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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

This figure shows how government spending as a percentage of GDP has evolved since 2000Q1. The numbers reflect the recent 5-year revision of the National Income and Product Accounts (the so-called “NIPA revisions”) and preliminary Q2 numbers, which are due for an update about a week from now. The figure shows that government consumption (at the top of the figure in blue) and gross investment (farther down, at about 4 percent of GDP in an aqua, or light blue, color) have been on a downward trend when expressed as percentages of GDP. Current transfer payments are depicted in red. They remain higher as a percentage of GDP than before the financial crisis; nonetheless, they are relatively flat. Government interest payments, in green, were well under control, in part because rates remained very low as of the end of Q2. The fixed-investment series is gross in the sense that it does not adjust for depreciation. Adding together all of these figures, total gross expenditures were 37.9 percent of GDP in Q2, less than a tenth of a percentage point (.1%) higher than in Q1. For a longer-term comparison, try a total of 42.3 percent in 2009Q2. Gross (and net) government spending has been falling for a long time. The sequester, whose effects are beginning to be reflected in official data, continues… Read More

It is almost conventional wisdom today to view Germany as the winner of the euro crisis. Reisenbichler and Morgan recently argued this case in Foreign Affairs, although cautiously adding that Germany’s supposed gains may not last. The miserable truth is, however, that the euro has yet to produce any real winner, while Germany’s apparent gains from the euro crisis in particular are largely an illusion about to unravel. Ultimately only a fundamental re-design of institutions and policies in the Euro-zone would open up the prospect of creating a union of true euro winners. Misled by ill-conceived ideas and beliefs – and against its own national interest – Germany is adamantly blocking such a move. Actual policies pursued and regime reforms undertaken since 2009 under German dictate have made Europe progressively more vulnerable, and ever more of a threat to global stability as well. As of now, the euro remains firmly on track for eventual breakup – an event which would see Germany among the biggest losers. The view of Germany as the winner of the euro crisis points as evidence at Germany’s current low unemployment rate, balanced public budget, and low borrowing costs. The contrast with the situation elsewhere in the Euro-zone is so crass that Germany currently also enjoys an influx of skilled immigrants, providing further support to its… Read More

L. Randall Wray and Mariana Mazzucato explain some of the motivation behind their joint project that brings together the insights of Schumpeter and Minsky (note that Schumpeter was Minsky’s dissertation adviser) to explore the relationship between finance and innovation, the changing nature of each, and how the financial system might be restructured to better support the capital development of the economy — by contrast with a system that seems to revolve around financial innovation (the focus of Minsky’s earliest work) for the sake of speculation. [iframe src=”http://www.youtube.com/embed/QLuQB4zybRk?feature=player_detailpage” frameborder=”0″ allowfullscreen” width=”480″ height=”270″]

Dimitri Papadimitriou in Bloomberg View yesterday: In December 2010, the so-called troika of lenders — the European Commission, the European Central Bank and the International Monetary Fund — predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent. This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24. Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014. Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted. … Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors,… Read More

One of the theories that motivates the policies the troika (EC/IMF/ECB) is imposing on Greece is that reducing Greek wages will make Greek exports more attractive, helping to contribute, so the theory goes, to growth in GDP and employment. And in an interview that appeared yesterday at Truthout, Dimitri Papadimitriou points out that Greek competitiveness, at least in terms of relative unit labor costs, has indeed increased, more so than in any other eurozone country save Germany. But despite the fact that exports have also risen some, Greece is still stuck — and likely hasn’t even seen the worst of its social and economic deterioration. This graph from the Levy Institute’s recent stock-flow analysis (pdf) of the Greek economy illustrates the point (N.B. in this figure, an increase in value, i.e., moving to the right, implies a decrease in competitiveness). Although relative unit labor costs (in orange) have declined in Greece, Papadimitriou points out in the interview that “the declining fortunes do not affect consumer prices [in green] that are continuously rising, pushing more and more people into deeper poverty”: Papadimitriou goes on to lay out an alternative negotiating strategy for Greece, based on exploiting what he calls a “division in the house of troika.” If this strategy fails, the options become more “unthinkable”:

When it comes to the Federal Reserve and Fed policy, the bulk of today’s progressives can be sorted into two broad groups. There are those who, in the face of congressional sabotage of fiscal policy, shrug their shoulders and conclude that we might as well get behind QE because it’s the only game in town — thus setting the “progressive” pole of the debate in such a way that Milton Friedman represents the leftward edge of the possible — and there are those who largely cede the battlefield on Fed policy, either for lack of interest or due to skepticism that the Fed can do much to affect growth and employment anyway. There are, of course, some notable exceptions, but they are a minority — and this has the effect of narrowing the dialogue when it comes to central bank policy. Bill Greider, in two new policy notes drawn from his work at The Nation, shows us what it might look like to go beyond progressive indifference or hostility to the Fed and articulate a positive alternative agenda. Both of Greider’s notes focus on how the Federal Reserve’s money-creation power, which was used to great effect in propping up the financial system, might be redirected to aiding the “real” economy: The Federal Reserve’s most distinctive asset is money—its awesome and… Read More

On the face of it, the troika’s (ECB/IMF/EU) bailouts of Greece, with their attendant demands for budget austerity, privatization, and labor market reforms, have failed and failed again — whether we’re talking about basic material well-being or debt ratios: Currently, the official unemployment rate stands at 27 percent, while youth unemployment is above 62 percent and more than 30 percent of the population lives near or below the poverty line. In a nation of less than 11 million people, more than half a million children live in poverty—that’s one out of three—with nearly 60 percent of them living in households that experience “severe material deprivation.” The debt-to-GDP ratio declined from 170 percent at the end of 2011 to 156 percent at the end of 2012 (following a rather sizable “haircut” among private holders of Greek bonds) and will remain at unsustainable levels for the unforeseeable future. In fact, the best scenario envisioned by Greece’s international lenders is that the country’s debt-to-GDP ratio will be reduced to 120 percent by 2020 — only 6.8 percent less than what it was when the debt crisis began in late 2009. When the same policies are tried over and over again, with the same dismal results, there are plenty of potential reasons for an unwillingness to change course. As frequently noted, the allure of… Read More