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Kevin Drum has excised another section of the now-famous leaked fundraiser video, and this time the GOP challenger is holding forth on quantitative easing and other subjects. Drum picks on Romney’s specific claim that the government is buying three-quarters of US treasury debt, but there’s something in this quotation that’s more fundamentally off: We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future. The problem here is that Romney’s “fantasy” world, in which the government “makes up” money, is just a roughly accurate description of fiat money.  And if you’re rooting around in the text of Obama’s American Recovery and Reinvestment Act for the dastardly provision that created this new “feeyat” money thing, don’t waste your time—it’s been around for a long, long time.  If you’re interested in the actual history of money, as opposed to the “we used to have real money… Read More

We’re seeing a lot of “is the euro crisis over?” stories pop up in the press lately (or rather, again).  The sensible responses are “no” and “which euro crisis?” Presumably, this burst of enthusiasm derives in part from Mario Draghi’s announcement to (sort of) commit to (sort of) unlimited bond purchases.  But even if you think, optimistic reader that you are, that this will (sort of) rein in the periphery’s galloping borrowing costs and forestall an immediate breakup of the eurozone (at least until next month), that would just leave us with a slightly smaller pile of crises—including a crippling growth crisis. For Greece in particular, to declare its crisis “over” requires a serious dose of lowered expectations: The unemployment rate currently stands at 23.5 percent, wages and salaries have shrunk by as much as 30 percent, a series of pension cuts has been implemented (the latest proposal is to cut up to 600 euros per month from individual pension checks!), hospital operating expenses have been reduced by half, and the education budget has been hit so hard that many schools throughout the country operated without heating oil last winter. If you want to know what it looks like when a national crisis isn’t over, read more here.

For those who haven’t seen it already, US News and World Report did a brief piece a short while ago on Minsky’s approach to financial instability.  After running through a list of recent financial panics and crises, Chris Gay notes that from a certain theoretical perspective, this wasn’t supposed to happen.  “This sort of blood-curdling free-fall is supposed to be a once-in-a-lifetime event, like the transit of Venus or a federal budget surplus.  How is it,” he asks, “that someone who was in high school when Justin Bieber was in Pampers has already experienced half a dozen of them? Either we need to redefine ‘crash’ or someone owes you some lifetimes.”  Black swans were once thought by European ornithologists to be rare, until they discovered a number of the birds in Australia.  By contrast, the assumption that financial panics and crises are rare has stuck around, despite more than enough experience with the economic equivalent of black feathers. In Minsky’s view, financial crises are a normal part of the functioning of this economic system; they are not some deus ex machina that arrives from without to push the system off-balance.  Digesting this way of looking at the stability of our economic system won’t just affect whether we’re surprised when the next panic or crisis comes crashing down on our heads, but… Read More

by Lekha Chakraborty India has recently turned to a debate over the effect of the Prime Minister’s personal characteristics on the country’s growth and development outcomes. Do political leaders’ personal characteristics affect economic growth? It is an elusive empirical question. One of the most robust findings of a recent treatment of this topic is that leaders do matter for economic growth and, in particular, more educated leaders generate higher growth. The paper, titled “Do Educated Leaders Matter?,” appeared in The Economic Journal in 2011, by Timothy Besley of the London School of Economics and co-authored by Jose G. Montalvo and Marta Reynal-Querol. They examined this issue in a new context of how the educational attainment of a political leader affects a country’s economic growth during the leader’s tenure in office. The study also finds a strong negative effect on growth of a random exit of the Prime Minister from his office.  “[I]ntelligence is central to the Platonic view of leadership,” they write, “so the idea that more educated citizens could be better leaders would come as no surprise.” This finding naturally leads us to the question of who should be appointed as Prime Minister. In India, we currently find a well-educated technocrat in that position. With the recent controversial article by Simon Denyer, the New Delhi bureau chief of the… Read More

