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(The following was written by Sunanda Sen and first appeared at TripleCrisis) A panic of unprecedented order has struck the crisis-ridden Indian economy. It brings to the fore the question of what led to this massive downturn, especially when the country was touted, not long back, as one of the high-growth emerging economies of Asia. A volte-face, from scenes of apparent stability marked by high GDP growth and a booming financial sector to a state of flux in the economy, can completely change the expectations of those who operate in the market, facing situations with an uncertain future. Such possible transformations were identified by Kindleberger in 1978 as a passage from manias, which generate positive expectations, to panics, which head toward a crisis. While manias help continue a boom in asset markets, they are sustained by using finance to hedge and even speculate in the asset market, as Minsky pointed out in 1986. However, asset-market bubbles generated in the process eventually turn out to be on shaky ground, especially when the financial deals rely on short-run speculation rather than on the prospects of long-term investments in real terms. With asset-price bubbles continuing for some time under the influence of what Shiller described in 2009 as irrational exuberance, and also with access to liquidity in liberalised credit markets, unrealistic expectations of the… Read More

From a panel discussion yesterday at the George Washington University Law School on what we have(n’t) learned since the 2008 financial collapse (via Matias Vernengo). Galbraith begins by cautioning that these “lessons learned” frameworks often leave unchallenged the premise that the crisis is over and done with, when, as he argues, the events of 2008 were merely an “acute phase” of a broader crisis we are still living through. [iframe  src=”http://www.youtube.com/embed/rY-U9A7f-7o?start=822″ frameborder=”0″ allowfullscreen width=”432″ height=”243″]

The policy strategy being imposed on Greece by its international lenders depends on the success of something called “internal devaluation”: in the absence of being able to devalue its own currency, Greek wages have been cut in the hopes that this generates an export-led economic recovery. So, how is this going? As Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza explain in a new One-Pager, not very well. The authors observe that Greece has succeeded in increasing the sort of “competitiveness” required by this strategy: it has lowered its relative labor costs more than any other country in the eurozone except for Germany. Furthermore, Greece’s net exports have expanded since 2009. Mission accomplished? Not quite. One problem, the authors point out, is that 71 percent of Greek export growth since 2009 has come in the form of an increase in the value of trade related to its oil refineries — which is to say, in an area that has little to do with internal devaluation (and depends on volatile factors like changes in oil prices). Most of the increase in net exports came from a decline in imports (a result of the neverending recession). But most important of all, the gains from net exports have not come close to offsetting the dramatic plunge in domestic demand, as you can see here… Read More

The Heritage Foundation presents what one hopes it doesn’t believe is a clever critique of US public finances: Brad Plumer has the inevitable takedown here. This pretty much sums up the inanity of these government-as-household analogies: “Anyway, it’s a good analogy. The U.S. federal government really does resemble your typical money-printing family that owns lots of tanks, operates a giant insurance conglomerate, can borrow money at extremely low rates, and is assumed to be immortal.”

I hope that all of you saw the very nice feature on Wynne Godley in the NYTimes. It is about time he’s getting the notice he deserved. I just came across a juicy quote from Wynne: “I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is.” Here’s an interview I recently gave to a Brazilian reporter. Q: The crisis, which began with the collapse of Lehman Brothers on September 15, 2008, will complete five years. What has changed in the world economy during this period? LRW: Unfortunately, the global financial system was restored to its 2006 status through massive bail-outs by the public sector. It was not reformed. It was not investigated and prosecuted for fraud. Essentially, it was allowed to go back to doing what it did in the years preceding the crisis. Our real economies are still “financialized” with too much debt and with the financial sector taking far too big a share of profits. As a result, in most developed economies around the world, the real sector is very weak. Of course, the success story was the BRICs—which largely avoided the worst of the crisis and even made gains in their… Read More

In this video, Pavlina Tcherneva and Philip Harvey look at the job guarantee and basic income grant proposals in the context of a discussion of economic rights. Tcherneva begins with the theory behind the job guarantee — a federally-funded (and in Tcherneva’s version, locally-administered) program that would offer a paid job to anyone willing and able to work — and then (16:10) turns to a real-world example that, while not quite a job guarantee, was in the family of direct job creation programs: Argentina’s Plan Jefes. (Tcherneva has a related working paper that analyzes the socially transformative potential of direct job creation, over and above its macroeconomic stabilization benefits, in the context of the alteration of Plan Jefes into a pure cash transfer program, Plan Familias.) Philip Harvey (31:45) looks at the legal bases of the rights to work and income (beginning with US statutes) before moving on to a comparison of basic income guarantees with job guarantees: [iframe src=”http://www.youtube.com/embed/-3uWDnLVPv8?start=190″ frameborder=”0″ allowfullscreen” width=”480″ height=”270″] This talk was delivered as part of Columbia’s “Modern Money” series; you can find links to background reading for this seminar here.

Robert Barbera, a regular contributor to the Levy Institute’s Minsky conferences, has a great post at Johns Hopkins’ Center for Financial Economics on the cycle of amnesia and remembrance that seems to plague mainstream economic theorists. Here’s a key passage: Perhaps the most indictable offense that mainstream economists committed, from 1988 through 2008, was to retrace, step by step, Keynes’s path of discovery from 1924 through 1936. Wholesale deregulation of finance and categorical confidence in a reductionist role for central banks came into being as the conventional wisdom embraced the 1924 view that free markets and stable prices alone gave us the best chance for economic stability. To add insult to injury, the conventional wisdom before the crisis was embedded in models called “new Keynesian” which were gutted of the insights of Keynes. This conventional wisdom gave license to a succession of asset market boom/bust cycles that defied the inflation/deflation model but were, nonetheless, ignored by central bankers and regulators alike. Quite predictably, in the aftermath of the grand asset market boom/bust cycle of 2008-2009, we are jettisoning Keynes, circa 1924, for the Keynes of 1936. It’s worth reading the whole thing: “Exit Keynes, the Friedmanite, Enter Minsky’s Keynes.”

