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In this Skai TV interview, Dimitri Papadimitriou focuses on the eurozone banking crisis and rising unemployment in the southern tier, arguing that the approval of 200 million euros to combat unemployment in Greece is far too small to reach the desired outcome.  (Segment, in Greek, begins at 23:30)

Paul Krugman warns against “caricaturing” Keynesian economics, and in particular the General Theory (GT), Keynes’s best known work. One caricature heard from time to time is that the book is not mathematically tractable. The caricature also claims that no one has succeeded in fitting such a contradictory and confusing bunch of arguments into a clear, mathematically coherent model. Okay, in the spirit of a concession to these macro skeptics, what follows is a schematic caricature of sorts that seems okay to me as a broad summary of the first 18 chapters or so of the book, from a classic book by Pasinetti. So for those who insist that (1) they need a preview in a very concise form or (2) that they will never have time for the lengthy and complicated GT, below is the aforementioned schema. It is only meant to show that one can in fact simplify this oft-misinterpreted work quite a bit using mathematical symbols and keep the gist of the first part of the story. where the variables are defined as follows: L = liquidity preference (psychological factors affecting long-term interest rates, especially expected future rate changes) M-overbar = policy-determined money supply I = nominal interest rate E = expected profitability of investment projects, given economic conditions C = consumption I = investment Y = total… Read More

Last week Allan Sheahan published a piece arguing that “Jobs Are Not the Answer” to America’s unemployment problem. Here’s his reasoning: “The current unemployment rate of 7.5% percent means close to 20 million Americans remain unemployed or underemployed. Nobody states the obvious truth: that the marketplace has changed and there will never again be enough jobs for everyone who wants one — no matter who is in the White House or in Congress. Fifty years ago, economists predicted that automation and technology would displace thousands of workers a year. Now we even have robots doing human work. Job losses will only get worse as the 21st century progresses.” In fact, economists have recognized this possibility since at least the early 19th century, when David Ricardo posed it as “the machine problem.”  “Robots” have been doing “human work” since the time of Adam Smith’s pin factory. Or, indeed, since the first proto-human discovered the fulcrum and lever so that one could do the work of four. However, “unemployment” has existed only since the development of production for market. Our tribal ancestors “worked” about a dozen hours a week to provide the food, clothing, and shelter required for the standard of life they deemed acceptable. They occupied themselves the rest of the time with all the other human activities that we regard… Read More

The French and German governments recently issued a joint statement titled “Together for a stronger Europe of Stability and Growth.” The communiqué emphasizes strengthened policy coordination and the use of indicators in establishing a common assessment of economic conditions in the currency union as a whole, member states, and particular markets. The new push for deeper policy coordination is intended to prevent future crises by identifying early on any incipient imbalances that might point toward fresh troubles ahead. Overall, the initiative aims at making the European economy more resilient and competitive. Such an exercise begs the question of what should be the benchmark and underlying model in the envisioned common assessment. In this regard, Germany has sharpened its diplomatic skill-set, and is keen to have France on its side at the launching platform. For at some point the benchmark will need to be spelled out. While today’s German authorities may not wish to say so all too loudly, it is clear that they view Germany as the model to follow for its crisis-stricken euro partners. So it was left to Angela Merkel’s predecessor, Gerhard Schröder, to be a little more suggestive in a recent op-ed in The Financial Times titled “France should copy Germany’s reforms to thrive.” Referring to the experiences with Germany’s Agenda 2010 reforms of 2003-5, which apparently… Read More

Who is running the largest current account surplus in the world? China? Saudi Arabia? Both wrong! These are only the number two and three countries. China had a record $420bn surplus in 2008, but that imbalance has more than halved since. As a share of GDP China’s external imbalance is down from ten to two-and-a-half percent since the global crisis — evidence of a remarkable rebalancing. The oil price would need to be significantly higher still to make Saudi Arabia the number one. So for 2012 the number one prize actually goes to: Germany! The world champion of 2012 ran up a current account surplus of almost $240bn. At a rocking seven percent of GDP, that’s just slightly below Germany’s pre-crisis record of almost $250bn in U.S. dollar terms. In euro terms 2012 actually set a new record for Germany. And that is an interesting part of the whole story, as the euro has depreciated by some 20 percent from its peak against the U.S. dollar. Back in the 2000s, the euro appreciated very strongly against the U.S. dollar (as well as in real effective terms) between 2002 and the summer of 2008. Euro appreciation cut Germany off from benefiting even more from the record global boom of the 2000s. However, somehow Germany, then also known as the “sick man… Read More

