PUBLICATIONS
According to Senior Scholar Jan Kregel, Washington’s solution to the imminent collapse of the financial markets starts at the wrong end—with the devalued assets resulting from debt deflation, rather than the absolute liquidity preference caused by the failure to assess counterparty risk with confidence. He proposes that the Federal Reserve could play the same role as the exchange clearinghouse in the interbank market, whereby banks could hold deposits with the Fed in order to build liquidity. Since the Fed would be the counterparty for banks, the banks would not have to assess the counterparty risk of borrowers. The Fed, as counterparty, eliminates the associated risks of interbank lending, thus reducing short-term interest rates and restoring confidence in the interbank market. The Fed guarantee would take the place of the Treasury’s $700 billion bailout.
This proposal should resolve the problem of assessing counterparty risk, says Kregel, and restore short-term lending without government funding, asset pricing, or approval of a bailout package. The problem of recapitalizing and reviving banks can be approached by the FDIC or an agency similar to the Hoover-era Reconstruction Finance Corporation, while home foreclosures could be dealt with through an agency modeled after the Home Owners’ Loan Corporation of the 1930s.
Money manager capitalism is characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk. This type of capitalism has resulted in a series of boom-and-bust cycles in equities, real estate, and commodities. Because subsequent cycles have been increasingly damaging to the U.S. economy, we are now at the point where we are experiencing the most severe financial crisis since the Great Depression.
In this topical brief, Senior Scholar L. Randall Wray shows how money manager capitalism (financialization) has destabilized one asset class after another. He determines that speculation, rather than fundamentals, dominates the boom in the commodity futures markets, and he criticizes the actions of the Commodity Futures Trading Commission. Wray concludes that policymakers must fundamentally change the structure of our economic system, break the cycle of booms and busts, and reduce the influence of managed money, as well as prevent the next speculative boom in yet another asset class. He also recommends that Congress begin considering its response to the collapse of commodity prices.
Many economists assume that an unemployment rate below the natural rate of unemployment creates inflation. In this new working paper, President Dimitri B. Papadimitriou outlines the merits of government job creation programs that would satisfy the noninflationary criteria, with particular emphasis on Argentina’s Plan Jefes y Jefas de Hogar Desocupados and India’s guaranteed employment program in the state of Maharashtra.
Government direct job creation programs were first proposed by Hyman P. Minsky in response to the failure of the War on Poverty program in the 1960s. Papadimitriou notes that full employment is a necessary ingredient for equitable growth outcomes. He finds that an effectively designed employment guarantee program can provide a universally accessible social safety net, while contributing toward the achievement of the United Nations’ Millennium Development Goals.
Inflation targeting (IT) is a new monetary policy framework that has been adopted by many countries. The authors, including Senior Scholar Philip Arestis, examine why and how Brazil adopted the IT strategy. They find that both IT and non-IT countries have been successful in taming inflation, but inflation and interest rates during Brazil’s IT period (since 1999) have been high, while economic growth has been low.
The authors find that the pass-through from exchange rate fluctuations to inflation is more significant in Latin American economies than in industrialized countries because the region has a substantially higher degree of openness, a history of high inflation, low central bank credibility, and large mismatches between foreign currency assets and liabilities. As a result, these countries are more susceptible to supply shocks.
The Report, a quarterly newsletter, is aimed at a diverse general audience interested in policy matters. It includes interviews with prominent scholars and public officials who can provide insights into current topics of debate, editorials by Levy Institute research staff, summaries of new publications, synopses of conferences and other events, and news of the Institute and its scholars.
