeated efforts to do away with TBTF practices over the last several decades have been unsuccessful. Congress has typically found the underlying problem to be inadequate regulation and/or supervision that has permitted important financial companies to undertake excessive risk. It has responded by strengthening regulation and supervision. Others have located the underlying problem in inadequate regulators, suggesting the need for modifying the incentives that motivate their behavior. A third explanation is that TBTF practices reflect the government’s perception that large financial firms serve a public interest—they constitute a “national resource” to be preserved. In this case, a structural solution would be necessary. Breakups of the largest financial firms would distribute the “public interest” among a larger group than the handful that currently hold a disproportionate concentration of financial resources.

    The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 constitutes the most recent effort to eliminate TBTF practices. Its principal focus is on the extension and augmentation of regulation and supervision, which it envisions as preventing excessive risk taking by large financial companies; Congress has again found the cause for TBTF practices in the inadequacy of regulation and supervision. There is no indication that Congress has given any credence to the contention that regulatory motivations have been at fault. Finally, Dodd-Frank eschews a structural solution, leaving the largest financial companies intact and bank regulatory agencies still with extensive discretion in passing on large bank mergers. As a result, the elimination of TBTF will remain problematic for years to come.

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    Associated Program:
    Author(s):
    Bernard Shull

  • One-Pager No. 23 | December 2011

    The extraordinary scope and magnitude of the financial crisis of 2007–09 induced an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort function. Estimates of the total amount of bailout funding provided by the Fed have ranged from its own lowball claim of $1.2 trillion to Bloomberg’s estimate of $7.7 trillion (just for the biggest banks) to the GAO tally of $16 trillion. But new research conducted as part of a Ford Foundation project directed by Senior Scholar L. Randall Wray finds that the Fed’s commitments—in the form of loans and asset purchases to prop up the global financial system—far exceeded even the highest estimates.

     

  • Working Paper No. 698 | December 2011

    There have been a number of estimates of the total amount of funding provided by the Federal Reserve to bail out the financial system. For example, Bloomberg recently claimed that the cumulative commitment by the Fed (this includes asset purchases plus lending) was $7.77 trillion. As part of the Ford Foundation project “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,” Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fed’s bailout of the financial system—the most comprehensive investigation of the raw data to date. This working paper is the first in a series that will report the results of this investigation.

    The purpose of this paper is to provide a descriptive account of the Fed’s extraordinary response to the recent financial crisis. It begins with a brief summary of the methodology, then outlines the unconventional facilities and programs aimed at stabilizing the existing financial structure. The paper concludes with a summary of the scope and magnitude of the Fed’s crisis response. The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.

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    Associated Program:
    Author(s):
    James Andrew Felkerson

  • Conference Proceedings | November 2011
    Financial Reform and the Real Economy
    A conference organized by the Levy Economics Institute of Bard College with support from the FordFoundationLogo.

    This year’s Minsky conference marks the Levy Institute’s 25 anniversary, and the third year of the Ford–Levy joint initiative on reforming global financial governance. This initiative aims to examine financial instability and reregulation within the theoretical framework of Minsky’s work on financial crises. Minsky was convinced that a program of financial reform must be based on a critique of the existing system that identifies not only what went wrong, but also why it happened. Speakers addressed the ongoing effects of the global financial crisis on the real economy, and examined proposed as well as recently enacted policy responses. Should ending too-big-to-fail be the cornerstone of reform? Do the markets’ pursuit of self-interest generate real societal benefits? Is financial sector growth actually good for the real economy? Will the recently passed US financial reform bill make the entire financial system, not only the banks, safer?

  • Policy Notes No. 4 | May 2011

    At the end of 1930, as the 1929 US stock market crash was starting to have an impact on the real economy in the form of falling commodity prices, falling output, and rising unemployment, John Maynard Keynes, in the concluding chapters of his Treatise on Money, launched a challenge to monetary authorities to take “deliberate and vigorous action” to reduce interest rates and reverse the crisis. He argues that until “extraordinary,” “unorthodox” monetary policy action “has been taken along such lines as these and has failed, need we, in the light of the argument of this treatise, admit that the banking system can not, on this occasion, control the rate of investment, and, therefore, the level of prices.”

    The “unorthodox” policies that Keynes recommends are a near-perfect description of the Japanese central bank’s experiment with a zero interest rate policy (ZIRP) in the 1990s and the Federal Reserve’s experiment with ZIRP, accompanied by quantitative easing (QE1 and QE2), during the recent crisis. These experiments may be considered a response to Keynes’s challenge, and to provide a clear test of his belief in the power of monetary policy to counter financial crisis. That response would appear to be an unequivocal No.

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    Author(s):

  • Conference Audio | April 2011

    Audio:

    Click on an audio link to play the clip.
     
    Financial Reform and the Real Economy

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

    The 20th Annual Minsky Conference addressed the ongoing effects of the global financial crisis on the real economy, and examined proposed and recently enacted policy responses: Should ending too-big-to-fail be the cornerstone of reform? Do the markets’ pursuit of self-interest generate real societal benefits? Is financial sector growth actually good for the real economy? Will the Dodd-Frank financial reform bill make the entire financial system, not only the banks, safer?

  • Will Dodd-Frank Prevent "It" from Happening Again? `
    This monograph is part of the Institute's ongoing research program on Financial Instability and the Reregulation of Financial Institutions and Markets, funded by the Ford Foundation. This program's purpose is to investigate the causes and development of the recent financial crisis from the point of view of the late financial economist and Levy Distinguished Scholar Hyman P. Minsky. The monograph draws on Minsky's extensive work on regulation in order to review and analyze the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in response to the crisis in the US subprime mortgage market, and to assess whether this new regulatory structure will prevent "It"—a debt deflation on the order of the Great Depression—from happening again. It seeks to assess the extent to which the Act will be capable of identifying and responding to the endogenous generation of financial fragility that Minsky believed to be the root cause of financial instability, building on the views expressed in his published work, his official testimony, and his unfinished draft manuscript on the subject. Whether the Dodd-Frank Act will fulfill its brief—in part, "to promote the financial stability in the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices"—is an open question. As Minsky wrote in his landmark 1986 book Stabilizing an Unstable Economy, "A new era of reform cannot be simply a series of piecemeal changes. Rather, a thorough, integrated approach to our economic problems must be developed." This has been one of the organizing principles of our project. 

  • Public Policy Brief No. 117 | April 2011

    Scott Fullwiler and Senior Scholar L. Randall Wray review the roles of the Federal Reserve and the Treasury in the context of quantitative easing, and find that the financial crisis has highlighted the limited oversight of Congress and the limited transparency of the Fed. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is whether the Fed should be able to commit the public purse in times of national crisis.

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    Associated Program:
    Author(s):
    Scott Fullwiler L. Randall Wray

  • Summary Vol. 20, No. 2 | April 2011

    In this issue of the Summary, papers focus on international trade and the export baskets of China and India, the competitiveness of the eurozone, the roles of the Federal Reserve and Treasury, a reorientation of fiscal policy, a restructuring of the global financial system, the merits of capital controls, financial fragility, a theory of money, and US immigration.

    INSTITUTE RESEARCH

    Program: The State of the US and World Economies

    • SUNANDA SEN, International Trade Theory and Policy: A Review of the Literature
    • SUNANDA SEN, China in the Global Economy
    • JESUS FELIPE and UTSAV KUMAR, Unit Labor Costs in the Eurozone: The Competitiveness Debate Again

    Program: Monetary Policy and Financial Structure

    • SCOTT FULLWILER and L. RANDALL WRAY, It’s Time to Rein In the Fed
    • MARSHALL AUERBACK, What Happens if Germany Exits the Euro?
    • PAVLINA R. TCHERNEVA, Bernanke’s Paradox: Can He Reconcile His Position on theFederal Budget with His Recent Charge to Prevent Deflation?
    • ÉRIC TYMOIGNE, Financial Stability, Regulatory Buffers, and Economic Growth: Some Postrecession Regulatory Implications
    • MICHAEL HUDSON, US “Quantitative Easing” Is Fracturing the Global Economy
    • GREG HANNSGEN and DIMITRI B. PAPADIMITRIOU, The Central Bank “Printing Press”: Boon or Bane? Remedies for High Unemployment and Fears of Fiscal Crisis
    • SCOTT FULLWILER and L. RANDALL WRAY, Quantitative Easing and Proposals for Reform of Monetary Policy Operations
    • L. RANDALL WRAY, Money
    • PAVLINA R. TCHERNEVA, Fiscal Policy Effectiveness: Lessons from the Great Recession
    • PAVLINA R. TCHERNEVA, Fiscal Policy: Why Aggregate Demand Management Fails and What to Do about It

    Program: Immigration, Ethnicity, and Social Structure

    • JOEL PERLMANN, A Demographic Base for Ethnic Survival? Blending across Four Generations of German-Americans
    • JOEL PERLMANN, Views of European Races among the Research Staff of the US Immigration Commission and the Census Bureau, ca. 1910

    Program: Economic Policy for the 21st Century

    Explorations in Theory and Empirical Analysis

    • JESUS FELIPE, UTSAV KUMAR and ARNELYN ABDON, Exports, Capabilities, and Industrial Policy in India
    • TIMOTHY AZARCHS and TAMAR KHITARISHVILI, Disaggregating the Resource Curse: Is theCurse More Difficult to Dispel in Oil States than in Mineral States?
    • JESUS FELIPE and JOHN MCCOMBIE, Modeling Technological Progress and Investment in China: Some Caveats
    • JESUS FELIPE, UTSAV KUMAR and ARNELYN ABDON, How Rich Countries Became Richand Why Poor Countries Remain Poor: It’s the Economic Structure . . . Duh!

