Publications

In the Media

  • In the Media | October 2014
    By Ronald Find
    Global Finance, October 29, 2014. All Rights Reserved.

    Governors of the world’s central banks face difficult choices as they are increasingly tasked with promoting financial stability and providing a boost to growth. Not all central bankers—or other stakeholders—believe this is, or should be, their role. What’s more, the tools at their disposal may have limited effects and unforeseen consequences, leaving the bankers between a rock and a hard place. . . .


    Read more: https://www.gfmag.com/magazine/october-2014/central-banks-where-do-they-go-here
  • In the Media | September 2014
    By Joshua Holland
    Moyers & Company, September 29, 2014. All Rights Reserved.

    Matthew Yglesias calls this chart, from Pavlina Tcherneva, an economist at the Levy Economic Institute at Bard College, “the most important chart about the American economy you’ll see this year.” It illustrates how much income gains those at the top have enjoyed during each of our post-war expansions....

    Read more:
     http://billmoyers.com/2014/09/29/smart-charts-economic-recovery-1-percent/
  • In the Media | September 2014
    By Aaron Abbruzzese
    Mashable, September 27, 2014. All Rights Reserved.

    If it seems like the rich are getting richer, well, the data might just back you up. A new graph based on data from times of growth backs up growing concern that the current economic system is disproportionately favoring those that are already wealthy....

    Read more:
     http://mashable.com/2014/09/25/this-really-depressing-graph-about-the-u-s-economy-is-turning-heads/
  • In the Media | September 2014
    By Neil Irwin
    The New York Times, September 25, 2014

    Economic expansions are supposed to be the good times, the periods in which incomes and living standards improve. And that’s still true, at least for some of us....

    Read more:
     http://www.nytimes.com/2014/09/27/upshot/the-benefits-of-economic-expansions-are-increasingly-going-to-the-richest-americans.html?hp&action=click&pgtype=Homepage&version=HpSum&module=second-column-region®ion=top-news&WT.nav=top-news&abt=0002&abg=0
     
     
  • In the Media | September 2014
    By Christopher Ingraham
    The Washington Post, September 25, 2014

    Take a look at this chart, from Bard College economist Pavlina Tcherneva. In an August 2013 paper, she wrote:

    An examination of average income growth [in the U.S.] during every postwar expansion (from trough to peak) and its distribution between the wealthiest 10% and bottom 90% of households reveals that income growth becomes more inequitably distributed with every subsequent expansion during the entire postwar period.

    In other words, the wealthy are capturing more and more of the overall income growth during each expansion period....

    Read more:
     http://www.washingtonpost.com/blogs/wonkblog/wp/2014/09/25/this-depressing-chart-shows-that-the-rich-arent-just-grabbing-a-bigger-slice-of-the-income-pie-theyre-taking-all-of-it/
  • In the Media | September 2014
    By Jordan Weissmann
    Slate, September 25, 2014

    When you write about the economy every day for a living, you can start feeling numb toward charts about income inequality. After all, the story doesn't change much week to week, and usually neither do the visualizations. But this one, from Bard College economist Pavlina Tcherneva, somehow still feels astonishing, and has stirred up a bunch of attention today. It shows how much of U.S. income growth has been claimed by the top 10 percent of households during economic expansions, and how much was claimed by the bottom 90 percent. Guess who's gotten the lion's share in recent years?

    Read more: 
    http://www.slate.com/blogs/moneybox/2014/09/25/how_the_rich_conquered_the_economy_in_one_chart.html
  • In the Media | September 2014
    By Dimitri B. Papadimitriou
    New Geography, September 25, 2014

    It's September, but island beaches from the Aegeans to Zante are still buzzing in Greece. Mykonos has been the summer's Go-To spot for superstars and supermodels; the mainland and cities are also seeing the British and Europeans coming back....

    Read more:
     http://www.newgeography.com/content/004533-will-lindsay-lohan-save-greece
  • In the Media | September 2014
    By Matthew Yglesias
    Vox, September 25, 2014. All Rights Reserved.

    Pavlina Tcherneva's chart showing the distribution of income gains during periods of economic expansion is burning up the economics internet over the past 24 hours and for good reason. The trend it depicts is shocking....

    Read more:
     http://www.vox.com/xpress/2014/9/25/6843509/income-distribution-recoveries-pavlina-tcherneva
  • In the Media | September 2014
    By Kevin Drum
    Mother Jones, September 27, 2014. All Rights Reserved.

    It's not easy finding new and interesting ways to illustrate the growth of income inequality over the past few decades. But here are a couple of related ones. The first is from "Survival of the Richest" in the current issue of Mother Jones, and it shows how much of our total national income growth gets hoovered up by the top 1 percent during economic recoveries. The super-rich got 45 percent of total income growth during the dotcom years; 65 percent during the housing bubble years; and a stunning 95 percent during the current recovery. It's good to be rich....

    Read more:
     http://www.motherjones.com/kevin-drum/2014/09/rich-are-getting-richer-part-millionth
  • In the Media | August 2014
    By C. J. Polychroniou
    Truthout, August 27, 2014

    Is the Greek crisis nearly over as the International Monetary Fund, the European Commission and the Greek government like to proclaim because of the sharp decline in Greek bond yields, the attainment of a primary surplus and an increase in foreign tourism? If so, what about the 27.2 per cent of the population that remains unemployed and the widespread poverty across the nation, the ever growing public debt ratio and the dismal state of Greek exports? And what about the United States? Is America on the way to becoming Greece as many Republicans claimed a couple of years ago? Dimitri B. Papadimitriou, executive vice president and Jerome Levy professor of economics at Bard College, and president of the Levy Economics Institute at Bard, who foresees Greece emerging into a debt prison and a rather gloomy economic future for the United States, discusses these questions in an exclusive interview for Truthout with C. J. Polychroniou.

    Read the entire post here: 
    http://www.truth-out.org/news/item/25796-greek-crisis-and-the-dark-clouds-over-the-american-economy-an-interview-with-dimitri-b-papadimitriou
  • In the Media | August 2014
    Etorno Inteligente, August 22, 2014. All Rights Reserved.

    Portafolio
     / Colombia comete un gran error en perseguir el objetivo de entrar a la Organización para la Cooperación y el Desarrollo Económicos (Ocde), porque eso debe ser para países con un grado similar de desarrollo, dice el economista Jan Kregel, investigador del Levy Economics Institute of Board College de Estados Unidos.

    El experto, relator de la Comisión de la ONU sobre la reforma al sistema financiero internacional, participa en la Décima Semana Económica de la Universidad Central.

    Colombia ha basado su crecimiento en productos básicos. ¿Cómo mantener esa tendencia a largo plazo? 

    Lo que se puede predecir para una economía como la colombiana es una crisis externa sustantiva porque, si se mira el déficit externo, algo así como el 50 por ciento de las exportaciones de Colombia provienen del petróleo. Si hay una disminución de los precios, el primer impacto es empeorar el déficit externo y reducir los flujos financieros y habrá una presión fuerte sobre la tasa de cambio y la posición de los exportadores empeorará.

    ¿Qué debe el país hacer para reactivar la industria? 

    Hay un impacto de la enfermedad holandesa. Las exportaciones de materias primas han tenido una elevación de precios y han apreciado la tasa de cambio. Por eso, otras exportaciones son menos competitivas. Otro factor es la redistribución de las manufacturas globalmente. Si uno mira el impacto de las importaciones en la economía colombiana, hay un gran incremento de las compras a Asia.

    ¿Colombia tiene enfermedad holandesa? 

    Absolutamente sí. La enfermedad holandesa se puede clasificar de dos maneras: una es simplemente el impacto de los productos básicos, creando una mejora en los términos de comercio y un aumento de los ingresos del país. Pero el impacto de la tasa de cambio en la competitividad acaba con un incremento de los ingresos nacionales y al mismo tiempo se abaratan los bienes importados.

    El peligro real de la enfermedad holandesa no está solamente en la tasa de cambio, sino que se ve en la distribución del consumo de productos nacionales a importados.

    Una mejora en los precios de las materias primas es lo mismo que un incremento en los ingresos nacionales pero, al mismo tiempo, esto causa una apreciación en la tasa de cambio y el ingreso doméstico incrementado se va a gastar en bienes más baratos y estos son los importados. Entonces es un factor doble.

    ¿Es sano para Colombia ingresar a la Ocde? 

    Es un gran error. México y Corea cometieron el mismo error y ambos sufrieron crisis financieras sustantivas como resultado de esto. Si nos remontamos a las viejas teorías de los economistas estructuralistas, se alegó que una de las condiciones básicas para ingresar a cualquier tipo de acuerdo de esta naturaleza es que hubiese un nivel similar de desarrollo, de productividad y de competitividad.

    Colombia va a entrar a la Ocde sin preocuparnos por competir con Estados Unidos, y estamos hablando de competir con México. La pregunta es si Colombia va a ser capaz de competir en los mercados internacionales con otros países en desarrollo que ya están en la Ocde y no parece prometedor. ¿Por qué se quiere entrar a la Ocde? Es básicamente para darles confianza a los inversionistas extranjeros para que inviertan en Colombia, pero esto implica empoderar más la enfermedad holandesa.

    Pero Colombia es hoy uno de los países de Latinoamérica que más crece. 

    Es un crecimiento que desilusiona. No se puede mirar crecimiento sin empleo. Si se va a desarrollar la economía no importa qué tan alta sea la tasa de inversión ni qué tan alto sea el crecimiento si no se genera empleo. Si no se reduce el sector informal no se está generando desarrollo.

    Pero el desempleo ha bajado… 

    Ha bajado, pero no es mucho y sigue siendo sumamente alto. Hay un problema de desempleo disfrazado que debe ser de 40 por ciento. La pregunta es ¿Por qué? La explicación proviene de la enfermedad holandesa y del impacto sobre el sector de manufacturas.

    ¿HAY QUE REGULAR MERCADOS? 

    La dificultad es que nunca habrá una regulación que dé estabilidad a los mercados financieros en el mundo, porque estos siempre van adelante de los reguladores.

    La reglamentación está para reducir la rentabilidad de los bancos y estos existen solo si pueden tener utilidades sustanciales en su negocio.

    Fernando González P. Subeditor Economía y Negocios 

    −−> Colombia comete un gran error en perseguir el objetivo de entrar a la Organización para la Cooperación y el Desarrollo Económicos (Ocde), porque eso debe ser para países con un grado similar de desarrollo, dice el economista Jan Kregel, investigador del Levy Economics Institute of Board College de Estados Unidos.

    El experto, relator de la Comisión de la ONU sobre la reforma al sistema financiero internacional, participa en la Décima Semana Económica de la Universidad Central.

    Colombia ha basado su crecimiento en productos básicos. ¿Cómo mantener esa tendencia a largo plazo? 

    Lo que se puede predecir para una economía como la colombiana es una crisis externa sustantiva porque, si se mira el déficit externo, algo así como el 50 por ciento de las exportaciones de Colombia provienen del petróleo. Si hay una disminución de los precios, el primer impacto es empeorar el déficit externo y reducir los flujos financieros y habrá una presión fuerte sobre la tasa de cambio y la posición de los exportadores empeorará.

    ¿Qué debe el país hacer para reactivar la industria? 

    Hay un impacto de la enfermedad holandesa. Las exportaciones de materias primas han tenido una elevación de precios y han apreciado la tasa de cambio. Por eso, otras exportaciones son menos competitivas. Otro factor es la redistribución de las manufacturas globalmente. Si uno mira el impacto de las importaciones en la economía colombiana, hay un gran incremento de las compras a Asia.

    ¿Colombia tiene enfermedad holandesa? 

    Absolutamente sí. La enfermedad holandesa se puede clasificar de dos maneras: una es simplemente el impacto de los productos básicos, creando una mejora en los términos de comercio y un aumento de los ingresos del país. Pero el impacto de la tasa de cambio en la competitividad acaba con un incremento de los ingresos nacionales y al mismo tiempo se abaratan los bienes importados.

    El peligro real de la enfermedad holandesa no está solamente en la tasa de cambio, sino que se ve en la distribución del consumo de productos nacionales a importados.

    Una mejora en los precios de las materias primas es lo mismo que un incremento en los ingresos nacionales pero, al mismo tiempo, esto causa una apreciación en la tasa de cambio y el ingreso doméstico incrementado se va a gastar en bienes más baratos y estos son los importados. Entonces es un factor doble.

    ¿Es sano para Colombia ingresar a la Ocde? 

    Es un gran error. México y Corea cometieron el mismo error y ambos sufrieron crisis financieras sustantivas como resultado de esto. Si nos remontamos a las viejas teorías de los economistas estructuralistas, se alegó que una de las condiciones básicas para ingresar a cualquier tipo de acuerdo de esta naturaleza es que hubiese un nivel similar de desarrollo, de productividad y de competitividad.

    Colombia va a entrar a la Ocde sin preocuparnos por competir con Estados Unidos, y estamos hablando de competir con México. La pregunta es si Colombia va a ser capaz de competir en los mercados internacionales con otros países en desarrollo que ya están en la Ocde y no parece prometedor. ¿Por qué se quiere entrar a la Ocde? Es básicamente para darles confianza a los inversionistas extranjeros para que inviertan en Colombia, pero esto implica empoderar más la enfermedad holandesa.

    Pero Colombia es hoy uno de los países de Latinoamérica que más crece. 

    Es un crecimiento que desilusiona. No se puede mirar crecimiento sin empleo. Si se va a desarrollar la economía no importa qué tan alta sea la tasa de inversión ni qué tan alto sea el crecimiento si no se genera empleo. Si no se reduce el sector informal no se está generando desarrollo.

    Pero el desempleo ha bajado… 

    Ha bajado, pero no es mucho y sigue siendo sumamente alto. Hay un problema de desempleo disfrazado que debe ser de 40 por ciento. La pregunta es ¿Por qué? La explicación proviene de la enfermedad holandesa y del impacto sobre el sector de manufacturas.

    ¿HAY QUE REGULAR MERCADOS? 

    La dificultad es que nunca habrá una regulación que dé estabilidad a los mercados financieros en el mundo, porque estos siempre van adelante de los reguladores.

    La reglamentación está para reducir la rentabilidad de los bancos y estos existen solo si pueden tener utilidades sustanciales en su negocio.
    Associated Program:
    Author(s):
  • In the Media | August 2014
    By Dimitri B. Papadimitriou
    The Huffington Post, August 21, 2014

    Do European lenders want unemployment to keep rising in Greece?

    It looks that way. The commitment to economic austerity policies by the "troika"–the European Central Bank, the European Commission, and the International Monetary Fund–hasn't wavered. Meanwhile, the country's unemployment rate has soared to yet another unexpected high. In a population of 9.3 million, 1.3 million are out of work....

    Read the full article here: http://www.huffingtonpost.com/dimitri-b-papadimitriou/are-eu-bankers-trying-to-_b_5696270.html
  • In the Media | July 2014
    By Jon Talton
    The Seattle Times, July 7, 2014. All Rights Reserved.

    It has been well documented that wages adjusted for inflation for most workers have been stagnant since the mid-1970s. The one exception: from the late 1990s until 2002. This is a key driver of rising inequality. But researchers at the Levy Economics Institute of Bard College have added a new twist.

    The labor force is aging and becoming better educated. Workers are also putting off retirement, having been hammered by the bubble collapses of 2001 and 2008. The result: real wages for many workers likely have been declining between 2002 and 2012, especially for those with less than a college degree. But a degree may not alone guarantee future results. “Going forward, as baby boomers retire, the average experience in the labor force will decline, pulling average wages down.”

    Speaking of the labor market:
     The latest JOLTS report (Job Openings and Labor Turnover) is out. May is little changed from April. Especially disconcerting is the low level of “voluntary separations,” which would indicate workers feel confident in finding a new job and demand for labor is rising. But there are 2.1 times as many job seekers as openings. This is true across every industry. Economist Heidi Shierholz of the Economic Policy Institute goes into detail here.

    And furthermore:
     Seattle-based Payscale, which surveys cash compensation for full-time, private industry employees, released its second-quarter index. Real wages in the index are down about 8 percent from 2006. “Annual U.S. wage growth was 1.8 percent last quarter, but inflation in (the second quarter) was the highest it’s been in three years,” said Katie Bardaro, lead economist at PayScale. “As a result, the high inflation essentially wiped out wage growth and consumers experienced no real wage growth in terms of their actual purchasing power.”

    Consumer prices increased 2.1 percent over the 12 months ending in May. So inflation is very subdued — too subdued to really get the recovery going. The big problem is the weak labor market, so employers can hold down wages. After all, they have choices. Many workers don’t.
  • In the Media | June 2014
    By Dimitri B. Papadimitriou

    The Guardian, June 15, 2014

    The US Congressional Budget Office is projecting a continued economic recovery. So why look down the road – say, to 2017 – and worry?

    Here's why: because the debt held by American households is rising ominously. And unless our economic policies change, that debt balloon, powered by radical income inequality, is going to become the next bust....

    Read the full article here: www.theguardian.com/money/2014/jun/15/us-economy-bubble-debt-financial-crisis-corporations
     

  • In the Media | May 2014
    By Martin Sosnoff
    Forbes, May 19, 2014. All Rights Reserved.

    At the Sotheby’s May evening auction, Steve Wynn was the successful bidder for Jeff Koons’s life-sized Popeye sculpture, knocked down at a disappointing $28,115,000, and destined for one of Steve’s casino properties. Within this lot is some cautionary metaphor about conspicuous consumption reigning, again. The Koons piece is an immaculate, but exaggerated life sized presence in colorful, shiny sheet steel.

    When Wynn took control of the Golden Nugget Casino in Las Vegas some 40 years ago, I sold him my block of stock, a reportable position. He deserved all his successes, a great operator who made Vegas a family destination resort while competition still ran grind joints.

    I accept that there are hundreds of art buyers who easily qualify for spending $50 million or more on “name brand” work. Whether this is driven by connoisseurship, emotionality or trading savvy is another story. These big hitters are equivalent to whales at gaming casinos: Alice Walton (the Warhol Coca-Cola), Elaine Wynn (the Bacon) and corporate types like Russian oligarchs and Malaysian honchos, dealers – investors like the Mugrabi family, the jewelry purveyor Graff, even a handful of hedge fund operators.

    The economics of taste suggests, long term, elevated art prices don’t hold up, excepting masterpieces. More critical, overindulgence ultimately is divisive for the country by calling attention to how the top 0.1% conduct themselves. Eventually, a public outcry congeals. Congressmen begin to speak out on income inequality. Unions get their raucous voice back.

    Our middle-class holds minimal free capital for equity investment. A market rising 32% makes Buffett and his ilk billions richer, year-over-year. For the family with $50,000 in stocks, if that, we are talking chump change. Individual pension fund assets carry a discounted value based upon when they can be withdrawn.

    Republicans and major multinational corporations call for tax breaks on the repatriation of offshore earnings, but the facts suggest just the opposite is called for. Corporate income tax rates rest much lower than during the sixties and seventies. Wage earners gain no leverage when the unemployment rate is elevated. Take home pay rises at a measly 2% rate, unless you work for Twitter or other dot com operators and are richly vested in zero cost equity.

    Twitter’s insiders disgorged hundreds of millions of shares once their lockup ended. Employees drove Twitter down 17%, overnight. Such action is indicative of a middle class as yet capital starved. Not just machinists, even young computer code writers.

    If I were Dan Loeb, instead of coveting Sotheby’s, an overpriced piece of paper that just broke below $40, I’d be driving a Buick and seeking naming opportunities at hospitals and graduate business schools. Buffett and Bill Gates are great role models here, and as far as I know disinterested in $100 million Bacon canvases.

    The problem with conspicuous consumption is it can take decades, even centuries before it ends. Never happily. The French Revolution was preceded by bread riots but their political system for centuries exempted the nobility from taxation.

    When I compare our present Gilded Age with the past, I see major differentiation. End of 19th century, Robber Barons mainly were industrialists with controlling positions in oil (Rockefeller), steel (Carnegie), railroads (Vanderbilt), the Guggenheims (minerals), Rosenwalds and Hartfords (retailing). Yes – there was J.P. Morgan and Jules Bache and a few Russians, but no Chinese, Japanese and Malaysians throwing their money around in the art world.

    Land based wealth existed but yielded minimal returns in rents and farm income. There’s no material book value in Twitter and Facebook excepting cash and intellectual property. We have come a long way from when wealth rested in hard assets – minerals and chemicals, now in serious oversupply.

    Art world players mainly are linked to stock market wealth. They include a couple of dozen hedge fund operators. Likewise, private capital operators at KKR, Blackstone, Carlyle and Leon Black. Throw in a dozen VC’s and Internet founders. Although establishment corporate management has learned how to milk their income statements, only a handful walk away billionaires. Unconventionally designed yachts belong to Russians and headman owners like Larry Ellison at Oracle.

    If our S&P 500 Index puts together another year like 2013 in the next couple of years, the art market, surely goes through the roof. Deal proliferation would break out all over, too. Analysts would disremember how to punish tech houses with big disparity between GAAP and non-GAAP earnings.

    The stock market is capitalized currently at 16 times earnings, not 10 or 11, vulnerable to any sign of a decelerating economy. I don’t know where hedge fund capital comes out in a bearish setting. After all, most of them weren’t bullish enough last year and badly trailed the market.

    Obama doesn’t even have an inclination or the power to tax the carried interest of private capital operators at standard rates. Don’t expect any substantive tax reform that redistributes income downward to the poor and lower middle class categories. It could take decades. Infrastructure spending, what the country needs desperately to create jobs, is a stalled initiative for years to come.



    The Levy Economics Institute at Bard College rightly underscores that rising income inequality weighs down the economic setting. GDP momentum, absent positive numbers on exports, must depend on rising private borrowing. But, a high debt to income ratio is unsustainable unless the stock market shows late foot.

    The distribution of income over three decades flows to the top 1%. They control most of the assets in equities but are themselves vulnerable to a stock market bubble as denouement.

    In the sixties and seventies, from my ski chalet in Franconia, New Hampshire I’d zip out in zero degrees early mornings with my band of brown baggers. We sharpened our own skis at home, and ate tons of spaghetti together. My next door neighbor, a dermatologist who was coining money, even in New Hampshire, asked me if it was okay with the group if he bought a new Caddy.

    I told him to drop down one price point. The group might frown on such conspicuous consumption. Les did just that. Those days are gone but not forgotten.
  • In the Media | May 2014
    By Barry Elias
    MoneyNews, May 8, 2014. All Rights Reserved.

    Future rises in income inequality will lead to a prolonged period of anemic economic growth and high unemployment.

    Income for the bottom 90 percent of households has stagnated during the past 35 years. Strong economic activity in the 1990s and 2000s was largely generated by consumption that was financed by borrowing. The resulting high levels of debt relative to income precipitated the financial and economic crisis.

    Since 2008, the bottom 90 percent of households have deleveraged, thereby reducing their debt-to-disposable-income ratio. This ratio for the top 10 percent has remained relatively stable. Should this deleveraging trend continue, by 2017, economic growth will be 1.7 percentage points lower than the post-recession period, and unemployment will rise 1.3 percentage points to 7.6 percent, according to the Levy Economics Institute.

    Future economic growth is unlikely to arise from the activities of the top 10 percent of households. Their consumption levels tend to remain relatively stable, and their investments are driven by short-term arbitrage opportunities of financial assets — not long-term direct investment in businesses that generate strong employment and income growth.

    Coupled with weak foreign demand and restrictive government fiscal policy, future economic growth may be driven by domestic deficits. This burden will fall primarily on the bottom 90 percent in the private sector and exacerbate income disparity. However, as debt-to-income levels rise, a financial and economic crisis becomes more probable.

    The only viable solution to this economic conundrum is greater income equality.
  • In the Media | May 2014
    By C. J. Polychroniou
    Truthout, May 4, 2014. All Rights Reserved.

    When the global financial crisis of 2008 reached Europe's shores sometime in late 2009, Greece was the first victim of the euro system's failure. Facing persistently large deficits and very high public debt levels, the country ended up being shut out of the global bond markets, raising the prospect of a sovereign bankruptcy. In light of these developments, in May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed to provide a 110 billion euro bailout loan to Greece in exchange for severe austerity measures and strict conditions. The "rescue" plan, as has been openly admitted by now, was designed not for the purpose of reviving Greece's ailing economy but to save Europe's banks. Thus, as many economists had anticipated, the bailout plan made things worse, spreading havoc with its "economics of social disaster." Less than two years later - and with the debt-to-GDP ratio having increased substantially - a second international bailout plan went into effect for the sum of 130 billion euros. All the money lent to Greece was being used to pay off debt obligations on time while the radical budget cuts and sharp tax hikes that were adopted were meant to readjust the nation's fiscal condition, with no regard for the economic and social costs which these policies entailed.

    Four years later, Greece looks like a badly battered boxer. Its economy has shrunk by 20%; the unemployment rate has reached stratospheric levels; poverty has become widespread; the debt-to-GDP ratio has increased dramatically and Greeks are leaving the country in record numbers. However, both EU and Greek government officials are claiming that the country is moving in the right direction, hailing its recent re-emergence in international credit markets as a sign the economy is recovering. Indeed, the government now talks of the Greek "success story," hoping that this narrative will tilt the electoral balance as Greece's main opposition Radical Left Coalition party (Syriza) is expected to win the European Parliamentary and local elections in May.

    For an analysis of the latest developments in Greece, C. J. Polychroniou (a research associate and policy fellow at the Levy Economics Institute and a columnist for the Greek nationally distributed newspaper, The Sunday Eleftherotypia) interviewed Dimitri B. Papadimitriou, president of the Levy Economics Institute of Bard College, executive vice president and Jerome Levy Chair Professor of Economics, for Truthout. An edited and shorter version of the interview appears simultaneously in Greek on the Sunday edition of Eleftherotypia).  

    C.J. Polychroniou for Truthout: After four years as the pariah of the financial markets, in the course of which 330 billion euros was granted/guaranteed in international bailouts in order to avoid an official bankruptcy, Greece has made a successful return to the international bond markets. Why did Greece return to the bond markets now when the country's debt-to-GDP ratio is much bigger than it was back in 2010?

    Dimitri B. Papadimitriou:
     The return to the bond markets was an act of pure symbolism. The government purposely made the success of the austerity program dependent on achieving a primary surplus as opposed to the return to growth in output and employment. Recall that the idea of expansionary austerity embraced by the country's international lenders was spectacularly discredited. Thus, the Troika (IMF, EU and European Central Bank ) and Greece's compliant government needed to invent a new metric of success, and it was associated with achieving a primary surplus as large as it could be so that financial markets can be impressed. However, no one else is impressed, especially the international lenders, for three main reasons: (1) The primary surplus was achieved by a one-off (non-recurring) excess revenue from the gains of Greek bonds in the portfolios of Eurozone's central banks and the European Central Bank's (ECB) holding that were returned to Greece; (2) collections of old tax revenue; and (3) non-recurring spending cuts and delayed payment of the government's debt to the private sector, whether VAT refunds or non-payments to private sector vendors.

    Finally, the return to the markets was costly to the country - the apparent low interest rate of 4.95% notwithstanding - since the interest rate of the funds borrowed from the European Stability Mechanism (ESM) is at a very much lower interest rate. To be sure, the hedge funds and the private sector [parties] buying the new bonds knew that there was an implicit guarantee from the ECB that would accept these bonds under its Outright Monetary Transactions (OMT) program. So the bonds were not backed by the progress of the Greek economy - it would be ludicrous to assume so, for an economy in continuing recession and increasing debt to GDP ratio, especially if its credit rating is still below investment grade. So, all in all, it was an act of desperation and a strategy to give the government extra help in the soon-to-be-held local and European Parliament elections.

    The government has hailed the return to the financial markets as a sign that the crisis is over. Yet, the unemployment rate right now stands at 28%; the education and health care systems have been decimated; 1 out of 3 Greeks live below the poverty line and, according to some estimates, the debt could grow to 190% of GDP by the end of 2015. Do these numbers spell out an economic "success story" or a national tragedy?

    All these statistics point to the failure of the harsh program of fiscal consolidation, but if you are interested in presenting a portrait of success, you need to invent a condition that will persuade the non-critical mind that things are much better. No one likes Cassandras, even though they turn out to be quite accurate in the end. As has become clear by now, the Greek mass media industry has played an inappropriate role in persuading people that economic conditions are much better than they think, that the country has reached bottom and it is just about to turn the corner. How many times have we heard that we are seeing the light at the end of the tunnel? But the tunnel is unfortunately very, very long and it will take either a decade or more for conditions to be turned around if present policy continues, with more erosion of living standards and very high structural unemployment, or a relatively quick improvement with an immediate reversal of policy. For this, the omens are very clear, but the political will is not. And one should not expect any change of policy to happen without a change in political leadership. Brussels, Berlin and Frankfurt have a lot to lose with a change of the prevailing policy, and thus they must continue to enforce it despite the destroyed lives that it leaves behind as it moves forward. So we are seeing a tragedy which I am afraid will expand unless the European Parliamentary elections give a different message either with a significant showing of the extreme right or left parties. Marine Le Pen's impressive showing in the relatively recent local [French] elections speaks to my point. It would be ironic if voters, despite the catastrophic consequences they continue to endure, give the present European leadership another message of approval. It will be self-flagellation with a vengeance.

    The feeling one gets as a result of the implementation of austerity in the case of Greece and the other fiscallytroubled countries in the Eurozone is that this is not simply a fine-tuning policy. If that is indeed the case, what is then the ultimate strategy of austerity?

    In my view, the idea of austerity was not a policy of fine-tuning. To the contrary, it was a policy of radical change to allow markets to reign supreme with no government interference. This is a doctrine first put to test by the late US President Reagan and UK Prime Minister Thatcher. They both embraced the view that government is the problem to economic ills and not the solution. But the real world has taught us time and again that government at difficult times and downturns is the only solution. We saw it to be the case in the US, Germany, China, Japan and every other economy in trouble. Why Greece and the other fiscally troubled economies should become experiments of contrarian policy whose results were predicted is something that really boggles the mind. No one would dare apply the idea of austerity to the extent it has been applied to countries such as the US or even Germany and other countries of the industrial world irrespective of how high their debt-to-GDP ratios are. Why aren't we forcing Germany and France with their mighty GDP machines to have high public surpluses so they can decrease their debt to GDP ratios to the 69% limit as required by the Maastricht Treaty? After all, Germany is a growing economy. So it is clear that member states in the Eurozone are not equal. When Germany was the sick man in Europe, it was acceptable for the government to follow the Keynesian prescription, but now that its status has changed to that of hegemon, the laissez-faire paradigm returned in vogue. There will always be many thoughtless leaders, but sooner rather than later people take steps to remove them from positions of strength and power.

    The advocates of austerity claim that this policy will improve the external fundamentals of fiscally troubled countries in the Eurozone. Has this happened in the case of Greece?

    People who are not knowledgeable about structure of economies on which they impose policies should never be surprised with contrarian results. The Greek economy cannot be improved just because policy makers impose policies that supposedly restructure labor markets - read here, suppression of wages and eliminating labor rights and standards - if import and export elasticities are different than those assumed in the policy implementation. The sum of import and export elasticities in Greece is barely above one, which makes a substantial increase in net exports the goal of a wild imagination, at least in a relevant time frame. No wonder Greece's net exports have failed to offset the public spending cuts, and thus not contributed to the growth of GDP. And those increases are primarily from oil-related products that are volatile in concert with oil price volatility. To be sure, tourism is important, but despite last year's "huge" increase in foreign tourist arrivals to Greece, net employment continued to plummet. The external fundamentals are not dependent on labor reforms, but on large investment, public partnership with the private sector, which will not be forthcoming any time soon. It won't happen with the privatization of the old Athens airport or with other similar "privatization" schemes.

    Radical structural reforms, which include labor and product markets and blanket privatizations, constitute the second component of the conditions behind Greece's bailout plans. First, is there in economic literature a direct connection between labor market flexibility, productivity growth and national economic performance?

    The economic literature, as economists know, can produce conflicting results. It will not be surprising to find cases when statistics will prove that there is a positive outcome in terms of increasing productivity with flexible labor conditions, but this is always dependent on the level of technology diffusion. To be sure, German workers have the highest productivity in Europe along with those in the Netherlands, but it is not because they are paid less than other Eurozone workers but because of the high level of effective technology used. So they are about 70% more productive as compared to Greeks, Portuguese or Spaniards despite the fact that the latter work substantially many more hours during the week. Clearly, Germany's and other North European economies enjoy better economic performance, but this is not due to so-called labor flexibility only. Germany is successful because it is lucky, having an extraordinary number of idle and low-wage workers from East Germany when the unification took place. Unification gave Germany the ability to hold West German wages down. But this should not be used as an example of a successful application of a labor flexibility policy. The literature also abounds in studies showing that labor productivity is not dependent on labor flexibility. Indeed, the theory and policy of "efficiency" wages, promoted by none other than Nobel Laureate George Akerlof and current Fed Chair Janet Yellen, is part of the economic research which shows there are productivity gains and other positive outcomes to firms which pay higher than market wages. All in all, then, the argument of flexible wages does not, I am afraid, hold water.

    The international experience with privatizing electricity, gas, water, sanitation, and public health services indicates that there are anti-social effects behind privatization. So why are Greek governments so eager to privatize virtually everything in Greece?

    As has been shown in certain cases, the public sector can be inefficient, but this is not tantamount to the private sector being efficient either. There are key industries that must be in the public domain because their goods or services are considered public goods. In many advanced countries, such as in the US, the goods and services mentioned are mostly in the private sector's hands, but it does not mean that they are efficient or price competitive. To the contrary, whenever a service was privatized or became unregulated, it never gave the desired effects in being price competitive. For countries like Greece marked with high income distribution inequality, some of the services (such as health services, for example) must be the business of the public sector. Other services can be privatized, but they must be highly regulated. The privatization process in Greece is a fire sale of public property just because the international lenders have imposed it. If profitable, and in the public interest, then some of these services can be privatized, but should continue to be regulated. In the US, however, no one would dream of privatizing the national lotteries; they are the most profitable and high revenue sources of government revenue, yet in Greece it was the first public company to go on sale. There is no general rule that these services should be privatized. They need to be run efficiently either under the aegis of the government or the private sector - absent the corruption, nepotism or other ills of the up-to-now Greek clientist political system. The absence of transparency should not be the reason for privatizing them.

    You have argued in a number of publications in the recent past that what Greece needs is a European type of a Marshall Plan. Doesn't this suggestion run counter to existing political structures and economic realities in Europe?

    I am pleasantly surprised to read of late that even the government speaks of a European Marshall-type plan of aid to Greece. The existing political structure in Europe may be seeing such an aid program as anathema, but I believe it recognizes that if the European project is to be kept intact, it must begin to think along those lines. An economic and monetary union requires various types of support from the economically strong to the weak. This will eventually take place willingly or not, and the evidence shows that it not to the benefit of the weak only - but more so to the strong. The announcement of the creation of a Greek Investment Fund with the support of Germany's KfW is a step in the right direction even though the details of the plan are rather sketchy. Thus, even though I have been labeled by many the Cassandra of Greece, I want to be optimistic that such aid may not be that farfetched.

    The European Union and the International Monetary Fund have disagreed all along about the sustainability of the Greek debt load. Who is right, if any?

    There is no question in anyone's mind that the debt load is unsustainable. It was known from early on that a debt restructuring will be needed. The haircut that took place was ill-conceived and hurt the country more than it helped since it decimated the balance sheets of Greek and Cypriot banks along with public pension trust funds and middle-class Greek citizens. It occurred much too late after the German, French and Italian banks unloaded their Greek holdings to their counterparts in Greece and Cyprus. When it happened, it was a thoughtless decision despite the government celebrating it as a major accomplishment. I haven't agreed on anything with former ECB Vice President Papademos' views about the Greek economy except with his opposition to such a haircut when it happened. All in all, the IMF is, of course, correct - but Brussels, Berlin and Frankfurt are trapped, having convinced every European citizen that Greece's debt load is sustainable. The government will celebrate a new accomplishment after the European elections when the debt will be restructured by extending its maturity to perhaps 50 years and lowering the interest rate. This is in economic terms a present-value "haircut," but not a debt-load reduction. It is the proverbial kicking the can further down the road, which will subject the country to continued vigilance and restrict its sovereignty over its fiscal policy stance.

    Syriza represents itself as a viable alternative to the current economic, social and political malaise in Greece by claiming that, when it comes to power, it will put an end to austerity and will force the European Union to rethink its policies towards Greece. However, while a good percentage of Greek voters have shifted to the left, many others seem to believe that Syriza's political rhetoric rests either on naive thinking or plain opportunism. What are your own thoughts on this matter?

    I believe Syriza is the only viable alternative that Greece has at the present time if a change in policy direction is to be achieved. Its mandate to change policy would be very difficult indeed. But it can be done, although not free of risks. But risks are endemic in any policy prescription that would be implemented, and I believe the current policy being followed entails higher risks for the economic future of Greece. What I fear more is the disappearance of what used to be a middle class, let alone the immiseration of low-income, low-skilled workers. What these groups need right now is a lifeline - which, unfortunately, is not in the cards. Given the additional financing that will be needed in 2014 and 2015, more austerity will be needed which will affect even further the country's living standards, a process which will have even further adverse effects for the middle class and the low-income and low-skilled segments of the population. With conditions worsening, even more people are expected to question the prevailing policy. And if there is one political force which can offer a viable alternative to the current nightmare, it is none other than Syriza. Yes, perhaps there is an element of political naivete characterizing Syriza, but there is seriousness of purpose and the work of the gifted in its midst is very refreshing and encouraging. To be sure, political analysts talk about the importance of the incumbent candidates and this would be a very difficult problem to overcome. I want to believe, however, that despite the internal squabbling which frequently occurs among the different groups inside Syriza, the party will, at the end, prevail. At least I hope so. To those who oppose them, I can only respond by saying be careful what you wish for.

    If the economic "success story" of Greece turns out in the end to be nothing more than a politically constructed myth, and the prospects of the European integration project remain what they are today, why shouldn't Greeks opt to leave the euro?

    There is plenty of evidence that the success story is a politically constructed myth with the acquiescence of the European leadership. The question about the country remaining in the euro club is interesting and very important. I believe that Greece cannot leave the euro since the costs associated with an exit are very consequential. As I have written elsewhere, Greece has a number of options that it can follow, if the European leadership continues with its intransigence and continuing policy of the dangerous idea of austerity. If all other options fail, the introduction of a carefully designed parallel financial system is a very viable alternative in order to get a handle on both domestic financial market liquidity and employment growth and output. This is not a novel idea. The Greek government used a similar program in 2010, although very haphazardly conceived, but it was introduced nevertheless. It is not a crackpot idea and has been embraced by both conservative and liberal thinkers. This will address some of the most serious challenges the Greek economy and society face without endangering the country's membership in the euro. So, there are other alternatives available before the unthinkable becomes the only option.
  • In the Media | April 2014
    By Robert Feinberg
    MoneyNews, April 30, 2014. All Rights Reserved.

    Jason Furman, the brilliant economist who chairs the Council of Economic Advisers, spoke recently at the 23rd Annual Hyman Minsky Conference, sponsored by the Levy Economics Institute of Bard College. 

    The title of Furman's presentation was "Whatever Happened to the Great Moderation?" He argued that with the right economic policies, as advocated by the administration, this mythical Great Moderation could be restored. 

    I suspect a priori that the Great Moderation was a result of official policies that suppressed normal adjustments that should have taken place in the economy, for example, by neglecting prudential and consumer protection regulation of "too big to fail" banks, so that when the 2008 episode of the permanent financial crisis erupted, it was much more costly and disruptive than it would otherwise have been. 

    Ironically, after having written this sentence, I found that a similar suggestion had been made by a famous economist — none other than Hyman Minsky. The very informative Wikipedia entry on the Great Moderation also contains a reference to a 2003 speech by University of Chicago economist Robert Lucas as president of the American Economic Association celebrating the idea that the profession had practically solved "the central problem depression prevention." 

    Furman defined the Great Moderation as the reduction in the volatility of a wide range of economic variables, and to the associated increase in the longevity of economic expansions and reduction in the frequency and severity of economic contractions. Among the economists cited as having contributed research on this subject are former Federal Reserve Chairman Ben Bernanke (2004) and Douglas Elmendorf (2006), currently director of the Congressional Budget Office. 

    Furman dated the beginning of the debate over the Great Moderation to the early 1990s. To his credit, Furman took time out to question, as I do, whether "there ever was a 'Great Moderation,' let alone that it has returned and rendered further policy steps unnecessary."

    Furman dismissed the idea that policy responses are not needed, because recessions serve a purpose and little can be done, on the ground that while this might be true in "normal times," these times are characterized by a large shortfall in output, and policy responses are needed. He seems not to have considered that maybe these are "normal times," and that the slow growth and shortfall in output are due to previous misguided policies. 

    Instead, he offered some new misguided policies, a lot of them, under what he calls "The Unfinished Agenda for Economic Stability." This is ironic, because it seems that Minsky himself was highly skeptical that "economic stability" could be achieved by policy. 

    It almost becomes amusing to consider the grab bag of measures Furman offers as holding out hope of averting or coping with future downturns. He claimed that Obamacare will have a counter-cyclical effect, a notion that is heatedly disputed, and he also pointed to increased progressivity in taxation. Reducing inequality is highly speculative as a counter-cyclical measure, but maybe they can start with salaries of reckless bank executives and their feckless regulators. 

    Finally, Furman pointed to implementation of Dodd-Frank and Housing and Finance Reform, which are laughable, because neither is likely to happen, and they might not produce the effects he expects even if they do. 

    As a political document, the speech represents how desperate the administration is to establish a positive legacy as President Obama's popularity declines.

    (Archived video can be found here.)
  • In the Media | April 2014
    By Robert Feinberg
    MoneyNews, April 28, 2014. All Rights Reserved.

    Rep. Carolyn Maloney, D-N.Y., spoke at the 23rd Annual Hyman P. Minsky Conference, held in Washington at the National Press Club recently. The conference was sponsored by the Levy Economics Institute of Bard College, an independent group that "encourages diversity of opinion in the examination of economic policy issues while striving to transform ideological arguments into informed debate." The theme of the conference was "Stabilizing Financial Systems for Growth and Full Employment," and it was co-sponsored by the Ford Foundation. 

    The conferences celebrate the life and work of Minsky, who was an early theorist on the financial crisis and an advocate of government intervention to respond to financial crises that inevitably occur from time to time. This is the first of three articles on speeches delivered at the conference by Maloney and Jason Furman, chairman of the Council of Economic Advisers.

    Maloney struggled to deliver the speech due to a cough, and perhaps also due to some form of the flu, she seemed medicated and perhaps to be reading the speech for the first time, although the arguments were very familiar. 

    Later that day the House was scheduled to vote on what is known as the "Ryan budget," authored by Rep. Paul Ryan, R-Wis., which she rightly stated represents the embodiment of the Republican platform, and she devoted the speech to two provisions related to financial reform that would be affected by the Ryan budget, namely the so-called "Orderly Liquidation" provisions contained in title II of the Dodd-Frank Act, and so-called "Housing Finance Reform" now being tentatively considered in Congress.

    In 2008, I predicted privately that there would be a bank bailout, based on a cynical recollection of the deals that were put together in 1988 during the savings and loan crisis to stretch that mess out past the November election at what was then considerable cost to taxpayers. However, this prediction was not nearly cynical enough. The George W. Bush administration, with Henry Paulson as Treasury Secretary, was so incompetent, or the needs of Paulson's former firm, Goldman Sachs, were so pressing, that the bailout could not be put off. 

    The 2008 election offered a choice between a candidate who had virtually no experience and one who had a lifetime of experience but seemed not to have learned much from it. 

    Candidate John McCain made a big show of "suspending" a campaign that voters may not have noticed even existed. McCain flew back to Washington, ostensibly to intervene in the crisis, but without any actual plan. Meanwhile, candidate Barack Obama stayed coolly on the sidelines and benefited from the contrast with the manic McCain.

    After the failure of Lehman Brothers and the bailouts of Bear Stearns and AIG, the official story line was, not surprisingly, that the reason the crisis happened was that the regulators lacked the authority to resolve nonbanks whose failure threatened the health of the financial system. Title II of Dodd-Frank gives the FDIC the authority to borrow up to $150 billion to fund the resolution of failing institutions through "debtor in possession" financing. The Ryan budget wants to repeal this authority, and Maloney is extremely exercised about this prospect.

    Given that this move has engendered such a reaction from bailout apologists like Maloney, legislators seeking to prevent yet another round of bailouts might consider attaching the repeal of title II to any legislation coming out of the Senate that looks promising.

    (Archived video can be found here.) 
  • 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.) 
  • In the Media | April 2014
    By Panos Mourdoukoutas

    Forbes, April 14, 2014. All Rights Reserved.

    For years, China has been enjoying robust economic growth that has turned it into the world’s second largest economy.

    The problem is, however, that China’s growth is in part driven by over investment in construction and manufacturing sectors, fueling asset bubbles that parallel those of Japan in the late 1980s. With one major difference: China’s overinvestment is directed by the systematic efforts of local governments to preserve the old system of central planning, through massive construction and manufacturing projects for the purpose of employment creation rather than for addressing genuine consumer needs.

    Major Chinese cities are filled with growing numbers of new vacant buildings. They were built under government mandates to provide jobs for the hundreds of thousands of people leaving the countryside for a better life in the cities, rather than to house genuine business tenants.

    China’s real estate bubble is proliferating like an infectious disease from the eastern cities to the inner country. It has spread beyond real estate to other sectors of the economy, from the steel industry to electronics and toys industries.  Local governments rush and race to replicate each other’s policies, especially local governments of the inner regions, where corporate managers have no direct access to overseas markets, and end up copying the policies of their peers in the coastal areas.

    We all know how the Japanese bubble ended. What should Chinese policy makers do? How can they burst their bubble?

    There is  a bad way and a good way, according to L. Randall Wray and Xinhua Liu, writing in "Options for China in a Dollar Standard World: A Sovereign Currency Approach.” (Levy Economics Institute, Working Paper No 783, January 2014).

    The bad way is to pursue European-style austerity, which reins in central government deficits.

    We all know what that means–the Chinese economy is almost certain to be placed in a downward spiral that will jeopardize employment growth. Besides, as the authors observe, China’s fiscal imbalances aren’t with central government, but with local governments. In fact, China’s main imbalance “appears to be a result of loose local government budgets and overly tight central government budgets.”

    That’s why the authors propose fiscal restructuring rather than austerity. Rein in local government spending, and expand central government spending.

    That’s the good way to burst the bubble. But is it politically feasible? Can Beijing reign over local governments?

    That remains to be seen. 

  • In the Media | April 2014
    Por Alfredo Zaiat
    Fracasos Múltiples Internacionales está regresando al escenario político y económico argentino. La moción de censura y la amenaza de iniciar el camino de la expulsión del país de esa institución por la calidad de las estadísticas públicas colocó al Gobierno en una situación incómoda. La opción era romper con ese organismo internacional, convirtiéndose en el único país del mundo en quedar fuera de esa entidad multilateral, lo que hubiera derivado en la marginación del G-20, en la clausura al acceso de créditos del Banco Mundial, el BID y del mercado, y en deteriorar la reputación internacional frente a otros países, o negociar el espacio de intervención de sus técnicos. Esta última fue la elección del gobierno de CFK. Implicó una primera evaluación silenciosa del FMI sobre el sistema financiero local el año pasado y luego la cooperación técnica para la elaboración del nuevo índice de precios al consumidor y la actualización del indicador PBI. La evaluación general de la economía (el conocido artículo IV del convenio constitutivo del Fondo, en cuya sección 3 establece “la supervisión de las políticas de tipo de cambio de los países miembros”) es la única cuestión de tensión en la relación Argentina-FMI.

    Aceptar la revisión anual es una decisión política, de carácter simbólico, más que económico. En Washington, en el marco de la Asamblea Anual conjunta del FMI-BM Axel Kicillof le reiteró a David Lipton, subdirector gerente del Fondo Monetario Internacional, que el país no analiza volver a aceptar las auditorías anuales. Argentina no registra deuda con el FMI después de que el 5 de enero de 2006 cancelara el total por 9530 millones de dólares, y no está negociando ni requiere de un crédito del organismo atado a condicionalidades en la política económica. Instrumenta una estrategia heterodoxa que no es simpática al staff del Fondo, como quedó expresado en el último Perspectivas Económicas Mundiales. Estos técnicos consideran a la Argentina como un mal ejemplo por su política económica de crecimiento, inclusión social y autonomía del mercado de capitales. También es resistida por la persistente crítica a las recetas ortodoxas realizada por CFK en foros internacionales.

    Después de ocho años de esa tensa relación, para las autoridades del Fondo les resulta satisfactorio retomar el vínculo con el país, como lo dijo su director gerente, Christine Lagarde, para mostrar que todas las ovejas están en el rebaño. Mientras, para el Gobierno le resulta necesario para despejar el frente externo en un contexto de escasez de divisas, y para facilitar la negociación del default de doce años con el Club de París. Incluso sin revisión anual de la economía es una reconciliación por conveniencia mutua.

    El entusiasmo que manifiestan analistas y economistas del establishment por cada comentario de funcionarios del Fondo o del Banco Mundial, excitación exacerbada si incluye algún componente crítico, es una particularidad argentina. En general las observaciones del Fondo no son tomadas con seriedad, puesto que ya ha habido suficiente experiencia global para comprobar el fracaso de sus recomendaciones. En los hechos, el FMI es esencialmente un actor político para condicionar políticas económicas en función de garantizar el pago de la deuda a los acreedores, además de preservar los intereses económicos de las potencias (Estados Unidos y Europa).

    Sobre ese rol del Fondo, la ex presidenta del Banco Central, Mercedes Marcó del Pont, señaló que “frente a los datos que muestran una desaceleración en las economías de la región el FMI, una vez más con serios problemas de diagnóstico, recomienda medidas que profundizarían los problemas. El desafío para América latina es utilizar el espacio de política ganado en estos años para sostener los niveles de actividad y empleo, con políticas anticíclicas, fundamentalmente en el terreno fiscal, para sostener la demanda interna”. Lo afirmó el miércoles pasado en la Minsky Conference, en Washington, siendo la primera vez que habló en público desde que dejó el cargo, ratificando que es diferente a otros ex funcionarios que cuando dejaron el gobierno se dedicaron a castigar a la Argentina en foros internacionales. Marcó Del Pont destacó la solvencia de la economía argentina en el 23rd Annual Hyman P. Minsky Conference on the State of the US and World Economics, organizado por el Levy Economics Institute. Participó del panel Financial re-regulation to support growth and employment (re-regulación financiera para impulsar el crecimiento y el empleo). Los principales conceptos de Marcó del Pont sobre la situación económica de América latina y, en particular, de Argentina, fueron los siguientes:

    - No puede ignorarse que los dos factores clave que han promovido a nivel agregado el crecimiento de la región, el denominado viento de cola (precios de los commodities y flujos de capital) han acentuado, salvo casos excepcionales como el de Argentina, la primarización de sus estructuras productivas.

    - América latina deberá lidiar con estos fenómenos en un contexto internacional que se presenta menos benévolo para nuestras naciones ya que ni las condiciones de liquidez internacional ni los términos del intercambio se proyectan tan favorables como hasta ahora.

    - El desafío pasa entonces por delinear estrategias anticíclicas que al mismo tiempo que busquen sostener los niveles de actividad y empleo, actúen también en la transformación de sus estructuras productivas, alentando la diversificación e industrialización. Para ello deben maximizar el uso del espacio de política ganado durante la década.

