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Your Minsky quotation of the day: The rise in bank share prices that follows a growth in profitability is particularly important in a world of professionally managed institutionalized banks.  The typical professional bank president is not a rich man when he starts his career.  As a bank president he is a hired hand trying to achieve a personal fortune.  But given the tax structure, it is difficult to accumulate a fortune by saving out of income; the most efficient route for a business executive is by way of stock options and the capital gains that accrue as the stock market price per share rises.  As holders of stock options, bank management is interested in the price, on the exchanges, of their bank’s shares. The price of any stock is related to the earnings per share, the capitalization rate on earnings of the bank’s perceived risk class, and the expected rate of growth of such earnings.  If bank management can accelerate the growth rate of earnings by increasing leverage without a decrease in the perceived security and safety of the bank’s earnings, then the price of shares will rise because both earnings and the capitalization rate on earnings that reflects growth expectations rise.  In a capitalist society with institutionalized organizations and tax laws such as ours, fortune-seeking by the mangers of… Read More

C. J. Polychroniou surveys the distressing results, in terms of unemployment (and particularly youth unemployment), of the “neo-Hooverism” and obsession with price stability that permeate European Union policymaking and explains that a fundamental change in approach is needed: Europe is in dire need of an economic and political revolution. It needs an immediate return to Keynesian measures and a new institutional architecture for the eurozone. It needs to move toward a United States of Europe. If such steps are not taken, Europe’s economies and societies could very well end up in a situation similar to that of the United States in the 1930s. Read Polychroniou’s one-pager here.

Yanis Varoufakis, former adviser to the Greek Prime Miniser and co-author of “A Modest Proposal,” delivers this special report for Channel 4 News on the situation in Greece: (credit to Naked Keynesianism) A quick comparison of working hours for supposed Greek “grasshoppers” and German “ants,” or of the generousness of their governments’ respective social welfare expenditures, should help dispel the tiresome insect talk. Update:  There is a good interview of Varoufakis posted today at Naked Capitalism that opens with a discussion of “the essence of the economists’ inherent error”:

Perhaps we’re back to our old ways. For many moons, the household savings rate has again been falling, though it is still above the levels reached in the years leading up to the home loan crisis of 2007–2009. There are even some signs of a resurgence of the mortgage-backed securities industry. Could the economy be riding a merry-go-round familiar to students of economic history, as concerns about financial fragility, risky borrowing, and small nest eggs ebb and flow with the headlines of the day? There is an economic term for this type of historical pattern that has not been prominent in recent debates. In loose terms, an epistemic cycle is an economic cycle of learning, knowing about, or understanding certain issues or facts; for example, the dangers of reckless consumer borrowing. The late Hyman Minsky of our Institute wrote authoritatively about the tendency of financial risk-taking to build up over time in the years following a crisis, as people gradually let their guard down after a fight to save the financial system. Eventually such trends would bring on a crisis and a subsequent return to more cautious behavior, especially on the part of banks and regulators. This leads to the question of whether policymakers can reduce the danger that risky levels and types of borrowing will return over the coming… Read More

(cross posted at EconoMonitor) Guess which US bank holds assets equal to a fifth of US GDP. Now guess what percent of its assets have extremely long maturities, greater than ten years: a) 10%; b) 20%; c) 30%; d) 40%; e) 50%. Answer: The Fed, and e) 50% of its assets have ten years or more to maturity. Recap. The global financial crisis (GFC) began about four years ago. The Fed pulled out all the stops to save the biggest banks. As I discussed previously the Fed engaged in “deal-making” designed to protect creditors of failing banks, and used Section 13(3) to create Special Purpose Vehicles that engaged in legally questionable lending and asset purchases to save banks and shadow banks. Four years later, the Fed’s balance sheet is still humongous and it is even increasing its interventions in recent weeks through loans to foreign central banks. A recent speech by Herve Hannoun at the Bank for International Settlements, “Monetary policy in the crisis: testing the limits of monetary policy” (link below) shows that ramping up the role for central banks has taken place all over the world. Indeed, in emerging market economies, the central banks have assets equal to 40% of GDP. In large part that is due to accumulation of foreign currency reserves among countries like China and… Read More

Everyone from Amity Shlaes to Mitt Romney and the European Commission has been telling us lately that slashing government spending under current economic conditions will depress growth.  On “Cross Talk” Dimitri Papadimitriou debates the merits (or lack thereof) of austerity and explains why the United States of Europe needs to become more like the United States of America: At the end of the last exchange, when Fragkiskos Filippaios asks, with respect to the idea of a common fiscal policy for Europe, “who’s going to be responsible for that?” you can hear Papadimitriou’s reply:  the European Parliament.  For more on his views about how to complete the incomplete Union in Europe, see Papadimitriou’s latest policy brief, “Fiddling in Euroland.”

