Commentary

Rania Antonopoulos, director of the Gender Equality and the Economy program at the Levy Institute, has a blog post up at Direct Care Alliance making the case for adding social care investments to the American Jobs Act, citing the large employment effects of direct job creation programs in early childhood education and long-term care for the elderly and chronically ill. A version of this idea showed up on the DC legislative radar recently, in the form of a jobs bill that includes a “Health Corps” and “Child Care Corps” among its provisions for direct job creation (see items 5 and 7).

Money quote from a recent Forbes article:  “with the right parenting [psychopaths] can become successful stockbrokers instead of serial killers.” Also, a reminder that when we talk about how “the markets” are reacting to this or that, we’re talking about this guy: (hat tip to Thorvald Grung Moe, our visiting Norwegian central banker)

In the case of a major reform like the Dodd-Frank Act, the attention spans of most journalists and opinion-mongers inevitably peak around the legislative battle, pronouncements are made in the aftermath, and then everyone moves on.  But as articles like this remind us, so much of the action still remains to be played out, in the nitty-gritty of the rule-making process.  To wit, a draft proposal that fleshes out the “Volcker rule” prohibitions on proprietary trading was recently released.  The rule was intended to restrict banks’ ability to make bets with their own capital, but the draft language in question suggests those restrictions could end up being fairly weak (due in part to a broader interpretation of the sort of “hedging” that will be deemed permissible). This is just the beginning of the beginning for Dodd-Frank.  Looking beyond these initial rule-writing stages, there is the further question of how the law and its provisions will hold up over time.  Rules are only as good as the regulatory and enforcement structures that shape and govern them.  That’s not much of a catchy slogan (worst-selling bumper sticker of all time?), but it contains some critical truth. Jan Kregel (recently elected to the Lincean Academy) highlighted these dynamics in his investigation of the origins and eventual erosion of Glass-Steagall, the New Deal-era legislation…more

It’s a time-honored tradition, and something of a mug’s game, to pick quotations from Adam Smith that clash with contemporary free market doctrine.  But uses and misuses of Smith aside, this one happens to hit the conceptual nail on the head.  Jared Bernstein, who is evidently working on a longer piece on debt, pulls this quotation from Adam Smith on the regulation of financial institutions: Such regulations may, no doubt, be considered as in some respects a violation of natural liberty.  But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society are, and ought to be, restrained by the laws of all governments…[T]he obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

“A rollicking saga that involves all sorts of things not normally associated with think tanks – chickens, pirate radio, retired colonels, Jean Paul Sartre, Screaming Lord Sutch, and at its heart is a dramatic and brutal killing committed by one of the very men who helped bring about the resurgence of the free market in Britain.”  Over at the BBC, Adam Curtis provides an entertaining mini-history of think tanks in the UK — the “dealer in second-hand ideas,” as Hayek allegedly described them. Featuring this fantastic image of an early pamphlet (easily the best title ever for a political pamphlet, or anything else for that matter): (hat tip INET)

Wray responds to critics of yesterday’s post, and includes an excerpt from his policy brief on the topic (for a more condensed version, highlights of the brief are here).

(Cross posted from EconoMonitor) Back in fall of 2008 I wrote a piece examining what was then the biggest bubble in human history: http://www.levyinstitute.org/pubs/ppb_96.pdf. Say what? You thought that was tulip bulb mania? Or, maybe the NASDAQ hi-tech hysteria? No, folks, those were child’s play. From 2004 to 2008 we experienced the biggest commodities bubble the world had ever seen. If you looked to the top 25 traded commodities, you found prices had doubled over the period. For the top 8, the price inflation was much more spectacular. As I wrote: According to an analysis by market strategist Frank Veneroso, over the course of the 20th century, there were only 13 instances in which the price of a single commodity rose by 500 percent or more. For example, the price of sugar rose 641 percent in 1920, and in the same year, the price of cotton rose 538 percent. In 1947, there was a commodities boom across three commodities: pork bellies (1,053 percent), soybean oil (797 percent), and soybeans (558 percent). During the Hunt brothers episode, in 1980, silver prices were driven up by 3,813 percent. Now, if we look at the current commodities boom, there are already eight commodities whose price rise had reached 500 percent or more by the end of June: heating oil (1,313 percent), nickel (1,273…more

