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The Advocate General (AG) has spoken on the ECB’s OMT program today. Apparently the markets were more concerned about the latest U.S. retail sales numbers than delighted about the “okay in principle provided that” signal sent from Luxembourg to the German triangle of euro power (Frankfurt, Berlin, and Karlsruhe). First of all, in the AG’s view, OMT constitutes monetary policy but not economic policy. That was one of the critical issues. The German Constitutional Court (GCC) had preliminarily concluded that the ECB may be stepping outside the monetary policy domain, for which it enjoys exclusive competence. In its previous judgment on the Pringle case the ECJ found that the ESM constitutes economic policy, which remains primarily a national responsibility in Europe’s Economic and Monetary Union, and does not encroach on the ECB’s territory. On OMT the opposite verdict was reached, based on the following evaluation: “in order for a measure of the ECB actually to form part of monetary policy, it must specifically serve the primary objective of maintaining price stability and it must also take the form of one of the monetary policy instruments expressly provided for in the Treaties and not be contrary to the requirement for fiscal discipline and the principle that there is no shared financial liability. If there are isolated economic-policy aspects to the measure… Read More

by Scott Fullwiler Tim Worstall has a post decrying the dangers of MMT ever being used in the real world—even as he recognizes or at least suggests that it might be the correct description of how the monetary system works—and is particularly concerned about Stephanie Kelton’s new appointment as Chief Economist on the Senate Budget Committee. (Note: Randy Wray also posted a critique of Mr. Worstall’s post.) Mr. Worstall’s main issue is one we’ve heard hundreds of times before—because MMT explains that currency-issuing governments operating under flexible exchange rates and without debt in a foreign currency do not actually have budget constraints, this opens the door to all sorts of problems if put into practice. We can’t trust our government with this information, in other words—it must be required to match spending with revenues over some period (whether each year, over the business cycle, etc.) or at least plan over some period of time to not allow the debt ratio to rise beyond a modest level.** Mr. Worstall notes the frequently heard MMT argument that the point of taxes is to regulate the economy—and takes particular issue with the view that taxes can be increased/decreased in real time. Note, though, that this is simply a metaphorical or simplified explanation—it blends the Chartalist argument that “taxes drive money” with the functional… Read More

On Wednesday, January 14, 2015, the European Court of Justice (ECJ) Advocate General Pedro Cruz Villalon will publish his opinion on the European Central Bank’s (ECB) “Outright Monetary Transactions” (OMT) program. The Advocate General’s opinion will give us important clues and is likely going to shape the court’s later ruling on the matter. What is at issue? The OMT program played a critical role in calming the markets since the height of the euro panic in the summer of 2012. ECB president Mario Draghi kicked off the counterattack on the markets by dropping his by now famous “whatever it takes” hint in a speech in late July in London. A few days later, on August 2, 2012, the ECB announced that “the Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.” The technical details of the OMT were then published on September 6, 2012, when the bank also terminated its earlier Securities Markets Programme (SMP) under which it had purchased fairly small quantities of government debts issued by euro crisis countries. Moreover, any purchases were sterilized to preempt “monetary financing” accusations (see here). Rather predictably, like in the case of the earlier… Read More

Greece is back in the headlines as upcoming elections look likely to produce a workable majority for the anti-austerity Syriza party. Some suggest this would represent the first step toward the country’s inevitable exit from the eurozone. Not so fast, says Dimitri Papadimitriou in an interview with Bloomberg Radio’s Kathleen Hays and Vonnie Quinn (segment begins around 13:40). A Syriza victory would likely usher in significant changes — most notably the plan to write down Greece’s public debt and end austerity policies — but Papadimitriou emphasizes that pulling Greece from the eurozone is not part of Syriza’s platform. And he suggests that much of the “Grexit” talk being deployed by the current government in Greece and other European policymakers (particularly in the vicinity of Berlin) should be understood as a scare tactic directed at the Greek electorate. (In that vein, Peter Spiegel recently reported in the Financial Times that “privately, European officials acknowledge that 2015 is not 2012. Nobody really believes Grexit is imminent.” Spiegel’s article, which contains this particular gem, is worth reading in full: “At the core of Mr Tsipras’s economic platform is debt relief, an idea so unthinkable that nearly every mainstream economist has advocated it.”) Contrary to those who now confidently claim the eurozone would be just fine if Greece were to leave or be forced… Read More