    INSTITUTE NEWS

    Upcoming Events:

    • 20th Annual Hyman P. Minsky Conference, April 13–15, 2011
    • The Wynne Godley Memorial Conference, May 25–26, 2011
    • The Hyman P. Minsky Summer Seminar, June 18–26, 2011

    PUBLICATIONS AND PRESENTATIONS

    • Publications and Presentations by Levy Institute Scholars
    • Recent Levy Institute Publications
    Download:
    Author(s):
    W. Ray Towle

  • Working Paper No. 662 | March 2011

    This paper examines the causes and consequences of the current global financial crisis. It largely relies on the work of Hyman Minsky, although analyses by John Kenneth Galbraith and Thorstein Veblen of the causes of the 1930s collapse are used to show similarities between the two crises. K.W. Kapp’s “social costs” theory is contrasted with the recently dominant “efficient markets” hypothesis to provide the context for analyzing the functioning of financial institutions. The paper argues that, rather than operating “efficiently,” the financial sector has been imposing huge costs on the economy—costs that no one can deny in the aftermath of the economy’s collapse. While orthodox approaches lead to the conclusion that money and finance should not matter much, the alternative tradition—from Veblen and Keynes to Galbraith and Minsky—provides the basis for developing an approach that puts money and finance front and center. Including the theory of social costs also generates policy recommendations more appropriate to an economy in which finance matters.

  • Working Paper No. 660 | March 2011

    This paper provides a brief exposition of financial markets in Post Keynesian economics. Inspired by John Maynard Keynes’s path-breaking insights into the role of liquidity and finance in “monetary production economies,” Post Keynesian economics offers a refreshing alternative to mainstream (mis)conceptions in this area. We highlight the importance of liquidity—as provided by the financial system—to the proper functioning of real world economies under fundamental uncertainty, contrasting starkly with the fictitious modeling world of neo-Walrasian exchange economies. The mainstream vision of well-behaved financial markets, channeling saving flows from savers to investors while anchored by fundamentals, complements a notion of money as an arbitrary numéraire and mere convenience, facilitating exchange but otherwise “neutral.” From a Post Keynesian perspective, money and finance are nonneutral but condition and shape real economic performance. It takes public policy to anchor asset prices and secure financial stability, with the central bank as the key public policy tool.

     

  • Working Paper No. 659 | March 2011

    Stability is destabilizing. These three words concisely capture the insight that underlies Hyman Minsky’s analysis of the economy’s transformation over the entire postwar period. The basic thesis is that the dynamic forces of a capitalist economy are explosive and must be contained by institutional ceilings and floors. However, to the extent that these constraints achieve some semblance of stability, they will change behavior in such a way that the ceiling will be breached in an unsustainable speculative boom. If the inevitable crash is “cushioned” by the institutional floors, the risky behavior that caused the boom will be rewarded. Another boom will build, and the crash that follows will again test the safety net. Over time, the crises become increasingly frequent and severe, until finally “it” (a great depression with a debt deflation) becomes possible.

    Policy must adapt as the economy is transformed. The problem with the stabilizing institutions that were put in place in the early postwar period is that they no longer served the economy well by the 1980s. Further, they had been purposely degraded and even in some cases dismantled, often in the erroneous belief that “free” markets are self-regulating. Hence, the economy evolved over the postwar period in a manner that made it much more fragile. Minsky continually formulated and advocated policy to deal with these new developments. Unfortunately, his warnings were largely ignored by the profession and by policymakers—until it was too late.

  • Working Paper No. 658 | March 2011
    Rethinking Money as a Public Monopoly

    In this paper I first provide an overview of alternative approaches to money, contrasting the orthodox approach, in which money is neutral, at least in the long run; and the Marx-Veblen-Keynes approach, or the monetary theory of production. I then focus in more detail on two main categories: the orthodox approach that views money as an efficiency-enhancing innovation of markets, and the Chartalist approach that defines money as a creature of the state. As the state’s “creature,” money should be seen as a public monopoly. I then move on to the implications of viewing money as a public monopoly and link that view back to Keynes, arguing that extending Keynes along these lines would bring his theory up to date.

  • Working Paper No. 656 | March 2011

    This paper begins by defining, and distinguishing between, money and finance, and addresses alternative ways of financing spending. We next examine the role played by financial institutions (e.g., banks) in the provision of finance. The role of government as both regulator of private institutions and provider of finance is also discussed, and related topics such as liquidity and saving are explored. We conclude with a look at some of the new innovations in finance, and at the global financial crisis, which could be blamed on excessive financialization of the economy.

  • Working Paper No. 655 | March 2011

    In the aftermath of the global financial collapse that began in 2007, governments around the world have responded with reform. The outlines of Basel III have been announced, although some have already dismissed its reform agenda as being too little (and too late!). Like the proposed reforms in the United States, it is argued, Basel III would not have prevented the financial crisis even if it had been in place. The problem is that the architects of reform are working around the edges, taking current bank activities as somehow appropriate and trying to eliminate only the worst excesses of the 2000s.

    Hyman Minsky would not be impressed.

    Before we can reform the financial system, we need to understand what the financial system does—or, better, what it should do. To put it as simply as possible, Minsky always insisted that the proper role of the financial system is to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined.

    In this paper, we first examine Minsky’s general proposals for reform of the economy—how to restore stable growth that promotes job creation and rising living standards. We then turn to his proposals for financial reform. We will focus on his writing in the early 1990s, when he was engaged in a project at the Levy Economics Institute on reconstituting the financial system (Minsky 1992a, 1992b, 1993, 1996). As part of that project, he offered his insights on the fundamental functions of a financial system. These thoughts lead quite naturally to a critique of the financial practices that precipitated the global financial crisis, and offer a path toward thorough-going reform.

  • Working Paper No. 654 | March 2011
    Financial Fragility Indexes

    With the Great Recession and the regulatory reform that followed, the search for reliable means to capture systemic risk and to detect macrofinancial problems has become a central concern. In the United States, this concern has been institutionalized through the Financial Stability Oversight Council, which has been put in charge of detecting threats to the financial stability of the nation. Based on Hyman Minsky’s financial instability hypothesis, the paper develops macroeconomic indexes for three major economic sectors. The index provides a means to detect the speed with which financial fragility accrues, and its duration; and serves as a complement to the microprudential policies of regulators and supervisors. The paper notably shows, notably, that periods of economic stability during which default rates are low, profitability is high, and net worth is accumulating are fertile grounds for the growth of financial fragility.

  • Working Paper No. 653 | March 2011

    In this paper I will follow Hyman Minsky in arguing that the postwar period has seen a slow transformation of the economy from a structure that could be characterized as “robust” to one that is “fragile.” While many economists and policymakers have argued that “no one saw it coming,” Minsky and his followers certainly did! While some of the details might have surprised Minsky, certainly the general contours of this crisis were foreseen by him a half century ago. I will focus on two main points: first, the past four decades have seen the return of “finance capitalism”; and second, the collapse that began two years ago is a classic “Fisher-Minsky” debt deflation. The appropriate way to analyze this transformation and collapse is from the perspective of what Minsky called “financial Keynesianism”—a label he preferred over Post Keynesian because it emphasized the financial nature of the capitalist economy he analyzed.

  • One-Pager No. 8 | February 2011

    The economic crisis that has gripped the US economy since 2007 has highlighted Congress’s limited oversight of the Federal Reserve, and the limited transparency of the Fed’s actions. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is, Should the Fed be able to commit the public purse in times of national crisis?

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    Associated Program:
    Author(s):
    Scott Fullwiler L. Randall Wray

  • Working Paper No. 647 | December 2010

    This paper advances three fundamental propositions regarding money:

    (1) As R. W. Clower (1965) famously put it, money buys goods and goods buy money, but goods do not buy goods.

    (2) Money is always debt; it cannot be a commodity from the first proposition because, if it were, that would mean that a particular good is buying goods.

    (3) Default on debt is possible.

    These three propositions are used to build a theory of money that is linked to common themes in the heterodox literature on money. The approach taken here is integrated with Hyman Minsky’s (1986) work (which relies heavily on the work of his dissertation adviser, Joseph Schumpeter [1934]); the endogenous money approach of Basil Moore; the French-Italian circuit approach; Paul Davidson’s (1978) interpretation of John Maynard Keynes, which relies on uncertainty; Wynne Godley’s approach, which relies on accounting identities; the “K” distribution theory of Keynes, Michal Kalecki, Nicholas Kaldor, and Kenneth Boulding; the sociological approach of Ingham; and the chartalist, or state money, approach (A. M. Innes, G. F. Knapp, and Charles Goodhart). Hence, this paper takes a somewhat different route to develop the more typical heterodox conclusions about money.

     

  • Working Paper No. 645 | December 2010

    Beyond its original mission to “furnish an elastic currency” as lender of last resort and manager of the payments system, the Federal Reserve has always been responsible (along with the Treasury) for regulating and supervising member banks. After World War II, Congress directed the Fed to pursue a dual mandate, long interpreted to mean full employment with reasonable price stability. The Fed has been left to decide how to achieve these objectives, and it has over time come to view price stability as the more important of the two. In our view, the Fed’s focus on inflation fighting diverted its attention from its responsibility to regulate and supervise the financial sector, and its mandate to keep unemployment low. Its shift of priorities contributed to creation of the conditions that led to this crisis. Now in its third phase of responding to the crisis and the accompanying deep recession—so-called “quantitative easing 2,” or “QE2”—the Fed is currently in the process of purchasing $600 billion in Treasuries. Like its predecessor, QE1, QE2 is unlikely to seriously impact either of the Fed’s dual objectives, however, for the following reasons: (1) additional bank reserves do not enable greater bank lending; (2) the interest rate effects are likely to be small at best given the Fed’s tactical approach to QE2, while the private sector is attempting to deleverage at any rate, not borrow more; (3) purchases of Treasuries are simply an asset swap that reduce the maturity and liquidity of private sector assets but do not raise incomes of the private sector; and (4) given the reduced maturity of private sector Treasury portfolios, reduced net interest income could actually be mildly deflationary.