If you haven’t already read Fisher’s 1933 article “The Debt-Deflation Theory of Great Depressions,” read it today. It contains his theory of booms and busts that later inspired Hyman Minsky to develop the Financial Instability Hypothesis (HM duly acknowledged his debt to Fisher in his 1986 book).  Fisher’s article is unfortunately becoming more relevant by the day. Fisher notes that the two dominant factors in all great booms and depressions are over-indebtedness and deflation. Over-investment and over-speculation with borrowed money are at the heart of the crisis. Once in a crisis, it is very hard to get out again, especially when prices start to fall (deflation). The typical reaction is to liquidate positions and repay debt. But when this becomes a generalized response to the crisis “the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe.” (p. 344) But, according to Fisher, it need not be this way: “it is always economically possible to stop or prevent a depression simply by reflating the price level up to the average level at which outstanding…more

Dimitri Papadimitriou was interviewed for Ian Masters’ “Background Briefing” segment regarding Greece’s place in the eurozone debt crisis, the inevitability of default (“… it’s going to happen much sooner than we think”), and other issues.  Listen here.

Dimitri Papadimitriou writes in the Huffington Post about two different “endgame” scenarios for the euro: The collapse of the euro project will break in one of two ways. Most likely, and least desirable, is that nations will leave the euro in a coordinated dissolution which might ideally resemble an amicable divorce. As with most divorces, it would leave all the participants financially worse off. Wealthier countries would be back to the kinds of tariffs, transaction costs, and immobile labor and capital that inspired the euro in the first place; poorer nations could kiss their subsidies, explicit and implicit, good-bye. Less likely, but more desirable, would be a major economic restructuring leading towards increased European consolidation. The EFSF — the European Financial Stability Facility, which is the rescue fund of the European Central Bank — has access to €440 billion. Thus far, the real beneficiaries of the EU bailouts have been the banks that hold all the debt (you haven’t seen this movie before, have you?). But with some restructuring and alteration of regulations, that wouldn’t need to be the case. The doomed rescue plans we’re seeing don’t address the central problem: Countries with very different economies are yoked to the same currency. Nations like Greece aren’t positioned to compete with countries that are more productive, like Germany, or have lower…more

Brookings issued a report yesterday, called Rethinking Central Banking, by a group of high-profile economists including Eichengreen, Rajan, Reinhart, Rogoff and Shin. The group – called the Committee on International Economic Policy and Reforms – argues that the conventional approach to central banking needs to be rethought. The neat separation between price stability and other objectives is no longer feasible. The group wants central banks to adopt an explicit financial stability objective, expand their macro-prudential toolkit, and use monetary policy if needed to support financial stability: “If, in the interest of financial stability the central bank sets policies that could result in deviations from its inflation target, then so be it.” (p. 30) They also support the use of capital controls to stem short-term speculative capital flows, and call for more cooperation and coordination between systemically significant central banks. These policy prescriptions are not radical or new. Much of the ongoing debate in Basel and Washington is focusing on just how to develop these new macro-prudential policies. What is noteworthy with the report, though, is their acknowledgment of weaknesses in the prevailing paradigm. They note that: Central banks have allowed credit growth to run free (p. 6) International capital markets are destabilizing (p. 21) Interest rates affect financial stability and hence real activity (p. 12) This is significant, since it…more

Since graphical information manages to fail less spectacularly at getting people to change their minds, here are three graphs; one addressing what we ought (not) to do, one addressing what we are doing, and the other what we can do. The first comes from the IMF, compiling 30 years of evidence showing that fiscal contraction reduces both employment and incomes: The second is a graph of changes in government purchases of goods and services in the US, showing dramatic fiscal contraction in a very crucial part of government spending: The third is a graph of the real rates on 5-year Treasuries, showing that the federal government can borrow at negative real rates to reverse the above fiscal contraction: I’d like to say more, but the research suggests that doing so in non-graphical form might be counterproductive.