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Japan is the champion nation in terms of budget deficits and government debt relative to GDP. Many have long argued (wrongly) that this is because holders happen to have addresses in Japan. Nonsense. A sovereign government that issues its own currency makes interest payments on its debt in exactly the same manner whether the holder has an address at the South Pole or on Mars: a keystroke to a savings deposit at the central bank. What matters is whether the country issues its own currency. That is why the little spat between the UK and France—with France insisting that credit agencies ought to down-grade the UK before they downgrade France—is so silly. France can have a debt ratio under 15% of GDP and still be forced to default. The UK can have a debt ratio above Japan’s 200% and still face no chance of involuntary default. That is the beauty and utility of issuing your own currency. France is a currency user and its fate depends on Germany—which is busy sucking up every spare Euro it can lay its greedy hands on. France is no better off than the panhandler on the street corner begging for pocket change—a user of currency, not an issuer. Read the rest here.

The Levy Institute, with underwriting from the Labour Institute of the Greek General Confederation of Workers, has helped design and implement a program of direct job creation throughout Greece. Two-year projects, financed using European Structural Funds, have already begun. This report by Senior Scholar Rania Antonopoulos, President Dimitri B. Papadimitriou, and Research Analyst Taun Toay traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. Overall, the report aims to aid policymakers and planners in channeling program resources to the most deserving regions, households, and persons; and in devising data collection methodologies that will facilitate accurate and useful monitoring and evaluation systems for a targeted employment creation program. On its own, the report provides an excellent in-depth portrayal of the evolution of the Greek economy since joining the euro and traces some of the harrowing challenges ahead—particularly in youth employment (the youth labor force participation rate is 20 percent below the OECD average—what’s happening in Greece will truly mark an entire generation). For those interested in the policy side, the report also provides a solid introduction to the conceptual justification behind a direct job creation program along the lines of Hyman Minsky’s “employer of last resort” idea (beginning on p.33 of the… Read More

Philip Arestis and Malcolm Sawyer have a guest post at Triple Crisis that critiques the latest proposal for a new fiscal compact in the EU (essentially an SGP with more automatic sanctions for those who surpass the 3 percent of GDP budget deficit limit and the annual structural deficit limit of 0.5 percent of GDP).  Arestis and Malcom note the asymmetrical restrictions of the compact (there are limits on deficits, but not surpluses) and demonstrate that the deficit limits are entirely too stringent: The ‘fiscal compact’ assumes that an upper limit of 3 per cent of GDP is consistent with a near balanced structural budget despite the swings in economic activity and associated swings in budget deficits as the automatic stabilisers take effect. As a rule of thumb a 1 per cent fall in GDP below trend leads to around a 0.7 per cent rise in the budget deficit – hence a more than 3 per cent drop in GDP before trend with a structural deficit of 0.5 per cent would lead to a country breaching the limit. Note that this is a drop in GDP below trend – and could come from an actual drop of more like 1 per cent (with a 2 per cent trend growth rate).

BARD COLLEGE TO LAUNCH INNOVATIVE MBA IN SUSTAINABILITY Now Enrolling Students for Fall 2012 in New York City www.bard.edu/mb ANNANDALE-ON-HUDSON, N.Y. — Responding to a revolution in business strategy and to rising student demand, Bard College announces the creation of a new Master of Business Administration in Sustainability Program. Based in New York City, the new MBA in Sustainability responds to the dramatic surge in demand for training in sustainable business practices being created by green start-up businesses and major corporate efforts, such IBM’s Smarter Planet and General Electric’s Eco-Imagination. The two-year program, which will start in fall 2012, is being developed as a partnership between the Bard Center for Environmental Policy (Bard CEP), which grants M.S. degrees in environmental policy and in climate science and policy, and the Levy Economics Institute of Bard College, a leading nonpartisan economic policy research organization. “Bard is proud to make a substantive contribution to such an important field,” said Bard College President Leon Botstein. The Bard MBA in Sustainability provides a rigorous education in core business principles, as well as sustainable business practices, with a focus throughout on economics, environment, and social equity. Green companies must achieve quality production and performance, efficient operations, sound financial management, deep employee engagement, responsible and effective marketing, creative responses to changing economic conditions, flexible strategies, and continuous innovation…. Read More