Marriner Eccles was Chairman of the Federal Reserve under President Franklin D. Roosevelt. This note consists of excerpts from an address he gave to the US Senate Committee on Finance in 1933, before he was called to Washington for public service by FDR. The original address contained in the Congressional Records has been reduced from over thirty pages (including questions and answers) to only three pages here that contain his essential message. Some parts have been slightly modified to fit the current time and crisis. Additions or alteration to the text has been marked by square brackets. All original figures used by Eccles in the address have been inflated by a factor of 16.4, according to the official US CPI index. In the mad confusion and fear brought about by our present disordered economies, we need bold and courageous leadership more than at any other time in our history. The orthodox capitalistic system of uncontrolled individualism, with its free competition, will no longer serve our purpose. We can only survive and function under a modified capitalistic system controlled and regulated from the top by government. The proposals I offer are all intended to bring about, by Government action, an increase of purchasing power on the part of all the people, resulting in an immediate and increasing volume in all lines… Read More

Who would have expected extreme thinking from central bankers? That is the theme of some coverage in the financial press over the past few weeks. For example, the Financial Times takes note that “a growing chorus of economists is saying central banks should take more radical steps, including buying assets other than government bonds.” Some, if not all, of these steps are not so radical from a broad historical perspective. Following the recent bankers’ brainstorming session in Jackson Hole, Wyoming, Fed Chairman Ben Bernanke was said to be pondering various possibilities including (1) QE (quantitative easing) 3, (2) a lowering of the interest rate paid on banks’ reserve accounts at the Fed, (3) an extension until 2015 of the Fed’s low-interest-rate precommitment, and perhaps in the longer term, (4) adopting nominal GDP targeting, as endorsed, for example, by George Soros in a recent opinion piece on the eurozone and Germany in particular. Today, the Fed announced that it would adopt options (1) and (3), purchasing $40 billion in mortgage-backed debt each month for an indefinite period and predicting that the federal funds rate would remain near zero through mid-2015 (see news article for more details). Most of the measures being contemplated are portrayed as more radical than they actually are, in my view. For example, most of the actions being… Read More

The Levy Economics Institute of Bard College will hold its fourth annual Hyman P. Minsky Summer Seminar in June 2013.  The Summer Seminar provides a rigorous discussion of both the theoretical and the applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial crisis.  It is of particular interest to graduate students, recent graduates, and those at the beginning of their academic or professional career. The 2013 Seminar program will be organized by Jan Kregel, Dimitri B. Papadimitriou, and L. Randall Wray, and the teaching staff will include well-known economists concentrating on and expanding Minsky’s work. Registration information can be found here.

Columbia University is hosting a seminar series on “Money and the Public Purpose.”  The seminar, open to the public, begins this week and features a number of Levy Institute scholars.  From the overview: Modern Money and Public Purpose is an eight-part, interdisciplinary seminar series held at Columbia Law School over the 2012-2013 academic year. The series aims to present new perspectives and progressive policy proposals on a range of contemporary issues facing the U.S. and global macroeconomy. Seminars will feature a mix of academics and practitioners on topics ranging from the history of debt and money and the structure of the financial system to economic human rights for the 21st century. Tomorrow’s session features Randall Wray and Michael Hudson on “The Historical Evolution of Money and Debt.” Full schedule here.  Background reading here.

Whatever the outcome of efforts to resolve severe economic difficulties in Europe and elsewhere, it is becoming increasingly clear that the next big economic crisis may not hinge on interest rates at all. One reason is that the world’s central banks, many of them following something like a Robinsonian “cheap money policy,” have managed to keep interest rates reasonably low in many countries. For example, it seems clear that yields on Spanish and Italian bonds are under control for now, after statements last month by Mario Draghi, the president of the ECB, that he was “ready to do whatever it takes,” to keep interest rates down. As made clear in this interesting and enlightening 2003 book edited by Bell and Nell (Stephanie Bell Kelton and Edward Nell), the theoretical argument for the Eurozone was badly flawed from the beginning.  (Indeed, many in the world of heterodox economics saw these  flaws from the beginning.) But, returning in this post to a key theme in Joan Robinson’s writings on the interest rate, I will offer some of the thoughts of John Maynard Keynes himself, who wrote in 1945 that: The monetary authorities can have any rate of interest they like.… They can make both the short and long-term [rate] whatever they like, or rather whatever they feel to be right. … Historically… Read More

