Commentary

A few days ago Peter Bofinger, one of Germany’s “wise men,” published an astonishing post titled “German wage moderation and the Eurozone crisis” that appeared on VoxEU.org (see here) and Social Europe (see here). The post was astonishing in more than one way. First of all, it seems astonishing that, in late 2015, and not 10 years earlier or so, a wise man from Germany should feel the need to draw attention to the role of German wage moderation in the eurozone crisis. Persistent German wage moderation under the euro is an undeniable fact. How can there be any controversy about it some 20 years after it started? No less astonishing was the particular occasion that triggered Bofinger’s post. Bofinger responds to a recently published CEPR Policy Insight titled “Rebooting the Eurozone: Step I – agreeing a crisis narrative.” This is an essay by a group of CEPR-related economists attempting to establish what they see as a “crisis narrative” that may be more in accordance with the basic facts about the eurozone crisis (rather than being based on myth or political convenience). In particular, these economists reject the official narrative that is still popular today among some key eurozone authorities, especially Germany’s finance ministry: namely, the “sovereign debt crisis” myth. Their alternative crisis narrative highlights large intra-eurozone capital flows and…more

From Edward Chancellor’s review in Reuters Breakingviews of L. Randall Wray’s Why Minsky Matters: Minsky, who taught economics at the University of Washington in St Louis before ending up at the Levy Institute at Bard College, had little time for conventional economics with its emphasis on equilibrium, rational expectations and the view that money and finance were largely irrelevant: “Nobody ‘up there’ understands American capitalism,” he once contemptuously wrote. […] When the credit crunch arrived, it provided posthumous support for Minsky’s economic vision. Subprime mortgages were revealed as a classic form of Ponzi finance. Losses of securitized debt cascaded through the financial system, prompting a liquidity crisis, exactly as described in Minsky’s work. The Great Moderation gave way to the Great Recession, and the Lehman bust became known as the ultimate example of a “Minsky moment.” As a result, the crisis made Minsky something of a household name beyond strictly economic circles. Unfortunately, Minsky in the original isn’t an easy read. “He needs to be translated,” writes Wray, in the preface to “Why Minsky Matters.” As a former teaching assistant of Minsky’s and colleague at the Levy Institute, Wray is perfectly positioned to perform that task. Few people understand Minsky as well as Wray. Written in clear prose, with Minsky’s idiosyncratic ideas and language patiently explained, Wray provides the best general introduction to Minsky’s…more

Yesterday, Senator Bernie Sanders gave an important speech in which he invoked President Roosevelt’s “Second Bill of Rights” in defense of his platform. As Bernie rightly pointed out, all of Roosevelt’s New Deal social programs to which we have become accustomed were tagged as “socialism”—just as pundits are branding Bernie’s proposals as dangerous socialist ideas. You can see Bernie’s prepared remarks here. Just before Bernie’s speech, I was asked to do an interview with Alex Jensen, on TBS eFM’s “This Morning” English radio program in Seoul, Korea. I was sent a list of questions and jotted down very brief responses. Unfortunately, in our radio interview we were only able to get through a few of these. You can listen to the interview here (“1119 Issue Today with Professor L.R. Wray”). As you will see, in addition to the subject of MMT and its critics, we talked about the platform of Senator Sanders and why his proposals have caught the imagination of the US population. Here are some of the questions and my brief (written) answers.

by Josh Ryan-Collins The theoretical and policy arguments for monetary reform are becoming more accepted by economists and establishment figures. The financial crisis blew apart the idea that deregulated private money creation by commercial banks leads to more efficient outcomes and allocation of capital, as has been noted by Martin Wolf of the Financial Times and Lord Adair Turner, amongst others. Yet there are few examples of how public money creation – and its variants – can support economic growth without causing negative side effects, not least inflation. In a new working paper, I examine the case of the Bank of Canada (the Canadian central bank) in the 1935-1975 period, perhaps the most interesting example of public money creation in the 20th century in the English speaking world. Throughout this period the Bank of Canada engaged in significant direct or indirect monetary financing of government debt. In other words, the central bank created new money that was credited to the government’s account either via purchase of government bonds or direct lending. On average, about one-fifth of government debt was financed and held by the central bank, with all interest returning to the state (Figure 1). Figure 1: Monetary financing and consumer price inflation in Canada, 1935-2012[1] This monetary financing supported the Canadian state to recover from the Great Depression, fight World…more

