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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 But he doesn’t. Indeed, his views are outdated by at least a century, or more.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

I’d like to take a moment to give a brief report on some research that my colleagues Ajit Zacharias, Rania Antonopoulous, and I have been working on as a result of collaboration between the Levy Economics Institute and United Nations Development Programme (UNDP) Regional Service Centre for Latin America and the Caribbean (RSCLAC), particularly the Gender Practice, Poverty, and Millennium Development Goals (MDG) Areas. It addresses an identified need to expand our understanding of the links between income poverty and the time allocation of households, and between paid and unpaid work. Policies to combat poverty and promote equality require a deeper and more detailed understanding of the linkages between conditions of employment, unpaid household production, and existing arrangements of social provisioning—including social care provisioning. Income poverty is customarily judged by the ability of individuals and households to gain access to some level of minimum income based on the premise that such access ensures the fulfilment of basic material needs.  However, this approach neglects to take into account the necessary (unpaid) household production requirements, without which basic needs cannot be fulfilled. Households differ in terms of their household production requirements and also in terms of the time their members have available to meet the requirements, so it should not be assumed that all households can meet these requirements. In order to… Read More

Matthew Goldstein and Jennifer Ablan report on the latest US investment craze:  buying up large bundles of foreclosed homes from Fannie Mae and renting them out to take advantage of the hot rental market.  Randall Wray is among the critics quoted in the article who contend that, as Goldstein and Ablan put it, “the federal government is fostering a transfer of wealth of sorts by selling big pools of foreclosed homes to big fund investors and high-net-worth individuals. There’s also concern that some of the players who helped create the housing crisis will now benefit by buying foreclosed homes at a steep discount.” Wall Street benefited from the ballooning indebtedness of American households on the way up, and now on the way down they’re taking advantage of the flipside of that indebtedness, as families’ assets are seized, transferred, and rented out … likely to some of the same people who just lost their homes.  That feedback loop is galling enough.  But as Wray has pointed out, it’s also a cycle that’s been greased by foreclosure fraud. Felix Salmon is surprised at the continued success of the financial industry in pushing legislation (in this case, he’s talking about the proposed “JOBS Act,” a key provision of which involves a nice dose of financial deregulation):  “a bill which was essentially drafted by… Read More

In 2010, the first year of the economic recovery, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez.  There are a whole host of reasons for the stubborn persistence of corrosive levels of inequality, but one of the surprising contributing factors may be found in the way we approach fiscal stimulus policy. In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them.  The status quo, at best, offers us two choices in fiscal policy flavors:  austerity and stimulus through aggregate demand management.  While stimulus is preferable, says Tcherneva, there are still flaws in a fiscal strategy that aims at boosting investment and growth without explicitly targeting unemployment.  The problem with pump priming is that it is rarely aggressive enough to adequately reduce unemployment—and when it is sufficiently aggressive, it has inflationary tendencies. Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution.  She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct… Read More

It says something about how badly the battle for public opinion on budget matters has been lost when a headline about a “fiscal cliff” the US is about to fall over in 2013 leaves you grimly expecting a pile of words dedicated to the poorly articulated threat of near-term public debt and deficits.  But in this case, hold off on letting your eyes glaze over.  The author is Alan Blinder and the fiscal emergency he’s talking about is a large scheduled swing toward further budget austerity: a combination of expiring tax cuts and automatic spending cuts (from the debt ceiling deal) that are all set to occur in January 2013.  Combined, says Blinder, the fiscal contraction amounts to a drag of 3.5% of GDP—a serious blow to aggregate demand. And if the macro-level view of things doesn’t grip you, the view from the ground offers enough frustrating examples of the self-inflicted wounds to come.  As Nancy Folbre points out today, Head Start, the early childhood education (ECE) funding program, is destined for cuts.  This isn’t just a “think of the poor children!” moment (though, seriously, think of the poor children.  For whatever reason, only budget hawks are allowed to chastise us for short-changing the next generation).  The economic case for borrowing right now (at negative real interest rates) to make… Read More

The Nation notes that austerity policies in Europe have proved to be very damaging to economic growth in the region, and points out that after adhering to IMF and EU austerity programs since last May, Portugal is “even deeper in the hole. The austerity has only increased its debt, as it has spread more suffering.” The editorial goes on to point out that the euro countries have also been hindered by their unified currency system. This system currently makes it difficult for member governments to see to it that there is a market for their bonds and other securities—namely, their central banks. Taking exception to Republican fears of a “Greek-type collapse,” the Nation emphasizes that the “sovereign currency” possessed by the American government has always allowed it to avoid difficulties making payments on its debt. (A web version of the editorial is here. A similar Washington Post opinion piece is posted here.) Compare this with the current financial problems experienced by many state and local governments, as documented by recent articles in the New York Times (“Deficits Push New York Cities and Counties to Desperation”) and the Wall Street Journal (“States Keep Axes Sharpened”). Many things can go wrong in an economy, even one with a smoothly running monetary system.  But the Nation’s argument remains crucial for the U.S.—first, that… Read More

C J Polychroniou explains how the latest pair of efforts aimed at addressing the Greek crisis, the newest bailout package and the bond swap, create tremendous complications down the road even if they may offer a temporary respite.  As you know, the bailout money was shackled to a series of grim austerity measures that will push the already struggling nation further under water.  But his analysis of the bond swap is even more intriguing. One way of getting at the political challenge in the eurozone is to note that many powerful economic solutions involve, not to put too fine a point on it, reinvesting resources from countries like Germany into countries like Greece.  This is something that happens all the time within units that understand themselves as nations (or aspire to such an understanding.  As Dimitri Papadimitriou and Randall Wray point out, after reunification Germany invested resources in the former East Germany in much the same way).  But the question of whether revenues from New York are being shoveled into Mississippi rarely becomes a live issue.  Within the eurozone, however, these distributional questions are fraught with political peril; dooming a whole host of solid policy solutions.  And Polychroniou suggests that the restructuring of roughly 200 billion euros in private debt that just took place may have actually made these political… Read More

Although recent employment numbers seem to have set off a fresh round of complacency, the December Strategic Analysis from the Levy Institute makes it pretty clear that more fiscal stimulus is necessary if the economy is going to reach decent levels of growth and employment anytime soon. However, there’s very little reason to think that anything substantial is forthcoming on the stimulus front, as the US slides slowly into austerity.  And the biggest obstacle is congressional opposition.  Short of an historic wave election, substantial new stimulus just isn’t likely (although when it comes to increasing government spending to counteract a recession, Congress appears to be much more accommodating when there’s a Republican in the Oval Office).  But short of these once-in-generation electoral outcomes, there’s another possibility:  business groups could come around to the realization that they might benefit from an increase in aggregate demand and start seriously pushing their clients in Congress to pass something. An article in Bloomberg points out that just such a push occurred in the 1940s, as a coalition of business interests, concerned about what would happen to demand as war spending wound down, pushed for fiscal stimulus (interesting side note:  Fed Chairman Marriner Eccles is featured in the article as someone whose Depression-era experience in the private sector led him to conclude that government stimulus… Read More