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Mon Dec 9th, 2013 at 11:16:36 AM EST
How to Exit Austerity, Without Exiting the Euro Rob Parenteau New Economic Perspecitves
First of all, if a government stops having its own currency, it doesn't just give up `control over monetary policy'...If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market, in competition with businesses, and this may prove excessively expensive or even impossible, particularly under `conditions of extreme urgency'...The danger then is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.
So wrote the late Wynne Godley in his August 1997 Observer article, "Curried Emu". The design flaws in the euro were, in fact, that evident even before the launch - at least to those economists willing to take the career risk of employing heterodox economic analysis. Wynne's early and prescient diagnosis may have come closest to identifying the ultimate flaw in the design of the eurozone - a near theological conviction that relative price adjustments in unfettered markets are a sufficiently strong force to drive economies back onto full employment growth paths.
Rob Parenteau notes that countries caught in the deflationary vise brought about by the EMU and the associated policies would face a high cost for exiting the Euro and proposes an alternative.
(Corrected name for Syriza leader)
Mon Oct 28th, 2013 at 01:09:51 AM EST
The UK at the heart of a renewed globalisation
Mark Carney, Governor of the Bank of England gave a speech linked above at an event to celebrate the 125th anniversary of the Financial Times, London, 24 October 2013. Perry Mehrling posted that speech and a Bloomberg article (see below) about the Federal Reserve's proposal on his Money and Banking discussion forum, asking for discussion. My response is below:
It seems like both the Fed and the BoE are planing to significantly increase capital reserves well ahead of current Basel III deadlines. This will put pressure on the EMU banks and on European national central banks that have been resisting such increases, as they are far below even the current US and UK reserve requirements. Paris and Berlin will likely complain, with some justification, that they have different systems and should not be held to the same requirements. What will Spain, Greece, Portugal, Italy and Ireland do and how can they comply? The periphery has trouble complying with the current requirements and the ECB is hamstrung by Germany when it comes to helping them and is not a true central bank to begin with. Nor is there a real EMU wide fiscal authority.
Mark Carney of the BoE made by far the most significant and revealing claims. In effect, he proposes to make the BoE the dealer of last resort for banks and market makers operating in the UK, very much like what Perry Mehrling has proposed and described, in this case with unlimited support in British pounds and significant standing swap agreements with other foreign central banks for other major currencies, including soon the Chinese Renminbi. To me the clear implication is that such backstop would be provided to UK domiciled branches of foreign banks, perhaps via the BoE discount window, but it is hard enough to parse Fed statements, let alone BoE statements.
To me the revealing part consisted of the following:
"And in times of actual or prospective stressed conditions we stand ready to provide cheap, plentiful money through more frequent auctions."
"Cheap, plentiful money" seems a large step beyond Bagehot's "Lend freely at a high rate against good collateral." It sounds like in times of stress there will be QE for the world. Of course the current overnight rate from the BoE is 0.5%, so the "cheap" money commitment seems more like forward guidance. To me this indicates that the BoE are still flummoxed at their inability to increase economic activity through the monetary policies available to the central bank, and, of course, they are saddled with the gratuitous 'austerity' program of the current Tory/LibDem Coalition. Given the dependence of the British economy on the financial sector the prospect of the global economy slipping into deflation must surely terrify the BoE, if not George Osborne. David Cameron might not know enough to be terrified.
It will be interesting to see how the proposed policy for resolving failed international banks will develop. That has to be the most difficult part of all. The other shoe to drop will be how the implicit extension of regulation by the BoE to non-Bank market makers unfolds. Will this require action by Parliament and will such action be forthcoming?
Criticisms and additional thoughts are appreciated.
Wed Sep 25th, 2013 at 01:30:20 AM EST
There is great suffering in the peripheral countries of the Euro zone and the existing 'austerity' policies are gratuitously inflicting economic damage and destroying lives, especially in Greece and Cyprus, but also in Portugal, Spain and Ireland. At present, Germany has no motive to change anything and is the chief beneficiary of the existing crisis. This seems likely to continue so long as German workers accept their reduced circumstances and blame them on 'lazy southerners'. Germany is adamant about maintaining a hard money Euro and keeping all debts segregated by nationality while refusing to approve any surplus recycling mechanism within the Eurozone. These positions seem unlikely to change any time soon. Splitting the EMU into two monetary unions could provide a path to a resolution.
