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by Daniel Alpert It is highly likely that this week will see the Federal Reserve’s Open Market Committee elect to increase the Fed Funds policy rate of interest for the first time since June of 2006, and after slashing the rate to the lowest level in history—approaching the so-called zero lower bound. But the return journey to interest rate policy rate normalcy will be a long and winding one. The ability to influence longer term interest rates, over which the Fed has no direct control, will be even more limited (in fact, after the Fed’s move and any interim market volatility, long term market interest rates are likely to fall if the global economy maintains it present trend). Yet it is very clear that the policy makers at the Fed are quite anxious to regain the control over monetary policy that they very much lack at the zero lower bound—if only to be able to do something when a new recession emerges. Here, then, are the four routes that the Fed may choose to head down in order to achieve interest rate normalization, and my opinion of how effective (or ineffective) each policy is likely to be if implemented.   The Policy Rates—Fed Funds and the Discount Rate How it Works: The Federal Reserve Banks are the banks to the banking… Read More

I was recently in Tbilisi to participate in a conference that took stock of what we know about the challenges of job creation in the South Caucasus and Western CIS. While researching gender inequalities in the labour markets of these countries, I searched for evidence on how the challenge of job creation can be overcome without perpetuating gender inequalities in the region, and preferably, by reducing them. I quickly discovered that there was no simple answer to this question. Nevertheless, I came away with a couple of key insights. One was that expanding women-owned businesses could be a way to create more and better jobs. Female-owned businesses not only tend to operate in labour-intensive sectors but – and more surprisingly – they have greater scale economies than male-owned businesses, which means that their performance benefits more from expansion. Importantly, they tend to hire proportionately more women. For example, in 2009 in Georgia, almost 60 percent of full-time workers in firms where women were among the owners were female, compared to 31 percent in firms without women owners. This suggests that if we push for more female-owned businesses, we can create better jobs. It also suggests that private-sector development policies would be more effective if they had stronger gender components. For example: Would tax breaks for start-ups with their own daycare facilities increase business… Read More

A few days ago Peter Bofinger, one of Germany’s “wise men,” published an astonishing post titled “German wage moderation and the Eurozone crisis” that appeared on VoxEU.org (see here) and Social Europe (see here). The post was astonishing in more than one way. First of all, it seems astonishing that, in late 2015, and not 10 years earlier or so, a wise man from Germany should feel the need to draw attention to the role of German wage moderation in the eurozone crisis. Persistent German wage moderation under the euro is an undeniable fact. How can there be any controversy about it some 20 years after it started? No less astonishing was the particular occasion that triggered Bofinger’s post. Bofinger responds to a recently published CEPR Policy Insight titled “Rebooting the Eurozone: Step I – agreeing a crisis narrative.” This is an essay by a group of CEPR-related economists attempting to establish what they see as a “crisis narrative” that may be more in accordance with the basic facts about the eurozone crisis (rather than being based on myth or political convenience). In particular, these economists reject the official narrative that is still popular today among some key eurozone authorities, especially Germany’s finance ministry: namely, the “sovereign debt crisis” myth. Their alternative crisis narrative highlights large intra-eurozone capital flows and… Read More

From Edward Chancellor’s review in Reuters Breakingviews of L. Randall Wray’s Why Minsky Matters: Minsky, who taught economics at the University of Washington in St Louis before ending up at the Levy Institute at Bard College, had little time for conventional economics with its emphasis on equilibrium, rational expectations and the view that money and finance were largely irrelevant: “Nobody ‘up there’ understands American capitalism,” he once contemptuously wrote. […] When the credit crunch arrived, it provided posthumous support for Minsky’s economic vision. Subprime mortgages were revealed as a classic form of Ponzi finance. Losses of securitized debt cascaded through the financial system, prompting a liquidity crisis, exactly as described in Minsky’s work. The Great Moderation gave way to the Great Recession, and the Lehman bust became known as the ultimate example of a “Minsky moment.” As a result, the crisis made Minsky something of a household name beyond strictly economic circles. Unfortunately, Minsky in the original isn’t an easy read. “He needs to be translated,” writes Wray, in the preface to “Why Minsky Matters.” As a former teaching assistant of Minsky’s and colleague at the Levy Institute, Wray is perfectly positioned to perform that task. Few people understand Minsky as well as Wray. Written in clear prose, with Minsky’s idiosyncratic ideas and language patiently explained, Wray provides the best general introduction to Minsky’s… Read More