In a new One-Pager, Nicola Matthews sums up some of the findings from her analysis of the activities of the Federal Reserve’s special lending facilities set up during the last financial crisis. She contends that the Fed departed from a classical understanding of what central banks should do in liquidity crises but focuses in particular on the lending rates. “[E]xamination of the data shows that most of the Fed’s emergency facilities lent at rates that were, on average, at or below (sometimes well below) market rates, with the big banks the primary beneficiaries,” she writes. Matthews notes that the top eight individual borrowers paid a combined weighted mean interest rate of 1.49 percent. The lowest rates went to Morgan Stanley and Goldman Sachs in December 2008, at 0.01 percent (on $50 million and $200 million, respectively). These emergency facilities were also engaged in lending for sustained periods of time: excluding ST OMO and the support given to Bear Stearns and AIG, the average length of the lending facilities was 22 months. Matthews notes that these extended durations suggest that many of the banks receiving support may have been insolvent, rather than merely illiquid. “So what?” you might ask. This was an extraordinary crisis, and it demanded an extraordinary response. Matthews argues that while Fed intervention was needed, the particular approach… Read More

(cross-posted from ineteconomics.org) This week workers in fast food restaurants across the country gathered to protest the minimum wage in the United States, which currently is a paltry $7.25, and to fight for a better standard of living. The battle for a living wage for the nation’s poorest workers is set against the backdrop of mass unemployment and the highest level of economic inequality in the U.S. in almost a century. The first minimum wage laws in the U.S. were the result of a state-by-state effort in the Progressive era to secure a floor to a decent life to employed women and youth. The first of these was enacted in Massachusetts in 1912 and eventually led to the 1938 Fair Labor Standards Act, which instituted a minimum wage at the federal level. The objective was fairness, economics opportunity, stability, and social cohesion. The problem was the unequal power between labor and capital—a rationale that even early neoclassical economists embraced on the grounds that it constrained labor’s bargaining power and reduced morale, productivity, and wellbeing. The solution was to set the “rules of the game” so that working women could support their families and young workers would not fall prey to discriminatory practices of their employers. In the absence of such rules, economists thought, the market mechanism wouldn’t work. Firms simply… Read More

The Modern Money Network at Columbia University — heir to the “Modern Money and Public Purpose” seminar series — is starting up in September, with a pair of events that might be interesting to some of our readers: 1. Money as a Hierarchical System Date: Thursday, September 12th, 6.15pm Location: Room 104, Jerome Greene Hall, Columbia Law School Moderator: Raúl Carrillo, J.D. Candidate (’15), Columbia Law School Speaker 1: Christine Desan, Leo Gottlieb Professor of Law, Harvard Law School Speaker 2: L. Randall Wray, Professor of Economics, University of Missouri-Kansas City Speaker 3: Katharina Pistor, Michael I. Sovern Professor of Law, Columbia Law School & Director, Center on Global Legal Transformation Speaker 4: Perry Mehrling, Professor of Economics, Barnard College & Director of Education Programs, Institute for New Economic Thinking 2. Central Banking in Theory and Practice Date: Monday, September 23th, 6.15pm Location: Room 103, Jerome Greene Hall, Columbia Law School Moderator: Richard Clarida, C. Lowell Harriss Professor of Economics and International Affairs, Columbia University Speaker 1: Lord Adair Turner, Senior Fellow, Institute for New Economic Thinking and former Director, U.K. Financial Services Authority Speaker 2: James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government, University of Texas at Austin Speaker 3: Matias Vernengo, Associate Professor, Bucknell University & Senior Research Manager, Central Bank… Read More

The case for being alarmed about the US budget deficit — more specifically, for being worried that it’s too high, or will be too high in the next decade or two — continues to weaken, and this is so even if we limit ourselves to the deficit hawks’ own theoretical turf. These days, you don’t need to have read Abba Lerner to know that we should be moving on to more pressing matters. Now that the deficit is shrinking fast, the standard fallback is to shift the focus to the long term. The go-to story for long-term deficit anxiety has to do with the prospect of healthcare costs rising much faster than the rate of economic growth (in the medium term, it’s more about predictions of how high the Federal Reserve will raise interest rates). The problem is that this healthcare story is badly out of date. The last several years have seen a significant slowdown in cost growth in the medical sector. Initially, it could be suggested that the recession was playing the main role here (so cost growth would simply snap back to previous trends when the economy recovered). However, more and more evidence is coming in to suggest that it’s primarily changes in practices and behavior unrelated to the recession that are “bending of the cost curve”… Read More

I was recently asked by an interviewer who’s going to replace Chairman Bernanke. I declined to predict because I don’t do horseraces. You’d have to be inside the beltway to understand which way President Obama is leaning. There’s not much doubt that Wall Street is pulling for one of its own, Larry Summers, and Wall Street usually gets what it wants. Let me turn to what we should want in a central banker, rather than trying to pick the winner of the contest. To understand the qualities desired, we need to know what central bankers should be able to do. There is a lot of misconception over the role played by the Fed in our economy. The power of the central bank is substantially less than usually imagined, or at least what influence it has is not in the areas usually identified. It has little direct impact on inflation, unemployment, economic growth, or exchange rates. It does set the overnight interest rate, but there is no plausible theory nor evidence that this matters very much. The “interest rate channel” is weak — normally the Fed is raising rates in a boom, when everyone is enthusiastically borrowing and spending, so higher rates do not diminish optimism. In a slump, when the Fed normally lowers rates, it is too late — pessimism… Read More