Here’s an unintentionally hilarious piece by Tim Worstall at Forbes. Watch out, he warns, MMT has come to Washington! Our nation’s capital! No doubt ruin and wastage will follow. Why? Well. Nothing wrong with the theory of Modern Money Theory, he admits. “It’s not actually that I disagree very much with the economics that is being laid out in MMT: indeed, I’m terribly tempted to agree that they’re actually correct in much of what they say.” He admits that MMT is right on budgets: “It’s most certainly not obvious that MMT proponents are all barking mad or anything. Jamie Galbraith (who I’ve had one or two very limited interactions with) is certainly a reasonable guy. And his insistence that a budget surplus, despite the ribbing he gets about it, is in fact economically contractionary doesn’t seem to have anything wrong with it. Budget deficits are fiscally expansive, a surplus is fiscally contractionary, if there’s any one statement at the heart of Keynesianism that’s it.” And it is right on money: “And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like.” And really nothing wrong with the policy, either. No, it is all politics. What he’s afraid of… Read More

With the January 25th elections in Greece approaching, Dimitri Papadimitriou writes about the future of Greek policy and the discussions that took place at a recent Levy Institute conference in Athens: At the Athens economics conference, Europe At The Crossroads, the participants were a diverse collection of policymakers, overflowing with disagreements on the very best route to growth. Nonetheless, with one notable exception (the leader of Ireland’s central bank, endorsing European Central Bank policy), the overwhelming majority united on a single principle: The bailout and its related austerity programs have failed miserably. […] The home base of some of the conference’s strongest austerity critics may come as a surprise. Peter Bofinger of Germany, the only Keynesian in Chancellor Angela Merkel’s council of economic advisers, described the risks the current approach poses for Greece, France, and Italy, and outlined why a continuation also threatens to destroy the rest of Europe. That includes Germany. Pointing to serious weaknesses in its economic foundations, Bofinger particularly singled out the FRG’s problematic physical infrastructure, an issue echoed by Elga Bartsch, Chief European economist at Morgan Stanley. And Bofinger raised the widely ignored fact that — despite endless German bellyaching about the so-called EU drain on its wealth — Germany’s contribution to other members of the European Union has been exactly zero euros. Read the rest: “Hello 2015. Goodbye… Read More

A New York Times article over the weekend delves into the history and rationale of the 2 percent inflation target, beloved of central bankers everywhere and a fairly recent innovation. Of course, the US Federal Reserve has a dual mandate, which includes both inflation and employment goals. The Fed said last week that it was most likely to start raising interest rates around the summer of 2015, but many countries’ central banks are moving in the opposite direction, solely because inflation is falling short of their targets. Private borrowers—who usually have higher propensities to spend than lenders—benefit from an easing of the burden of debt when wages and prices move broadly upward. Also, for governments with debts that they cannot service with their own currency, inflation eases the burden of making payments, as tax revenues tend to rise in step with nominal wages and prices. Of course, falling prices have the opposite effect. The resulting changes in spending reverberate through the rest of the economy. Recent data show that there exists a strong threat of deflation around the world in economies such as Japan and the Eurozone, where core inflation has recently turned negative. The effect of deflation on spending by indebted households was noted by Keynes in Chapter 19 of the General Theory (pp. 268-269). Michal Kalecki also argued… Read More

I highly recommend a movie to be released next year (that is, the year that begins next week). Terry Jones, of Monty Python fame, is one of the key developers of the film. It is on the Global Financial Crisis, but also provides a quick history of bubbles and crashes. It is highly entertaining and as good as any that I’ve seen on the crisis. The movie features Hyman P. Minsky as well as J. K. Galbraith, who appear as life-sized puppets. One of Terry’s crew told me they brought Minsky over from England on a plane as a fare-paying customer. I would have loved to have seen the look on the faces of the flight attendants. I hope they bought him a beer. Originally they were to film Minsky in his office at the Levy Institute, but when they saw pictures of it they said that there’s no way such a big and important economist could have had such an inauspicious office (albeit in beautiful Blithewood overlooking the Hudson). So they used a nice library down in Manhattan. As Terry puts it, ”I wanted to be part of this project as soon as I discovered economics students are taught crashes just don’t happen.” Here’s the blurb on the purpose of the project: In revealing the truth about our unstable economic system, the… Read More

