Commentary

Since the outbreak of the global financial crisis and recession, we’ve seen some renewed interest (and angst) regarding the role of the central bank and of treasury-central bank cooperation.  (The most recent example comes out of Japan, in which Japanese PM Shinzo Abe has been pushing for the Bank of Japan to accommodate his relatively ambitious fiscal stimulus program.) In the US context, many of these issues bring us back to the 1951 Treasury-Federal Reserve Accord, establishing the parameters of the Fed’s independence.  In a new working paper and one-pager, Thorvald Grung Moe of Norges Bank (and a research associate at the Levy Institute) offers an alternative reading of the history and significance of the ’51 Accord—and of central bank independence in general—through an analysis of the career and views of Fed Chairman Marriner Eccles, and of his supporting role in the events leading up to the Accord in particular. Moe stresses that Eccles’ support for the Accord has to be understood in the inflationary context of the time, and that a portrait of Eccles’ views that doesn’t also include his 1930s-era support for deficit financing and accommodative monetary policy is seriously incomplete.  “The history of the Accord,” Moe writes, “should teach central bankers that independence can be crucial for fighting inflation, but also encourage them to be more supportive…more

Below is the video from the first part of last week’s event at Columbia University that featured key leadership figures from the official Greek opposition party (SYRIZA). (3:29) Alexis Tsipras, Leader of the Opposition in Greek Parliament, Leader of SYRIZA, and President of Synaspismós. (46:40) Panel discussion, featuring Rena Dourou, Member of Greek Parliament (SYRIZA); Critic of the Opposition for the Foreign Relations and European Issues, Yiannis Milios, Economic Advisor, SYRIZA, Member of the Political Secretariat of Synaspismos and Professor of Political Economy, National Technical University of Athens, Mathew Forstater, Professor of Economics and Director, Center for Full Employment and Price Security, University of Missouri – Kansas City, and Research Associate, Levy Economics Institute, Katharina Pistor, Professor of Law and Director, Center for Global Legal Transformation, Columbia Law School, and Thomas Ferguson Director of Research Programs, the Institute for New Economic Thinking (INET).

[This is the fourth part of a series (1, 2, 3) on sovereign deficits and debt.  The series was started in response to Ed Dolan’s original post detailing agreements and possible disagreements with the MMT approach.] To recap very quickly, we agreed that sovereign government cannot become “insolvent” and forced to involuntarily default on commitments in its own currency. We moved on to “math sustainability” and agreed that so long as the interest rate paid on sovereign debt is below the GDP growth rate, then government does not necessarily face explosive growth of deficits and debts. And we agreed that the overnight interest rate is a policy variable, so that the central bank could keep it below the growth rate if desired. And we agreed that Treasury could use a “debt management” strategy to ensure that its average rate paid would be “low”—near to the Fed’s target rate, and if the Fed was pursuing a low rate strategy then on likely growth rates usually used in these types of models then the Treasury’s rate paid could be kept below the growth rate. (Of course in recession the growth rate can go below zero but the interest rate would remain at zero or above; however this argument about sustainability is about the long term, not about cyclical problems.) Now that always…more

There is much hype about “currency wars” in the international media this week, reaching the heights of the Davos gathering. The excitement seems to have been started by Bundesbank president Jens Weidmann, who earlier this week aired his concerns about an apparent politicization of exchange rates owing to an erosion of central bank independence and rising political pressures for more aggressive monetary policies. Japan is the current focus of attention, as the deflation-worn nation is said to have kicked off a new round in the covert global battle for competitive advantage through currency manipulation by announcing a somewhat higher inflation target as well as new quantitative easing measures. In fact, the yen has depreciated markedly since last Fall against the U.S. dollar and even more so against the euro in anticipation of fresh policy moves by the Japanese authorities. There is of course nothing new about sharp movements in the yen’s exchange rate. With zero interest rate policies in place for more than a decade, the yen for long won the popularity contest as carry-trade funding currency; with corresponding gyrations seen in winding versus unwinding phases in the global carry trade game. So the yen has appreciated strongly since the global crisis as the spectrum of funding currencies increased. Nor would it be the first time that the Japanese authorities…more

Update:  the transcripts were released this morning (Jan. 18) and are available here. Any day now, the transcripts from the 2007 Federal Reserve Open Market Committee meetings will be released to the public (FOMC transcripts are withheld for five years).  These transcripts should give us some additional insight into the discussions that were occurring around the outbreak of the global financial crisis and help fill in our understanding of the reasoning behind the Fed’s initial response.  See here for the detailed breakdown of what we already know about the Fed’s “unconventional” lender-of-last-resort responses, including tallies of all the loans and asset purchases made under various special programs and facilities, and breakdowns of the support provided to major recipients. The Federal Reserve operated with a large degree of discretion during the course of the crisis (under the auspices of Section 13(3) of the Federal Reserve Act) and Dodd-Frank allegedly places some new limits on those powers—while also enshrining new regulatory responsibilities for the Fed.  On net, what does this all mean for the Federal Reserve’s power and discretion in a post-Dodd-Frank era?  In a new one-pager, Bernard Shull assesses the question and expresses some skepticism about the idea that the Fed will be meaningfully constrained by the new rules. For instance, about Dodd-Frank’s restrictions on the Fed’s ability to provide credit…more