    - La región tiene márgenes de maniobra para encarar ese desafío. En gran medida ello quedó de manifiesto durante lo peor de la crisis de 2008-2009. Disponen, por un lado, de mercados internos dinámicos que han constituido la base de sustentación del crecimiento durante los últimos años. Y a diferencia de lo ocurrido en las décadas del ’80 y ’90 América latina no atraviesa en general por situaciones de fragilidad financiera o elevada exposición en materia de endeudamiento externo. Ambos rasgos son particularmente ciertos en el caso de Argentina.

    - Ahora bien, esta descripción no supone ignorar que en la gran mayoría de los países de la región (ciertamente no en Argentina) persiste un elevado grado de integración con los mercados financieros internacionales, lo cual potencia su exposición a los ciclos de liquidez internacional. Recordemos que la cuenta capital y financiera de América latina registra el más elevado grado de apertura de todas las economías del mundo en desarrollo.

    - El diagnóstico predominante y las recomendaciones subsecuentes que surgen del main stream no toman en cuenta estos fenómenos estructurales, complejos, que caracterizan a nuestras economías. Persiste, en cambio, una unilateral preocupación por la ausencia de “reformas estructurales” (léase mayor flexibilización del mercado de trabajo) o por la presencia de la “dominancia fiscal” (léase ajuste fiscal) como uno de los principales fenómenos explicativos de inestabilidad macroeconómica y de crisis. Se soslaya en el debate la importancia de la “dominancia de la balanza de pagos” como factor que históricamente ha truncado los procesos de desarrollo de América latina.

    - Abordar las condiciones de la re-regulación financiera para el crecimiento y el empleo requiere incorporar a la regulación de los flujos de capital dentro del instrumental permanente de política económica de los países en desarrollo. Y los bancos centrales deberían jugar un rol activo en ese terreno.

    - Esa regulación de la cuenta capital incluyó, a partir de 2011, restricciones a la compra de moneda extranjera para fines de ahorro por parte de los argentinos, la cual se había constituido en una fuente desestabilizadora del mercado de cambios y en canal de fuga del excedente económico por fuera del circuito de inversión y consumo. En efecto, el elevado bimonetarismo que todavía caracteriza a nuestra economía es un condicionante no menor para la administración del mercado de cambios.

    - Ahora bien, ¿cómo se ubica Argentina frente al ya mencionado escenario internacional menos favorable? Sin duda alguna el haber regulado el ingreso de capitales de portafolio nos torna menos vulnerables a los cambios que se presentan en el ciclo de liquidez, no sólo en términos de volúmenes sino, en un futuro no tan lejano, de tasas de interés. Frente a la aparición en los últimos años de un ligero desequilibrio externo el desafío de la política económica es garantizar las fuentes de recursos externos que nos permitan sostener los niveles de actividad y empleo, y en paralelo abordar los déficit sectoriales que impactan en las cuentas externas. Y en ese sentido el desequilibrio industrial y energético deben ubicarse en el centro de las prioridades.

    - Argentina tiene, entonces, espacio para buscar recursos externos que se orienten hacia los destinos estratégicos que remuevan los obstáculos estructurales y garanticen capacidad de repago.

    - Vale la pena insistir, el carácter virtuoso o no que asuma el acceso de Argentina, ya sea de su soberano como de sus empresas, a corrientes de inversión directa o de financiamiento depende de manera decisiva en la asignación de esos recursos y su capacidad para remover las causas estructurales del estrangulamiento externo. Dicho en otros términos en la capacidad para promover el proceso de desarrollo, esto es, de transformación productiva y una más equitativa distribución del ingreso.
    Este conjunto de ideas puede actuar de buen antídoto ante tanta contaminación en el debate económico, al que ahora se ha vuelto a incorporar en forma activa el FMI. 
  • 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
    Class Editori, April 11, 2014. All Rights Reserved.

    MILANO (MF-DJ)--La Banca centrale europea e' pronta a intervenire per affrontare il problema della bassa inflazione che continua a rimanere sotto il target ufficiale della Bce. Lo ha dichiarato il vice presidente della Bce Vitor Constancio, aggiungendo che i policy maker stanno ancora cercando di capire quali misure devono prendere e confermando che l'acquisto di titoli e' una possibilita'. "Faremo qualcosa perche' l'inflazione e' troppo bassa, e anche considerando solo il compito principale sulla stabilita' dei prezzi, noi chiaramente, nel medio termine, non stiamo raggiungendo il nostro target di inflazione del 2%. Quindi dobbiamo affrontare seriamente il nostro compito", ha detto Constancio in una conferenza a Washington sponsorizzata dal Levy Economics Institute. Il vice presidente ha sottolineato che neanche se il sistema bancario europeo ritornasse in piena salute si potrebbe garantire una ripresa della crescita economica. La Banca centrale ha posto grande enfasi sulla valutazione dei bilanci degli istituti europei prima di diventare supervisore unico alla fine dell'anno. Si spera che l'esercizio costringera' le banche a ripulire i bilanci e a raccogliere capitali, con l'obiettivo di renderli piu' forti in modo da concedere maggiori prestiti all'economia reale. Ma secondo Constancio questo modo di agire e' troppo semplicistico. "I bilanci delle banche sono gia' stati largamente riparati". Inoltre, ha aggiunto il membro della Bce, non e' assolutamente chiaro che "la finanza sia una condizione sufficiente per far ripartire la crescita europea". L'Eurozona deve affrontare numerosi problemi che "potenzialmente sono molto piu' seri dei danni inflitti dalla crisi finanziaria e la conseguente crisi del settore bancario". Questi problemi sono anche molto piu' difficili da affrontare", ha concluso il vice presidente. 
  • 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
    The Wall Street Journal, April 11, 2014. All Rights Reserved.

    ECB’s Constancio: “We Will Do Something” About Low Inflation.  The ECB is poised to take action to tackle the problem of low inflation that continues to consistently undershoot its official target, ECB Vice President Vitor Constancio said Thursday. He said policy makers are still trying to figure out which measures to take, adding that bond buying is a possibility.   “We will do something because the situation is that inflation is indeed very low, and even considering only our primary mandate of price stability we are clearly not achieving our target of having, on a medium-term basis, inflation below but close to 2%,” Mr. Constancio told a conference in Washington sponsored by the Levy Economics Institute. http://on.wsj.com/1n92J4q 

    ECB Constancio Says Healthy Bank Sector Won’t Guarantee Quick Economic Rebound. 
    http://on.wsj.com/1sHfLdz

    ECB’s Praet: Euro-Zone Economies ‘Will See Economic Slack Until 2017.’ The euro zone economy will see economic slack persist until 2017 at least, European Central Bank executive board member Peter Praet said Thursday, suggesting that the ECB will maintain its easy-money policies well into the future. Still, Mr. Praet signaled that the ECB is in no rush to provide additional stimulus through rate cuts or other measures, saying that the bank’s inflation outlook remains in place despite a string of weak reports. http://on.wsj.com/1ixBFaW
     
  • 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
    ECB VP: Euro Zone Faces Problems That Are More Profound Than Just Weakness in the Banking Sector
    By Todd Buell and Christopher Lawton

    The Wall Street Journal, April 10, 2014. All Rights Reserved.


    The euro zone faces problems that are more profound than just weakness in the banking sector and that are harder to address, European Central Bank Vice President Vitor Constancio said Thursday.

    In remarks prepared for delivery in Washington, Mr. Constancio said that even if banks in the euro zone could completely erase the damage from the financial crisis, it wouldn't be a guarantee that strong growth and low unemployment would return quickly.

    The ECB has placed great emphasis on its assessment of banks' balance sheets, which it is carrying out before becoming the single currency's banking supervisor later this year. It is hoped that the exercise, culminating in a stress test, will force banks to clean up their balance sheets, raise capital, which should put them in a stronger position to lend to the real economy.

    But Mr. Constancio said this story line is too simplistic.

    Firstly, "bank balance sheets in the euro area have to a large degree already been repaired," he said. Furthermore, he said it was "far from clear that finance is a sufficient condition for jump-starting growth in Europe."

    "Even a complete rehabilitation of the euro area's banking system…will not guarantee a quick return to high growth and low unemployment," he added. The euro zone's economy faces numerous issues, he said, that are "are potentially more serious than the damage inflicted by the financial crisis and the subsequent euro area crisis on the euro area banking sector. These issues are also far more difficult to address."

    Mr. Constancio mentioned three issues that he called the "chief obstacles" to growth in Europe: the "remarkable" slowdown in emerging markets, the "large" drop in domestic private investment in Europe since the financial crisis, and weak domestic demand.

    The last point "is often left out of the public discourse, but micro evidence suggests that it is a problem that cannot be underestimated." He added that survey data suggest that euro-zone firms face problems on the demand side that are more serious than problems coming from bank lending.

    Mr. Constancio said that while bank deleveraging "certainly plays an important role in the inadequate current levels of credit supply to the real economy, factors related to the demand side are even more important," he said.

    Lending to the private sector has been declining in annual terms for nearly two years in the euro zone and many experts have said that this is a signal of the weakness of the recovery in the currency bloc and a factor that may force the ECB to pump more money into the 18-nation currency bloc.

    Mr. Constancio, however, said that a "creditless" recovery is "far from unusual," especially after a financial crisis.

    He said that based on current trends, the euro zone faces a future over the medium term of "stable but low growth, with unemployment evolving to lower levels in 15 years as a result of a declining active population."

    "Europe has to react swiftly if it wants to avoid a whole generation being wasted and sacrificed," he said.

    Turning to monetary policy, he said that while ECB policy will continue "to provide stimulus", the central bank can't be called upon to "do everything." Indeed, "people seem to expect too much from central banks." Rather, governments must accept responsibility to promote investment, increase demand, and implement active labor market policies, he said.

    In an apparent reference to Samuel Beckett, Mr. Constancio said that commentators have been "waiting for the Godot of a new wave of technical innovations that will save the day" out of a trap of low growth and low inflation.

    "Maybe it will come," he said. "But I am sure that we also need active policies and new economic thinking to deal with the income distribution problems that the coming technology will aggravate as well as the role of finance and demand in monetary economies where it is wrong to try to reduce macroeconomics to narrow real and long-term supply-side considerations, as our present predicament so impressively demonstrates."
  • 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 Brian Blackstone and Christopher Lawton
    The Wall Street Journal, April 10, 2014. All Rights Reserved.

    WASHINGTON—The euro zone economy will see economic slack persist until 2017 at least, European Central Bank executive board member  Peter Praet  said Thursday, suggesting that the ECB will maintain its easy-money policies well into the future.

    Still, Mr. Praet signaled that the ECB is in no rush to provide additional stimulus through rate cuts or other measures, saying that the bank's inflation outlook remains in place despite a string of weak reports.

    "The degree of slack in the economy is very high," Mr. Praet said in a speech at a conference in Washington, D.C., sponsored by the Levy Economics Institute. "Whatever the measure you take of output gap, this output gap is unlikely to be closed in the euro zone before 2017."

    The output gap refers to the difference between the present level of gross domestic product with where it should typically be based on the economy's growth potential. When economies experience recession, as the euro zone did from late 2011 until early last year, this gap rises, limiting inflationary pressures and giving central banks added leeway to ease monetary policy.

    Mr. Praet, who heads the ECB's economics department, also noted that bank lending to the private sector remains weak in the euro zone, although there seems to be some substitution toward greater debt issuance in the capital markets.

    Mr. Praet is in Washington, D.C. for the spring meetings of the International Monetary Fund, which brings together top central bankers and finance ministers from around the world. The IMF has in recent weeks pressed the ECB to consider more dramatic stimulus measures to keep inflation from staying too low. But outside of a small rate reduction last November, the ECB has largely resisted such steps, saying inflation should gradually accelerate toward its target of just under 2%.

    Annual euro-zone inflation was 0.5% in March, more than a four-year low.

    "We have a sequence of monthly inflation that have been weaker than what we have expected. But we are still in our base scenario," Mr. Praet. The ECB expects a gradual acceleration in annual consumer-price growth toward 1.7% by the end of 2016.

    "There is a lot of noise also in the monthly figures," he said.

    At its monthly meeting last week, the ECB held interest rates steady, but it beefed up its commitment to ease policy if needed. The ECB's rate board "is unanimous in its commitment to using also unconventional instruments within its mandate to cope effectively with risks of a too prolonged period of low inflation," the bank said in its policy statement last week.

    Mr. Praet called this signal "quite important." Still, he added that expectations of future inflation remain well anchored.
    The design of any future ECB stimulus program will depend on the problem the bank is trying to tackle, he said.

    In his speech, Mr. Praet said divergent economic growth and productivity continues to plague the euro zone, and urged the monetary bloc's various members to embark on reforms to narrow the gap between richer and poorer countries.

    "The first decade of Economic and Monetary Union failed to produce real convergence," Mr. Praet said.

    "What the euro area needs, in my view, is to 'rerun' the convergence process."
  • In the Media | April 2014
    By Pedro Nicolaci da Costa
    The Wall Street Journal, April 10, 2014. All Rights Reserved.

    The European Central Bank is poised to take action to tackle the problem of low inflation that continues to consistently undershoot its official target, ECB Vice President Vitor Constancio said Thursday.

    Mr. Constancio said policy makers are still trying to figure out which measures to take, adding that bond buying is a possibility.

    “We will do something because the situation is that inflation is indeed very low, and even considering only our primary mandate of price stability we are clearly not achieving our target of having, on a medium-term basis, inflation below but close to 2%. So we do take seriously our mandate,” Mr. Constancio told a conference in Washington sponsored by the Levy Economics Institute.

    During his prepared remarks, Mr. Constancio argued returning Europe’s banking system to full health would not be enough to ensure economic growth picks up.

    The ECB has placed great emphasis on its assessment of banks’ balance sheets, which it is carrying out before becoming the single currency’s banking supervisor later this year. It is hoped that the exercise, culminating in a stress test, will force banks to clean up their balance sheets, raise capital, which should put them in a stronger position to lend to the real economy. But Mr. Constancio suggested this story line is too simplistic.

    “Bank balance sheets in the euro area have to a large degree already been repaired,” he said. Furthermore, he said it was “far from clear that finance is a sufficient condition for jump-starting growth in Europe.”

    “Even a complete rehabilitation of the euro area’s banking system…will not guarantee a quick return to high growth and low unemployment,” he added. The euro zone’s economy faces numerous issues, he said, that are “are potentially more serious than the damage inflicted by the financial crisis and the subsequent euro area crisis on the euro area banking sector. These issues are also far more difficult to address.” 
  • 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.
  • 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 sounded bullish in his outlook for the U.S. economy the rest of this year, saying the Fed's aggressive actions have continued to play a major role.

    "Unconventional monetary policies have been critical in supporting the moderate recovery that we have had, which I think now is looking reasonably well-grounded going forward," he said during a question and answer question following a speech at the Levy Economic Institute's Hyman Minsky Conference.

    This is reflected in the "fairly large" expectations that growth is going to be picking up over the course of this year," he said.

    The U.S. economy is recovering at a modest pace, Tarullo said, and he argued that the policy pursued by the Fed "has been essential to ensure that moderate pace of recovery."

    At the same time, he acknowledged that the Fed's aggressive actions have not created "the kind of recovery that everybody would have preferred."

    Tarullo said the Fed's asset purchase program and its zero interest rate policies have had "a pretty demonstrable effect" on interest rate-sensitive sectors such as auto sales and the housing market.

    "In doing what we have done to try to affect longer term rates and not just short-term rates, I think we've actually facilitated a bunch of economic activity that would not have otherwise taken place," he added.

    The level of aggregate demand continues to be inadequate, he said, a fact that is highlighted by the "relatively low rates" of capital investments by businesses.

    This is because firms have decided that "the demand they expect does not justify the additional investment in capacity," Tarullo said.
  • In the Media | March 2014
    By Duncan Weldon
    BBC News Magazine, March 23, 2014. All Rights Reserved.

    American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented, writes Duncan Weldon.

    Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.

    His long out-of-print books were suddenly in high demand with copies changing hands for hundreds of dollars - not bad for densely written tomes with titles like Stabilizing an Unstable Economy.

    Senior central bankers including current US Federal Reserve chair Janet Yellen and the Bank of England's Mervyn King began quoting his insights. Nobel Prize-winning economist Paul Krugman named a high profile talk about the financial crisis The Night They Re-read Minsky.

    Here are five of his ideas.

    Stability is destabilising


    Minsky's main idea is so simple that it could fit on a T-shirt, with just three words: "Stability is destabilising."

    Most macroeconomists work with what they call "equilibrium models" - the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.

    To generate an economic crisis or a sudden boom some sort of external shock has to occur - whether that be a rise in oil prices, a war or the invention of the internet.

    Minsky disagreed. He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent.

    They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.

    Three stages of debt

    Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.

    In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest.

    As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.

    The easiest way to understand is to think of a typical mortgage. Hedge finance means a normal capital repayment loan, speculative finance is more akin to an interest-only loan and then Ponzi finance is something beyond even this. It is like getting a mortgage, making no payments at all for a few years and then hoping the value of the house has gone up enough that its sale can cover the initial loan and all the missed payments. You can see that the model is a pretty good description of the kind of lending that led to the financial crisis.

    Minsky moments

    The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.

    It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they're on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when they look down and see nothing but thin air. Then they plummet to the ground, and that's the crisis and crash of 2008.

    Finance matters

    Until fairly recently, most macroeconomists were not very interested in the finer details of the banking and financial system. They saw it as just an intermediary which moved money from savers to borrowers.

    This is rather like the way most people are not very interested in the finer details of plumbing when they're having a shower. As long as the pipes are working and the water is flowing there is no need to understand the detailed workings.

    To Minsky, banks were not just pipes but more like a pump - not just simple intermediaries moving money through the system but profit-making institutions, with an incentive to increase lending. This is part of the mechanism that makes economies unstable.

    Preferring words to maths and models

    Since World War Two, mainstream economics has become increasingly mathematical, based on formal models of how the economy works.

    To model things you need to make assumptions, and critics of mainstream economics argue that as the models and maths became more and more complex, the assumptions underpinning them became more and more divorced from reality. The models became an end in themselves.

    Although he trained in mathematics, Minsky preferred what economists call a narrative approach - he was about ideas expressed in words. Many of the greats from Adam Smith to John Maynard Keynes to Friedrich Hayek worked like this.

    While maths is more precise, words might allow you to express and engage with complex ideas that are tricky to model - things like uncertainty, irrationality, and exuberance. Minsky's fans say this contributed to a view of the economy that was far more "realistic" than that of mainstream economics.

    Analysis: Why Minsky Matters
     is broadcast on BBC Radio 4 at 20:30 GMT, 24 March 2014 or catch up on BBC iPlayer.
  • In the Media | March 2014
    Dimitri B. Papadimitriou
    Huffington Post, March 25, 2014. All Rights Reserved.

    Negotiations between the Greek government and its international lenders were finally resolved last week, after seven long months. In January, Prime Minister Antonis Samaras made a celebratory announcement projecting a small, 2013 primary budget surplus of 1.5 billion euros. Also recently announced: European Union co-funding for a long-delayed 7.5 billion euro road construction project in 2014.

    Sounds good. No reason to suggest that Greece needs an extreme monetary makeover right now, is there? Yes, there is. Talk of a recovery isn't just premature, it reflects a complete fantasy. For starters, at today's rate of net job creation Greece won't reach a reasonable employment level for more than a decade. That's too long.

    An alternative domestic currency could be the basis for a solution. A parallel currency that was used to finance a government employment program would provide a relatively quick restoration of a lost standard of living to a large fraction Greece's population. We reached that conclusion at the Levy Institute after modeling multiple scenarios based on the narrow range of available options.

    Here's the context that makes such a radical move rational: The failures of the current strategy have been so great that even a total abandonment of austerity programs now would provide relief only at a very slow pace. A modest increase in government spending like the infrastructure project, while the right approach, isn't nearly powerful enough to fuel a turnaround; once it's finished the economy will contract again. And the primary surplus stems from conditions unlikely to be sustained: dramatic spending cuts, higher taxes, and a one-off return of earnings by European central banks on their holdings of Greek government bonds.

    Bank lending is down (by 3.9 percent), real interest is up to its highest rate since Greece joined the European Monetary Union (8.3 percent), and price deflation has set in. Unemployment just reached a new high of 24.9 percent for men, 32.2 percent for women, and a breathtaking 61.4 percent for youths. Even the shots at reducing the debt to GDP ratio, the foremost priority of Greece's creditors, have been spectacular misfires. It has risen from 125 percent at the crisis onset to 175 percent now.

    To repair Greece's position, numerous ideas have been floated for a currency that would function alongside the euro. Proposals have been termed everything from 'government IOUs' to 'tax anticipation notes' to 'new,' 'local,' or 'fiscal' currencies; most visibly, Thomas Mayer of Deutsche Bank coined (so to speak) 'geuros.' Some plans envisioned an orderly exit out of the euro. Most shared the perspective of the troika -- the European Central Bank, the European Commission, and the International Monetary Fund -- that export-led growth through increased price competitiveness and lower wages is central to solving the problem.

    Our policy synthesis fundamentally differs from those views. We see Greece remaining in the Eurozone and initiating a parallel financial system that, most importantly, restores liquidity in the domestic market.

    Why not stress exports? Price elasticity in Greece's trade sector is low, our analysis shows, which explains why there hasn't been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.

    That should be the focus in Greece, too. We modeled a parallel financial system that would stimulate demand by financing an employment guarantee program known as an ELR; the government serves as the Employer of Last Resort. It would hire anyone able and willing to work to produce public goods. Wage levels would be low enough to make private employment more attractive, but high enough to ensure a decent living standard. The program would be financed by a government issue of a parallel currency... call it the geuro.

    Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.

    The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.

    Foreign trade would still require euros, which would remain in circulation, and Greece's private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.

    In our simulation, 550,000 jobs (and many more indirect ones, via a sensible fiscal multiplier) would be created at a net cost of 3.5b geuros per year. The infusion would contribute a 7 percent GDP increase, and there would still be a sizable euro surplus. As with any fiscal stimulus, the overall deficit would increase and there would be a deterioration in the balance of payments, although a manageable one.

    Restoring domestic demand needs to be Greece's economic policy emphasis. Despite any downsides, a parallel currency that supports an employment guarantee program would be a U-turn towards rebuilding the population's purchasing power -- and rebuilding Greece's ravished economy.

    This article originally appeared on EconoMonitor on March 24, 2014, under the title "The Currency/Jobs Connection in Greece."
  • In the Media | March 2014
    The Old Lady Fails to Get an "A"
    Credit Writedowns, March 21, 2014. All Rights Reserved.

    One thing’s for sure: The financial crisis has dealt a deadly blow to what was until recently considered the state-of-the-art of monetary policy. Just compare the 1992 edition of Modern Money Mechanics, published by the Federal Bank of Chicago, with the articles and videos published this month by the Bank of England (BoE).

    The former publication explains that a bank’s excess reserves can be used to make loans, that prudent bankers “will not lend more than their excess reserves,” and that there is a “deposit expansion and contraction associated with a given change in bank reserves,” a.k.a. the money multiplier. Ultimately, “the total amount of reserves is controlled by the Federal Reserve.”

    In stark contrast to what was considered common knowledge twenty years ago, the BoE now considers the multiplier a mistaken belief. For the Bank of England, a “common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach.” Contrary to a widespread view, “neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.” The BoE further explains: “Loans create deposits, not the other way around”; and bank reserves do not provide incentives for banks to lend “as the money multiplier mechanism would suggest.”

    The many professionals in the banking and finance industry who often have trouble with the way academics teach and discuss money and monetary policy will find the new view much closer to their operational experience. The few economists who have long rejected the “state-of-the-art” in their models, and refused to teach it in their classrooms, will feel vindicated. Those lagging behind had better adapt quickly to a changing paradigm, re-write their lecture notes, and avoid describing the stance of monetary policy with the position of a money supply function. For example, the Khan Academy’s course in banking includes several lectures based on the notion of the money multiplier. To serve its users well, the Khan Academy should largely revise those lectures or at least explain that they apply to a monetary system based on gold or some other fixed-rate system.

    The views expressed in the BoE publication do not come out of the blue. Several studies have recently challenged the notion of the money multiplier. The fact that this is now stated by a central bank marks good progress in the understanding of monetary operations, especially in light of conventional wisdom having inspired a number of erroneous interpretations during the banking and financial crisis.

    It is also a blow to the “Monetarist Keynesian” approach that continues to inspire mainstream macroeconomic models. In a video that is part of a 1980 series called “Free to Choose,” Milton Friedman explains the money multiplier in a fixed-rate monetary system (the gold standard) and argues that the same principle holds in the contemporary U.S. banking system. Friedman concludes that the Great Depression was caused by the U.S. Fed doing a very poor job, forcing the money multiplier to work its way downwards and effectively destroying the money supply. A former graduate student at MIT who had studied Friedman’s view of the Great Depression—named Ben Bernanke—has seemingly dealt with the 2007-08 crisis with one idea in mind: prevent the money supply contraction that caused the Great Depression. This was the theoretical foundation of Helicopter Ben’s QEs.

    For the Bank of England, now, there are two common misconceptions about Quantitative Easing: “that QE involves giving banks ‘free money’; and that the key aim of QE is to increase bank lending by providing more reserves to the banking system, as might be described by the money multiplier theory.” The BoE also explains how the amount of central bank money (banknotes and bank reserves) is fixed by the demand of its users and not by the central bank “as it is sometimes described in some economics textbooks.”

    And yet, more progress is desirable, and I would not mark the BoE paper with an A.

    For all those economists who feel they have been ahead of the curve on this matter, the Bank of England should make an additional effort, especially on two remaining issues.

    1. Why money is valuable to its holders

    In its account of money and monetary policy, the BoE asks the question: What makes an inconvertible piece of paper valuable? The BoE explains that money is an IOU issued by a single (monopolist) supplier rather than by a variety of individuals. Although a twenty-pound note is no longer convertible into gold, it is “worth twenty pounds precisely because everybody believes it will be accepted as a means of payment both today and in the future… And for everyone to believe that, it is important that money maintains its value over time and is difficult to counterfeit. It’s the central bank’s job to ensure that that is the case.”

    Economists have always had a hard time proving how confidence alone could suffice. Money historians dealing with “token money” (not redeemable in gold or silver) and those economists who are aware of the political foundation of money or who have read or heard Warren Mosler have a different answer. It is inaccurate to describe paper currency as an “unredeemable” asset whose value depends on users’ confidence. Paper money gives its holder a credit that is redeemable in a very concrete way, and it is so redeemed every time holders of money use currency to pay their liabilities to the government: taxes, sanctions, and fines. In fact, the national currency is the only means available for making such payments.

    The BoE remains silent on this point. Acknowledgement of this fact would entail accepting that the payment of taxes is made possible by government spending and not the other way around. It is tax payers, not governments, that can go broke!

    2. How powerful is monetary policy

    On this point, the BoE publication does not break much with the past, at the risk of making statements that clash with the rest of the paper.

    The BoE makes two accurate statements regarding central bank money (banknotes and bank reserves):

    1) it is not chosen or fixed by the central bank;

    2) it does not multiply up into loans and bank deposits.

    This would seem to imply that a central bank does not control the money supply. More accurately, as the ECB states on its website, “by virtue of its monopoly, a central bank is able to manage the liquidity situation in the money market and influence money market interest rates.”

    To the reader’s surprise, however, the BoE concludes that the central bank can:

    “influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money.”

    For the BoE, changing interest rates is a powerful means to influence bank lending and thus the money supply and the overall economy. This view that interest rates trigger an effective “transmission mechanism” is one of the Great Faults in monetary management committed during the Great Recession.

    There are various channels through which interest rates influence demand, output, and the price level, yet none is empirically strong, and some work in different directions. Bank lending is primarily pro-cyclical, as a famous quote attributed to Mark Twain explains effectively (“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”), and the Global Crisis proved central banks to be powerless in trying to reverse this course. The reality is that the level of interest rates affects the economy mildly and in an ambiguous way. To state that monetary policy is powerful is an unsubstantiated claim.
    Associated Program:
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  • In the Media | January 2014
    Rania Antonopoulos
    Kathimerini, January 31, 2014. All Rights Reserved.

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

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

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

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

    Let's start with the obvious. If we divide the 1.4 billion euros with 440,000 job opportunities to be created in the next two years, we arrive at an average of 220,000, now unemployed, future employed per year, who will receive a total of 3,182 euros during one year. Namely, 265 euros per month. So these jobs offer underemployment, or starvation wages or both. Job opportunities? These interventions in reality provide employment for four to five months. Then what?

    But, also, there was nothing new proposed. The present government, on January 10, 2013 had presented us with a National Action Plan for Youth Employment.  The "Action Plan" consisted essentially of a compilation of already existing interventions, which, it should be noted, had already received miserably failing grades by ELIAMEP, through a study that they produced at the request of the National Bank of Greece. Mr. Samaras suggested the same and identical measures. If these “actions” have not worked in the past, why should we expect them to help now? This is important, because at this difficult hour it would be wise not to throw out the window EU funds. At the end, if the aim is to provide income support, let’s expand unemployment coverage, and not pretend we are creating jobs.

    But the essential problem is that the proposed action plan is based on the wrong diagnosis. First, its focus is on the young unemployed, and secondly, it mistakenly identifies the causes of youth unemployment in "employability"–namely, inthe absence of knowledge, experience, and seniority.

    Let's start with the second question first. The proposal carries a message that youth unemployment will fought through the acquisition and improvement of knowledge on the one hand (through VTC), and  practical experience in temporary jobs in private sector companies. Success should be evaluated by the ability of participants to find a permanent job after termination of participation in these programs. Do we then expect the young graduates to find a job? how many new jobs were announced in 2013? What has changed since 2008 is demand for labor due to the tremendous reduction of GDP and not the quality of the labor supply of young people. Unemployment has sky rocketed [from 7.7 to over 27%] due to austerity, lack of liquidity SMEs face, and the rapid, albeit legal, reduction of salaries and pensions. These are more or less commonly accepted facts. 2008 employees aged 15–24 included approximately 270,300 young aged workers, when in 2013 there were only 125,300 (a 145,000 reduction). Similarly, today the total number of unemployed people aged 15–24 is approximately 178,500—in 2008 there were 72,300 (an increase of 106,200). The numbers speak for themselves.

    Measures of "improving knowledge" will not do, not when our well-educated graduates migrate abroad massively.  These "solutions" are of European origin and are ineffective because the main problem we face is that the private sector has shrunk and this has produced a plummeting of demand of the existing workforce due to the depth and duration of the recession—the problem is not lack of quality and skills of the labor force.

    Let us now consider the first issue, the problem of youth unemployment. Indeed, the unemployment rate is very high among the youth and especially for 15–24 years, from 22.1% in 2008 to 57.2% today. But among the 1.3 billion unemployed (average of the first three quarter of 2013) the 1,186,000 are over 25 years old. According to the Hellenic Statistical Authority, all unemployed aged 15–24 amounted to 178,500. Recall that the second pillar consists of 240,000 unemployed young people aged up to 24 years! All the newcomers put together, among the 15–24 years of age, are less than 130.00. Even if we include new entrants ages 25–29, we reach 225,000 persons. The numbers are not consistent, at least not for the youth category of 15–24. Unless the same young person who participates one month in a training program and is then engaged in the private sector represents two “jobs.”

    The age targeted measures are ill conceived, as is the focus on employability. Most tragic of all is that long-term unemployed by now hits approximately 900,000 unemployed, of which 844,000 are not in the category of “youth.” Among them, 224,100 have been out of paid work for more than 48 months (4 years) and an additional 317.00 unemployed, for 24–47 months. For all these long-term unemployed, including those who have exhausted their resources and cannot pay even their electricity bill, for the 777, 000 unemployed who have a high school education level or lower, the announcement of Mr. Samaras highlights that there will be some lucky 200,000 young and more mature workers (440,000 minus 240, 000 people) that will be offered an “employment opportunity” for a few months out of a year in the private or public sector, receiving the meager earnings mentioned earlier.

    What must be urgently understood is that although the economy is now approaching the area of balancing the internal and external balance of payments and the pressure on further depressing the economy gradually slows down, this does not automatically lead to recovery. The economy can remain at frighteningly low production levels, high unemployment and income inequality of catastrophic dimensions. Recovery needs high and sustained private and public investment rates, and certainly gradual relief from the austerity measures. But let us remember that the decade before the crisis, with on average GDP growth about 4%, the economy created each year, on average, 55–60 thousand new jobs. Even if the growth rate returns to precrisis levels, at 4%, generating even 50–60 thousand new jobs per year, to reach the employment levels of 1998 to 2008 will be impossible in the near future; the figures for unemployment are so high, that the next decade will be 'lost', including for people sent to educational training centers.

    It is reasonable to ask, What can the poor government do when it has to deal with the Troika "requirements" of the one hand and the NSRF European Unon funds on the other, which are focused on these specific "actions"? Negotiate hard and convince their "partners" that the yardstick for introducing or maintaining conditionality measures, structural and otherwise, at this time is whether they increase unemployed or not; and  point out to other partners that these "actions" against unemployment are incompatible with the Greek reality—that the "Youth Guarantee" and the rest should be channeled to other types of interventions.

    The time has come to stop recycling the same distorted views. This crisis requires urgently a custom tailored Greek New Deal, which should last for at least the next three years. That is, the extension of a radically reorganized job guarantee program*, a community-based program of "koinofelis ergasia" not for five months but for 11 months per year, not for the 50,000–90,000 jobs for the unemployed but 440,000 real year-round jobs. As for what it will cost and where will we find the money, I reserve the right to provide relevant information next month through a study of the Levy Institute in cooperation with INE / GSEE [General Confederation of Trade Unions]. There is a solution, but it requires getting rid of current obsessions and to not follow the beaten track. Whether the political will of the current government to do so exists, is another matter.

    *The Levy Institute was instrumental in proposing a Job Guarantee policy for Greece, which was adopted by the Ministry of Labor in 2011, as a pilot program for 55,000 unemployed. It was rolled out in 2012 and was run through the NGO sector in collaboration with local and community governing bodies. For a background document that includes guidance notes on how best to design and implement such an initiative see http://www.levyinstitute.org/publications/?docid=1458
  • In the Media | November 2013
    By Dimitri B. Papadimitriou
    Reuters, November 26, 2013. All Rights Reserved.

    A recent visit by President Obama to an Ohio steel mill underscored his promise to create 1 million manufacturing jobs. On the same day, Commerce Secretary Penny Pritzker announced her department’s commitment to exports, saying “Trade must become a bigger part of the DNA of our economy.”

    These two impulses — to reinvigorate manufacturing and to emphasize exports — are, or should be, joined at the hip. The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade.

    It’s the best shot the U.S. has to energize its weak economic recovery. R&D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide.

    The Obama administration is proud of the 2012 increase of 4.4 percent in overall exports over 2011. But that rise hasn’t provided a major jolt to employment and growth rates, because our net exports — that is, exports minus imports — are languishing. Significantly, the U.S. is losing ground in the job-rich arena of exported manufactured goods with high-technology content. Once the world leader, we’ve now been surpassed by Germany.

    America’s economic health won’t be strong while its trade deficit stands close to a problematically high 3 percent of GDP (and widening). Up until the Reagan administration, we ran trade surpluses. Then, manufacturing and net exports began to shrink almost in tandem.

    Our past performance proves that we have plenty of room to grow crucial manufacturing exports, and even eliminate the trade gap. The rehabilitation should begin with a national commitment to basic research, which in turn boosts private sector technology investment. The resulting rise in GDP would be an important counterbalance to a slightly higher federal deficit.

    Just-completed Levy Economics Institute simulations measured how a change in the target of government spending could influence its effectiveness. The best outcomes came about when funds were used to stoke innovation specifically in those export-oriented industries that might yield new products or cost-saving production techniques. When a relatively small stimulus was directed towards, for example, R&D at high tech manufacturing exporters, its effects multiplied. The gains were even better than the projections for a lift to badly needed infrastructure, which was also considered.

    Economists haven’t yet pinpointed a percentage figure that reflects the added value of R&D, but there’s a strong consensus that it is significant. Despite the riskiness of each research-inspired experiment, R&D overall has proven to be a safe bet. Government-supported research tends to be pure rather than applied, but, even so, when aimed to complement manufacturing advances, small doses have a good track record.

    Recognition that R&D outlays bring quantifiable returns partly explains why the federal National Income and Product Accounts have recently been altered to conform with international standards. NIPA will now treat R&D spending as a form of fixed investment. This will be a powerful tool to help reliably gauge its aftermath.

    Private sector-based innovation has also proved to be far more likely to occur when it is catalyzed by a high level of public finance. (For amazing examples, check out this just-released Science Coalition report.) Contractors spend more once government has kicked in; productivity rises and prices drop.

    The prospect of a worldwide positive-sum game is far more realistic than the “currency wars” dynamic so often raised by the media. Overseas buyers experience lower prices and the advantages of novel products. Domestic consumers, meanwhile, enjoy higher incomes and more employment, with some of the earnings spent on imports.

    An export-oriented approach faces multiple barriers. Anemic economies across the globe could spell insufficient demand. Another challenge lies in the small absolute size of the U.S. export sector.

    But the range of strategic policy options for the U.S. is limited. A rapid increase in research-based exports is the only way we see to simultaneously comply with today’s politically imposed budget restrictions and still promote strong job and GDP growth.

    Instead of stimulating tech-dependent producers, though, we’ve been allowing manufacturing to stagnate and competitiveness to erode. Public R&D spending as a percentage of GDP has dropped, and is scheduled for drastic cuts under the sequester.

    Sticking with the current plan means being caught up in weak growth and low employment for years. Jobs are being created at a snail’s pace, with falling unemployment rates largely a reflection of a shrinking workforce.

    For our R&D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period.

    We need this boost. It’s urgent that we bring down joblessness and grow the economy. A change in fiscal policy biased towards R&D shows real promise as a viable way to help rescue the recovery.
  • In the Media | November 2013
    Bank for International Settlements, November 11, 2013
    Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at the Minsky Conference in Greece, organised by the Levy Economics Institute, Athens, 8 November 2013.

    Ladies and gentlemen,

    The last time I gave a speech here in Athens was in early January 2008. How much the world has changed since then.
     

    Yet it has not always changed in the ways that observers predicted. I still remember clearly, in the early weeks of May 2010, the prophetic claims that Greece would leave the euro area within weeks, that other countries would follow within months, and that the collapse of the euro would be complete before the year was out.

    Those claims were wrong - and the Greek people have played an important part in proving them so.

    Since the loss of market access in early 2010, the Greek people have made extraordinary efforts to refute the naysayers and turn the economy around. They have executed a fiscal adjustment of historic proportions and embarked on the difficult road of structural reforms. The results of these actions have accrued first and foremost to Greece - but they have also accrued to the wider euro area.

    However, this turnaround is still only half complete. There is still much work to do. And what I would like to emphasise in my remarks today is that staying on the path of reform is essential not only for the citizens of today. It is also essential for those of tomorrow.

    Like all Western societies, and some rapidly ageing Eastern ones, Greece faces long-term fiscal challenges linked to high public debt levels and demographic developments. These challenges raise profound questions about intergenerational justice. And it is only through reforms that they can be answered in a fair way.

    For all ageing societies, this implies, first, ensuring sustainable public finances and, second, achieving stronger economic growth. Both are necessary because they are mutually reinforcing: fiscal sustainability creates the stability and confidence necessary for future growth; and higher growth creates the revenues and debt-to-GDP ratios necessary for fiscal sustainability.

    Let me therefore deal with each in turn, starting with what is being done to ensure fiscal sustainability in the context of intergenerational justice.

    Strengthening sustainability

    The fiscal challenges that Greece is facing today, while more severe than others, are not unique to this country. All Western societies are being confronted with difficult questions about the distribution of consolidation and spending between current and future generations.

    A first question is how the burden of high public debt levels in Western societies will be shared between generations. This question is particularly pertinent in the euro area because all countries are bound by law to start reducing their debts to below 60% of GDP - and average public debt levels in the euro area are currently in excess of 95% of GDP.

    If fiscal consolidation starts today, then the generation which has benefited most from this debt will play the largest role in reducing it. But if consolidation is delayed, then future generations will have to bear the burden of debt reduction - this would constitute a direct transfer from our children and grandchildren to ourselves.

    And it is only us who are taking the decision. Our children and grandchildren have no power to raise their objections.

    A second question with intergenerational consequences is how to spread the costs of demographic change. In the EU, it is projected that by 2060 there will be just two working-age people for every person over 65, compared with a ratio of 4:1 today. This means the weight of supporting an ageing population will rest on ever fewer shoulders.

    If current generations are proactive in reforming pension systems, they can reduce the load that the shrinking working age population will have to carry. But if they choose instead to preserve their entitlements, then they make the lives of future generations commensurately harder. They would be effectively sacrificing their descendants' quality of life for their own.

    In other words, all Western societies are facing choices about the distribution of responsibility. Do we, the current generation, take responsibility for the long-term fiscal challenges that we have played a large part in creating? Or do we delay and pass the consequences of our choices onto our children and grandchildren? I think it is fairly clear what a perspective of intergenerational justice would imply.

    This perspective is of course not new. The so-called "demographic time bomb" has been predictable for many years. Indeed, I pointed to this issue when I spoke here in Greece in early 2008. But what has changed today is the urgency for action. The crisis has meant that these difficult choices can no longer be delayed. One might say it has pressed the fast-forward button and brought the challenges of the future into the present.

    This is the broader context for the ongoing consolidation process in Greece. Certainly, it is about increasing spending control and tax collection. But it is also about putting Greece on a sustainable path for the future; limiting the load that is bequeathed to our descendants; and ensuring that those that created fiscal problems take responsibility for them.

    What Greece has achieved

    And indeed, this is what is happening in Greece today. The commitment the Greek people have shown to fiscal consolidation has been remarkable, even in international comparison.

    The primary deficit has declined by almost 10 percentage points of GDP between 2009 and 2012. Taking into account the deep and prolonged recession, the underlying fiscal adjustment has been even larger. The OECD estimates that structural adjustment was nearly 14 percentage points of GDP in this period.

    As Greece is one of the smaller euro area Member States, the scale of its efforts is not always appreciated appropriately. If the level of expenditure consolidation we have seen in Greece were applied in Germany, it would be equivalent to a permanent reduction in public spending of 174 billion euro. That is more than the total sum of social spending.

    Greece has also made important progress in addressing the long-term fiscal challenges linked to its ageing population. There is little doubt that before the crisis the Greek pension system was unsustainable. In the Commission's 2009 Ageing Report, age-related spending in Greece was projected to increase from 22% of GDP in 2007 to a staggering 38% of GDP in 2060. By contrast, the average for the euro area would be under 30% of GDP in 2060.

    But thanks to the pension reforms the authorities have introduced, the Greek system is now comparable to others. In the 2012 Ageing Report, age-related spending in Greece was projected to increase to just under 30% of GDP in 2060 - so around than 8 percentage points lower than the previous estimate. This is almost identical to the euro area average. If we take into account as well the recently legislated increase in the pension age, Greece may even be ahead of others.

    In short, the Greek people have taken vital measures to ensure long-term fiscal sustainability. This will reduce the burden that will be passed to future generations. And I recognise that in doing so, current generations have made considerable sacrifices. Real earnings have fallen by over 20% between 2009 and 2012, undoing the gains made since adopting the euro. Far too many people are currently without work, with unemployment at over 27% and youth unemployment reaching 57%. For so much potential to be lying idle is a tragedy.

    What remains to be done

    Nevertheless, this is the painful cost of reversing the misguided economic policies and lack of reforms in the past. And fiscal sustainability - and hence intergenerational justice - is not yet assured. While the government appears to be on track to meet its 2013 primary balance target, Greece still has some way to go to reach the primary surplus targets of 1.5% of GDP in 2014, 3% of GDP in 2015 and 4.5% of GDP in 2016. This means that fiscal consolidation has to continue.

    Based on current projections, a fiscal gap has emerged for 2014. It comes mainly from delayed gains from the tax administration reform, shortfalls in the collection of social security contributions and the continuing underperformance of the instalment schemes for outstanding tax obligations. Measures will have to be identified to close it.

    Looking forward, failure by the authorities to proceed with tax administration reform and to accelerate the fight against tax evasion will unavoidably widen the fiscal gap - and imply the need for higher savings on the expenditure side. This simple truth should provide sufficient incentives for stepping up the pace of tax administration reform.

    To put tax collection in Greece in context, according to the most recent OECD data, the tax debt in Greece as a share of annual net tax revenue was almost 90% in 2010, compared with an OECD average of under 14%. Fighting tax evasion now is therefore key to enhancing social fairness - both on an intra-generational and an inter-generational basis.

    To this effect, the recently legislated semi-autonomous tax agency will need to become fully operational and be shielded from political interference.

    Beyond that, accelerating the implementation of public administration reform is key to the success of the wider reform agenda. Significant delays have occurred in finalising staffing plans and transferring employees to the new mobility scheme, and this is slowing down the identification of redundant positions and the necessary modernisation of the public sector.

    Of course, consolidation would be made easier by higher rates of growth. But we should not treat growth as an exogenous variable. On the contrary, it depends critically on the decisions of the Greek authorities - namely on their willingness to implement the growth-enhancing measures in the programme. The relatively closed and rigid nature of the Greek economy is both a challenge and an opportunity: it makes the process of reform harder, but it also means that the potential for reforms to raise growth is commensurately greater.

    Let me therefore turn to the subject of growth, which forms the second part of my remarks today.

    Strengthening growth

    The economic situation in Greece has started to pick up this year, with the economy stabilising and seasonally-adjusted real GDP increasing by 0.2% quarter-on-quarter in Q2 2013. Overall, GDP growth is expected to turn positive next year at 0.6%.

    But while these are welcome developments, they still represent a relatively weak recovery, especially given the depth of the recession that preceded it. In my view, to add momentum to this recovery and lay the foundations for medium-term growth, the authorities need to address three challenges. First, increasing the economy's external competitiveness; second, ensuring the banking sector can fund the recovery; and third, attracting productive foreign investment.

    Increasing external competitiveness

    As Greece is undergoing a simultaneous deleveraging in its public and private sectors, sectoral accounting tells us that its external sector must go into surplus. The key for growth is to ensure that this happens as much as possible through higher exports rather than import compression. The best way Greece can achieve this is by improving its price competitiveness.

    Price competitiveness is particularly important for Greek firms as their exports are largely concentrated in low-tech products. At the end of the last decade, high-tech or intermediate-tech products represented only 28% of total exports, compared to nearly 50% for the EU average. Yet since euro entry price competitiveness in Greece has actually been on a worsening trend. According to the Commission, the real effective exchange rate (on an HICP basis) in Greece was still rising until 2011.

    To facilitate an export-led recovery, this trend has to be corrected and there is no way this can be achieved in the short run other than by adjusting prices and costs. I know the difficulties that such adjustment creates and the criticisms that are levelled against it. But we are in a monetary union and this is how adjustment works. Sharing a currency brings considerable microeconomic benefits but it requires that relative prices can adjust to offset shocks.

    This process has already begun in Greece today. Thorough labour market reforms have reduced labour costs significantly. costs have now fallen by around by 18% since 2009, with wage adjustment being the main driver of that fall. Indeed, compensation per employee has fallen by about 20% in this period.

    But the translation of cost competitiveness gains into prices has been too slow - notwithstanding the encouraging recent trend of disinflation. This is largely because reforms in product markets have not kept pace with those in labour markets. And this not only limits the potential for the external sector to generate growth, but also lowers citizens' real incomes.

    Speeding up the pace of product market reforms is therefore a priority. The authorities have introduced several recent reforms, for example removing barriers to entry in transportation services, repealing restrictions in the retail sector and removing mandatory recourse to services for a number of regulated professions. However, as of today product market regulations are still among the most restrictive in Europe. Further reform will help remove unjustified privileges and the related excess profits, and by helping prices adjust, this will in turn strengthen social fairness.

    Funding the recovery

    While product market reforms are an essential part of building a more competitive economy, their ability to generate growth depends also on other developments - in particular, the condition of the banking sector.

    If banks do not make new loans, this impedes the entry of new players into liberalised sectors, which then reduces competitive pressures and price adjustments. And if banks do not write off loans to insolvent debtors, in particular "zombie" companies, this slows down the necessary reallocation of resources toward exports and higher-productivity sectors.

    In other words, cleaning up bank balance sheets and ensuring a well-functioning bank lending channel is an equally important part of the adjustment process. This is the second challenge for growth.

    The authorities in Greece have taken important steps to preserve the stability of the banking sector. The recapitalisation of the four core banks was completed in June 2013, while the consolidation of the banking sector has continued through the resolution of non-viable banks and the absorption of Greek subsidiaries of foreign banks. Deposit inflows have continued, in part offsetting the deposits lost between the end of 2009 and the middle of 2012.

    But despite these improvements, credit growth to the private sector remains very weak, in particular for the small and medium-sized enterprises (SMEs) that make up about 60% of business turnover in Greece. The last ECB survey on SME financing showed that 31% of SMEs had applications for bank loans rejected, well above the euro area average of 11%. Moreover, the sectoral allocation of credits has not substantially shifted towards export-oriented sectors since 2010, suggesting that banks are not facilitating internal rebalancing.

    To some extent, these developments are cyclical: the weak economic environment means banks are attaching higher credit risk to SMEs. But there is also a more structural explanation. Non-performing loans (NPLs) increased from 16% at the end of 2011 to 29% of total loans in the first quarter of 2013. This is acting as a barrier to new lending to higher- growth sectors.

    Unfortunately, this problem is in part being created by government policy. The ongoing moratorium on auctioning the properties of debtors in default has slowed down resolution of NPLs and balance sheet restructuring. Moreover, suggestions by policy-makers about horizontal debt relief for bank debtors are leading to a steep rise in strategic defaults, with banks estimating that 25% of NPLs in the mortgage and SME sectors are now strategic.

    This deterioration in the payment culture, even if it helps individuals on a micro level, is deeply damaging to the economy as a whole. If it continues, it will ultimately lead to higher costs for banks, new recapitalisation needs and further constrictions in bank lending. In my view, to restart lending to the real economy, this self-fulfilling cycle must be broken.

    I welcome the fact that the Greek authorities have established an inter-agency working group to identify ways to improve the effectiveness of debt resolution processes. Its priority should be to establish a time-bound framework to facilitate the settlement of borrower arrears using standardised protocols. This would help to remove expectations about future debt relief, and as such, remove the debilitating moral hazard this is creating.

    Otherwise, the ultimate result would be that excessively high risk premia become structural and choke off investment and job creation - thus punishing the whole of society for the actions of those in strategic default.

    Attracting productive foreign investment

    The third challenge for growth is to attract higher foreign investment. This is important to add momentum to the recovery in the short term, while also increasing the capital and knowledge base of the Greek economy over the medium term. Indeed, before the crisis, investment in knowledge-based capital in Greece was among the lowest in the euro area.

    From the available signals, there seems to be significant investor interest in Greece. While total investment in Greece has fallen by around 43% from 2008-2012, foreign direct investment (FDI) flows have recently been positive, driven largely by investment in the banking sector. But anecdotal evidence suggests that foreign interest in the real economy is also growing, with several multinational companies announcing plans to increase their output at Greek units in the coming years. To maximise such investments, I see three actions as key.

    First, the authorities need to redouble their efforts to improve the business environment. Product and labour market flexibility is certainly a part of this, but there is also a wider challenge related to reducing bureaucracy, red tape and corruption. Progress has been made in these areas but Greece still ranks second to last among euro area countries on the World Bank's Ease of Doing Business Index.

