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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

UPDATE:  to read the Working Paper (“$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient”) click here Since the global financial crisis began in 2007, Chairman Bernanke has striven to save Wall Street’s biggest banks while concealing his actions from Congress by a thick veil of secrecy. It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get him to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion. On December 8, Bernanke struck back with a highly misleading and factually incorrect memo countering Bloomberg’s report. Bloomberg has—to my mind—completely vindicated its analysis; see here. Any fair-minded reader would conclude that Bernanke’s memo to Senators Johnson and Shelby and Representatives Bachus and Frank is misleading. One could even conclude that it is not just a veil of secrecy, but rather a fog of deceit that the Fed is trying to throw over Congress. He argues that the sum total of the Fed’s lending was a mere $1.2 trillion, and that it was spread across financial and nonfinancial institutions of all sizes. Further, he asserts… Read More

In his latest installment, C. J. Polychroniou surveys the slow motion collapse of the eurozone and the ongoing fragility of the US economy, and insists that underneath it all lies a deeper crisis.  What we are witnessing, he suggests, is not just the fallout from the latest banking panic or financial crisis, but a set of symptoms linked to a broader economic malaise:  a crisis of advanced global capitalism. Advanced capitalism had been facing severe structural stresses, strains, and deformations for many years prior to the eruption of the financial crisis in 2007, including overproduction, growing trade deficits, lack of job growth, and elevated debt levels. Private debt accumulation in the West, which has spiraled out of control, is largely the outcome of wage stagnation. In the United States, wages have remained stagnant since the mid to late 1970s, leading to a new Gilded Age, with renewed claims about the superiority of Darwinian capitalism. At the same time, the poor and working-class populations have come to be seen as a sort of nuisance in the galaxy the rich occupy, with attacks being launched by the rich on their wages and working conditions and the media often carrying out derogatory campaigns against working-class identity. Read the one-pager here.

Policy coordination and information exchange are critical to resolving the eurozone crisis. With this in mind, the Levy Institute is making selected publications that address aspects of the crisis—including policy briefs, one-pagers, and working papers—available online in Greek translation. A list of our current titles is available at www.levyinstitute.org/greek/, and more will be added weekly.

As Dimitri Papadimitriou has said, the European Central Bank is one of the only institutions that can save the euro project.  The commitment alone to making unlimited purchases of member-state debt might do the trick.  But as we have seen, there is a lot of opposition to the ECB acting as lender of last resort.  Why? Here are a couple more links on this question: Paul De Grauwe (“Why the ECB refuses to be a Lender of Last Resort“):  it may not (just) be dogma holding the ECB back, but a rational (though, to De Grauwe’s mind, unfortunate) calculation.  His analysis suggests the ECB won’t act until the sovereign debt crisis turns into a banking crisis. Noah Millman (“In the Long Run, We’re All German“):  the ECB is engaged in a game of chicken, attempting to secure as much of a commitment to fiscal rectitude and reform as it can before it steps in to stave off a eurozone collapse.  (Recent suggestions of a kind of quid pro quo in which a stronger fiscal pact would lay the groundwork for the ECB stepping up as lender of last resort lends some credence to this theory.  They should also plant doubts for those who think the ECB’s inaction on this front stems merely from good faith concerns about Article 123-type Treaty… Read More

This is one of the questions Marshall Auerback tackles in a piece at Counterpunch.  His answer, as you might expect, is “no.”  He also addresses the concern that the ECB risks an impaired balance sheet if it steps up and plays a larger role in buying member-state debt: … if the ECB bought the bonds then, by definition, the “profligates” do not default. In fact, as the monopoly provider of the euro, the ECB could easily set the rate at which it buys the bonds (say, 4% for Italy) and eventually it would replenish its capital via the profits it would receive from buying the distressed debt (not that the ECB requires capital in an operational sense; as usual with the euro zone, this is a political issue). At some point, Professor Paul de Grauwe is right :  convinced that the ECB was serious about resolving the solvency issue, the markets would begin to buy the bonds again and effectively do the ECB’s heavy lifting for them. The bonds would not be trading at these distressed levels if not for the solvency issue, which the ECB can easily address if it chooses to do so.  But this is a question of political will, not operational “sustainability.” So the grand irony of the day remains this: while there is nothing the… Read More

While the latest figures show the unemployment rate dipping below 9 percent, a lot of this decrease has to do with individuals giving up and leaving the labor force.  As for additional stimulus, Congress is currently negotiating an extension, and possible expansion, of the payroll tax cut.  But Republicans are insisting that it be “paid for,” so it’s not yet clear what effect this would have if passed.  That leaves the Federal Reserve as the only US institution to turn to.  Zero Hedge tries to provide some (small) reason for optimism on this front, suggesting that the composition of the FOMC may become more “dovish” in 2012 when the next group of voting members is rotated in (Fisher, Kocherlakota, Evans, and Prosser out; Pianalto, Lacker, Lockhart, and Williams in).

Michael Hudson has an article appearing in the Frankfurter Allgemeine Zeitung on the history of debt and democracy.  For those who can’t read German, Hudson has produced an abbreviated English version.  An excerpt: The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. Read the English version here.

A great series of videos at INET collecting clips from Robert Johnson’s interview of Steve Keen, who is among those (few) credited with seeing the financial crisis coming.  Hyman Minsky’s work has played a large role in Keen’s own thinking on this.  In this particular clip, Keen talks about the ways in which economists have been taught to assume an unhelpful story about the way in which banks operate and touches on the basic idea of endogenous money. Along similar lines:  this working paper by Randall Wray looks at what banks actually do (and what role the financial sector should ideally play in an economy) in the context of examining Minsky’s later work at the Levy Institute on restructuring the American financial system.  (Policy brief version here). Also, take a look at the last video in which Keen talks about developing a monetary model of capitalism.  For non-economists, this has to be among the more confusing claims to theoretical advancement.  (“Wait … you mean there are economic models that don’t include money?  Wh…”)

Yanis Varoufakis has an interesting exchange with Warren Mosler and Philip Pilkington, responding to their thoughts on the ideal path for a nation intending on breaking away from the euro.  The Mosler-Pilkington “plan” (clearly gunning for the Wolfson Prize) is basically this:  (1) the government in question starts using the new national currency as a means of payment (paying public salaries, etc.); (2) the government announces that tax payments must be made in that currency.  The merit of this approach, they say, is that it is “hands off”: Should the government of a given country announce an exit from the Eurozone and then freeze bank accounts and force conversion there would be chaos. The citizens of the country would run on the banks and desperately try to hold as many euro cash notes as possible in anticipation that they would be more valuable than the new currency. Under the above plan, however, citizens’ bank accounts would be left alone. It would be up to them to convert their euros into the new currency at a floating exchange rate set by the market. They would, of course, have to seek out the currency any time they have to pay taxes and so would sell goods and services denominated in the new currency. This ‘monetises’ the economy in the new currency while… Read More