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“We’ve put this off for too long.  We need debt relief and jobs and until we get these two things, I think recovery is impossible”—Randall Wray, quoted in a Reuters article examining the possibility of negotiating massive consumer debt relief. Although household borrowing has been declining, debt burdens remain sky high: (from the latest Levy Institute Strategic Analysis)

Martin Wolf, in the Financial Times last week, “thinks the unthinkable” and inches toward what sounds distinctly like a Modern Money Theory approach:  “Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.” Wolf goes on to argue that such a policy needn’t be inflationary, insisting on the absence of a necessary and immediate linkage between central bank money and the overall money supply:  “…the policy would be inflationary only if it led to chronic excess demand. So long as the central bank retains the right to call a halt, that need be no serious danger.” To learn more about MMT and its policy implications, this short working paper by Randall Wray is a good place to start.  Wray is also putting together an MMT primer over at New Economic Perspectives. Beyond the particulars of Modern Money Theory, would it be too naive to expect that the latest crises, convulsions, and lingering stagnation would prompt more economists and economic thinkers to move beyond “normal science” and begin, in a more general sense, thinking the unthinkable?

“It may come as a surprise to some, but the original scheme by Charles Ponzi did not make its money by providing seven decades of benefits to retirees before folding up shop and leaving town with a suitcase full of cash,” writes Benjy Sarlin.  In a new One-Pager Greg Hannsgen and Dimitri Papadimitriou display just how loopy it really is to compare Social Security to a Ponzi scheme.  The authors produce a graph tracing the long history of new taxpayers (“investors”), new beneficiaries, and those leaving the program (and this mortal plane); the picture that emerges is not one of a fraudulent money-making venture that is about to sneak out the back door with your savings. But let’s leave Charles Ponzi alone for the moment.  What about the looming shortfall in the program, you ask?  Citing testimony delivered last year by their Levy Institute colleague James Galbraith, the authors suggest that there are reasons to be skeptical of these projections.  To see why, have a look at this critique by Galbraith, Wray, and Mosler of the intergenerational accounting methods used to forecast fiscal doom in programs like Social Security (highlights here). I can tell by that glazed look in your eye that you’re still not convinced.  Alright:  even if the official projections pan out (and there is, as the authors… Read More

“The problem is that we have way too much money chasing way too few good assets. The total amount of financial bets out there is way over $600 trillion around the world. There just aren’t enough good investments to absorb that amount of money. So, what happens is they blow up–one asset after another. Then, those inevitably crash.”  Jumping off from his latest post, Randall Wray was interviewed at Benzinga regarding his arguments about a commodities bubble and the potential for a new crash. Wray suggests in this interview that, in the face of another crisis, Washington may be constrained in its ability to come to the rescue as it did in 2008: The Dodd-Frank legislation makes it very difficult to repeat that performance. I’m not saying that they won’t find a way around the rules, or they won’t find a way to do it again. They might, but it’s going to be very politically unpopular. I’m not sure they are going to be able to do it again. Once prices start tumbling, all of the asset markets are actually linked. Even though it’s not obvious, they really are. It will tumble across all of them. And it’s not clear that we will be able to stop it this time. At least, not as easily as last time.

Michael Hudson on the ECB and eurozone national central banks’ restricted abilities to purchase government debt: Their banks have perpetuated the “road to serfdom” myth that a central bank runs the danger of fueling inflation if it creates money – in contrast to commercial banks, which supposedly run no such danger if they create money on their own computer keyboards. It is not considered inflationary for them to charge interest to the government, which then needs to pay by taxing the economy at large. When you find this kind of distortion being popularized and even written into law, there always is a special interest at work. The supposed contrast between “bad” central banks and “good” commercial banks is a lobbying effort seeking to monopolize credit creation in the hands of commercial banks, by promoting a travesty of how central banks are supposed to act. The reality is that commercial banks have fueled an enormous asset-price inflation in recent years. The debt they have created imposes an interest burden that deflates the economy – even while adding to the cost of living and doing business. Meanwhile, central banks monetize government deficits that are supposed to spur recovery, not simply be giveaways to financial institutions and other vested interests. … Whether a bank is private or public, money and credit are created… Read More