    The most fundamental shortcoming of QE—or, in fact, of using monetary policy in general to combat the recession—is that it only “works” if it somehow induces the private sector to spend more out of current income. A much more direct approach, particularly given much-needed deleveraging by the private sector, is to target growth in after tax incomes and job creation through appropriate and sufficiently large fiscal actions. Unfortunately, stimulus efforts to date have not met these criteria, and so have mostly kept the recession from being far worse rather than enabling a significant economic recovery. Finally, while there is identical risk to the federal government whether a bailout, a loan, or an asset purchase is undertaken by the Fed or the Treasury, there have been enormous, fundamental differences in democratic accountability for the two institutions when such actions have been taken since the crisis began. Public debates surrounding the wisdom of bailouts for the auto industry, or even continuing to provide benefits to the unemployed, never took place when it came to the Fed committing trillions of dollars to the financial system—even though, again, the federal government is “on the hook” in every instance.

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    Associated Program:
    Author(s):
    Scott Fullwiler L. Randall Wray

  • Working Paper No. 639 | November 2010

    The Federal Reserve’s quantitative easing is presented as injecting $600 billion into “the economy.” But instead of getting banks lending to Americans again—households and firms—the money is going abroad, through arbitrage interest-rate speculation, currency speculation, and capital flight. No wonder foreign economies are protesting, as their currencies are being pushed up.

  • One-Pager No. 6 | November 2010

    Before we can reform the financial system, we need to understand what banks do—or, better yet, what banks should do. Senior Scholar L. Randall Wray examines Hyman Minsky’s views on banking and the proper role of the financial system—not simply to finance investment in physical capital but to promote the “capital development” of the economy as a whole and the improvement of living standards, broadly defined.

  • Working Paper No. 637 | November 2010
    Some Postrecession Regulatory Implications

    Over the past 40 years, regulatory reforms have been undertaken on the assumption that markets are efficient and self-corrective, crises are random events that are unpreventable, the purpose of an economic system is to grow, and economic growth necessarily improves well-being. This narrow framework of discussion has important implications for what is expected from financial regulation, and for its implementation. Indeed, the goal becomes developing a regulatory structure that minimizes the impact on economic growth while also providing high-enough buffers against shocks. In addition, given the overarching importance of economic growth, economic variables like profits, net worth, and low default rates have been core indicators of the financial health of banking institutions.

    This paper argues that the framework within which financial reforms have been discussed is not appropriate to promoting financial stability. Improving capital and liquidity buffers will not advance economic stability, and measures of profitability and delinquency are of limited use to detect problems early. The paper lays out an alternative regulatory framework and proposes a fundamental shift in the way financial regulation is performed, similar to what occurred after the Great Depression. It is argued that crises are not random, and that their magnitude can be greatly limited by specific pro-active policies. These policies would focus on understanding what Ponzi finance is, making a difference between collateral-based and income-based Ponzi finance, detecting Ponzi finance, managing financial innovations, decreasing competitions in the banking industry, ending too-big-to-fail, and deemphasizing economic growth as the overarching goal of an economic system. This fundamental change in regulatory and supervisory practices would lead to very different ways in which to check the health of our financial institutions while promoting a more sustainable economic system from both a financial and a socio-ecological point of view.

  • Working Paper No. 636 | November 2010

    This paper examines Federal Reserve Chairman Ben Bernanke’s recipe for deflation fighting and the specific policy actions he took in the aftermath of the 2008 financial crisis. Both in his academic and in his policy work, Bernanke has made the case that monetary policy is able to stem deflationary forces largely because of its “fiscal components,” and that governments like those in the United States or Japan face no constraints in financing these fiscal components. On the other hand, he has recently expressed strong concerns about the size of the federal budget deficit, calling for its reversal in the name of financial sustainability. The paper argues that these positions are fundamentally at odds with each other, and resolves the paradox by arguing on theoretical and technical grounds that there are no fundamental differences in financing conventional government spending programs and what Bernanke considers to be the fiscal components of monetary policy.

  • Working Paper No. 634 | November 2010

    The post-1945 mode of global integration has outlived its early promise. It has become exploitative rather than supportive of capital investment, public infrastructure, and living standards.

    In the sphere of trade, countries need to rebuild their self-sufficiency in food grains and other basic needs. In the financial sphere, the ability of banks to create credit (loans) at almost no cost, with only a few strokes on their computer keyboards, has led North America and Europe to become debt ridden—a contagion that now threatens to move into Brazil and other BRIC countries as banks seek to finance buyouts and lend against these countries' natural resources, real estate, basic infrastructure, and industry. Speculators, arbitrageurs, and financial institutions using "free money" see these economies as easy pickings. But by obliging countries to defend themselves financially, they and their predatory credit creation are helping to bring the era of free capital movements to an end.

    Does Brazil really need inflows of foreign credit for domestic spending when it can create this at home? Foreign lending ends up in its central bank, which invests its reserves in US Treasury and euro bonds that yield low returns, and whose international value is likely to decline against the BRIC currencies. Accepting credit and buyout "capital inflows" from the North thus provides a "free lunch" for key-currency issuers of dollars and euros, but it does not significantly help local economies.

  • Working Paper No. 630 | October 2010
    The Case of India

    India has been experiencing rising inflows of overseas capital since the deregulation of its financial sector. Often looked upon as a success story among other emerging economies, the country has been subject to pitfalls and trilemmas that deserve attention. It has been officially recognized by the Governors of RBI that the financial crisis in India reflects the “dirty face” of what is described in the literature as the impossible trinity, along with the volatility in the markets that was caused by speculative capital in search of profits. However, Joseph Stiglitz observed that India’s policymakers, “particularly the Reserve Bank of India, are already doing a great job. I wish the US Federal Reserve displayed the same understanding of the role of regulation that the RBI has done, at least so far.” Recently, the United States made a path-breaking move with the launching of the recent bill on the regulation of Wall Street, which was passed by a majority of the Senate on May 20, 2010. We urge the implementation of similar laws in India and other emerging economies, especially in view of the fact that the recent moves for financial deregulation in these countries have, rather, been in the opposite direction.

  • Policy Notes No. 3 | October 2010
    The global financial breakdown is part of the price to be paid for the refusal of the Federal Reserve and Treasury to accept a prime axiom of banking: debts that cannot be paid, won’t be. These agencies tried to “save” the banking system from debt writedowns by keeping the debt overhead in place, while reinflating asset prices. In the face of the repayment burden that is shrinking the US economy, the Fed’s way of helping the banks “earn their way out of negative equity” actually provided opportunities for predatory finance, which led to excessive financial speculation. It is understandable that countries whose economies have been targeted by global speculators are seeking alternative arrangements. But it appears that these arrangements cannot be achieved via the International Monetary Fund or any other international forum in ways that US financial strategists will accept willingly.

  • Working Paper No. 625 | October 2010
    A Dubious Success Story in Monetary Economics

    This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.

     

  • Working Paper No. 623 | September 2010
    A Keynes-Minsky Episode?

    The enormity and pervasiveness of the global economic crisis that began in 2008 makes it relevant to analyze the circumstances that can explain this catastrophe. This will also provide clues to the appropriate remedial measures needed to prevent future occurrences of similar developments.

    The paper begins with some theoretical concerns relating to factors that could trigger a similar crisis. The first of these concerns relates to the deregulated financial institutions and the growing uncertainty that can be witnessed in these liberalized financial markets. The secondrelates to financial engineering with innovations in these markets, simultaneously providing cushions against risks while generating flows of liquidity that remain beyond the conventional sources of bank credit.

    Interpreting the role of uncertainty, one can observe the connections between investment and finance, both of which are subject to changes in the state of expectations. The initial formulation can be traced back to John Maynard Keynes’s General Theory (1936), where liquidity preference is linked to asset prices and new investments. The Keynesian analysis of the impact of uncertainty related expectations was reformulated in 1986 by Hyman P. Minsky, who introduced the possibility of sourcing external finance through debt, which further adds to the impact of uncertainty. Minsky’s characterization of deregulated financial markets considers the newfangled sources of nonbank credit, especially with the involvement of banks in the securities market under the universal banking model.

    As for the institutional arrangements that provide for profits on transactions, financial assets bought and sold in the primary market as initial public offerings of stocks are usually transacted later, in the secondary market, where these are no longer backed by physical assets.In the upswing, finance creates a myriad of financial claims and liabilities, and thus becomes increasingly remote from the real economy, while innovations to hedge and insulate assets continue to proliferate in the financial market, especially in the presence of uncertainty.

    The paper dwells on an account of the pattern of the financial crisis and its spread in the United States. This is appended by a stylized account of the turn of events in terms of a theoretical model that highlights the role of uncertainty in the process.

  • Working Paper No. 622 | September 2010

    This paper discusses recent UK monetary policies as instances of John Kenneth Galbraith’s “innocent fraud,” including the idea that money is a thing rather than a relationship, the fallacy of composition (i.e., that what is possible for one bank is possible for all banks), and the belief that the money supply can be controlled by reserves management. The origins of the idea of quantitative easing (QE), and its defense when it was applied in Britain, are analyzed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE “worked,” either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK.