Yesterday, Senator Bernie Sanders gave an important speech in which he invoked President Roosevelt’s “Second Bill of Rights” in defense of his platform. As Bernie rightly pointed out, all of Roosevelt’s New Deal social programs to which we have become accustomed were tagged as “socialism”—just as pundits are branding Bernie’s proposals as dangerous socialist ideas. You can see Bernie’s prepared remarks here. Just before Bernie’s speech, I was asked to do an interview with Alex Jensen, on TBS eFM’s “This Morning” English radio program in Seoul, Korea. I was sent a list of questions and jotted down very brief responses. Unfortunately, in our radio interview we were only able to get through a few of these. You can listen to the interview here (“1119 Issue Today with Professor L.R. Wray”). As you will see, in addition to the subject of MMT and its critics, we talked about the platform of Senator Sanders and why his proposals have caught the imagination of the US population. Here are some of the questions and my brief (written) answers.

by Josh Ryan-Collins The theoretical and policy arguments for monetary reform are becoming more accepted by economists and establishment figures. The financial crisis blew apart the idea that deregulated private money creation by commercial banks leads to more efficient outcomes and allocation of capital, as has been noted by Martin Wolf of the Financial Times and Lord Adair Turner, amongst others. Yet there are few examples of how public money creation – and its variants – can support economic growth without causing negative side effects, not least inflation. In a new working paper, I examine the case of the Bank of Canada (the Canadian central bank) in the 1935-1975 period, perhaps the most interesting example of public money creation in the 20th century in the English speaking world. Throughout this period the Bank of Canada engaged in significant direct or indirect monetary financing of government debt. In other words, the central bank created new money that was credited to the government’s account either via purchase of government bonds or direct lending. On average, about one-fifth of government debt was financed and held by the central bank, with all interest returning to the state (Figure 1). Figure 1: Monetary financing and consumer price inflation in Canada, 1935-2012[1] This monetary financing supported the Canadian state to recover from the Great Depression, fight World… Read More

A new volume on EU financial regulation edited by Rainer Kattel, Jan Kregel, and Mario Tonveronachi: Have past and more recent regulatory changes contributed to increased financial stability in the European Union (EU), or have they improved the efficiency of individual banks and national financial systems within the EU? Edited by Rainer Kattel, Tallinn University of Technology, Director of Research Jan Kregel, and Mario Tonveronachi, University of Siena, this volume offers a comparative overview of how financial regulations have evolved in various European countries since the introduction of the single European market in 1986. The collection includes a number of country studies (France, Germany, Italy, Spain, Estonia, Hungary, Slovenia) that analyze the domestic financial regulatory structure at the beginning of the period, how the EU directives have been introduced into domestic legislation, and their impact on the financial structure of the economy. Other contributions examine regulatory changes in the UK and Nordic countries, and in postcrisis America. You can read an excerpt (which includes the Introduction and part of Chapter 2) at Routledge. Table of contents below the fold:

The 2016 Minsky conference will be held here at Blithewood mansion, home of the Levy Institute. Barney Frank will be among the keynote speakers: Will the Global Economic Environment Constrain US Growth and Employment? Organized by the Levy Economics Institute of Bard College with support from the Ford Foundation Levy Economics Institute of Bard College Blithewood Annandale-on-Hudson, New York 12504 April 12–13, 2016 The 2016 Minsky Conference will address whether what appears to be a global economic slowdown will jeopardize the implementation and efficiency of Dodd-Frank regulatory reforms, the transition of monetary policy away from zero interest rates, and the “new” normal of fiscal policy, as well as the use of fiscal policies aimed at achieving sustainable growth and full employment. Participants