A new volume on EU financial regulation edited by Rainer Kattel, Jan Kregel, and Mario Tonveronachi: Have past and more recent regulatory changes contributed to increased financial stability in the European Union (EU), or have they improved the efficiency of individual banks and national financial systems within the EU? Edited by Rainer Kattel, Tallinn University of Technology, Director of Research Jan Kregel, and Mario Tonveronachi, University of Siena, this volume offers a comparative overview of how financial regulations have evolved in various European countries since the introduction of the single European market in 1986. The collection includes a number of country studies (France, Germany, Italy, Spain, Estonia, Hungary, Slovenia) that analyze the domestic financial regulatory structure at the beginning of the period, how the EU directives have been introduced into domestic legislation, and their impact on the financial structure of the economy. Other contributions examine regulatory changes in the UK and Nordic countries, and in postcrisis America. You can read an excerpt (which includes the Introduction and part of Chapter 2) at Routledge. Table of contents below the fold:

The 2016 Minsky conference will be held here at Blithewood mansion, home of the Levy Institute. Barney Frank will be among the keynote speakers: Will the Global Economic Environment Constrain US Growth and Employment? Organized by the Levy Economics Institute of Bard College with support from the Ford Foundation Levy Economics Institute of Bard College Blithewood Annandale-on-Hudson, New York 12504 April 12–13, 2016 The 2016 Minsky Conference will address whether what appears to be a global economic slowdown will jeopardize the implementation and efficiency of Dodd-Frank regulatory reforms, the transition of monetary policy away from zero interest rates, and the “new” normal of fiscal policy, as well as the use of fiscal policies aimed at achieving sustainable growth and full employment. Participants

“Hyman Minsky is the most important economist since Keynes, yet it’s virtually impossible to find any books about him.” That’s from Michael Pettis’s blurb for Randy Wray’s new book Why Minsky Matters, which is now shipping: Hyman Minsky’s name has appeared in the popular press a lot more since the financial crisis, but often without much more elaboration of his ideas than a paragraph noting (to the bewilderment of non-economists) that his economic research stands out because of the way in which it takes into account the significance of the financial sector and the possibility of financial crises. And as Wray points out, reading Minsky can be a challenge (though one you won’t regret embracing: you can browse through the digital archive of his papers here). This book is a guided tour of Minsky’s work, covering everything from his views on the inherent instability of the financial dynamics of capitalism to his work on poverty and full employment policies. The book’s introduction is available for download (pdf), and Arnold Kling (who declares himself “not completely converted”) just posted a nice review.

Dimitri Papadimitriou and new Levy Institute Research Associate Emilios Avgouleas write about one of the obstacles to recovery of the Greek economy: the absence of credit expansion in connection with still-troubled Greek banks. Beyond deposit flight and the ongoing recession, Papadimitriou and Avgouleas argue that the botched recapitalization of Greek banks can also be blamed for the failure to alleviate this liquidity crunch. As the next round approaches, they warn that past recapitalization efforts did not follow internationally-tested best practices: The decision by creditors to allow the old, now minority, shareholders and incumbent management to retain effective control of Greek banks is highly questionable. This rather unusual governance approach in a post-rescue period meant that the Greek banking system did not benefit from any cleanup efforts, especially in light of the interlocking and privileged relationships some bankers enjoy with Greek political, media, and economic interests. In addition, they stress that effective recapitalization requires some attempt to restructure loan portfolios: an attempt to deal with the significant — and still growing — share of loans falling into the “nonperforming” category (NPLs). This chart showing the growth of NPLs (from a strategic analysis by Papadimitriou, Michalis Nikiforos, and Gennaro Zezza), gives you a sense of the debt-deflation trap in which Greece is stuck: In order to clear the way for Greek banks to return to making loans, Avgouleas and Papadimitriou propose the creation of a “bad bank” that would take on the NPLs,…more