The idea of breaking up the big banks, while seemingly growing in popularity, leaves a lot of unanswered questions.  And one of the biggest questions is probably this:  what will be the structure of the smaller institutions that remain after such a break up?  If these smaller institutions are allowed to entangle themselves in the same complex activities as before, then we will still be a long way from stabilizing the financial system. In this context (and with a recent IMF paper reconsidering the Depression-era “Chicago Plan”), Jan Kregel looks at one potential proposal for simplifying the financial structure; an alternative to Dodd-Frank’s partiality and complexity.  In his latest policy brief (“Minsky and the Narrow Banking Proposal: No Solution for Financial Reform“), Kregel looks at Hyman Minsky’s consideration of a narrow banking proposal in the mid-1990s (at the time, Minsky was looking at potential reforms for a post-Glass-Steagall financial system).  In this narrow banking proposal, commercial and investment banking functions would be separated into distinct subsidiaries of a bank holding company, with 100 percent reserves required for the deposit-taking subsidiary and a 100 percent ratio of capital to assets for the investment subsidiary. Minsky eventually turned against the proposal, and Kregel likewise concludes that narrow banking is not the answer.  Among other reasons, Kregel notes that in such a narrow… Read More

Over at The Nation, Dimitri Papadimitriou writes about the accelerating eurozone bank runs, in which euros have been flowing out of Spanish and Greek banks and into Germany at an eye-popping rate, and lays out scenarios for how this whole things ends: The migration of money into Germany is quickening. And under TARGET 2, the trillions of euros that the ECB has loaned out to finance this race will be uncollectable. How to counteract a disaster of these proportions? Unlimited deposit insurance for all euros in EMU banks, backed by the creation of a strong European federal treasury, would end the bank runs, just as deposit insurance in the United States has prevented them here ever since the Great Depression. The insurance liability would be on Europe’s central bank, which would become insolvent if Spain or Italy abandoned the euro. Since, unlike the United States, the ECB doesn’t have a unified European treasury to backstop it, Germany would presumably get the bill for a default. As Randall Wray and I predict in a new Levy Institute policy paper, “That’s a bill Germany will not accept, hence, probably no deposit insurance.” And no future for the euro. Update: Papadimitriou was also interviewed on the topic for Ian Masters’ Background Briefing radio program (listen here).

Since eurozone governments don’t issue the currency in which their debts are denominated and can’t borrow euros directly from the European Central Bank, member-states essentially have to run budget surpluses—generating euros by taxing the private sector—if they’re going to reliably meet their debt servicing costs, according to Jan Kregel, and they have to run even bigger surpluses if they’re going to reach the debt limits set by the Stability and Growth Pact.  Kregel puts this in Minskyan terms:  “member-states should be engaged in ‘hedge’ finance, which means producing a fiscal surplus well in excess of debt service. If it cannot do this, it must issue additional debt to the private sector, since it cannot borrow from the ECB. In this case, the government would be engaging in what Minsky called ‘Ponzi’ finance: it would be borrowing to meet debt service.” But in order to maintain such budget surpluses, Kregel points out, the eurozone needs higher economic growth, and this sets up a fundamental paradox: …governments cannot produce this growth through deficit spending; it must come from either domestic or foreign demand. Lowering government expenditures or raising taxes to generate the required fiscal surplus will only reduce domestic demand. This leaves external demand as the only solution. But without the ability to improve external competitiveness through exchange rate adjustment, internal depreciation… Read More