“Hyman Minsky is the most important economist since Keynes, yet it’s virtually impossible to find any books about him.” That’s from Michael Pettis’s blurb for Randy Wray’s new book Why Minsky Matters, which is now shipping: Hyman Minsky’s name has appeared in the popular press a lot more since the financial crisis, but often without much more elaboration of his ideas than a paragraph noting (to the bewilderment of non-economists) that his economic research stands out because of the way in which it takes into account the significance of the financial sector and the possibility of financial crises. And as Wray points out, reading Minsky can be a challenge (though one you won’t regret embracing: you can browse through the digital archive of his papers here). This book is a guided tour of Minsky’s work, covering everything from his views on the inherent instability of the financial dynamics of capitalism to his work on poverty and full employment policies. The book’s introduction is available for download (pdf), and Arnold Kling (who declares himself “not completely converted”) just posted a nice review.

Dimitri Papadimitriou and new Levy Institute Research Associate Emilios Avgouleas write about one of the obstacles to recovery of the Greek economy: the absence of credit expansion in connection with still-troubled Greek banks. Beyond deposit flight and the ongoing recession, Papadimitriou and Avgouleas argue that the botched recapitalization of Greek banks can also be blamed for the failure to alleviate this liquidity crunch. As the next round approaches, they warn that past recapitalization efforts did not follow internationally-tested best practices: The decision by creditors to allow the old, now minority, shareholders and incumbent management to retain effective control of Greek banks is highly questionable. This rather unusual governance approach in a post-rescue period meant that the Greek banking system did not benefit from any cleanup efforts, especially in light of the interlocking and privileged relationships some bankers enjoy with Greek political, media, and economic interests. In addition, they stress that effective recapitalization requires some attempt to restructure loan portfolios: an attempt to deal with the significant — and still growing — share of loans falling into the “nonperforming” category (NPLs). This chart showing the growth of NPLs (from a strategic analysis by Papadimitriou, Michalis Nikiforos, and Gennaro Zezza), gives you a sense of the debt-deflation trap in which Greece is stuck: In order to clear the way for Greek banks to return to making loans, Avgouleas and Papadimitriou propose the creation of a “bad bank” that would take on the NPLs,… Read More

Jan Kregel, the Levy Institute’s director of research, was recently interviewed by the Buenos Aires Herald regarding Argentina’s economic prospects and its ongoing situation with the “vulture funds.” On Argentina’s policy challenges: So there are no alternatives to devaluation? Argentina has one net advantage. As a result of the vulture funds it’s relatively insulated from the global crisis. Now it has a decision to make on how it is going to respond. China and Brazil didn’t have a choice but Argentina does. There has to be an exchange rate adjustment and it will be difficult because everybody else is doing the same thing. You can do it on a gradual basis but you would be doing it in a non-gradual context, taking the real as an example. The government claims that a devaluation isn’t necessary and can be replaced by a larger consumption thanks to counter cyclical measures. Do you agree? If you continue to go counter-current, that means the exchange rate will remain low. The country has a big opportunity to do import substitution due to the global context. Now is the moment to support domestic industry. The question is if you do that by increasing consumption or by more direct policies to stimulate manufacturing industries. You should first do the second, that will then boost consumption. Argentina saw huge economic growth in… Read More

by Felipe Rezende Introduction The creation of new sources of financing and funding are at the center of discussions to promote real capital development in Brazil. It has been suggested that access to capital markets and long-term investors are a possible solution to the dilemma faced by Brazil’s increasing financing requirements (such as infrastructure investment and mortgage lending needs) and the limited access to long-term funding in the country. Policy initiatives were implemented aimed at the development of long-term financing to lengthen the maturity of fixed income instruments (Rezende 2015a). Though average maturity has lengthened over the past 10 years and credit has soared, banks’ credit portfolios still concentrate on short maturities (with the exception of the state-owned banks including Caixa Economica Federal [CEF] and the Brazilian Development Bank [BNDES]). While there was widespread agreement that public banks, and BNDES in particular, played an important stabilizing role to deal with the consequences of the 2007-2008 global financial crisis, there is, however, less agreement on BNDES’ current role (de Bolle). BNDES has been subject to a range of criticisms, such as crowding out private sector bank lending, and it is said to be hampering the development of the local capital market (Rezende 2015). It is commonly believed that “development banks and other institutions in Latin America tend to replace markets rather… Read More