UPCOMING EVENT
The Levy Economics Institute is pleased to announce that it will hold The Hyman P. Minsky Summer Seminar in June 2010. The Seminar will provide a rigorous discussion of both theoretical and applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial crisis. The Seminar will consist of a Summer School from June 19 to 26, followed by an International Conference on June 27, 28, and 29, both to be held at the Levy Institute in Annandale-on-Hudson, New York. For more information, including how to apply, visit www.levy.org.
PUBLICATIONS
President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen examine two key laws enacted during the Great Depression: the National Industrial Recovery Act (NIRA, 1933) and the National Labor Relations Act (NLRA, 1935). Recent revisionists have claimed that these laws slowed the economic recovery by hurting businesses and maintaining high unemployment.
An article by Harold Cole and Lee Ohanian maintained that the Acts hindered recovery in part by allowing companies to conspire to reduce output and raise prices, and to reduce employment by raising wages. However, the brief finds that any adverse effects of the legislation were small, and overshadowed by the benefits of Social Security and federal deposit insurance. The impact of fiscal policy and jobs programs was both positive and significant, and had a much greater effect on economic growth in the 1930s than NIRA and NLRA. Hence, the public works and relief programs of the New Deal are the most relevant lessons for ending the current recession and employment slump.
According to conventional theory, perfectly competitive markets allow the full utilization of land, labor, and capital, and their efficient allocation across alternative uses. This paper by Research Associate Fatma Gül Ünal studies the link between land ownership inequality and the functioning of rural factor markets in Turkey. Her analytical method to measure the relationship between market malfunctioning and asset distribution contributes to the dialogue on why free market policies fail and fills an important empirical gap in the development literature.
In the developing world, there is an inverse relationship between farm size and yield per acre, so the unequal distribution of land as a major productive asset results in the overutilization of land and underutilization of labor. Ünal’s investigation supports the claim that factor markets are structurally limited in reducing inequalities as a result of landownership concentration. Rural factor markets have a tendency to perpetuate rather than ameliorate land-related inequalities, resulting in a failure to distribute economic opportunities.
This four-part study by Research Associate Éric Tymoigne critically analyzes reports dealing with U.S. financial system reform. It uses Hyman P. Minsky’s analytical framework and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion is that all of the reports fail to deal with the socioeconomic dynamics that emerge during periods of economic stability, and therefore their proposals are unlikely to limit financial fragility. Any meaningful systemic and prudential regulatory changes should analyze cash flows rather than capital equity, and prevent Ponzi processes whether they are legal or not (see also, Working Paper Nos. 573.1–.2).
The author reviews the Department of the Treasury’s Blueprint for a Modernized Financial Regulatory Structure (2008), the Counterparty Risk Management Policy Group III’s Containing Systemic Risk: The Road to Reform (2008), the Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience (2008), the Group of Thirty’s Financial Reform: A Framework for Financial Stability (2009), the OECD Strategic Response to the Financial and Economic Crisis (2009), the Government Accountability Office’s A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System (2009), and the International Center for Monetary and Banking Studies’ Fundamental Principles of Financial Regulation (2009).
Éric Tymoigne analyzes the trends in the U.S. financial sector over the past 30 years and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. He blames the economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and a regulatory system that is unwilling to recognize the intrinsic instability of market mechanisms. We need to change our approach to regulating financial institutions and recognize the interests of the socioeconomic system (i.e., financial and systemic stability) rather than the interests of Wall Street or Main Street.
The first part of the study assesses the evolution of securitization and how it contributed to Ponzi processes in the mortgage industry and other sectors of the economy. The second part focuses on the regulatory changes that contributed to the worst financial crisis of the past 80 years. Tymoigne argues that regulation and supervision should be oriented toward managing the growth of systemic risk at all levels through an analysis of creditworthiness that includes the detection of Ponzi financial practices. In addition, the government should put in place an industrial policy that limits mergers and acquisitions, counters the Ponzi tendencies of market mechanisms, and manages financial innovations.
The Summary updates current Levy Institute research, with synopses of new publications, accounts of professional presentations by the research staff, and an overview of Levy Institute events. This issue leads off with the Institute’s annual Minsky conference, which focused on the extraordinary challenges posed by the global financial crisis. Also in this issue are summaries of papers that provide insight into strategies for stabilizing the world and U.S. economies, reforming the international financial system, promoting government employment policies, and encouraging gender-aware macroeconomic strategies.