    Second, foreign investment would naturally rise if privatisation were increased. In 2012 only 0.1 billion euro was derived from privatisation receipts, instead of the 3.6 billion euro originally forecast. Yet the example of the Port of Piraeus shows what well-targeted privatisation can achieve. Since the transfer of management of part of the port to the company COSCO in 2009, container traffic has tripled and its market share in the Mediterranean has risen from 2% to 6%.

    Third, it is crucial for foreign investors that uncertainty about Greece's medium-term outlook is dispelled. The greatest source of such uncertainty in the past was persistent questions about Greece's place in the euro area, but thanks to the joint efforts at the European and national levels, this seems to have significantly declined over the last year. The main source of uncertainty today is the continued commitment of the authorities to the programme. I therefore trust that the authorities will do everything possible to remove such doubts.

    Conclusion

    Let me conclude.

    Greece has made tremendous progress in recent years to close its fiscal deficit. By any standards, what has been achieved is remarkable.

    But the process of restoring sustainability and growth in Greece is not yet complete - and neither is the progress so far secured. If the authorities fail to address the remaining challenges, they will put at risk what has already been achieved.

    In other words, Greece today stands at a crossroads.

    In the one direction lies the path of difficult choices. This is the steep and thorny way, and it requires great commitment to negotiate, but it is the one that will lead to a reformed state, a sustainable economy and justice between generations.

    In the other direction lies the path of easy answers. This path is littered with false alternatives, such as recurrent proposals for debt restructuring.

    To some, debt restructuring or larger haircuts on government bonds may seem politically attractive. But such practices can only be a last resort. They are by no means a sustainable option to ease a government's financial obligations. They would not help to promote fiscal discipline and could create higher costs in the long run. And they would do nothing to address the fundamental weaknesses in the Greek economy.

    In short, the path of easy answers leads to stagnation, decline and an over-burdening of the young and future generations.

    From what I see today, I trust that the Greek people know which path they need to take. A recent poll shows that 69% of the public supports the euro - and being part of the euro means taking tough but necessary decisions.

    Responsible choices and reliability are the preconditions for solidarity. Greece has already received support from other euro area countries equivalent to 17,000 euro per Greek citizen. And, provided that it complies with the programme, those countries are committed to supporting Greece until it regains market access.

    In short, all the conditions are present for Greece to return to prosperity - and for the sake of both current and future generations, I trust that Greece will make the most of them.

  • In the Media | November 2013
    By Martin Baccardax
    MNI News, November 8, 2013. All Rights Reserved.

    FRANKFURT (MNI) - European Central Bank Executive Board member Yves Mersch praised the efforts of Greece's government to tackle its structural and fiscal reforms but said there was much left to be done in order to ensure a lasting recovery for the struggling economy.

    In prepared remarks for a speech at the Minsky Conference in Athens organised by the Levy Economics Institute, Mersch urged the continued efforts of the Greek government to tackle tax evasion, attract foreign investment and increase internal competitiveness.

    "The Greek people have taken vital measures to ensure long-term fiscal sustainability. This will reduce the burden that will be passed to future generations," Mersch said "And I recognise that in doing so, current generations have made considerable sacrifices."

    "Nevertheless, this is the painful cost of reversing the misguided economic policies and lack of reforms in the past. And fiscal sustainability - and hence intergenerational justice - is not yet assured," he added. "While the government appears to be on track to meet its 2013 primary balance target, Greece still has some way to go to reach the primary surplus targets of 1.5% of GDP in 2014, 3% of GDP in 2015 and 4.5% of GDP in 2016. This means that fiscal consolidation has to continue."

  • In the Media | November 2013
    Matina Stevis
    The Wall Street Journal, November 8, 2013. All Rights Reserved.

    ATHENS—Further haircuts on Greek government debt should only be "the last resort" in the country's efforts at an economic turn-around, European Central Bank Executive Board member Yves Mersch said Friday.

    Speaking at a conference here in Athens, organized by the Levy Institute of Bard College, Mr. Mersch cautioned that "Greece today stands at a crossroads."

    Hard-earned reforms towards a sustainable economy is one way, "easy answers" the other, he said.

    Greece's privately-held debt was restructured in May 2012 in the biggest debt restructuring in history. Most of its debt is now held by euro-zone governments and the International Monetary Fund, which have been keeping the country afloat since 2010 through bailouts worth a total of some EUR240 billion.

    The IMF has called on euro-zone governments to accept losses on their loans to Greece in a form of debt forgiveness, in order to ease the debt burden on the country and give it breathing room to grow. Greece's economy has lost about one-quarter of its output since 2008.

    But euro-zone leaders have rejected the idea, noting that the terms of the bailout loans to Greece are very favorable, with an interest rate near the refinancing cost of the loans and maturities that stretch out over the next three decades.

    Mr. Mersch said debt forgiveness wouldn't "help promote fiscal discipline and could create higher costs in the long run."

    A haircut on Greece's debt would "do nothing to address the fundamental weakness in the Greek economy," Mr. Mersch added.

    A delegation from the troika of institutions overseeing Greece's bailout--the IMF, the ECB and the European Commission--is currently in Athens conducting a review of its progress. The mission had been suspended in September and has been fraught with disagreements over fresh austerity measures in the 2014 budget, as well as the speed at which the Greek government is implementing structural reforms.

    Greece can only hope to get a fresh slice from its aid package if the review is successfully completed and euro-zone finance ministers approve a new disbursement. The earliest this might happen, given the delays in the review, is December.
  • In the Media | November 2013
    By Jörg Bibow
    Investors Chronicle, November 4, 2013. All Rights Reserved.

    The news that euro area inflation fell to a four-year low of 0.7 per cent last month raises a paradox.

    On the one hand, it’s widely agreed that such a rate is, as Societe Generale’s Michala Marcussen says, “uncomfortably low”. This is because it poses the risk of deflation - falling prices. And this could be a big problem. It would tighten monetary policy because falling prices mean a higher real interest rate. And if consumers expect deflation to last, they might postpone spending in the hope of picking up bargains later, and in doing so kill off the fragile recovery. Many economists therefore expect the ECB to react by cutting interest rates, possibly as soon as this week.

    However, for the most stricken countries in the euro area, deflation is supposed to be a solution, not a problem. The reason for this is simple. The euro area’s crisis was due in large part to current account imbalances within the region, with the south borrowing heavily from the north. These occurred because southern economies lost price competitiveness against the north and so sucked in imports whilst exports faltered. For example, between 2000 and 2010 Germany’s relative unit labour costs fell by 11.7 per cent, whilst Portugal’s rose by 9.2 per cent and Greece’s by 22.5 per cent. As Jorg Bibow of New York’s Levy Economics Institute put it: “At the heart of today’s euro debt crisis is an intra-area balance of payments crisis caused by seriously unbalanced intra-area competitiveness positions.”

    The official solution to these imbalances is for the south to cut wages relative to the north to restore competitiveness. The IMF is calling on Portugal to “reduce production costs” and Greece to use “wage adjustment” (a euphemism for cuts) to close the “competitiveness gap” with Germany. And – thanks to mass unemployment - they are doing just this. David Owen at Jefferies Fixed Income points out that hourly labour costs are falling in Greece and Portugal. And falling wages mean falling prices. In September, Greek consumer price inflation was minus one per cent, Portugal’s was 0.3 per cent and Spain’s 0.5 per cent.

    This poses the question. How can deflation be a danger for the euro area as a whole, when it is supposed to be a solution for the south?

    One could argue that the export and import sectors are a bigger fraction of GDP in individual countries than they are for the eurozone as a whole, and so improved competitiveness would do more to boost growth in Greece or Portugal than it would for the euro area as a whole. And one might add that investment is more sensitive to costs within the eurozone than it is between the eurozone and rest of the world, and so improved competitiveness would do more to attract inward investment into Greece or Portugal than it would into the euro area.

    These, though, aren’t the whole story. As I argue elsewhere, it’s not at all certain that falling wages will be sufficient to turn around Greece and Portugal.

    Instead, this paradox highlights a flaw within the euro area - that it contains a bias towards unemployment and deflation. In theory, Greek and Portuguese competitiveness could be improved not just by wage cuts there but by inflation (and higher demand) in the north. But this isn’t happening. Yes, German wages are rising. But only slowly. And it is still running a big external surplus which is, as the US Treasury recently said, creating “a deflationary bias for the euro area.”
    In this sense, low inflation in the euro area isn’t merely a problem in itself, but is a symptom of a deeper structural malaise.
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  • In the Media | October 2013
    Reforms Are Beginning to Bite and to Stimulate a Broad Economic Recovery
    By Catherine Bolger

    The Wall Street Journal, October 11, 2013. All Rights Reserved.


    Investing in Greece has been highly profitable for a number of foreign investors, and they're going back for more. Levy Institute President Dimitri B. Papadimitriou comments on the outlook for long-term investment.

  • In the Media | October 2013
    Tim Mullaney
    USA Today, October 16, 2013. All Rights Reserved.

    Fitch Ratings took a step toward cutting the U.S. government's AAA debt rating Tuesday, as the clock ticked toward the Thursday deadline to raise the nation's debt ceiling or risk default.

    Chicago-based Fitch, the third-largest of the major debt-rating companies behind Standard & Poor's and Moody's Investors Service, put U.S. Treasury bonds on Rating Watch Negative, which is sometimes but not always a first step before a downgrade. Fitch said in a statement that it still thinks the debt ceiling will be raised in time to prevent a default.
     
    Fitch said the government would have only limited capacity to make payments on the $16.7 trillion national debt after Treasury Department's emergency measures run out Thursday.

    Some Republicans have advocated Treasury make debt service payments before paying day-to-day bills, but Fitch said that may not be legal or technologically possible. Even Treasury could do that, a failure to act would still leave the U.S. missing payments for Social Security and payments to government contractors, Fitch said.

    "All of (these) would damage the perception of U.S. sovereign creditworthiness and the economy,'' Fitch said in a statement. "The prolonged negotiations over raising the debt ceiling ... risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This `faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other AAA" bonds.

    Fitch said it could make a decision on whether to lower its AAA rating on U.S. debt by the end of the first quarter.

    "The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy," the Treasury Department said in response.

    One money manager quickly backed Fitch's action, which affects all U.S. bonds.

    "This action by Fitch is not about ability to pay,'' said Cumberland Advisors chief investment officer David Kotok. "It is about governance and our willingness to pay. In that category the United States has reached the brink of political failure.''
    Economists have warned that there are two main ways failing to raise the debt ceiling could hurt the economy.

    One is by causing chaos in financial markets, forcing stock prices lower and freezing credit to many borrowers. The other is by forcing the government to cut spending by as much as $130 billion over as little as six weeks to avoid borrowing more, Moody's Analytics estimated last week.

    A study Tuesday by Bard College estimated that a rapid-fire balanced budget scenario would cause the U.S. economy to shrink by almost 3% in 2014 and the unemployment rate to surge to more than 9.5%.

    That is before accounting for the chance that a failure to raise the debt ceiling will push U.S. trading partners into recession, the Bard study says.

    "A recession in the United States would certainly exert a negative influence on growth in the rest of the world, which would in turn feed back to the States," Bard economist Michalis Nikiforos said.

    Moody's says it has no plans to change its Aaa rating on U.S. debt.

    Political brinksmanship was a key reason for S&P's downgrade of the U.S. to AA+ from AAA in 2011, the last time Washington flirted with refusing to raise the debt ceiling. The lack of an agreement on the debt limit this week would not necessarily trigger another S&P downgrade, spokesman John Piecuch said.

    "Passing (Oct.) 17th is not a specific trigger," Piecuch said.

    If the U.S. missed a debt payment, however, its rating would be lowered to selective default, he added.

    Contributing: John Waggoner, Adam Shell and David M. Jackson 
  • 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
    Mark Dittli
    Finanz und Wirtschaft, September 30, 2013. All Rights Reserved.

    Hyman Minsky erkannte die Gefahr exzessiver Kreditschöpfung durch die Banken. Er hielt es für eine Torheit der Ökonomie, den Finanzsektor zu ignorieren.


    Man stelle sich vor: eine Mischung aus John Maynard Keynes und Joseph Schumpeter, mit einem Schuss Hayek. Das Resultat ist einer der wichtigsten Ökonomen des vergangenen Jahrhunderts, der bis heute in der breiten Öffentlichkeit kaum bekannt ist: Hyman Minsky (1919–1996).

    In den Jahren seit dem Ausbruch der Finanzkrise ist der Name des Amerikaners wieder in der ökonomischen Debatte ­aufgetaucht; als «Minsky Moment» wurde die verhängnisvolle Periode im August 2007 bezeichnet, als das Finanzsystem ­begann, aus den Fugen zu geraten. Angesichts der heutigen Renaissance Minskys geht leicht vergessen, dass er während ­seiner akademischen Karriere ein Randdasein fristete, kaum ernst genommen in der Mainstream-Ökonomie.

    Das war ein folgenschwerer Fehler. ­Hyman Minsky befasste sich als Ökonomieprofessor mit dem Finanzsektor und der Rolle, die dieser in der Realwirtschaft spielt. Er zeigte, dass das Finanzsystem ­inhärent instabil ist, zu Übertreibungen und Krisen neigt. Wer seine hauptsächlich in den Siebziger- und Achtzigerjahren verfassten Schriften liest, findet erschreckend präzise Parallelen zu den Ereignissen von 2007 und danach. Lebte Minsky heute noch, könnte er zu Recht ein «Ich habe es ja gesagt» in die Runde werfen.

    Der wahre Keynes

    Hyman Philip Minsky, 1919 als Sohn jüdischer weissrussischer Immigranten in Chicago geboren, studierte Mathematik und Ökonomie an der University of Chicago. Master- und Doktortitel in Ökonomie erlangte er an der Harvard University, sein Doktorvater war Joseph Schumpeter. Nach dem Studium folgten Lehraufträge an der Brown University sowie in Berkeley. 1965 übernahm Minsky einen Lehrstuhl an der Washington University in St. Louis, den er bis 1990 behielt. Danach forschte er weitere sechs Jahre bis zu seinem Tod am Levy Economics Institute.

    Auf einen simplen Satz reduziert war der Kern von Minskys Lehre die Suche nach dem wahren Keynesianismus. Hierzu ein kurzer Exkurs: John M. Keynes löste 1936 mit der «General Theory of Employment, Interest, and Money» in der Volkswirtschaftslehre eine Revolution aus. Das Werk war jedoch in vielen Belangen bruchstückhaft, und Keynes hatte die Absicht, auf etliche Aspekte näher einzugehen. 1937 erlitt er jedoch einen Herzinfarkt und konnte mehrere Jahre kaum arbeiten. Später absorbierten ihn der Weltkrieg und seine Arbeit an der Konzeption des Bretton-Woods-Systems. 1946 starb Keynes; er kam nicht mehr dazu, die General Theory zu verfeinern. Das Werk blieb eine Art Bibel, deren Interpretation anderen überlassen war.

    Diesen Part übernahmen John Hicks und später Alvin Hansen sowie Paul Samuelson. Sie erschufen auf Basis der General Theory die sogenannte neoklassische Synthese, die Lehrbuchökonomie, die ab den Fünfzigerjahren zum Mainstream wurde.

    Grundannahme der neoklassischen Synthese ist das Equilibriumsmodell, das besagt, dass die Wirtschaft stets ein Gleichgewicht sucht.

    «Die populäre, mathematisch hergeleitete Modellierung der General Theory, besonders in der Gestalt des IS/LM-Modells von Hicks (...), tut sowohl dem Geist als auch dem Gehalt von Keynes’ Werk Gewalt an.»

    Herzstück der Hicks’schen Interpretation der General Theory war das IS/LM-Modell, das den Markt für Güter und den Markt für Geld im Gleichgewicht darstellt. In diesem Modell ist Geld eine neutrale Grösse, es entsteht exogen, durch die Entscheide der Zentralbank. Der Finanzsektor wird daher weitgehend ausgeblendet respektive als irrelevant betrachtet. Das Finanzsystem ist nichts anderes als ein Mechanismus, um Geld von Sparern zu Investoren zu transferieren.

    Vom Wesen der Ungewissheit

    Minsky sah in der neoklassischen Synthese eine Perversion von Keynes’ Lehre. «Die mathematisch hergeleitete Modellierung der General Theory transformierte Keynes’ Theorie in ein das Gleichgewicht suchendes System», schrieb er: «Sie tut ­sowohl dem Geist wie auch dem Gehalt von Keynes’ Werk Gewalt an.» Die Ausblendung des Finanzsektors hielt er für eine absurde Abstraktion der Realität.

    Minsky verstand sich sehr wohl als Keynesianer, aber für ihn lag der Schlüssel in der Interpretation der General Theory in deren Kapitel 12. Dieses befasst sich mit der Rolle der Spekulation an den Märkten, mit Massenpsychologie und Herdentrieb. In ihrer Versessenheit auf mathematische Modelle hätten Hicks und seine Nachfolger vergessen, wie wichtig für Keynes der ­Begriff der Ungewissheit war und was diese für die Entscheidungsfindung von Investoren bedeute, warnte er.

    Schon in den späten Fünfzigerjahren prophezeite Minsky, die populäre Auslegung des «Keynesianismus» werde zu Inflation und finanzieller Instabilität führen. Zwanzig Jahre später sollte sich die Warnung bewahrheiten.

    1975, mittlerweile war der populäre Keynesianismus angesichts steigender ­Inflationsraten diskreditiert, publizierte Minsky sein erstes grosses Werk mit dem Titel «John Maynard Keynes». Er sah es als Versuch, die wahre Substanz der General Theory, die Rolle der Finanzbeziehungen in einem fortgeschrittenen kapitalistischen System, ans Licht zu bringen. Die Mainstream-Ökonomie hatte den Finanzsektor wegrationalisiert: Minsky setzte ihn ins Zentrum seiner Arbeit.

    1986 legte er mit seinem zweiten Werk, «Stabilizing an Unstable Economy», nach. Darin formulierte er seine Hypothese der finanziellen Instabilität, die zu seinem Hauptvermächtnis werden sollte.

    «Ein komplexes Finanzsystem wie das unsere generiert destabilisierende Kräfte. Depressionen sind natürliche Konsequenz des ungehinderten Kapitalismus (...). Das Finanzsystem kann nicht dem freien Markt überlassen werden.»

    Nach Minsky – in diesem Punkt folgt er Schumpeter – ist das kapitalistische ­System nicht stabil. Es findet kein Equilibrium; das Gleichgewicht ist bloss eine Station auf dem Weg von einem Ungleichgewicht ins nächste. Der Grund dafür liegt im Verhalten der Marktakteure: Gefühlte Stabilität in der Gegenwart verleitet sie dazu, immer risikofreudiger zu werden – was den Grundstein für die nächste Krise legt. «Stabilität führt zu Instabilität», beschrieb Minsky sein Paradoxon.

    Die zentrale Rolle in diesem Prozess spielt der Finanzsektor. Nach Minsky – und Schumpeter – entsteht Geld nicht exogen, sondern endogen, innerhalb des Wirtschaftssystems, «aus dem Nichts», durch die Kreditschöpfung der Banken. Diese befeuert den Gang der Wirtschaft und treibt die Spekulation an.

    Minsky unterschied zwischen drei Zuständen in der Finanzierungsstruktur von Unternehmen oder Personen: Abgesichert («Hedge»), Spekulativ und Ponzi. Im ersten Stadium erwirtschaften die Schuldner aus ihrer Arbeit genügend Cashflow, um die Zinslast zu bedienen und die Schulden allmählich abzuzahlen. Im zweiten Stadium reicht der Cashflow nur zur Bedienung der Zinsen, aber nicht zur Amortisation der Schuld. Ein spekulativer Schuldner ist darauf angewiesen, dass er seine Kredite am Fälligkeitstermin durch neue ablösen kann. Das letzte Stadium im ­Zyklus nannte Minsky Ponzi, nach dem Hochstapler Charles Ponzi, der in den Zwanzigerjahren mit einem Pyramidensystem 15 Mio. $ ergaunert hatte. In diesem Stadium reicht der erarbeitete Cashflow des Schuldners nicht einmal mehr, um die Zinsen zu bedienen. Um über Wasser zu bleiben, muss er darauf zählen, dass sich der Wert der Anlagen in seiner Bilanz laufend erhöht.

    Mit diesem Modell erklärt sich das Minsky-Paradoxon, wonach Stabilität zu Instabilität führt: In einer gesunden Wirtschaft sind die meisten Kredite an abgesicherte Schuldner verliehen. In der gefühlten Stabilität werden diese jedoch risikofreudiger und nehmen immer mehr Schulden auf, um verheissungsvolle Investitionsprojekte zu realisieren. Die Banken agieren in dieser Phase nicht als Korrektiv, sondern ­legen ihre Risikoscheu ebenfalls ab und vergeben immer freimütiger Kredit. Der Kreislauf treibt sich in die Höhe, bis die Wirtschaft aus zahlreichen spekulativen oder Ponzi-Schuldnern besteht – und höchst fragil geworden ist.

    Die Bändigung des Biestes

    Irgendwann kippt dann die Stimmung. Schlagartig können sich Schuldner nicht mehr refinanzieren, die Banken frieren die Kreditvergabe ein, die Preise von Vermögenswerten geraten ins Rutschen, Notverkäufe beschleunigen den Prozess. Die deflationäre Schuldenliquidation beginnt.

    Für den Ausbruch der Krise ist kein exogener Schock nötig. «Instabilität entsteht durch die Mechanismen innerhalb des Systems, nicht ausserhalb», schrieb Minsky, «unsere Wirtschaft ist nicht instabil, weil sie durch den Ölpreis oder Kriege geschockt wird. Sie ist instabil, weil das in ihrer Natur liegt.» In beiden Extremen des Ungleichgewichts, im Spekulationsboom wie in der deflationären Schuldenliquidation, entsteht kein Korrektiv: Der Boom nährt sich selbst, genauso wie sich die Wirtschaft in der Depression immer weiter in die Tiefe schraubt.

    Minsky sah nur eine Möglichkeit, das Biest zu bändigen. In den extremen Phasen des Ungleichgewichts muss der Staat einspringen. In der Depression bedeutet das fiskal- und geldpolitische Stützung, um die selbstzerstörerische deflationäre Schuldenliquidation zu stoppen. Als Korrektiv im Boom sah Minsky vor allem institutionelle Bremsen im Bankensektor: Er empfahl harte Eigenmittelanforderungen für die Banken sowie Beschränkungen in ihrer Gewinnausschüttung. Grossbanken, deren Bilanz eine winzige Eigenkapital­decke aufweist, waren Minsky ein Gräuel. «Ein komplexes Finanzsystem wie das Unsere generiert auf endogenem Weg gefährliche destabilisierende Kräfte», schrieb er, «Depressionen sind eine natürliche Konsequenz des ungehinderten Kapita­lismus.» Und in letzter Konsequenz: «Das Finanzsystem kann nicht dem freien Markt überlassen werden.»

    Das Ende der Geschichte

    Es erstaunt kaum, dass Minsky mit diesen Ansichten in den Achtzigern keine Chance hatte. Eine Theorie des Ungleichgewichts war damals weltfremd. Neukeynesianer, Neoklassiker, Monetaristen sowie die Anhänger der österreichischen Schule waren sich in der Annahme einig, dass das Wirtschaftssystem – zumindest in der langen Frist – in ein Gleichgewicht strebt. Es war die Zeit der Theorie der rationalen Erwartungen, der effizienten Finanzmärkte, untermauert mit der Präzision mathematischer Modelle. Es war die Zeit der Deregulierungswellen im Bankensektor, gestartet unter Reagan und Thatcher, fortgesetzt in den USA unter Bill Clinton. Es war die Zeit der «grossen Moderation», mit robustem Wachstum und flachen, harmlosen Rezessionen. Sogar die Inflation war besiegt. Es war das «Ende der Geschichte» in der Ökonomie.

    Für Hyman Minsky war in dieser Welt kein Platz mehr. Nur ein verlorenes Grüppchen Post-Keynesianer scharte sich noch um ihn. 1996 starb er an Krebs.

    Vier Jahre später war Minsky in den «Essays on the Great Depression» des Princeton-Professors Ben Bernanke nur eine Fussnote wert. Ein exzessiver Schuldenaufbau – wie von Minsky gewarnt – sei in einer freien Marktwirtschaft gar nicht möglich, weil das irrationales Verhalten der Marktteilnehmer voraussetzen würde. «Und das», schrieb der spätere Chef der US-Notenbank, «ist kaum vorstellbar.»

    Zur selben Zeit begann am US-Häusermarkt ein beispielloser, von Krediten befeuerter Anstieg der Preise. Dasselbe Muster war in Spanien, England, Irland zu beobachten. Überall explodierte die Kreditschöpfung, überall regierte der spekulative Exzess, bereitwillig angetrieben von den Banken. Überall konnten lehrbuchmässig die drei Stufen von Minskys Instabilitätshypothese beobachtet werden. Und dann kam es zum Knall, der beinahe das globale Finanzsystem in die Tiefe riss.
    «Hyman Minsky ist der analytischste und überzeugendste aller zeitgenössischen Ökonomen, die in exzessivem Schuldenaufbau die Achillesferse des ­Kapitalismus sehen», schrieb der Ökonom James Tobin 1987 in einer Besprechung von «Stabilizing an Unstable Economy».

    Hätte man bloss auf ihn gehört.
  • In the Media | September 2013
    Financial Times, September 27, 2013. © The Financial Times Ltd.

    Sir, Professor Christopher Gilbert in his letter of September 25 suggests that "some of the most important southern countries [including Italy] ... do so little to help themselves" that they therefore should not seek greater co-operation from euro institutions, as advocated by Professors Emiliano Brancaccio and other economists including myself (Letters, September 23). Prof Gilbert himself does not offer suggestions on which further reforms should be implemented in Italy to restore prosperity through "serious adjustment".

    Italy has already undergone a major reform in its pension system, which implied a large structural reduction in perspective payments from the public sector. It should also be noted that the number of parttime workers has risen from about 13 per cent of total employment in 2004 to about 18 per cent this year, with full-time employment steadily declining since the beginning of the recession period in 2007, surely a sign of increased flexibility ("serious adjustment?") in the labour market. Public employees' wages have been frozen and public employment has been in free fall since 2007.

    It seems that "more radical domestic efforts" in these directions, as advocated by Prof Gilbert, would surely imply a further increase in poverty and social exclusion, further weakening of the industrial structure due to depressed domestic demand and stronger political support to nationalistic parties, exactly the fears that motivated the letter of warning from economists.

    Gennaro Zezza, Associate Professor, Università di Cassino, Italy 
  • 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.
  • 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
    La Sinistra per Gualdo, 25 Settembre 2013. Tutti i diritti riservati.

    La crisi economica in Europa continua a distruggere posti di lavoro. Alla fine del 2013 i disoccupati saranno 19 milioni nella sola zona euro, oltre 7 milioni in più rispetto al 2008: un incremento che non ha precedenti dal secondo dopoguerra e che proseguirà anche nel 2014. La crisi occupazionale affligge soprattutto i paesi periferici dell’Unione monetaria europea, dove si verifica anche un aumento eccezionale delle sofferenze bancarie e dei fallimenti aziendali; la Germania e gli altri paesi centrali dell’eurozona hanno invece visto crescere i livelli di occupazione. Il carattere asimmetrico della crisi è una delle cause dell’attuale stallo politico europeo e dell’imbarazzante susseguirsi di vertici dai quali scaturiscono provvedimenti palesemente inadeguati a contrastare i processi di divergenza in corso. Una ignavia politica che può sembrare giustificata nelle fasi meno aspre del ciclo e di calma apparente sui mercati finanziari, ma che a lungo andare avrà le più gravi conseguenze.

    Come una parte della comunità accademica aveva previsto, la crisi sta rivelando una serie di contraddizioni nell’assetto istituzionale e politico dell’Unione monetaria europea. Le autorità europee hanno compiuto scelte che, contrariamente agli annunci, hanno contribuito all’inasprimento della recessione e all’ampliamento dei divari tra i paesi membri dell’Unione. Nel giugno 2010, ai primi segni di crisi dell’eurozona, una lettera sottoscritta da trecento economisti lanciò un allarme sui pericoli insiti nelle politiche di “austerità”: tali politiche avrebbero ulteriormente depresso l’occupazione e i redditi, rendendo ancora più difficili i rimborsi dei debiti, pubblici e privati. Quell’allarme rimase tuttavia inascoltato. Le autorità europee preferirono aderire alla fantasiosa dottrina dell’“austerità espansiva”, secondo cui le restrizioni dei bilanci pubblici avrebbero ripristinato la fiducia dei mercati sulla solvibilità dei paesi dell’Unione, favorendo così la diminuzione dei tassi d’interesse e la ripresa economica. Come ormai rileva anche il Fondo Monetario Internazionale, oggi sappiamo che in realtà le politiche di austerity hanno accentuato la crisi, provocando un tracollo dei redditi superiore alle attese prevalenti. Gli stessi fautori della “austerità espansiva” adesso riconoscono i loro sbagli, ma il disastro è in larga misura già compiuto.

    C’è tuttavia un nuovo errore che le autorità europee stanno commettendo. Esse appaiono persuase dall’idea che i paesi periferici dell’Unione potrebbero risolvere i loro problemi  attraverso le cosiddette “riforme strutturali”. Tali riforme dovrebbero ridurre i costi e i prezzi, aumentare la competitività e favorire quindi una ripresa trainata dalle esportazioni e una riduzione dei debiti verso l’estero. Questa tesi coglie alcuni problemi reali, ma è illusorio pensare che la soluzione prospettata possa salvaguardare l’unità europea. Le politiche deflattive praticate in Germania e altrove per accrescere l’avanzo commerciale hanno contribuito per anni, assieme ad altri fattori, all’accumulo di enormi squilibri nei rapporti di debito e credito tra i paesi della zona euro. Il riassorbimento di tali squilibri richiederebbe un’azione coordinata da parte di tutti i membri dell’Unione. Pensare che i soli paesi periferici debbano farsi carico del problema significa pretendere da questi una caduta dei salari e dei prezzi di tale portata da determinare un crollo ancora più accentuato dei redditi e una violenta deflazione da debiti, con il rischio concreto di nuove crisi bancarie e di una desertificazione produttiva di intere regioni europee.

    Nel 1919 John Maynard Keynes contestò il Trattato di Versailles con parole lungimiranti: «Se diamo per scontata la convinzione che la Germania debba esser tenuta in miseria, i suoi figli rimanere nella fame e nell’indigenza […], se miriamo deliberatamente alla umiliazione dell’Europa centrale, oso farmi profeta, la vendetta non tarderà». Sia pure a parti invertite, con i paesi periferici al tracollo e la Germania in posizione di relativo vantaggio, la crisi attuale presenta più di una analogia con quella tremenda fase storica, che creò i presupposti per l’ascesa del nazismo e la seconda guerra mondiale. Ma la memoria di quegli anni sembra persa: le autorità tedesche e gli altri governi europei stanno ripetendo errori speculari a quelli commessi allora. Questa miopia, in ultima istanza, è la causa principale delle ondate di irrazionalismo che stanno investendo l’Europa, dalle ingenue apologie del cambio flessibile quale panacea di ogni male fino ai più inquietanti sussulti di propagandismo ultranazionalista e xenofobo.

    Occorre esser consapevoli che proseguendo con le politiche di “austerità” e affidando il riequilibrio alle sole “riforme strutturali”, il destino dell’euro sarà segnato: l’esperienza della moneta unica si esaurirà, con ripercussioni sulla tenuta del mercato unico europeo. In assenza di condizioni per una riforma del sistema finanziario e della politica monetaria e fiscale che dia vita a un piano di rilancio degli investimenti pubblici e privati, contrasti le sperequazioni tra i redditi e tra i territori e risollevi l’occupazione nelle periferie dell’Unione, ai decisori politici non resterà altro che una scelta cruciale tra modalità alternative di uscita dall’euro.

    Promosso da Emiliano Brancaccio e Riccardo Realfonzo (Università del Sannio), il “monito degli economisti” è sottoscritto da Philip Arestis (University of Cambridge), Georgios Argeitis (Athens University), Wendy Carlin (University College of London), Jesus Ferreiro (University of the Basque Country), Giuseppe Fontana (Università del Sannio), James Galbraith (University of Texas), Mauro Gallegati (Università Politecnica delle Marche), Eckhard Hein (Berlin School of Economics and Law), Alan Kirman (University of Aix-Marseille III), Jan Kregel (University of Tallin), Heinz Kurz (Graz University), Alfonso Palacio-Vera (Universidad Complutense Madrid), Dimitri Papadimitriou (Levy Economics Institute), Pascal Petit (Université de Paris Nord), Dani Rodrik (Institute for Advanced Study, Princeton), Malcolm Sawyer (Leeds University), Willi Semmler (New School University, New York), Felipe Serrano (University of the Basque Country), Engelbert Stockhammer (Kingston University), Tony Thirlwall (University of Kent). 
  • 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 | September 2013
    Financial Times, September 23, 2013. 

    The European crisis continues to destroy jobs. By the end of 2013 there will be 19 million unemployed in the eurozone alone, over 7 million more than in 2008, an increase unprecedented since the end of World War II and one that will stretch on into 2014. The employment crisis strikes above all the peripheral member countries of the European Monetary Union, where an exceptional rise in bankruptcy is also under way, whereas Germany and the other central countries of the eurozone have instead witnessed growth on the job front. This asymmetry is one of the causes of Europe’s present-day political paralysis and the embarrassing succession of summit meetings that result in measures glaringly incapable of halting the processes of divergence under way. While this sluggishness of political response may appear justified in the less severe phases of the cycle and moments of respite on the financial market, it could have the most serious consequences in the long run.

    As foreseen by part of the academic community, the crisis is revealing a number of contradictions in the institutions and policies of the European Monetary Union. The European authorities have taken a series of decisions that have in actual fact, contrary to announcements, helped to worsen the recession and widen the gaps between the member countries. In June 2010, when the first signs of the eurozone crisis became apparent, a letter signed by three hundred economists pointed out the inherent dangers of austerity policies, which would further depress the demand for goods and services as well as employment and incomes, thus making the payment of debts, both public and private, still more difficult. This alarm was, however, unheeded. The European authorities preferred to adopt the fanciful doctrine of “expansive austerity”, according to which budget cuts would restore the markets’ confidence in the solvency of the EU countries and thus lead to a drop in interest rates and economic recovery. As the International Monetary Fund itself recognises, we know today that the policies of austerity have actually deepened the crisis, causing a collapse of incomes in excess of the most widely-held expectations. Even the champions of “expansive austerity” now acknowledge their errors, but the damage is now largely done. 

    The European authorities are, however, now making a new mistake. They appear to be convinced that the peripheral member countries can solve their problems by implementing “structural reforms”, which will supposedly reduce costs and prices, boost competitiveness, and hence foster export-driven recovery and a reduction of foreign debt. While this view does highlight some real problems, the belief that the solution put forward can safeguard European unity is an illusion. The deflationary policies applied in Germany and elsewhere to build up trade surpluses have worked for years, togeteher with other factors, to create huge imbalances in debt and credit between the eurozone countries. The correction of these imbalances would require concerted action on the part of all the member countries. Expecting the peripheral countries of Union to solve the problem unaided means requiring them to undergo a drop in wages and prices on such a scale as to cause a still more accentuated collapse of incomes and violent debt deflation with the concrete risk of causing new banking crises and crippling production in entire regions of Europe.

    John Maynard Keynes opposed the Treaty of Versailles in 1919 with these far-sighted words: “If we take the view that Germany must be kept impoverished and her children starved and crippled […] If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.” Even though the positions are now reversed, with the peripheral countries in dire straits and Germany in a comparatively advantageous position, the current crisis presents more than one similarity with that terrible historical phase, which created the conditions for the rise of Nazism and World War II. All memory of those dreadful years appears to have been lost, however, as the German authorities and the other European governments are repeating the same mistakes as were made then. This short-sightedness is ultimately the primary reason for the waves of irrationalism currently sweeping over Europe, from the naive championing of flexible exchange rates as a cure for all ills to the more disturbing instances of ultra-nationalistic and xenophobic propaganda.

    It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed. The experience of the single currency will come to an end with repercussions on the continued existence of the European single market. In the absence of conditions for a reform of the financial system and a monetary and fiscal policy making it possible to develop a plan to revitalise public and private investment, counter the inequalities of income and between areas, and increase employment in the peripheral countries of the Union, the political decision makers will be left with nothing other than a crucial choice of alternative ways out of the euro.

    Emiliano Brancaccio and Riccardo Realfonzo (Sannio University, promoters of “the economists’ warning”), Philip Arestis (University of Cambridge), Wendy Carlin (University College of London), Giuseppe Fontana (Leeds and Sannio Universities), James Galbraith (University of Texas), Mauro Gallegati (Università Politecnica delle Marche), Eckhard Hein (Berlin School of Economics and Law), Alan Kirman (University of Aix-Marseille III), Jan Kregel (University of Tallin), Heinz Kurz (Graz University), Alfonso Palacio-Vera (Universidad Complutense Madrid), Dimitri Papadimitriou (Levy Economics Institute), Pascal Petit (Université de Paris Nord), Dani Rodrik (Institute for Advanced Study, Princeton), Willi Semmler (New School University, New York), Engelbert Stockhammer (Kingston University), Tony Thirlwall (University of Kent).

    ...and also: Georgios Argeitis (Athens University), Marcella Corsi (Sapienza University of Rome), Jesus Ferreiro (University of the Basque Country), Malcolm Sawyer (Leeds University), Sergio Rossi (University of Fribourg), Francesco Saraceno (OFCE, Paris), Felipe Serrano (University of the Basque Country), Lefteris Tsoulfidis (University of Macedonia).
     
  • In the Media | September 2013
    By Chanan Tigay
    The New Yorker, September 17, 2013. © 2013 Condé Nast. All Rights Reserved.


    A bullet hole mars the window in the office of Yannis Stournaras, the finance minister of Greece. It is tempting to see it as yet another unpleasant outcome of austerity: in the face of crippling government debt, maybe he can’t afford to fix it.

    But he insists that austerity has nothing to do with his decision to leave the window unrepaired; he’s kept the hole, a pot shot at a predecessor from a 2010 protest, as a “memoir” of the rough path he’s had to hew. The central figure in Greece’s economic maelstrom, Stournaras, a fifty-six-year-old economics professor, has become the face of painful deprivations—firings, tax hikes, slashed wages and pensions—as the country struggles to emerge from its fiscal troubles.

    The concern about whether he has money for renovations isn’t too far-fetched. Recently, the aging wallpaper in a number of Ministry of Finance offices began to crumble, and Stournaras had the rooms painted at a cost of fifteen hundred euros. When word of this extravagance leaked, the rightist newspaper Democracy condemned him as “wasteful.”

    Stournaras laughed as he told me this story; his office appeared to have been furnished sometime during the first Bush Administration. It featured laminate floors, scruffy wood bookshelves, and shiny red sofas arranged in an L. In the waiting room, a month-old copy of the Financial Times grew brittle on an unused coffee table.

    The underlying rot—in the walls and in the economy—long preceded Stournaras’s ascendance. And, by some measures, the belt-tightening is working: two weeks after we spoke, the government reported that the shrinking of Greece’s economy had slowed in the second quarter of this year. Yet Stournaras has, perhaps inevitably, become a target for criticism. In February, a prominent parliamentarian slammed him as “arrogant” after he questioned a prior government’s proclivity for spending. In July, another blasted the “knife he puts against our throats.” In August, a third member of Parliament threatened to seek Stournaras’s removal.

    It is worth noting that the politicians unleashing these attacks were members of Stournaras’s own governing coalition, which includes the conservative New Democracy and the socialist Pasok parties, historical adversaries.

    “There is no friendship at all,” said Theodore Pelagidis, an economist and friend of Stournaras’s. “Yannis is alone.”
     


    In 2010, an alliance
    of international creditors known as the troika—the European Commission, European Central Bank, and International Monetary Fund—agreed to bail out Greece to the tune of a hundred and ten billion euros, on the condition that the country starve itself into solvency. When economic problems persisted, the troika agreed to a second rescue package, to be doled out in stages, this one running a hundred and thirty billion euros. By the time Antonis Samaras became Prime Minister in the summer of 2012, Greece was still living up to its reputation as “the last Soviet economy.” The bloated public sector was addicted to outsize salaries and pensions, patronage was rampant, and tax evasion seemed to outpace soccer as the national sport.

    Samaras, representing the New Democracy party, was elected on a promise to slow austerity. Yet in appointing a finance minister, he chose Stournars, an Oxford-educated economist whose work had called for public-sector reductions. Stournaras is widely seen as a straight-talking “technocrat” and not a politician. If the troika demanded austerity, he could push reforms forward without being distracted by an angry political base.

    Within hours of taking office in July of 2012, Stournaras found himself across a table from representatives of the troika. They were back in Athens to decide whether to award a tranche of thirty-one and a half billion euros to a desperate Greece. This time, in return, they wanted even deeper spending cuts.

    Without the billions of euros, Greece risked going broke and being forced out of the eurozone, which Stournaras believed could lead to the collapse of Greek banks and, he told me, “looting of supermarkets.” Squeezed between intense domestic pressure to roll back reductions and what he believed was economic necessity, Stournaras sided with the troika and its austerity program. “We can’t ask for anything from our creditors before we get it back on course,” he had told journalists shortly after taking office. This was not the message many ordinary Greeks wanted to hear, and their representatives in Parliament castigated him. In his defense, Stournaras reëmphasized that Greece had to show skeptical creditors that it could be trusted, by owning up to past indulgences and trying to correct them.

    Negotiations with the troika dragged on for five months. Then, in November of 2012, European finance ministers gathered in Brussels for a series of dramatic meetings to determine Greece’s fate.

    In Belgium, Stournaras negotiated constantly. He went two days without sleep. He quarreled with Austria’s finance minister. He communicated constantly with Samaras. “Our two mobile phones were on fire,” the Prime Minister told me.

    Between meetings, Stournaras shuttled home to Athens to help cajole a reluctant Parliament into passing new austerity legislation to pacify the paymasters in Brussels. The omnibus bill would, among other things, raise the retirement age, cut pensions, and slash lump-sum payments for retirees. A vote was slated for midnight on November 8th—just in time to meet a troika deadline.

    At six o’clock on the evening before the vote, Stournaras introduced an amendment that would have ended the “special salaries” enjoyed by employees at the Hellenic Parliament. The staffers revolted: their union announced an immediate strike that threatened to paralyze Parliament and prevent a vote altogether. With the troika deadline looming, Stournaras was forced to relent. He withdrew his amendment, but did not do so quietly. In an address to Parliament later that evening, he denounced the bitterly anti-austerity parties who had painted him as a puppet of the troika: "We condemn them. Because of what’s at stake tonight, and because of the urgent nature of the bill, I am forced to withdraw the amendment in question. He who has eyes let him see."

    The measures passed, narrowly, setting up Greece’s moment of truth. Would it all be enough to convince the troika that Greece had changed its ways?

    “I’ve called it the ‘thriller,’” said Raphael Moissis, the deputy chairman of the Foundation for Economic and Industrial Research, the think tank from which Stournaras was plucked to lead the Ministry of Finance. “We literally stayed up the night to hear whether the Europeans were going to say yes to a restructuring program for Greece, or whether they were going to say ‘the hell with you.’”

    On November 27th, the troika announced that it would release the next round of loans. Greece would remain in the Eurozone. The decision was a victory for Stournaras, one step forward in what he described as a “multifaceted war.”



    But was the triumph
    really so clear-cut?

    One morning in 2009, Chris Spirou was laid off by an Athens bakery. A divorced father, he spent three months looking diligently for a job but found nothing, eventually making his way to Norway and the Netherlands to find work before returning home when his father died. After getting the boot from a friend’s trailer, he suddenly became homeless—an “indescribable” realization, he said.

    “I am below zero. Wrecked. Devastated,” said Spirou, who is fifty-four. He said he feels “hate” for the people who put him in this position: members of Parliament and technocrats like Stournaras. “He doesn’t look at the political cost even if human beings are committing suicide, losing their jobs, their children are hungry.” Austerity, Spirou said, has killed the economy.

    Some prominent economists echo Spirou’s analysis. Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College, said that although large-scale cutbacks may in fact be reducing Greece’s budget deficit, these gains have come with “catastrophic consequences”: homelessness, suicides, unemployment, once-comfortable families reduced to rummaging through trash bins.

    Other economists, meanwhile, are asking a larger question: Does austerity even work? Paul Krugman has argued that Europe’s reliance on austerity—not just in Greece—is precisely the opposite of what should be done: according to the logic popularized by John Maynard Keynes, economies falter when people stop spending, and when that happens, only governments can step in as spenders to get things going again.

    Of course, given Greece’s economic woes, the country could not have implemented this theory on its own. Other Europeans, with Germany in the lead, were willing to kick in enough for Athens to close its deficits over a period of years, but they would not offer up sufficient sums for the Greeks to spend their way out of the desert. To the contrary, they insisted on cuts.

    Describing the decisions he made, Stournaras, whose compact, athletic build and frequent smile made him look younger than his years, was resolute. Along with Prime Minister Samaras, he said, he fought to mitigate the pain—by cutting property taxes, for example. But even now, Stournaras—who calls himself a “reconstructed Keynesian”—believes that cuts, though upsetting, are working; unfortunately, there aren’t many other ways to reduce the public-sector deficit, and to forgo the cuts would only damage the economy further.

    “But this is not something easy that you can tell the public,” he said. “That the alternative is Argentina or even Syria.”

    It was muggy during my visit, and while Stournaras spoke, he wore shirtsleeves and a tightly cinched purple tie, having removed a dark suit jacket. He ticked off the government’s accomplishments: an operating budget surplus for the first seven months of this year, increased competitiveness in once-closed markets, and a slowing of the economy’s contraction. Most of which means little to the twenty-eight per cent of Greeks who are out of work, or to those who have suffered debilitating cuts to their pay and pensions.

    “It’s not easy for somebody who was earning two thousand euros suddenly to earn one thousand,” Stournaras said. The cuts he has championed have affected even his own mother. “A poor woman, because my father had died very young,” he said. “So she lives on the minimum pension.”

    How does that make you feel? I asked.

    “Very bad,” said the father of two, his eyes now fixed on his desk. “Very bad, really.”


    Stournaras was born
    in Athens, in 1956. His father was a Communist, he told me, whom “ultra-rightist” gangs persecuted and tried to have arrested; years later, when Stournaras was doing graduate work at Oxford, his father, who died at the age of sixty-two, asked him not to return home because he feared his own politics would haunt his son. Early on, Stournaras took up swimming and still regularly swims long distances. (He also jogs and plays ping-pong.) In his car on the way to a meeting with the Prime Minister, he told me that swimming was the best preparation he received for the rigors of his position. These days, he avoids swimming in pools, which could seem luxurious while other Greeks are forced into homeless shelters. “So I have to train myself and go to the sea,” he said. During a recent six-kilometre swim, the waters near his vacation home on the island of Syros turned rough. When I met him, he was unable to hear from his right ear.

    In many ways, Stournaras is the ideal messenger for Greece’s tough news: he is respected in European economic circles, seen as someone who operates above partisan politics. Before taking office, he was a professor at the University of Athens, chairman and C.E.O. of Emporiki Bank, and advised prior governments. Stournaras was appointed to the Ministry of Finance, not elected. This gives him the freedom to make controversial decisions, but on the flip side, of course, if his policies become too unpopular, Prime Minister Samaras can summarily fire him. The afternoon before I met Stournaras, Michael Massourakis, the chief economist at Alpha Bank, told me that in choosing Stournaras, “the political parties wanted to find somebody who is nonpolitical so they can scapegoat him if things go bad.”

    For the moment that seems unlikely. Although Samaras came to office on a pledge to slow austerity measures and Stournaras has supported them, the two are now friends who work together closely, meeting often, sharing jokes.

    In the midst of our discussion, Stournaras’s phone rang. It was the Prime Minister.

    “I have a reporter here from the The New Yorker,” Stournaras told him. “Shall I put you on?”

    Stournaras activated the speakerphone setting so I could hear. Samaras—laughing knowingly—informed me that despite “previous ideological differences” he and Stournaras share a common goal: keeping Greece in the eurozone.

    “That’s what I told him!” Stournaras said.

    “Do you hear me, Yannis?”

    “Yeah, yeah, I do.”

    “Am I correct in this assessment?”

    “Absolutely.”

    Then Samaras quoted Neil Diamond. “You know that song that says, ‘Used-to-bes don’t count anymore, they just lay on the floor till we sweep them away?’” he said. “The idea is that differences don’t matter as long as there is a common cause that links us together.”

    As Samaras spoke, Stournaras smiled appreciatively. Despite this display of seemingly genuine affection, it was hard for me to forget what I’d been told a day earlier: that for all this friendship, Stournaras could yet prove dispensable.



    Greece still has
    a long way to go. The government is again under pressure from its lenders, with the troika evaluating the country’s economic recovery and money-saving efforts as it weighs a third bailout package. “All the low-hanging fruit has been reaped at this point,” Alpha Bank’s Massourakis said. “It has to do major things that Greek governments were not very eager to do.”

    Future objectives include reforming Greece’s tax system, opening closed markets, and restructuring or even privatizing some public businesses. A new round of protest marches has already begun, with civil servants taking to the streets in late August to oppose planned suspensions and firings.

    “Stournaras is very unlucky in the sense that now people are very tired,” Alexis Papahelas, the executive editor of the respected newspaper Kathimerini, said. “Every time someone hears about a reform, they think they’re going to lose part of their income.”

    Compounding Stournaras’s problems, observers said, is the fact that the Samaras-led coalition, with an advantage of just five seats in Parliament, could be sunk by even a small disagreement. And if the coalition falls apart, many believe it will be succeeded by extremists—from either the far right or the far left, a scenario Samaras called “catastrophic.”

    Nonetheless, a March poll found that Stournaras’s approval rating was unusually high for a finance minister. This may reflect his penchant for directness, and his distance from the political elite that has ruled Greece for decades. When I asked Stournaras why he took his current job—and with it a large pay cut—after having rejected several prior ministerial appointments, he sounded a philosophical note. “Patriotic duty,” he responded. “It’s like being at war and you’re asked to participate and you say no. You cannot say no.”

    Chanan Tigay is the author of the forthcoming book “Unholy Scriptures: Fraud, Suicide, Scandal & the Bible that Rocked the Holy City” (Ecco/HarperCollins).
  • In the Media | September 2013
    By Jonathan Schlefer

    The New York Times, September 10, 2013. All rights Reserved.

    Wynn Godley

    BOSTON — With the 2008 financial crisis and Great Recession still a raw and painful memory, many economists are asking themselves whether they need the kind of fundamental shift in thinking that occurred during and after the Depression of the 1930s. “We have entered a brave new world,” Olivier Blanchard, the International Monetary Fund’s chief economist, said at a conference in 2011. “The economic crisis has put into question many of our beliefs. We have to accept the intellectual challenge.”

    If the economics profession takes on the challenge of reworking the mainstream models that famously failed to predict the crisis, it might well turn to one of the few economists who saw it coming, Wynne Godley of the Levy Economics Institute. Mr. Godley, unfortunately, died at 83 in 2010, perhaps too soon to bask in the credit many feel he deserves.