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    Author(s):
    Dirk Bezemer Geoffrey Gardiner

  • Book Series | September 2010
    Edited by Dimitri B. Papadimitriou and L. Randall Wray

    Hyman Minsky’s analysis, in the early 1990s, of the capitalist economy’s transformation in the postwar period accurately predicted the global financial meltdown that began in late 2007. With the republication in 2008 of his seminal books John Maynard Keynes (1975) and Stabilizing an Unstable Economy (1986), his ideas have seen an unprecedented resurgence, and the essays collected in this companion volume demonstrate why both economists and policymakers have turned to Minsky’s works for guidance in understanding and addressing the current crisis. The volume brings together the world’s foremost Minsky scholars to provide a comprehensive overview of his approach, and includes chapters that extend his analysis to the present. Beginning with Minsky’s ideas on money, banking, and finance—including his influential financial instability hypothesis—subjects range from the psychology of financial markets to financial innovation and disequilibrium, to the role of Big Government in constraining endogenous instability, to a Minskyan approach to international relations theory.

    Published By: Edward Elgar

  • Public Policy Brief No. 115 | September 2010
    A Minskyan Analysis

    In this new brief, Senior Scholar L. Randall Wray examines the later works of Hyman P. Minsky, with a focus on Minsky’s general approach to financial institutions and policy.

    The New Deal reforms of the 1930s strengthened the financial system by separating investment banks from commercial banks and putting in place government guarantees such as deposit insurance. But the system’s relative stability, and relatively high rate of economic growth, encouraged innovations that subverted those constraints over time. Financial wealth (and private debt) grew on trend, producing immense sums of money under professional management: we had entered what Minsky, in the early 1990s, labeled the “money manager” phase of capitalism. With help from the government, power was consolidated in a handful of huge firms that provided the four main financial services: commercial banking, payments services, investment banking, and mortgages. Brokers didn’t have a fiduciary responsibility to act in their clients’ best interests, while financial institutions bet against households, firms, and governments. By the early 2000s, says Wray, banking had strayed far from the (Minskyan) notion that it should promote the capital development of the economy.

  • Working Paper No. 614 | August 2010

    With the global crisis, the policy stance around the world has been shaken by massive government and central bank efforts to prevent the meltdown of markets, banks, and the economy. Fiscal packages, in varied sizes, have been adopted throughout the world after years of proclaimed fiscal containment. This change in policy regime, though dubbed the “Keynesian moment,” is a “short-run fix” that reflects temporary acceptance of fiscal deficits at a time of political emergency, and contrasts with John Maynard Keynes’s long-run policy propositions. More important, it is doomed to be ineffective if the degree of tolerance of fiscal deficits is too low for full employment.

    Keynes’s view that outside the gold standard fiscal policies face real, not financial, constraints is illustrated by means of a simple flow-of-funds model. This shows that government deficits do not take financial resources from the private sector, and that demand for net financial savings by the private sector can be met by a rising trade surplus at the cost of reduced consumption, or by a rising government deficit financed by the monopoly supply of central bank credit. Fiscal deficits can thus be considered functional to the objective of supplying the private sector with a provision of financial wealth sufficient to restore demand. By contrast, tax hikes and/or spending cuts aimed at reducing the public deficit lower the available savings of the private sector, and, if adopted too soon, will force the adjustment by way of a reduction of demand and standard of living.

    This notion, however, is not applicable to the euro area, where constraints have been deliberately created that limit public deficits and the supply of central bank credit, thus introducing national solvency risks. This is a crucial flaw in the institutional structure of Euroland, where monetary sovereignty has been removed from all existing fiscal authorities. Absent a reassessment of its design, the euro area is facing a deflationary tendency that may further erode the economic welfare of the region.

  • Working Paper No. 612 | August 2010

    Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled “Reconstituting the United States’ Financial Structure.” This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper).

    Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.

  • Working Paper No. 606 | August 2010

    The subprime financial crisis has forced several North American and European central banks to take extraordinary measures and to modify some of their operational procedures. These changes have made even clearer the deficiencies and lack of realism in mainstream monetary theory, as can be found in both undergraduate textbooks and most macroeconomic models. They have also forced monetary authorities to reject publicly some of the assumptions and key features of mainstream monetary theory, fearing that, on that mistaken basis, actors in the financial markets would misrepresent and misjudge the consequences of the actions taken by the monetary authorities. These changes in operational procedures also have some implications for heterodox monetary theory; in particular, for post-Keynesian theory.

    The objective of this paper is to analyze the implications of these changes in operational procedures for our understanding of monetary theory. The evolution of the operating procedures of the Federal Reserve since August 2007 is taken as an exemplar. The American case is particularly interesting, both because it was at the center of the financial crisis and because the US monetary system and its federal funds rate market are the main sources of theorizing in monetary economics.

     

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    Author(s):
    Marc Lavoie

  • After the Crisis: Planning a New Financial Structure
    A conference organized by the Levy Economics Institute of Bard College with support from the FordFoundationLogo.

    On April 14–16, more than 200 policymakers, economists, and analysts from government, industry, and academia gathered at the NYC headquarters of the Ford Foundation for the Levy Institute’s annual Minsky conference on the state of the US and world economies. This year’s conference drew upon many Minskyan themes, including reconstituting the financial structure; the reregulation and supervision of financial institutions; the relevance of the Glass-Steagall Act; the roles of the Federal Reserve, FDIC, and the Treasury; the moral hazard of the “too big to fail” doctrine; debt deflation; and the economics of the “big bank” and “big government.” Speakers compared the European and Latin American responses to the global financial crisis and proposals for reforming the international financial architecture. Moreover, central bank exit strategies, both national and international, were considered.

  • Working Paper No. 605 | June 2010
    An Evolutionary Approach to the Measure of Financial Fragility
    Different frameworks of analysis lead to different conceptions of financial instability and financial fragility. On one side, the static approach conceptualizes financial instability as an unfortunate byproduct of capitalism that results from unpredictable random forces that no one can do anything about except prepare for through adequate loss reserves, capital, and liquidation buffers. On the other side, the evolutionary approach conceptualizes financial instability as something that the current economic system invariably brings upon itself through internal market and nonmarket forces, and that requires change in financial practices rather than merely good financial buffers. This paper compares the two approaches in order to lay the foundation for the empirical analysis developed within the evolutionary approach. The paper shows that, with the use of macroeconomic data, it is possible to detect financial fragility, especially Ponzi finance. The methodology is applied to residential housing in the US household sector and is able to capture some of the trends that are known to be sources of economic difficulties. Notably, the paper finds that Ponzi finance was going on in the housing sector from at least 2004 to 2007, which concurs with other works based on more detailed data.

  • Working Paper No. 604 | June 2010
    The Financial Trilemma and the Wall Street Complex

    This would seem an opportune moment to reshape banking systems in the Americas. But any effort to rethink and improve banking must acknowledge three major barriers. The first is a crisis of vision: there has been too little consideration of what kind of banking system would work best for national economies in the Americas. The other two constraints are structural. Banking systems in Mexico and the rest of Latin America face a financial regulation trilemma, the logic and implications of which are similar to those of smaller nations’ macroeconomic policy trilemma. The ability of these nations to impose rules that would pull banking systems in the direction of being more socially productive and economically functional is constrained both by regional economic compacts (in the case of Mexico, NAFTA) and by having a large share of the domestic banking market operated by multinational banks.

    For the United States, the structural problem involves the huge divide between Wall Street megabanks and the remainder of the US banking system. The ambitions, modes of operation, and economic effects of these two different elements of US banking are quite different. The success, if not survival, of one element depends on the creation of a regulatory atmosphere and set of enabling federal government subsidies or supports that is inconsistent with the success, or survival, of the other element.

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    Author(s):
    Gary A. Dymski

  • Working Paper No. 602 | June 2010
    The use of government fiscal stimulus to support the economy in the recent economic crisis has brought increases in government deficits and increased government debt. This has produced an interest in sustainable government debt and the role of deficits in the economy. This paper argues in favor of a concept of "responsible" government policy, referring to positions held by Franklin and Marshall Professor Will Lyons. The idea is that government should be responsible to the needs and desires of its citizens, but that this should go beyond physical security and education, to economic security. Building on the fallacy of composition and misplaced concreteness, it suggests that in an integrated macro system an increased desire to save on the part of the private sector will be self-defeating unless the government acts in a responsible manner to support those desires. This can only be done by government dissaving via an expenditure deficit. The outstanding government debt simply represents the desires of the public to hold safe financial assets, and can only be unsustainable if the public’s desires change. The government should always be responsive to these desires, and adjust its expenditure policy.

  • Working Paper No. 601 | June 2010
    Motives, Countermeasures, and Prospects
    Regulatory forbearance and government financial support for the largest US financial companies during the crisis of 2007–09 highlighted a "too big to fail" problem that has existed for decades. As in the past, effects on competition and moral hazard were seen as outweighed by the threat of failures that would undermine the financial system and the economy. As in the past, current legislative reforms promise to prevent a reoccurrence.

    This paper proceeds on the view that a better understanding of why too-big-to-fail policies have persisted will provide a stronger basis for developing effective reforms. After a review of experience in the United States over the last 40 years, it considers a number of possible motives. The explicit rationale of regulatory authorities has been to stem a systemic threat to the financial system and the economy resulting from interconnections and contagion, and/or to assure the continuation of financial services in particular localities or regions. It has been contended, however, that such threats have been exaggerated, and that forbearance and bailouts have been motivated by the "career interests" of regulators. Finally, it has been suggested that existing large financial firms are preserved because they serve a public interest independent of the systemic threat of failure they pose—they constitute a "national resource."

    Each of these motives indicates a different type of reform necessary to contain too-big-to-fail policies. They are not, however, mutually exclusive, and may all be operative simultaneously. Concerns about the stability of the financial system dominate current legislative proposals; these would strengthen supervision and regulation. Other kinds of reform, including limits on regulatory discretion, would be needed to contain "career interest" motivations. If, however, existing financial companies are viewed as serving a unique public purpose, then improved supervision and regulation would not effectively preclude bailouts should a large financial company be on the brink of failure. Nor would limits on discretion be binding.

