Commentary

The 20th Annual Hyman P. Minsky Conference, organized by the Levy Institute with support from the Ford Foundation, featured a broad range of speakers, including Gary Gensler (CFTC Chairman—occasioning some interesting back-and-forth in Q&A regarding commodities speculation), Paul McCulley, Andrew Sheng, Phil Angelides, Charles Plosser, Gary Gorton, Charles Evans, Vitor Constancio (Vice President of the ECB), Sheila Blair (head of the FDIC), Martin Mayer (who is apparently writing a biography of Minsky), and more.  The proceedings, including Q&A sessions, can be found here; select audio can be accessed here. There’s a lot of good material to mine, but I’d like to highlight one particular session:  “Financial Journalism and Financial Reform: What’s Missing from the Headlines?” (the title explains itself), moderated by John Cassidy of the New Yorker and featuring Jeff Madrick, Joe Nocera, Steve Randy Waldman, and Francesco Guerrera (see “Session 2” for the audio).  There’s a great quotation from Steve Randy Waldman here:  “Goldman Sachs is just an off-balance sheet special purpose vehicle of the United States government.  Lloyd Blankfein is either a civil servant or a government contractor.  It’s just [that] his pay is out of line.” The context is a discussion (starting at the 9:50 mark of Waldman’s presentation) that jumps off from this Minsky quotation: “financial reform needs to confront the public nature of much that…more

Among the (many) obstacles to working out a solution to the crisis in the eurozone is resistance to schemes that involve debt buyouts, national guarantees, mutual insurance, and fiscal transfers.  Stuart Holland has a new one-pager and policy note in which he suggests a twin-track strategy for solving the crisis that does not rely on any of the above. His recommended strategies revolve around using the EIF (European Investment Fund) as an issuer of eurobonds, and having member-states with at-risk bonds convert a share of them, through enhanced cooperation, into EU bonds (allowing, for instance, Germany, the Netherlands, Austria, and Finland to keep their own bonds).  According to Holland, neither of these strategies would require ratification by national parliaments or an alteration of the EU treaty.  The one-pager builds on an earlier policy note by Holland and Yanis Varoufakis, “A Modest Proposal for Overcoming the Euro Crisis.” Read Holland’s one-pager here and the elaborated policy note version here.

At Pragmatic Capitalist, Cullen Roche writes about the “eerily prescient” predictions regarding the euro made by Modern Money Theorists and economists looking at sectoral balances.  Roche quotes from Randall Wray’s Understanding Modern Money (see in particular p. 91ff), a paper by Stephanie Kelton (Bell), and a Wynne Godley article written in 1997 (“Curried Emu — the meal that fails to nourish,” Observer, Aug. 31).  From Godley: If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under ‘conditions of extreme emergency.’ … The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift. See also Godley’s earlier piece (1992) in the London Review of Books, “Maastricht and All That“: I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority. The incredible lacuna in the Maastricht programme is that, while it contains a…more

If you’re in Manhattan or have access to an internet connection tomorrow (Nov. 8), Reuters is sponsoring a Keynes vs. Hayek debate between two teams of economists and writers, including the Levy Institute’s James Galbraith. “Four Keynesians – economist James Galbraith, son of the high priest of Keynesianism, John K. Galbraith; New Yorker columnist John Cassidy,  Sylvia Nasar, the historian of economic thought and author of Grand Pursuit; Steve Rattner, the architect of Obama’s auto company bail-out – will slug it out with four Hayekians – Economics Nobel Prize-winner Edmund Phelps; Professor Lawrence H. White of George Mason University; Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute; and Stephen Moore of the Wall Street Journal.” The debate will be hosted at the Asia Society (5:00-7:30 pm) and can be viewed live online here.

Thorvald Grung Moe, Visiting Scholar at the Levy Institute, delivered a lecture last week on fractional reserve banking and the landscape of alternative options.  He ended with a quotation from FDR that’s worth repeating, particularly in the context of the “We Are the 99%” movement and stories like this about a return to business as usual (+10% or so) on Wall Street: “I wish our banking and economists friends would realize the seriousness of the situation from the point of view of the debtor classes – i.e. 90 per cent of the human beings in this country – and think less from the point of view of the 10 per cent who constitute the creditor classes.“ (Letter from FDR to Treasury Secretary Woodin, September 30, 1933.  As quoted in Ronnie Phillips, The Chicago Plan and New Deal Banking Reform.)

“If you’re going to have a model of capitalism, your model must be able to generate a Depression as one of its potential states. …if you can’t model that, you’re not modeling capitalism.” Via the Institute for New Economic Thinking, Steve Keen explains how Minsky’s work played a foundational role in helping him to see the financial crisis coming: Later in the video, Keen starts talking about the “holy hell!” moment he had in 2005 when looking at private debt-to-GDP ratios (Keen notes the central role private debt plays in Minsky’s theory). This (from Randall Wray’s Minsky-inspired policy brief) is the sort of thing he would have been seeing: Sources: Census Bureau; National Income and Product Accounts (NIPA); Federal Reserve Flow of Funds Accounts (from 1945)