“This collection brings together distinguished scholars who have been influenced by Jan Kregel‘s prodigious contributions to the fields of economic theory and policy. The chapters cover and extend many topics analyzed in Kregel’s published work, including monetary economic theory and policy; aspects of the Cambridge (UK and US) controversies; Sraffa’s critique on neoclassical value and distribution theory; Post-Keynesianism; employment policy; obstacles in financing development; trade and development theories; causes and lessons from the financial crises in East Asia, Latin America, and Europe; Minskyan-Kregel theories of financial instability; and global governance. Combining rigorous scholarly assessment of the issues, the contributors seek to offer solutions to the debates on economic theory and the problem of continuing high unemployment, to identify the factors that determine economic expansion, and to analyze the impact of financial crises on systemic stability, markets, institutions, and international regulations on domestic and global economic performance. The scope and comprehensive analyses found in this volume will be of interest to economists and scholars of economics, finance, and development.” From the table of contents: 1. Jan Kregel’s Economics; Dimitri B. Papadimitriou 2. The Reconstruction of Political Economy: Alternative, Parallel Paths to Rediscovering the Distinctively Classical Surplus Approach; Mathew Forstater 3. Post-Keynesian, Post-Sraffian Economics: An Outline; Alessandro Roncaglia and Mario Tonveronachi 4. Money in The General Theory: The Contributions of Jan Kregel;… Read More

Outside Money: The Advantages of Owning the Magic Porridge Pot L. Randall Wray “Money is always introduced into economic models through very simple ways—whether by ‘helicopter drops,’ ‘inheritance from the past,’ or ‘deposit multipliers.’ Once introduced, money is largely irrelevant—neutral in the long run and non-neutral in the short run only because of ad hoc assumptions. This casual and misleading treatment of money contributed to the two greatest economic disasters since the Great Depression: the Global Financial Crisis and the Euro Crisis. In both cases, economists ‘could not see it coming’ because their understanding of money was deeply flawed. In the first instance, they misunderstood ‘inside’ money and led the rush toward the financial excesses that inevitably led to the 2008 crash. In the second, they designed a currency system based on a fundamentally flawed understanding of sovereign currency, creating a union that would inevitably fail. The alternative framework offered by the state money tradition—broadly defined—provides the understanding that would have prevented both disasters.” Minsky, Monetary Policy, and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies Srinivas Yanamandra “This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003–04 to 2013–14)…. Read More

The Levy Economics Institute of Bard College co-organized an international conference on November 21-22 in Athens, Greece, on the continuing crisis in the eurozone. Among the speakers were: • Elga Bartsch, Morgan Stanley’s chief European economist; • Peter Bofinger, a German academic economist and a member of the German Chancellor’s Council of Economic Advisers; • Marek Belka, governor of Poland’s central bank; • Giannis Dragasakis, a Greek politician and member of the Greek parliament for the Coalition of the Radical Left (SYRIZA); • Heiner Flassbeck, a former director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD) and former vice minister of the German Federal Ministry of Finance; • Patrick Honohan, governor of Ireland’s central bank; • Stuart Holland, a British academic economist teaching in Portugal and a former member of the British parliament; • Stephen Kinsella, an Irish academic economist; • numerous Greek economists, including Panagiotis Liargovas, the head of Parliamentary Budget Office at Greek Parliament; and, last but not least, • scholars from the Levy Institute, including its president (Dimitri B. Papadimitriou), who heads the Institute’s macro-modeling team projects. Adding to this rather illustrious list of speakers were panel moderators from The New York Times, Wall Street Journal, Bloomberg News, National Public Radio (USA), and various daily newspapers in… Read More

The Levy Economics Institute Master of Science in Economic Theory and Policy is an innovative degree program focusing on empirical and policy analysis, with extensive research opportunities. To learn more about the program and receive an application fee waiver, attend one of our upcoming webinars: Saturday, December 6, at noon (EST): Co-hosted by Program Director Jan Kregel. Research focus: Monetary Policy and Financial Structure Wednesday, January 7, at 5pm (EST): Co-hosted by Research Scholar Michalis Nikiforos. Research focus: Macroeconomic Theory and Modeling To join a webinar, simply click here at the time listed above. Please visit our website for more information about the program: www.bard.edu/levyms/ Regular Decision deadline: January 15. Scholarships available.