Germany’s Federal Statistical Office released its first estimate of German GDP in 2012 at a press conference held in Wiesbaden yesterday: “German economy withstands the European economic crisis in 2012.” Reporting that growth slowed markedly in Germany last year, down to only 0.7 percent from 3 percent in 2011 and 4.2 percent in 2010, the international media seemed to pin the slump (the Office’s estimate assumes a contraction in GDP of 0.5 percent in the final quarter) on the euro crisis (FT.com:  “Germany hit by debt crisis turbulence”; WSJ.com: “Euro crisis damps German growth”). It is rather unsurprising that German exports have not been doing so well in the crisis-stricken countries of the euro area of late. Germany’s trade and current account surpluses with its euro partners have declined significantly. But so far the crisis has actually been a mixed blessing overall. For one thing, benefiting from its haven status, Germany’s interest rates and financing costs are extremely favorable. While lending support to property markets, finance minister Wolfgang Schäuble enjoyed a nice windfall too, as Germany’s general government budget ended the year with a small surplus, in part owing to savings on debt interest payments (much in contrast to his partners elsewhere in the area). But that is far from all.

Next week, January 24th, the Modern Money and Public Purpose seminar at Columbia University will feature a special session with top leadership from the Greek opposition party, SYRIZA, including leader of the opposition Alexis Tsipras and economy critic George Stathakis (who gave an entertaining talk at the November Minsky conference in Berlin—see Session 3 for audio).  This special event will also feature the Levy Institute’s Mathew Forstater and our director of the Gender Equality and the Economy program, Rania Antonopoulos.  See here for a full schedule and list of participants.

Below is the video from the latest session of the Modern Money and Public Purpose seminar at Columbia University, featuring Jan Kregel and Forbes‘ John Harvey.  The session touched on the sustainability of fiscal and trade deficits, why economists need to study accounting, the risks of paying down the government debt, the real meaning of “fiscal responsibility,” and the assumptions about the appropriate size of government that are sowing confusion in the budget debate.

So far, a large part of the discussion of whether the Treasury should mint (or convincingly threaten to mint) a trillion-dollar platinum coin in response to the congressional threat to refuse to raise the debt limit (see here for background) hovers around questions of legality or ill-defined “seriousness.”  (On the political front, the administration’s press secretary passed up an opportunity on Wednesday to explicitly rule out the idea.  On the legal front, Matthew Yglesias suggests a theory in which the government is not just permitted but obligated to mint the coin.) But the platinum coin discussion actually touches on fundamental issues that go beyond legality or political decorum; issues about the understanding (and misunderstanding) of money.  (Recently, both Joe Weisenthal and Paul Krugman moved the conversation in this direction.) One suspects that some objections to the large-denomination platinum coin on the grounds of “silliness” are motivated by simple incredulity about the nature of money.  Behind a lot of the Dr. Evil-themed snickering there lurks a very common “metallist” conception:  an insistence that money must always be backed by something like gold, or in the case of the trillion-dollar coin, that its value is given by the value of the platinum in the coin; something other than the mere fiat of government.  To those who are moved by the argument that…more

In the latest phase of our endless budget brinksmanship, congressional Republicans will attempt to extract policy concessions in return for raising the debt limit (Republicans are not only demanding cuts to Social Security and Medicare—they are brazenly demanding that Democrats propose, and therefore own, these unpopular cuts).  The administration and key allies are claiming they will not negotiate over the debt limit. At stake in this standoff is not just whether the federal government will default on its financial commitments (which is to say, whether Congress will absurdly prevent the government from paying the bills that Congress has legally obligated it to rack up) but also whether we will move one step further toward making these standoffs a customary part of the (mal)functioning of government. In the context of some key changes made by the Dodd-Frank Act, this new normal on the debt ceiling has disquieting implications for how the federal government will respond when the next financial crisis hits.  Dodd-Frank doesn’t do much to prevent the next crisis from emerging, but it does change the way the government can respond.  At last year’s Minsky conference in New York (see Session 6), Morgan Ricks noted that a number of organizations that played a large role in the response to the financial meltdown (Fed, Treasury, FDIC) have seen their discretionary authority…more

Olivier Blanchard (the IMF’s chief economist) and Daniel Leigh tell us in their new working paper that IMF forecasters “significantly underestimated” how much damage austerity would inflict on employment and growth in Europe.  The authors are careful to insist that their results do not imply that austerity should be abandoned:  “The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single economy.” Greece’s particular pace of fiscal consolidation, required by the EU-ECB-IMF “troika” as part of the Greek bailout deals, has helped deliver a rise in unemployment that looks like this: That’s from a new policy note by Giorgos Argitis.  Argitis focuses on the “Greek deal” reached this past November and concludes that it, along with the troika’s entire strategy to date, cannot succeed—even by its own cramped set of objectives.  “[T]he debt structure of the Greek public sector was not sustainable before, did not become sustainable after the ‘haircut’ in March 2012, and will not become sustainable as a result of the Eurogroup’s decision in November,” he writes. The problem is not just that austerity is creating devastating levels of unemployment (which, if you’ve been following the debate, is all-too-easily dismissed as a necessary cost—a sign of virtuous…more

This Saturday at 5pm Eastern, FDL will be hosting an online discussion (here) with the Levy Institute’s Randall Wray on his lastest book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems: In a challenge to conventional views on modern monetary and fiscal policy, this book presents a coherent analysis of how money is created, how it functions in global exchange rate regimes, and how the mystification of the nature of money has constrained governments, and prevented states from acting in the public interest.