    To address this motivation, a structural solution is necessary. Breakups through divestiture, perhaps encompassing specific lines of activity, would distribute the "public interest" among a larger group of companies than the handful that currently hold a disproportionate and growing concentration of financial resources. The result would be that no one company, or even a few, would appear to be irreplaceable. Neither economies of scale nor scope appear to offset the advantages of size reduction for the largest financial companies. At a minimum, bank merger policy that has, over the last several decades, facilitated their growth should be reformed so as to contain their continued absolute and relative growth. An appendix to the paper provides a review of bank merger policy and proposals for revision.
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    Author(s):
    Bernard Shull

  • One-Pager No. 3 | May 2010

    A year and a half after the collapse in the financial markets, the debate about necessary “reforms” is still in its early stages, and none of the debaters seriously claims that his solution will in fact prevent a new crisis. The problem is that the proposed remedies deal with superficial matters of industrial organization and regulatory procedure, while the real problems—outsized, ungovernable financial firms and rampant securitization—lie on a more profound level.

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    Author(s):
    Martin Mayer

  • One-Pager No. 2 | May 2010
    What We Can Do Today to Straighten Out Financial Markets

    Congress is currently debating new regulations for financial institutions in an effort to avoid a repeat of the recent crisis that brought the banking system to the brink. Some of those proposed changes would be valuable. But what nobody seems to have noticed is that the government already has the power to address some of the most important factors that contributed to the crisis. Today, right now, Washington could change a few key rules and prevent a repeat of the rampant speculation, and possible fraud, that led to so much trouble this last time around.

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  • In the Media | May 2010
    Wynne Godley and Marc Lavoie
    The work of Wynne Godley and Marc Lavoie offers a novel approach, based on a consistent accounting methodology relating stocks and flows, and making use of Post-Keynesian behavioural assumptions that tie the analysis to a monetary economics perspective. The authors’ objective is to provide an analytical framework that could provide an alternative to the standard approach, by taking into account comprehensively the interrelations between real and financial variables.
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    Author(s):
    Célia Firmin

  • Working Paper No. 593 | May 2010
    The paper examines three aspects of a financial crisis of domestic origin. The first section studies the evolution of a debt-financed consumption boom supported by rising asset prices, leading to a credit crunch and fluctuations in the real economy, and, ultimately, to debt deflation. The next section extends the analysis to trace gradual evolution toward Ponzi finance and its consequences. The final section explains the link between the financial and the real sector of the economy, pointing to an inherent liquidity problem. The paper concludes with comments on the interactions between the three aspects.
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    Author(s):
    Amit Bhaduri

  • Working Paper No. 592 | May 2010
    The 2008 global financial crisis was the consequence of the process (1) of financialization, or the creation of massive fictitious financial wealth, that began in the 1980s,; and (2) the hegemony of a reactionary ideology—namely, neoliberalism—based on self-regulated and efficient markets. Although laissez-faire capitalism is intrinsically unstable, the lessons of  the 1929 stock market crash of 1929 and the Great Depression of the 1930s were transformed into theories and institutions or regulations that led to the “30 glorious years of capitalism” (1948–77) and that could have helped avoid a financial crisis as profound as the present one. But it did not, because a coalition of rentiers and “financists” achieved hegemony and, while deregulating the existing financial operations, refused to regulate the financial innovations that made these markets even  riskier. Neoclassical economics played the role of a meta-ideology as it legitimized, mathematically and “scientifically,” neoliberal ideology and deregulation. From this crisis a new democratic capitalist system will emerge, though its character is difficult to predict. It will not be financialized, but the glory years’ tendencies toward a global and knowledge-based capitalism in which professionals  have more say than rentier capitalists, as well as the tendency to improve democracy by making it more social and participative, will be resumed.
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    Author(s):
    Luiz Carlos Bresser-Pereira

  • Conference Audio | April 2010

    Audio:

    Click on an audio link to play the clip.
     
    After the Crisis—Planning a New Financial Structure

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford foundation

    From his extensive research, Hyman Minsky was convinced that economic systems are prone to financial instability and crisis, and urged that lessons be learned from the crisis of 1929–1933 so that “it”—the Great Depression—could not happen again. This year’s conference drew upon many Minskyan themes, including reconstituting the financial structure; the reregulation and supervision of financial institutions; the relevance of the Glass-Steagall Act; the roles of the Federal Reserve, FDIC, and the Treasury; the moral hazard of the “too big to fail” doctrine; debt deflation; and the economics of the “big bank” and “big government.” Speakers compared the European and Latin American responses to the global financial crisis and proposals for reforming the international financial architecture. Moreover, central bank exit strategies, both national and international, were considered.

  • Public Policy Brief Highlights No. 109A | April 2010
    Toward an Alternative Public Policy to Support Retirement

    Pension funds have taken a big hit during the current financial crisis, with losses in the trillions of dollars. In addition, both private and public pensions are experiencing significant funding shortfalls, as is the government-run Pension Benefit Guaranty Corporation, which insures the defined-benefit pension plans of private American companies. Yeva Nersisyan and Senior Scholar L. Randall Wray argue that the employment-based pension system is highly problematic, since the strategy for managing pension funds leads to excessive cost and risk in an effort to achieve above-average returns. The average fund manager, however, will only achieve the risk-free return. The authors therefore advocate expanding Social Security and encouraging private and public pensions to invest only in safe (risk-free) Treasury bonds—which, on average, will beat the net returns on risky assets.

  • Public Policy Brief Highlights No. 107A | April 2010

    The purpose of the 1933 Banking Act—aka Glass-Steagall—was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation.

    Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act’s restrictions on securities trading (deregulation). He concludes that a return to the Act’s simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks’ ability to compete with other financial institutions. Moreover, fundamental reform—the conflicting relationship between state and national charters and regulation—was bypassed by the Act.

  • Public Policy Brief No. 109 | March 2010
    Toward an Alternative Public Policy to Support Retirement

    Pension funds have taken a big hit during the current financial crisis, with losses in the trillions of dollars. In addition, both private and public pensions are experiencing significant funding shortfalls, as is the government-run Pension Benefit Guaranty Corporation, which insures the defined-benefit pension plans of private American companies. Yeva Nersisyan and Senior Scholar L. Randall Wray argue that the employment-based pension system is highly problematic, since the strategy for managing pension funds leads to excessive cost and risk in an effort to achieve above-average returns. The average fund manager, however, will only achieve the risk-free return. The authors therefore advocate expanding Social Security and encouraging private and public pensions to invest only in safe (risk-free) Treasury bonds—which, on average, will beat the net returns on risky assets.

  • Working Paper No. 587 | February 2010

    While most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the “shadow banking system” and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income—what is sometimes called “financialization”—as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme.

    The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail—and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications.

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    Author(s):
    Yeva Nersisyan L. Randall Wray

  • Working Paper No. 586 | February 2010

    The current financial crisis has been characterized as a “Minsky” moment, and as such provides the conditions required for a reregulation of the financial system similar to that of the New Deal banking reforms of the 1930s. However, Minsky’s theory was not one that dealt in moments but rather in systemic, structural changes in the operations of financial institutions. Therefore, the framework for reregulation must start with an understanding of the longer-term systemic changes that took place between the New Deal reforms and their formal repeal under the 1999 Financial Services Modernization Act. This paper attempts to identify some of those changes and their sources. In particular, it notes that the New Deal reforms were eroded by an internal process in which commercial banks that were given a monopoly position in deposit taking sought to remove those protections because unregulated banks were able to provide substitute instruments that were more efficient and unregulated but unavailable to regulated banks, since they involved securities market activities that would eventually be recognized as securitization. Regulators and the courts contributed to this process by progressively ruling that these activities were related to the regulated activities of the commercial banks, allowing them to reclaim securities market activities that had been precluded in the New Deal legislation. The 1999 Act simply made official the de facto repeal of the 1930s protections. Any attempt to provide reregulation of the system will thus require safeguards to ensure that this internal process of deregulation is not repeated.

  • Working Paper No. 585 | February 2010

    The extension of the subprime mortgage crisis to a global financial meltdown led to calls for fundamental reregulation of the United States financial system. However, that reregulation has been slow in implementation and the proposals under discussion are far from fundamental. One explanation for this delay is the fact that many of the difficulties stemmed not from lack of regulation but from a failure to fully implement existing regulations. At the same time, the crisis evolved in stages, interspersed by what appeared to be the system’s return to normalcy. This evolution can be defined in terms of three stages (regulation and supervision, securitization, and a run on investment banks), each stage associated with a particular failure of regulatory supervision. It thus became possible to argue at each stage that all that was necessary was the appropriate application of existing regulations, and that nothing more needed to be done. This scenario progressed until the collapse of Lehman Brothers brought about a full-scale recession and attention turned to support of the real economy and employment, leaving the need for fundamental financial regulation in the background.

  • Working Paper No. 584 | February 2010

    This paper investigates the United States dollar’s role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007–09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that United States spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the “Bretton Woods II” regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent US current account deficits may turn into a “Bretton Woods III” regime that sees US fiscal policy and public debt as “minding the store” in maintaining US and global growth.

  • Public Policy Brief No. 107 | January 2010

    The purpose of the 1933 Banking Act—aka Glass-Steagall—was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation.

    Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act’s restrictions on securities trading (deregulation). He concludes that a return to the Act’s simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks’ ability to compete with other financial institutions. Moreover, fundamental reform—the conflicting relationship between state and national charters and regulation—was bypassed by the Act.