The Levy Institute’s Pavlina Tcherneva delivered a campus-wide lecture at Bard College yesterday that discussed the Federal Reserve’s policy actions during the crisis and the future of government stabilization policy.  The lecture also covered some of the themes in her working paper “Bernanke’s Paradox” (written roughly a year ago), which also appeared in the Journal of Post Keynesian Economics. In the context of noting Bernanke’s increasingly urgent calls for more help from fiscal policy, it’s worth highlighting this portion of the working paper: The second key implication of Bernanke’s non-orthodox approach to monetary policy is that, not only is fiscal policy effective (something rejected for decades by neoclassical advocates of the Ricardian Equivalence Hypothesis), but it is, in fact, more potent in recessions. This is because the mainstream has finally recognized that the Fed cannot alone and unilaterally rain money on the banking system … More importantly, from Bernanke’s new interpretation of monetary easing, we can extract one interesting new conclusion, namely that the Fed cannot exogenously expand the money supply without government spending. What this means is that, even if the Fed lent against a wide variety of assets, it may be able to prevent a sell-off or to put a floor on these asset prices, but it will not be able to boost aggregate demand. The only way…more

This is a great graphic put together by Kevin Drum, who calls it “The Ben Bernanke Congress-ometer” (go read the original post for context): Remember:  Ben Bernanke was appointed by George W. Bush.  Prior to that he headed Bush’s Council of Economic Advisers.  For all intents and purposes, he’s a Republican.  It’s interesting to note that, (1) unlike his fellow Party members, Bernanke’s job prospects do not directly hinge on stagnant growth and incomes (in fact, if you listen to the GOP debates, re-election of the current incumbent might provide Bernanke with more job security), and (2) unlike most of his fellow Party members, Bernanke seems not to have abandoned, sometime around January 2009 (a date whose significance escapes me for the moment), the belief that fiscal policy can stimulate growth.

[The following is the text of Senior Scholar Randall Wray’s presentation, delivered October 28, 2011, at the annual conference of the Research Network Macroeconomics and Macroeconomic Policies (IMK) in Berlin. This year’s conference was titled “From crisis to growth? The challenge of imbalances, debt, and limited resources.”] It is commonplace to link Neoclassical economics to 18th or 19th century physics with its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic CDOs. Guided by invisible hands, supplies balance demands and all markets clear. Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies, themselves. Certainly there is a price, somewhere, someplace, somehow, that will balance supply and demand—for the stuff we can drop on our feet to break a toe, and on to the mental and physical efforts of our brethren, and finally to notional derivatives that occupy neither time…more

In the LA Times today, Dimitri Papadimitriou writes about the very real danger of seeing the end of economic union in Europe; a union Papadimitriou insists is ultimately worth saving. He quickly sketches out what a serious first step toward a solution might look like (rather than this patchwork of half-measures that is sure to be torn apart).  The latest set of deals don’t look like they will provide the “breathing room” they’re intended to create.  What’s needed, Papadimitriou suggests, is for the European Central Bank to step forward with a bond-buying program; something that would perform a function similar to that of the US TARP program. But calming volatility, providing real breathing room, is just the first step.  The next steps in the eurozone triage ultimately need to include serious efforts to tackle the underlying growth problem in Greece: Greece lacks both an industrial base and the widespread availability of technology. It simply can’t be productive enough to compete with neighbors such as Germany, France or the Netherlands. It’s in deep recession and doesn’t have the resources to grow out of it, even with an easing of its still-enormous debt level. Most of the austerity measures and reforms in place — and calls to continue or increase them — won’t work. Raising taxes in a society distinguished by flagrant…more

C. J. Polychroniou delivers his verdict on the recent eurozone “haircut” deal for Greece (that already looks likely to fall apart given yesterday’s news that Papandreou will submit the plan to a sure-to-be-defeated referendum).  In this new one-pager, he highlights a number of elements that make the deal destined for failure—even if the referendum were to succeed.  The most glaring flaw, says Polychroniou, is the absence of any credible plan for growth (and as the leaked “troika” document reveals, even some policymakers in the eurozone are coming to admit that “austerity!” does not constitute such a plan): More fundamentally, a 50 percent haircut alone will not solve the Greek debt problem. When all is said and done, neither recapitalizing European banks nor turbo-charging the EFSF (especially with dubious schemes) can credibly resolve the eurozone crisis without also enacting policies to promote long-term growth. And at this stage, the only viable and immediate solution to reviving the economies of Greece and the other European member-states is through public spending and quantitative easing. But these are policies that are precluded by Germany’s incorrigibly stubborn disposition toward expansionary fiscal consolidation. Read the one-pager here.

This post provides our latest update of the quarterly figures for the real and nominal GDP of U.S. trading partners (1970q1-2016q4), which were presented a few years ago in a Levy Institute working paper and have now been updated to the second quarter of 2011, with predictions up to 2016 based on the latest IMF World Economic Outlook. The database has been requested over the years by other researchers, so we decided to put it up on our web site. It is, and will be, available here: http://www.levyinstitute.org/pubs/gdp_ustp.xls Our index for the annual growth rate in the real GDP of U.S. trading partners, reproduced above, now shows that no boost in U.S. exports from accelerating growth in the rest of the world can be expected. More specifically, according to the IMF the eurozone will not contribute much to global growth, and if fiscal consolidation in Southern European countries will indeed be implemented, we expect a further slowdown in the area. Given that the eurozone accounts for roughly 16 percent of U.S. exports, the impact on the U.S. economy of a European slowdown, through trade, will not be dramatic — certainly not as dramatic as the potential negative impact on financial wealth if the eurozone sovereign debt crisis spirals out of control.