    But his influence has begun to spread. Martin Wolf, the eminent columnist for The Financial Times, and Jan Hatzius, chief economist of global investment research at Goldman Sachs, borrow from his approach. Several groups of economists in North America and Europe — some supported by the Institute for New Economic Thinking established by the financier and philanthropist George Soros after the crisis — are building on his models.

    In a 2011 study, Dirk J. Bezemer, of Groningen University in the Netherlands, found a dozen experts who warned publicly about a broad economic threat, explained how debt would drive it, and specified a time frame.

    Most, like Nouriel Roubini of New York University, issued warnings in informal notes. But Mr. Godley “was the most scientific in the sense of having a formal model,” Dr. Bezemer said.

    It was far from a first for Mr. Godley. In January 2000, the Council of Economic Advisers for President Bill Clinton hailed a still “youthful-looking and vigorous” expansion. That March, Mr. Godley and L. Randall Wray of the University of Missouri-Kansas City derided it, declaring, “Goldilocks is doomed.” Within days, the Nasdaq stock market peaked, heralding the end of the dot-com bubble.

    Why does a model matter? It explicitly details an economist’s thinking, Dr. Bezemer says. Other economists can use it. They cannot so easily clone intuition.

    Mr. Godley was relatively obscure in the United States. He was better known in his native Britain — The Times of London called him “the most insightful macroeconomic forecaster of his generation” — though often as a renegade.

    Mainstream models assume that, as individuals maximize their self-interest, markets move the economy to equilibrium. Booms and busts come from outside forces, like erratic government spending or technological dynamism or stagnation. Banks are at best an afterthought.

    The Godley models, by contrast, see banks as central, promoting growth but also posing threats. Households and firms take out loans to build homes or invest in production. But their expectations can go awry, they wind up with excessive debt, and they cut back. Markets themselves drive booms and busts.

    Why did Mr. Godley, who had barely any formal economics training, insist on developing a model to inform his judgment? His extraordinary efforts to overcome a troubled childhood may be part of the explanation. Tiago Mata of Cambridge University called his life “a search for his true voice” in the face of “nagging fear that he might disappoint [his] responsibilities.”

    Mr. Godley once described his early years as shackled by an “artificial self” that kept him from recognizing his own spontaneous reactions to people and events. His parents separated bitterly. His mother was often away on artistic adventures, and when at home, she spent long hours coddling what she called “my pain” in bed.

    Raised by nannies and “a fierce maiden aunt who shook me violently when I cried,” Mr. Godley was sent at age 7 to a prep school he called a “chamber of horrors.”

    Despite all that, Mr. Godley, with his extraordinary talent, still managed to achieve worldly success. He graduated from Oxford with a first in philosophy, politics and economics in 1947, studied at the Paris Conservatory, and became principal oboist of the BBC Welsh Orchestra.

    But “nightmarish fears of letting everyone down,” he recalled, drove him to take a job as an economist at the Metal Box Company. Moving to the British Treasury in 1956, he rose to become head of short-term forecasting. He was appointed director of the Department of Applied Economics at Cambridge in 1970.

    In the early 1980s, the British Tory government, allied with increasingly conventional economists at Cambridge, began “sharpening its knives to stab Wynne,” according to Kumaraswamy Velupillai, a close friend who now teaches at the New School in New York. They killed the policy group he headed and, ultimately, the Department of Applied Economics.

    But after warning of a crash of the British pound in 1992 that took official forecasters by surprise, Mr. Godley was appointed to a panel of “six wise men” advising the Treasury.

    In 1995 he moved to the Levy Institute outside New York, joining Hyman Minsky, whose “financial instability hypothesis” won recognition during the 2008 crisis.

    Marc Lavoie of the University of Ottawa collaborated with Mr. Godley to write “Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth” in 2006, which turned out to be the most complete account he would publish of his modeling approach.

    In mainstream economic models, individuals are supposed to optimize the trade-off between consuming today versus saving for the future, among other things. To do so, they must live in a remarkably predictable world.

    Mr. Godley did not see how such optimization is conceivable. There are simply too many unknowns, he theorized.

    Instead, Mr. Godley built his economic model around the idea that sectors — households, production firms, banks, the government — largely follow rules of thumb.

    For example, firms add a standard profit markup to their costs for labor and other inputs. They try to maintain adequate inventories so they can satisfy demand without accumulating excessive overstock. If sales disappoint and inventories pile up, they correct by cutting back production and laying off workers.

    In mainstream models, the economy settles at an equilibrium where supply equals demand. To Mr. Godley, like some Keynesian economists, the economy is demand-driven and less stable than many traditional economists assume.

    Instead of supply and demand guiding the economy to equilibrium, adjustments can be abrupt. Borrowing “flows” build up as debt “stocks.”

    If rules of thumb suggest to households, firms, or the government that borrowing, debt or other things have gone out of whack, they may cut back. Or banks may cut lending. The high-flying economy falls down.

    Mr. Godley and his colleagues expressed just this concern in the mid-2000s. In April 2007, they plugged Congressional Budget Office projections of government spending and healthy growth into their model. For these to be borne out, the model said, household borrowing must reach 14 percent of G.D.P. by 2010.

    The authors declared this situation “wildly implausible.” More likely, borrowing would level off, bringing growth “almost to zero.” In repeated papers, they foresaw a looming recession but significantly underestimated its depth.

    For all Mr. Godley’s foresight, even economists who are doubtful about traditional economic thinking do not necessarily see the Godley-Lavoie models as providing all the answers. Charles Goodhart of the London School of Economics called them a “gallant failure” in a review. He applauded their realism, especially the way they allowed sectors to make mistakes and correct, rather than assuming that individuals foresee the future. But they are still, he wrote, “insufficient” in crises.

    Gennaro Zezza of the University of Cassino in Italy, who collaborated with Mr. Godley on a model of the American economy, concedes that he and his colleagues still need to develop better ways of describing how a financial crisis will spread. But he said the Godley-Lavoie approach already is useful to identify unsustainable processes that precede a crisis.

    “If everyone had remained optimistic in 2007, the process could have continued for another one or two or three years,” he said. “But eventually it would have broken down. And in a much more violent way, because debt would have piled up even more.”

    Dr. Lavoie says that one of the models he helped develop does make a start at tracing the course of a crisis. It allows for companies to default on loans, eroding banks’ profits and causing them to raise interest rates: “At the very least, we were looking in the right direction.”

    This is just the direction that economists building on Mr. Godley’s models are now exploring, incorporating “agents” — distinct types of households, firms and banks, not unlike creatures in a video game — that respond flexibly to economic circumstances. Stephen Kinsella of the University of Limerick, the Nobel laureate economist Joseph Stiglitz and Mauro Gallegati of Polytechnic University of Marche in Italy are collaborating on one such effort.

    In the meantime, Mr. Godley’s disciples say his record of forecasting still stands out. In 2007 Mr. Godley and Dr. Lavoie published a prescient model of euro zone finances, envisioning three outcomes: soaring interest rates in Southern Europe, huge European Central Bank loans to the region or brutal fiscal cuts. In effect, the euro zone has cycled among those outcomes.

    So what do the Godley models predict now? A recent Levy Institute analysis expresses concern not about serious financial imbalances, at least in the United States, but weak global demand. “The main difficulty,” they wrote, “has been in convincing economic leaders of the nature of the main problem: insufficient aggregate demand.” So far, they are not having much success.

    A version of this article appears in print on September 11, 2013, on page B1 of the New York edition with the headline: Embracing Economist Who Modeled the Crisis.

  • In the Media | August 2013
    By Ronald Janssen

    Social Europe Journal, August 27, 2013. All Rights Reserved.

    While the German public opinion, courtesy of the debate in the run up to the next political elections, is discovering the fact that Greece will be needing a third bail out, a team of economists from the US – based Levy Institute describes how things look like from the side of Greece.

    Click here for the full article.

  • In the Media | August 2013
    By Dimitri B. Papadimitriou
    Ekathimerini.com, August 12, 2013. © 2013 H Kaθhmepinh. All Rights Reserved.

    At their White House meeting last week, U.S. President Barack Obama assured Greek Prime Minister Antonis Samaras of his support as Greece prepares for talks with creditors on additional debt relief amid record-high unemployment.

    The U.S. should also endorse a new blueprint for recovery based on one of the most successful economic assistance programs of the modern era: the Marshall Plan.

    It is clear by now that the European Union’s policies in Greece have failed. Projections that government spending cutbacks would stop the economy’s free-fall proved to be wildly optimistic. The 240 billion euro ($319 billion) bailout from the euro area and International Monetary Fund has shown little sign of success, and Greece is experiencing its sixth year of recession.

    The spending cuts and tax increases, along with the dismissal of huge numbers of public-sector employees, demanded as a condition of the loans and assistance have only deepened the economic pain.

    Instead of changing course, however, euro-area economists have responded to bad news by revising their forecasts to reflect lower expectations. Those numbers document a staggering record of mistaken assumptions that has led to today’s failure.

    In December 2010, the so-called troika of lenders—the European Commission, the European Central Bank and the International Monetary Fund—predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.

    This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.

    Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.

    Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.

    Greece last faced economic ruin immediately after World War II. By 1949, the country was bankrupt, with virtually no industry; transportation networks, farmland and villages had been devastated, and about a quarter of the population was homeless.

    Marshall Plan funds allowed Greece to rebuild, start power utilities, finance businesses and aid the poor. And, because social chaos had created an opening for communist and extremist parties, the U.S. hoped the stimulus would stabilize democracy, even as it created wealth.

    Like other Marshall Plan nations, Greece experienced growth on a scale it had never known. The astonishing transformation was widely hailed as an “economic miracle,” and the nation continued to surge more than 20 years after the assistance ended.

    With that enormous achievement in mind, the Levy Economics Institute has constructed a macroeconomic model of what a Marshall-type recovery plan could do for the Greek economy today. We assumed a modest stimulus from EU institutions of 30 billion euros between 2013 and 2016 that would be directed at public consumption and investment, and particularly jobs.
    Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.

    A rebuilding plan could address Greece’s tremendous need to renovate schools, hospitals, libraries, parks, roads and bridges. Forests need to be replenished: Catastrophic fires have led to deforestation. Tourism once accounted for more than 25 percent of the economy; now, extraordinary beach cleanups are badly needed to attract visitors.

    University graduates, after having been trained at public expense, are now forced to seek opportunity outside Greece. They could make valuable contributions, introducing information technology and other know-how to the government, health and education sectors.

    These efforts could draw an idled, but ready and trained labor force, to construction, education, social service and technology. More employment would increase aggregate demand, which is now severely depressed. In turn, the multiplier effect of these expenditures would increase GDP substantially.

    Instead, Greece is applying “expansive austerity.” The idea is based on a contested theory, and the real-world results have been a humanitarian disaster. These policies are lowering demand by reducing incomes, which cuts into tax revenue. The inevitable result is higher deficits and debt-to-GDP ratios.

    For comparison, we modeled what we expect to happen in the coming years if Greece stays on its scheduled fiscal diet. The government has consistently been unable to meet troika-mandated deficit-reduction targets, and the lenders have consistently required further cutbacks.

    The results of our modeling exercise were clear: Under today’s policies, unemployment would continue to increase, reaching almost 34 percent by the end of 2016. Under a Marshall Plan scenario, the rate would fall to about 20 percent.

    Similarly, if Greece institutes the currently planned austerity measures, we calculate that its gross domestic product would reach about 158 billion euros by the end of 2016, compared with 162 billion euros projected for 2013. That would be more than 15 billion euros short of the troika-mandated target.

    If, alternatively, government squeezes harder to meet the required deficit-to-GDP ratio goals, the endgame will be even worse: A poor and increasingly out of work population, among other factors, will push GDP to about 148 billion euros, more than 30 percent below its 2008 peak. A Marshall Plan scenario would put GDP a little above the troika’s target.

    The first Marshall Plan wasn’t an act of charity or a bailout: It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration. To institute a modern version, we need to revise discredited austerity theories—or the euro-area institutions that promote them.

    *Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College.
     
  • In the Media | August 2013
    By Dimitri B. Papadimitriou
    Bloomberg, August 11, 2013. All Rights Reserved.

    At their White House meeting last week, U.S. President Barack Obama assured Greek Prime Minister Antonis Samaras of his support as Greece prepares for talks with creditors on additional debt relief amid record-high unemployment.

    The U.S. should also endorse a new blueprint for recovery based on one of the most successful economic assistance programs of the modern era: the Marshall Plan.

    It is clear by now that the European Union’s policies in Greece have failed. Projections that government spending cutbacks would stop the economy’s free-fall proved to be wildly optimistic.

    The 240 billion euro ($319 billion) bailout from the euro area and International Monetary Fund has shown little sign of success, and Greece is experiencing its sixth year of recession.

    The spending cuts and tax increases, along with the dismissal of huge numbers of public-sector employees, demanded as a condition of the loans and assistance have only deepened the economic pain.

    Instead of changing course, however, euro-area economists have responded to bad news by revising their forecasts to reflect lower expectations. Those numbers document a staggering record of mistaken assumptions that has led to today’s failure.

    Shifting Forecasts
    In December 2010, the so-called troika of lenders—the European Commission, the European Central Bank and the International Monetary Fund—predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.

    This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.

    Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.

    Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.

    Greece last faced economic ruin immediately after World War II. By 1949, the country was bankrupt, with virtually no industry; transportation networks, farmland and villages had been devastated, and about a quarter of the population was homeless.

    Marshall Plan funds allowed Greece to rebuild, start power utilities, finance businesses and aid the poor. And, because social chaos had created an opening for communist and extremist parties, the U.S. hoped the stimulus would stabilize democracy, even as it created wealth.

    Like other Marshall Plan nations, Greece experienced growth on a scale it had never known. The astonishing transformation was widely hailed as an “economic miracle,” and the nation continued to surge more than 20 years after the assistance  ended.

    With that enormous achievement in mind, the Levy Economics Institute has constructed a macroeconomic model of what a Marshall-type recovery plan could do for the Greek economy today. We assumed a modest stimulus from EU institutions of 30 billion euros between 2013 and 2016 that would be directed at public consumption and investment, and particularly jobs.

    Debt Forgiveness
    Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.

    A rebuilding plan could address Greece’s tremendous need to renovate schools, hospitals, libraries, parks, roads and bridges. Forests need to be replenished: Catastrophic fires have led to deforestation. Tourism once accounted for more than 25 percent of the economy; now, extraordinary beach cleanups are badly needed to attract visitors.

    University graduates, after having been trained at public expense, are now forced to seek opportunity outside Greece. They could make valuable contributions, introducing information technology and other know-how to the government, health and education sectors.

    These efforts could draw an idled, but ready and trained labor force, to construction, education, social service and technology. More employment would increase aggregate demand, which is now severely depressed. In turn, the multiplier effect of these expenditures would increase GDP substantially.
    Instead, Greece is applying “expansive austerity.” The idea is based on a contested theory, and the real-world results have been a humanitarian disaster. These policies are lowering demand by reducing incomes, which cuts into tax revenue. The inevitable result is higher deficits and debt-to-GDP ratios.

    For comparison, we modeled what we expect to happen in the coming years if Greece stays on its scheduled fiscal diet. The government has consistently been unable to meet troika-mandated deficit-eduction targets, and the lenders have consistently required further cutbacks.

    The results of our modeling exercise were clear: Under today’s policies, unemployment would continue to increase, reaching almost 34 percent by the end of 2016. Under a Marshall Plan scenario, the rate would fall to about 20 percent.

    Shrinking GDP
    Similarly, if Greece institutes the currently planned austerity measures, we calculate that its gross domestic product would reach about 158 billion euros by the end of 2016, compared with 162 billion euros projected for 2013. That would be more than 15 billion euros short of the troika-mandated target.

    If, alternatively, government squeezes harder to meet the required deficit-to-GDP ratio goals, the endgame will be even worse: A poor and increasingly out of work population, among other factors, will push GDP to about 148 billion euros, more than 30 percent below its 2008 peak. A Marshall Plan scenario would put GDP a little above the troika’s target.

    The first Marshall Plan wasn’t an act of charity or a bailout: It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration. To institute a modern version, we need to revise discredited austerity theories—or the euro-area institutions that promote them.

    (Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College.)
  • In the Media | August 2013
    By Ellen Freilich

    Reuters, August 9, 2013. © Thomson Reuters. All Rights Reserved.

    The recently passed Senate bill—S. 744, or the Border Security, Economic Opportunity, and Immigration Modernization Act—that would take significant steps toward comprehensive reform, is being held up in the Republican-controlled House of Representatives, with a “path to citizenship” for undocumented immigrants the apparent sticking point.

    A recent report from the Congressional Budget Office estimated the following:

    All told, relative to the committee-approved bill, the Senate-passed legislation would boost direct spending by about $36 billion, reduce revenues by about $3 billion, and increase discretionary costs related to S. 744 by less than $1 billion over the 2014-2023 period.

    Nathan Sheets and Robert Sockin at Citigroup are even more sweeping in their endorsement of immigration’s economic upside:

    We find that immigration has been a major driver of growth in the United States, the euro area, and the United Kingdom. Specifically, we find that about one-third of the growth in these economies over the past decade can be attributed to immigration. Stated bluntly, the average immigrant appears to have contributed roughly as much to GDP as the average person in the domestic-born population. We also find that a more rapid pace of immigrant inflows in the decades ahead will result in a corresponding increase in the level and growth rate of GDP.

    Yet according to a report rom the Levy Economics Institute, a liberal research group at Bard College, these broad endorsements fail to push back appropriately against the specific claim that is the law’s major point of contention: the purported economic costs of granting amnesty to undocumented immigrants.

    The Levy research argues that “legalizing a significant proportion of the undocumented immigrant population would not impose serious costs on either the economy in general or the social insurance system in particular.”

    In fact, author Selçuk Eren, a Levy research scholar, finds maintaining the status quo would be economically wasteful.

    Legalization would lead to increased benefit payouts for social insurance programs, since it would make a portion of the currently undocumented population eligible for benefits. At the same time, bringing undocumented immigrants into the legal labor pool would boost capital accumulation in the U.S. economy, the Institute said. Compared to legal immigrants, undocumented workers end up sending more of their savings back to their home countries as remittances.

    Moreover, offering a path to legal immigration status should increase labor productivity as newly legalized immigrants become able to better match their skills to the jobs available without having to maneuver through the shadows of the grey labor market.

    When we ran the numbers on a scenario in which 50 percent of undocumented immigrants became legal immigrants, the positive effects of the former outweighed the costs of the latter, leading to net benefits in the form of overall increases in capital stock, output, consumption, and labor productivity. These positive macroeconomic effects would also feed into improvements in the finances of the social insurance system.

    As a result, the overall costs to the system would ultimately be negligible: in order to support new beneficiaries, Social Security and unemployment insurance tax rates would need to increase by only 0.13 and 0.01 percentage points, respectively. Moreover, for the sake of simplicity we assumed that all currently undocumented immigrants pay into Social Security and unemployment insurance.

    Macroeconomic improvements would be fairly modest, amounting to around one- to two-tenths of 1 percent for many measures, the report said. The Institute also estimates an overall contribution of $36 billion per year to the U.S. economy. But while small, that’s hardly a downside.

    Still,  Eren concludes:

    We cannot reasonably oppose comprehensive immigration reform on the basis of the alleged economic burden of offering a pathway to citizenship. Even when we isolate this most controversial element of reform, maintaining the status quo is the most costly option.

  • In the Media | August 2013
    By C. J. Polychroniou
    Truthout, August 7, 2013. All Rights Reserved.

    Further austerity can only worsen Greece's economic plight, particularly already-catastrophic unemployment, warns Dimitri B. Papadimitriou, president of the Levy Economics Institute, according to the Institute's macro-economic model. But "unthinkable" economic policies—suggested by conservative and progressive economists alike—could.

    In early 2010, Greece's staggering deficit/debt problems turned into a major financial crisis when its sovereign debt was downgraded by rating agencies into junk territory, freezing Greece out of international capital markets. On May of that year, Europe and the International Monetary Fund (IMF) agreed to a €110 billion financing plan for Greece, which involved major budget cuts, slashes in wages and pensions, sharp tax increases, labor market reforms and privatization of state assets—i.e., a financing plan with the usual neoliberal adjustment strings attached. The plan was such a flop that it led less than two years later to a second bailout program worth €130 billion, which included even harsher structural adjustment and austerity measures than the first loan agreement.

    The primary aim of the first financial bailout of Greece was the repayment of loans, mainly to German and France banks, which were highly exposed to Greek sovereign debt. Today—and after a rather large haircut for private holders of Greek debt—most Greek public debt is held by the official sector—European Union (EU) government treasuries, the IMF, and the European Central Bank (ECB).

    Greece's financial sovereignty is under the direct command of the troika of the European Commission, the IMF and the European Central Bank (ECB), and virtually all of the money received by Greece's international lenders and through the privatization of state assets and publicly owned enterprises goes toward the repayment of debt. In the meantime, the Greek economy and society are administered shock therapy of the kind described by Naomi Klein in her book The Shock Doctrine, with the explicit aim of institutionalizing an extreme neoliberal order. Already, Greek wages are being steadily reduced to 1970s levels (the actual intent is to bring Greek wages in line with those of other Balkan nations—i.e., Bulgaria, Romania); workers' rights have all but disappeared; social public services are being dismantled and the unemployment rate, currently at 27.4%, is the highest in the European Union. Amazingly enough, IMF, EU and Greek government officials treat these developments as evidence that the Greek program is on the right track—in fact, insisting on more austerity measures.

    In the midst of this economic catastrophe, Greece is experiencing social decomposition not seen in Western societies since the end of the second world war—highlighted by the massive shrinkage of the middle class and the meteoric rise of the new poor—and a profound political crisis, underlined by the complete distrust exhibited by 90% of the population toward the government and the parliament (i.e., the political system as a whole). According to the same recent poll, 80% of the population mistrusts the European Union, while 68% brace themselves for worse days ahead. It is no surprise, therefore, that the sharpest rise of a neo-Nazi party in all of Europe is taking place today in Greece. Most of the support for Golden Dawn, a political party of thugs whose members do their best to imitate Hitler's "brown shirts," comes from unemployed and uneducated youth.

    On the positive side, Greece's Coalition of the Radical Left (Syriza) has also surged in the polls, receiving in the last round of national elections, held in June 2012, nearly 27% of the popular vote, slightly less than three percentage points below the conservatives who came first. In the 2009 national elections, Syriza had managed to attract only 4.6% of the popular vote. However, in the event of a victory in the next elections, the challenges it faces are daunting: Will it form a government with the conservatives? If not, will it opt for political anarchy? Will it be able to secure the renegotiation of the loan terms with the troika, which has so far been its main strategy for dealing with the catastrophe of Greece? If not, will it force Greece out of the euro?

    The international bailouts of Greece have been an unmitigated economic and social disaster, as a recently released econometric analysis of the Greek economic crisis by the Levy Economics Institute of Bard College attests, dispelling EU/IMF and Greek government officials' myths and lies about the alleged success of the Greek program. Even so, the options for the future of Greece remain starkly limited.

    In an interview for Truthout, Dimitri B. Papadimitriou, president of the Levy Economics Institute of Bard College, executive vice president and Jerome Levy Professor of Economics at Bard, discusses with C. J. Polychroniou (a research associate and policy fellow at the Levy Institute and columnist for the Greek newspaper Eleftherotypia) the findings of the Institute's study on the Greek economic crisis and their implications for the future of Greece.

    The Levy Economics Institute of Bard College has just published a major econometric analysis of the impact of "expansionary austerity" in Greece, with you as its lead author, which contradicts European Union (EU) and International Monetary Fund (IMF) claims that the experiment is producing positive results and actually makes a mockery of the Greek government's portrayal of the experiment as a "success story." How would you summarize the state of the Greek economy?

    This is the sixth year of Greece's Great Depression, with an economy in free fall after the EU/IMF austerity kicked into effect as part of the May 2010 bailout agreement, a policy which not only continues unabated but insists on an even higher dosage of the same medicine when the patient's condition deteriorates. The Greek GDP shrank by almost 5% in 2010, by over 7% in 2011, by 6.5% in 2012, and it is expected to shrink by an additional 4.5-5% by the end of 2013. The country's unemployment rate hit double digits shortly after the austerity measures were implemented and is currently above 27%. As expected, poverty and inequality have skyrocketed during the last three and a half years, and suicides plague a nation that was traditionally immune to such phenomena. Moreover, in spite of all the sacrifices made by average Greek citizens who have seen their standard of living reduced to 1970s levels because of major cuts in wages, social benefits and pensions and sharp tax increases as part of the classic IMF structural adjustment program imposed by the country's international lenders and followed by the compliant Greek governments, the nation's debt has been steadily increasing and currently stands at 160.50% of the GDP even after a large "haircut" of sovereign debt held by the private sector took place in 2012.

    In this context, it is simply mind boggling that anyone can possibly consider such outcomes as positive signs of an economic policy at work, let alone a "success story." But the dreadful economic and social trends we are witnessing are not surprising at all; on the contrary, they were long expected as consequences of discredited economic dogmas associated with neoliberalism. The simulations of the Levy Institute's specially constructed stock-flow macro-model show clearly that any fiscal consolidation during recessionary times does not result in a "success story" but, instead, in further economic decline.

    The ongoing Greek catastrophe is so immense that it staggers the imagination. Reversing Greece's downward economic trend poses now severe policy challenges as the options have become truly narrow. In the course of three and a half years of wild neoliberal experimentation, Greece has been transformed from an advanced economy into an emerging economy on the verge of a humanitarian crisis.

    Indeed, on what grounds then did the IMF and the EU expect austerity to work in the case of Greece, especially when the economy was already in a recession, and why don't they terminate this dangerous pursuit when all economic evidence is stacked against it?

    Recent reports from the IMF reveal that concerns from employees of the Fund about the first bailout program succeeding were voiced in 2010. But it's obvious that they were ignored and, instead of doing the obvious, that is, providing Greece with a much larger bailout program and in the spirit of true assistance rather than in the spirit of punishment, they focused on saving large French and German banks from incurring big losses on their holdings of Greek sovereign debt and, in so doing, hoping to prevent erosion of investors' confidence and contagion for other Eurozone highly indebted countries like Spain and Italy.

    Both the IMF and the EU produced rather optimistic scenarios about the effects of their policies on Greece, but all their projections were based on faulty evaluations of the country's public finances and erroneous estimates of the fiscal multipliers and their effect on austerity for an economy already in recession. However, despite the Fund's admission of big errors, both the IMF and the EU dismiss the need for either a revision or termination of the program, insisting dogmatically in turn that the program is "broadly correct." In the end, though, they will have to consider yet another debt restructuring before terminating the program, since the failure of the Greek program may seal the ultimate demise of the Fund and the dissolution of the Eurozone.

    One of the major arguments often made by troika in defense of neoliberal economic reforms in Greece is that the nation's labor market is highly inflexible. How does one define inflexible labor markets, and do they actually exact a high economic toll as neoliberals claim that they do?

    The word "inflexible" is cosmetic; it means workers should not be protected by strong unions with bargaining agreements covering wages and benefits, adhering to hiring and separation, and nondiscrimination clauses with recourse to state authority for noncompliance. The neoliberal doctrine makes no distinction between product and labor markets. But labor is not like rice where its price is bid up or pushed down dependent on supply and demand. In this line of thought, labor is simply a cost that can be cut and not an asset that can be developed. More and more evidence provides contrary results to those claimed by the neoliberal thinking.

    Wages have been dramatically cut in Greece, yet the unemployment rate continues to rise. Who benefits from low-income workers?

    Based on a Harmonized Competitiveness Indicator measuring unit labor costs, the relative Greek unit labor costs have decreased more than in any other Eurozone member country except for Germany, which systematically maintains lower values by severely suppressing wages. Despite the lower wages, unemployment is soaring because the country is in a deepening recession caused by the continuing and ever stronger grip of austerity that compresses both private and public consumption and investment. Under these circumstances, rising unemployment will further push wages downward - benefiting the private corporate sector, to be sure, much smaller now than its precrisis size. And as it has been widely reported, in Greece, many workers are either not "officially" employed, or paid regularly (in many private sector jobs workers are paid in small installments or are unpaid for several months) and/or have their social insurance contributions made on their behalf. Above all, the declining fortunes do not affect consumer prices that are continuously rising, pushing more and more people into deeper poverty.

    Both the Greek government and the EU have shown remarkable indifference so far to the problem of unemployment in Greece, which, among other things, has led to the increasing strength of the neo-Nazi party "Golden Dawn." Why isn't anything being done to address the unemployment problem?

    I don't think the Greek government is indifferent to the scourge of unemployment. But once you are forced to accept other people's money you have no choice but to abide with conditions placed from the lenders. Lenders are indifferent about lost output and unemployment, rising poverty and all other social and economic ills that come along. Where a government can be faulted is in its very poor negotiation skills with its lenders. The Greek governments clearly did not play their cards right against Berlin, Brussels and Frankfurt and Washington. The Greek governments can be blamed for continuously accepting even harsher austerity, pretending that ideological shifts are divorced from the economic conditions emanating from its very actions. The blame game is already a tired and unconvincing ploy.

    The econometric analysis on the state of the Greek economy involves model simulations in order to assess the impact of austerity for the next three years. What should we expect if the current policies of austerity continue?

    Our projections, which are derived from a stock-flow-consistent macroeconomic model especially constructed for Greece, show the faulty design of the troika program that yields inconsistent targets of deficit to GDP ratios, growth of GDP and unemployment. Our own simulations show that, should the agreed program of austerity continue unrevised, it will deliver a rising unemployment - reaching a high rate of 34% by the end of 2016, contradicting the troika's corresponding rate of slightly more than 20%. It is astonishing to think that even if their projections are correct - and there is plenty of evidence from their past four worsening revisions that they are not - that a higher than 20% unemployment should render the effort "successful."

    Greek political life is undergoing profound changes, and the Coalition of the Radical Left (Syriza) has an historic opportunity to rise to power. What should it do in the event that it forms a government but fails to compel Greece's international lenders to put an end to the vicious austerity measures and the ongoing national catastrophe?

    A progressive party like Syriza may have the unique opportunity by its sheer rise to power to engage in a different sort of negotiation. We should not forget that there is already a division in the house of troika. If Syriza were able to band with the other South European Eurozone members, this can become easier. Irrespective of this synergy, the division between the IMF and the European Commission can turn out to be advantageous to the strategy that Syriza has advocated: suspension of interest payments until growth emerges and then resumption of interest payments linked to GDP growth.

    Furthermore, this will need to be supplemented with a higher allocation of structural funds with no matching contribution for a number of years. (More than 40 billion euros have been paid toward interest that can be refunded). This can be made possible only if the present government's pronouncements of achieving a primary budget balance are realized. If this is not achievable—most likely it is not—then the options are more or less of the unthinkable sort. This includes the introduction of a parallel national nonconvertible currency, including government tax-based bonds traded and used for payment of taxes at par. The parallel currency can start with government consumption expenditures including the instituting of a carefully designed and monitored guaranteed public service employment program as advocated by the late Hyman Minsky. The experience of such jobs programs is encouraging. Design, monitoring and evaluation of the program would be under the aegis of a central state authority with many regional branches along the lines of the successfully designed Americorps structure in the US. The parallel currency will eventually replace the euro for all internal transactions, but more importantly, as mentioned, it will not be convertible to the euro—avoiding speculative attacks. Even though this may sound like a radical idea, it has been suggested by many conservative and progressive economists alike. 
  • In the Media | August 2013
    By Mike Sunnucks
    The benefits of legalizing many of the 11 million undocumented immigrants under business-backed reforms being considered by Congress outweigh the costs.

    That is according to a new study by the Levy Economics Institute at Bard College in New York.

    A white paper by Selcuk Eren contends legalized unauthorized immigrants would leave under-the-table jobs and start paying Social Security and other taxes, get better paying jobs and may save and spend more on their lives here in the U.S. rather than sending that money back to family in Mexico and other home countries.

    “Legalization should be expected to increase the level of capitalization in the U.S. economy,” Eren said.

    Immigrants send as much as $25 billion a year back to home countries, according to the Center for Immigration Studies.

    In many cases, undocumented immigrants also live on cash without credit cards or even bank accounts.

    Business and economic advocates of legalization argue the reform bill in Congress will bring those workers out of the shadows and into the mainstream economy.

    Eren acknowledges legalizing undocumented immigrants could add some strains on social services and welfare programs, but concludes the economic benefits outweigh those costs.

    A study earlier this year by Arizona State University's Morrison Institute expects legalization to increase immigrants’ wages by as much as $3,100 each per year. The ASU report said immigrants with legal status can get better jobs and earn higher wages than those being paid under the table or working with fake identification. Currently, unauthorized immigrants in Arizona make $27,100 a year on average.

    A Congressional Budget Office report also expects reforms — if passed by Congress — to hike immigrants wages by 12 percent. But the same report said American worker wages would remain flat or decline slightly over the next two decades if reforms pass.

    National and Arizona business interests are pushing hard for reforms to pass Congress. Agriculture and construction companies as well as chambers of commerce in Arizona back reforms as do high-tech CEOs such as Facebook’s Mark Zuckerberg, Google’s Eric Schmimdt and Yahoo’s Marissa Meyer. The reform bill increases the number of foreign worker visas, including for engineers and high-tech workers.
  • In the Media | July 2013
    By Ellen Freilich
    Reuters, July 30, 2013. @2013 Thomson Reuters. All rights reserved. 

    The spectacular failure of “expansionary austerity” policies has set Greece on a path worse than the Great Depression, according to a study from the Levy Economics Institute of Bard College.

    Using their newly-constructed macroeconomic model for Greece, the Levy scholars recommend a recovery strategy similar to the Marshall Plan to increase public consumption and investment.

    “A Marshall-type recovery plan directed at public consumption and investment is realistic and has worked in the past,” the authors of the report said.

    Employment in Greece is in free fall, with more than one million jobs lost since October 2008 — a drop of more than 28 percent, leaving the “official” unemployment rate in March at 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years, the Levy Institute scholars said.

    The study argues the austerity policies espoused by the “troika,” the group of international lenders who funded Greece’s bailouts, have failed and that continuing those prescriptions will only worsen Greece’s jobs, growth, and deficit outlook.

    “With joblessness in Greece now above 27 percent – a stark indicator of the troika’s failure to accurately project the consequences of their own policies, it’s astonishing that (European Commission) and (International Monetary Fund) officials continue to ask for more of the same,” Levy Institute President Dimitri Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza wrote in their analysis.

    “The Greek Economic Crisis and the Experience of Austerity: A Strategic Analysis,” seeks answers to Greece’s downward spiral of lost growth and employment combined with higher public deficits and debt.

    That spiral is the consequence of “foolish policy” enacted by the Greek government as it tried to comply with the terms of a fiscal consolidation program imposed by its international lenders, the economists said.

    Using the Levy Institute macroeconomic model of the Greek economy, or LIMG – a stock-flow consistent model similar to the Institute’s model of the U.S. economy, the Levy scholars analyze the economic crisis in Greece and recommend policies to restore growth and increase employment.

    Based on the LIMG simulations, the authors found that a continuation of austerity policies would lead to lower GDP and higher unemployment numbers than those forecast by the troika.

    In their baseline scenario, the authors contend that, based on the troika’s projections for changes in government revenues and outlays, GDP will grow more slowly and the unemployment rate will rise more sharply (to near 34 percent by the end of 2016) than the troika contends they will.

    The baseline scenario asserts that deficit targets will not be met, with the deficit-to-GDP ratio reaching 7.6 percent by 2016.

    Meeting the troika’s deficit targets, the LIMG model shows, would cause GDP and employment to decline even further than in the baseline scenario – another example of the “faulty thinking” used to support the troika’s projections, which the Levy scholars call too optimistic.

    “In addition to the errors in the values of the fiscal multipliers and the doctrine of ‘expansionary austerity,’ there are implicit supply-side effects emanating from market liberalization and internal devaluation, with all effects converging to produce higher output growth and employment, together with lower deficit-to-GDP ratios,” Papadimitriou, Nikiforos, and Zezza argue.

    “These flaws help to explain why, in the absence of any level of economic stimulus, the troika projections are so optimistic,” they said.

    The study’s authors conclude by recommending a recovery strategy centered on an expanded direct public-service job creation program.

    Their projections show that, using funds from the European Investment Bank or other EU institution, a modest fiscal boost of $30 billion (used at a rate of about $2 billion each quarter) would fundamentally change the outlook for Greece’s economy.

    GDP growth would exceed all previous scenarios. Jobs would  increase more than 200,000 jobs over the baseline “troika” scenario, and the government deficit would be lower than their baseline and GDP-target scenarios.

    “The simulations discussed show clearly that any form of fiscal austerity results in output growth and employment falling into a tailspin that becomes harder and harder to reverse,” the Levy scholars write.

    “We have shown that a relatively modest fiscal boost funded by the appropriate European Union institutions could not only arrest the further declines in GDP and employment, but also reverse their trend and put them on the road to recovery,” the authors of the study said.
  • In the Media | July 2013
    Open Democracy, July 24, 2013. All Rights Reserved.

    The lead author of a major econometric analysis of the Greek economic crisis discusses the disastrous outcomes of the policies enforced on Greece by its international lenders, and the IMF’s admission that it made serious errors in its assessment of the impact of austerity on the Greek economy and society. 

    C. J. Polychroniou: The Levy Economics Institute has just released a Strategic Analysis report (pdf), with you as its lead author, on the Greek economic crisis and the effects of austerity on growth and employment. The analysis relies on the Institute’s specially designed macroeconomic model for the Greek economy, which is similar to the Institute’s model of the US economy. First, what does the model consist of and how accurate has it been so far in assessing and predicting trends in the US economy?

    Dimitri B. Papadimitriou
    :
    The model’s theoretical foundations are rooted in Wynne Godley’s new Cambridge approach to economics, developed in the 1980s, enabling economists and the public alike to produce a serious study of how the whole economic system functions. The determination of national income, GDP growth, inflation and unemployment are all predominant concerns by which the public judges the success or failure of governments. The US model on which the model for Greece is based has had a rather spectacular success in predicting first the 2001-02 recession and subsequently very early on the American and the global financial crisis of 2007-08. An increasing number of economists and policymakers have come to realize the power of its predictive capacity, at least for the US.

    C.J.P: Reading the report, the first thing that stands out is that Greece is in a depression today (in addition to suffering from malaria, hungry school children and a surge in suicides) which is worse than anything experienced during the Great Depression of the 1930s in the US. This is shocking when we consider that benefits for those in retirement and the unemployed for example, did not even exist in the US until 1935. From this analysis, what is the driving force behind the ongoing and deepening economic crisis in Greece?


    D.B.P:
     
    It is true the Great Depression never looked so good as seen currently from Greece. Whereas during the Great Contraction, US government spending for consumption not infrastructure continued to grow, helping to arrest the economy’s decline, in Greece the same spending has fallen severely every year since 2008 with last year being the steepest drop in the country’s continuing downturn.

    This continuous decline is in concert with the country’s international lenders’ requirement in exchange for the two bail-out plans. This is an application of the dangerous idea of austerity that has been proven catastrophic wherever it has been applied during recessions, with the predictable consequences we are currently witnessing. During downturns, private consumption and investment are on declining paths and it falls on the public purse to stimulate the declining aggregate demand. The economic and social conditions you mention are the consequences of a foolish policy based on a discredited economic theory of “expansive austerity” along with labour market reforms as the best, most appropriate medicine for growth in countries like Greece running large government deficits and debt as percentages of GDP.       

    C.J.P: The IMF has admitted to miscalculations of the fiscal multipliers in the implementation of the austerity measures in Greece, yet the European authorities insist on fiscal restraint and implicitly accuse the IMF of playing politics. Who’s kidding whom here?  The IMF and the EU represent today what I call the “twin monsters of global neoliberalism.” So why should any economist be paying attention to what the IMF says? Action, after all, is what matters – and theirs towards Greece certainly haven’t changed. Correct? 

    D.B.P
    :
    The IMF’s confession to big errors in the first rescue programme about three years ago has been viewed as irrelevant, and the Fund still insists that no matter what it did, then, Greece would have suffered a deep downturn. In effect, all three - IMF, EC and ECB (the troika) - still refuse to acknowledge the flawed handling of the Greek sovereign debt crisis, maintaining to the contrary that the overall policy was correct.

    As my colleagues and I at the Levy Institute suggested when the first bailout programme was arranged, the amount was far smaller than required and the consequences of government spending cuts and tax increases were deeply underestimated.  But those charged with running the European Union and the IMF would not increase the bail-out funds to assist Greece, opting instead for muddling through until the big European banks (read German and French primarily) were willing to slough off their Greek bond holdings, thereby not risking contagion and the erosion of investor confidence in other troubled southern European economies, i.e., Spain and Italy. 

    Conventional wisdom and free market ideology are alive and well, and very many economists consider themselves as high priests and defenders of this religion that informs IMF’s standard austerity remedies, despite the overwhelming evidence to the contrary.   

    C.J.P: These “twin monsters of global neoliberalism” and the Greek government seem to have placed their recovery hopes for the domestic economy on an exports boost.  The Institute’s report analysis challenges this assumption. Why?

    D.B.P
    :
    Exports have been on caught up in an unstable trend before and after the crisis and unable to offset the drop in domestic demand. The strategy imposed by the troika aimed at increasing exports through internal devaluation (a decrease in unit labour costs) has not brought about the anticipated effects, despite the reduction in relative unit labour costs achieved since in 2010.

    Despite this decline in unit labour costs, consumer prices have not followed suit unlike in the single case of the European hegemon, Germany, that systematically maintains lower values in both. An analysis of the country’s exports by destination and technology content shows that the countries that import the bulk of Greek agricultural and medium-low technology goods and services are outside the euro area.

    Greece has suffered a reduction in its exports to countries such as Germany, once a major foreign market. The recent large increase in the value of Greek exports is due to oil refinery operations positively affected by increases in the price of oil. In short, the current strategy of grounding Greece’s recovery on exports is not only wrong-headed but also will shift production toward sectors with lower value added, and larger volatility in oil-related trade.

    C.J.P: Levy Institute projections are also highly pessimistic about unemployment and GDP growth rates in the middle term, questioning once again the rather optimistic predictions made recently by the European Commission and the IMF.  How much worse can unemployment get in Greece, which, as the Institute’s report states, already suffers“the highest level of any industrialized country in the free world during the last 30 years?”

    D.B.P
    :
    IMF and EC projections of GDP growth and employment are bizarrely incompatible within the framework of the imposed austerity policy. As our model simulations show, to meet the troika’s targets of government deficit to GDP ratios from now to 2016, even more austerity would be necessary, further depressing GDP and employment.

    On the other hand, to meet the troika’s growth and employment targets will require the reversal of austerity and a fiscal stimulus of close to a further 41 billion euros between now and 2016. Their projections have been consistently revised downwards four times between May 2010 and the latest occasion in June 2013. 

    The fact is that since the peak in October 2008, over 1 million jobs have been lost, and there are no signs of meaningful easing of the flawed programme forthcoming. With joblessness now at 27%, a stark indicator of the troika’s and the government’s failure to accurately project the consequences of their own policies, it is astonishing that they continue to ask for more of the same. Our own simulations of unemployment show that more jobs would be lost should the current austerity policy be continued, with unemployment climbing the charts, and soaring close to 34% by the end of 2016.  

    C.J.P: To the surprise of many observers abroad, the Greek population has remained rather stoical (or, some might say, politically apathetic) in the midst of a deepening crisis and the collapse of the nation. How do you explain this attitude when, for years, the impression given to the outside world was that contemporary Greek society thrived on a culture based on political radicalism?

    D.B.P
    :
    One easy answer would be that Greeks have are suffering from austerity fatigue. The other and perhaps more important explanation is that we should never take underestimate the capacity for a social meltdown. The Greek population may appear politically apathetic at present but the continuing social chaos has created a ever-wider opening for an extremist party. Only a progressive party of the left can reverse today’s carnage on the ground.    

    C.J.P: The way out of the crisis, according to the Institute’s Strategic Analysis report, is a recovery strategy along the lines of the Marshall Plan. Is it economics or politics and ideology that blocks discussions and initiatives from relying on the public sector for providing the necessary economic stimulus, via increases in public consumption and investment for a return to growth?


    D.B.P
    :
    Our model’s simulations demonstrate that an EU-funded Marshall-type recovery programme would be a real “success story” for Greece. If it were directed at public consumption and investment and particularly at jobs this would put Greece on the road to recovery. The first Marshall plan wasn’t charity or a bailout. It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration.

    As Winston Churchill told us, we should learn from history. European leaders and our government need to learn fast. Instituting such a programme would necessitate our revising what are now discredited economic theories, together with the European institutions that continue to promote them. 
  • 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.
  • In the Media | May 2013
    Di Elena Bonanni
    FIRSTOnline, 21 Maggio 2013. Tutti i diritti riservati.

    Gli azionisti votano oggi in assise sulla separazione delle cariche di presidente e ceo dopo gli scandali—Trema la doppia poltrona di Dimon—Le tre lezioni della balena di Londra dell'economista Jan Kregel (Bard College)—Il caso JPMorgan è diventato il terreno di gioco su cui si sta disputando la sfida sulla Volcker rule tra Senato e lobbies finanziarie

    Il regno di Jamie Dimon non è imploso (per ora) sullo scandalo della Balena di Londra (ma non solo). L’ultimo re di Wall Street, come è stato soprannominato dal Financial Times, non dovrà dividere il trono con un nuovo presidente (solo il 32% ha votato a favore della separazione delle poltrone di ceo e presidente). Più scivolosa risulta invece la posizione di tre membri della Commissione sui rischi (David Cote, ceo Honeywell International; James Crown, presidente di Henry Crown and Company; Ellen Futter, presidente del Museo americano di storia naturale) che hanno ottenuto sostegno da meno del 60% dei soci. 

    CtW Investment group, che rappresenta i fondi pensione dei sindacati, ha già chiesto le loro dimissioni. Tra i soci “ribelli” è diffusa la convinzione che i tre direttori non abbiano le competenze e che la banca abbia bisogno di nuovi manager in grado di supervisionare il risk management. Un cambio della guardia e un miglioramento delle competenze può sempre essere utile. Così come è necessaria la sostituzione di chi non ha supervisionato bene. Oltre al trader Bruno Iksil, soprannominato “la Balena di Londra”, JP Morgan ha infatti già licenziato anche i vertici del Chief Investment Office, la divisione londinese responsabile delle perdite, compresa la numero uno Ina Drew. E ha fatto causa a Javier Martin-Artajo, il supervisore di Iksil.

    Ma, nella realtà finanziaria di oggi, non sembra questa una soluzione sufficiente per evitare in futuro una nuova Balena. Né a JPMorgan né in qualsiasi altra istituzione finanziaria. Tutti si sono infatti focalizzati su “chi sapeva cosa e quando” e su chi era responsabile per aver dissimulato la situazione agli azionisti e alla comunità finanziaria. Ma nello studio “More swimming lessons from the london whale”, l’economista Jan Kregel (Bard College-New York), che analizza e amplia le conclusioni del report della Sottocommissione permanente per le indagini del Senato americano, rileva come il caso della Balena di Londra evidenzi implicazioni più importanti la stabilità del sistema finanziario. 

    Infatti, se i problemi fossero dovuti a incompetenza o stupidità, come suggerito dallo stesso ceo Dimon, allora la questione potrebbe essere risolta con la rimozione dei responsabili. “Da questo punto di vista—rileva Kregel—una volta che i responsabili vengono rimossi (come è successo) e le condizioni ripristinate (lo smantellamento dell’unità), tutta la questione può in effetti essere trattata se non come “una tempesta in una teiera”, come è stata inizialmente descritta da Dimon, come una goccia nel mare dei profitti di JPMorgan complessivi, come è stata successivamente presentata. 

    Dopo tutto, nessuno è perfetto e tutti fanno errori. Ma questa lettura farebbe perdere di vista le importanti questioni sistemiche sollevate dalle operazioni del Cio in generale e del Scp in particolare”. E che devono invece riportare l’attenzione sui rischi non risolti dalla normativa Dodd-Frank. A partire dalle stesse dimensioni delle istituzioni finanziarie  troppo grandi perché il management possa sapere effettivamente cosa succede e troppo grandi per essere regolate, la prima delle tre lezioni che emergono dallo studio di Kregel sul report della Sottocommissione del Senato e che Firstonline ripercorre in una serie di articoli.

    TROPPO GRANDE PER ESSERE SUPERVISIONATA

    I documenti dell’indagine del Senato hanno dato disclosure aggiuntiva e più dettagliata sulle comunicazioni tra i trader del Synthetic credit Portfolio (Scp), i loro manager del Chief investment office (Cio) e il top management della banca. “Questi scambi—scrive Kregel—non solo  riconfermano il fatto che il management ha dato una rappresentazione non corretta agli azionisti e ai regolatori dei dettagli e l’ampiezza delle difficoltà della divisione Chief investment office (Cio), ma ha anche reso chiaro che il management non aveva una comprensione approfondita delle operazioni  del Scp o dei motivi delle difficoltà di questa divisione”.  

    Per l’economista i documenti suggeriscono che è altamente probabile che i diversi livelli di management accusati di aver diffuso false informazioni non avevano la più pallida idea delle operazioni dell’unità Scp e del perché fosse entrata in sofferenza: nessun a quanto pare si era accorto delle difficoltà del Scp fino all’inizio del 2012. “Le comunicazioni del primo trimestre del 2012—rileva Kregel—suggeriscono che il management stesse lottando per capire cosa stesse andando male anche quando approvò misure che nelle intenzioni avrebbero dovuto risolvere il problema”. Ma che invece causarono un deterioramento più veloce del valore del portafoglio dell’unità che chiaramente non era stato compreso.

    Kregel rileva come né il Senato né l’indagine interna di JPMorgan sostengano l’idea che la banca fosse semplicemente troppo grande perché qualsiasi manager potesse avere conoscenza diretta delle operazioni multiple della divisione di cui era responsabile. E ovviamente non poteva neanche il boss di JPMorgan quando parlò della famosa “tempesta nella teiera”. Kregel spiega che ogni livello di management faceva affidamento sulle informazioni passate dai subordinati, i quali a loro volta avevano poca conoscenza diretta dell’unità che stavano gestendo, fino ai trader che per loro stessa ammissione non capivano le performance del portafoglio che loro stessi avevano creato e che furono poi sostituiti da individui con ancora meno comprensione delle difficoltà che stavano fronteggiando. 

    “La spiegazione più probabile della cattiva informazione relativa alla Balena—conclude Kregel—è un enorme fallimento del controllo e della regia manageriale che non è stato il risultato di un inganno deliberato ma piuttosto la risposta naturale di individui che erano pagati generosamente per assumersi la responsabilità ma che semplicemente non sapevano cosa stesse succedendo perché la taglia e la complessità dell’organizzazione lo rendeva impossibile—ancora una volta, la prova di una istituzione troppo grande da gestire efficacemente e a maggior ragione da regolare. Se la complessità è chiaramente una minaccia maggiore alla stabilità finanziaria rispetto alla grandezza, è di solito, ma non solo, la grandezza che porta alla complessità”.
        
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  • In the Media | May 2013
    Di Elena Bonanni
    FIRSTOnline, 21 Maggio 2013. Tutti i diritti riservati.

    LE TRE LEZIONI DELLA BALENA DI LONDRA/1 Jamie Dimon ha superato il voto sulla doppia poltrona mentre la fronda degli azionisti "ribelli" chiede le dimissioni dei tre membri della Commissione rischi che non hanno superato il 60% dei consensi— Ma il problema di JPMorgan non è solo la sostituzione dei manager “incompetenti”—Lo spiega l'economista Jan Kregel.