  • Policy Notes No. 11 | December 2009

    Past experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking—a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered “too big to fail” are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of “too big to fail” is simply aggravated. Thus, the current thrust of government regulatory reform—increased capital and liquidity requirements, and further legislation—is unlikely to lessen the systemic risks these institutions pose.

  • Public Policy Brief Highlights No. 106A | December 2009

    Social unrest across Europe is growing as Euroland’s economy collapses faster than the United States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.

  • Public Policy Brief No. 106 | November 2009

    Social unrest across Europe is growing as Euroland’s economy collapses faster than the United States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.

  • Working Paper No. 583 | November 2009
    The Fiction and Reality of the 10th Anniversary Blast

    This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated “stability oriented” policy wisdom inherited from Germany’s mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.

  • Working Paper No. 582 | November 2009
    The Methodological Puzzles of the Financial Instability Analysis

    The recent revival of Hyman P. Minsky’s ideas among policymakers, economists, bankers, financial institutions, and the mass media, synchronized with the increasing gravity of the subprime financial crisis, demands a reappraisal of the meaning and scope of the “financial instability hypothesis” (FIH). We argue that we need a broader approach than that conventionally pursued, in order to understand not only financial crises but also the periods of financial calm between them and the transition from stability to instability. In this paper we aim to contribute to this challenging task by restating the strictly financial part of the FIH on the basis of a generalization of Minsky’s taxonomy of economic units. In light of this restatement, we discuss a few methodological issues that have to be clarified in order to develop the FIH in the most promising direction.

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    Author(s):
    Alessandro Vercelli

  • Public Policy Brief No. 105 | October 2009

    The Obama administration has implemented several policies to “jump-start” the American economy—efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style “lost decade.” They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.

  • Working Paper No. 580 | October 2009

    This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have “soaked up” global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve’s pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of US banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it’s necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit.

    I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the US current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held—as liquid or illiquid assets. US current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy.

  • Working Paper No. 579 | October 2009
    The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis

    This paper aims to help bridge the gap between theory and fact regarding the so-called “Minsky moments” by revisiting the “financial instability hypothesis” (FIH). We limit the analysis to the core of FIH—that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky’s contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy o f financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit’s financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of the “Minsky moment” as the starting point of a Minskyan process—the phase of a financial cycle when many financial units suffer from both liquidity and solvency problems. Although the outlined approach is very simple and has to be further developed in many directions, we may draw from it a few policy insights on ways of stabilizing the financial cycle.

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    Author(s):
    Alessandro Vercelli

  • Policy Notes No. 9 | October 2009

    Oblivious to any lessons that might have been learned from the global financial mess it has created, Wall Street is looking for the next asset bubble. Perhaps in the market for death it has found a replacement for the collapsed markets in subprime mortgage–backed securities and credit default swaps (CDSs). Instead of making bets on the “death” of securities, this new product will allow investors to gamble on the death of human beings by purchasing “life settlements”—life insurance policies that the ill and elderly sell for cash. These policies will then be packaged together as bonds—securitized—and resold to investors, who will receive payouts when the people with the insurance die. In effect, just as the sale of a CDS creates a vested interest in financial calamity, here the act of securitizing life insurance policies creates huge financial incentives in favor of personal calamity. The authors of this Policy Note argue that this is a subversion—or an inversion—of insurance, and it raises important public policy issues: Should we allow the marketing of an instrument in which holders have a financial stake in death? More generally, should we allow the “innovation” of products that condone speculation under the guise of providing insurance?

  • Public Policy Brief Highlights No. 105A | October 2009
    <p>The Obama administration has implemented several policies to &ldquo;jump-start&rdquo; the American economy&mdash;efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses&mdash;and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style &ldquo;lost decade.&rdquo; They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.</p>

  • Working Paper No. 578 | September 2009

    This paper applies Hyman Minsky’s approach to provide an analysis of the causes of the global financial crisis. Rather than finding the origins in recent developments, this paper links the crisis to the long-term transformation of the economy from a robust financial structure in the 1950s to the fragile one that existed at the beginning of this crisis in 2007. As Minsky said, “Stability is destabilizing”: the relative stability of the economy in the early postwar period encouraged this transformation of the economy. Today’s crisis is rooted in what he called “money manager capitalism,” the current stage of capitalism dominated by highly leveraged funds seeking maximum returns in an environment that systematically under-prices risk. With little regulation or supervision of financial institutions, money managers have concocted increasingly esoteric instruments that quickly spread around the world. Those playing along are rewarded with high returns because highly leveraged funding drives up prices for the underlying assets. Since each subsequent bust wipes out only a portion of the managed money, a new boom inevitably rises. Perhaps this will prove to be the end of this stage of capitalism–the money manager phase. Of course, it is too early even to speculate on the form capitalism will take. I will only briefly outline some policy implications.

  • Public Policy Brief Highlights No. 103A | September 2009

    A group of experts associated with Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.

    Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

  • Working Paper No. 576 | September 2009

    This paper investigates the relationship between asset markets and business cycles with regard to the US economy. We consider the Goldman Sachs approach (2003) developed to study the dynamics of financial balances.

    By means of a small econometric model we find that asset market dynamics are fundamental to determining the long-run financial sector balance dynamics. The gap between long-run equilibrium values and the actual values of the financial balances help to explain the cyclical path of the economy. Among all financial sectors balances, the financing gap in the corporate sector shows a leading effect on business cycles, in a Minskyan spirit. The last results appear innovative with respect to Goldman Sachs’s findings. Furthermore, our econometric results are robust and quite stable.

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    Author(s):
    Paolo Casadio Antonio Paradiso

  • Public Policy Brief Highlights No. 102A | September 2009
    Is the B Really Justified?

    The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China–a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today’s richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group.

    Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.

  • Public Policy Brief No. 103 | August 2009

    A group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.

    Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

  • Public Policy Brief No. 102 | August 2009
    Is the B Really Justified?

    The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China–a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today’s richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group.

    Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.

  • Working Paper No. 574.4 | August 2009
    Summary Tables

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.1, 574.2, and 574.3.

  • Working Paper No. 574.3 | August 2009
    G30, OECD, GAO, ICMBS Reports

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.1, 574.2, and 574.4.

  • Working Paper No. 574.2 | August 2009
    Treasury, CRMPG Reports, Financial Stability Forum

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.1, 574.3, and 574.4.

  • Working Paper No. 574.1 | August 2009
    Key Concepts and Main Points

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.2, 574.3, and 574.4.

  • Working Paper No. 573.2 | August 2009
    Deregulation, the Financial Crisis, and Policy Implications

    This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work.

    It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street’s nor Main Street’s interests but rather the interests of the socioeconomic system. The latter requires financial stability if it’s to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability—and ultimately, the existence—of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices.

    See also, Working Paper No. 573.1, “Securitization, Deregulation, Economic Stability, and Financial Crisis, Part I: The Evolution of Securitization.”

  • Working Paper No. 573.1 | August 2009
    The Evolution of Securitization

    This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work.

    It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street’s nor Main Street’s interests but rather the interests of the socioeconomic system. The latter requires financial stability if it’s to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability—and ultimately, the existence—of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices.

    See also, Working Paper No. 573.2, “Securitization, Deregulation, Economic Stability, and Financial Crisis, Part II: Deregulation, the Financial Crisis, and Policy Implications.”

  • Policy Notes No. 8 | June 2009

    The demand for reform of the financial system has focused on the dollar’s loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances.

    In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the US consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.

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  • Policy Notes No. 7 | May 2009

    The capital adequacy requirements for banks, enshrined in international banking regulations, are based on a fallacy of composition—namely, the notion that an individual firm can choose the structure of its financial liabilities without affecting the financial liabilities of other firms. In practice, says author Jan Toporowski, capital adequacy regulations for banks are a way of forcing nonfinancial companies into debt. “Enforced indebtedness” then reduces the quality of credit in the economy. In an international context, the present system of capital adequacy regulation reinforces this indebtedness. Proposals for “dynamic provisioning” to increase capital requirements during an economic boom would simply accelerate the boom’s collapse. Contingent commitments to lend to governments in the event of private-sector lending withdrawals, alongside lending to foreign private-sector borrowers, are a much more viable alternative.

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    Author(s):
    Jan Toporowski

  • Public Policy Brief Highlights No. 100A | April 2009

    The Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector.

    Senior Scholar Jan Kregel compares the current situation with the Great Depression, and finds an absence of New Deal measures and institutions in the current rescue packages. The lessons of the Great Depression suggest that any successful policy requires fundamental structural reform, an understanding of how the financial system failed, and the introduction of a new financial structure (in a short space of time) that is designed to correct these failures. The current crisis could have been avoided if increased household consumption had been financed through wage increases, says Kregel, and if financial institutions had used their earnings to augment bank capital rather than bonuses.

  • Conference Audio | April 2009
    Meeting the Challenges of Financial Crisis

    A conference organized by The Levy Economics Institute of Bard College with support from the Ford Foundation.

    On April 16 and 17, 2009, top policymakers, economists, and analysts gathered at the Ford Foundation’s headquarters in New York City to offer their insights and policy guidelines on the extraordinary challenges posed by the global financial crisis. Topics included current conditions and forecasts; macro policy proposals by the Obama administration and others; the rehabilitation of mortgage financing and the banks; financial market reregulation; proposals to limit foreclosures and modify servicing agreements; regulation of alternative financial products (derivatives and credit default swaps); the institutional shape of the future financial system; and international responses to the crisis.

  • Meeting the Challenges of Financial Crisis

    A conference organized by The Levy Economics Institute of Bard College with support from the Ford Foundation.

