PUBLICATIONS
Former Federal Reserve (Fed) Chairman Alan Greenspan now admits that he could never have imagined that government deregulation would lead to a financial and economic crisis of biblical proportions. The ongoing financial turmoil has shown that private market regulation and counterparty monitoring didn’t work. Moreover, Secretary Henry M. Paulson has confirmed the worst fears of conspiracy theorists: the bailout is an opportunity to consolidate control over the nation’s financial system by a few large (Wall Street) banks.
According to President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray, we are moving into a deep recession, and the government should not rely on more borrowing by the private sector to pull us out of it. Resolving the liquidity crisis (mission almost accomplished) and preventing financial institutions from growing too fast (by making unsound loans) is the best strategy, they say.
The authors suggest that more jobs and rising incomes are the ticket for policy formation by the Obama Administration. They call for a bigger role for fiscal rather than monetary policy (e.g., a temporary suspension of payroll taxes and spending increases) and direct homeowner relief (putting $700 billion into keeping Americans in their homes will do much more good than handing the money to the financial “geniuses” that created the mess). The main responsibility for economic recovery must be in the hands of the Treasury (not the Fed), they say, and the country can afford the trillions of dollars it will take to counter the worst financial and economic crisis since the Great Depression. The financial system likely to emerge will be smaller and simpler, more closely regulated, less highly leveraged, and based on sound underwriting.
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As the House Committee on Financial Services meets to hear the expert testimony of witnesses concerning the regulation of the U.S. financial system, the measures that have been introduced to support the system are laying the groundwork for a new domestic financial architecture. Hyman P. Minsky suggests that the basic principle behind any reformulation of the regulatory system should limit the size and activities of financial institutions, and should be dictated by the ability of supervisors, examiners, and regulators to understand the institutions’ operations.
Following Minsky’s preference for bank holding company structures, Senior Scholar Jan Kregel proposes the creation of numerous types of subsidiaries within the holding company. The aim would be to limit each type of holding company to a range of activities that were sufficiently linked to their core function, and to ensure that each company was small enough to be effectively managed and supervised.
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A White House document in August 2004 stated that the U.S. homeownership rate had reached a record 69.2 percent (73.4 million homeowners), including a majority of minority households (the “democratization of homeownership”). According to Hyman P. Minsky, stability breeds instability, as represented by the recent record-high foreclosure rate and subprime financial crisis, along with rising unemployment, sluggish economic growth, and an unprecedented climb in commodity prices.
According to the authors, inequality also breeds instability. Inequality is the real cause of the financial crisis, they say, because the so-called democratization of homeownership represented a fictitious increase in housing demand that was fueled by innovative financing schemes. In essence, economically disadvantaged households were used to ride a wave of Wall Street speculation. The authors conclude that the only viable means to achieve higher homeownership rates and economic stability is a full employment (government) program with stable work opportunities, decent wages, and benefits.
Hyman P. Minsky promoted a form of (Keynesian) capitalism that significantly involves the government because of structural problems associated with market mechanisms (e.g., unfair distribution, economic instability, and unemployment). The author reviews Minsky’s theoretical framework and the supposedly “Keynesian” agenda of the Roosevelt and Kennedy/Johnson Administrations. The current perception is that these administrations employed Big Government capitalism even though monetary and fiscal discretions were used to fine-tune the economy. Tymoigne finds that the policies of Irving Fisher rather than those of John Maynard Keynes are more closely aligned with these administrations. There never was a Keynesian revolution in economic theory or policy, he says.
Economists use monetary structural vector autoregressions (VARs) to measure the effects of policy changes and to test models. Stable distributions with infinite variances are less well known by macroeconomists, but they were studied by scholars such as Benoit Mandelbrot and Eugene Fama in the 1960s and 1970s. When a stable distribution has a finite variance, it is a normal distribution and has a “characteristic exponent” of two; when it has an infinite variance, the characteristic exponent is greater than zero and less than two. In this working paper, Research Scholar Greg Hannsgen estimates the characteristic exponents of innovations in a monetary VAR, and finds that the distributions of the innovations have infinite variances. Therefore, structural factorizations of innovation variance-covariance matrices are impossible.