    Il regno di Jamie Dimon non è imploso (per ora) sullo scandalo della Balena di Londra (ma non solo). L’ultimo re di Wall Street, come è stato soprannominato dal Financial Times, non dovrà dividere il trono con un nuovo presidente (solo il 32% ha votato a favore della separazione delle poltrone di ceo e presidente). Più scivolosa risulta invece la posizione di tre membri della Commissione sui rischi (David Cote, ceo Honeywell International; James Crown, presidente di Henry Crown and Company; Ellen Futter, presidente del Museo americano di storia naturale) che hanno ottenuto sostegno da meno del 60% dei soci.

    CtW Investment group, che rappresenta i fondi pensione dei sindacati, ha già chiesto le loro dimissioni. Tra i soci “ribelli” è diffusa la convinzione che i tre direttori non abbiano le competenze e che la banca abbia bisogno di nuovi manager in grado di supervisionare il risk management. Un cambio della guardia e un miglioramento delle competenze può sempre essere utile. Così come è necessaria la sostituzione di chi non ha supervisionato bene. Oltre al trader Bruno Iksil, soprannominato “la Balena di Londra”, JP Morgan ha infatti già licenziato anche i vertici del Chief Investment Office, la divisione londinese responsabile delle perdite, compresa la numero uno Ina Drew. E ha fatto causa a Javier Martin-Artajo, il supervisore di Iksil.

    Ma, nella realtà finanziaria di oggi, non sembra questa una soluzione sufficiente per evitare in futuro una nuova Balena.
     Né a JPMorgan né in qualsiasi altra istituzione finanziaria. Tutti si sono infatti focalizzati su “chi sapeva cosa e quando” e su chi era responsabile per aver dissimulato la situazione agli azionisti e alla comunità finanziaria. Ma nello studio “More swimming lessons from the london whale”, l’economista Jan Kregel (Bard College-New York), che analizza e amplia le conclusioni del report della Sottocommissione permanente per le indagini del Senato americano, rileva come il caso della Balena di Londra evidenzi implicazioni più importanti la stabilità del sistema finanziario. 

    Infatti, se i problemi fossero dovuti a incompetenza o stupidità, come suggerito dallo stesso ceo Dimon, allora la questione potrebbe essere risolta con la rimozione dei responsabili. “Da questo punto di vista—rileva Kregel—una volta che i responsabili vengono rimossi (come è successo) e le condizioni ripristinate (lo smantellamento dell’unità), tutta la questione può in effetti essere trattata se non come “una tempesta in una teiera”, come è stata inizialmente descritta da Dimon, come una goccia nel mare dei profitti di JPMorgan complessivi, come è stata successivamente presentata. 

    Dopo tutto, nessuno è perfetto e tutti fanno errori. Ma questa lettura farebbe perdere di vista le importanti questioni sistemiche sollevate dalle operazioni del Cio in generale e del Scp in particolare”. E che devono invece riportare l’attenzione sui rischi non risolti dalla normativa Dodd-Frank. A partire dalle stesse dimensioni delle istituzioni finanziarie  troppo grandi perché il management possa sapere effettivamente cosa succede e troppo grandi per essere regolate, la prima delle tre lezioni che emergono dallo studio di Kregel sul report della Sottocommissione del Senato e che Firstonline ripercorre in una serie di articoli.

    TROPPO GRANDE PER ESSERE SUPERVISIONATA

    I documenti dell’indagine del Senato hanno dato disclosure aggiuntiva e più dettagliata sulle comunicazioni tra i trader del Synthetic credit Portfolio (Scp), i loro manager del Chief investment office (Cio) e il top management della banca. “Questi scambi—scrive Kregel—non solo  riconfermano il fatto che il management ha dato una rappresentazione non corretta agli azionisti e ai regolatori dei dettagli e l’ampiezza delle difficoltà della divisione Chief investment office (Cio), ma ha anche reso chiaro che il management non aveva una comprensione approfondita delle operazioni  del Scp o dei motivi delle difficoltà di questa divisione”.  

    Per l’economista i documenti suggeriscono che è altamente probabile che i diversi livelli di management accusati di aver diffuso false informazioni non avevano la più pallida idea delle operazioni dell’unità Scp e del perché fosse entrata in sofferenza: nessun a quanto pare si era accorto delle difficoltà del Scp fino all’inizio del 2012. “Le comunicazioni del primo trimestre del 2012—rileva Kregel—suggeriscono che il management stesse lottando per capire cosa stesse andando male anche quando approvò misure che nelle intenzioni avrebbero dovuto risolvere il problema”. Ma che invece causarono un deterioramento più veloce del valore del portafoglio dell’unità che chiaramente non era stato compreso.

    Kregel rileva come né il Senato né l’indagine interna di JPMorgan
     sostengano l’idea che la banca fosse semplicemente troppo grande perché qualsiasi manager potesse avere conoscenza diretta delle operazioni multiple della divisione di cui era responsabile. E ovviamente non poteva neanche il boss di JPMorgan quando parlò della famosa “tempesta nella teiera”. Kregel spiega che ogni livello di management faceva affidamento sulle informazioni passate dai subordinati, i quali a loro volta avevano poca conoscenza diretta dell’unità che stavano gestendo, fino ai trader che per loro stessa ammissione non capivano le performance del portafoglio che loro stessi avevano creato e che furono poi sostituiti da individui con ancora meno comprensione delle difficoltà che stavano fronteggiando.

    “La spiegazione più probabile della cattiva informazione relativa alla Balena—conclude Kregel—è un enorme fallimento del controllo e della regia manageriale che non è stato il risultato di un inganno deliberato ma piuttosto la risposta naturale di individui che erano pagati generosamente per assumersi la responsabilità ma che semplicemente non sapevano cosa stesse succedendo perché la taglia e la complessità dell’organizzazione lo rendeva impossibile—ancora una volta, la prova di una istituzione troppo grande da gestire efficacemente e a maggior ragione da regolare. Se la complessità è chiaramente una minaccia maggiore alla stabilità finanziaria rispetto alla grandezza, è di solito, ma non solo, la grandezza che porta alla complessità”. 
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    Author(s):
  • In the Media | May 2013
    Interview by Kostas Kalloniatis
    Eleftheritypia, May 19, 2013. All Rights Reserved.

    Youth unemployment is just one part of the wider problem of unemployment and of course requires specialized interventions to tackle it, according to Rania Antonopoulou, professor at Bard College, director of the research division for gender equality of the Levy Economics Institute, and associate researcher with the Labour Institute of the GSEE.

    Antonopoulos considers largely inadequate, if not hypocritical, the recent interest of the European political leadership in youth unemployment and considers the motivation to be in part fear of the risk of social explosion (recent media statements by Draghi, Barroso Leta, etc., provide support for this claim).

    She informs us that in the eurozone in 2012 there were 3.4 million unemployed young people aged 15–24, but roughly four times more unemployed were between 25 and 54 years old (12.6 million), with the result that young people constitute 27 percent of this total unemployed (up to 54 years old). In Greece, respectively, young unemployed stood at 173,000 persons in 2012, as compared to 950,000 unemployed aged 25–54 years, comprising a mere 18.2 percent.

    Antonopoulos underlines a crucial difference, especially for policy, between:

    A. the unemployment rate: for youth it was 55.3 percent in Greece in 2012; namely, for every 100 employed and unemployed young people, 55.3 were unemployed, when for the 24–54 age working age population group this rate was 23.4 percent;

    B. the ratio of unemployment to the total population of a certain age group, which includes everyone (the employed, the unemployed, and those not looking for work): for the young in Greece was only 16.2 percent in 2012 due to the fact that the vast majority are students, soldiers, etc. (i.e, a rate that is much less than the rate of unemployment) when the comparable number for ages 24–54 years was 20 percent ( much closer to their corresponding unemployment rate above); and

    C. the share of the unemployed by age group among the total number of persons that are unemployed, which for the young unemployed in Greece amounted in 2012 to 14.4 percent, which means that the remaining 85.6 percent of the unemployed were 25 years of age or older.

    Now, for Mr. Barroso and Co. the most important criterion is the unemployment rate. But for Ms. Antonopoulos the most important measure for guiding policy is the last measure, the share by age composition of the unemployed.

    With all this, Antonopoulos does not claim that there is  no need to pay attention to youth unemployment or university graduates seeking their first job. Instead, she proposes that equal attention, perhaps more attention, needs to be directed  to those who lost their jobs and are not as young.

    Therefore, she believes that the issue of unemployment in general needs to be addressed with anti-austerity pro-growth policies based on domestic demand stimulus, and that a focus in this particular period exclusively on youth unemployment based on erroneous calculations or political considerations (supposedly in response to the lost generation) is misguided. Priority should be given to the creation of an employer-of-last-resort policy—like the New Deal—capable of designing employment programs that match the capabilities of the unemployed to social needs, with the assistance of the trade unions, local communities and their elected governments, and the unemployed themselves.

    For youth unemployment, she indicated that specialized interventions along the lines of current interventions in Sweden and Finland are appropriate.
  • In the Media | April 2013
    Latin America and Gender Equality Bulletin (UNDP), April 2013. All Rights Reserved.

    In this interview, Rania Antonopoulos, a senior scholar and co-author of the research project report “Why Time Deficits Matter: Implications for the Measurement of Poverty,” discusses the importance of combining income and time poverty measurements in order to reach an effective reduction of poverty and promote more egalitarian societies.
  • In the Media | April 2013
    By David Dayen
    The American Prospect, April 24, 2013. All Rights Reserved.

    Satisfied with the meager reforms of the Dodd-Frank financial-reform bill, the Treasury is standing in the way of further efforts to rein in mega-banks.


    These are heady times for the bipartisan group of reformers seeking a safer and more manageable U.S. financial system. The leaders of this movement, Senators Sherrod Brown and David Vitter, introduced legislation yesterday to force the biggest banks to foot the bill for their own mistakes by imposing higher capital requirements. The bill would increase equity (either retained earnings or stock) in the financial system by $1.1 trillion and incentivize mega-banks to break themselves up, according to a Goldman Sachs report. Brown and Vitter previewed the legislation earlier this week at the National Press Club, insisting that the new regulations on risky mega-banks would diminish threats to the U.S. economy and prevent taxpayers from having to bail out banks in the future. Vitter also said the legislation would “level the playing field and take away a government policy subsidy, if you will, that exists in the market now favoring size.” With momentum, broadening support, and tangible legislation to push, bank reformers feel better positioned for success than they have since the passage of Dodd-Frank.

    Or rather, they did until the Treasury Department poured a giant bucket of cold water on their effort. In a speech to the Levy Economics Institute of Bard College's annual Minsky Conference last Thursday, Undersecretary for Domestic Finance Mary Miller claimed that Dodd-Frank had already solved the “Too Big to Fail” problem. Miller indicated that mega-banks do not enjoy an unfair advantage in their borrowing costs and that recent boosts to capital standards were already working to strengthen the financial system. Having a big public speech at an important venue by a top official the week before the release of Brown-Vitter sends a clear message about the Treasury’s position. “She is not going off the cuff in a policy speech like that,” said former Special Inspector General for the Troubled Asset Relief Program (TARP) and persistent bank critic Neil Barofsky. “This seems like a carefully measured response to Brown-Vitter that the regulatory-reform shop, from the Treasury perspective, is closed.”

    The resistance should not surprise anyone. Under Timothy Geithner, Treasury was openly hostile to far-reaching congressional proposals to constrain mega-banks. Despite the change in leadership at the department, many holdovers from the Geithner era, including Miller, still hold high-level positions. In his confirmation hearings, Treasury Secretary Jack Lew stated flatly that Dodd-Frank had dealt with the Too Big to Fail problem. Most important, Lew works for President Obama: Reaching an agreement to break up mega-banks by forcing them to carry more capital would represent a tacit admission that Dodd-Frank, widely touted as a centerpiece of the president's first term, failed in its core mission of stabilizing the financial system.

    Given that Miller is a 26-year veteran of the investment-management firm T. Rowe Price, it is no surprise that she espouses Wall Street’s worldview.

    What’s striking about Miller’s speech is how closely it mirrors the arguments set forth in several recent papers put out by the big banks, their lobbyists, and their allies. This includes the previously mentioned report on Brown-Vitter by Goldman Sachs; a policy brief by the Financial Services Forum and co-signed by the leading lobbyist groups for the banking industry; and a report with the cheery title "Banking on Our Future" by Hamilton Place Strategies (HPS), a public-relations firm staffed by top communications officials from the last three Republican presidential campaigns (HPS has admitted that its clients include large financial institutions). All of these reports were released in the past few months in an effort to derail Brown-Vitter. Given that Miller is a 26-year veteran of the investment-management firm T. Rowe Price, it is no surprise that she espouses Wall Street’s worldview.
     
    For example, Miller discounts an influential working paper from the International Monetary Fund (IMF) showing an $83 billion annual subsidy for mega-banks from their Too Big to Fail status by saying its evidence “predates the financial crisis and Dodd-Frank’s reforms.” This is precisely the argument the Financial Services Forum made, ignoring the fact that there are plenty of post-crisis studies hat show the subsidies persist. Miller highlights the resolution authority granted to the Federal Deposit Insurance Corporation (FDIC) under Dodd-Frank, which allows the FDIC to wind down any systemically important financial institution verging on collapse rather than resorting to a bailout. She says that, to the extent that a cost-of-borrowing advantage exists for mega-banks, resolution authority “should help wring it the rest of the way out of the market.” In practically the same language, HPS writes that resolution authority “helps eliminate any potential funding advantage big banks are thought to have.” And in providing statistical support for increased capital, Miller notes, “The 18 largest bank-holding companies … doubled the amount of their Tier 1 common equity capital over the last four years.” Goldman Sachs uses precisely this statistic, writing that “common equity has doubled for U.S. banks” since the financial crisis.

    Critics have assailed the bank-industry papers for their unrealistic views about the risks in the current system and over-optimistic evaluations of the impact of the most recent regulatory changes. The truth is that Dodd-Frank has emerged from the gate slowly, bank lobbyists have successfully gutted many of its provisions, and much of it remains in flux. Miller approvingly highlights the Volcker rule as a key financial reform, but the final rule has been delayed nearly a year and has yet to be adopted. The proposed rule to tax systemically important institutions, for example, would cost as little as $28 million, about .2 percent of annual earnings. Other provisions like resolution authority could prove unworkable in an interconnected, global financial system and amid the pressure of catastrophic collapse. Stanford economics professor Anat Admati, author of the book The Banker's New Clothes does not believe Dodd-Frank will hold up in a crisis, comparing it to “preparing for a disaster like an earthquake by putting an ambulance at the corner.”

    Since Brown-Vitter relies so heavily on imposing new capital requirements, Miller’s alignment with the industry on capital is the most telling section of her speech. Miller says that recently imposed capital rules—negotiated under an international process in Basel, Switzerland—are sufficient for banks to cover their own losses. But while the Basel rules as much as tripled capital requirements, as the Financial Times’s Martin Wolf quipped, when the standards were released in 2010, “tripling almost nothing does not give one very much.” Critics also argue that current capital rules afford banks far too many opportunities to use creative accounting to game the system. The rules allow banks to calculate their capital needs using “risk-weighted” assets, counting each type of asset differently based on its assumed level of risk. Banks use risk-weighting to sharply reduce the amount of capital they have to hold—by as much as 50 percent, according to some calculations. In the event of a systemic collapse where all assets fail, regardless of the accounting games, banks would not have the funds necessary to stay solvent. Indeed, during the 2008 financial crisis, investment banks like Lehman Brothers were allowed by the Securities and Exchange Commission to risk-weight assets, and nearly all of them failed. Meanwhile, Sheila Bair at the FDIC rejected risk-weighting, and the commercial banks her agency insured fared better. Brown-Vitter would ban risk-weighting in their capital standards, but Miller simply counsels to stay the course.

    Treasury’s rejection of Brown-Vitter has serious implications. On Monday, Senate Banking Committee chairman Tim Johnson reacted to Brown-Vitter by saying that regulators should finish implementing Dodd-Frank before Congress moves to enact additional reforms. Johnson didn’t cite Miller’s speech, but he didn’t have to: Democratic leaders in Congress will naturally resist turning against the wishes of their president and his economic team. And many rank-and-file lawmakers will cede to the perceived expertise of the Treasury Department. This gives Treasury outsized control of the financial-reform debate, which they’ve used to weaken and soften reforms at virtually every step of the Dodd-Frank process and beyond. In fact, Treasury officials credit themselves with stopping Sherrod Brown’s 2010 proposal to cap bank size. An anonymous senior official said at the time, “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”

    This all means that Brown-Vitter is likely to sit on a shelf unless and until Wall Street generates another crisis. With Sherrod Brown in line to potentially take over the Senate Banking Committee in 2014, reformers may benefit from the wait. But it will be a wait.

    Financial-reform advocates see Brown-Vitter as a major opportunity for President Obama to “get on the right side of history” and address the continued riskiness and complexity of modern finance. But Treasury’s primary concern appears to be limiting any constraints on the record profits of those mega-banks, rather than protecting the public from threats to the rest of the economy. As Barofsky concluded, “Treasury has defended the status of the Too Big to Fail banks every step of the way, why would they stop now?”
  • In the Media | April 2013

    For video excerpts from Minneapolis Fed President Narayana Kocherlakota’s speech "Low Real Interest Rates," presented at the Levy Institute’s 22nd Annual Minsky Conference in New York on April 18, click here. Includes audience and press Q&A.

  • In the Media | April 2013
    By Caroline Baum
    Bloomberg View, April 22, 2013. All Rights Reserved.

    It's not every day that a central banker admits that his medicine for curing the last crisis may be laying the groundwork for the next. But that's exactly what Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, said last week at the annual Hyman P. Minsky Conference at the Levy Economics Institute of Bard College.

    Kocherlakota said low real interest rates are necessary to achieve the Fed's dual mandate of maximum employment and stable prices. He also said that low real rates lead to inflated asset prices, volatile returns and increased merger activity, all of which are signs of financial market instability. Listen to what he calls his "key conclusion"—and what I'd call a true conundrum:

    "I've suggested that it is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low. I’ve also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets."

    Just think about that for a minute: What the Fed needs to do in order to achieve its macroeconomic objectives will create instability in financial markets. There's more:

    "On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis —- a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives."

    Damned if we do, damned if we don't. Other Fed officials have warned about froth in asset markets, but none to my knowledge has been as forthright in describing the Fed's life-saving medicine as systemic poison.

    Like his colleagues, Kocherlakota believes effective supervision and regulation of the financial sector are the best ways to address threats to macroeconomic stability. Yeah, and the tooth fairy leaves money under your pillow if you're good.

    For central bankers to believe regulation is the answer, they have to ignore history and disregard the tendency for regulators to be co-opted by those they are assigned to regulate, a phenomenon known as "regulatory capture."

    The Minsky Conference was the ideal place for Kocherlakota to deliver his remarks. Minsky observed that, during periods of prosperity and financial stability (the Great Moderation), investors are lulled into taking on more risk with borrowed money.

    At some point, investors are forced to sell assets to repay loans, sending asset prices into a downward spiral as cash becomes king. This is what's known as a "Minsky moment."

    Kocherlakota seems to be saying such an outcome is inevitable. If only he could tell us when.
  • In the Media | April 2013
    By Gareth Hutchens
    The Age (Melbourne), April 21, 2013. All Rights Reserved.

    If we needed more evidence that economics is not a science, we have it now.

    A shock wave hit the economics world this week when two of its most famous practitioners—Kenneth Rogoff and Carmen Reinhart—were found to have produced some very dodgy data to support their claims about the consequences of high government debt.

    It comes back to a research paper of theirs, Growth in a Time of Debt widely quoted since it was published in 2010. The paper shows that if government debt becomes too high—say, around 90 per cent of gross domestic product—then economic growth will almost always suffer. Global policymakers have taken it to mean that if countries with too-high debt levels want to kick-start flagging economies then they ought to begin the resuscitation process by reducing debt levels first.

    It has been repackaged into a simple message: Reduce your debt and economic growth will begin to pick up. But the corollary is that highly indebted governments should not try to spend their way out of economic stagnation because spending more will only make things worse. It has helped to provide the intellectual justification that the proponents of austerity wanted; thus the wave of austerity policies washing around the world since 2010. Millions of people have suffered because of it.

    But the intellectual edifice for the global austerity movement was severely weakened this week after it emerged that professors Reinhart and Rogoff had made some basic errors in their interpretation of data that supported their research.
    The errors were discovered by Thomas Herndon, a student at the University of Massachusetts Amherst's doctoral program in economics. He published a paper this week explaining what he found, with help from two of his teachers, Michael Ash and Robert Pollin.

    The paper shows Reinhart and Rogoff had omitted data, made a mistake in their Excel spreadsheet, and used a bizarre statistical methodology, all of which skewed results. It set the academic world ablaze.

    As Nobel laureate Paul Krugman wrote: "In this age of information, maths errors can lead to disaster. NASA's Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan Chase's "London Whale" venture went bad because modellers divided a sum instead of an average. So, did an Excel coding error destroy the economies of the Western world?"

    Reinhart and Rogoff have acknowledged they made a spreadsheet error, but they also say it didn't affect their result much.

    "It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," they said. "We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."

    But in the brouhaha that followed, a few people have been asking why it took so long for Reinhart and Rogoff's research to be tested.

    Imagine you've handed your assignment in at school. You make some wonderful claims in it about the way the world works. Your research—based on an analysis of data of 44 countries spanning 200 years—has led you to discover that high government debt to GDP ratios above a "90 per cent threshold" almost always lead to a slowdown in economic growth. It's a law that seems to hold no matter what you throw at it. You can compare different countries in disparate regions, and once you try to take account of the fact that a country's political and financial systems evolve over time you can mix and match these things across centuries of data and the law stays the same.

    It's a striking thesis. And luckily for you, you're not expected to hand your data in with your assignment so your work can be checked. Your teacher takes your word for it. That's not how the scientific method is supposed to work.
    Some economists, such as L. Randall Wray of the Levy institute, say they have written to Reinhart and Rogoff in the past to ask for data, but have been rebuffed. "They ignored our request. I have heard from several other researchers that Reinhart and Rogoff also ignored their repeated requests for the data," Professor Wray wrote this week.

    It is sobering to be reminded that economic analyses, produced in this way, can have such influence in the real world. It's worth remembering next time we hear some politician referring to "economic modelling" that supports his or her claim.
  • In the Media | April 2013
    By David Graeber
    The Guardian, April 21, 2013. All Rights Reserved.

    If Reinhart and Rogoff's 'error' has discredited the prevailing policy dogma, now is the time for an alternative that works

    The intellectual justification for austerity lies in ruins. It turns out that Harvard economists Carmen Reinhart and Ken Rogoff, who originally framed the argument that too high a "debt-to-GDP ratio" will always, necessarily, lead to economic contraction – and who had aggressively promoted it during Rogoff's tenure as chief economist for the IMF – had based their entire argument on a spreadsheet error. The premise behind the cuts turns out to be faulty. There is now no definite proof that high levels of debt necessarily lead to recession.

    Will we, then, see a reversal of policy? A sea of mea culpas from politicians who have spent the last few years telling disabled pensioners to give up their bus passes and poor students to forgo college, all on the basis of a mistake? It seems unlikely. After all, as I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality. We are talking about a politics of crime and punishment, sin and atonement.

    True, it's never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.

    The morality of debt has proved spectacularly good politics. It appears to work just as well whatever form it takes: fiscal sadism (Dutch and German voters really do believe that Greek, Spanish and Irish citizens are all, collectively, as they put it, "debt sinners", and vow support for politicians willing to punish them) or fiscal masochism (middle-class Britons really will dutifully vote for candidates who tell them that government has been on a binge, that they must tighten their belts, it'll be hard, but it's something we can all do for the sake of our grandchildren). Politicians locate economic theories that provide flashy equations to justify the politics; their authors, like Rogoff, are celebrated as oracles; no one bothers to check if the numbers actually add up.

    If ever proof was required that the theory is selected to suit the politics, one need only consider the reaction politicians have to economists who dare suggest this moralistic framework is unnecessary; or that there might be solutions that don't involve widespread human suffering.

    Even before we knew Reinhart and Rogoff's study was simply wrong, many had pointed out their historical survey made no distinction between the effects of debt on countries such as the US or Japan – which issue their own currency and therefore have their debt denominated in that currency – and countries such as Ireland, Greece, that do not. But the real solution to the eurobond crisis, some have argued, lies in precisely this distinction.

    Why is Japan not in the same situation as Spain or Italy? It has one of the highest public debt-to-GDP ratios in the world (twice that of Ireland), and is regularly featured in magazines like the Economist as a prima facie example of an economic basket case, or at least, how not to manage a modern industrial economy. Yet they have no problem raising money. In fact the rate on their 10-year bonds is under 1%. Why? Because there's no danger of default. Everyone knows that in the event of an emergency, the Japanese government could simply print the money. And Japanese money, in turn, will always be good because there is a constant demand for it by anyone who has to pay Japanese taxes.

    This is precisely what Ireland, or Spain, or any of the other troubled southern eurozone countries, cannot do. Since only the German-dominated European Central Bank can print euros, investors in Irish bonds fear default, and the interest rates are bid up accordingly. Hence the vicious cycle of austerity. As a larger percentage of government spending has to be redirected to paying rising interest rates, budgets are slashed, workers fired, the economy shrinks, and so does the tax base, further reducing government revenues and further increasing the danger of default. Finally, political representatives of the creditors are forced to offer "rescue packages", announcing that, if the offending country is willing to sufficiently chastise its sick and elderly, and shatter the dreams and aspirations of a sufficient percentage of its youth, they will take measures to ensure the bonds will not default.

    Warren Mosler and Philip Pilkington are two economists who dare to think beyond the shackles of Rogoff-style austerity economics. They belong to the modern money theory school, which starts by looking at how money actually works, rather than at how it should work. On this basis, they have made a powerful case that if we just get back to that basic problem of money-creation, we may well discover that none of this is ever necessary to begin with. In conjunction with the Levy Institute at Bard College, they propose an ingenious, yet elegant solution to the eurobond crisis. Why not simply add a bit of legal language to, say, Irish bonds, declaring that, in the event of default, those bonds could themselves be used to pay Irish taxes? Investors would be reassured the bonds would remain "money good" even in the worst of crises – since even if they weren't doing business in Ireland, and didn't have to pay Irish taxes, it would be easy enough to sell them at a slight discount to someone who does. Once potential investors understood the new arrangement, interest rates would fall back from 4-5% to a manageable 1-2%, and the cycle of austerity would be broken.

    Why has this plan not been adopted? When it was proposed in the Irish parliament in May 2012, finance minster Michael Noonan rejected the plan on completely arbitrary grounds (he claimed it would mean treating some bond-holders differently than others, and ignored those who quickly pointed out existing bonds could easily be given the same legal status, or else, swapped for tax-backed bonds). No one is quite sure what the real reason was, other than perhaps an instinctual bureaucratic fear of the unknown.

    It's not even clear that anyone would even be hurt by such a plan. Investors would be happy. Citizens would see quick relief from cuts. There'd be no need for further bailouts. It might not work as well in countries such as Greece, where tax collection is, let us say, less reliable, and it might not entirely eliminate the crisis. But it would almost certainly have major salutary effects. If the politicians refuse to consider it – as they so far have done – it's hard to see any reason other than sheer incredulity at the thought that the great moral drama of modern times might in fact be nothing more than the product of bad theory and faulty data series.
  • In the Media | April 2013
    By Robert Lenzner
    Forbes, April 20, 2013. All Rights Reserved.

    The President of the Federal Reserve Bank of Boston, Erick Rosengren, suggested this week that there could still be runs on money market mutual funds, as took place at the peak of the 2008 financial crisis, since these funds have “no capital” and invest in uninsured short term securities of banks and other financial service firms. While debate over potential regulatory solutions for money market funds continues on, the Boston Fed chief, emphasized that the safety of the money market mutual funds are a “significant unresolved issue.”

    As of April 13 there was $903.56 billion in retail money market funds sponsored by Fidelity, T. Rowe Price, Dreyfus, Invesco and others, The total amount of all kinds of money market funds, some owned by institutional investors, was $2.6 trillion. The average weekly yield was a record low of only 0.02%.

    He also singled out the issue of capital for the broker-dealer fraternity, where he raised the problem of “virtually no change for broker-dealers since the collapse of Lehman Brothers in September, 2008 and the shotgun marriage of Merrill Lynch into BankAmerica. The solution Rosengren recommended was that the “larger(these investment firms) get the higher the capital ratio”: should be imposed on them. The Boston Fed chief executive, speaking at Bard College’s Levy Institute conference on the economy and financial markets, seemed to be suggesting that the cause for this vacuum in policy is that “Regulatory bodies haven’t evolved as much as the financial markets.” In other words, 5 years after the 2008 meltdown we still have a major challenge in trying to make the global financial system secure against runs and speculative bubbles. There is still further to go in the structural reorganization of the danger from derivatives, but he believes clearing derivatives contracts on exchanges and the decline in bilateral transactions has reduced an element of risk.

    Nevertheless, Rosengren made crystal clear in conversation after his talk that he “sees no bubbles anywhere, not even in real estate where prices are still below their 2006 peak.” He believes prices of residential real estate in Boston and New York are still 15-20% under their peak—and prices in Miami, Phoenix, Las Vegas, California– are still priced at a steeper discount to the peak in 2006.

    As for the economy in general, Rosengren sees “traction” picking up momentum, in which case he would support the “prudent” position of gradually reducing the QE stimulus program. However, he is troubled by the fact that monetary policy(quantitative easing and record low interest rates) are in conflict with fiscal policy, the restraint of sequester and reduction of federal, state and local government spending, ie “the Obama cuts.”
  • In the Media | April 2013
    By Robert Lenzner
    Forbes, April 19, 2013. All Rights Reserved.

    The growing disparity in wealth made the great recession worse and the recovery weaker than ever before. This nation’s wealth disparity widened more than ever before over the last five years because of the steep decline in the value of residential homes and stagnant wages for the lower and middle income groups in the U.S., explained a member of the Federal Reserve Board, Sarah Bloom Raskin, in a speech that explored for the first time a fresh explanation about the obstacles holding back economic growth.

    This “financial vulnerability and marginal ability” to recover from the decline in the wealth of lower income and middle income Americans is “undermining our country’s strength,” Governor Raskin emphasized in New York yesterday at an economic conference sponsored by the Levy Institute at Bard College and the Ford Foundation. Raskin admitted to a feeling of frustration at the central bank about the inability of the Fed’s low interest rate policy together with the expansion in the money supply to alleviate this growing disparity between the wealthy and the rest of American families. She admitted there was current exploration at the Board level of the central bank that “our macro models should be adjusted,” because four years into the recovery a confluence of factors have contributed to a weak recovery.

    “Inequality contributed to the severity of the recession,” Raskin said flatly, and blamed this inequality- for the “differential expectations” in the future between well-off families– with those families not so well off, who were battered by a plunge in the value of their homes, a high level of debt and a continuance of lower wages. I had never heard that theme so sharply expressed as the blame for the mediocre rate of growth we are experiencing.

    Here are the Fed’s latest breakdown on the disparity in wealth. The top 20% of the population own 72% of the nation’s wealth in large part due to their vast holdings in the common shares of publicly held companies. By comparison, the poorest 20% of the U.S. population only own 3% of the wealth, and so were unable to shelter themselves when their homes declined in value, often below the face value of their mortgage and their take-home pay was not growing– or they lost their jobs.

    The distribution of wealth inequality is far worse than the disparity in incomes. Nonetheless, the Fed Governor suggested it does explain the lower levels of consumer spending. As to income disparity between 1979 and 2007, the Federal Reserve figures shows the highest income cohort doubled their annual compensation when adjusted for inflation. The top 1% of earners in the nation saw their share of the national income rise from 10% to 20%. Meanwhile the bottom 40% of the nation’s workers saw their share of the national income decline slightly from 13% to 10%.

    The middle class average income rose in those 30 years to 2007 by only 20% or less than 1% a year, underscoring just how much middle income Americans have fallen behind their wealthier brethren. Fed Governor Raskin called this performance “sluggishness.”

    One hopeful sign is the gradual increase in prices for residential homes throughout the United States. This trend has restored some semblance of household wealth for homeowners from low income and middle income sectors of the population. Another 10% increase in home values, Gov. Raskin suggested, would allow many more low income families to stay in their homes.

    More worrisome, however, is the trend for more and more jobs to be only part-time with less pay and less benefits. “We have lost 9 million jobs,” she said and the growing trend for new jobs to be part-time employment or involving contingent work is “no way to upward mobility” in America.
  • In the Media | April 2013
    By Greg Robb
    MarketWatch, April 19, 2013. All Rights Reserved.

    WASHINGTON (MarketWatch) – No financial institution, regardless of its size, will be bailed out by taxpayers again, Treasury Undersecretary for Domestic Finance Mary Miller said Thursday. As a result of the Dodd-Frank bank regulatory reform, "shareholders of failed companies will be wiped out; creditors will absorb losses; culpable management will not be retained and may have their compensation clawed back; and any remaining costs associated with liquidating the company must be recovered from disposition of the company's assets and, if necessary, from assessments on the financial sector, not taxpayers," Miller said in a speech at the Levy Economics Institute of Bard College. Miller also said evidence was mixed on whether large financial institutions continue to benefit from lower borrowing costs. The Treasury will continue to work to reduce the risks posed by large financial companies and to put in place measures to wind the companies down if the need arises, Miller said. 
  • In the Media | April 2013
    By Annalyn Kurtz
    CNNMoney, April 19, 2013. All Rights Reserved.

    Prices aren't going up very much. Should we celebrate?

    Not really. Inflation that's too low could be a bad sign for the U.S. economy, and some Federal Reserve officials are starting to get concerned. 

    Speaking to reporters on Wednesday, St. Louis Fed President James Bullard pointed to the Fed's preferred measure of inflation—personal consumption expenditures, minus food and energy—which recently has shown that prices are up 1.3% over a year ago.

    "That's pretty low," Bullard said at a Levy Economics Institute event. "I'm getting concerned about that, and I think that gives the FOMC some room to maneuver on its monetary policy."

    The Fed typically aims to keep inflation around 2% a year. Inflation at that level is considered healthy, coinciding with solid economic growth, a growing job market and gradually rising wages.

    "Economic history has shown that economies perform best with slightly higher levels of inflation, such as 2% to 3%," said Bernard Baumohl, chief global economist for the Economic Outlook Group. "Low and dormant inflation translates into a dormant economy."

    Why is low inflation bad? There are a few key reasons.

    First, when companies don't have any leeway to raise prices, they're more apt to cut costs, which could mean a cutback in hiring. Second, if inflation remains so low, consumers are not as motivated to rush out and spend, Baumohl said.

    Third, when inflation is low, it doesn't offer a large buffer against deflation if an economic shock occurs. Deflation—when prices fall—often freezes up spending, because who wants to go out and buy an item now, if they expect it to be cheaper in six months?

    Related: The Geeky Debt Fix that Might Work
    And fourth, low inflation often comes along with lower wage and revenue growth.

    Even with the recent low inflation data, Bullard's comments Wednesday came as a bit of a surprise to Fed watchers. For one, most Fed criticism lately has focused on how the central bank's unprecedented push to stimulate the U.S. economy could eventually lead to rapid inflation or asset bubbles. Fed policies are already cited as a key reason why stocks have recently hovered near five-year highs.

    Second, Bullard is known for leaning slightly hawkish. Just minutes before he met with reporters Wednesday, he gave a speech arguing that the Fed's stimulative policies probably won't solve the job market's problems.

    "I found Bullard's comments yesterday the most interesting in some time," said Ellen Zentner, senior economist for Nomura. "It suggests that other hawks could follow suit if lower inflation persists."

    The Fed has kept its key short-term interest rate near zero since 2008. When that wasn't enough to boost the U.S. economy, it launched several bond-buying sprees, known as quantitative easing, in an attempt to lower long-term interest rates.

    The Fed is now running its third such round of asset purchases, buying $85 billion in Treasuries and mortgage-backed securities each month.

    The program remains highly controversial, and most of the conversation lately has been speculation about when the Fed will start tapering off, and eventually ending, those bond buys.

    But on Wednesday, Bullard went so far as to say that if the inflation rate falls further, the Fed may have to think about increasing its monthly asset purchases, rather than winding them down anytime soon.

    His colleague, Minneapolis Fed President Narayana Kocherlakota, backed that sentiment Thursday.

    Kocherlakota is considered a Fed dove and has long favored stimulus, but if inflation was to fall even further, he said "that would make me in favor of even more accommodation," he told reporters.

    Bullard is a voting member on the Fed's policymaking committee this year, but Kocherlakota is not. Even so, if low inflation persists, expect to hear more Fed officials discuss the issue in the months ahead. 
  • In the Media | April 2013
    By Brai Odion-Esene
    MNI | Deutsche Börse Group, April 18, 2013. All Rights Reserved.

    NEW YORK (MNI) – Federal Reserve Board Governor Sarah Bloom Raskin Wednesday underlined her support for ongoing aggressive push by the Fed to support economic growth, saying that it will help the recovery gain a more secure foothold, with the measures potentially becoming "increasingly potent" as the housing market rebound continues.

    Why? Because the 2008–2009 recession had a disproportionate impact on low- and middle-income American families, the majority of whom have their wealth tied to housing - particularly home prices—she said in remarks prepared for delivery at the Hyman Minsky conference hosted by the Levy Institute.

    Many have argued the Fed of pursuing policies that favor a few over the many, but Raskin believes that "accommodative monetary policy that lifts economic activity more generally is expected to increase the odds of good outcomes for American families."

    Low- to middle-income families bore the brunt of the recession, and many are still struggling to reduce their debt burdens, she noted, while also seeing the values of their homes plummet.

    "Arguably, the FOMC's conduct of monetary policy in recent years has in part been designed to address this particular landscape," she said.

    "I believe that the accommodative policies of the FOMC and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction," Raskin added. "And the resulting expansion in employment will likely improve income levels at the bottom of the distribution."

    The Fed has kept interest rates at exceptionally low levels since late 2008, but Raskin noted that borrowers that have been through foreclosure or have underwater mortgages are less able to take advantage of the lower interest rates, either for home buying or other purposes, reducing the intended impact of the Fed's policies.

    However, "as the housing market recovers, though, I think it is possible that accommodative monetary policy could be increasingly potent," she said.

    Raskin spent significant time discussing the growing wealth inequality gap in America, and its implications for the macroeconomy.

    She argued that rising inequality and stagnating wages have contributed to the "tepid" recovery, noting that in wage gains in particular "have remained more muted than is typical during a recovery."

    Going forward, "it is very likely that, for many households, future labor earnings will be well below what they had anticipated in the years before the recession," Raskin predicted.

    Raskin also defended the Fed's focus on boosting the housing market and spurring faster job creation, noting that the house price shock and less than rosy employment prospects have households curtailing their spending in order to rebuild their nest eggs, while also trimming their budgets "in order to bring their debt levels into alignment with their new economic realities."

    "In this case, the effects of the plunge in net wealth and the jump in unemployment on subsequent spending have been long lasting and lingering," she said.

    Raskin also noted that the recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth - such as technological advances and globalization.

    "Given the long-standing trends toward greater income and wealth inequalities, it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends," she said.
  • In the Media | April 2013
    By Jonathan Spicer and Leah Schnurr
    Reuters, April 18, 2013. All Rights Reserved.

    (Reuters) – Easy money policies are bringing some relief to lower-income Americans hard-hit in the recession and the easing could become increasingly potent as the housing market recovers, a top U.S. Federal Reserve official said on Thursday.

    In a speech on equality and the U.S. economy, Fed Governor Sarah Raskin backed the policy accommodation and argued it would continue to help the overall economic recovery. But the long-running trend of inequality and stagnating wages in the United States has slowed that rebound, she said.

    "The accommodative policies ... and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction. And the resulting expansion in employment will likely improve income levels at the bottom of the distribution," Raskin said in prepared remarks to the Hyman P. Minsky conference.

    "However, given the longstanding trends toward greater income and wealth inequalities, it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends," she said.

    Raskin has consistently supported the central bank's policy of low interest rates and large-scale bond-buying, both of which are meant to spur investment, hiring and broader economic growth in the wake of the 2007–2009 recession.

    Gross Domestic Product growth was very tepid at the end of last year, but is expected to have rebounded strongly to 3-percent or more in the first quarter of this year. Still, recent economic signals have been weaker and the Fed is concerned that could hamper growth.

    Raskin's speech amounted to a in depth look into what effects growing economic inequality, which has been on the rise for decades in the United States, has on the current recovery and on Fed policy.

    "As the housing market recovers, I think it is possible that accommodative monetary policy could be increasingly potent," she said.

    Still, the recession's plunge in net wealth and jump in unemployment will have "long lasting and lingering" effects on spending.

    "Although it is too early to state with certainty what the long-term effect of this recession will be on the earnings potential of those who lost their jobs, given the severity of the job loss and sluggishness of the recovery ... it is very likely that, for many households, future labor earnings will be well below what they had anticipated in the years before the recession," said Raskin, who has a permanent vote on Fed policy.

    She noted that the country remains almost 2.5 million jobs short of pre-recession levels.

    The U.S. unemployment rate was 7.6 percent last month, down from 10 percent in 2009, but short of the 5-6 percent range to which Americans are accustomed.
  • In the Media | April 2013
    By Greg Robb
    MarketWatch, April 18, 2013. All Rights Reserved.

    If economists focused more research on the experiences of  less-advantaged households, they might gain new insight on the current struggles of the U.S. economy, said Federal Reserve Governor Sarah Bloom Raskin on Thursday.

    “It strikes me that macroeconomists are far from a comprehensive understanding of how wealth and income inequality may affect business cycle dynamics,” Raskin said in a speech on the economy sponsored the Levy Economics Institute of Bard College.

    For the sake of simplicity, the typical economic model focuses on “representative” households that focus on average gauges of wealth.

    While this might work in certain circumstances, it creates blind spots in research in the wake of the financial crisis, Raskin said.

    With real-wage growth stagnant, in the early years of the 2000s, many households had pinned their hopes on advancement on higher home prices, Raskin said. As a result, they were most vulnerable to the rapid decline in house prices and the contraction of credit that followed.

    “I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker,” Raskin said.

    “The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth,” she noted.

    At the moment, it is not part of the Fed’s mandate to address inequality. The distribution of wealth and income has not been a primary consideration in the way most macroeconomists think about business cycles. But if it’s effects are hurting the economy, perhaps our thinking should be adjusted, Raskin said.
  • In the Media | April 2013
    By Michael S. Derby
    The Wall Street Journal, April 18, 2013. All Rights Reserved.

    Federal Reserve stimulus aimed at spurring growth will likely grow more powerful as the housing market recovers further, but the trends that have fueled income inequality aren’t likely to change much, a U.S. central bank official said Thursday.

    “The accommodative policies of the [Federal Open Market Committee] and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction,” Fed governor Sarah Bloom Raskin said.

    “As house prices rise, more and more households have enough home equity to gain renewed access to mortgage credit and the ability to refinance their homes at lower rates,” she said.

    “I think it is possible that accommodative monetary policy could be increasingly potent” as the housing market picks up, Ms. Raskin said.

    The official said Fed staffers estimate house price increases of 10% or less from current levels would be enough to help around 40% of homeowners who owe more on their homes that the properties are worth to get back into the black. If more households regain a positive equity position, it will help unclog some of the traditional channels monetary policy operates in, which will over time make the stimulus better able to lift growth, Ms. Raskin said.

    The central banker is a voting member of the monetary policy setting FOMC. Her comments came from the text of a speech prepared for delivery before a gathering held by the Levy Economics Institute of Bard College in New York. The bulk of Ms. Raskin’s speech was devoted to trying to understand how wealth and income inequality played a role in creating the financial crisis, and how it might be affecting a recovery that has thus far been weak despite four years of mostly positive momentum.

    The official allowed that the issue isn’t well understood by mainstream economists. But she said the evidence suggests inequality very likely did play a significant part in the downturn. Ms. Raskin pointed to a long standing and widening gulf between top earners and the rest of the nation. Those who saw incomes stagnate relied more on debt and homeownership to cover the lack of rising wages, and when housing prices began to fall, these households were exposed and without sufficient resources to withstand the storm.

    As housing prices turned south, “not only did [these households] receive an unwelcome shock to their net current wealth, but they also undoubtedly have come to realize that house prices will not rise indefinitely and that their labor income prospects are less rosy than they had believed,” Ms. Raskin said.

    “As a result, they are curtailing their spending in an effort to rebuild their nest eggs and may also be trimming their budgets in order to bring their debt levels into alignment with their new economic realities,” the official said. Add the unemployed to that mix, and it isn’t much of a surprise the economy has struggled to recover, the official said.

    Ms. Raskin also said that even as monetary policy is likely to work better when housing picks up further, it is unlikely it will be able to do much right now for wealth and income inequalities. She said “it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends.”
  • In the Media | April 2013
    CentralBanking.com, April 18, 2013. All Rights Reserved.

    The president of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, said today that the Federal Open Market Committee (FOMC) will have to live with a "considerable period" of financial instability as the price of meeting the targets of its dual unemployment-price stability mandate.

    Speaking at the 22nd Annual Hyman P Minsky Conference, held at the Levy Economics Institute of Bard College, New York, Kocherlakota said the "unusually low" interest rates that he advocates are likely to cause "inflated asset prices, high asset return volatility and heightened merger activity" - all of which "are often interpreted as signifying financial market instability".

    However, Kocherlakota - who does not sit on the FOMC in 2013 - said that low interest rates in the US are as necessary a response to poor economic indicators as is putting on a coat when the weather is cold.

    He said: "...when I decide what coat to wear, my goal is to keep myself at a temperature that I view as appropriate, given prevailing conditions that I cannot influence. Similarly, when the FOMC decides on a level of the real interest rate, its goal is to keep the macroeconomy at an appropriate ‘temperature', given prevailing conditions that it cannot influence."

    Given unemployment is currently significantly above target levels, and inflation is running below the target of 2% per annum, Kocherlakota said the FOMC "needs to put on some more serious 'winter gear' if it is to get the economy back to the right temperature".

    "It seems likely", he said, "that the mandate-consistent time path of real interest rates could be unusually low for a considerable period of time".

    Volatile prices and more mergers likely
    Kocherlakota then discussed three likely financial market outcomes of a sustained low interest rate environment: inflated asset prices, unusually volatile asset returns and high merger activity.

    He said mergers will become more common because they "typically involve enduring current costs in exchange for a flow of future benefits". When credit is relatively cheap, businesses "will be more willing to pay the upfront costs of a merger in exchange for the anticipated flow of future benefits".

    Asset prices will experience more volatility, he said: "When the real interest rate is very high, only the near term matters to investors. Hence, variations in an asset's price only reflect changes in investors' information about the asset's near-term dividends or risk premiums.

    "But when the real interest rate is unusually low, then an asset's price will become correspondingly sensitive to information about dividends or risk premiums in what might seem like the distant future."

    Cost-benefit calculation
    Kocherlakota said the FOMC has to confront "an ongoing probabilistic cost-benefit calculation" as "raising the real interest rate will definitely lead to lower employment and prices" while "raising the real interest rate may reduce the risk of a financial crisis-a crisis which could give rise to a much larger fall in employment and prices".

    Thus, he said, "the committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives."
  • In the Media | April 2013
    The Kansas City Star, April 18, 2013. All Rights Reserved.

    Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank’s low interest rate policies, though necessary, will probably generate signs of financial instability.

    “Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” Kocherlakota said Thursday in the prepared text of a speech in New York. “All of these financial market outcomes are often interpreted as signifying financial market instability.”

    Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles in markets such as junk bonds and farmland.

    While George has dissented from this year’s Federal Open Market Committee decisions because of this risk, Kocherlakota is among the strongest supporters of additional monetary stimulus on the committee.

    In speeches earlier this month Kocherlakota said he sees an “ongoing modest recovery” with unemployment staying at 7 percent or more through late 2014. The slow recovery calls for “more accommodation,” he said in a speech, repeating his call to postpone consideration of any increase in interest rates. He doesn’t vote on policy this year.

    “It is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low,” Kocherlakota said at the Levy Economics Institute’s 22nd Annual Hyman P. Minsky Conference.
  • In the Media | April 2013
    MNI | Deutsche Börse Group, April 18, 2013. All Rights Reserved.

    NEW YORK (MNI) – The Federal Reserve has lowered interest rates to support an economy battered by the 2008-2009 recession, however the weak macroeconomic outlook suggests the central bank's actions have not been enough, and it has not lowered the real interest rate sufficiently, Minneapolis Federal Reserve Bank Governor Narayana Kocherlakota said Thursday.

    In remarks prepared for the Hyman Minsky conference hosted by the Levy Institute, Kocherlakota said the Fed's policy-setting Federal Open Market Committee might have to keep rates at exceptionally low levels for many years to come.
    Kocherlakota does not hold a voting position on the FOMC this year.

    He noted that over the past six years, the demand for safe assets has grown, while the supply of those assets has shrunk. The global supply of assets perceived as safe has also fallen, as the value of American residential land, and assets backed by land, and investors no longer view all forms of European sovereign debt as a safe investment.

    "I suggest that these dramatic changes in asset demand and asset supply are likely to persist over a considerable period of time -- possibly the next five to 10 years," Kocherlakota said. "If that forecast holds true, it follows that the FOMC will only be able to meet its congressionally mandated objectives over that time frame by taking policy actions that ensure that the real interest rate remains unusually low."

    In addition, using the analogy of deciding what clothes to wear based on weather conditions, Kocherlakota argued that "the truth is that the FOMC's choice of winter garb is actually insufficient to keep the U.S. economy appropriately warm."
    He pointed to the outlook for both employment and prices, which is too low relative to the FOMC's goals. Unemployment is currently 7.6%, and expected to fall only slowly, while inflation pressures are muted.

    "The Committee needs to put on some more serious winter gear if it is to get the economy back to the right temperature," he argued. "More prosaically, the FOMC can only achieve its dual mandate objectives by lowering the real interest rate even further below its 2007 level."

    Harking back to his comment on higher demand for safe assets, Kocherlakota said this is being fueled by tighter credit access, heightened perceptions of macroeconomic risk and increased uncertainty about federal fiscal policy. In particular, he said that restrictions on households' and businesses' ability to borrow typically lead them to spend less and save more.

    "Thus, the FOMC is confronted with a greater demand for safe assets and tighter supply of safe assets than in 2007. These changes in asset markets mean that, at any given level of real interest rates, households and businesses spend less. Their decline in spending pushes down on both prices and employment. As a result, the FOMC has to lower the real interest rate to achieve its objectives," he said.

    Kocherlakota predicted that over the five-to-10-year horizon, credit market access will remain limited relative to what borrowers had available in 2007, businesses will continue to feel a heightened degree of uncertainty about taxes and households will continue to feel a heightened degree of uncertainty about the level of federal government benefits.

    "These considerations suggest that, for many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals," he reiterated.

    He acknowledged, however, that keeping real interest rates low for a considerable period of time will likely be associated with other "unusual financial market outcomes" - not to mention give rise to "signs of financial market instability."

    The "unusual financial market outcomes" are inflated asset prices, unusually volatile asset returns and high merger activity, Kocherlakota said.

    These financial market phenomena could pose macroeconomic risks, and he believes that is best addressed using effective supervision and regulation of the financial sector.

    "It is possible, though, that these tools may only partly mitigate the relevant macroeconomic risks. The FOMC could respond to any residual risk by tightening monetary policy," he added.