Sun Sep 8th, 2013 at 12:15:58 AM EST
This diary was prompted by the ongoing discussion in Chris Cook's Credit, Currency and Other Animals and specifically, by Drew Jones' comment below:
How are the outcomes any different from other fixed currency regimes? You're still fixing the currency to a "commodity" whose value is disconnected from your country's macroeconomic needs in the name of achieving some imaginary "true" value.
We got away from fixed currencies for a reason. The Eurozone is currently engaged in a fine display of why we did so.
The problem is that so few people understand money, banking or 'money and banking'. Early 20th century monetary economists such as Irving Fisher, John Maynard Keynes and Allyn Young clearly understood the problems of the gold standard. The UK only really came out of the Long Depression when large quantities of gold started coming out of South African mines. Then prices started rising again. It was the financial collapse of 1873 which led Walter Bagehot to write Lombard Street
, describing how the banking system of the day worked to assure that cash flows were available to meet cash demands.
Part of the problem we have in understanding the current ongoing crisis is that we have taken our eyes off the money. Another perhaps related part is that we have no generally acknowledged set of rules for managing the money supply of individual currencies, let alone rules for managing a global financial system. Still another part is that this lack of rules is loved by some very wealthy individuals and organizations and they have learned to exploit it to their advantage. This all makes solving this problem more difficult and can render even discussions of the subject fraught.
Thu Jul 11th, 2013 at 02:52:29 AM EST
From the Bubble Economy to Debt Deflation and Privatization Michael Hudson naked capitalism
The Federal Reserve's QE3 has flooded the stock and bond markets with low-interest liquidity that makes it profitable for speculators to borrow cheap and make arbitrage gains buying stocks and bonds yielding higher dividends or interest. In principle, one could borrow at 0.15 percent (one sixth of one percent) and buy up stocks, bonds and real estate throughout the world, collecting the yield differential as arbitrage. Nearly all the $800 billion of QE2 went abroad, mainly to the BRICS for high-yielding bonds (headed by Brazil's 11% and Australia's 5+%), with the currency inflow for this carry trade providing a foreign-exchange bonus as well.
This financial engineering is not your typical bubble. The key to the post-2000 bubble was real estate. It is true that the past year and a half has seen some recovery in property prices for residential and commercial property. But something remarkable has occurred. So in this new debt-strapped low-interest environment, Hedge funds and buyout funds are doing something that has not been seen in nearly a century: They are buying up property for all cash, starting with the inventory of foreclosed properties that banks are selling off at distress prices.
Something else that has not been seen for almost a century is the USA on a gold standard. Under a gold standard it was common for banks to call in loans in bad times and then buy up the assets those loans had financed on the cheap. TPTB have figured out how to accomplish the same thing with fiat currency in the hands of a compliant monetary authority by pretending that we labor under the same constraints as those imposed by a gold standard. So this time we are being crucified on a virtual cross of gold.
Wed May 29th, 2013 at 08:30:12 AM EST
In their paper Fiscal Systems, Organizational Capacity, and Crisis: A Political Balance of Payments Approach Nathaniel Cline and Nathan Cedric Tankus illustrate the power of carefully looking at economic history while illuminating some of the limitations of economic and monetary theory, in this case that of MMT, and clarifying factors that affect the abilities of different societies to create a truly sovereign state.
(Warren) Mosler argues that in the mid 1990s he thought, "the theory of the monetary circuit was correct to the point of being entirely beyond dispute". However, he also argues that the theory "could be further enhanced by starting from the beginning". This beginning for Mosler was of course why the workers accepted the units of a currency as payment for their labor services. His answer (which is quite well known among heterodox economists by now) was that imposed debts denominated in that unit of account, give it's units value; in other words taxes. This is an important part of the story, but we would argue it is in fact not the beginning. The true beginning to the circuit is the question of where people and organizations gain the ability to tax.