J. Andrew Felkerson writes at AlterNet about the study he authored detailing the Federal Reserve’s bailout of financial institutions over the course of the latest crisis.  He explains some of the reasoning behind his study’s methodology, particularly with respect to his use of a cumulative measure of loans and asset purchases (the other two measures he uses involve the peak amount outstanding at a moment in time and peak weekly amounts): Perhaps the largest difference in our analysis is that we learned our money and banking theory from the late Hyman Minsky. He taught us that the modern economy is essentially financial, and as such, is prone to systemic financial crises that if left unchecked can lead to “bone crunching depressions.” Therefore it is essential to have a LOLR. Thus, any transaction between the Fed and the markets which is not part of conventional monetary operations, such as lending from the discount window or open market operations, represents an instance in which private markets were not able to or were unwilling to engage in the normal financial intermediation process. If it any point in time the private markets were capable (or willing) to carry out business as usual, Fed intervention would not have been required. Thus, we need to account for each extraordinary event, and the best way that we… Read More

Randall Wray has a new one-pager following up on the release of a report detailing and tallying up the Federal Reserve’s extraordinary efforts to prop up the banking system—a report with the rather eye-catching headline number of $29.6 trillion.  The Levy Institute working paper, the first in a series, is part of a Ford Foundation-supported project undertaken by James Felkerson and Nicola Matthews under Wray’s direction. In the one-pager, Wray explains the methodology and justification behind the report’s presentation of the raw data that was released (after some persuasion) by the Fed.  As an example, he runs through the numbers for just one facility, the Primary Dealer Credit Facility (PDCF) created in March 2008, and explains the three different measures compiled by the report.  First, they present the peak outstanding commitment (loans and asset purchases) at a point in time ($150 billion); then the peak flow of commitments over a week ($700 billion); and finally, the cumulative total over the life of the facility ($9 trillion).  Again, this is all for one facility (PDCF). What’s the point of all these numbers?  Wray explains: Take your pick: the appropriate number chosen depends on the question asked. The smallest number answers the question, What was the Fed’s peak exposure to losses (assuming the Fed would let the institutions fail without extending even… Read More

It’s difficult to know where to begin with this post from Casey Mulligan (the comments are definitely worth reading). He starts off by implying that those who might want to characterize the recession as involving “a lack of hiring” are simply misled by the nature of aggregate data on hiring and separations. He goes on to say this is due to the fact that turnover rates (and therefore hiring and separations) for younger people are higher throughout the business cycle than for older workers. He links to this 2010 Brookings paper by Michael Elsby, Bart Hobijn and Aysegul Sahin. Unfortunately for Mulligan’s point, the authors have this to say: Measures of unemployment flows for different labor force groups yield an important message on the sources of the disparate trends in unemployment across those groups: higher levels and greater cyclical sensitivity of joblessness among young, low-skilled, and minority workers, both in this and in previous downturns, are driven predominantly by differences in rates of entry into unemployment between these groups and others. In sharp contrast, a striking feature of unemployment exit rates is a remarkable uniformity in their cyclical behavior across labor force groups—the declines in outflow rates during this and prior recessions are truly an aggregate phenomenon.[p.3] While Mulligan states, correctly, that “[e]stimated job separations among employees ages 25-54 were… Read More

(cross posted at New Economic Perspectives) As I reported here and over at Great Leap Forward, a new study by two UMKC PhD students, Nicola Matthews and James Felkerson, provides the most comprehensive examination yet of the Fed’s bailout of Wall Street. They found that the true total cumulative amount lent and spent on asset purchases was $29 trillion. That is $29,000,000,000,000. Lots of zeros. The number is quite a bit bigger than previous estimates. You can read the first of what will be a series of reports on their study here. I want to be clear that this is a cumulative total—and for reasons I will discuss in this post it is the best measure if we want to understand the monumental Fed effort to restore Wall Street to its pre-crisis 2007 glory. It is certain that no government anywhere, ever, has committed so much to benefit so few. Wall Street owes the Fed a big fat wet kiss. That’s a kiss Chairman Bernanke apparently does not want. Last week he extended the Fed’s veil of secrecy over its bail-out of Wall Street by trying to counter a recent Bloomberg analysis of the extent of the Fed’s largess with a fog of deceit. Apparently the Chairman forgot the lesson we learned from Watergate: the cover-up is always worse than… Read More