Jan Kregel, the Levy Institute’s director of research, was recently interviewed by the Buenos Aires Herald regarding Argentina’s economic prospects and its ongoing situation with the “vulture funds.” On Argentina’s policy challenges: So there are no alternatives to devaluation? Argentina has one net advantage. As a result of the vulture funds it’s relatively insulated from the global crisis. Now it has a decision to make on how it is going to respond. China and Brazil didn’t have a choice but Argentina does. There has to be an exchange rate adjustment and it will be difficult because everybody else is doing the same thing. You can do it on a gradual basis but you would be doing it in a non-gradual context, taking the real as an example. The government claims that a devaluation isn’t necessary and can be replaced by a larger consumption thanks to counter cyclical measures. Do you agree? If you continue to go counter-current, that means the exchange rate will remain low. The country has a big opportunity to do import substitution due to the global context. Now is the moment to support domestic industry. The question is if you do that by increasing consumption or by more direct policies to stimulate manufacturing industries. You should first do the second, that will then boost consumption. Argentina saw huge economic growth in…more

by Felipe Rezende Introduction The creation of new sources of financing and funding are at the center of discussions to promote real capital development in Brazil. It has been suggested that access to capital markets and long-term investors are a possible solution to the dilemma faced by Brazil’s increasing financing requirements (such as infrastructure investment and mortgage lending needs) and the limited access to long-term funding in the country. Policy initiatives were implemented aimed at the development of long-term financing to lengthen the maturity of fixed income instruments (Rezende 2015a). Though average maturity has lengthened over the past 10 years and credit has soared, banks’ credit portfolios still concentrate on short maturities (with the exception of the state-owned banks including Caixa Economica Federal [CEF] and the Brazilian Development Bank [BNDES]). While there was widespread agreement that public banks, and BNDES in particular, played an important stabilizing role to deal with the consequences of the 2007-2008 global financial crisis, there is, however, less agreement on BNDES’ current role (de Bolle). BNDES has been subject to a range of criticisms, such as crowding out private sector bank lending, and it is said to be hampering the development of the local capital market (Rezende 2015). It is commonly believed that “development banks and other institutions in Latin America tend to replace markets rather…more

by Felipe Rezende In previous posts (see here and here), I discussed Standard & Poor’s (S&P) downgrade of Brazil’s long-term foreign currency sovereign credit rating to junk status, that is, to ‘BB+’ from ‘BBB-‘, and its decision to downgrade Brazil’s local currency debt to a single notch above “junk” status. S&P hosted a conference call on Monday morning to explain its downgrade of Brazil’s credit rating (you can view the video webcast replay here). During the conference call I had the opportunity to ask a couple of questions.  My first question, to S&P analyst Lisa Schineller, at around the 41:53 minute mark, was the following: Question: “Are there solvency risks associated with Brazil’s local currency debt? Brazil issues its own currency.” [Lisa Schineller]: “We would not say there are solvency risks, we rate, for both local currency and foreign currency, our ratings are continuum. Yes, we lowered both ratings, we are by no means thinking about a solvency issue here and risks there. There is less policy flexibility at hand, these ratings for the local currency BBB- is still in the investment grade category and the foreign currency is at the high end of the speculative grade category. I think this is an important point to highlight. There is this increase in the stress in the economy, in the policy…more

by Felipe Rezende So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’. First, what are sovereign debt ratings? Standard & Poor’s sovereign rating is defined as follows: A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery). So the ratings are related to “a sovereign’s ability and willingness to service financial obligations to nonofficial (commercial) creditors.” What does this tell us? To begin with, credit rating agencies have repeatedly been wrong. The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple-A rating to toxic subprime mortgage-backed securities are now downgrading Brazil’s sovereign debt. As the FCIC report pointed out, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011) After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign…more