Blog

The Washington Post is casually informing its readers that the eurozone’s austerity programs are really aimed at addressing all that government profligacy everyone knows was rampant in the run up to the crisis. This seems like another good opportunity to post this chart, showing net debt as a percentage of GDP in some key eurozone countries, pre and post crisis (click to enlarge): As you can see, for almost all of these countries the crisis was largely a cause of rising public debt ratios, not an effect.  Spain, which as the Post article notes is the latest country on the eurozone hot seat, had a public debt-to-GDP ratio of 27 percent in 2007 (and as Dean Baker points out, Spain was running a budget surplus).  Reckless! If you’re really looking for a debt-related problem in the buildup to the crisis, take a glance at the right-hand side of the chart.  There you’ll see private debt ratios at significantly higher levels.  For more on this and the real story behind the problems in the eurozone, see this policy brief by Dimitri Papadimitriou and Randall Wray (short version here). Update:  Paul Krugman adds more (responding to a piece in the FT by Kenneth Rogoff) by posting a graph showing the trend in public debt ratios in the eurozone periphery during the 2000s. … Read More

From the Introduction to Beyond the Minsky Moment, a recent publication of the Levy Institute’s program on Monetary Policy and Financial Structure: A new era of reform cannot be simply a series of piecemeal changes. Rather, a thorough, integrated approach to our economic problems must be developed; policy must range over the entire economic landscape and fit the pieces together in a consistent, workable way: Piecemeal approaches and patchwork changes will only make a bad situation worse. —Hyman P. Minsky, Stabilizing an Unstable Economy It’s been almost five years since the outbreak of the global financial crisis. Stepping back and surveying the last half decade’s worth of policy responses in the United States, what we see before us looks very much like the “piecemeal” and “patchwork” pattern of reform that Minsky cautioned against in Stabilizing an Unstable Economy (1986). What’s more, if there ever was any real political space for fundamental reform of the financial system, it has since disappeared, even as the economic wounds left by the crisis continue to fester. The battle to shape the rule-making and implementation process of the 2010 Dodd-Frank Act is ongoing, but as this monograph attempts to clarify, Dodd-Frank—indeed, the whole host of policy reactions (and nonreactions) since 2007—is largely undergirded by an approach to financial regulation that is incomplete and inadequate. Another serious… Read More

Although some considered (or pretended to consider) the eurozone crisis to have been “solved” with the last Greek bailout/bond swap, reality “begs to differ,” says C. J. Polychroniou.  In his latest one-pager, Polychroniou provides an update on the status of “eurozone crisis 2.0” as the spotlight shifts to Spain, Portugal, and Italy: The eurozone crisis isn’t back: it never left. It merely went into a very brief hibernation, as the world watched Europe’s leaders trying out various fixes for the wrong crisis. No matter how much cheap money the ECB provides or how high the EC “firewall” rises, Europe’s economic sickness will not be cured without massive government intervention to get the regional economy rolling again. Read the whole thing here.

In a Bloomberg article that details how banks in the eurozone periphery have begun carrying increasing proportions of the debt issued by their own nations’ governments (while banks in the core have reduced their holdings of peripheral sovereign debt), Dimitri Papadimitriou comments on some of the consequences of this “national fragmentation of credit”: “If there’s a private-sector restructuring of Portuguese sovereign debt, then Portugal’s banks will need a bailout like Greek banks did,” Dimitri Papadimitriou, president of the Levy Economics Institute at Bard College in Annandale-on-Hudson, New York, said in an interview. In Spain, stronger banks such as Banco Santander SA (SAN), the country’s largest lender, can handle losses from their sovereign holdings, while weaker savings institutions stung by soured real estate loans will need help, Papadimitriou said. Italian banks probably are buying more of their country’s debt because they can sell it to retail customers who still have an appetite for the securities, he said. Read the article here.

The annual Minsky conference, co-sponsored by the Levy Institute and the Ford Foundation, was held this past week in NYC. The audio transcripts of all the presentations (including one by yours truly) are online here. (I will also add my powerpoint below so you can look at it while listening to the audio.) My presentation quickly summarized results of a project I am directing that examines democratic governance and accountability of the Federal Reserve, focusing on its response to the global financial crisis. You can read our first report here. I won’t go into that today. I just wanted to very quickly summarize two quite interesting statements made by others over the course of the conference. First, Joe Stiglitz had a great analogy about derivatives. Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it? Remember Warren Buffet’s statement that all these new financial products are “weapons of mass destruction”–like the 1914 flu virus. And, indeed, just as Stiglitz said, spreading those deadly weapons all over… Read More

(cross posted at EconoMonitor) Since Paul Krugman kicked-off a heated discussion about Minsky’s views on banks, and because the annual “Minsky Conference” co-sponsored by the Ford Foundation and the Levy Economics Institute occurred this past week, I thought it would be useful to run a couple of posts laying out what Minsky was all about. This first piece will detail his early work on what led up to development of his famous “financial instability hypothesis.” Minsky’s Early Contributions In his publications in the 1950s through the mid 1960s, Minsky gradually developed his analysis of the cycles. First, he argued that institutions, and in particular financial institutions, matter. This was a reaction against the growing dominance of a particular version of Keynesian economics best represented in the ISLM model. Although Minsky had studied with Alvin Hansen at Harvard, he preferred the institutional detail of Henry Simons at Chicago. The overly simplistic approach to macroeconomics buried finance behind the LM curve; further, because the ISLM analysis only concerned the unique point of equilibrium, it could say nothing about the dynamics of a real world economy. For these reasons, Minsky was more interested in the multiplier-accelerator model that allowed for the possibility of explosive growth. In some of his earliest work, he added institutional ceilings and floors to produce a variety of possible… Read More