(Updated) Here’s what’s new from yesterday’s FOMC statement and Bernanke’s press conference:  the Fed has indicated that asset purchases (QE) will end when unemployment hits 7 percent.  (Note that that’s different from the point at which the Fed will begin considering raising short-term interest rates — previously linked to a threshold of 6.5 percent unemployment.) Commentators have pointed out that the Fed seems to be basing its expectations — that asset purchases will begin “tapering” this year and end by next year — on some fairly optimistic economic forecasts (this is a recurring issue).  There are also a lot of questions as to what’s motivating these signals of a less expansionary stance, given that inflation is too low by the Fed’s own measure.  “Frankly,” Yves Smith writes, “the real issue seems to be that the Fed has gotten itchy about ending QE.  Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures.” Somewhat related to this post on the Fed’s historic “reaction function,” here’s Tim Duy’s analysis: Bernanke continued to deflect attention from the low inflation numbers, describing them as largely transitory, identifying the impact of the sequester on medical payments as a factor.  Here is what I think is going on:  Overall, the Fed has basically… Read More

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… Read More

Last week, James Galbraith was supposed to be interviewed by ERT, the public broadcaster in Greece.  Events intervened when the Greek government ordered that ERT be shut down, and so instead of sitting for the interview, Galbraith delivered this speech in Thessaloniki in front of a large gathering assembled in response to the closure (ERT defied the directive and continued broadcasting on the internet; yesterday, a Greek court ordered that ERT be put temporarily back on the air).  After noting that the Greek crisis has been going on for five years now, with no sign of progress, Galbraith suggested that it might be time to start reconsidering the policy approach:  “After a certain amount of time, even an economist ought to reconsider their ideas. Most other people would so much more quickly, but we are a very patient and stubborn profession.”

We have been advocates of the theory that fiscal tightening is threatening economic recovery (last week, for example). John Taylor objects to the view that fiscal tightness has been the key to the slowness of growth in the recovery. In his blog, he states, “As a matter of national income and product accounting, it is true that cuts in state and local government purchases subtract from GDP, but these cuts are mainly an endogenous consequence not an exogenous cause of the weak recovery.” Taylor’s reasoning is that state and local government spending has been constrained by weak tax revenues. This is certainly true. However, Taylor’s argument seems to imply and rely upon another false dichotomy—variables are either exogenous causes or endogenous outcomes. Is it not more reasonable to say that these reductions in spending at the state and local level are “mainly an endogenous consequence and endogenous cause of the weak recovery”? (Note for further reading: This scheme of cumulative causation or positive feedback is part of the fiscal trap thesis advanced in a brief I wrote with Dimitri Papadimitriou last summer and fall: especially in a non-sovereign-currency system, spending cuts and slow growth can be part of a vicious cycle or downward spiral. This 2010 Levy Institute brief, among other publications, assessed the extent to which fiscal stimulus of various… Read More

A new book by the Levy Institute’s Randall Wray and Éric Tymoigne (release date July 31): The Rise and Fall of Money Manager Capitalism: Minsky’s half century from World War Two to the Great Recession The book studies the trends that led to the worst financial crisis since the Great Depression, as well as the unfolding of the crisis, in order to provide policy recommendations to improve financial stability. The book starts with changes in monetary policy and income distribution from the 1970s. These changes profoundly modified the foundations of economic growth in the US by destroying the commitment banking model and by decreasing the earning power of households whose consumption has been at the core of the growth process. The main themes of the book are the changes in the financial structure and income distribution, the collapse of the Ponzi process in 2007, and actual and prospective policy responses. The objective is to show that Minsky’s approach can be used to understand the making and unfolding of the crisis and to draw some policy implications to improve financial stability.

Boston Fed’s Eric Rosengren on the risk of financial runs and the implications for financial stability*  22nd Annual Minsky Conference (video) *(Link has changed:  see below the fold of this post for Rosengren video) Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt  New York Fed ‘Financialization’ as a Cause of Economic Malaise  NY Times The Cash and I  J. W. Mason A Blogospheric Taxonomy of the Fiscalist vs Monetarist Debate  FT The Biggest Economic Mystery of 2013: What’s Up With Inflation?  Atlantic How Schlubs Get Taken By Wall Street Pros  Forbes Fiscal Implications of the ECB’s Bond-buying Program VoxEU

In the context of the IMF’s latest release in its mea culpa series, this time on the problems with the Greek bailout plan (pdf), Dimitri Papadimitriou appeared on Skai TV to discuss the worsening crisis in Greece, the failure of austerity, and the need to renegotiate the bailout deal.  Segment (in Greek) begins at 9:35 mark: