The European Commission is planning a "paradigm shift" in its approach to the derivatives market, moving towards strict regulation of a sector which has been blamed for worsening the financial and economic crises, according to a draft document seen by EurActiv. "The Commission believes that a paradigm shift must take place away from the traditional view that derivatives are financial instruments for professional use, for which light-handed regulation was thought sufficient," reads a draft communicationword on derivatives to be published this week. According to the document, future regulation in the sector must lead "towards an approach where legislation allows markets to price risks properly". A number of legislative measures will be proposed in the course of 2010, it adds.
"The Commission believes that a paradigm shift must take place away from the traditional view that derivatives are financial instruments for professional use, for which light-handed regulation was thought sufficient," reads a draft communicationword on derivatives to be published this week.
According to the document, future regulation in the sector must lead "towards an approach where legislation allows markets to price risks properly". A number of legislative measures will be proposed in the course of 2010, it adds.
...A number of legislative measures will be proposed in the course of 2010, it adds.
Might as well wait until 2011 or '12, since there may be a self-correcting aspect to derivatives and derivatives of derivatives and derivatives of derivatives of derivatives.
Smart people have been pointing out the terrorist nature of these devices for several years. The collapse of the market that they caused which required massive use of the credit of the commons started 2 years ago. Why are they waiting?
...future regulation in the sector must lead "towards an approach where legislation allows markets to price risks properly".
But there is the rub. That is the whole basis of the stock market. Somebody thinks that the value of some share is too high and someone thinks it is too low.
In typical human fashion, they are attacking the wrong target. The market CAN price the risks properly, just not on a moment by moment basis. There were two or three rating agencies who supposedly allowed the risk to be properly assessed. Are they going to set up another? Perhaps a Financial Dictator who isn't connected to terrorist organizations.
But one would think that someone could pick up that hammer from within the EU establishment already. Surely there are anti-fraud, anti-rackets, anti-terrorism divisions already. . . and not have to wait until 2011 to get started. Never underestimate their intelligence, always underestimate their knowledge.
Frank Delaney ~ Ireland
The investigation into public bank BayernLB highlights the problems the German justice system faces in tackling the shortcomings that led to the financial crisis. Investigators are overwhelmed, and managers and supervisors have formed a wall of silence. It was shortly after 8.30 a.m. last Wednesday when the employees of Bayerische Landesbank (BayernLB), a publicly-owned German regional bank, received an unexpected visit. Many had just poured their first cup of coffee when about 50 police officers and prosecutors marched into the bank's legal department, where they presented a search warrant issued by the Munich district court. Then they proceeded to the executive suite on the sixth floor, where CEO Michael Kemmer has his office. At the same time, authorities were searching offices and private residences in Austria, Luxembourg and at Ammersee Lake near Munich, where Kemmer's predecessor Werner Schmidt has been living since he was forced to resign.
It was shortly after 8.30 a.m. last Wednesday when the employees of Bayerische Landesbank (BayernLB), a publicly-owned German regional bank, received an unexpected visit. Many had just poured their first cup of coffee when about 50 police officers and prosecutors marched into the bank's legal department, where they presented a search warrant issued by the Munich district court. Then they proceeded to the executive suite on the sixth floor, where CEO Michael Kemmer has his office.
At the same time, authorities were searching offices and private residences in Austria, Luxembourg and at Ammersee Lake near Munich, where Kemmer's predecessor Werner Schmidt has been living since he was forced to resign.
Odds are that more than one person in every bank and trading house felt guilty that their associates were playing some game that was Beyond the Pale of their corporate charter and common sense. Let's treat these people as other criminals who steal from old ladies and children are treated.
Stonewalling. Come on. I watch TV. Someone spends a day or two in the slammer, some clever detectives getting the DNA from their coffee cups, everybody's story cross checked, promises made that the first one who breaks gets off, the 2nd gets double time...they'll be squealing in no time. Never underestimate their intelligence, always underestimate their knowledge.
Government borrowing has leapt to new highs, with economists predicting that the Chancellor will have to raise his projections for public debt in the forthcoming Pre-Budget Report. Figures from the Office for National Statistics show that national debt is now equivalent to 59% of the UK's gross domestic product after borrowing grew by £14.8bn in September, compared with £8.7bn for the same month a year ago. Total net public borrowing now stands at a record £824.8bn, up from £695.2bn (48.4% of GDP) a year earlier.
Figures from the Office for National Statistics show that national debt is now equivalent to 59% of the UK's gross domestic product after borrowing grew by £14.8bn in September, compared with £8.7bn for the same month a year ago.
Total net public borrowing now stands at a record £824.8bn, up from £695.2bn (48.4% of GDP) a year earlier.
WASHINGTON (Reuters) - The rising cost of oil could damage the world economy just as it begins to rebound, U.S. Energy Secretary Steven Chu said on Tuesday. Wide swings in oil prices are difficult for industries to manage and the U.S. government is concerned about another price spike, Chu said. "Even $80 is making me nervous," he told the Reuters Washington Summit. Oil prices hit record levels above $147 a barrel last year, before crashing as a global recession cut energy demand. Crude prices are one again climbing. Chu said a sharp upswing in oil prices could hinder a global economic recovery. He pointed out that last year's oil price spike was a "disaster" for the world economy. "We've repeatedly said what the world wants and needs is stable prices," Chu said. "They have been inching up recently and it's a little bit concerning."
WASHINGTON (Reuters) - The rising cost of oil could damage the world economy just as it begins to rebound, U.S. Energy Secretary Steven Chu said on Tuesday.
Wide swings in oil prices are difficult for industries to manage and the U.S. government is concerned about another price spike, Chu said.
"Even $80 is making me nervous," he told the Reuters Washington Summit.
Oil prices hit record levels above $147 a barrel last year, before crashing as a global recession cut energy demand. Crude prices are one again climbing.
Chu said a sharp upswing in oil prices could hinder a global economic recovery. He pointed out that last year's oil price spike was a "disaster" for the world economy.
"We've repeatedly said what the world wants and needs is stable prices," Chu said. "They have been inching up recently and it's a little bit concerning."
European Union governments have agreed to begin winding down their extra programs to boost the economy in 2011, assuming the economy continues to recover next year. The agreement, announced during a meeting of EU finance ministers in Luxembourg on Tuesday, comes amid signs of a slight economic recovery in Europe. EU ministers said in a statement that they are encouraged by "signs of early recovery." Yet they have no plans to pull back on stimulus spending before 2011, as the current economic recovery "remains fragile." "Substantial fiscal consolidation is required in order to halt and eventually reverse the increase in debt and restore sound fiscal positions," the statement said. EU governments have spent billions of euros on public spending to prop up their economies during the financial crisis. The spending has pushed up budget deficits across Europe, with nearly all countries exceeding the EU's budget deficit limit of 3 percent of Gross Domestic Product (GDP).
The agreement, announced during a meeting of EU finance ministers in Luxembourg on Tuesday, comes amid signs of a slight economic recovery in Europe.
EU ministers said in a statement that they are encouraged by "signs of early recovery." Yet they have no plans to pull back on stimulus spending before 2011, as the current economic recovery "remains fragile."
"Substantial fiscal consolidation is required in order to halt and eventually reverse the increase in debt and restore sound fiscal positions," the statement said.
EU governments have spent billions of euros on public spending to prop up their economies during the financial crisis. The spending has pushed up budget deficits across Europe, with nearly all countries exceeding the EU's budget deficit limit of 3 percent of Gross Domestic Product (GDP).
Reforming UK banking through regulation is not enough and a fundamental rethink of how banks are structured is needed, the Bank of England governor has said.Some banks may have to split their core business from riskier practices, so they do not get too big to be allowed to fail, Mervyn King added.
Reforming UK banking through regulation is not enough and a fundamental rethink of how banks are structured is needed, the Bank of England governor has said.
Some banks may have to split their core business from riskier practices, so they do not get too big to be allowed to fail, Mervyn King added.
In a new study for the Cato Institute, Randal O'Toole, a free-market economist, finds himself in presumably rare agreement with the Nobel economist and liberal Times columnist Paul Krugman. In a 2005 column, Krugman wrote that heavily regulated areas of the country -- he called these the "Zoned Zone" -- were "prone to housing bubbles" because "a combination of high population density and land-use restrictions -- hence `zoned' -- makes it hard to build new houses." And indeed, O'Toole finds, Krugman's early diagnosis of the bubble has been borne out: In heavily regulated places like California and Florida, scarcity inflated housing prices, which have since tanked, while prices in less regulated Texas and Georgia "haven't significantly declined."
In a new study for the Cato Institute, Randal O'Toole, a free-market economist, finds himself in presumably rare agreement with the Nobel economist and liberal Times columnist Paul Krugman.
In a 2005 column, Krugman wrote that heavily regulated areas of the country -- he called these the "Zoned Zone" -- were "prone to housing bubbles" because "a combination of high population density and land-use restrictions -- hence `zoned' -- makes it hard to build new houses."
And indeed, O'Toole finds, Krugman's early diagnosis of the bubble has been borne out: In heavily regulated places like California and Florida, scarcity inflated housing prices, which have since tanked, while prices in less regulated Texas and Georgia "haven't significantly declined."
That Hissing Sound | Paul Krugman - New York Times (August 8, 2005)
... In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles. And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble. ...
... In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.
But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.
And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble. ...
In other words, the Zoned Zone is prone to housing bubbles.
If those who have the privilege of living in the Zone, actually pay for the privilege - ie through the use of a location benefit levy or tax on land rental values - then the problem gets solved, because the rental value gets captured for public, not private, benefit. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But there was something else going on: a general belief that bubbles just don't happen. What's striking, when you reread Greenspan's assurances, is that they weren't based on evidence -- they were based on the a priori assertion that there simply can't be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that "the word `bubble' drives me nuts," and went on to explain why we can trust the housing market: "Housing markets are less liquid, but people are very careful when they buy houses. It's typically the biggest investment they're going to make, so they look around very carefully and they compare prices. The bidding process is very detailed."Indeed, home buyers generally do carefully compare prices -- that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It's ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.
But there was something else going on: a general belief that bubbles just don't happen. What's striking, when you reread Greenspan's assurances, is that they weren't based on evidence -- they were based on the a priori assertion that there simply can't be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that "the word `bubble' drives me nuts," and went on to explain why we can trust the housing market: "Housing markets are less liquid, but people are very careful when they buy houses. It's typically the biggest investment they're going to make, so they look around very carefully and they compare prices. The bidding process is very detailed."
Indeed, home buyers generally do carefully compare prices -- that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It's ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.
We were tickled to find that the work's introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble. Writes Greenspan: "There is no perpetual motion machine which generates an ever-rising path for the prices of homes." Greenspan, however, didn't foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system.
Greenspan, however, didn't foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system.
California's attorney general, Jerry Brown, said Tuesday that he was suing State Street, the large Boston-based bank, accusing it of committing "unconscionable fraud" against the state's two largest employee pension funds, Calpers and Calstrs. Mr. Brown said he was seeing to recover more than $200 million in overcharges and penalties. Mr. Brown said that State Street overcharged the pension funds by adding a secret and substantial mark-up to the price of interbank foreign currency trades, totaling $56.6 million over eight years. The interbank rate is the price at which major banks buy and sell foreign currency. "Over a period of eight years, State Street bankers committed unconscionable fraud by misappropriating millions of dollars that rightfully belonged to California's public pension funds," Mr. Brown said in a statement. "This is just the latest example of how clever financial traders violate laws and rip off the public trust." State Street rejected Mr. Brown's assertions. "We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation," a bank spokeswoman, Carolyn Cichon, said in an e-mail statement. Mr. Brown contended that although the bank was contractually obligated to charge the interbank rate to the pension funds at the precise time of the trade, State Street consistently charged at or near the highest rate of the day, even if the interbank rate was lower at the time of trade.
Mr. Brown said that State Street overcharged the pension funds by adding a secret and substantial mark-up to the price of interbank foreign currency trades, totaling $56.6 million over eight years. The interbank rate is the price at which major banks buy and sell foreign currency.
"Over a period of eight years, State Street bankers committed unconscionable fraud by misappropriating millions of dollars that rightfully belonged to California's public pension funds," Mr. Brown said in a statement. "This is just the latest example of how clever financial traders violate laws and rip off the public trust."
State Street rejected Mr. Brown's assertions. "We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation," a bank spokeswoman, Carolyn Cichon, said in an e-mail statement.
Mr. Brown contended that although the bank was contractually obligated to charge the interbank rate to the pension funds at the precise time of the trade, State Street consistently charged at or near the highest rate of the day, even if the interbank rate was lower at the time of trade.
Zero Hedge has a column with the video and lots of comments. An atypical T&A show for CNBC with Michelle cast as expected, but modestly dressed, and Dennis Kneale cast as the ass, or perhaps he just seized the opportunity and made himself an ass. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
WASHINGTON -- As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression. A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings. .... "The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997....Moody's was spun off from Dun & Bradstreet in 2000, and the first company shares began trading on Oct. 31 that year at $12.57. Executives set out to erase a conservative corporate culture. (Trick or Treat!) .... "This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said. After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
....
"The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997....Moody's was spun off from Dun & Bradstreet in 2000, and the first company shares began trading on Oct. 31 that year at $12.57. Executives set out to erase a conservative corporate culture. (Trick or Treat!)
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.
After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.
Guess the "free market" doesn't always do things better. Who knew? But what about Standard and Poor's and Fitch? A long and informative article. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
The headlines that ran side by side on the front page of Saturday's New York Times summed up, inadvertently, the terrible fix that we've allowed our country to fall into.The lead headline, in the upper right-hand corner, said: "U.S. Deficit Rises to $1.4 Trillion; Biggest Since '45." The headline next to it said: "Bailout Helps Revive Banks, And Bonuses." We've spent the last few decades shoveling money at the rich like there was no tomorrow. We abandoned the poor, put an economic stranglehold on the middle class and all but bankrupted the federal government -- while giving the banks and megacorporations and the rest of the swells at the top of the economic pyramid just about everything they've wanted. And we still don't seem to have learned the proper lessons. We've allowed so many people to fall into the terrible abyss of unemployment that no one -- not the Obama administration, not the labor unions and most certainly no one in the Republican Party -- has a clue about how to put them back to work. Meanwhile, Wall Street is living it up. I'm amazed at how passive the population has remained in the face of this sustained outrage.
The headline next to it said: "Bailout Helps Revive Banks, And Bonuses."
We've spent the last few decades shoveling money at the rich like there was no tomorrow. We abandoned the poor, put an economic stranglehold on the middle class and all but bankrupted the federal government -- while giving the banks and megacorporations and the rest of the swells at the top of the economic pyramid just about everything they've wanted.
And we still don't seem to have learned the proper lessons. We've allowed so many people to fall into the terrible abyss of unemployment that no one -- not the Obama administration, not the labor unions and most certainly no one in the Republican Party -- has a clue about how to put them back to work.
Meanwhile, Wall Street is living it up. I'm amazed at how passive the population has remained in the face of this sustained outrage.
Op-Ed Columnist - Safety Nets for the Rich - NYTimes.com
Enough! Goldman Sachs is thriving while the combined rates of unemployment and underemployment are creeping toward a mind-boggling 20 percent. Two-thirds of all the income gains from the years 2002 to 2007 -- two-thirds! -- went to the top 1 percent of Americans.We cannot continue transferring the nation's wealth to those at the apex of the economic pyramid -- which is what we have been doing for the past three decades or so -- while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day.That money is never going to trickle down. It's a fairy tale. We're crazy to continue believing it.
Enough! Goldman Sachs is thriving while the combined rates of unemployment and underemployment are creeping toward a mind-boggling 20 percent. Two-thirds of all the income gains from the years 2002 to 2007 -- two-thirds! -- went to the top 1 percent of Americans.
We cannot continue transferring the nation's wealth to those at the apex of the economic pyramid -- which is what we have been doing for the past three decades or so -- while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day.
That money is never going to trickle down. It's a fairy tale. We're crazy to continue believing it.
We cannot continue transferring the nation's wealth to those at the apex of the economic pyramid -- which is what we have been doing for the past three decades or so -- while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day. That money is never going to trickle down. It's a fairy tale. We're crazy to continue believing it.
But while legislators are largely drawn, if not from that 1%, then from very close to it, they will continue to believe that "American Dream" crap and thus not do the root and branch thing necessary to help th 95% who are getting stuffed.
After all, the system works. Or, at least, it did for them so why does it need changing ? Heck, you can't even get all democrats to sign up for something basic like healthcare, so how on earth you're gonna get them to do something much much more radical I cannot imagine. keep to the Fen Causeway
One tenet that separates the United States from other countries is our belief in upward mobility. A study of attitudes in 27 countries found that Americans, more than people elsewhere, tend to believe that intelligence, skill, and effort will be rewarded with success. [...] But as Brookings Institution scholars Ron Haskins and Isabel Sawhill demonstrate in a compelling new book, America's record doesn't entirely justify this optimism. [...]Though we venerate the American Dream, studies show that children born to low-income parents in the United States are more likely to remain trapped near the bottom than their counterparts in Europe, the authors report.
One tenet that separates the United States from other countries is our belief in upward mobility. A study of attitudes in 27 countries found that Americans, more than people elsewhere, tend to believe that intelligence, skill, and effort will be rewarded with success.
[...]
But as Brookings Institution scholars Ron Haskins and Isabel Sawhill demonstrate in a compelling new book, America's record doesn't entirely justify this optimism.
Though we venerate the American Dream, studies show that children born to low-income parents in the United States are more likely to remain trapped near the bottom than their counterparts in Europe, the authors report.
What you should draw from this is the following: The Great Moderation is revealed as an illusion once we reach the zero bound, where interest rates are near zero. At this point the asset-price reflation can no longer rely on interest rates alone, but must also use increasingly heavy-handed tactics to get the economy going. This is where we now are. Terminal Debt is fast approaching. Steve Keen believes we are at a Terminal Debt stage, where no more debt can possibly be accumulated to revive growth. However, I have presented you with evidence that this is not necessarily the case (see posts here and here). Nevertheless, it is fast approaching. The central bank is damned if it does and damned if it doesn't. This was the takeaway of the Scylla and Charybdis post: All roads lead to a W-style Japanese depression or a deflationary bust because deflation is secular (Terminal Debt) while inflation is cyclical (asset prices). An inflationary scenario will invite a policy response which kills the recovery. This is good for government bonds but not for risky assets. Longer-term, this is a good environment for government bonds. They are the risk-free asset in an environment of secular deflation. Shares are not a good investment in this situation despite huge rallies. Remember, we saw huge bear market rallies after 1929 and again in Japan after 1990. I believe we are in the reflationary period of a longer-term depression right now. As a result, there is substantial downside risk for the economy going forward. Like Munchau, I don't have any magic bullet solution to this dilemma - although I do have a number of ideas. Feel free to chime in with your thoughts on the way forward.
What you should draw from this is the following:
I believe we are in the reflationary period of a longer-term depression right now. As a result, there is substantial downside risk for the economy going forward. Like Munchau, I don't have any magic bullet solution to this dilemma - although I do have a number of ideas. Feel free to chime in with your thoughts on the way forward.
This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices. While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability. Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector's overall size. So if Minsky is right, instability should continue and get worse.
This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.
While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability. Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.
His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector's overall size. So if Minsky is right, instability should continue and get worse.
Not only were economists blind to Veblen 100 years ago but they forgot about Keynes' "when the capital development of a coutry becomes a byproduct of the activities of a casino the job is likely to be ill-done" within 20 years. But the more egregious blindness is really the one regarding Minsky.
Let's see if I got this right. Minsky, by then already a respectable economist, writes a book about financial instability in 1986. In 1987 the market has the largest one-day crash in history and yet it's only now that people say that his theory has become interesting because of the current crisis?
What about the Savings and Loans crisis, the Mexican currency crisis, the Asian crisis, Russian crisis, Argentina, .com bubble...
WTF is wrong with economists? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues.
Dum-de-dum-de-dum.
Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important - and, unhappily, one of the least understood - rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment. Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action. The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending. - J.K. Galbraith, The Great Crash of 1929
Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important - and, unhappily, one of the least understood - rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment. Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action. The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending.
Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action.
The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending.
- J.K. Galbraith, The Great Crash of 1929
WTF is wrong with economists?
Ahh, I thik you have mistaken the function of economists as being analogous to physicists. If there is a demonstrated problem with physics, physicists go and examine their theories, design hypothesies about why they've gone wrong and then adjust the theories which describe the phenomenon to adjust to reality.
Economists are not that kind of beast.
The best way I can describe it is thus : The Queen of England thinks the world smells of fresh paint. This is because everywhere she goes people ensure that all is clean and freshly painted so that she gets the best impression possible of anything she sees.
Economists perform a similar function as the painters, they are there to adjust reality so that, whichever way a politician or commentator regards the economy, there is always a rosy glow to to the scene. keep to the Fen Causeway
Economists perform a similar function as the painters, they are there to adjust reality so that, whichever way a politician or commentator regards the economy, there is always a rosy glow to to the scene.
(Using the word 'school' to mean 'large group of predatory fish', presumably.)
So if Minsky is right, instability should continue and get worse.
In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.
As Krugman never tires to say, we're in a Keynesian liquidity trap, against the zero lower bound of interest rates, and conventional monetary policy has ceased to have any effect (good or bad). En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
asset-price reflation can no longer rely on interest rates alone, but must also use increasingly heavy-handed tactics to get the economy going
As Geezer says in his diary;-
When the "home equity loan" became the source of funds for consumption, we bailed out. We knew it was over- that the motors were now finally silent, that the system was losing altitude fast, and had to crash very soon.
To us this seems a statement of the bleeding obvious. However this obviousness seems to elude most commentators, politicians and their appointed administrators. keep to the Fen Causeway
The implication is that asset-price inflation is needed to get the economy going. Discuss.
as in say, housing prices going up again, so everyone with a toe-hold in the middle class feels rich enough to be a confident consumer again?
what other assets might be on the table for this?
carbon tax credits for bicyclists?
satyagraha spinning wheels?
can you have 'asset-price inflation' without it bubbling sooner or later, as all the speck-ers smell opportunity, and cluster, jacking and jockeying the asset's reputed value high enough to pay a foodchain of middlemen to suck as much as they can out of it as it attains necessary 'velocity'on its way from raw material to 'end-user'? ~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~
Oddly reminiscent of most of what passes for economics, certainly.
The wheels are spinning, people are earning merit, but nothing much is happening.