Matías Vernengo does a quick review of “Getting Up to Speed on the Financial Crisis,” which is a survey of work on the global financial crisis that will be published in the Journal of Economic Literature.  “Getting Up to Speed” is intended as a “one-weekend-reader’s guide” to the crisis.  It offers, says Vernengo, a fine selection of the relevant orthodox literature on the financial crisis.  The problem is that that such a selection only gets you so far in understanding the crisis and its roots: The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession. Vernengo points to a number of heterodox contributions that provide more comprehensive accounts of the dynamics underlying the crisis, including Wynne Godley’s (1999) “Seven Unsustainable Processes” (if you haven’t read this Godley piece, it’s worth your time).  Read Vernengo here at Triple Crisis. Also take a look at Gerald Epstein’s follow-up, in which he quotes the rather revelatory first… Read More

The Financial Times got its hands on a confidential “debt sustainability analysis” that was circulated among eurozone finance ministers.  The gist of the analysis is that the austerity measures being imposed on the Greek population will depress growth so brutally that the government will almost certainly not meet its debt reduction targets: …even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out. It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors. In other words, the latest rescue plan for Greece could be classified (if one were feeling deeply generous) under the category of “buying time.”  But buying time for what exactly? In this policy brief, Dimitri Papadimitriou and Randall Wray tell us that the eurozone must ultimately move in one of two directions:  either toward a coordinated breakup or toward the development of some real fiscal and monetary policy capacities, which means having the European Central Bank step up as… Read More

Dylan Matthews had a piece on Modern Monetary Theory in the Washington Post yesterday that featured Levy Institute scholars James Galbraith and Randall Wray.  WaPo also put together a “family tree” that displays some Post Keynesian and New Keynesian lineages. The piece has been bouncing around the internet, first with some supportive comments by Jared Bernstein (he critiques the political viability of being able to control inflation through tax increases and insists on the long-term challenge we face due to rising health care costs).  Both Dean Baker and Kevin Drum ask what’s so special about MMT, with Drum suggesting a focus on views about inflation.  According to Drum, this is the central question: So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. If that’s the right estimate, then you could argue that we’ve been doing OK for the past few decades. But if full employment is really more consistent with an unemployment rate of 4%, then we’ve been wasting an awful lot of productive capacity for nothing. … Of course, you… Read More

It has been recognized for well over a century that the central bank must intervene as “lender of last resort” in a crisis. In the 1870s Walter Bagehot explained this as a policy of stopping a run on banks by lending without limit, against good collateral, at a penalty interest rate. This would allow the banks to cover withdrawals so the run would stop. Once deposit insurance was added to the assurance of emergency lending, runs on demand deposits virtually disappeared. However, banks have increasingly financed their positions in assets by issuing a combination of uninsured deposits plus very short-term nondeposit liabilities (such as commercial paper). Hence, the GFC actually began as a run on these nondeposit liabilities, which were largely held by other financial institutions. And here is where the issue gets complicated. As I argued in a previous blog post, banks and other institutions relied largely on “rolling over” short-term liabilities (often, overnight). But when reports about the quality of bank assets began to surface as subprime mortgage delinquencies rose, financial institutions began to worry about the solvency of the issuers of the liabilities. As markets came to recognize what had been going on in the securitization market for the past half-decade, “liquidity” dried up—no one wanted to hold uninsured liabilities of financial institutions. In truth, it was… Read More

The people at Bloomberg appear to have made a curious error on their website yesterday.  They have attributed an op-ed to Amity Shlaes that was almost certainly not written by her.  You see, Amity Shlaes is a well-known skeptic of Keynes and all things Keynesian, having written the bible for those who like to claim that the New Deal made the Great Depression worse.  (For a nice takedown of such claims, as well as Shlaes’ contributions in particular, see this Levy Institute policy brief.) The Bloomberg op-ed in question contends that the Obama administration’s intention to withdraw militarily from Afghanistan and other places will devastate those countries’ economies.  This is because, according to the op-ed, establishing US military bases in foreign countries boosts economic growth there. The real Amity Shlaes would have carefully instructed us that such public interventions not only cannot increase economic growth (even in the context of a downturn) but will actually decrease it (the New Deal, you see, is what made the regular ol’ Depression “Great”). Now if this was written by Amity Shlaes, it is a peculiar way of announcing her conversion.  But let’s not quibble over ceremony.  If it is indeed Shlaes, let’s follow her lead.  In order to boost the growth rate in a time of economic malaise here at home, we should… Read More

If it controlled its own currency, the usual thing for a country like Greece to do in these circumstances would be to devalue.  Since it doesn’t control its own currency, Greece is being “asked” to pull off an internal devaluation, or as C. J. Polychroniou puts it: Essentially, what they agreed to are additional measures that are specifically designed to reduce the standard of living for the majority of the working population as a means of improving the nation’s competitiveness. Aside from firing civil servants, the new memoranda are all about major private sector wage cuts and an overhaul of labor rights. This is from Polychroniou’s newest one-pager, “The New European Economic Dogma,” released yesterday.  Polychroniou takes on what he regards as the flawed ideology behind the policies that are being dumped on the Greek people; policies motivated by an ambiguous and, says Polychroniou, toxic conception of “competitiveness.” Read the one-pager here.