    On April 16 and 17, more than 150 policymakers, economists, and analysts from government, industry, and academia gathered at the NYC headquarters of the Ford Foundation for the Levy Institute’s annual Minsky conference on the state of the US and world economies. This year’s conference focused on the extraordinary challenges posed by the current global financial crisis. Topics included current conditions and forecasts, macro policy proposals by the Obama administration and others, the rehabilitation of mortgage financing and the banks, financial market reregulation, proposals to limit foreclosures and modify servicing agreements, regulation of alternative financial products (derivatives and credit default swaps), the institutional shape of the future financial system, and international responses to the crisis.

  • Public Policy Brief No. 100 | April 2009

    The Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector.

    Senior Scholar Jan Kregel compares the current situation with the Great Depression, and finds an absence of New Deal measures and institutions in the current rescue packages. The lessons of the Great Depression suggest that any successful policy requires fundamental structural reform, an understanding of how the financial system failed, and the introduction of a new financial structure (in a short space of time) that is designed to correct these failures. The current crisis could have been avoided if increased household consumption had been financed through wage increases, says Kregel, and if financial institutions had used their earnings to augment bank capital rather than bonuses.

  • Working Paper No. 558 | April 2009

    International financial flows are the propagation mechanism for transmitting financial instability across borders; they are also the source of unsustainable external debt. Managing volatility thus requires institutions that promote domestic financial stability, ensure that domestic instability is contained, and guarantee that international institutions and rules of the game are not themselves a cause of volatility. This paper analyzes proposals to increase stability in domestic markets, in international markets, and in the structure of the international financial system from the point of view of Hyman P. Minsky’s financial instability hypothesis, and outlines how each of these three channels can produce financial fragility that lays the system open to financial instability and financial crisis.

  • Policy Notes No. 3 | March 2009

    All of the various schemes that have been put forward to resolve the current credit crisis follow either the “business as usual” or the “good bank” model. The “business as usual” model takes different forms—insurance or guarantee of the assets or liabilities of the financial institutions, creation of a “bad bank” to buy toxic assets, temporary nationalization—and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s.

    The “good bank” solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression.

    In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified “good bank” approach, with the government either guaranteeing a large proportion of the personal sector’s assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured.

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    Author(s):
    Elias Karakitsos

  • Policy Notes No. 2 | March 2009

    Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out.

    The authors of this new Policy Note say that a far better approach is for central banks to widen their scope and target the net wealth of the personal sector. Using interest rates in both the upswing and the downswing of a (business) cycle would avoid moral hazard. A net wealth target would not impede the free functioning of the financial system, as it deals with the economic consequences of the rise and fall of asset prices rather than with asset prices (equities or houses) per se. It would also help to control liquidity and avoid future crises. The current crisis has its roots in the excessive liquidity that, beginning in the mid 1990s, financed a series of asset bubbles. This liquidity was the outcome of “bad” financial engineering that spilled over to other banks and to the personal sector through securitization, in conjunction with overly accommodating monetary policy. Hence, targeting net wealth would also help control liquidity, the authors say, without interfering with the financial engineering of banks.

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    Author(s):
    Philip Arestis Elias Karakitsos

  • Working Paper No. 557 | March 2009
    Third Time a Charm? Or Strike Three?

    United States financial regulation has traditionally made functional and institutional regulation roughly equivalent. However, the gradual shift away from Glass-Steagall and the introduction of the Financial Modernization Act (FMA) generated a disorderly mix of functions and products across institutions, creating regulatory gaps that contributed to the recent crisis. An analysis of this history suggests that a return to regulation by function or product would strengthen regulation. The FMA also made a choice in favor of financial holding companies over universal banks, but without recognizing that both types of structure require specific regulatory regimes. The paper reviews the specific regime that has been used by Germany in regulating its universal banks and suggests that a similar regime adapted to holding companies should be developed.

  • Public Policy Brief No. 99 | March 2009

    In the current global financial crisis, economists and policymakers have reembraced Big Government as a means of preventing the reoccurrence of a debt-deflation depression. The danger, however, is that policy may not downsize finance and replace money manager capitalism. According to Senior Scholar L. Randall Wray, we need a permanently larger fiscal presence, with more public services. His advice to President Obama is to discard all of former Treasury Secretary Paulson’s actions. Wray believes that we can afford any necessary spending and bailouts, and that these actions will not burden our grandchildren.

  • Public Policy Brief No. 97 | January 2009
    The Outlook for Macroeconomics and Macroeconomic Policy

    “Change” was the buzzword of the Obama campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas Palley, the neoliberal economic policy paradigm underlying that agenda must itself change if there is to be a successful policy response to the crisis. Mainstream economic theory remains unreformed, says Palley, and he warns of a return to failed policies if a deep crisis is averted. Since Post Keynesians accurately predicted that the US economy would implode from within, there is an opportunity for Post Keynesian economics to replace neoliberalism with a more successful approach.

    Palley notes that there is significant disagreement among economic paradigms about how to ensure full employment and shared prosperity. A salient feature of the neoliberal economy is the disconnect between wages and productivity growth. Workers are boxed in on all sides by globalization, labor market flexibility, inflation concerns, and a belief in “small government” that has eroded economic rights and government services. Financialization, the economic foundation of neoliberalism, serves the interests of financial markets and top management. Thus, reversing the neoliberal paradigm will require a policy agenda that addresses financialization and ensures that financial markets and firms are more closely aligned with the greater public interest.

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    Author(s):
    Thomas I. Palley

  • Working Paper No. 555 | January 2009

    This paper explores the significance of Islamic banking in Malaysia for stability in the country’s economy as a whole. Neither conventional theory nor Islamic economics puts forward a systematic explanation of financial intermediation; consequently, neither is capable of identifying destabilizing elements in the system. Instead, a flow-of-funds approach similar to Minsky’s own is applied to the (post-) modern (consumption-led) business cycle and financial (and asset) market.

    Malaysia’s structural current account surplus contributes to the overcapitalization of domestic firms. This in turn finances a financial (as opposed to an industrial), consumption-led (instead of investment-led) business cycle, where banking favors destabilizing asset price inflation. Islamic banks operating interdependently with conventional ones contribute to economic destabilization, channelling surplus funds from the corporate to the household sector.

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    Author(s):
    Ewa Karwowski

  • Working Paper No. 554 | January 2009

    The argument put forward in this paper is twofold. First, the financial crisis of 2007–08 was made global by the current account deficit in the United States; and second, there is global dependence on the United States trade deficit as a means of maintaining liquidity in financial markets. The outflow of dollars from the United States was invested in US capital markets, causing inflation in asset markets and leading to a bubble and bust in the subprime mortgage sector. Since the US dollar is the international reserve currency, international debt is mostly denominated in dollars. Because there is a high degree of global financial integration, any reduction in the US balance of trade will have negative effects on many countries throughout the world—for example, those countries dependent on exporting to the United States in order to finance their debt.

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    Author(s):
    Julia S. Perelstein

  • Public Policy Brief Highlights No. 97A | January 2009
    The Outlook for Macroeconomics and Macroeconomic Policy

    “Change” was the buzzword of the Obama campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas Palley, the neoliberal economic policy paradigm underlying that agenda must itself change if there is to be a successful policy response to the crisis. Mainstream economic theory remains unreformed, says Palley, and he warns of a return to failed policies if a deep crisis is averted. Since Post Keynesians accurately predicted that the US economy would implode from within, there is an opportunity for Post Keynesian economics to replace neoliberalism with a more successful approach.

    Palley notes that there is significant disagreement among economic paradigms about how to ensure full employment and shared prosperity. A salient feature of the neoliberal economy is the disconnect between wages and productivity growth. Workers are boxed in on all sides by globalization, labor market flexibility, inflation concerns, and a belief in “small government” that has eroded economic rights and government services. Financialization, the economic foundation of neoliberalism, serves the interests of financial markets and top management. Thus, reversing the neoliberal paradigm will require a policy agenda that addresses financialization and ensures that financial markets and firms are more closely aligned with the greater public interest.

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    Associated Program:
    Author(s):
    Thomas I. Palley

  • Working Paper No. 553 | December 2008
    Is It Worth the Premium? What Are the Alternatives?

    Following an analysis of the forces behind the “global capital flows paradox” observed in the era of advancing financial globalization, this paper sets out to investigate the opportunity costs of self-insurance through precautionary reserve holdings. We reject the idea of reserves as low-cost protection against the vagaries of global finance. We also deny that arrangements giving rise to their rapid accumulation might be sustainable in the first place. Alternative policy options open to developing countries are explored, designed to limit both the risks of financial globalization and the costs of insurance-type responses. We propose comprehensive capital account management as an alternative to full capital account liberalization. The aims of a permanent regulatory regime of capital controls, with respect to both the aggregate size and the composition of capital flows, are twofold: first, to maintain sufficient macro policy space; second, to assure a good micro fit of external expertise incorporated in foreign direct investment as part of a country’s development strategy.

  • Working Paper No. 549 | November 2008

    These notes present a new approach to corporate finance, one in which financing is not determined by prospective income streams but by financing opportunities, liquidity considerations, and prospective capital gains. This approach substantially modifies the traditional view of high interest rates as a discouragement to speculation; the Keynesian and Post-Keynesian theory of liquidity preference as the opportunity cost of investment; and the notion of the liquidity premium as a factor in determining the rate of interest on longer-term maturities.

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    Author(s):
    Jan Toporowski

  • Policy Notes No. 6 | November 2008

    While serving as chairman of the Federal Reserve Board, Alan Greenspan advocated unsupervised securitization, subprime lending, option ARMs, credit-default swaps, and all manner of financial alchemy in the belief that markets “work” to reduce and spread risk, and to allocate it to those best able to assess and bear it—in his view, markets would stabilize in the absence of nasty government intervention. But as Greenspan now admits, he could never have imagined the outcome: a financial and economic crisis of biblical proportions.