Thu May 16th, 2013 at 03:10:20 PM EST
Beta: Universal Basic Income Calculator New Deal 2.0 Mike Konczal
Click here to try a new Universal Basic Income calculator. You can click on which programs you'd like to turn into a UBI, and what taxes you'd be willing to put into motion, and it will tell you how large of a UBI can be supported with those resources. You can also type in your own numbers if you are interested.
[editor's note, by ARGeezer] Inserted blockquotes around first paragraph.
Sun Dec 16th, 2012 at 03:17:30 PM EST
While perusing an INET article on risk, "Choice Under Uncertainty": A Misnomer by Raphaële Chappe, (someone to keep an eye on), I saw another reference to Frank Knight, one of the founders of the Chicago School of economics and his 1921 work on risk. I knew of Knightian uncertainty but decided to find out more about Knight. Wiki to the rescue:
Knight is best known as the author of the book Risk Uncertainty and Profit, (PDF) based on his Ph.D. dissertation at Cornell University. In that book, he carefully distinguished between economic risk and uncertainty. Situations with risk were those where the outcomes were unknown but governed by probability distributions known at the outset. He argued that these situations, where decision making rules such as maximising expected utility can be applied, differ in a deep way from "uncertain" ones, where the outcomes were likewise random, but governed by an unknown probability model. Knight argued that uncertainty gave rise to economic profits that perfect competition could not eliminate.
While most economists now acknowledge Knight's distinction between risk and uncertainty, the distinction has not resulted in much theoretical modelling or empirical work. (emphasis added)
Well, fancy that! Who could'a imagined? Perhaps one of the perks of being the guy who first described a field is the opportunity to systematically ignore the implications when those implications were awkward. I can hear his ghost responding to an accusation that his life's work paved the road to the biggest financial calamity since the Great Depression whilst ignoring Knightian uncertainty: "Don't harangue me about risk! I wrote the book."
This seems to be the focus of Raphaële Chappe's academic work and one her background well equips her to investigate with authority.
Thu Nov 29th, 2012 at 05:38:35 AM EST
From The Federal Reserve Bank of San Francisco Economic Letter #2012-35 of November 26, 2012:
(Cascading Hat Tips to Migeru Shimbun and Economist's View)
Highway Grants: Roads to Prosperity?
By Sylvain Leduc and Daniel Wilson
Federal highway grants to states appear to boost economic activity in the short and medium term. The short-term effects appear to be due largely to increases in aggregate demand. Medium-term effects apparently reflect the increased productive capacity brought by improved roads. Overall, each dollar of federal highway grants received by a state raises that state's annual economic output by at least two dollars, a relatively large multiplier.
Increasing government spending during periods of economic weakness to offset slower private-sector spending has long been an important policy tool. In particular, during the recent recession and slow recovery, federal officials put in place fiscal measures, including increased government spending, to boost economic growth and lower unemployment. One form of government spending that has received a lot of attention is public investment in infrastructure projects. The 2009 American Recovery and Reinvestment Act (ARRA) allocated $40 billion to the Department of Transportation for spending on the nation's roads and other public infrastructure. Such public infrastructure investment harks back to the Great Depression, when programs such as the Works Progress Administration and the Tennessee Valley Authority were inaugurated.
Thu Nov 1st, 2012 at 02:08:25 AM EST
It is hardly surprising that we have heard so little about this in the media.
Here is a transcript of Arny Gunderson on Democracy Now on the concerns about nuclear plant safety in the storm:
AMY GOODMAN: Can you talk about what you feel needs to happen right now? And talk about nuclear power plants in Connecticut, in Vermont, your main concern.