    Kocherlakota counseled, however, that the FOMC should only take that action "if the certain loss in terms of the associated fall in employment and prices is outweighed by the possible benefit of reducing the risk of an even larger fall in employment and prices caused by a financial crisis."

    Meaning? "The FOMC's decision about how to react to signs of financial instability will necessarily depend on a delicate probabilistic cost-benefit calculation," he said.

    The FOMC, Kocherlakota said, has to weigh the certainty of "a costly deviation from its dual mandate objectives" against the benefit of reducing the probability of "an even larger deviation from those objectives."
  • In the Media | April 2013
    by Jon C. Ogg
    24/7 Wall Street, April 18, 2013. All Rights Reserved.

    The Federal Reserve may have released its Beige Book on Wednesday showing no real risks to quantitative easing and to the $85 billion per month used for buying bonds. Despite three weak economic readings so far on Thursday, two different speeches from regional presidents of the Federal Reserve are taking different sides of the easy money from quantitative easing and bond buying.

    Lacker went on to say that he favors slowing the rate of bond purchases immediately, and he is leaning toward a swift end to the program. He thinks that the continued buying will make a Fed exit that much trickier. One last note is that inflation is tame now, but Lacker is worried that inflation risks will rise once the Federal Reserve and Ben Bernanke get closer to their decision to end quantitative easing.Richmond Fed President Jeffrey Lacker gave an interview to CNBC on Thursday morning saying that the bond-buying efforts have not had much of an impact on the labor market. He thinks that the labor market is struggling due to wider challenges. As a reminder, Lacker was the lone monetary policy hawk throughout 2012, but he is not considered a voting member who gets to cast dissenting public views at each FOMC meeting due to term rotations.

    A second speech of caution may be taken out of context from headlines, but Minneapolis Federal Reserve Bank president Narayana Kocherlakota spoke at the Levy Institute in New York this morning. His take was that very low interest rates could persist for close to decade because the economic risks and economic instability will be with us for so long. His take is that the FOMC will have to maintain very low real interest rates to achieve its dual mandate of full employment and low inflation.

    Where the Narayana Kocherlakota speech gets interesting is that he thinks this will be met with inflated asset prices, high asset return volatility and even with heightened merger activity. Be advised that Narayana Kocherlakota also is not a voting member of the FOMC, and he is considered dovish as a big supporter of quantitative easing. Kocherlakota even went on to say that he supports lowering the Fed’s unemployment target down to 5.5% rather than 6.5%.

    You have to love it when two non-voting Fed presidents offer differing views. Lacker is as hawkish as a member of the Fed can be. Kocherlakota is on the other end of the spectrum.

  • In the Media | April 2013
    NASDAQ, April 18, 2013. All Rights Reserved.

    NEW YORK – Federal Reserve stimulus aimed at spurring growth will likely grow more powerful as the housing market recovers further, but the trends that have fueled income inequality aren't likely to change much, a U.S. central bank official said Thursday.

    "The accommodative policies of the [Federal Open Market Committee] and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction," Fed governor Sarah Bloom Raskin said.

    "As house prices rise, more and more households have enough home equity to gain renewed access to mortgage credit and the ability to refinance their homes at lower rates," she said.

    "I think it is possible that accommodative monetary policy could be increasingly potent" as the housing market picks up, Ms. Raskin said.

    The official said Fed staffers estimate house price increases of 10% or less from current levels would be enough to help around 40% of homeowners who owe more on their homes that the properties are worth to get back into the black. If more households regain a positive equity position, it will help unclog some of the traditional channels monetary policy operates in, which will over time make the stimulus better able to lift growth, Ms. Raskin said.

    The central banker is a voting member of the monetary policy setting FOMC. Her comments came from the text of a speech prepared for delivery before a gathering held by the Levy Economics Institute of Bard College in New York. The bulk of Ms. Raskin's speech was devoted to trying to understand how wealth and income inequality played a role in creating the financial crisis, and how it might be affecting a recovery that has thus far been weak despite four years of mostly positive momentum.

    The official allowed that the issue isn't well understood by mainstream economists. But she said the evidence suggests inequality very likely did play a significant part in the downturn. Ms. Raskin pointed to a long standing and widening gulf between top earners and the rest of the nation. Those who saw incomes stagnate relied more on debt and homeownership to cover the lack of rising wages, and when housing prices began to fall, these households were exposed and without sufficient resources to withstand the storm.

    As housing prices turned south, "not only did [these households] receive an unwelcome shock to their net current wealth, but they also undoubtedly have come to realize that house prices will not rise indefinitely and that their labor income prospects are less rosy than they had believed," Ms. Raskin said.

    "As a result, they are curtailing their spending in an effort to rebuild their nest eggs and may also be trimming their budgets in order to bring their debt levels into alignment with their new economic realities," the official said. Add the unemployed to that mix, and it isn't much of a surprise the economy has struggled to recover, the official said.

    Ms. Raskin also said that even as monetary policy is likely to work better when housing picks up further, it is unlikely it will be able to do much right now for wealth and income inequalities. She said "it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends."
  • In the Media | April 2013
    MNI | Deutsche Börse Group, April 18, 2013. All Rights Reserved.

    NEW YORK (MNI) - Treasury Under Secretary Mary Miller Thursday night avoided a specific direct comment on the day's relatively weak $18 billion TIPS 5-year note auction.

    But she did tell MNI in an exclusive comment that "over the past week, people have been reassessing their inflation expectations."

    She also hailed the cooperation between the Bank of England and the U.S. FDIC on banking regulation.

    Miller was answering questions from the audience at the annual Human Minsky Conference where she had delivered a speech saying, as reported earlier, that as much as current commentary ascribes great funding advantages to those banks of a size to be considered "too big to fail," that the perception may be increasingly out of date.

    The U.S. TIPS market declined sharply Thursday afternoon after the auction tailed nearly seven basis points although it drew reasonably good indirect bids. The auction size had been increased $2 billion over a similar previous auction.
    Miller also parried when asked by an audience member if the U.S. regulators such as Treasury should make U.S. banks leave ISDA. "You need to step back and look at the totality of financial regulation," said Miller.

    Adapting to the "clarity" of the Dodd-Frank Act about how taxpayers will be spared any future bank bailouts, credit ratings firms that had given the biggest banks a seven-notch uplift beyond their underlying creditworthiness, have now taken back as much as six notches. "One rating agency," she noted "has also recently indicated it may further reduce or eliminate its remaining ratings uplift assumptions by the end of 2013," she said.
  • In the Media | April 2013
    MNI | Deutsche Börse Group, April 18, 2013. All Rights Reserved.

    NEW YORK (MNI) - Minneapolis Federal Reserve Bank President Narayana Kocherlakota Thursday called on the central bank to provide even more support to the ongoing economic recovery, arguing concerns about risks to financial stability do not yet supersede the need to spur faster job creation and maintain price stability.

    Speaking to reporters on the sidelines of the Hyman Minsky conference in New York, Kocherlakota said , with regard to possible bubbles forming in asset classes, "Right now ... I don't see those kinds of risks out there."

    Kocherlakota is not a voter on the policy-setting Federal Open Market Committee this year.

    The question to be asked, he said, is do financial stability risks loom large enough to warrant taking monetary policy action to do something about them.

    "Is it (monetary policy) effective enough at mitigating that risk to warrant the loss of jobs and the disinflationary pressures? The answer to that is absolutely not at this stage," Kocherlakota said.

    "The worry about financial stability is still so tenuous that I would not want to be robbing the immediate stimulus to the economy on that basis," he added.

    Kocherlakota said he sees inflation running below target over the next two years, while the unemployment rate remains elevated.

    Speaking at the same conference Wednesday, St. Louis Fed President James Bullard has said he would support ramping up the Fed's bond purchases - currently at a pace of $85 billion a month - should inflation continue to decline.

    Asked for his thoughts, Kocherlakota said his outlook for inflation has not changed yet although the recent drop "is certainly a cause for concern."

    The Fed cannot risk delivering too little inflation relative to what it promises, he said, so it is important to protect the FOMC's 2% inflation target "both from above ... and from below as well."

    "I'm in favor of more accommodation," Kocherlakota declared, and so inflation softening "would make me even more in favor of more accommodation."

    In his prepared remarks, Kocherlakota had argued that the FOMC needs to put on "some more serious winter gear if it is to get the economy back to the right temperature."

    Asked by MNI what would constitute more serious action by the Fed, Kocherlakota again said the FOMC would provide additional stimulus to the economy by lowering its unemployment threshold to 5.5% from 6.5%.

    "That would provide even more of a guarantee in terms of how long interest rates were going to remain (exceptionally low), that would push downward further on real interest rates and provide more stimulus to demand," he said.

    Kocherlakota was then asked whether "more serious winter gear" also meant upping the scale of the Fed's asset purchases.

    "We have to become a lot more clear about what exactly are the metrics associated with that," Kocherlakota said, noting that the FOMC's vow to maintain the aggressive bond purchases until there is a "substantial improvement" in the labor market outlook, is being subjected to different interpretations.

    "I think we'd really solve a lot of problems, in terms of the fed funds rate, by being much more explicit about the markers for that (QE3)," Kcoherlakota said.

    Kocherlakota added that he feels more confident in the ability of forward guidance to provide the requisite stimulus because the FOMC has been so clear about it.

    As to the effectiveness of the Fed's policies, Kocherlakota argued that they are having an impact on the economy, arguing that the Fed's asset purchases have not only pushed down the yields of the securities being bought, but also yields "across the economy."

    "So I think that there is evidence that our actions are being effective," he said, before adding, "it would be nice if we did even more."
  • In the Media | April 2013
    By Michael S. Derby
    4-Traders, April 18, 2013. All Rights Reserved.

    NEW YORK--A Federal Reserve official said Thursday interest rates are likely to stay very low for years to come, which raises the prospect that chronic financial instability will be an enduring threat.

    "For a considerable period of time, the [Federal Open Market Committee] may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets," Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said.

    "For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals," the official said. "Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity," he said.

    In an environment where bubbles regularly threaten to form, and other markets see prices move away from fundamentals, the Fed will be confronted with difficult choices. "These potentialities are best addressed through effective supervision and regulation of the financial sector," Mr. Kocherlakota said, although he allowed that it is possible the Fed may also have to employ the blunt tool of monetary policy to cool markets down if risks rise enough.

    The official, when asked if he saw any markets devolving into a bubble, responded "the answer is absolutely not at this stage." At the current moment, "I don't see those kind of risks out there."

    But he also said that given the importance now placed on financial stability, bank regulators and supervisors face greater challenges as they do their work.

    Mr. Kocherlakota's comments came from a speech he gave at a conference held in New York by the Levy Economics Institute of Bard College. He took questions from the audience and spoke with reporters as well. The official is not currently a voting member of the monetary policy setting FOMC.

    Mr. Kocherlakota has been one of the biggest supporters of aggressive Fed action to support the economy, and has argued in recent speeches the Fed is not going far enough to aid the economy, and should add more stimulus by saying it wants to achieve a lower unemployment rate before hiking interest rates.

    He reiterated that he'd still like to lower the threshold at which the Fed would potentially entertain raising rates, from 6.5% to 5.5%. He said weakening inflation pressures were "definitely a cause for concern" but he hasn't changed his outlook for price pressures. Mr. Kocherlakota said he still expects economic growth of 2.5% this year and 3% next year, and believes that will be enough to help raise inflation over time from its current very low level.

    In his speech, the central banker said that the low interest rate world that could persist for "possibly the next five to 10 years" is in part the result of Fed actions over the course of the financial crisis and its aftermath. But the central banker said that other forces are also conspiring to keep rates very low.

    The three that are most important beyond Fed policy are tighter credit availability, increased worry about economic risk and uncertainty surrounding the outlook for U.S. government finance, he said.

    These factors are causing investors, households and firms to keep their money where it is safest, and it is also causing them to save more. At the same time, those who need better yields will go into riskier assets, creating the risk prices for those markets could go haywire, the official explained.

    In as much as Fed policy has helped create the low returns savers are wounded by, so too have market forces, Mr. Kocherlakota said.

    "I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others," he said. "That seems about as compelling as blaming me for creating winter in Minnesota by putting on my long johns," Mr. Kocherlakota said.

    The official said in his speech he expects unemployment to fall "only slowly," and he said "inflation pressures are muted."
  • In the Media | April 2013
    By Michael S. Derby
    Euroinvestor, April 18, 2013. All Rights Reserved.

    NEW YORK – A Federal Reserve official said Thursday interest rates are likely to stay very low for years to come, which raised the prospect that chronic financial instability risks will dog the economy for a long time.

    "For a considerable period of time, the [Federal Open Market Committee] may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets," Federal Reserve Bank of Minneapolis President Narayana Kocherlaktoa said.

    "For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals," the official said. "Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity," he said.

    In an environment where bubbles regularly threaten to form, and other markets see prices move away from fundamentals, the Fed will be confronted with difficult choices. "These potentialities are best addressed through effective supervision and regulation of the financial sector," Mr. Kocherlakota said, although he allowed that it is possible the Fed may also have to employ the blunt tool of monetary policy to cool markets down if risks rise enough.

    Mr. Kocherlakota's comments came from the text of a speech that was to be presented at a conference held in New York by the Levy Economics Institute of Bard College. The official is not currently a voting member of the monetary policy setting FOMC.

    Mr. Kocherlakota has been one of the biggest supporters of aggressive Fed action to support the economy, and has argued in recent speeches the Fed is not going far enough to aid the economy, and should add more stimulus by saying it wants to achieve a lower unemployment rate before hiking interest rates.

    In his speech, the central banker said that the low interest rate world that could persist for "possibly the next five to 10 years" is in part the result of Fed actions over the course of the financial crisis and its aftermath. But the central banker said that other forces are also conspiring to keep rates very low.

    The three that are most important beyond Fed policy are tighter credit availability, increased worry about economic risk and uncertainty surrounding the outlook for U.S. government finance, he said.

    These factors are causing investors, households, and firms to keep their money where it is safest, and it is also causing them to save more. At the same time, those who need better yields will go into riskier assets, creating the risk prices for those markets could go haywire, the official explained.

    In as much as Fed policy has helped create the low returns savers are wounded by, so too have market forces, Mr. Kocherlakota said.

    "I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others," he said. "That seems about as compelling as blaming me for creating winter in Minnesota by putting on my long johns," Mr. Kocherlakota said.

    The official said in his speech he expects unemployment to fall "only slowly," and he said "inflation pressures are muted."
  • In the Media | April 2013
    By Dan Fitzpatrick
    The Wall Street Journal, April 18, 2013. All Rights Reserved.

    New York Department of Financial Services Superintendent Benjamin Lawski signaled in a speech Thursday that he will not shy away from taking the “lead” among regulators while confronting U.S. financial giants.

    Lawsky rankled other regulators last year when he pursued a money laundering case against British bank Standard Chartered that ended with a settlement of $340 million. His agency, which serves as New York’s top banking regulator, was less than a year old at the time.

    “A dose of healthy competition among regulators is helpful and necessary to safeguarding the stability of our nation’s financial system,” Lawsky told a crowd in New York gathering for the Hyman P. Minsky Conference on the State of the U.S. and World Economies.

    During his talk  Lawsky dropped hints about new lines of inquiry for his department. He mentioned a trend of private equity companies buying insurance companies; the use of captive insurance subsidiaries to shift risk and take advantage of looser oversight requirements; and the use of outside consultants to monitor bank abuses.

    “The monitors are hired by the banks, they’re embedded physically at the banks, they are paid by the banks and they depend on the banks for future business,” he said.

    Lawsky said to expect actions in “the coming weeks and months” on the consultancy issue. “We expect that those actions will help propel reform at both the state and federal levels.” 
  • In the Media | April 2013
    Money News, April 18, 2013. All Rights Reserved.

    Easy money policies are bringing some relief to lower-income Americans hard-hit in the recession and the easing could become increasingly potent as the housing market recovers, a top U.S. Federal Reserve official said on Thursday.

    In a speech on equality and the U.S. economy, Fed Governor Sarah Raskin backed the policy accommodation and argued it would continue to help the overall economic recovery. But the long-running trend of inequality and stagnating wages in the United States has slowed that rebound, she said.

    "The accommodative policies ... and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction. And the resulting expansion in employment will likely improve income levels at the bottom of the distribution," Raskin said in prepared remarks to the Hyman P. Minsky conference.

    "However, given the longstanding trends toward greater income and wealth inequalities, it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends," she said.

    Raskin has consistently supported the central bank's policy of low interest rates and large-scale bond-buying, both of which are meant to spur investment, hiring and broader economic growth in the wake of the 2007-2009 recession.

    Gross Domestic Product growth was very tepid at the end of last year, but is expected to have rebounded strongly to 3-percent or more in the first quarter of this year. Still, recent economic signals have been weaker and the Fed is concerned that could hamper growth.

    Raskin's speech amounted to an in-depth look into what effects growing economic inequality, which has been on the rise for decades in the United States, has on the current recovery and on Fed policy.

    "As the housing market recovers, I think it is possible that accommodative monetary policy could be increasingly potent," she said.

    Still, the recession's plunge in net wealth and jump in unemployment will have "long lasting and lingering" effects on spending.

    "Although it is too early to state with certainty what the long-term effect of this recession will be on the earnings potential of those who lost their jobs, given the severity of the job loss and sluggishness of the recovery ... it is very likely that, for many households, future labor earnings will be well below what they had anticipated in the years before the recession," said Raskin, who has a permanent vote on Fed policy.

    She noted that the country remains almost 2.5 million jobs short of pre-recession levels.

    The U.S. unemployment rate was 7.6 percent last month, down from 10 percent in 2009, but short of the 5-6 percent range to which Americans are accustomed.
  • In the Media | April 2013
    By Jeff Kearns
    Bloomberg, April 18, 2013. All Rights Reserved.

    Federal Reserve Governor Sarah Bloom Raskin said the Fed should press on with record easing, predicting that current policy will increasingly improve the economic outlook for low-income Americans.

    The Fed’s near-zero interest rate policy and asset purchases are growing more effective by supporting the housing market and spurring economic activity, Raskin said today in a speech at a Ford Foundation conference in New York.

    “Accommodative monetary policy could be increasingly potent” as the housing market recovers, Raskin said. “As house prices rise, more and more households have enough home equity to gain renewed access to mortgage credit and the ability to refinance their homes at lower rates.”

    The Federal Open Market Committee in March agreed to continue buying $85 billion in Treasuries and mortgage bonds per month in an effort to bolster growth and reduce unemployment that was at 7.6 percent last month. Fed officials are debating how to eventually curtail asset purchases that have swollen the central bank’s balance sheet to a record $3.3 trillion.

    “The accommodative policies of the FOMC and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction,” Raskin said. “And the resulting expansion in employment will likely improve income levels at the bottom of the distribution.”


    Financial Shocks

    At the December 2007 start of the 18-month recession, there were an “unusually large” number of low- and middle-income households that were vulnerable to financial shocks after 30 years of “sluggish” wage growth, Raskin said.

    “Their exposure to house prices had increased dramatically,” and they were more likely to be affected by lost jobs and reduced savings, Raskin said. That deepened the recession and prolonged the recovery, she said today at the foundation’s 22nd Annual Hyman P. Minsky Conference.

    U.S. growth slumped to 0.4 percent in the fourth quarter, the slowest since the first quarter of 2011, amid government budget cuts and military spending that plunged the most since the waning days of the Vietnam War four decades ago.

    Economists expect growth to rebound. Gross domestic product probably grew at a 3 percent annualized rate from January through March, according to the median forecast in an April 5-9 Bloomberg survey of 69 economists. That’s up from the 2 percent gain projected by economists last month.

    The Standard & Poor’s 500 Index slumped for a second day, dropping 0.7 percent to a six-week low of 1,541.61 as earnings from UnitedHealth Group Inc. to EBay Inc. disappointed investors. The yield on the benchmark 10-year Treasury note decreased 0.01 percentage point to 1.68 percent.

    Raskin, 52, was appointed by President Barack Obama  in 2010 for a term that expires in 2016. Before joining the Fed she was Maryland’s Commissioner of Financial Regulation, according to the Fed Board website.
  • In the Media | April 2013
    El Financiero, April 18, 2013. All Rights Reserved.

    Nueva York. – Las políticas ultraexpansivas de la Reserva Federal de Estados Unidos inevitablemente resultarán en la inestabilidad de los mercados financieros por años pero tales riesgos son necesarios para impulsar el empleo y la inflación, dijo el jueves un banquero central estadounidense.

    Relacionando a la Fed con una excursión en el estado de Minnesota en medio del invierno, el presidente de la Fed de Minneapolis Narayana Kocherlakota dijo que las tasas de interés reales bajas son tan necesarias como vestir una cálida parka, y probablemente sean necesarias "por varios años más".

    Reforzando su argumento expansionista, de que hay que aliviar aún más el crédito, el funcionario dijo que el débil panorama económico sugiere que las tasas deberían ser todavía más bajas pese a la resultante inflación de los precios de los activos, los retornos volátiles y la mayor actividad de fusiones corporativas.

    "Por muchos años más", dijo, el comité monetario de la Fed "solo podrá lograr sus objetivos establecidos por el Congreso si sigue políticas que resulten en señales de inestabilidad de los mercados financieros", dijo Kocherlakota en comentarios preparados para una conferencia Hyman P. Minsky.
  • In the Media | April 2013
    Forbes, April 18, 2013. All Rights Reserved.

    Admitting that the Federal Reserve is responsible for creating financial instability, and possibly brewing the next toxic asset bubble, Minneapolis Fed President Narayana Kocherlakota said they have to do more to stimulate the economy, as inflation is too low.  Kocherlakota predicted five to ten years of financial instability, as the Fed marches on with unusually low, and currently negative, interest rates, yet suggested the alternative would be “much worse.”

    Going much further than Fed Chairman Ben Bernanke. Kocherlakota directly tied high levels of financial instability with the Fed’s policies designed to keep rates “unusually low.”  Interestingly, though, he didn’t suggest this was a reason to reverse course, rather, he felt it was an unwanted but tolerable side effect.

    Speaking at the Levy Economics Institute’s Minsky conference, Kocherlakota spoke of “incredible demand for safe assets,” which, in conjunction with Fed policy, will conspire to keep real rates very low for possibly five to ten years.

    Demand for safety has risen, as tight credit access pushes households and some businesses to increase saving.  At the same time, fears of a coming macroeconomic shock diminishes demand for businesses and workers’ products.  Add the fiscal situation, where spending and revenues are completely out of whack, and one sees a constant yearning for safety.  In part this has helped the dollar remain relatively resilient, while fueling gold’s rise during times of market stress, despite recent weakness.

    On the supply side, investors knew where to find it before the crash: in U.S. real state or assets backed by it, in European sovereign debt, and in Treasuries. With the real estate sector obliterated and Europe in shambles, supply of safe assets has fallen dramatically, Kocherlakota explained.

    This environment undoubtedly sets the stage for “unusual” events in financial markets.  Kocherlakota spoke of Fed policy inflating asset prices, while accelerating volatility; he also mentioned increased merger activity.  Indeed, U.S. stock markets have been trading at or near record highs for some time, while stocks in the housing sector, such as KB Home and Lennar, are up near their 52-week highs.  Financial stocks like Citigroup, JPMorgan Cahse, and Bank of America are all outperforming the market dramatically over the past six months, while gold, eternally seen as a safe asset, is down hard in the same time period.

    The risk of creating another destructive bubble is there, according to Kocherlakota, but he doesn’t see it as imminent.  The Fed’s current state of surveillance is vastly superior than it was before the financial crisis, the Minneapolis Fed chief said, giving him comfort that they will be able to anticipate, or at least mitigate, any dangers.

    So, the Fed has to do more.  Kocherlakota’s two-year inflation projection is well below trend, and fearing deflation, he’s ready to do more.  Even after defending quantitative easing, Kocherlakota said he prefers to use forward guidance to affect market perceptions.   Specifically, he’d like to lower the unemployment target from 6.5% to 5.5%, signaling that easing will remain in place for longer.  QE isn’t as well understood from a metric perspective, he explained.

    Asked about diminishing returns, and if Fed policy was at a point where it is increasingly ineffective, while risks continue to mount, Kocherlakota was quick to reject the hypothesis.  There’s ample evidence the Fed has been effective, particularly in mortgage markets and in real rates, as seen in TIPS, while raising rates would be destructive, helping a few to the detriment of many, he said.

    Kocherlakota echoed comments made by his colleague from St. Louis, James Bullard, who on Wednesday also said inflation was “too low,” arguing for the Fed to do more. While Bullard said forward guidance is ineffective, and asked for a modification in the flow rate of asset purchases (Fed code for more money printing), they both agree the Fed has to do more to stimulate the economy.
  • In the Media | April 2013
    By Michael S. Derby
    Capital.gr, April 18, 2013. All Rights Reserved.

    (Adds Kocherlakota's comments on market imbalances, inflation)

    NEW YORK--A Federal Reserve official said Thursday interest rates are likely to stay very low for years to come, which raises the prospect that chronic financial instability will be an enduring threat.

    "For a considerable period of time, the [Federal Open Market Committee] may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets," Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said.

    "For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals," the official said. "Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity," he said.

    In an environment where bubbles regularly threaten to form, and other markets see prices move away from fundamentals, the Fed will be confronted with difficult choices. "These potentialities are best addressed through effective supervision and regulation of the financial sector," Mr. Kocherlakota said, although he allowed that it is possible the Fed may also have to employ the blunt tool of monetary policy to cool markets down if risks rise enough.

    The official, when asked if he saw any markets devolving into a bubble, responded "the answer is absolutely not at this stage." At the current moment, "I don't see those kind of risks out there."

    But he also said that given the importance now placed on financial stability, bank regulators and supervisors face greater challenges as they do their work.

    Mr. Kocherlakota's comments came from a speech he gave at a conference held in New York by the Levy Economics Institute of Bard College. He took questions from the audience and spoke with reporters as well. The official is not currently a voting member of the monetary policy setting FOMC.

    Mr. Kocherlakota has been one of the biggest supporters of aggressive Fed action to support the economy, and has argued in recent speeches the Fed is not going far enough to aid the economy, and should add more stimulus by saying it wants to achieve a lower unemployment rate before hiking interest rates.

    He reiterated that he'd still like to lower the threshold at which the Fed would potentially entertain raising rates, from 6.5% to 5.5%. He said weakening inflation pressures were "definitely a cause for concern" but he hasn't changed his outlook for price pressures. Mr. Kocherlakota said he still expects economic growth of 2.5% this year and 3% next year, and believes that will be enough to help raise inflation over time from its current very low level.

    In his speech, the central banker said that the low interest rate world that could persist for "possibly the next five to 10 years" is in part the result of Fed actions over the course of the financial crisis and its aftermath. But the central banker said that other forces are also conspiring to keep rates very low.

    The three that are most important beyond Fed policy are tighter credit availability, increased worry about economic risk and uncertainty surrounding the outlook for U.S. government finance, he said.

    These factors are causing investors, households and firms to keep their money where it is safest, and it is also causing them to save more. At the same time, those who need better yields will go into riskier assets, creating the risk prices for those markets could go haywire, the official explained.

    In as much as Fed policy has helped create the low returns savers are wounded by, so too have market forces, Mr. Kocherlakota said.

    "I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others," he said. "That seems about as compelling as blaming me for creating winter in Minnesota by putting on my long johns," Mr. Kocherlakota said.

    The official said in his speech he expects unemployment to fall "only slowly," and he said "inflation pressures are muted."
  • In the Media | April 2013
    Money News, April 18, 2013. All Rights Reserved.

    Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank’s low interest rate policies, though necessary, will probably generate signs of financial instability.

    “Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” Kocherlakota said in the prepared text of a speech in New York.

    “All of these financial market outcomes are often interpreted as signifying financial market instability.”

    Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles in markets such as junk bonds and farmland.

    While George has dissented from this year’s Federal Open Market Committee decisions because of this risk, Kocherlakota is among the strongest supporters of additional monetary stimulus on the committee.

    In speeches earlier this month Kocherlakota said he sees an “ongoing modest recovery” with unemployment staying at 7 percent or more through late 2014. The slow recovery calls for “more accommodation,” he said in a speech, repeating his call to postpone consideration of any increase in interest rates. He doesn’t vote on policy this year.

    “It is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low,” Kocherlakota said at the Levy Economics Institute’s 22nd Annual Hyman P. Minsky Conference.

    Near Zero
    The Minneapolis Fed chief has said the central bank should hold its target interest rate near zero until unemployment falls to 5.5 percent. That’s a full percentage point below the 6.5 percent threshold that has been adopted by the FOMC.

    “For a considerable period of time, the FOMC may only be able to achieve its macroeconomic objectives in association with signs of instability in financial markets,” Kocherlakota said. “These financial market phenomena could pose macroeconomic risks. In my view, these potentialities are best addressed using effective supervision and regulation of the financial sector.”
  • In the Media | April 2013
    By Joshua Zumbrun
    Bloomberg, April 18, 2013. All Rights Reserved.

    Federal Reserve Bank of Minneapolis President  Narayana Kocherlakota said the central bank’s low interest-rate policies, though necessary, will probably generate signs of financial instability.

    “Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” Kocherlakota said today in the prepared text of a speech in New York.  “All of these financial market outcomes are often interpreted as signifying financial market instability.” He told reporters later he doesn’t see financial instability as imminent.

    Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles in markets such as junk bonds  and farmland.

    While George has dissented from this year’s Federal Open Market Committee decisions because of this risk, Kocherlakota is among the strongest supporters of additional monetary stimulus on the committee.

    In speeches earlier this month, Kocherlakota said he sees an “ongoing modest recovery” with unemployment staying at 7 percent or more through late 2014. The slow recovery calls for “more accommodation,” he said in a speech, repeating his call to postpone consideration of any increase in interest rates. He doesn’t vote on policy this year.

    Dual Mandate
    “It is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low,” Kocherlakota said at the Levy Economics Institute’s 22nd Annual Hyman P. Minsky Conference.

    The Minneapolis Fed chief has said the central bank should hold its target interest rate near zero until unemployment  falls to 5.5 percent. That’s a percentage point below the 6.5 percent threshold that has been adopted by the FOMC.

    Answering audience questions, Kocherlakota said the recovery in the housing market is evidence that the Fed’s monthly purchases of $85 billion in Treasuries and mortgage securities are effective.

    “They are having an impact on the economy,” he said. “Look at what’s going on in the mortgage market.”

    “It would be nice if we did even more along those lines because I think our tools have been effective,” he said. “In the housing market, in particular, you’ve certainly seen direct effects of that kind of stimulus.”

    Growth Outlook
    Kocherlakota told reporters that the current growth outlook is sufficient to raise inflation, currently measured at 1.3 percent by the Fed’s preferred price gauge, closer to the Fed’s goal of 2 percent.

    “It’s very important to protect the target both from above, which gets so much attention, but from below as well,” he said.

    “Given the stimulus we’re providing, given the growth I see in the economy, 2.5 percent in 2013, 3 percent in 2014, that kind of growth I see as sufficient to put upward pressure on inflation,” Kocherlakota said.

    He said he’s already “in favor of more accommodation” and further declines in the inflation rate would make him “even more” supportive of additional stimulus.

    In his speech, Kocherlakota said that “for a considerable period of time,” the FOMC may only be able to “achieve its macroeconomic objectives in association with signs of instability in financial markets. These financial market phenomena could pose macroeconomic risks. In my view, these potentialities are best addressed using effective supervision and regulation of the financial sector.”

    “The low interest-rate environment” in coming years “will put even more pressure on the regulatory framework,” Kocherlakota told reporters after his speech.
  • In the Media | April 2013
    By Elizabeth D. Festa
    LifeHealthPro, April 18, 2013. All Rights Reserved.

    New York insurance regulators have the captives industry and private equity firms that own annuity companies under a microscope for their effect on financial solvency and stability, and the fear policyholders may be left holding the bag.

    The use of captives of insurers places the stability of the broader financial system at greater risk, the New York State Department of Financial Services (DFS) lead supervisor said today in New York.

    DFS Superintendent Ben Lawsky even invoked AIG and analogized the use of captives to the same risky practices that precipitated the 2008 financial crisis, issuing subprime mortgage-backed securities (MBS) through structured investment vehicles and writing credit default swaps on higher-risk MBS.

    Lawsky also said his state regulators are ramping up their scrutiny of private equity firms that are acquiring insurance companies, particularly fixed and indexed annuity writers. He warned that their failure could put policyholders, retirees and the financial system at risk.

    He also suggested that regulators might need to beef up existing regulations to prevent the easy acquisition of annuity-rich insurance companies.

    The long term nature of the life insurance business raises similar issues, yet under current regulations it is less burdensome for a private equity firm to acquire an insurer than a bank.

    The specific risk DFS is concerned about is whether these private equity firms are more short-term focused when this is a business that’s all about the long haul.

    “There can be exceptions, but generally private equity firms follow a model of aggressive risk-taking and high leverage, typically making high-risk investments,” Lawsky said. “Private equity firms typically manage their investments with a much shorter time horizon – for example, three to five years -- than is typically required for prudent insurance company management.”

    If they don’t happen to be long-term players in the insurance industry, their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.

    Private equity-controlled insurers now account for nearly 30 percent of the indexed annuity market (up from 7 percent a year ago) and 15 percent of the total fixed annuity market (up from 4 percent a year ago).

    Lawsky said he hopes to “shed light on and further stimulate a national debate on the use of captive insurance companies and special purpose vehicles (SPVs) by some of the world’s largest financial firms.

    He hopes to do this though the DFS’ ongoing “serious investigation” into what he believes is not even a true risk transfer.
    Lawsky, who is superintendent of both banking and insurance in the state, suggested in his remarks the shaky ground of solvency upon which some insurers, he believes, are standing. When the time finally comes for a policyholder to collect their promised benefits, the reserves of insurers have shrunk so there is a smaller buffer available to ensure that the policyholders receive the benefits to which they are legally entitled, he explained.

    Lawsky said that many times captives do not actually transfer the risk for policies off the parent company’s books because the parent company is ultimately still on the hook for paying claims if the shell company’s weaker reserves are exhausted.

    Lawsky spoke of his concerns with what he terms “shadow insurance” or “financial alchemy” during a speech Thursday in New York City at the annual Hyman P. Minsky conference on the state of the U.S. and world economies organized by the Levy Economics Institute of Bard College.
  • In the Media | April 2013
    Politico, April 18, 2013. All Rights Reserved.

    FIRST LOOK III: LAWSKY ON REGULATORY COMPETITION
     — Excerpts from remarks New York Superintendent of Financial Services Ben Lawsky is to give this morning at the Minsky Conference at the Ford Foundation in NYC on “healthy competition” in financial regulation: “The New York State Department of Financial Services (DFS) is only about 18 months old. So, in many ways, we’re the new regulator on the block. And at DFS, we’re fortunate to work with federal partners who have a deep well of institutional knowledge and expertise — which complements our own. But we also have another key attribute at DFS. We’re nimble. And we’re agile. And we’re able to take a fresh look at issues across the financial industry — both new and old." 
  • In the Media | April 2013
    Reuters, April 18, 2013. All Rights Reserved.

    (Reuters) – The Federal Reserve's ultra accommodative policies will inevitably result in financial market instability for years but such risks are necessary to boost employment and inflation, a top U.S. central bank official said on Thursday. 

    Likening the Fed to a Minnesotan heading out into the winter cold, Minneapolis Fed President Narayana Kocherlakota said low real interest rates are as necessary as wearing a warm parka, and will probably be needed for many more years.

    Kocherlakota is probably the most dovish of the 19 policymakers at the Fed, which has kept borrowing costs low for more than four years and is snapping up $85 billion in bonds each month to stimulate the U.S. economic recovery.

    Bolstering his argument for yet more easing, the Minneapolis policymaker said the weak economic outlook suggests borrowing costs should be lower for even longer than the Fed now plans despite the inflated asset prices, volatile returns, and higher corporate merger activity that will result.

    "For many years to come," he said, the Fed's policy-setting committee "will only be able to achieve its congressionally mandated objectives by following policies that result in signs of financial market instability," Kocherlakota told a Hyman P. Minsky conference.

    Financial regulation is the best defense against such instability, he said.

    But if the Fed considers raising rates to stabilize things, it has to weigh "the certainty of a costly" departure from achieving maximum employment and price stability against the benefit of reducing "the probability of an even larger" departure those objectives, Kocherlakota warned.

    Central bank policymakers would also have to consider the effect a sooner-than-desired rate-rise would have on the Fed's overall credibility, he later told reporters. "That's going be part of the question you have to ask yourself," he said.

    Frustrated with the slow and erratic recovery, the central bank has said it will keep short-term rates low until the unemployment rate falls to at least 6.5 percent, from 7.6 percent last month, as long as inflation, now below the Fed's 2-percent target, remains contained.

    Meanwhile the Fed's bond-buying is meant to depress longer term rates and encourage investing, hiring and economic growth.

    Kocherlakota is alone among policymakers in wanting the central bank to aim to keep rates low until unemployment falls as low as 5.5 percent, a level to which Americans are more accustomed.

    Kocherlakota, whose hometown is expecting yet another spring snowfall, said the policy-setting Federal Open Market Committee (FOMC) is responding to forces beyond its control when it decides how long to keep rates low, given it is falling short of both its employment and inflation goals.

    "When I decide what coat to wear, my goal is to keep myself at a temperature that I view as appropriate, given prevailing conditions that I cannot influence," he said.

    "Similarly, when the FOMC decides on a level of the real interest rate, its goal is to keep the macro economy at an appropriate temperature, given prevailing conditions that it cannot influence," he added. "But the truth is that the FOMC's choice of winter garb is actually insufficient to keep the U.S. economy appropriately warm."

    Talking to reporters, he did not go so far as to call for more asset purchases. But he said it was very important that the Fed protects its 2-percent inflation target "both from above, which gets so much attention, but from below as well."

    On Wednesday, St. Louis Fed President James Bullard surprised some economists when he said the central bank should ramp up its quantitative easing program if inflation continues to fall. According to the Fed's preferred measure, inflation is at about 1.3 percent.

    In his speech, Kocherlakota added he expects credit markets will remain limited over the next five to 10 years, causing headaches for investors seeking safe-haven assets.    
  • In the Media | April 2013
    By Zachary Tracer
    The Washington Post, April 18, 2013. All Rights Reserved.

    (Updates with Lawsky’s comment in the fourth paragraph.)

    April 18 (Bloomberg) -- New York’s financial regulator is scrutinizing what he called the “troubling role” of private equity firms as they expand into the insurance industry through acquisitions, according to a speech today.

    Private-equity firms “may not be long-term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns,” New York Department of Financial Services Superintendent Benjamin Lawsky said today in prepared remarks. “This type of business model isn’t necessarily a natural fit for the insurance business, where a failure can put policyholders at significant risk.”

    Leon Black’s Apollo Global Management LLC has agreed to buy four insurers since 2008, including a $1.8 billion deal in December for Aviva Plc’s U.S. life and annuity business. A firm owned by Guggenheim Partners LLC shareholders agreed the same month to buy a variable-annuity unit from Sun Life Financial Inc. for $1.35 billion.

    “DFS is moving to ramp up its activity” monitoring private-equity firms’ role, he said today, without naming companies, at the Hyman P. Minsky Conference in New York. “We hope that other regulators will soon follow suit.” 
  • In the Media | April 2013
    By Michael S. Derby
    The Wall Street Journal, April 18, 2013. All Rights Reserved.

    Federal Reserve official said Thursday interest rates are likely to stay very low for years to come, which raised the prospect that chronic financial instability risks will dog the economy for a long time.

    “For a considerable period of time, the [Federal Open Market Committee] may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets,” Federal Reserve Bank of Minneapolis President Narayana Kocherlaktoa said.

    “For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals,” the official said. “Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” he said.

    In an environment where bubbles regularly threaten to form, and other markets see prices move away from fundamentals, the Fed will be confronted with difficult choices. “These potentialities are best addressed through effective supervision and regulation of the financial sector,” Mr. Kocherlakota said, although he allowed that it is possible the Fed may also have to employ the blunt tool of monetary policy to cool markets down if risks rise enough.

    Mr. Kocherlakota’s comments came from the text of a speech that was to be presented at a conference held in New York by the Levy Economics Institute of Bard College. The official is not currently a voting member of the monetary policy setting FOMC.

    Mr. Kocherlakota has been one of the biggest supporters of aggressive Fed action to support the economy, and has argued in recent speeches the Fed is not going far enough to aid the economy, and should add more stimulus by saying it wants to achieve a lower unemployment rate before hiking interest rates.

    In his speech, the central banker said that the low interest rate world that could persist for “possibly the next five to 10 years” is in part the result of Fed actions over the course of the financial crisis and its aftermath. But the central banker said that other forces are also conspiring to keep rates very low.

    The three that are most important beyond Fed policy are tighter credit availability, increased worry about economic risk and uncertainty surrounding the outlook for U.S. government finance, he said.

    These factors are causing investors, households, and firms to keep their money where it is safest, and it is also causing them to save more. At the same time, those who need better yields will go into riskier assets, creating the risk prices for those markets could go haywire, the official explained.

    In as much as Fed policy has helped create the low returns savers are wounded by, so too have market forces, Mr. Kocherlakota said.

    “I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others,” he said. “That seems about as compelling as blaming me for creating winter in Minnesota by putting on my long johns,” Mr. Kocherlakota said.

    The official said in his speech he expects unemployment to fall “only slowly,” and he said “inflation pressures are muted.”
  • In the Media | April 2013
    By Joshua Zumbrun
    Bloomberg Businessweek, April 18, 2013. All Rights Reserved.

    Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank’s low interest rate policies, though necessary, will probably generate signs of financial instability.

    “Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” Kocherlakota said today in the prepared text of a speech in New York. “All of these financial market outcomes are often interpreted as signifying financial market instability.”

    Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles in markets such as junk bonds and farmland.

    While George has dissented from this year’s Federal Open Market Committee decisions because of this risk, Kocherlakota is among the strongest supporters of additional monetary stimulus on the committee.

    In speeches earlier this month Kocherlakota said he sees an “ongoing modest recovery” with unemployment staying at 7 percent or more through late 2014. The slow recovery calls for “more accommodation,” he said in a speech, repeating his call to postpone consideration of any increase in interest rates. He doesn’t vote on policy this year.

    “It is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low,” Kocherlakota said at the Levy Economics Institute’s 22nd Annual Hyman P. Minsky Conference.

    Near Zero

    The Minneapolis Fed chief has said the central bank should hold its target interest rate near zero until unemployment falls to 5.5 percent. That’s a full percentage point below the 6.5 percent threshold that has been adopted by the FOMC.

    Answering audience questions, Kocherlakota said the recovery in the housing market is evidence that the Fed’s monthly purchases of $85 billion in Treasuries and mortgage securities are effective.

    “They are having an impact on the economy,” he said. “Look at what’s going on in the mortgage market.”

    “It would be nice if we did even more along those lines because I think our tools have been effective,” he said. “In the housing market in particular you’ve certainly seen direct effects of that kind of stimulus.”

    In his speech, Kocherlakota said that “for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets. These financial market phenomena could pose macroeconomic risks. In my view, these potentialities are best addressed using effective supervision and regulation of the financial sector.”
  • In the Media | April 2013
    By Michael S. Derby
    The Wall Street Journal, April 18, 2013. All Rights Reserved.

    NEW YORK – A Federal Reserve official said Thursday interest rates are likely to stay very low for years to come, which raises the prospect that chronic financial instability will be an enduring threat.

    "For a considerable period of time, the [Federal Open Market Committee] may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets," Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said.

    "For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals," the official said. "Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity," he said.

    In an environment where bubbles regularly threaten to form, and other markets see prices move away from fundamentals, the Fed will be confronted with difficult choices. "These potentialities are best addressed through effective supervision and regulation of the financial sector," Mr. Kocherlakota said, although he allowed that it is possible the Fed may also have to employ the blunt tool of monetary policy to cool markets down if risks rise enough.

    The official, when asked if he saw any markets devolving into a bubble, responded "the answer is absolutely not at this stage." At the current moment, "I don't see those kind of risks out there."

    But he also said that given the importance now placed on financial stability, bank regulators and supervisors face greater challenges as they do their work.

    Mr. Kocherlakota's comments came from a speech he gave at a conference held in New York by the Levy Economics Institute of Bard College. He took questions from the audience and spoke with reporters as well. The official is not currently a voting member of the monetary policy setting FOMC.

    Mr. Kocherlakota has been one of the biggest supporters of aggressive Fed action to support the economy, and has argued in recent speeches the Fed is not going far enough to aid the economy, and should add more stimulus by saying it wants to achieve a lower unemployment rate before hiking interest rates.

    He reiterated that he'd still like to lower the threshold at which the Fed would potentially entertain raising rates, from 6.5% to 5.5%. He said weakening inflation pressures were "definitely a cause for concern" but he hasn't changed his outlook for price pressures. Mr. Kocherlakota said he still expects economic growth of 2.5% this year and 3% next year, and believes that will be enough to help raise inflation over time from its current very low level.

    In his speech, the central banker said that the low interest rate world that could persist for "possibly the next five to 10 years" is in part the result of Fed actions over the course of the financial crisis and its aftermath. But the central banker said that other forces are also conspiring to keep rates very low.

    The three that are most important beyond Fed policy are tighter credit availability, increased worry about economic risk and uncertainty surrounding the outlook for U.S. government finance, he said.

    These factors are causing investors, households and firms to keep their money where it is safest, and it is also causing them to save more. At the same time, those who need better yields will go into riskier assets, creating the risk prices for those markets could go haywire, the official explained.

    In as much as Fed policy has helped create the low returns savers are wounded by, so too have market forces, Mr. Kocherlakota said.

    "I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others," he said.

    "That seems about as compelling as blaming me for creating winter in Minnesota by putting on my long johns," Mr. Kocherlakota said.

    The official said in his speech he expects unemployment to fall "only slowly," and he said "inflation pressures are muted."
  • In the Media | April 2013
    By Greg Robb
    MarketWatch, April 18, 2013. All Rights Reserved.

    WASHINGTON (MarketWatch) – Financial market conditions requiring the Federal Reserve to keep rates unusually low may persist for the next five to 10 years, said Narayana Kocherlakota, the president of the Minneapolis Fed Bank on Thursday. This low-rate environment, and Fed policy, in turn, can be expected to "be associated with financial market phenomena that are seen as signifying instability," such as inflated asset prices, high asset return volatility and heightened merger activity, Kocherlakota said, in a speech at the Levy Economics Institute of Bard College. This instability is best addressed through effective supervision and regulation, Kocherlakota said. However, the Fed may have to confront the dilemma of whether to raise rates to reduce the risks of a financial crisis with the certainty that any tightening would lead to lower employment and prices, he said. The Fed is in a better position to address this challenge than it was in 2007, he said. 
  • In the Media | April 2013
    Hellenic Shipping News, April 18, 2013. All Rights Reserved.

    Federal Reserve Bank of St. Louis President James Bullard on Wednesday said he is concerned inflationary pressures may be growing too weakly and the central bank may have to do something about it.

    "Inflation is running very low" as measured by the personal consumption expenditures price index, the Fed's favored inflation gauge, the policymaker said. "I'm getting concerned about that," he said, adding that the low rate of price pressure "gives the [Federal Open Market Committee] some room to maneuver" on the monetary-policy front.

    The central banker didn't suggest that any move toward a more-stimulative monetary policy was imminent. The Fed is currently pursuing a policy of buying bonds to drive up growth and lower the unemployment rate. While most expect the bond-buying program to continue for some months to come, improving economic conditions have driven some central bankers to say the pace of buying could be reduced at some point.

    The Fed wants inflation at 2% and it considers under-target inflation to be undesirable. Central bankers consider a deflationary environment as damaging to the economy.

    In his speech, Mr. Bullard also appeared to take issue with the central bank's latest move to provide increased monetary-policy guidance, saying the Fed is limited in what it can do to affect labor-market conditions.

    The best and most-effective action the Fed can take is to focus on its traditional mandate of inflation control, the official said. "Frontline research suggests that price stability remains the policy advice even in the face of serious labor-market inefficiencies," Mr. Bullard said. "This research should provide the benchmark for contemporary monetary policy," he explained.

    At the same time, "the current high level of unemployment is causing some to suggest that the [FOMC] should put more weight on unemployment in its decision-making process," he said. That would be a mistake, he said, as research shows "monetary policy alone cannot effectively address multiple labor-market inefficiencies...One must turn to more-direct labor-market policies to address those problems."

    Monetary policy by itself is "too blunt" to help lower high unemployment levels, the policymaker said. When it comes to aiding the labor market, "it's not that you can't do something about it, it's just that maybe you shouldn't lean on the monetary-policy maker" to do it.

    Mr. Bullard is a voting member of the monetary-policy-setting FOMC. His comments came from a speech given before a conference held by the Levy Economics Institute of Bard College, in New York. Much of his talk referenced work by economists Federico Ravenna and Carl Walsh.

    Mr. Bullard has long argued that monetary policy faces limits in what it can do to aid the labor market, and he has said that, if the Fed were to target achieving a given unemployment rate, it could lead policy to go seriously wrong. But he also gave his qualified support to the Fed's decision last December to job and inflation thresholds.

    At that time, the Fed said it would keep short-term interest rates near 0% so long as the unemployment rate is above 6.5% and expected inflation is below 2.5%. Officials have been careful to note that these levels aren't targets and that they don't promise immediate action if breached. Some have said the Fed could easily keep rates unchanged with a sub-6/5% unemployment rate if inflation remained under the threshold.

    The Fed's new policy guidance reflects in large part its congressionally given mandate to keep prices stable and to promote maximum sustainable job growth. The Fed is unique among major central banks in having this goal, with other major central banks charged with pursuing stable inflation alone.

    Mr. Bullard's comments Wednesday appeared to reflect an ongoing discomfort with this new policy regime, one that is unlikely to bring a rate increase for several more years if the Fed is right about how the labor market will perform.

    In his prepared remarks, Mr. Bullard said the Fed over recent years has done a good job of keeping inflation near the central bank's official target of 2%. He said the unemployment rate "remains high" and, compared to its current 7.6% level, it will likely be in the "low-7% range" by year's end. 
  • In the Media | April 2013
    By Greg Edwards
    St. Louis Dispatch, April 17, 2013. All Rights Reserved.

    St. Louis Fed President Jim Bullard said Wednesday the Federal Reserve should keep its focus on inflation instead of putting more weight on high unemployment.

    More emphasis on unemployment “may be highly counterproductive,” he said at a conference in New York.
    Bullard said he expects unemployment, which was 7.6 percent last month, will drop to the low 7 percent range by the end of the year.

    He made the remarks at the annual Hyman P. Minsky Conference in New York City, organized by the Levy Economics Institute of Bard College.
  • In the Media | April 2013
    Boston Herald, April 17, 2013. All Rights Reserved.

    Federal Reserve Bank of Boston President Eric Rosengren called for more regulation of broker-dealers and money market mutual funds in a speech at a New York conference today, but he began his remarks by acknowledging the victims of Monday’s Marathon attack.

    “I want to take a moment to acknowledge that I join you from a community in Boston that on Monday endured a terrible and profoundly cruel tragedy at the Marathon,” Rosengren told the audience at the 22nd annual Hyman P. Minsky Conference on the State of the U.S. and World Economies. “My thoughts are with the many people who were wounded, with those — including Boston Fed staff — who were uninjured but at the scene, and most of all with the families and friends of those whose lives were lost.”