Debts left over on consumers’ balance sheets from the mortgage crisis have had particularly serious and long-lasting effects on the economic health of those localities where the crisis hit the hardest, according to what appears to be some  interesting and important evidence discussed in an article in today’s New York Times. Of course, the notion that such balance-sheet issues are crucial is a key part of the macroeconomics we work on here, and very much in the tradition of Godley, Minsky, and other heterodox economists.

Last week I explained why Minsky matters, outlining his main contributions. This was, in part, a response to a blog post by Paul Krugman that appeared to dismiss the importance of trying to find out “what Minsky really meant.” But, more importantly, it was a response to his defense of a simple model of debt deflation dynamics that left banks out of the picture. In Krugman’s view, banks are not very important since all they do is to intermediate between savers and investors, taking in deposits and packaging them into loans. In my post last week I promised to go into more detail on Minsky’s approach to banking. And right on cue, Krugman expanded on his views in this post. Now, I know that Krugman’s own specialty is not money and banking, so one would not expect him to have a deep understanding of all the technical details.  However, he is an important columnist and textbook writer, so if he is going to expound upon “what banks do,” he should at least have the basics more-or-less correct. But he doesn’t. Indeed, his views are outdated by at least a century, or more. Can one imagine a science writer at the NYTimes presenting Newtonian physics as state-of-the-art? If there is any banking “mysticism,” it is what Krugman is presenting—not what Minsky’s followers… Read More

In his latest policy note, C. J. Polychroniou argues that the political and economic dominance of finance is pushing advanced liberal societies to a breaking point: The main problem is the power that finance capitalism exerts over domestic society and the abuses that it inflicts. Finance capitalism is economically unproductive (it does not create true wealth), socially parasitic (it lives off the revenues produced by other sectors of the economy), and politically antidemocratic (it restricts the distribution of wealth, creates unparalleled inequality, and fights for exclusive privileges). At the turn of the 20th century, finance capitalism … was still seeking to bring industry under its control and exercised its brutal power largely on undemocratic societies overseas. By the late 1970s, it can safely be said that finance capitalism had subjugated industry at home and took control of government power in the same manner that the great industrialists of the 19th and 20th centuries were able to influence public policy. The difference is that finance capitalism has no vested interest in seeing the living standards of ordinary people improve, and regards any public intervention as an attack on its freedom to exploit society’s economic and financial resources as it sees fit. Industrial capitalism was a progressive stage of economic development relative to agrarian capitalism and feudalism. …. But the dominance of… Read More

Philip Pilkington and Warren Mosler have teamed up to present a financial innovation that they believe could settle the eurozone’s sovereign debt crisis:  a special type of “tax-backed bond” that contains a clause stating that if (and only if) the country issuing the bond defaults, the bond can be used to make tax payments in that country.  “If an investor holds an Irish government bond, for example, worth 1,000 euros,” they write, “and the Irish government misses a payment of interest or principal, the investor can simply use the bond to make tax payments to the Irish government in the amount of 1,000 euros.” Pilkington and Mosler call attention to the fact that countries like Japan that issue their own currency are not facing unbearably heavy interest costs on their debt; with the reason being that such countries can always make payments when due.  Investors know that Japan can always create enough yen to meet its obligations.  Eurozone member-states, however, are users, not issuers of the euro, and as a result, while many countries in the periphery have debt-to-GDP ratios that are smaller than Japan’s, they nevertheless face higher and higher debt servicing costs. The idea behind the tax-backed bond, which draws inspiration from Modern Monetary Theory, is to provide a way of securing investor confidence in peripheral debt (the… Read More

My friend Steve Keen recently presented a “primer” on Hyman Minsky; you can read it here. In his piece, Steve criticized the methodology used by Paul Krugman and argued that Krugman could learn a lot from Minsky. In particular, Krugman’s equilibrium approach and primitive dynamics were contrasted to Minsky’s rich analysis. Finally, Krugman’s model of debt deflation dynamics left out banks—while banks always played an important role in Minsky’s approach. Krugman responded here. I found two things of interest in this exchange. First, Krugman argued: “So, first of all, my basic reaction to discussions about What Minsky Really Meant — and, similarly, to discussions about What Keynes Really Meant — is, I Don’t Care.” This is not the first time Krugman has mentioned Minsky—see, for example, here, which previewed a talk he was to give titled “The night they reread Minsky.” Amazingly, Minsky only appears in the title of the talk. It is pretty clear that Krugman has not cared enough to try to find out what Minsky wrote, much less “what Minsky really meant.” Minsky always argued that he stood “on the shoulders of giants”—and he took the time to find out what they had said. So while Minsky probably would have agreed with Krugman that arguing about what the “master” really meant was less interesting, he did believe it was… Read More