    The problem is, market forces are not stabilizing. Left to their own devices, Wall Street wizards gleefully ran right off the cliff, and took the rest of us with them for good measure. The natural instability of market processes was recognized long ago by John Maynard Keynes, and convincingly updated by Hyman P. Minsky throughout his career. Minsky’s theory explained the transformation of the economy over the postwar period from robust to fragile. He pointed his finger at managed money—huge pools of pension funds, hedge funds, sovereign wealth funds, university endowments, money market funds—that are outside traditional banking and therefore largely underregulated and undersupervised. With a large appetite for risk, managed money sought high returns promised by Wall Street’s financial engineers, who innovated highly complex instruments that few people understood.

    In this new Policy Note, President Dimitri B. Papadimitriou and Research Scholar L. Randall Wray take a look back at Wall Street’s path to Armageddon, and propose some alternatives to the Bush-Paulson plan to “bail out” both the Street and the American homeowner. Under the existing plan, Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.

    But it is highly unlikely that relieving banks of some of their bad assets, or injecting some equity into them, will increase their willingness to lend. Resolving the liquidity crisis is the best strategy, the authors say, and keeping small-to-medium-size banks open is the best way to ensure access to credit once the economy recovers. A temporary suspension of the collection of payroll taxes would put more income into the hands of households while lowering the employment costs for firms, fueling spending and employment. The government should assume a more active role in helping homeowners saddled with mortgage debt they cannot afford, providing low-cost 30-year loans directly to all comers; in the meantime, a moratorium on foreclosures is necessary. And federal grants to support local spending on needed projects would go a long way toward rectifying our $1.6 trillion public infrastructure deficit.

    Can the Treasury afford all these measures? The answer, the authors say, is yes—and it is a bargain if one considers the cost of not doing it. It is obvious that there exist unused resources today, as unemployment rises and factories are idled due to lack of demand. Markets are also voting with their dollars for more Treasury debt. This does not mean the Treasury should spend without restraint—whatever rescue plan is adopted should be well planned and targeted, and of the proper size. The point is that setting arbitrary budget constraints is neither necessary nor desired—especially in the worst financial and economic crisis since the Great Depression.

  • Working Paper No. 548 | November 2008
    A Minskyan Analysis of the Subprime Crisis

    The paper uses Minsky’s financial instability hypothesis as an analytical framework for understanding the subprime mortgage crisis and for introducing adequate reforms to restore economic stability. We argue that the subprime crisis has structural origins that extend far beyond the housing and financial markets. We further argue that rising inequality since the 1980s formed the breeding ground for the current financial markets meltdown. What we observe today is only the manifestation of the ingenuity of the market in taking advantage of moneymaking opportunities, regardless of the consequences. The so-called “democratization of homeownership ” rapidly turned into record-high delinquencies and foreclosures. The sudden turn in market expectations led investors and banks to reevaluate their portfolios, which brought about a credit crunch and widespread economic instability. The Federal Reserve Bank’s intervention came too late and failed to usher in adequate regulation. Finally, the paper argues that a true democratization of homeownership is only possible through job creation and income-generation programs, rather than through exotic mortgage schemes.

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    Author(s):
    Luisa Fernandez Fadhel Kaboub Zdravka Todorova

  • Policy Notes No. 5 | October 2008

    As the House Committee on Financial Services meets to hear the expert testimony of witnesses concerning the regulation of the financial system, the measures that have been introduced to support the system are laying the groundwork for a new domestic financial architecture. Hyman Minsky suggests that the basic principle behind any reformulation of the regulatory system should limit the size and activities of financial institutions, and should be dictated by the ability of supervisors, examiners, and regulators to understand the institutions’ operations. Following Minsky’s preference for bank holding company structures, Senior Scholar Jan Kregel proposes the creation of numerous types of subsidiaries within the holding company. The aim would be to limit each type of holding company to a range of activities that were sufficiently linked to their core function and to ensure that each company was small enough to be effectively managed and supervised.

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  • Working Paper No. 547 | October 2008
    “Keynesianism” All Over Again?

    Recently, national newspapers all over the world have suggested that we should reread John Maynard Keynes, and that Hyman P. Minsky provides a valuable framework for understanding the world in which we live. While rereading Keynes and discovering Minsky are noble goals, one should also remember the mistakes that were made in the past. The mainstream interpretation and implementation of Keynes’s ideas have been very different from what Keynes proposed, and they have been reduced to simple “fiscal activism.” This led to the 1950s and 1960s “Keynesian” era, during which fine-tuning was supposed to be a straightforward way to fix economic problems. We know today that this is not the case: just playing around with taxes and government expenditures will not do. On the contrary, problems may worsen. If one wants to get serious about Keynes and Minsky, one should understand that the theoretical and policy implications are far-reaching. This paper compares and contrasts Minsky’s views of the capitalist system to the tenets of the New Consensus, and argues that there never has been any true Keynesian revolution. This is illustrated by studying the Roosevelt and Kennedy/Johnson eras, as well as Keynes’s reaction to the former and Minsky’s critique of the latter. Overall, it is argued that the theoretical framework and policy prescriptions of Irving Fisher, not Keynes, have been much more consistent with past and current government policies.

  • Policy Notes No. 4 | October 2008

    The impaired risk assessment caused by the collapse of mortgage-backed securities is the major problem threatening the stability of the American financial system, yet it is not clear that removing these assets from institutional balance sheets, as the government has proposed, will make it easier to assess counterparty risk in short-term credit markets. Resolving the disruption of counterparty risk should be the first objective of policy, argues Senior Scholar Jan Kregel, since these markets provide basic liquidity support for institutions operating in the broader financial markets.

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  • Public Policy Brief No. 96 | October 2008
    Money Manager Capitalism and the Financialization of Commodities

    Money manager capitalism—characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk—has resulted in a series of boom-and-bust cycles in equities, real estate, and commodities. Because subsequent cycles have been increasingly damaging to the broader economy, we are now at the point where we are experiencing the most severe financial crisis since the Great Depression. Hasty interventions (bailouts) by Congress, the Treasury, and the Federal Reserve are attempting to keep the financial industry solvent, in the belief that government inaction would result in a prolonged recession.

    In this new public policy brief, Senior Scholar L. Randall Wray shows how money manager capitalism (financialization) has destabilized one asset class after another. He concludes that policymakers must fundamentally change the structure of our economic system, break the cycle of booms and busts, and reduce the influence of managed money—as well as prevent the next speculative boom in yet another asset class.

  • Working Paper No. 544 | September 2008

    The monetary policy regime of inflation targeting (IT) has been adopted by a significant number of emerging economies. While the focus of this paper is on Brazil, which began inflation targeting in 1999, the authors also examine the experience of other countries, both for comparative purposes and for evidence of the extent of this “new” economic policy’s success. In addition, they compare the experience of Brazil with that of non-IT countries, and ask the question of whether adopting IT makes a difference in the fight against inflation.

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    Author(s):
    Philip Arestis Luiz Fernando de Paula Fernando Ferrari-Filho

  • Working Paper No. 543 | September 2008
    The Financial Theory of Investment

    Expanding on an approach developed by financial economist Hyman Minsky, the authors present an alternative to the standard “efficient markets hypothesis”—the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike.

    Coauthors L. Randall Wray and ric Tymoigne argue that the current financial crisis, which began with the collapse of the US subprime mortgage market in 2007, provides a compelling reason to show how Minsky’s approach offers us a solid grounding in the workings of financial capitalism. They examine Minsky’s extension to Keynes’s investment theory of the business cycle, which allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility—what is well known as his financial instability hypothesis. They then update Minsky’s approach to finance with a more detailed examination of asset pricing and the evolution of the banking sector, and conclude with a brief review of the insights that such an approach can provide for analysis of the current global financial crisis.

  • Policy Notes No. 3 | August 2008
    Policy Response to the Current Crisis

    As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. Labor markets continue to weaken as firms shed jobs, and state tax revenues have plummeted. In March, the dollar fell to new record lows against the euro and other currencies. Commodities prices have boomed, fueling inflation and adding to consumer distress.

    What's a central bank to do? So far, the Federal Reserve has met or exceeded the market’s anticipations for rate cuts. It has allowed banks to offer securitized mortgages as collateral against borrowed reserves, and opened its discount window to a broad range of financial institutions to guard against future liquidity problems (remember Bear Stearns?). It helped to formulate a rescue plan for Freddie Mac and Fannie Mae, and Chairman Ben Bernanke even supported the fiscal stimulus package that will increase the federal budget deficit—something that is normally anathema to central bankers. Most importantly, Fed officials have consistently argued that, while they are carefully monitoring inflation pressures, they will not reverse monetary easing until the fallout from the subprime crisis is past.

    Unfortunately, the policy isn’t working—the economy continues to weaken, the financial crisis is spreading, and inflation is accelerating. The problem is that policymakers do not recognize the underlying forces driving the crisis, in part because they operate with an incorrect model of how our economy works. This Policy Note summarizes that model, offers an alternative view based on Hyman Minsky’s approach, and outlines an alternative framework for policy formation.

  • Policy Notes No. 2 | June 2008

    “At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was ‘that which can be securitized, will be securitized.’” So notes Hyman Minsky in a prescient memo on the nature, and the implications, of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. This memo, which served as the basis for a lecture in Minsky’s monetary theory class at Washington University, has not been widely circulated. It is published here in its entirety, with a preface and an afterword by Senior Scholar L. Randall Wray that places Minsky’s work in context.

     

Project Director

Jan Kregel
Director, Ford–Levy Institute Project on Financial Instability and the Reregulation of Financial Institutions and Markets
Fax: 845-758-1149
E-mail: kregel@levy.org