    Rosengren told conference-goers that maintaining financial stability has been a key focus since the mortgage meltdown.
    “The financial crisis of 2008 and its aftermath have significantly increased the attention policymakers devote to financial stability issues. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and a variety of new bank regulatory initiatives, including the Basel III capital accord, are intended to reduce the risk of similar problems in the future,” the Boston Fed chief said. “For commercial banks, the policy changes stemming from the crisis have been increases in bank capital, stress tests to ensure capital is sufficient to weather serious problems, increased attention to liquidity and new measures intended to improve the resolution of large systemically important commercial banks.”

    But Rosengren said tougher regulations have not been applied to money market mutual funds and broker-dealers, whose failure was at the center of the financial crisis.

    Specifically citing the failure of prominent broker-dealers Bear Stearns and Lehman Brothers at “critical junctures during the crisis,” Rosengren said: “Despite the central role that broker-dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem, I am sorry to say. In short, I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted.”

    Because little has changed with regard to broker-dealers, Rosengren direly concluded: “The status quo represents an ongoing and significant financial stability risk.”

    To remedy the situation, he suggested: “In my view, then, consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions, which have deposit insurance and pre-ordained access to the central bank’s Discount Window.”
  • In the Media | April 2013
    By Ylan Q. Mui
    Wonkblog, The Washington Post, April 17, 2013. All Rights Reserved.

    How much power does monetary policy have to create jobs?

    That question is at the heart of the debate over the Federal Reserve’s recent policy decisions. A majority on the Fed’s policy committee has explicitly endorsed keeping low interest rate policies in place until the unemployment rate falls to 6.5 percent (or inflation becomes a problem). But on Wednesday morning, St. Louis Fed President James Bullard warned that focusing on unemployment could put the central bank’s decades of work stabilizing inflation at risk.

    The title of his speech at the Levy Economics Institute of Bard College’s annual Minsky Conference said it all: “Unpleasant implications for unemployment targeters.” He cited work by  economists Federico Ravenna and Carl Walsh that suggests that keeping prices contained is the best way the central bank can help the economy, even when the labor market is in turmoil.

    “The idea that the Fed should put more weight on unemployment does not fare very well in this analysis,” Bullard said. “In fact, such an approach might be counterproductive.”

    The problem, Bullard said, is that the Fed really only has one antidote for an ailing economy — adjusting the price of money — and that tool’s impact on unemployment is indirect.

    “The monetary guys can really do one thing,” he said. “ It’s not that you don’t want to address unemployment. It’s that it’s not a good way to address unemployment efficiency.”

    But while Bullard sees pursuing easy money policies to try get boost hiring as problematic, he is more open to such easing when the inflation rate is falling below the Fed’s 2 percent target. Indeed, Bullard said he is becoming “concerned” that inflation is too low, and that if prices fell further, he would be ready to ratchet up the Fed’s $85-billion-a-month bond-buying program.

    Bullard was one of the first Fed officials to push for changing the pace of the central bank’s asset purchases to match economic conditions. He has said he would consider reducing purchases by small amounts, perhaps even at each of the Fed’s policymaking meetings, as the economy improves. But Wednesday was the first time he has broached the policy of increasing bond purchases to reach the inflation goal.

    “We should defend our inflation target from the low side,” Bullard said. “If we say 2 percent, we should get 2 percent.”
  • In the Media | April 2013
    By Annalyn Kurtz
    CNNMoney, April 17, 2013. All Rights Reserved.

    Cue the flashback to summer 2010. Ben Bernanke and other officials at the Federal Reserve were warning that inflation was approaching dangerous lows, perhaps even flirting with the dreaded "D" word -- deflation. Bernanke gave a key speech in Jackson Hole that August hinting that more Fed stimulus might be in the pipeline. Sure enough, it was. The Fed launched QE2 about two months later.

    A similar murmur is starting up again: Could inflation be getting too low? St. Louis Fed President James Bullard thinks so.

    "Inflation is pretty low right now, and it's been drifting down," he told reporters at a Levy Economics Institute event Wednesday morning.

    "If it doesn't start to turn around soon, I think we'll have to rethink where we stand on our policy," he added.

    The Federal Reserve usually aims to keep inflation around 2% a year, but recently has said it would be willing to tolerate inflation up to 2.5% a year in exchange for a lower unemployment rate. (The unemployment rate has been stuck above 7% for more than four years now.)

    Where is the inflation rate currently? It was 1.3% as of February, according to the Fed's preferred measure, which strips out gas and food prices.

    Should it get any lower, Bullard said he would push his Fed colleagues to ramp up their asset purchases. The Fed is currently buying $85 billion a month in Treasuries and mortgage-backed securities, in an attempt to lower long-term interest rates and stimulate more spending.

    The policy has no official end-date, but Bernanke has made it clear that the Fed can adjust its purchasing depending on economic activity. Fed watchers mostly interpreted that language as a sign that the Fed may taper down its purchases later this year. Few have been discussing the possibility that the Fed may do just the opposite, increasing its purchases in the coming months.

    Bullard made it clear that he thinks more purchases are a possibility. In his scrum with reporters Wednesday, he repeated multiple times that he's "willing" to "defend" the Fed's inflation target from the low side -- meaning, if inflation gets uncomfortably below the Fed's 2% long-term goal.
  • In the Media | April 2013
    By Michael S. Derby
    Fox Business, April 17, 2013. All Rights Reserved.

    The most recent reforms of the financial regulatory system have left Wall Street's broker-dealers largely untouched and a continued threat to the financial stability, a Federal Reserve official said Wednesday.

    "Despite this history of failure and substantial government support, little has changed in the solvency requirements of broker-dealers," Federal Reserve Bank of Boston President Eric Rosengren said. "The status quo represents an ongoing and significant financial stability risk."

    "Consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions" to help mitigate the threat these institution might pose in a period of renewed financial stress, the central banker said.

    Mr. Rosengren is a voting member of the monetary policy Federal Open Market Committee. His comments came from the text of a speech to be delivered before a gathering held by the Levy Economics Institute of Bard College, in New York.

    Mr. Rosengren did not address monetary policy or the economic outlook in his formal remarks. The official has in a number of speeches shown a great interest in financial stability and unresolved matters that exist in the wake of the passage of the Dodd-Frank reform legislation. In past speeches, Mr. Rosengren has shown a considerable amount of alarm about money market funds, which he sees as subject to destabilizing runs.

    In his speech, the official highlighted the role broker-dealers like Bear Stearns and Lehman Brothers played in the financial crisis. In the current environment, many of these types of operations have been subsumed into bank holding companies with levels of access to the traditional safety net, but he sees still insufficient levels of capital compared to the risks these firms may be exposed to.

    "Being housed within a bank holding company should not obviate the need for the broker-dealer subsidiary to hold more capital," Mr. Rosengren said. "Broker-dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis."

    The official worried that under the status quo, new trouble could force a return of Fed emergency lending facilities that are tailored to support broker-dealer operations. That would be a bad outcome, Mr. Rosengren says.
  • In the Media | April 2013
    Reuters, April 17, 2013. All Rights Reserved.

    (Reuters) – The Federal Reserve should buy bonds if inflation continues to fall, a top Fed official said on Wednesday, stressing the U.S. central bank needs to prevent inflation from being too far below its target.

    Still, St. Louis Fed President James Bullard cautioned that more monetary policy accommodation is not yet needed and said he does not currently fear deflation.

    "If inflation continues to go down, I would be willing to increase the pace of purchases," Bullard told reporters after a speech at the Hyman P. Minsky Conference in New York.

    The comments from Bullard, a pragmatic centrist and a voting member of the Fed's policy committee this year, provide an interesting twist to a policy debate that has recently been focused on what level of improvement in the labor market would prompt the central bank to dial down its $85 billion in monthly asset purchases.

    The Fed has an official 2-percent inflation target and has said it will keep benchmark interest rates near zero until unemployment falls to at least 6.5 percent, as long as inflation expectations do not breach 2.5 percent.

    "I'm very willing to defend the inflation target from the low side. If we say 2 percent, we should hit 2 percent," Bullard said.
    The Fed's preferred measure of inflation, the Personal Consumption Expenditures or PCE rate, is around 1.3 percent and is not expected to rise much over the next two years, in large part because of the droves of Americans who are unemployed.

    "If it doesn't start to turn around here soon, I think we'll have to rethink where we are on the policy," said Bullard.

    In the past, Bullard has talked about tapering bond purchases based on where the unemployment level stands.

    Asked about this, Bullard said his stance on inflation is in line with that thinking because part of that analysis was watching how far inflation drifts from the central bank's target, which was made official last year.

    The Fed is currently buying $45 billion in Treasuries and another $40 billion in mortgage-backed securities through the latest round of quantitative easing, known as "QE3", as it tries to bolster the economic recovery.

    The central bank has said it will continue buying bonds until the outlook on jobs improves substantially. Financial markets have started to turn their attention to how long purchases might go on.

    Ward McCarthy, chief financial economist at Jefferies, sent a note to clients following the comments that read: "So much for tapering ... upsizing may be in order."

    Bullard said he would prefer to ramp the easing up if needed by buying Treasuries rather than mortgage-backed securities, in part because the Fed should aim to have only government bonds in its portfolio in the longer term.

    A different measure of inflation, the consumer price index, showed on Tuesday that prices fell last month.

    In his speech, Bullard said the Fed should remain focused on inflation and resist putting more weight on the employment part of its dual mandate.

    Unlike most central banks in the developed world, the Fed is tasked with both maintaining price stability and achieving full employment. Since the deep recession, it has eased monetary policy to unprecedented levels to lower the unemployment rate, which last month was 7.6 percent.

    "People have been focusing on employment a lot, but have maybe gotten a little bit blinded about the inflation numbers that have come in very low," Bullard told reporters.

    At the same time, he acknowledged it hurts the central bank's credibility to look past headline inflation in favor of so-called core inflation, which strips out volatile items food and gasoline. He said doing so creates a disconnect between Main Street and policymakers.
  • In the Media | April 2013

    MNI | Duetsche Börse Group, April 17, 2013. All Rights Reserved.

    NEW YORK (MNI) – Many religiously monitor and analyze labor market data for clues on how long the Federal Reserve will maintain its aggressive measures to help the recovery, but one influential Fed official Wednesday said he would support increasing the bond buying program to arrest a continued decline in inflation.

    "People have been focusing on unemployment a lot but maybe are a little bit blinded that the inflation numbers have come in very low," St. Louis Federal Reserve Bank James Bullard told reporters on the sidelines of the Minsky conference hosted by the Levy Institute in New York.

    During the question and answer session with the audience, Bullard noted that inflation, as measured by the personal consumption expenditures index, is running very low right now.

    "I'm getting concerned by that," Bullard said, adding that inflation running below the policy-setting Federal Open Market Committee's price stability target gives the group "room to maneuver."

    Pressed by reporters to indicate exactly what "room to maneuver" means, Bullard - a voter on the FOMC this year - said, "I think if inflation continued to go down I'd be willing to increase the pace of (asset) purchases.

    "As it stands right now inflation has drifted lower on a PCE basis. This is not what I expected and I think inflation should be closer to target than it is."

    Asked by MNI if his decision to adjust the $85 billion a month in bond buying is tied to just price stability, and not the outlook for the labor market as the FOMC has said, Bullard said he looks at all economic data "But I'm going to put a lot of weight on inflation that's for sure, and I'm very willing to defend the inflation target from the low side.

    "If we say 2%, we should get 2% and we shouldn't let that lapse," he said. "We should defend our inflation target from the low side."

    Bullard said while he is not advocating the FOMC up its asset purchases tomorrow, it does have the capacity to increase the size should it decide to with causing market imbalances.

    If Committee where to make such a decision, Bullard said he would favor buying more U.S. Treasury securities.

    He stressed that the current fall in prices is not on par with that seen in the summer of 2010, when the Fed unveiled a $600 billion asset purchase program, so it is "too early" for to talk about deflation.

    However, "if it doesn't start to turn around here soon, I think we'll have to rethink where we are on our policy," Bullard said.

    Bullard has said he favors tying the pace of the current asset purchase program to economic conditions, and argued that where inflation is relative to target is one of those conditions.

    At the same time, he cautioned that conditions could turn around and PCE could be back up closer to target. "That is what I expect to happen but so far it hasn't been happening," Bullard said.

    Responding to questions from the audience, Bullard said he does not believe there is nothing that can be done to address the problems in the market, but the issue is that "maybe you shouldn't lean on the monetary policymaker to do a lot about it."

    What is needed is a more targeted approach to helping those without a job, Bullard said, since the impact of monetary policy is too indirect. 

  • In the Media | April 2013
    By Joshua Zumbrun and Steve Matthews
    Bloomberg Businessweek, April 17, 2013. All Rights Reserved.

    James Bullard, president of the Federal Reserve Bank of St. Louis, said U.S. inflation has fallen too far below the central bank’s 2 percent goal and a further drop could prompt increased bond buying.

    “Inflation should be closer to target than it is and we should defend the inflation target from the low side,” Bullard told reporters today after a speech in New York. “If it doesn’t start to turn around here soon, I think we’ll have to rethink where we are in our policy.”

    One option would be for the Federal Open Market Committee to increase monthly purchases from $85 billion, the level reaffirmed in March, Bullard said. The policy group said asset purchases will continue until the labor market outlook improves “substantially” and pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent.

    “I think we could do more if we had to,” Bullard said. “I don’t want to give you the impression that I’m willing to do more today.”

    Consumer prices rose 1.3 percent in February from a year earlier, according to the Fed’s preferred gauge of inflation. Bullard said the current disinflation is “not quite as bad as it was in the fall of 2010.”

    Second Round
    That year, Bullard initiated calls for a second round of bond buying, which ran from November 2010 until June 2011.
    Any new purchases should be in Treasury securities rather than mortgage bonds because the market is larger, he said. Bullard said he “would like to see the Fed eventually return to an all-Treasuries portfolio.”

    By contrast, minutes of the March 19-20 FOMC meeting showed that a number of Fed officials said the central bank should begin slowing its bond buying program later this year and stop it by year end.

    A recent plunge in gold prices doesn’t have implications for forecast inflation though does point to weakness in the global economy, the St. Louis Fed president said.

    “Europe is in recession, and China is not growing quite as fast as before so those two factors would seem to suggest global commodity demand would be down some,” Bullard told reporters.

    Monetary Policy
    In his prepared remarks, Bullard said monetary policy should be guided by the central bank’s price-stability goal and it would be a mistake to place a greater focus on high unemployment.

    The unemployment rate has been dropping 0.7 percentage point a year since its peak after the recession, and will be in the “low 7 percent range by the end of 2013,” he said at the Hyman Minsky Conference, hosted by the Levy Economics Institute.

    In response to audience questions, Bullard cited the example of Germany’s labor-market reforms as a model for U.S. policy makers.

    “Germany has been very impressive on the labor market dimension” in recent years, he said. “You could copy their policies” to encourage jobs, while monetary policy itself is a “very blunt instrument” that can’t be targeted.

    Among Fed policy makers, Fed Minneapolis Bank President Narayana Kocherlakota has urged more stimulus for economic growth by reducing the threshold for consideration of a policy tightening to a 5.5 percent unemployment rate.

    Fed Vice Chairman Janet Yellen yesterday said she favors holding the benchmark interest rate “lower for longer,” while New York Fed President William C. Dudley said a slowdown in the pace of employment growth in March highlights the need to maintain the pace of bond purchases.

    Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
  • In the Media | April 2013
    By Michael S. Derby
    Real Time Economics Blog, The Wall Street Journal, April 17, 2013. All Rights Reserved.

    Federal Reserve Bank of St. Louis President
     James Bullard said Wednesday inflationary pressures may be growing too weakly and if they soften further, the central bank may have to boost its asset buying to bring price pressures back up to more desirable levels.

    “Inflation is running very low” as measured by the personal consumption expenditures price index, the Fed’s favored inflation gauge, the policymaker said. “I’m getting concerned about that,” he said.

    “If inflation [gains] continues to go down, I’d be willing to increase the pace of purchases” of bonds the Fed is now engaged in, Mr. Bullard said. “This is not what I expected, and I think inflation should be closer to the target than it is,” the official said, adding he considers it just as important to defend the Fed’s 2% inflation target from the low side, as it is to keep prices from going over 2%.

    The central banker didn’t suggest that any move toward a more-stimulative monetary policy was imminent, and he said it remains possible price pressures could pick up. If the Fed were to have to increase its purchases, he believes it could be done without harming market functioning, and he said he would favor Treasury bonds over mortgages.

    The Fed currently is pursuing a policy of buying bonds to drive up growth and lower the unemployment rate. While most expect the bond-buying program to continue for some months to come, improving economic conditions have driven some central bankers to say the pace of buying could be reduced at some point.

    The Fed wants inflation at 2%, and it considers under-target inflation to be undesirable. Central bankers consider a deflationary environment as damaging to the economy.

    Mr. Bullard is a voting member of the monetary-policy-setting Federal Open Market Committee. His comments came from a speech given before a conference held by the Levy Economics Institute of Bard College, in New York.
    In his formal speech, Mr. Bullard appeared to take issue with the central bank’s latest move to provide increased monetary-policy guidance, saying the Fed is limited in what it can do to affect labor-market conditions.

    “Frontline research suggests that price stability remains the policy advice even in the face of serious labor-market inefficiencies,” Mr. Bullard said.

    At the same time, “the current high level of unemployment is causing some to suggest that the [FOMC] should put more weight on unemployment in its decision-making process,” he said. That would be a mistake, he said, as research shows “monetary policy alone cannot effectively address multiple labor-market inefficiencies…One must turn to more-direct labor-market policies to address those problems.”

    Monetary policy by itself is “too blunt” to help lower high unemployment levels, the policymaker said. When it comes to aiding the labor market, “it’s not that you can’t do something about it, it’s just that maybe you shouldn’t lean on the monetary-policy maker” to do it.

    Mr. Bullard long has argued that monetary policy faces limits in what it can do to aid the labor market, and he has said that, if the Fed were to target achieving a given unemployment rate, it could lead policy to go seriously wrong. But he also gave his qualified support to the Fed’s decision last December to job and inflation thresholds.

    At that time, the Fed said it would keep short-term interest rates near 0% so long as the unemployment rate is above 6.5% and expected inflation is below 2.5%. Officials have been careful to note that these levels aren’t targets and that they don’t promise immediate action if breached. Some have said the Fed easily could keep rates unchanged with a sub-6.5% unemployment rate if inflation remained under the threshold.

    The Fed’s new policy guidance reflects in large part its congressionally given mandate to keep prices stable and to promote maximum sustainable job growth. The Fed is unique among major central banks in having this goal, with other major central banks charged with pursuing stable inflation alone.

    Mr. Bullard’s comments Wednesday appeared to reflect an ongoing discomfort with this new policy regime, one that is unlikely to bring a rate increase for several more years if the Fed is right about how the labor market will perform.

    In his prepared remarks, Mr. Bullard said the Fed over recent years has done a good job of keeping inflation near the central bank’s official target of 2%. He said the unemployment rate “remains high” and, compared to its current 7.6% level, it likely will be in the “low-7% range” by year’s end.
  • In the Media | April 2013
    Forbes, April 17, 2013. All Rights Reserved.

    St. Louis Fed President James Bullard spoke in New York on Wednesday, warning that inflation remains too low and suggesting he’d be ready to increase the rate of asset purchases, or QE, to defend their target “from below.”

    Making sure to dispel any rumors of the Federal Reserve looking to tighten its monetary stance any time soon, St. Louis Fed chief Bullard told academics easy money is here to stay. The Fed has “room to maneuver,” and the capacity to increase its rate of purchases, Bullard explained at the Levy Economic Institute’s Minsky Conference, adding that quantitative easing is a better tool than forward guidance to signal the central bank’s intention to markets.

    It’s commonplace these days to attribute recent risk asset strength to the Bernanke Fed. Even the International Monetary Fund is doing it. Market participants have been nervous about the future path of Fed policy, which has sent U.S. stocks to record highs, particularly as recent FOMC minutes seem to suggest consensus within the committee, which has supported Ben Bernanke’s expansive policies consistently, might begin to break.

    Bullard was sure to dispel those rumors as well, noting that as Fed transparency has gone up, subtle differences in opinion have surfaced. “I don’t think there has been any breakdown of consensus,” said the St. Louis Fed boss, who didn’t dissent last meeting, adding there are “nuanced positions.”

    Interestingly Bullard suggested strong unemployment targets shouldn’t be part of policymakers’ toolkit. “Should the Fed, or any central bank, put more weight on unemployment than price stability?” he asked the crowd, before presenting research by economists Ravenna and Walsh suggesting that those targets would further distort labor markets. The Fed currently has a soft target for both inflation and the unemployment rate.

    Instead, central bankers should focus on price stability, as monetary policy is too “blunt” of an instrument to target the intricacies of the labor market. As mentioned above, Bullard did say QE is a more direct, and preferable way, for the Fed to act (given nominal rates in the zero range and forward guidance as the other major tool), but said he sees asset purchases affecting labor markets in the same way as interest rate moves.
     
    Bullard’s bullishness wasn’t enough to boost markets, though. Wall Street was a sea of red at 11:32 AM in New York, with all three major equity indexes well in the red. The Nasdaq led the way, down 1.9%, followed by the S&P 500 and the Dow, which lost 1.6% and 1% respectively. Gold slid to $1,385.50 an ounce while the yield on 10-year Treasuries stood at 1.57%.
     
    Asked about the huge amount of excess reserves sitting at the Fed, rather than being lent out by the banks, Bullard chose to speak of the possibility to tighten policy through interest. Depositary institutions like JPMorgan Chase, Bank of New York Mellon, and Citigroup, among others, have nearly $1.7 trillion sitting at the Fed, according to the St. Louis Fed, yet they have been criticized for failing to lend those out, given tighter credit markets and lower loan demand amid a slow economy.

    The so-called Bernanke put has been one of the major factors helping investors jump back into the market and prop asset prices to new highs. While there has been dissent within the Federal Reserve, Bernanke has always reaffirmed his intention to pursue his easy policies. Bullard seems to agree, even though he does suggest the flow rate, or pace, of asset purchases, should be the way for them to signal their intentions to markets. Still, it seems, QE is here to stay.

  • In the Media | April 2013
    MNI | Deutsche Börse Group, April 17, 2013. All Rights Reserved.

    NEW YORK (MNI) – Boston Federal Reserve Bank President Eric Rosengren Wednesday said the Fed has not yet hit its employment or inflation targets, and he remains a strong supporter of its aggressive measures to spur the economic recovery - which are starting to yield results.

    Taking questions from the audience after a speech at the Minsky conference in New York, Rosengren said he has been in favor of the path monetary policy has taken since the 2008 crisis, and continues to be.

    Rosengren holds a voting position on the policy-setting Federal Open Market Committee this year, and he said he is "strongly supportive" of the FOMC's buying of $85 billion a month in U.S. Treasury securities and mortgage bonds to support the recovery.

    The quantitative easing program is working, he said, although the recovery is still not as fast as he would like to see.
    Stronger growth than the 2.5% average seen so far during the recovery is needed, but there continue to be some bright spots, he said.

    The circumstances have changed in the housing sector, for instance, with the market improving "quite dramatically."

    Auto sales are also almost back to their pre-crisis levels, showing that in interest-sensitive sectors where the Fed's actions can have an effect, "our policies are having a big impact, an important impact. We are getting a much better outcome," Rosengren said.

    Rosengren focused on the subject of bank regulation in his prepared remarks, and he reiterated that the pace of regulatory reform is not moving as fast as he would like.

    He said he believes some regulatory agencies do not view financial stability as part of their mandate but said the work being done now is moving in the right direction.
  • In the Media | April 2013
    By Greg Robb
    MarketWatch, April 17, 2013. All Rights Reserved.

    WASHINGTON (MarketWatch) — Inflation might be too low and the Federal Reserve may need to respond, said James Bullard, the president of the St. Louis Fed Bank on Wednesday.

    “Inflation is running very low,” as measured by the personal consumption expenditures prices index, Bullard said in a question-and-answer period after a speech at the Levy Economics Institute of Bard College.

    “I’m getting concerned about that,” Bullard said, according to Dow Jones Newswires.

    Prices of the 10-year benchmark Treasury note rose Wednesday, pushing yields down nearly 3 basis points to 1.699%. 
     
    The Fed’s preferred measure of inflation, the personal consumption expenditures price index, increased at a 1.3% annual rate in February. This is well below the Fed’s target of 2%.

    Earlier this week, an alternate measure of inflation, the consumer price index, posted a surprising 0.2% decline in March. The index rose at 1.5% annual rate, the slowest pace since last July.

    Bullard’s comments suggest a growing risk of deflation, a general decline in prices.

    The implication is that the Fed will continue its easy-policy stance, and perhaps augment it with other steps, said Michael Moran, chief U.S. economist at Daiwa Securities America Inc.

    The Fed’s bond buying has been successful at keeping deflation at bay. It is designed to push down interest rates and boost asset prices, sparking demand that prevents prices from falling.

    The asset purchases also influences inflation expectations, Moran said.

    Bullard didn’t suggest any move to a more-stimulative policy. But he said the low inflation rate gives the Fed “room to maneuver,” a suggestion that there is no need to hurry to slow down the Fed’s asset purchases.

    The Fed is buying $85 billion in Treasurys and mortgage-backed securities each month. Markets are focused on when the Fed might taper or end the purchases because many see this as the first sign that higher interest rates may be in the offing.

    In his prepared remarks, Bullard said the goal of Fed policy should be to keep inflation close to its inflation target.

    Bullard said new research has found it would be counterproductive for the Fed to “put more weight” on unemployment over price stability in its decision-making process.

    Bullard noted that since 1995, the Fed has been following “New Keynesian” advice by keeping inflation close to a 2% target. The problem since the financial crisis is that the New Keynesian model doesn’t take unemployment into account.

    Now, cutting-edge research that puts employment into these models has found that monetary policy alone can’t impact the labor market, he said. The best way to help the job market remains direct labor-market policies.

    Bullard is a voting member of the Fed’s interest-rate-setting committee this year. 

    Greg Robb is a senior reporter for MarketWatch in Washington. 
  • In the Media | April 2013
    Money News, April 17, 2013. All Rights Reserved.

    Boston Federal Reserve President Eric Rosengren said banks should hold more capital if they own a broker-dealer unit because such businesses pose greater risks during periods of financial stress.

    “Bank holding companies with large broker-dealer affiliates should hold more capital to reflect the reduced stability of their liabilities during times of stress,” Rosengren said in prepared remarks for a speech in New York.

    Rosengren made his call as members of Congress and regulators try to reduce the risk that a large bank failure might result in a taxpayer-funded bailout. Senate Republicans and Democrats are discussing legislation that would boost capital standards. Fed officials are considering ways to curb balance-sheet expansion at the largest banks and toughen capital requirements for the largest firms.

    “Despite the central role that broker-dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem,” Rosengren said at the 22nd Annual Hyman P. Minsky Conference in New York. “I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted.”

    The Fed-assisted emergency sale of Bear Stearns Cos. to JPMorgan Chase & Co. in March 2008 was the first time since the Great Depression that the U.S. central bank had come to the assistance of a securities firm, as opposed to a bank.

    Lehman Bankruptcy
    Six months later, the bankruptcy of Bear Stearns’s larger rival, Lehman Brothers Holdings Inc., shocked financial markets and led the three biggest U.S. securities firms — Merrill Lynch & Co., Goldman Sachs Group Inc. and Morgan Stanley — to be acquired by or convert to banks in an effort to get the backing of the Fed.

    To help keep the firms afloat during the financial crisis in 2008, the Fed launched the Primary Dealer Credit Facility, which at its peak lent out $156 billion. A second facility, the Term Securities Lending Facility, lent an additional $246 billion at its peak.

    “Given that recent history, the assumption that collateralized lenders like broker-dealers are not susceptible to runs has been proven wrong,” Rosengren said at the conference, hosted by the Levy Economics Institute of Bard College and the Ford Foundation.

    SEC Regulation

    “Broker-dealer capital regulation by the SEC remains largely unchanged, despite the lessons of the financial crisis,” he said. “Consequently, broker-dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis.”

    The Boston Fed chief, formerly his bank’s head of supervision, has previously taken the lead in calling for additional regulations on the money-market fund industry that were subsequently endorsed by all 12 Fed presidents.

    The 2011 bankruptcy of MF Global Holdings Ltd. once again called into question the ability of independent securities firms to survive on funding provided by the capital markets. Jefferies Group Inc., which staved off a run on its own funding in the wake of MF Global’s collapse, agreed in November to combine with its largest shareholder to shore itself up against future market turmoil.

    “The status quo represents an ongoing and significant financial-stability risk,” Rosengren said.

    Basel Standards

    U.S. and international regulators have an analytical approach that requires more capital for risks embedded in large bank holding companies. The Basel Committee on Banking Supervision has decided that systemically important global banks should bear a charge of 1 percent to 2.5 percent more capital to total assets weighted for risk based on their size, complexity and interconnectedness.

    The Financial Stability Board in November listed 28 banks that should be subject to the requirement for additional capital. The list is updated annually and a phase-in period begins in 2016.

    Global trading banks such as Citigroup Inc., JPMorgan Chase, HSBC Holdings Plc, and Deutsche Bank AG occupy the top tier in the group, bearing a charge of 2.5 percent. Barclays and BNP Paribas are in the second tier, with a charge of 2 percent; Goldman Sachs, Morgan Stanley, Bank of America Corp., Credit Suisse Group AG and four other banking groups are in the third tier, at 1.5 percent.

    Stress Tests
    In addition, the Fed determines capital adequacy through its stress tests which include a separate diagnostic for firms with large-scale trading operations.

    The Fed tested the 19 largest banks this year against three different scenarios with 26 variables including exchange rates, incomes and interest rates. In addition, six bank holding companies with “significant trading activity” — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo & Co. — had their portfolios stressed under conditions of a global market shock.

    Rosengren said that securities-trading units should face higher capital requirements whether they are in a bank-holding company or not.

    “Given the very different risks of runs posed by broker-dealers and their less stable liability structure, an argument can be made for higher capital requirements for broker-dealers as well as organizations, such as bank holding companies, with significant broker-dealer operations,” he said.

    Rosengren, 55, became president of the Boston Fed in July 2007, and previously served in the economic and supervision departments of the bank.
  • In the Media | April 2013
    By Joshua Zumbrun and Craig Torres
    Bloomberg, April 17, 2013. All Rights Reserved.

    Boston Federal Reserve President Eric Rosengren  said banks should hold more capital if they own a broker-dealer unit because such businesses pose greater risks during periods of financial stress.

    “Bank holding companies with large broker-dealer affiliates should hold more capital to reflect the reduced stability of their liabilities during times of stress,” Rosengren said in prepared remarks for a speech today in New York.

    Rosengren made his call as members of Congress and regulators try to reduce the risk that a large bank failure might result in a taxpayer-funded bailout. Senate Republicans and Democrats are discussing legislation that would boost capital standards. Fed officials are considering ways to curb balance-sheet expansion at the largest banks and toughen capital requirements for the largest firms.

    “Despite the central role that broker-dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem,” Rosengren said at the 22nd Annual Hyman P. Minsky Conference in New York. “I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted.”

    The Fed-assisted emergency sale of Bear Stearns Cos. To JPMorgan Chase & Co. (JPM) in March 2008 was the first time since the Great Depression that the U.S. central bank had come to the assistance of a securities firm, as opposed to a bank. 
  • In the Media | April 2013
    By Greg Robb
    MarketWatch, April 17, 2013. All Rights Reserved.

    WASHINGTON (MarketWatch) — The financial health of large U.S. broker-dealers remains a significant financial stability risk five years after the financial crisis, and regulators should consider making them increase their capital buffers, said Eric Rosengren, the president of the Boston Fed Bank, on Wednesday.

    “Despite the central role that broker-dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem, I am sorry to say,” Rosengren said in a speech to a conference in New York sponsored by the Levy Economics Institute of Bard College.

    “The status quo represents an ongoing and significant financial stability risk,” he said. “Broker-dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis.”

    Some broker-dealers, like Goldman Sachs and Morgan Stanley, became bank holding companies during the crisis. Rosengren said bank holding companies with large broker-dealer affiliates might have to hold more capital than other banks to reflect the reduced stability of their liabilities during times of stress.

    It is rare for Fed officials to comment on the financial health of broker-dealers.

    Regulation of these firms primarily falls under the purview of the Securities and Exchange Commission.

    Rosengren said he was concerned that broker-dealers represent a moral hazard, similar to “too big to fail” banks.

    If there were another crisis, the Fed might have to consider relaunching emergency credit facilities that were used by broker-dealers in 2008 and 2009.

    “If broker-dealers assume that they will once again have access to such government support should markets be disrupted, they will have little incentive to take the steps necessary to shield themselves from financing problems during a crisis and thus minimize their need for a government backstop,” Rosengren said.

    The Fed set up two emergency facilities during the crisis. The first, the Primary Dealer Credit Facility, provided overnight loans to primary dealers in return for collateral. At its peak, lending in the program was $156 billion.

    A second plan, the Term Securities Lending Facility, allowed primary dealers to lend less-liquid securities to the Fed for one month in exchange for Treasurys. The peak balance of that program was $246 billion. 
  • In the Media | April 2013
    MNI | Deutsche Börse Group, April 17, 2013. All Rights Reserved.

    NEW YORK (MNI) - St. Louis Federal Reserve Bank President James Bullard Wednesday argued that monetary policy may not be the ideal tool to tackle the nation's jobs crisis, and that more direct policies are needed, while the Fed would be better served focusing more on its price stability mandate.

    In remarks prepared for delivery at the Hyman Minsky Conference hosted by the Levy Institute in New York, Bullard said that "the essential problem is that monetary policy is not a good tool to address labor market inefficiency."

    He noted that the current high level of unemployment is causing some to suggest the policy-setting Federal Open Market Committee should "put more weight" on unemployment in its decision-making process.

    Bullard holds a voting position on the FOMC this year, and he countered that "frontline research suggests that 'price stability' remains the policy advice even in the face of serious labor market inefficiencies."

    Bullard said the FOMC should focus on keeping inflation close to its target, citing recent research that suggests deviating from this policy can lead to "substantially worse" outcomes for households.

    "The idea that the Fed should 'put more weight' on unemployment does not fare well in this analysis," he said. "Such an approach may be highly counter-productive."

    "Monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems," he added.

    Bullard noted that the unemployment rate has declined about 0.7 percentage points each year since its post-recession peak, and that at this pace unemployment should be "in the low 7% range" by the end of 2013.
  • In the Media | April 2013
    By Michael S. Derby
    The Wall Street Journal, April 17, 2013. All Rights Reserved.

    NEW YORK--The most recent overhauls of the financial regulatory system have left Wall Street's broker-dealers largely untouched and a continued threat to the financial stability, a Federal Reserve official said Wednesday.

    "Despite this history of failure and substantial government support, little has changed in the solvency requirements of broker-dealers," Federal Reserve Bank of Boston President Eric Rosengren said. "The status quo represents an ongoing and significant financial stability risk."

    "Consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions" to help mitigate the threat these institutions might pose in a period of renewed financial stress, the central banker said.

    Mr. Rosengren is a voting member of the monetary-policy setting Federal Open Market Committee. His comments came from the text of a speech delivered before a gathering held by the Levy Economics Institute of Bard College, in New York.

    Mr. Rosengren didn't address monetary policy or the economic outlook in his formal remarks. The official has, in a number of speeches, shown a great interest in financial stability and unresolved matters that exist in the wake of the passage of the Dodd-Frank overhaul legislation. In past speeches, Mr. Rosengren has shown a considerable amount of alarm about money-market funds, which he sees as subject to destabilizing runs.

    In his speech, the official highlighted the role broker-dealers like Bear Stearns and Lehman Brothers played in the financial crisis. In the current environment, many of these types of operations have been subsumed into bank-holding companies with levels of access to the traditional safety net, but he sees still insufficient levels of capital compared with the risks these firms may be exposed to.

    "Being housed within a bank-holding company should not obviate the need for the broker-dealer subsidiary to hold more capital," Mr. Rosengren said. "Broker-dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis."

    The official worried under the status quo, new trouble could force a return of Fed emergency-lending facilities tailored to support broker-dealer operations. That would be a bad outcome, Mr. Rosengren said.

    In comments to the audience, Mr. Rosengren said he believes Fed stimulus policies were helping the economy, and he remains concerned credit standards for the mortgage market have become tighter than they should be. He said there are signs of life now appearing in the housing and car markets.

    Mr. Rosengren also said he is strongly supportive of the current stance of monetary policy.
  • In the Media | April 2013
    By Steve Matthews and Joshua Zumbrun
    Bloomberg, April 17, 2013. All Rights Reserved.

    James Bullard, president of the Federal Reserve Bank of St. Louis, said monetary policy should be guided by the central bank’s price-stability goal even with historically high unemployment.

    “The idea that the Fed should ‘put more weight’ on unemployment does not fare well,” Bullard said in a speech in New York. “Such an approach may be highly counterproductive.”

    Bullard supported the Federal Open Market Committee decision in March to continue to buy $85 billion in bonds every month until the labor market outlook improves “substantially.” It also pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent. The unemployment rate stood at 7.6 percent in March.

    Bullard, in his presentation on the current economy, said the U.S. unemployment rate has been declining at about 0.7 percentage point per year since peaking after the last recession ended.

    “At this pace, the unemployment rate will be in the low 7 percent range by the end of 2013,” he said to the Hyman Minsky Conference on the State of the U.S. and World Economies.

    While that rate is “high by historical standards,” Bullard cited academic work by economists Federico Ravenna and Carl Walsh as suggesting the Fed should use its inflation goal, which is 2 percent, as the main guide to policy.

    Serious Inefficiencies
    “Frontline research suggests that ‘price stability’ remains the policy advice even in the face of serious labor market inefficiencies,” Bullard said. “Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions.”

    “The essential finding is that monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems,” Bullard said.

    Federal Reserve Vice Chairman Janet Yellen yesterday said she favors holding the benchmark interest rate “lower for longer,” while New York Fed President William C. Dudley said a slowdown in the pace of employment growth in March highlights the need to maintain the pace of bond purchases.

    Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
  • In the Media | April 2013
    By Robert Hultqvist
    di.se, April 17, 2013. All Rights Reserved.

    Federal Reserve bör fokusera på sitt traditionella mandat i form av prisstabilitet och det finns begränsningar i vad centralbanken kan göra för arbetsmarknaden.  "Penningpolitik isolerat kan inte effektivt åtgärda multipla ineffektiviteter på arbetsmarknaden... Man måste rikta sig mot mer direkta arbetsmarknadsåtgärder för att åtgärda de problemen", säger James Bullard, ordförande för Federal Reserve Bank i St Louis, enligt en presentation inför ett tal han kommer att hålla vid the Levy Economics Institute of Bard College, enligt Dow Jones Newswires.  I talet uppger Fed-ledamoten att centralbanken har gjort ett bra jobb med att hålla inflationen i närheten av tvåprocentsmålet. Arbetslösheten är fortsatt hög och kommer sannolik att sjunka till ett lågt sjuprocentspann vid slutet av året, bedömer han vidare.
     
  • In the Media | April 2013
    Reuters, April 17, 2013. All Rights Reserved.

    (Reuters) - The Federal Reserve should remain focused on inflation and resist putting more weight on its employment mandate, a top U.S. central bank official said on Wednesday.

    St. Louis Fed President James Bullard, in a speech, cited research by Federico Ravenna and Carl Walsh that suggests "price stability remains the policy advice even in the face of serious labor market inefficiencies."

    Unlike most central banks in the developed world, the Fed is tasked with maintaining price stability and achieving full employment. Since the deep recession, it has eased policy to unprecedented levels to lower the unemployment rate, which last month was 7.6 percent.

    "The idea that the Fed should put more weight on unemployment ... may be highly counter-productive," Bullard, an inflation hawk and a voting member of the Fed's policy committee this year, said according to prepared remarks.

    "The essential finding (of the research) is that monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems," he was to tell the annual Hyman P. Minsky Conference in New York.

    Bullard expects unemployment to drop to the low 7 percent range by year end.
  • In the Media | April 2013
    Televisa, April 17, 2013. All Rights Reserved.

    Daña la credibilidad hablar de inflación subyacente pues crea una desconexión entre los precios minoristas y las políticas del gobierno

    NUEVA YORK, EU, abr. 17, 2013.- La actual tasa baja de inflación en Estados Unidos deja a la Reserva Federal con "espacio para maniobrar" mientras intenta apuntalar la economía estadounidense a través de sus políticas monetarias extraordinarias, dijo un alto representante de la Fed.

    Sin embargo, el presidente de la Fed en St. Louis James Bullard dijo que estaba preocupado sobre el ambiente de baja inflación.

    Bullard dijo que daña la credibilidad del banco central hablar de "inflación subyacente", que es la que descarta rubros volátiles como los precios del los alimentos y la gasolina, creando una desconexión entre los precios minoristas y las políticas del gobierno.

    Bullard estaba respondiendo preguntas del público tras un discurso en la conferencia anual Hyman P. Minsky en Nueva York.
  • In the Media | April 2013
    By Michael S. Derby
    The Wall Street Journal, April 17, 2013. All Rights Reserved.

    St. Louis Fed leader James Bullard appeared to take issue with the central bank’s latest move to provide increased monetary policy guidance, saying in a speech Wednesday the Fed is limited in what it can do to affect labor market conditions.

    The best and most effective thing the Federal Reserve can do is focus on its traditional mandate of inflation control, the official said. “Frontline research suggests that price stability remains the policy advice even in the face of serious labor market inefficiencies,” Mr. Bullard said. “This research should provide the benchmark for contemporary monetary policy,” he explained.

    At the same time, “the current high level of unemployment is causing some to suggest that the [Federal Open Market Committee] should put more weight on unemployment in its decision-making process,” he said. That would be a mistake, as research shows “monetary policy alone cannot effectively address multiple labor market inefficiencies…. One must turn to more direct labor market policies to address those problems,” the official said.

    Mr. Bullard is a voting member of the monetary policy setting FOMC. His comments came from slides that were associated with a talk he was to give at a conference held by the Levy Economics Institute of Bard College, in New York.

    Mr. Bullard has long argued that monetary policy faces limits in what it can do to aid the labor market, and he has said if the Fed were to target achieving a given unemployment rate, it could lead policy to go seriously wrong. But he also gave his qualified support to the Fed’s decision last December to job and inflation thresholds.

    The Fed said then that it would keep short term interest rates near zero percent so long as the unemployment rate is above 6.5% and expected inflation is below 2.5%. Officials have been careful to note these levels aren’t targets and don’t promise immediate action if breached. Some have said the Fed could easily keep rates unchanged with a sub-6/5% unemployment rate if inflation remained under the threshold.

    Mr. Bullard’s comments Wednesday appeared to reflect an ongoing discomfort with this new policy regime, one that is unlikely to bring a rate hike for several more years if the Fed is right about how the labor market will perform.

    In his prepared remarks, Mr. Bullard said the Fed has over recent years done a good job of keeping inflation near the central bank’s official target of 2%. He said the unemployment rate “remains high” and compared to its current 7.6% level, it will likely be in the “low 7% range” by year’s end. 
  • In the Media | April 2013
    PRWeb, April 17, 2013. All Rights Reserved.

    Federal Reserve Bank of St. Louis President James Bullard gave remarks Wednesday on "Some Unpleasant Implications for Unemployment Targeters" at the 22nd Annual Hyman P. Minsky Conference.

    Federal Reserve Bank of St. Louis President James Bullard gave remarks Wednesday on “Some Unpleasant Implications for Unemployment Targeters” at the 22nd Annual Hyman P. Minsky Conference.

    During his presentation, Bullard noted that the U.S. unemployment rate remains high by historical standards and that it has declined about 0.7 percentage points per year from its post-recession peak level. “At this pace, the unemployment rate will be in the low 7 percent range by the end of 2013,” he said.

    Given this current high level of unemployment, some have suggested that the Federal Open Market Committee (FOMC) should “put more weight” on unemployment in its decision-making process, Bullard said. “However, frontline research suggests that ‘price stability’ remains the policy advice even in the face of serious labor market inefficiencies.” In Bullard’s view, the results from this recent research, by economists Federico Ravenna and Carl Walsh, should be considered as an important benchmark for contemporary monetary policy.

    Price Stability
    Bullard noted that the New Keynesian macroeconomics literature has been extraordinarily influential in monetary policy. The standard policy advice from this literature is “price stability,” he said, explaining that “practically speaking, this means ‘focus on keeping inflation close to target.’”

    Technically, Bullard said, the policy advice is to maintain a price level path that is consistent with the inflation target. The FOMC has maintained such a price level path since 1995, which he has discussed previously. (See, for example, Bullard’s speech on Sept. 20, 2012, “A Singular Achievement of Recent Monetary Policy.”)

    Thus, actual FOMC monetary policy during the past 18 years seems to have mimicked the policy advice from the New Keynesian literature. However, Bullard noted that the standard model does not include unemployment. In light of today’s high level of unemployment, he said that the main question is whether the FOMC should adopt a policy rule that “puts more weight” on this variable.

    Unemployment
    To determine how the policy advice changes when unemployment is included in the model, Bullard examined recent research by Ravenna and Walsh. In a 2011 paper(1), they found that “the optimal policy is still very close to price stability, even with unemployment explicitly in the model,” Bullard said. That is, the policymaker should still “keep inflation as close to target as is practicable,” he explained. “Expressed as a Taylor-type rule, it would mean putting almost all the weight on the inflation term.”

    Furthermore, the authors suggest that deviating from this policy can lead to substantially worse outcomes for households, Bullard said. “The idea that the Fed should ‘put more weight’ on unemployment does not fare well in this analysis. Such an approach may be highly counter-productive,” he stated.

    In a 2012 paper(2), Ravenna and Walsh asked why price stability remains close to optimal. “Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions,” Bullard said, which means that other policy tools are needed.

    “The essential finding is that monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems,” Bullard said.

    1. Ravenna, Federico, and Walsh, Carl E. “Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework.” American Economic Journal: Macroeconomics, April 2011, 3(2), pp. 130–62.

    2. Ravenna, Federico, and Walsh, Carl E. “Monetary Policy and Labor Market Frictions: A Tax Interpretation.” Journal of Monetary Economics, March 2012, 59(2), pp. 180–95.
     
  • In the Media | April 2013
    Reuters, April 17, 2013. All Rights Reserved.

    A top Federal Reserve official said Wednesday that If inflation continues to fall he would be willing to increase the pace of the central bank's bond-buying to defend its 2 percent inflation target.

    St. Louis Fed President James Bullard cautioned that further accommodation in monetary policy is not needed yet, however, and said he does not currently fear deflation.

    "If inflation continues to go down, I would be willing to increase the pace of purchases," Bullard told reporters after a speech at the annual Hyman P. Minsky Conference in New York.

    The Fed has an official 2 percent inflation target and has said that, as long as inflation expectations do not breach 2.5 percent, it will keep benchmark interest rates near zero until unemployment falls to 6.5 percent.

    (Watch More: Fed's Bullard Discounts Weak Job Report)

    "I'm very willing to defend the inflation target from the low side," Bullard said. "If we say 2 percent, we should hit 2 percent."

    The comments from Bullard, a pragmatic centrist and a voter on Fed policy this year, provide an interesting twist to a policy debate that has recently been focused on what level of improvement in the labor market would prompt the central bank to dial down the purchases.

    The Fed's preferred measure of inflation, the Personal Consumption Expenditures rate, is around 1.3 percent and is not expected to rise much over the next two years, in large part because of the millions of unemployed workers.

    The Fed is buying $85 billion a month in Treasurys and mortgage-backed securities through the latest round of quantitative easing, known as QE3, as it tries to bolster the economic recovery.

    An inflation hawk, Bullard said he would prefer to ramp up if needed by buying Treasurys rather than MBS.

    The central bank has said it will keep buying bonds until the labor market outlook improves substantially; financial markets have began turning their attention to how long purchases might go on.

    In his speech, Bullard said the Fed should remain focused on inflation and resist putting more weight on the employment part of its dual mandate.

    Unlike most central banks in the developed world, the Fed is responsible for both maintaining price stability and achieving full employment. Since the Great Recession, it has eased monetary policy to unprecedented levels to lower the unemployment rate, which stood at 7.6 percent last month.

    "People have been focusing on employment a lot but have maybe gotten a little bit blinded about the inflation numbers that have come in very low," Bullard told reporters.
  • In the Media | April 2013
    Reuters, April 17, 2013. All Rights Reserved.

    (Reuters) – The current low inflation rate leaves the Federal Reserve with "room to maneuver" as it tries to boost the U.S. economy through its extraordinary monetary policies, a top Fed official said on Wednesday.

    Still, St. Louis Fed President James Bullard said he was concerned about the low inflation environment. Bullard said it hurts the central bank's credibility to talk about so-called core inflation, which strips out volatile items such as food and gasoline prices, by creating a disconnect between Main Street and policymakers.

    Bullard was fielding questions from the audience following a speech at the annual Hyman P. Minsky Conference in New York.
  • In the Media | April 2013
    By Michael S. Derby
    The Wall Street Journal, April 17, 2013. All Rights Reserved.

    NEW YORK--Federal Reserve Bank of St. Louis President James Bullard on Wednesday said he is concerned inflationary pressures may be growing too weakly and the central bank may have to do something about it.

    "Inflation is running very low" as measured by the personal consumption expenditures price index, the Fed's favored inflation gauge, the policymaker said. "I'm getting concerned about that," he said, adding that the low rate of price pressure "gives the [Federal Open Market Committee] some room to maneuver" on the monetary-policy front.

    The central banker didn't suggest that any move toward a more-stimulative monetary policy was imminent. The Fed is currently pursuing a policy of buying bonds to drive up growth and lower the unemployment rate. While most expect the bond-buying program to continue for some months to come, improving economic conditions have driven some central bankers to say the pace of buying could be reduced at some point.

    The Fed wants inflation at 2% and it considers under-target inflation to be undesirable. Central bankers consider a deflationary environment as damaging to the economy.

    In his speech, Mr. Bullard also appeared to take issue with the central bank's latest move to provide increased monetary-policy guidance, saying the Fed is limited in what it can do to affect labor-market conditions.

    The best and most-effective action the Fed can take is to focus on its traditional mandate of inflation control, the official said. "Frontline research suggests that price stability remains the policy advice even in the face of serious labor-market inefficiencies," Mr. Bullard said. "This research should provide the benchmark for contemporary monetary policy," he explained.

    At the same time, "the current high level of unemployment is causing some to suggest that the [FOMC] should put more weight on unemployment in its decision-making process," he said. That would be a mistake, he said, as research shows "monetary policy alone cannot effectively address multiple labor-market inefficiencies...One must turn to more-direct labor-market policies to address those problems."

    Monetary policy by itself is "too blunt" to help lower high unemployment levels, the policymaker said. When it comes to aiding the labor market, "it's not that you can't do something about it, it's just that maybe you shouldn't lean on the monetary-policy maker" to do it.

    Mr. Bullard is a voting member of the monetary-policy-setting FOMC. His comments came from a speech given before a conference held by the Levy Economics Institute of Bard College, in New York. Much of his talk referenced work by economists Federico Ravenna and Carl Walsh.

    Mr. Bullard has long argued that monetary policy faces limits in what it can do to aid the labor market, and he has said that, if the Fed were to target achieving a given unemployment rate, it could lead policy to go seriously wrong. But he also gave his qualified support to the Fed's decision last December to job and inflation thresholds.