ARNIE GUNDERSEN: Yeah. The biggest problem, as I see it right now, is the Oyster Creek plant, which is on Barnegat Bay in New Jersey. That appears to be right about the center of the storm. Oyster Creek is the same design, but even older than Fukushima Daiichi unit 1. It's in a refueling outage. That means that all the nuclear fuel is not in the nuclear reactor, but it's over in the spent fuel pool. And in that condition, there's no backup power for the spent fuel pools. So, if Oyster Creek were to lose its offsite power--and, frankly, that's really likely--there would be no way cool that nuclear fuel that's in the fuel pool until they get the power reestablished. Nuclear fuel pools don't have to be cooled by diesels per the old Nuclear Regulatory Commission regulations. I hope the Nuclear Regulatory Commission changes that and forces the industry to cool its nuclear fuel pools, as well.
This time of year, there's a lot of power plants in refueling outages. And all of those plants will be in a situation where there's no fuel in the nuclear reactor; it's all in the fuel pool. Systems have been shut down to be maintained, including diesels, perhaps even completely dismantled. And in the event that there's a loss of offsite power from the high winds from this hurricane, we will see the water in the fuel pools begin to heat up.
Wed Oct 24th, 2012 at 12:06:56 PM EST
The president vows debt-cutting "grand bargain, immigration reform in 2013"
The conversation had initially been off-the-record, but the White House gave the daily permission to publish it after editor Rick Green penned an unusual public complaint.
"It will probably be messy. It won't be pleasant. But I am absolutely confident that we can get what is the equivalent of the grand bargain that essentially I've been offering to the Republicans for a very long time, which is $2.50 worth of cuts for every dollar in spending, and work to reduce the costs of our health care programs," Obama said.
And we can easily meet -- 'easily' is the wrong word -- we can credibly meet the target that the Bowles-Simpson Commission established of $4 trillion in deficit reduction, and even more in the out-years, and we can stabilize our deficit-to-GDP ratio in a way that is really going to be a good foundation for long-term growth. Now, once we get that done, that takes a huge piece of business off the table," he went on to say.
Does Obama really believe debt reduction will work? (I don't think he is talking about credit writedowns.) Or is he counting on, say, 'debt reduction' of $1 trillion over ten years as a justification for $400 billion of stimulus now? Nor, given his record, do I think he is counting on additional savings at the expense of the health insurance industry - or any other part of the financial sector for that matter, and that is where most of the savings could be made that would not impact the quality of delivery of health care to the public.
Update [2012-10-24 12:22:13 by ARGeezer]: Edited portion in the blockquote.
Sat May 5th, 2012 at 01:22:56 AM EST
Speech for Harlem Tenants Association, November 14, 2008 By Robert Fitch
Michael Hudson apparently has a copy of Robert Fitche's speech which he provided to Yves Smith. This was the basis for an article in naked capitalism.
"What's President-elect Obama's prescription for urban pains?.... Obama himself is not easy to read. In my lifetime, we haven't had a politician with his gifts: his writing talent; his eloquence; his charisma; his mastery of public policy; his ability to run a national campaign against formidable rivals. Obama projects so brilliant an aura that it's almost blinding. He's become the bearer of pride for forty-five million African Americans who want to be judged by the content of their character. He's the prophet of hope; the apostle of change and the organizer of "Yes We Can."
Update [2012-5-5 14:50:0 by ARGeezer]:
All this makes Obama's actual politics very hard to put in any critical perspective. By actual politics I mean above all, the principal interests he represents; his authentic political philosophy. Where he fits on the on the Left-Right political spectrum. Obama resists being identified with either the Right or the Left. Even when he talks about his mom's liberalism, it's with a certain irony. "A lonely witness for secular humanism, a soldier for the New Deal, Peace Corps, position-paper liberalism."
Obama is a partisan of the Third Way. In Europe, the Third Way means you're neither socialist nor capitalist. In the U.S. it means you're neither for liberalism nor conservatism.....Are traditional political vocations now obsolete? The Left stands for the interests of those who have to work for a living; for the tenants and the poor. For the victims of discrimination. The Right in America stands for the interests of the employers and the investing class. For those who own the land, the houses, the banks and the hedge funds.For Joe the plumber who was really Joe the plumbing contractor. And for those who see themselves as the victims of affirmative action.
In a way, though, the Left and the Right have more in common with each other than they do with the advocates of the Third Way. The Left and the Right argue that different interests matter. The Third Way says they don't. According to them, the oppressed and the oppressors, the lions and the lambs should set down together and celebrate their unity in one great post-partisan, multi-cultural 4th of July picnic. One of Obama's most repeated mantras resonates here: "a common good and a higher interest," he says. "That's the change I'm looking for."
added blockquotes, links and paragraph divisions.
Thu Apr 26th, 2012 at 04:51:32 AM EST
So says Steve Randy Waldman in his current post on his blog, interfluidity:
We are in a depression, but not because we don't know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.
Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable. (Emphasis added.)
I can think of reasons macroeconomists might want to pretend that there is a general preference for GDP growth and full employment, but there are many macroeconomists who certainly do not presume such preferences exist. Most are just not amongst "The Serious People".
Sat Mar 17th, 2012 at 11:30:48 PM EST
Economics without a blind spot on debt Steve Keen
Steve Keen is being interviewed in front of a live audience at the London School of Economics on April 3. The topic will be Banks vs. the Economy. The following was excerpted from a post he prepared for the LSE blog British Politics and Policy at LSE and which he reproduced on his blog Debtwatch.
The LSE and the BBC are to be applauded for this contribution to the discussion of what needs to be done to resolve the ongoing financial, social, political and economic crisis gripping the world.
As a car driver, you have surely had the experience of changing lanes and being beeped by a car with which you were about to collide--but which you didn't see before the lane change. It's because the car was clearly visible in your rear-view mirror, but that part of the image fell on your retina's blind-spot--so you didn't see it. Fortunately most of us learn that we have a blind spot, and so we check carefully to avoid being fooled by it again--and causing an avoidable accident.
If only economists could learn the same way, we might not now be in the accident of this never-ending economic crisis. "Neoclassical" economists (who dominate both academic economics and policy advice to governments) have a blind-spot about the role of private debt in macroeconomics, yet despite the economy crashing once before because of it during the Great Depression, they continue to argue that it's irrelevant now--during this latest crash.
Wed Feb 15th, 2012 at 12:16:06 PM EST
CAUTERISE AND PRINT: GERMANY'S NEWEST PLAN A Yanis Varoufakis
While Greece burnt, and the Parliament of the Hellenic Republic was insincerely accepting impossible conditions for implementing yet another unworkable fiscal adjustment plan, the buzz in Frankfurt's financial district was an exciting, fresh German Plan A. For the first time in two years, since the euro Crisis began, Germany's captains of finance could be seen to have re-discovered a spring in their step. The new optimism stems from a new Plan which is predicated upon a long delayed recognition and two strategic choices:
Germany's belated epiphany is that, without a major redesign of the euro architecture, a number (>1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin's conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system. The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed.
The detail not yet `worked out' concerns the identity of the countries to be shown the door. The consensus opinion in Frankfurt was that Greece and Portugal are certainties. Few expressed the view that Portugal is too close to Spain to cauterise effectively while others went against the grain of majority opinion suggesting that Ireland ought to be liberated too. My impression is that, current thinking, has settled on Greece and Portugal, with a questionmark over Ireland. (Emphasis from original.)
Thu Feb 2nd, 2012 at 03:40:15 AM EST
Bloomberg invited Steve Keen to write an 800-word feature on "The Future of Economics" for the World Economic Forum, which started on Wednesday, January 25 2012 in Davos. Perhaps the senior editor thought this paper was too challenging. I haven't been able to find this paper either at Bloomberg News' site or the World Economic Forum web site to confirm that it was distributed to participants, but it would be a high profile appearance for TARA if it were. The challenge is to the orthodoxy rather than to the intellect.
For its entire history, macroeconomics has been dominated by mathematical models that ignore the existence of money, debt and banking, and that perceive the economy's movement through time as transitions from one state of equilibrium to another.