(Cross posted from EconoMonitor) Greece’s Finance Minister reportedly said that his nation cannot continue to service its debt and hinted that a fifty percent write-down is likely. Greece’s sovereign debt is 350 billion euros—so losses to holders would be 175 billion euros. That would just be the beginning, however. Nouriel Roubini has argued that the crisis will spread from Greece and increase the possibility that both Italy and Spain could be forced out unless European leaders greatly increase the funds available for bail-outs. The Sunday Telegraph has suggested that as much as 1.75 trillion sterling could be required. To put that in perspective, the US bailout of its financial system after 2008 came to $29 trillion. The 1.75 trillion figure will almost certainly prove to be wishful thinking if sovereign debt goes bad, because that will make the US subprime crisis look like a nursery school dispute. All the major European banks will go down—and so will the $3 trillion US money market mutual funds. (That probably explains why the US has suddenly taken a keen interest in Euroland, with the Fed ramping up lending to what Americans had formerly seen as “Eurotrash” financial institutions.) It is becoming increasingly clear that authorities are merely trying to buy time to figure out how they can save the core French and German… Read More

According to Alan Blinder, writing in the Wall Street Journal, the Fed’s latest operation includes a detail (“the sleeper in the package”) that is aimed at boosting the housing market: For more than a year now, the Fed has been allowing its portfolio of agency debt (e.g., Fannie Mae and Freddie Mac) and mortgage-backed securities (MBS) to shrink naturally as mortgages are paid off and securities mature. To maintain the size of its balance sheet, the Fed has been reinvesting the proceeds in Treasurys. But starting “now” (the Fed’s word), and continuing indefinitely, those proceeds will be reinvested in agency bonds and MBS instead. The objective here is exactly what it was for the first round of quantitative easing, QE1: to reduce spreads between MBS and Treasurys (which had widened a bit), and thereby to help the ailing housing market.

Rania Antonopoulos, director of the Gender Equality and the Economy program at the Levy Institute, has a blog post up at Direct Care Alliance making the case for adding social care investments to the American Jobs Act, citing the large employment effects of direct job creation programs in early childhood education and long-term care for the elderly and chronically ill. A version of this idea showed up on the DC legislative radar recently, in the form of a jobs bill that includes a “Health Corps” and “Child Care Corps” among its provisions for direct job creation (see items 5 and 7).

Money quote from a recent Forbes article:  “with the right parenting [psychopaths] can become successful stockbrokers instead of serial killers.” Also, a reminder that when we talk about how “the markets” are reacting to this or that, we’re talking about this guy: (hat tip to Thorvald Grung Moe, our visiting Norwegian central banker)

In the case of a major reform like the Dodd-Frank Act, the attention spans of most journalists and opinion-mongers inevitably peak around the legislative battle, pronouncements are made in the aftermath, and then everyone moves on.  But as articles like this remind us, so much of the action still remains to be played out, in the nitty-gritty of the rule-making process.  To wit, a draft proposal that fleshes out the “Volcker rule” prohibitions on proprietary trading was recently released.  The rule was intended to restrict banks’ ability to make bets with their own capital, but the draft language in question suggests those restrictions could end up being fairly weak (due in part to a broader interpretation of the sort of “hedging” that will be deemed permissible). This is just the beginning of the beginning for Dodd-Frank.  Looking beyond these initial rule-writing stages, there is the further question of how the law and its provisions will hold up over time.  Rules are only as good as the regulatory and enforcement structures that shape and govern them.  That’s not much of a catchy slogan (worst-selling bumper sticker of all time?), but it contains some critical truth. Jan Kregel (recently elected to the Lincean Academy) highlighted these dynamics in his investigation of the origins and eventual erosion of Glass-Steagall, the New Deal-era legislation… Read More

It’s a time-honored tradition, and something of a mug’s game, to pick quotations from Adam Smith that clash with contemporary free market doctrine.  But uses and misuses of Smith aside, this one happens to hit the conceptual nail on the head.  Jared Bernstein, who is evidently working on a longer piece on debt, pulls this quotation from Adam Smith on the regulation of financial institutions: Such regulations may, no doubt, be considered as in some respects a violation of natural liberty.  But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society are, and ought to be, restrained by the laws of all governments…[T]he obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

“A rollicking saga that involves all sorts of things not normally associated with think tanks – chickens, pirate radio, retired colonels, Jean Paul Sartre, Screaming Lord Sutch, and at its heart is a dramatic and brutal killing committed by one of the very men who helped bring about the resurgence of the free market in Britain.”  Over at the BBC, Adam Curtis provides an entertaining mini-history of think tanks in the UK — the “dealer in second-hand ideas,” as Hayek allegedly described them. Featuring this fantastic image of an early pamphlet (easily the best title ever for a political pamphlet, or anything else for that matter): (hat tip INET)