    At that time, the Fed said it would keep short-term interest rates near 0% so long as the unemployment rate is above 6.5% and expected inflation is below 2.5%. Officials have been careful to note that these levels aren't targets and that they don't promise immediate action if breached. Some have said the Fed could easily keep rates unchanged with a sub-6/5% unemployment rate if inflation remained under the threshold.

    The Fed's new policy guidance reflects in large part its congressionally given mandate to keep prices stable and to promote maximum sustainable job growth. The Fed is unique among major central banks in having this goal, with other major central banks charged with pursuing stable inflation alone.

    Mr. Bullard's comments Wednesday appeared to reflect an ongoing discomfort with this new policy regime, one that is unlikely to bring a rate increase for several more years if the Fed is right about how the labor market will perform.

    In his prepared remarks, Mr. Bullard said the Fed over recent years has done a good job of keeping inflation near the central bank's official target of 2%. He said the unemployment rate "remains high" and, compared to its current 7.6% level, it will likely be in the "low-7% range" by year's end.
  • In the Media | April 2013
    By Michael S. Derby
    Dow Jones Business News, April 17, 2013. All Rights Reserved.

    NEW YORK—St. Louis Fed leader James Bullard appeared to take issue with the central bank's latest move to provide increased monetary policy guidance, saying in a speech Wednesday the Fed is limited in what it can do to affect labor market conditions.

    The best and most effective thing the Fed can do is focus on its traditional mandate of inflation control, the official said. "Frontline research suggests that price stability remains the policy advice even in the face of serious labor market inefficiencies," Mr. Bullard said. "This research should provide the benchmark for contemporary monetary policy," he explained.

    At the same time, "the current high level of unemployment is causing some to suggest that the [Federal Open Market Committee] should put more weight on unemployment in its decision-making process," he said. That would be a mistake, as research shows "monetary policy alone cannot effectively address multiple labor market inefficiencies... One must turn to more direct labor market policies to address those problems," the official said.

    Mr. Bullard is a voting member of the monetary policy setting FOMC. His comments came from slides that were associated with a talk he was to give at a conference held by the Levy Economics Institute of Bard College, in New York.

    Mr. Bullard has long argued that monetary policy faces limits in what it can do to aid the labor market, and he has said if the Fed were to target achieving a given unemployment rate, it could lead policy to go seriously wrong. But he also gave his qualified support to the Fed's decision last December to job and inflation thresholds.

    The Fed said then that it would keep short-term interest rates near zero% so long as the unemployment rate is above 6.5% and expected inflation is below 2.5%. Officials have been careful to note these levels aren't targets and don't promise immediate action if breached. Some have said the Fed could easily keep rates unchanged with a sub-6/5% unemployment rate if inflation remained under the threshold.

    Mr. Bullard's comments Wednesday appeared to reflect an ongoing discomfort with this new policy regime, one that is unlikely to bring a rate hike for several more years if the Fed is right about how the labor market will perform.

    In his prepared remarks, Mr. Bullard said the Fed has over recent years done a good job of keeping inflation near the central bank's official target of 2%. He said the unemployment rate "remains high" and compared to its current 7.6% level, it will likely be in the "low 7% range" by year's end.

  • In the Media | April 2013
    On April 5, Senior Scholar Jan Kregel was featured on the panel "China in the World: Growth, Adjustment, and Integration" at the INET (Institute for New Economic Thinking) conference "Changing of the Guard?" in Hong Kong. The conference, cosponsored by the Fung Global Institute and the Centre for International Governance Innovation, focused on some of today's most pressing global concerns, including economic inequality and financial instability, set against the backdrop of Asia's rising share of the world economy. Click here for the panel video (Kregel’s remarks begin at 28:00).  
    Associated Program:
    Author(s):
  • In the Media | April 2013
    By Dimitri B. Papadimitriou
    Los Angeles Times, April 5, 2013. All Rights Reserved.

    The government can and should increase the deficit to return us to prosperity. Without such outlays we can’t get enough GDP growth to seriously attack unemployment.

    Just before the congressional spring break, a Senate budget proposal to decrease, but not eliminate, the deficit over 10 years was denounced as “pro debt” by an Alabama senator. It was the kind of proud and loud anti-deficit rhetoric that, no matter how nonsensical, plays nicely into Washington group-think on the subject.

    The deficit has arguably gained the distinction of being the single most widely misunderstood public policy issue in America. Just 6% (6!) of respondents in a recent poll correctly stated that it had been shrinking, which has in fact been the case for several years, while 10 times more, 62%, wrongly believed that it’s been getting bigger.

    Despite prevailing notions in the capital and throughout the nation, those of us at the Levy Economics Institute—along with many other analysts and economists—have concluded that the deficit should be increased.

    Why add to the deficit right now? Jobs. Our economic models clearly show that without increased government outlays we’ll be unable to generate enough GDP growth to seriously attack unemployment. If we tried to balance the budget through tax hikes, our still-recovering economy would be hurt. That leaves a temporarily bigger deficit as an important option.

    A mutation in the link between growth and jobs makes the issue urgent. While we are seeing some economic growth, the unemployment rate is not responding as strongly to the gains as it did in the past.

    This slow job growth—today’s “jobless recovery”—isn’t an outlier. It’s a phenomenon that has been increasing over the last three decades, with jobs coming back more and more slowly after a downturn, even when GDP is increasing. The weak employment response has been an almost straight-line trend for more than 30 years.

    Our institute’s newest econometric models show that each 1% boost in the GDP today will create, roughly, only a third as much improvement to the unemployment rate as the same 1% rise did in the late 1970s.

    Traditionally, we’ve assumed that GDP growth would be followed by an employment surge. The break in that link is now very clear. It’s especially worrisome this year, with only a small GDP rise universally anticipated.

    The Federal Reserve, for one, just reduced its growth outlook to 2.8% at most for 2013. The shallow recovery we’re seeing may indeed continue through 2014 and beyond. Since employment now consistently lags well behind GDP, we’ll have a long slog before we reach pre-crisis unemployment levels (below 4.6%). Some Federal Reserve officials believe it might take three years just to get from today’s 7.7% down to 6.5%. Full employment would still be nowhere in sight.

    The quantitative data are telling us that without a stimulus, we can’t expect a strong employment lift. But instead of stimulus, we’re devising federal budgets that cut spending and lay off workers. The sequester is expected to depress GDP growth by perhaps half a percentage point—when we know that more growth than ever will be needed to raise employment—and cost anywhere from 700,000 to more than 1 million jobs.

    Slower government spending is one reason that post-recession growth has been below par compared with other recoveries, Fed Vice Chair Janet Yellen has argued. As government outlays and employment have shrunk, the contribution of public funds to national growth has also fallen. By our estimates, that contribution now stands at about zero. That’s another data point indicating that federal deficits need to be increased.

    To better understand the changing relationship between growth and jobs, the Levy Institute recently looked at three scenarios through 2016: what the results might be of a small, medium or large stimulus. A strong stimulus was clearly the most effective option, since it had a powerful, positive influence on employment growth and, in the long term, on deficit reduction. Of course, that route is completely unfeasible in the current political climate. But we saw that even a small amount of deficit spending could help put the recovery on track if it were combined with a mix of private investment, increased exports and good policy alternatives.

    That points toward a way forward. Increasing the deficit while our economy is fragile is not “pro deficit,” any more than a family with a 30-year home mortgage is “pro debt.” To reclaim a phrase that deficit hawks have tried to make their own, it is “sensible and serious.” The federal government can run a deficit, as it almost always has, to help the nation return to prosperity.

    With our new understanding of the fraying tie between GDP growth and jobs, we know that millions of Americans are on course for an agonizingly slow march out of joblessness unless we make a move. The nature of slumps and recoveries has changed, and the policies to manage them need to change too.

    Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and executive vice president of Bard.
  • In the Media | March 2013
    March 27, 2013
    “Rethinking the State” is a video project funded by the Ford Foundation and the Institute for New Economic Thinking (INET) with the aim of using the recent economic crisis to question assumptions behind economic theory and to rethink the role of the state, finance, and austerity in promoting growth and innovation. In the first of a series of interviews with leading economists, Senior Scholar Jan Kregel discusses the causes and consequences of the Greek crisis, and the ineffectiveness and side effects of austerity. Click here for the complete interview. More information on “Rethinking the State” is available from INET
    Associated Program:
    Author(s):
  • In the Media | March 2013
    By Tom Krisher
    The Associated Press, March 25, 2013. All Rights Reserved.

    The last-ditch effort to save the banking system in Cyprus should bring a rally when U.S. stock markets open today, according to several investment managers.

    Cyprus and its international creditors agreed early today on key elements of a deal for a 10-billion-euro ($13-billion) bailout. Cyprus’ second-biggest bank, Laiki, will be restructured, and holders of deposits exceeding 100,000 euros will have to take losses, a European Union diplomat said. The diplomat spoke on condition of anonymity pending the official announcement.

    It was unclear just how big of a hit big depositors will have to take, but the tax on deposits was expected to net several billion euros, reducing the amount of rescue loans the country needs.

    U.S. investors won’t care too much about who takes losses in Cyprus, as long as there’s a bailout that stops the run on banks in the Mediterranean island nation and keeps the eurozone stable, said Karyn Cavanaugh, market strategist at ING Investment Management in New York.

    “If this works out, regardless of the terms, this is going to be good for the market,” she said Sunday night.

    The tax on large deposits likely will be 10 to 20 per cent, in order to raise about $7.5 billion, said Jack Ablin, chief investment officer for BMO Private Bank in Chicago.

    The move should be well received by U.S. investors because it’s the third bailout deal in the eurozone, including Greece and Spain, and in each case the countries have agreed to austerity plans.

    “I suspect investors will take that news pretty well,” he said.

    The Dow Jones industrial average dropped more than 90 points Thursday in part on fears that the crisis in Cyprus will intensify. But it rebounded and erased the loss on Friday.

    Late Sunday, Dow Jones industrial futures were up 42 points to 14,501. The broader S&P futures added six points to 1,558.00 and Nasdaq futures rose fractionally as well. Japan’s benchmark Nikkei 225 gained 1.35 per cent to 12,505.51 in early trading.

    The European Central Bank had threatened to stop providing emergency funding to Cyprus’ banks after today if there is no agreement on a way to raise 5.8billion euros needed to get a 10-billion-euro rescue loan package from the International Monetary Fund and the other countries that use the euro currency.

    If Cyprus fails to get a bailout, some of its banks could collapse within days, rapidly dragging down the government and possibly forcing the country of around one million people out of the eurozone.

    Analysts say that could threaten the stability of the currency used by more than 300 million people in 17 EU nations.

    A plan agreed to in marathon negotiations earlier this month called for a one-time levy on all bank depositors in Cypriot banks. But the proposal ignited fierce anger among Cypriots and failed to garner a single vote in the Cypriot Parliament.

    The idea of some sort of deposit grab has returned to the fore after Cyprus’ attempt to gain Russian financial aid failed this past week, with deposits above 100,000 euros at the country’s troubled largest lender, Bank of Cyprus, possibly facing a levy of up to 25 per cent.

    Monday’s deal between Cyprus, the International Monetary Fund and the European Commission still needs approval by the 17-nation eurozone’s finance ministers. The deal could still be scuttled if Parliament rejects the tax on depositors, said Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College.

    And Cavanaugh said any glitch that thwarts the deal could still cause U.S. markets to plunge later. She’s still concerned that the U.S. economy, with recent weak corporate earnings, may be hurt by economic troubles in Europe. She’s advising investors to be defensive, staying in the market but moving some of their portfolios into bonds.

    However, Ablin said tiny Cyprus shouldn’t have much of an impact on U.S. markets short of a total default.

    “We’ve been through a lot, and the euro has not yet fallen off the table,” he said. “I guess the conventional wisdom is the euro can sustain a big setback in Cyprus and still continue to move forward.”
  • In the Media | March 2013
    Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
    March 18, 2013. Copyright © 2013 KPFK. All Rights Reserved.

    Pacifica Radio host Ian Masters interviews Levy Institute President Dimitri B. Papadimitriou about the banking meltdown in Cyprus that has revived concerns about the viability of the eurozone. They also look into the exposure that Russian companies and individuals have in troubled banks in Cyprus, where banking assets are eight times the size of the country’s economy.


    Full audio is available here.  
  • In the Media | March 2013
    Cómo usar la información de uso del tiempo para informar a las políticas de reducción de la pobreza con perspectiva de género
    Latin America and Gender Equality Bulletin (UNDP), March 2013. All Rights Reserved.

    Desde que la Plataforma para la Acción de Beijing instara a los países a relevar encuestas de uso del tiempo para medir “cuantitativamente el valor del trabajo no remunerado que no se incluye en las cuentas nacionales, por ejemplo, el cuidado de los familiares a cargo y la preparación de alimentos”, el levantamiento de encuestas de uso del tiempo ha avanzado sin pausa en los países en desarrollo. En nuestra región, un importante número de países han recolectado información de uso del tiempo, con variadas metodologías y alcances.

    Puede decirse que México y Uruguay muestran los avances más sostenidos en este campo, ya que han levantado o están por levantar su tercera encuesta de uso del tiempo. Pero no están solos: en los últimos años Argentina (en Buenos Aires y en Rosario), Bolivia, Brasil, Costa Rica (en la Gran Área Metropolitana), Colombia, Chile (en Gran Santiago), Ecuador, Panamá, Perú y Venezuela han levantado encuestas de uso del tiempo. Aquellas de las que se conocen los resultados –algunas son muy recientes, como la de Venezuela, o están en campo, como la de Colombia– muestran que las mujeres realizan más trabajo doméstico y de cuidados que los varones, en particular las madres de hijas e hijos pequeños y las ocupadas, y que mujeres y varones provenientes de hogares pobres por ingresos realizan más trabajo doméstico y de cuidados que quienes provienen de hogares no pobres.

    La Plataforma para la Acción de Beijing asocia de manera muy clara la visibilización, medición, y valoración del trabajo doméstico y de cuidados a su incorporación en las cuentas nacionales –comparables al Producto Bruto Interno– a través de cuentas satélites. Esto implica reconocer que el trabajo doméstico y de cuidados “expande” el ingreso nacional, y por lo tanto el bienestar.

    El nivel “macro” de análisis tiene su correlato a nivel micro.

    El consumo de los hogares es superior a sus gastos en bienes y servicios, ya que el trabajo doméstico y de cuidados no remunerado que se realiza en ellos expande las posibilidades de consumo de sus miembros. La valoración de los “servicios” que brinda el trabajo doméstico y de cuidados complementa el ingreso monetario, y brinda una medida “ampliada” del bienestar.

    El consumo de los hogares es superior a sus gastos en bienes y servicios, ya que el trabajo doméstico y de cuidados no remunerado que se realiza en ellos expande las posibilidades de consumo de sus miembros. La valoración de los “servicios” que brinda el trabajo doméstico y de cuidados complementa el ingreso monetario, y brinda una medida “ampliada” del bienestar.

    Si en las medidas de pobreza absoluta, la medición de requerimientos de ingresos no implica que el hogar (o las personas) estén efectivamente consumiendo la canasta de pobreza, sino sólo que tengan los ingresos para adquirirla, el establecimiento de un requerimiento de tiempo implica determinar si las personas (y por lo tanto los hogares en que viven) podrían realizar el trabajo doméstico y de cuidados necesario para vivir con la canasta de pobreza (dada la estructura de los hogares, el tiempo de trabajo remunerado, y la distribución intra-hogar del trabajo doméstico y de cuidados),  no que efectivamente lo estén realizando. Si “no les alcanza el tiempo”, entonces tienen “déficits” que las hacen pobres de tiempo.

    Si el ingreso del hogar alcanza para compensar el valor de estos déficits, entonces, serán pobres de tiempo pero no de ingreso “ajustado”. Pero si el ingreso no alcanza para comprar sustitutos de estos déficits, entonces las personas y los hogares en que habitan serán pobres de tiempo e ingresos. La medida de pobreza de ingreso y tiempo LIMTIP no hace otra cosa que corregirlas medidas de pobreza absoluta que estamos acostumbradas y acostumbrados a utilizar, para hacerlas más fieles a sus supuestos.
    Con una notable excepción, especialmente bienvenida si, además de las diferencias de ingreso nos preocupan las diferencias de género y la desigual división sexual del trabajo: mientras que en las medidas de pobreza de ingreso se supone que al interior del hogar la distribución del consumo es “justa” (acorde a las necesidades), y que un hogar pobre lo es porque no alcanza a cubrir en conjunto un nivel de consumo mínimo, en la medida LIMTIP no se realiza ningún supuesto, sino que se toma la distribución del trabajo doméstico y de cuidados del observada en el hogar. Y los déficits de tiempo se calculan a nivel individual, no conjunto, y por lo tanto no se “compensan” entre miembros del hogar.

    Aunque este último es un supuesto fuerte, no tomarlo implicaría borrar una diferencia de género crucial, que además conocemos. Podría argumentarse que la medida LIMTIP combina dos modos muy distintos de medir la pobreza –el ingreso a nivel hogar, el tiempo a nivel individual. Pero no se hace porque se esté de acuerdo con el modo en que se mide la pobreza por ingresos, sino porque no tenemos, todavía, una mejor medida del consumo de bienes y servicios remunerados al interior de los hogares.


    La medida de pobreza LIMTIP permite conjugar, como ninguna otra hasta el momento, dos mandatos de la Plataforma para la Acción de Beijing, que no por casualidad, aparecen a continuación uno del otro: “hacer evidente la desigualdad en la distribución del trabajo remunerado y el no remunerado entre mujeres y varones” y “perfeccionar los conceptos y métodos de obtención de datos sobre la medición de la pobreza entre hombres y mujeres”. Hacia allí estamos trabajando.
  • In the Media | March 2013
    "Exiting The Crisis: The Challenge of an Alternative Policy Road Map," a policy forum oganized by the Athens Development and Governance Institute and the Levy Economics Institute of Bard College, was held at the Athinais Cultural Centre in Athens, Greece, March 8–9.
    Speaking at the Athens policy forum on March 9, Senior Scholar James K. Galbraith noted that Greece is effectively powerless in its present situation because what’s being done within the country—a program of austerity that has led to widespread poverty and the highest unemployment rate in the European Union—is dictated and constrained from without. Real change, said Galbraith, will come about only when the north of Europe realizes that things cannot continue. At that point, Germany in particular must decide whether to save the eurozone with a policy of solidarity and mutual support, or to follow what is an emerging political tendency, which is to effectively break the eurozone in two.

    Click here for a video of his remarks.
  • In the Media | March 2013
    “Exiting The Crisis: The Challenge of an Alternative Policy Road Map,” a policy forum oganized by the Athens Development and Governance Institute and the Levy Economics Institute of Bard College, was held at the Athinais Cultural Centre in Athens, Greece, March 8–9.
    Speaking at the Athens forum on March 8, Senior Scholar Jan Kregel observed that, on a global level, productivity is higher than it’s ever been, yet policies have been imposed within the European Union that prevent large segments of its population from benefitting. Policies that bring about a resumption of income growth and employment are the only solution—a solution that is wholly dependent upon north-south cooperation.

    Click here for a video of his remarks.
    Associated Program:
    Author(s):
  • In the Media | February 2013
    By Dimitri B. Papadimitriou
    The Huffington Post, February 20, 2013. All Rights Reserved.

    Why has the world’s premiere deficit-reduction laboratory produced such a dismal failure? European leadership still expects the painful über austerity measures imposed on Greece to result in a dramatic improvement of its debt to GDP ratio. But the experiment in endurance is not succeeding for an important reason: Austerity programs have been rooted in myths about what caused the crisis in the first place.

    The popular notion that government overspending is the basis of Greece’s deficit woes is simply wrong. Evidence doesn’t support what seems to be a never-ending scolding about profligate spending.

    Greek national expenditures were at about 45 percent of GDP in 1990, long before the crisis. That share remained stable through 2006. Proportionally, its size was well below that of France, Italy, or even Germany. While Greece has a reputation for a nasty, historically oversized public sector, in the lead up to the crisis it behaved no differently than its neighbors, and its rate of spending didn’t prevent it from catching and surpassing affluent eurozone nations in growth. Rapid spending increases weren’t notable until the 2008 recession. The timeline reinforces the conviction that long-term government extravagance hasn’t been key to the Greek meltdown.

    Its debt picture was also steady. For years, Greece ran a deficit of 3 to 5 percent of GDP, and roughly a 120 percent debt to GDP ratio without any market upheaval. In 2000, just before it joined the euro, its deficit was 3.8 percent, where it more or less remained through the early euro years. Government borrowing didn’t explode until the sovereign debt crisis surfaced in 2009, which indicates that its record of national debt wasn’t the primary cause of Greece’s deficit crunch, either.

    Other trends were more worrisome than government spending and borrowing. Revenues, for one, had been a creeping problem. Even before Greece joined the euro, it lagged considerably behind other European economies in tax collection. A Levy Institute analysis shows that by 2005, revenues from income and wealth taxes in particular, were still well below other European countries. The notable increase in government revenue, from 9.8 percent of GDP in 1988 to 2005’s high of 13.5 percent (before stabilizing at a slightly lower level), was mainly from an increase in social contributions. Tax evasion was rampant in the robust shadow economy.

    In the late 1990s another danger emerged. Investment was concentrated in construction, while machinery and transportation equipment, more important for creating productive capacity, played a smaller part. Greece’s increase in investment relative to savings and its strong growth in real GDP became dependent on private sector demand that was driven by debt. Household consumption, meanwhile, was being financed by running down family financial assets, as well as by borrowing. The private sector became a net borrower against the rest of the world.

    Sound familiar?

    These weren’t the only issues underlying the Greek crisis, of course. To tick a few more linked fundamentals off the list: A problematic effective exchange rate was propelling a deterioration in the trade balance. Export prices had risen much faster in Greece than in the rest of the eurozone, with Greek companies unable or unwilling to absorb euro appreciation by lowering their margins. At the same time, the transfer balance—mostly remittances from abroad—declined. Then property income fell.

    Most importantly for the future, in contrast to some other troubled countries, Greece’s private sector, as well as its government, has a net debt against foreigners. This combination means that Greece must transfer real assets, rather than just financial ones, if it is going to reduce total debt.

    Not one of these problems is likely to improve under a continued austerity regime. And while the probability of reaching European Commission targets is a fantasy, the fallout from making deficit reduction the foremost priority has been radioactive. Poverty and unemployment have increased disastrously. The threat of even more worker lay-offs, with a resulting national collapse, remains. Per capita GDP has declined by at least 5 percent in each of the last four years. By these and numerous other measures, cost-cutting has fueled a deep recession and devastating economic and social corrosion.

    Before Greece’s debt and deficit troubles can be resolved, GDP growth needs to be restored, not the other way around. This in no way minimizes the debt’s alarming potential, and the need to roll it over at low or even zero rates. Even at the current lower interest level, payments could quickly become astronomical. Despite this, a focus on growth must be central.

    Last year we finally saw small, scattered walk-backs from support for austerity policies. Let’s hope that this year will bring a giant step away from cherished—but nonetheless imaginary—legends of Greece’s fall.
  • In the Media | January 2013
    Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
    January 30, 2013. Copyright © 2013 KPFK. All Rights Reserved.

    Pacific Radio host Ian Masters interviews President Dimitri B. Papadimitriou about the unexpected contraction in GDP in the last quarter of 2012 and what it means for a slowing recovery—unwelcome news that might give Republican deficit hawks pause as they insist on more budget cuts. Full audio of the interview is available  here.

     

  • In the Media | January 2013
    By Jon Kelly

    BBC News Magazine, January 9, 2013. All Rights Reserved.

    Campaigners want to prevent the US’s rising debt from bringing government spending to a halt by minting the world’s most expensive coin. Could this bizarre scheme become reality?

    It sounds like the plot of some whimsical comedy‑the 1954 Gregory Peck film The Million Dollar Note springs to mind—but a drive to create super-valuable loose change is being taken seriously in the corridors of Washington DC.

    A petition urging the creation of platinum coin worth $1tn (£624bn) has attracted nearly 7,000 signatures and the support of some heavyweight economists.

    Experts say the plan would be lawful and should allow the government to keep spending if President Barack Obama fails to convince lawmakers to raise the “debt ceiling”—a cap, set by Congress, on the US government’s borrowing ability.

    But most believe the coin is more likely to be used as a threat than ever actually come into being.

    “When people first hear about it they think, ‘Oh, it’s a gimmick,’“ says L Randall Wray, professor of economics at the University of Missouri–Kansas City.

    “But it makes you think harder about the way the government spends.”

    The coin owes its widely discussed, though still hypothetical existence to the looming deadline over the debt ceiling—which, as things stand, will prevent the US government issuing new bonds and paying bills, in about two months.

    Republicans, who control the US House of Representatives, have pledged to seek spending cuts before consenting to any increase in this limit.

    But opponents fear this brinksmanship could threaten the US’s credit rating if the country’s debt reaches or breaks through this ceiling.

    These mostly centre-left critics, including Democratic Congressman Jerrold Nadler, have pointed to a loophole in US law that allows the Treasury Secretary to allocate any value he or she likes to a coin.

     

    They say the Treasury could order the coin to be minted and then deposit it at the Federal Reserve, the US’s central bank.

    Effectively, the coin is an accounting trick, says Cullen Roche, who blogs about finance and economics at Pragmatic Capitalism.

    Its real purpose, however, would be political—to neutralise the threat by Republicans in Congress that federal employees would not be paid, he adds.

    “It’s a loophole to replace something that’s totally insane with something that’s slightly less insane,” he says.

    The campaign has been taken seriously by such eminent people as Nobel prize-winning economist and New York Times columnist Paul Krugman, and Philip Diehl, the former director of the United States mint. It has also inspired the Twitter hashtag, #MintTheCoin.

    But it has attracted opposition, too. Republican Congressman Greg Walden has promised to introduce a bill to ban the government from creating high-value coins to pay its debts.

    Walden said he feared the practice would be “very inflationary.”

    Wray disagrees. “These trillion-dollar coins are held only by the Fed,” he says. “There’s no increase in the money supply out there.”

    Supporters of the scheme also say the Federal Reserve could sell bonds, which would withdraw money from circulation.

    As yet, however, no such coins exist anywhere. And even those who believe the plan is perfectly feasible concede that it is likely to remain a bargaining chip in the debt-ceiling talks, rather than becoming a reality.

    “I think the president will be reluctant to do it because it undermines everyone’s credibility,” says Roche.

    Coin collectors might be advised not to hold their breath about this new denomination turning up on eBay any time soon.

     

  • In the Media | January 2013

    Daily Freeman, January 7, 2013. All Rights Reserved.

    ANNANDALE-ON-HUDSON, N.Y. — The Association for Social Economics  has awarded Pavlina R. Tcherneva, research associate at the Levy Economics Institute of Bard College and assistant professor of economics at Bard, the 2013 Helen Potter Prize.

    The prize was created and endowed by the Association for Social Economics in 1975 and is awarded each year to a promising scholar of social economics for authoring the best article in The Review of Social Economy. Tcherneva is being awarded the prize for her article “On-the-spot Employment: Keynes’s Approach to Full Employment and Economic Transformation” published in the March 2012 issue.

    She will be presented with the award at the Association for Social Economics  presidential breakfast to be held in San Diego, Calif., this month. For more information, visit www.socialeconomics.org.

    Tcherneva conducts research in the fields of modern monetary theory and public policy, and has collaborated with policymakers from Argentina, Bulgaria, China, Turkey, and the United States on developing and evaluating various job-creation programs.

    Her current research examines the nexus between monetary and fiscal policies under sovereign currency regimes and the macroeconomic merits of alternative stabilization programs. She has also examined the role, nature, and relative effectiveness of the Federal Reserve’s alternative monetary policies and the American Recovery and Reinvestment Act during the Great Recession.

  • In the Media | January 2013

    Pacifica Radio, January 4, 2013. All Rights Reserved.

    Senior Scholar L. Randall Wray talks to KPFK’s Suzi Weissman about the economic prospects waiting on the far side of the fiscal cliff. Full audio of the interview is available here.

  • In the Media | December 2012
    By Mitja Stefancic
    The University of Ljubljana Faculty of Economics provides an overview of the Institute's Minsky Conference on Financial Instability here.
  • In the Media | November 2012
    Interview with James K. Galbraith
    The Real News Network, November 30, 2012. All Rights Reserved.

    The first in a planned series of six interviews with Senior Scholar James K. Galbraith on the validity of the "fiscal cliff." Full audio and a transcript of the interview are available here.
  • In the Media | November 2012
    Por Andrea Hopkins y Sarah Marsh, Reuters

    El Periòdico de México, 28 de Noviembre de 2012. Copyright © 2006 El Periòdico de México. Todos los derechos reservados.

    TORONTO / BERLIN — Las profundas divisiones de la Reserva Federal quedaron expuestas el martes, apenas dos semanas antes de la siguiente reunión de política monetaria del banco central de Estados Unidos, con un funcionario de la Fed impulsando un mayor alivio y otro defendiendo la fijación de límites.

    La brecha pone de relieve los obstáculos que enfrenta el presidente de la Fed, Ben Bernanke, en su intento de alcanzar un consenso entre sus compañeros sobre los esfuerzos políticos a veces polémicos del banco central por reducir la elevada tasa de desempleo del país, que registró un 7,9 por ciento el mes pasado.

    Charles Evans, presidente de la Reserva Federal de Chicago y uno de los moderados de la Fed, dijo que las tasas de interés deberían permanecer cerca de cero hasta que la tasa de desempleo caiga a menos del 6,5 por ciento. Tal política acarrearía "sólo riesgos mínimos de inflación", y podría impulsar el crecimiento más rápido que en otro caso, dijo.

    Evans, que pasará a ocupar en enero un asiento con derecho a voto en el panel de fijación de política de la Fed, también dijo que la Fed debería intensificar su programa de alivio cuantitativo en el nuevo año para mantener su nivel global de compras de activos en 85.000 millones de dólares al mes por la mayor parte, si no todo, el 2013.

    Pero el presidente de la Fed de Dallas, Richard Fisher, un duro que se inclina por el rigor fiscal, dijo que el banco central de Estados Unidos podría meterse en problemas si no se establece un límite a la cantidad de activos que está dispuesto a comprar.

    "No se puede expandir de manera ilimitada sin consecuencias terribles", dijo a periodistas en el marco de la conferencia organizada por el Levy Economics Institute de Berlín. "No hay un infinito en la política monetaria, sabemos eso a partir de la experiencia alemana", agregó.

    En septiembre, la Fed lanzó un abierto programa de compra de activos, partiendo con 40.000 millones de dólares en valores respaldados por hipotecas y prometiendo continuar o reforzar el programa a menos que las perspectivas del mercado laboral mejoren sustancialmente.

    Esas compras se suman a los 45.000 millones de dólares en bonos del Tesoro a largo plazo que la Fed está comprando cada mes bajo la Operación Twist, compras que se financian con la venta de una cantidad igual de bonos del Tesoro a corto plazo.

    "Es importante mantener el nivel general de compra de activos en 85.000 millones de dólares, al menos por un tiempo hasta que podamos ver si lo estamos haciendo mejor o no, o si las cosas van más lento, podemos ajustarlo, dependiendo de esa evaluación", dijo a los periodistas que asistían a una conferencia en el Instituto CD Howe en Toronto.

    "Creo que debemos tener una discusión sobre qué es una 'mejoría sustancial'. ¿lo hemos visto? En mi opinión, no lo hemos hecho", agregó.

    Evans dijo que juzgaría que el mercado laboral ha mejorado sustancialmente una vez que vea ganancias mensuales de al menos 200.000 puestos de trabajo durante unos seis meses, así como sobre una tendencia de crecimiento del Producto Interno Bruto que conduzca a la disminución del desempleo.

    "Estaría muy sorprendido si pudiéramos alcanzar eso antes de que hayan pasado seis meses, y no me sorprendería si tarda hasta fines del 2013", declaró.

    Evans dijo que la Fed debería mantener las tasas bajas mucho más allá de esa fecha, hasta que la tasa de desempleo llegue al 6,5 por ciento, siempre y cuando las perspectivas de inflación para los próximos dos o tres años se mantengan por debajo del 2,5 por ciento. El objetivo de inflación de la Fed es del 2 por ciento.

    Evans durante el último año había pedido tasas bajas hasta que la tasa de desempleo caiga al 7 por ciento, mientras la inflación no amenace con superar la barrera del 3 por ciento.

    El martes Evans dijo que ahora considera que un umbral de desempleo de un 7 por ciento es "demasiado conservador". El también dijo que ahora cree que una garantía de que la inflación no supere el 2,5 por ciento es apropiada, dado que un umbral mayor "pone a muchas personas ansiosas", y no es necesario para que la política funcione.

    "Es mucho más probable que alcancemos el umbral de un 6,5 por ciento de desempleo antes de que la inflación comience incluso a acercarse a un número modesto como un 2,5 por ciento", afirmó.

    La Fed han estado aumentando las discusiones sobre los llamados umbrales -puntos específicos de datos económicos como el desempleo y las tasas de inflación- que indicarían cuándo el banco central probablemente comenzará a subir las tasas de interés desde casi cero.

    El presidente de la Fed de Minneapolis, Narayana Kocherlakota, el presidente de la Fed de Boston, Eric Rosengren, y la influyente vicepresidenta de la Fed, Janet Yellen, han expresado apoyo a la idea.

    En Berlín, Fisher también intervino en el debate.

    "Una opción que creo que podríamos seguir es tener una definición de nuestro objetivo de desempleo, así como nuestro objetivo a largo plazo la inflación", dijo, haciendo notar que esto sería difícil, y que el establecimiento de un límite global de compras de activos era preferible.

  • In the Media | November 2012
    Pide Fisher de Fed fijar límites a la compra de activos


    El presidente de la Reserva de Dallas, Richard Fisher, subrayó que no estaba preocupado por la inflación en Estados Unidos, sino por el desempleo, al tiempo que el Banco Central debería considerar fijar un límite para el total de activos que está dispuesto a comprar.

    "Las tasas de interés son las más bajas en la historia de Estados Unidos, la pregunta es qué va a estimular a las empresas y poner a nuestra gente de vuelta en el trabajo", dijo Fisher, un crítico de la política de alivio de la Fed, en declaraciones en una conferencia organizada por el Levy Economics Institute de Berlín.

    "Es momento de que aclaremos cuáles son nuestros objetivos y nuestros límites", subrayó Fisher, un crítico de la política expansiva de la Fed, quien se describe a sí mismo como ortodoxo frente a la inflación.

    "Una opción es tener una definición de nuestra meta del empleo, además de nuestra meta de inflación de largo plazo. Será difícil de hacer, pero es una opción", resaltó.

    La segunda opción sería anunciar "más pronto que tarde" cuánto está dispuesta a comprar la Fed.

    El Banco Central estadunidense anunció una tercera ronda de compras de activos en septiembre, de final abierto, que según dice continuará hasta que haya una mejora sustancial en el mercado laboral.

    A la espera de la Fed

    En Estados Unidos se conocerá el informe económico conocido como Beige Book, esperando encontrar pistas sobre los próximos pasos a seguir por parte de la Reserva Federal y de su percepción en torno al problema fiscal.
  • In the Media | November 2012
    Por Andrea Hopkins y Sarah Marsh

    TORONTO / BERLIN (Reuters) — Las profundas divisiones de la Reserva Federal quedaron expuestas el martes, apenas dos semanas antes de la siguiente reunión de política monetaria del banco central de Estados Unidos, con un funcionario de la Fed impulsando un mayor alivio y otro defendiendo la fijación de límites.

    La brecha pone de relieve los obstáculos que enfrenta el presidente de la Fed, Ben Bernanke, en su intento de alcanzar un consenso entre sus compañeros sobre los esfuerzos políticos a veces polémicos del banco central por reducir la elevada tasa de desempleo del país, que registró un 7,9 por ciento el mes pasado.

    Charles Evans, presidente de la Reserva Federal de Chicago y uno de los moderados de la Fed, dijo que las tasas de interés deberían permanecer cerca de cero hasta que la tasa de desempleo caiga a menos del 6,5 por ciento. Tal política acarrearía "sólo riesgos mínimos de inflación", y podría impulsar el crecimiento más rápido que en otro caso, dijo.

    Evans, que pasará a ocupar en enero un asiento con derecho a voto en el panel de fijación de política de la Fed, también dijo que la Fed debería intensificar su programa de alivio cuantitativo en el nuevo año para mantener su nivel global de compras de activos en 85.000 millones de dólares al mes por la mayor parte, si no todo, el 2013.

    Pero el presidente de la Fed de Dallas, Richard Fisher, un duro que se inclina por el rigor fiscal, dijo que el banco central de Estados Unidos podría meterse en problemas si no se establece un límite a la cantidad de activos que está dispuesto a comprar.

    "No se puede expandir de manera ilimitada sin consecuencias terribles", dijo a periodistas en el marco de la conferencia organizada por el Levy Economics Institute de Berlín. "No hay un infinito en la política monetaria, sabemos eso a partir de la experiencia alemana", agregó.

    En septiembre, la Fed lanzó un abierto programa de compra de activos, partiendo con 40.000 millones de dólares en valores respaldados por hipotecas y prometiendo continuar o reforzar el programa a menos que las perspectivas del mercado laboral mejoren sustancialmente.

    Esas compras se suman a los 45.000 millones de dólares en bonos del Tesoro a largo plazo que la Fed está comprando cada mes bajo la Operación Twist, compras que se financian con la venta de una cantidad igual de bonos del Tesoro a corto plazo.

    "Es importante mantener el nivel general de compra de activos en 85.000 millones de dólares, al menos por un tiempo hasta que podamos ver si lo estamos haciendo mejor o no, o si las cosas van más lento, podemos ajustarlo, dependiendo de esa evaluación", dijo a los periodistas que asistían a una conferencia en el Instituto CD Howe en Toronto.

    "Creo que debemos tener una discusión sobre qué es una 'mejoría sustancial'. ¿lo hemos visto? En mi opinión, no lo hemos hecho", agregó.

    Evans dijo que juzgaría que el mercado laboral ha mejorado sustancialmente una vez que vea ganancias mensuales de al menos 200.000 puestos de trabajo durante unos seis meses, así como sobre una tendencia de crecimiento del Producto Interno Bruto que conduzca a la disminución del desempleo.

    "Estaría muy sorprendido si pudiéramos alcanzar eso antes de que hayan pasado seis meses, y no me sorprendería si tarda hasta fines del 2013", declaró.

    Evans dijo que la Fed debería mantener las tasas bajas mucho más allá de esa fecha, hasta que la tasa de desempleo llegue al 6,5 por ciento, siempre y cuando las perspectivas de inflación para los próximos dos o tres años se mantengan por debajo del 2,5 por ciento. El objetivo de inflación de la Fed es del 2 por ciento. Evans durante el último año había pedido tasas bajas hasta que la tasa de desempleo caiga al 7 por ciento, mientras la inflación no amenace con superar la barrera del 3 por ciento.

    El martes Evans dijo que ahora considera que un umbral de desempleo de un 7 por ciento es "demasiado conservador". El también dijo que ahora cree que una garantía de que la inflación no supere el 2,5 por ciento es apropiada, dado que un umbral mayor "pone a muchas personas ansiosas", y no es necesario para que la política funcione.

    "Es mucho más probable que alcancemos el umbral de un 6,5 por ciento de desempleo antes de que la inflación comience incluso a acercarse a un número modesto como un 2,5 por ciento", afirmó.

    La Fed han estado aumentando las discusiones sobre los llamados umbrales -puntos específicos de datos económicos como el desempleo y las tasas de inflación- que indicarían cuándo el banco central probablemente comenzará a subir las tasas de interés desde casi cero.

    El presidente de la Fed de Minneapolis, Narayana Kocherlakota, el presidente de la Fed de Boston, Eric Rosengren, y la influyente vicepresidenta de la Fed, Janet Yellen, han expresado apoyo a la idea.

    En Berlín, Fisher también intervino en el debate.

    "Una opción que creo que podríamos seguir es tener una definición de nuestro objetivo de desempleo, así como nuestro objetivo a largo plazo la inflación", dijo, haciendo notar que esto sería difícil, y que el establecimiento de un límite global de compras de activos era preferible.

    (Reporte de Sarah Marsh y Reinhard Becker en Berlín, Andrea Hopkins y Jeffrey Hodgson en Toronto; Escrito por Ann Saphir. Editado en español por Carlos Aliaga)

  • In the Media | November 2012
    The China Post, November 29, 2012. Copyright © 1999–2012 The China Post.

    TORONTO/BERLIN—Deep divisions at the Federal Reserve were on display on Tuesday, just two weeks before the U.S. central bank's next policy-setting meeting, with one top Fed official pushing for more easing, and another advocating limits.
    The divide underscores the hurdles Fed Chairman Ben Bernanke faces as he tries to win consensus among his fellow policymakers on the central bank's sometimes controversial efforts to bring down the nation's lofty unemployment rate, which registered 7.9 percent last month.

    Charles Evans, president of the Chicago Federal Reserve Bank and one of the Fed's most outspoken doves, said interest rates should stay near zero until the jobless rate falls to at least 6.5 percent. Such a policy would carry “only minimal inflation risks,” and could boost growth faster than otherwise, he said.
    Evans, who rotates into a voting seat on the Fed's policy-setting panel in January, also said the Fed should step up its program of quantitative easing in the new year to keep its overall level of asset purchases at US$85 billion a month for most, if not all, of 2013.

    But Dallas Fed President Richard Fisher, a self-identified inflation hawk, said the U.S. central bank could get into trouble if it does not set a limit on the amount of assets it is willing to buy.

    “You cannot expand without limits without horrific consequences,” he told reporters on the sidelines of the conference organized by the Levy Economics Institute in Berlin. “There is no infinity in monetary policy, we know that from the German experience.”

    In September the Fed launched an open-ended asset-purchase program, kicking it off with a monthly US$40 billion in mortgage-backed securities and promising to continue or ramp up the program unless the outlook for the labor market improves substantially.

    Those purchases come on top of the US$45 billion in long-term Treasurys the Fed is buying each month under Operation Twist, purchases that are funded with sales of a like amount of short-term Treasuries.

    “It's important to maintain the overall level of asset purchases at US$85 billion, at least for a time until we can see whether or not we are doing better or things are going more slowly, and we can adjust, depending on that assessment,” Evans told reporters attending a speech at the C.D. Howe Institute in Toronto.

    “I think we have to have discussion about what is 'substantial improvement.' Have we seen it? In my opinion, we have not,” he said.

    Evans said he would judge the labor market as substantially improved once he sees monthly job gains of a least 200,000 for about six months, as well as above-trend growth in gross domestic product that would lead to declines in unemployment.

    “I would be very surprised if we could achieve that before six months have passed, and I would not be surprised if it takes until the end of 2013,” he said.
  • In the Media | November 2012
    By Phil Bolton
    Global Atlanta, November 27, 2012. All content © 1993- GlobalAtlanta.com, All Rights Reserved.

    The president and CEO of the Federal Reserve Bank of Atlanta, Dennis Lockhart, spoke at an economic conference in Berlin Nov 27 about the potential harm that cyber attacks on U.S. banks could do to the global payments system.
     
    Mr. Lockhart called the attacks “a real financial concern” that the Atlanta Fed is studying. He cited attacks in recent months on U.S. banks that flooded bank web servers with junk data, allowing the hackers to target certain web applications and disrupt online services.
     
    “The increasing incidence and heightened magnitude of attacks suggests to me the need to update our thinking,” he told attendees at the Hyman P. Minsky Conference organized by the Levy Economic Institute of Bard College. Dr. Minsky was an American economist who researched the characteristics of financial crises.
     
    The two-day conference is being supported by the Ford Foundation, the German Marshall Fund of the United States and Deutsche Bank AG to address challenged to global growth affected by the eurozone debt crisis; the impact of the credit crunch on economic and financial markets; the larger implications of government deficits and the debt crisis for U.S., European and Asian economic policy and central bank independence and financial reform.
     
    Mr. Lockhart is one of many speakers including Philip D. Murphy, the U.S. ambassador to Germany; Klaus Gunter Deutsch, director of Deutsche Bank Research; and Peter Praet, chief economist and executive board member of the European Central Bank.

    Mr. Lockhart qualified his concerns saying that he didn’t think cyber attacks on payment systems was as critical as fiscal crises or bank runs. But he suggested that resilience measures of the sort banks have to maintain operations in a natural disaster such as multiple back-up sites and redundant computer systems would be appropriate.
     
    Mr. Lockhart also said that the Atlanta Fed is investigating the current state of public pensions as a possible source of financial instability and called it “the other debt problem” that the U.S. faces.
     
    If public funds can attain an 8 percent average annual return on their portfolios, he said that public state and municipal pension funds in the U.S would still have an $800 billion funding gap to fill.
     
    Using more realistic return assumptions, such as the longer-term rate on U.S. Treasuries, the gap could reach as high as $3 trillion to $4 trillion, he added.
    He cited three strategies fund managers can apply: increase contributions, decrease promised future benefit or assume more investment risk.
     
    “As a financial stability consideration, the problem of pension underfunding is not likely to be the source of any immediate shock or trigger a broader systemic crisis,” he said.
     
    “However, the situation needs to be monitored, as public finance does contribute to financial and economic stability more broadly.”
  • In the Media | November 2012
    By Andrea Hopkins and Sarah Marsh
    Yahoo! News, November 27, 2012. (c) Copyright Thomson Reuters 2012.

    TORONTO/BERLIN Nov 27 (Reuters) — Deep divisions at the Federal Reserve were on display on Tuesday, just two weeks before the U.S. central bank's next policy-setting meeting, with one top Fed official pushing for more easing, and another advocating limits.

    The divide underscores the hurdles Fed Chairman Ben Bernanke faces as he tries to win consensus among his fellow policymakers on the central bank's sometimes controversial efforts to bring down the nation's lofty unemployment rate, which registered 7.9 percent last month.

    Charles Evans, president of the Chicago Federal Reserve Bank and one of the Fed's most outspoken doves, said interest rates should stay near zero until the jobless rate falls to at least 6.5 percent. Such a policy would carry "only minimal inflation risks," and could boost growth faster than otherwise, he said.

    Evans, who rotates into a voting seat on the Fed's policy-setting panel in January, also said the Fed should step up its program of quantitative easing in the new year to keep its overall level of asset purchases at $85 billion a month for
    most, if not all, of 2013.

    But Dallas Fed President Richard Fisher, a self-identified inflation hawk, said the U.S. central bank could get into
    trouble if it does not set a limit on the amount of assets it is willing to buy.

    "You cannot expand without limits without horrific consequences," he told reporters on the sidelines of the conference organized by the Levy Economics Institute in Berlin. "There is no infinity in monetary policy, we know that from the German experience."

    In September the Fed launched an open-ended asset-purchase program, kicking it off with a monthly $40 billion in mortgage-backed securities and promising to continue or ramp up the program unless the outlook for the labor market improves substantially.

    Those purchases come on top of the $45 billion in long-term Treasuries the Fed is buying each month under Operation Twist, purchases that are funded with sales of a like amount of short-term Treasuries.

    "It's important to maintain the overall level of asset purchases at $85 billion, at least for a time until we can see whether or not we are doing better or things are going more slowly, and we can adjust, depending on that assessment," Evans told reporters attending a speech at the C.D. Howe Institute in Toronto.

    "I think we have to have discussion about what is 'substantial improvement.' Have we seen it? In my opinion, we
    have not," he said.

    Evans said he would judge the labor market as substantially improved once he sees monthly job gains of a least 200,000 for about six months, as well as above-trend growth in gross domestic product that would lead to declines in unemployment.

    "I would be very surprised if we could achieve that before six months have passed, and I would not be surprised if it takes
    until the end of 2013," he said.

    Evans said the Fed should keep rates low well beyond that date, until the jobless rate hits at least 6.5 percent, as long
    as the inflation outlook for the next two to three years remains below 2.5 percent. The Fed's inflation target is 2 percent.

    Evans for the past year had called for low rates until the jobless rate falls to 7 percent, as long as inflation does not
    threaten to breach 3 percent.

    On Tuesday Evans said he now views a 7 percent unemployment threshold as "too conservative," and sees a 2.5 percent
    inflation safeguard as appropriate, given that a higher threshold makes some people "apoplectic" and is not needed in
    order for the policy to work.

    "We're much more likely to reach the 6.5 percent unemployment threshold before inflation begins to approach even
    a modest number like 2.5 percent," he said.

    Fed policymakers have been ramping up discussions on so-called thresholds—economic data points such as specific
    unemployment and inflation rates - that would signal when the central bank is likely to begin raising benchmark interest rates from near zero.

    Minneapolis Fed President Narayana Kocherlakota, Boston Fed President Eric Rosengren and the Fed's influential vice chair, Janet Yellen, have all expressed support for the idea.

    In Berlin, Fisher also chimed into the debate. "One option I believe we might pursue is to have a definition of our unemployment target as well as our long-term inflation target," he said, noting it would be difficult, however, and setting an overall limit on asset purchases was preferable.

    Fed Chairman Bernanke said last week that adopting numerical thresholds for unemployment and inflation could be a "very promising" step to develop the Fed's communication strategy, but stressed that it was still under discussion.

    On at least one issue, Fisher and Evans agreed: lack of jobs, not high inflation, is the biggest problem for the U.S.
    economy.

    "I am not worried about inflation right now, I am worried about an underemployed workforce in America," said Fisher.
  • In the Media | November 2012
    By Brian Blackstone and Harriet Torry
    The Wall Street Journal, November 27, 2012. Copyright ©2012 Dow Jones & Company, Inc. All Rights Reserved.

    A temporary fix to the “horrific” US federal budget deficit that fails to give businesses any clarity on tax and regulatory policy could have destructive effects on the US economy, a Federal Reserve official warned Tuesday.

    US businesses are in a “defensive crouch,” Dallas Fed President Richard Fisher said in a speech to a conference sponsored by the Levy Institute. If US leaders provide only a temporary solution to the looming deadline of combined tax hikes and spending cuts, known as the fiscal cliff, “that fix may well have an effect” on the economy, Mr. Fisher said.

    US tax and regulatory policies are “stuck in a pre-globalization time warp” and must be “completely rebooted,” Mr. Fisher said.

    The Fed’s policy rate is near zero and in recent years officials have introduced a series of asset-purchase measures to keep long-term interest rates low, pushing the central bank’s balance sheet past $3 trillion. Mr. Fisher said inflation remains under control in the US, with underemployment and unemployment remaining a top economic concern.

    “I do not believe that inflation will be the inevitable consequence” of the rapid rise of the Fed’s balance sheet, Mr. Fisher said.

    Still, “we’re going to need to soon decide and signal to the markets when…the punchbowl (of ultra-accomodative monetary policy) first will be ended and then when it will be withdrawn,” he said.

    The US economy has seen an uneven recovery since exiting recession in 2009 with unemployment near 8%, far above the rates associated with vibrant activity. “I’m worried about an underemployed workforce, a dispirited workforce,” Mr. Fisher said.

    He noted, however, that business balance sheets are in their best shape in many years. “American businesses are ready to roll, and we want them to roll,” he said.

    Mr. Fisher outlined two ways that US bond yields may rise. If inflation expectations rise, yields would increase, Mr. Fisher said, adding the Fed is guarding “ferociously” against this scenario.

    The “happy” outcome, he said, is if the economy recovers and the money currently parked at the Fed is put to work in the economy. This is the scenario the Fed hopes for, he said, even if it means a loss on its holdings of debt securities.