At any point in history, these would be heroic assumptions. Could it really be true that models without either money or instability are provably superior at predicting the economy's future course than models in which money and banking exist, and in which the model economy can be out of equilibrium? If not, is it the case then that such models are simply too difficult to construct--that the best we can do is pretend that the economy doesn't have banks or money, and that it's always in equilibrium, even if we know these assumptions are false?
Sat Sep 17th, 2011 at 11:35:29 PM EST
From: Bailout Rebellion in Germany Heats Up zero hedge
"There cannot be any prohibition to think" just so that the euro can be stabilized, wrote Philipp Rösler, Minister of Economics and Technology, in a commentary published on September 9 (Welt, article in German). "And the orderly default of Greece is part of that," he added. Instantly, all hell broke loose, and Denkverbot (prohibition to think) became a rallying cry against the onslaught of criticism that his remarks engendered.
I have always believed: "when you are right you are right!" In this case Philipp Rösler is definitely right about Denkverbot. But there is a more fundamental Denkverbot than the one to which he referred which should also be rejected: That the current financial crisis could better be resolved by writing down unpayable debt, as opposed to bankrupting governments trying to pay the unpayable.
Sun Sep 4th, 2011 at 01:12:09 PM EST
Liquidity has almost been given a bad name by all of the officials who have claimed that the problem with the economy from 2008 to today is lack of liquidity. Critics have vociferously asserted that the bigger problem is solvency. Given the price history of US residential real estate since 2008 and the size of the class of US RMBS financial assets from 2002 to 2006 the solvency of institutions holding these RMBSs certainly seems questionable. But looked as on its own merits, as opposed to the camouflage uses to which it has been put, liquidity is an important and neglected factor in our financial markets.
London Banker has a new post on this subject: Liquidity, Liquidity, Bank Capital and Market Reform. After all, there was a time when central banks were not the chief source of liquidity and it would seem desirable to find a way to return to that situation, especially seeing that re-inflating the bubble doesn't seem to be working so well. His post consists of a series of comments from a friend's e-mail, shown here in orange, to which London Banker responds.
Central bankers and securities regulators lost sight of liquidity over the past decade or two in permitting reforms which compromised the health of the financial system. Thanks to the Greenspan and Bernanke puts, and to surplus recycling by Asian economies, many took liquidity - like oxygen - for granted. Like oxygen, you only realise how critical liquidity is when its absence becomes noticeable.
Now that bank regulators have rediscovered liquidity as an essential attribute of healthy banks and healthy markets, it is important to reinforce some key qualities.
Liquidity means you can generate cash from a physical asset or paper claim.
If you can't exchange the asset for a major currency to meet a sudden funding need, then the asset shouldn't be permitted as regulatory capital. Basel II and Basel III have generated hundreds of pages around credit scoring and asset type while ignoring the fact that most of what banks are attributing as capital cannot be turned into cash on demand.
But, effectively, the criteria came to be having a AAA rating on the asset. But that was like Kansas before the tornado of 2008. The tornado exposed the fraud of the AAA ratings and "We ain't in Kansas anymore!"
Tue Jun 7th, 2011 at 01:32:34 AM EST
Saviour of Last Resort
Over the last few weeks Yanis Varoufakis and Tasos Patokos "have carried out a series of simulations regarding the Greek debt-to-GDP ratio under different scenaria." The graph below represents four scenarios that have been modeled:
Thu May 26th, 2011 at 09:27:59 PM EST
Marshall Auerback has a post in New Economic Perspectives with the above title. He makes an interesting case. I know that similar observations have been made on ET in the last year. At the very least, his article pushes a re-framing of the existing debate over debt in Euro-zone countries.
When the euro was launched, leading German politicians used to argue, with evident relish (and much to the chagrin of the British in particular), that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel's government is avoiding airy talk of political union - preferring instead to force harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. This is becoming both economically and politically unsustainable. If the objective is to save the currency union, perhaps policy makers are looking at this the wrong way around. In the end, paradoxically, to save the European Monetary Union, the least disruptive way forward would be for the Germans, not the periphery countries, to leave.
by gmoke - Jul 15