Micah Hauptman of Public Citizen has drawn from the work of the Levy Institute’s Marshall Auerback and Randall Wray to put together a concise piece that lays out five core critiques of credit default swaps.  Among the basic problems he highlights is a flaw-riddled process for determining when a CDS pays off: … there are no bright lines to determine when a CDS payment is triggered. The system for determining when payments should occur is murky, unregulated, and replete with conflicts of interest. For speculators to cash in on their bets and receive CDS payments, there must be a “credit event.” Failure to pay when due is the most common credit event, however a “credit event” can also occur through bankruptcy, a change in interest rate, a change in principal amount, or postponement of interest or principal payment date. But even within these occurrences, there is considerable legal debate over what constitutes an “event.” Consider the current financial crisis in Greece. The country has experienced distress due to mounting government debt. European officials recently reached a tentative restructuring agreement. Under the agreement, Greece will undergo a strict austerity plan to regain solvency and Greece’s creditors will receive a reduction in their interests. Whether this restructuring agreement constitutes a “credit event” will likely be contested. Decisions like this as to whether… Read More

In our latest Strategic Analysis we estimate that a cut in the general government deficit in the United States would have strong adverse effects on unemployment and a relatively smaller impact on the U.S. public debt-to-GDP ratio, since GDP would slow down with a cut in government expenditures and transfers. A similar strategy of deficit reduction seems to be on the agenda for many eurozone countries; notably Italy, where a new government was recently put in charge to implement unpopular tax increases that the Berlusconi government was not willing to adopt. A comparison of our simulation for the U.S. with the European Commission’s for the eurozone may therefore be interesting. First of all, the United States is now (third quarter of 2011) back to the pre-recession level of output, as measured by real GDP. Using this figure we could say that the recession is behind us, and we can plan for the future (although this is far from true if we look at the unemployment rate!). And in our projections we show that an acceleration in aggregate demand is needed if the unemployment rate is going to be reduced (the green line), while policies to cut the government deficit will lead to stagnation (the red line) and an increase in unemployment. Let’s look at a similar chart for Europe, taken… Read More

OK, anytime one criticizes the Fed or Wall Street there will be some push-back by the professionals who serve their masters. (By contrast, Barry Ritholtz understood the argument, see here.)  My original piece on Friday got picked up by a number of blogs and generated a lot of hostile responses. I expect that. It is obvious from their comments that many of them did not bother to read the post very carefully, or, if they did, that they stuck to talking points. And it looks like many of them deal in obfuscations that would make Chairman Bernanke proud. But let us presume they were not hired by the Fed and Goldman and instead assume good intentions. I will have a longish post over at New Economic Perspectives tomorrow that addresses several issues that were not adequately covered in my post on Friday. But here I will deal with the main topic of a number of the comments—which centered around the proper way to measure the Fed’s intervention: stocks or flows. Several commentators presume I cannot tell the difference between stocks and flows. No long-time reader of this blog or of NEP would be confused about this. I know the difference, and indeed have been using Wynne Godley’s stock-flow consistent approach for a very long time. As I said on Friday, we… Read More

Lessons from the bankruptcy of MF Global — the 8th largest in US history Yesterday, CEO Jon Corzine of MF Global appeared before the House Agricultural Committee. The hearing was a reminder that despite well intended legislation, including the Dodd-Frank Act, the speculative behaviors that brought down AIG and Lehman are still considered fair business deals in the financial sector. Recent reports on the financial crisis in Europe confirm that MF Global was not an isolated case. The extent of speculative positions among banks have reached mind-boggling proportions, with OTC derivatives now standing at over $700 trillion (!) and increasing rapidly.  Banks in Europe are currently scrambling for funds as their regular sources of funds are rapidly drying up. Several analysts point to the fragility of the shadow banking system as a key determinant of the ongoing liquidity crisis, where virtually unlimited leverage seems to be the norm rather than the exception. According to a Reuter’s report yesterday, the bankruptcy of MF Global shows how the London OTC market has been used by AIG, Lehman, and now MF Global to accumulate layers and layers of leverage on only a tiny bit of capital. The process of re-hypothecation is behind all of this, with especially lax rules in London permitting, for example, the finance arm of AIG—AIG Financial Products—to run up… Read More