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It's okay if you're a conservative

by Migeru Sun Jul 7th, 2013 at 02:47:00 PM EST

I got to thinking about the rhetoric of monetary austerity and There-Is-No-Alternative, and I remembered the following oft-repeated argument by Thomas:

It annoys me that I keep having to point this out, but if the environmental movement is seen to stand for - to advocate- mass poverty, it will loose all popular support, and die a highly deserved death. This entire line of thinking is a dead end, because if it is mistaken - and I am quite confident it is -  it is Evil, in exactly the same way austerity is Evil, and if correct we are in any case doomed, because the course of action that would imply will never ever happen.
Austerity is evil. Austerians (and first among them, Merkel and Schäuble) continuously promise decades of recession and mass poverty. But it doesn't seem to be losing popular support; or if it is, it's losing popular support more slowly than the opposition. The "opinion leaders" in the media are not attacking Austerity with this kind of argument that voluntary poverty is unacceptable as they would be if those in power were "back to the land" environmentalists.

So, if Austerity™ "will lose all popular support and die a highly deserved death", why is it not happening? Does it happen "in the long run", when we're all dead anyway?

Read more... (2 comments, 454 words in story)

A short note on extreme flooding (wonkish)

by Migeru Sat Jun 15th, 2013 at 05:36:59 AM EST

We just had a discussion of whether the Central European floods of the past week are an indication of a change in climate regime or not. A particular bone of contention was Jeff Masters' throwaway remark (quoted by ATinNM) that

If it seems like getting two 1-in-100 to 1-in-500 year floods in eleven years is a bit suspicious--well, it is. Those recurrence intervals are based on weather statistics from Earth's former climate. We are now in a new climate regime ...
One difficulty here is that the meaning of "100-year flood" seems to be unintuitive. As I explained in the thread:
the correct way to think about this is as the probability of the waiting time. Thus, "two events in 11 years" means "one waiting time of 11 years" so we're talking about just one observation, not two. The first flood resets the clock, so to speak. If we knew the date of the previous "100-year flood" in Central Europe, we'd have two observations to compare with the 100-year average waiting time.
ARGeezer, however, puts his finger on a key methodological issue:
I was originally thinking about the appropriateness of the designation of a certain level of flood as a 'hundred year event' and how that designation was achieved. Was it that no such event had been seen for 100 years, that the known frequency of such events was 100 years or was it simply assigning a designation in the face of knowing that the historical record is sketchy.
The fact is that detailed river flow statistics only exist for about 100 years, often less, and are extrapolated to larger flood sizes using theoretical probability distributions. In a 1994 paper [PDF] for the Geological Society of America, Donald Turcotte wrote
For large floods the fractal predictions (F) correlates best with the log Gumbel (LGu), while the other statistical techniques predict longer recurrence time for very serious floods. The fractal and log Gumbel are essentially power-law correlations, whereas the others are essentially logarithmic. The Log Pearson type III (LP) is the Federally-approved distribution for evaluating the flood hazard in the United States. For station I-1805 the 100 year flood predicted by the fractal correlation is a factor of 1.6 greater than the 100 year flood predicted by the Log Pearson type III correlation. For station 11-0980 the 100-year flood predicted by the fractal correlation is a factor of 2.3 times greater than the 100 year flood predicted by the log Pearson type III correlation. If, in fact, fractal statistics are applicable, then the use of log Pearson type III statistics consistently underestimates the severity of the 100, 150 and 200 year floods.
With the fit parameters given by Turcotte, "under the fractal model" the 100-year flood sizes given by the "Federally aproved" model are actually 40-year floods. Further evidence in favour of self-similar distributions over the log-Pearson type III is given, for instance, in this 2006 paper (only abstract available). The immediate question is whether the Europeans are making the same model assumption as the Americans and thus the so-called "100-year floods" are actually 40-year floods, in which case to have two of them in 11 years is not really that shocking.

Below the fold, some more wonk on recurrence time statistics.

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The Brussels Consensus: economic disaster in EU candidate countries (III)

by Migeru Tue May 7th, 2013 at 03:56:50 PM EST

This is what a currency peg to the Euro does to an economy on the fringes of the EU: The Economic Winter Will Stay in Croatia (6 May 2013)

Quite pessimistically is titled the spring forecast of the European Commission for Croatia - "Recovery slipping further away. Stuck in recession". Only two months before its accession to EU, the moods in Croatia are not at all festive. The economy has been in recession since 2008 as by now the economic activity has shrunk by almost 12%. The first signs of recovery are expected in 2014, but the conditionality is huge. In 2013, the Croatian economy is expected to contract by 1% as the main hamper to growth still is domestic demand which will continue to decline. The main reasons are continuing growth of unemployment as well as the nominal cuts of public sector wages by 3%. Inflation, too, is a factor for the not good economic perspectives ahead of the future 28th EU member state.
What? The Commission doesn't think cutting public sector wages in a recession is a good idea? Someone should tell Portugal!

Read more... (8 comments, 575 words in story)

Ferguson hates on Keynes

by Migeru Mon May 6th, 2013 at 02:30:01 AM EST

From everyone's favourite sorry excuse for a historian: An Unqualified Apology (05/04/2013)

During a recent question-and-answer session at a conference in California, I made comments about John Maynard Keynes that were as stupid as they were insensitive.

I had been asked to comment on Keynes's famous observation "In the long run we are all dead." The point I had made in my presentation was that in the long run our children, grandchildren and great-grandchildren are alive, and will have to deal with the consequences of our economic actions.

But I should not have suggested - in an off-the-cuff response that was not part of my presentation - that Keynes was indifferent to the long run because he had no children, nor that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes's wife Lydia miscarried.

Niall Ferguson omits the third and important way his comments were stupid: he should not have suggested that Keynes advocated deficit spending when the economy is far from full employment because he was indifferent to the long run.

front-paged by afew

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All of Draghi's Horses

by Migeru Sat Mar 30th, 2013 at 11:36:43 AM EST

You can read the whole piece on The Court Astrologer

I have an analysis piece up on Eurointelligence: thoughts on banking union and the Cyprus 'solution' (28.03.2013)
"The central bank defends the payment system every day, every hour, every minute." Scott Fullwiler calls this "the fundamental truth of central bank operations" and I will call it the essence of monetary union.

...

In sum, the case seems compelling for a Eurozone-wide clearing system, liquidity provision, deposit insurance, banking regulation and supervision, and a special resolution scheme for banks. The case is underpinned by the necessity to provide a unified and efficient payments system for the currency area, and the need to ensure its safety and defend its integrity. Arguments against joint supervision hinder the Central bank in distinguishing between illiquid and insolvent institutions. Polemics against joint deposit insurance actually foster cross-border deposit runs. And rhetoric against Target2 undermines the integrity of the payments and clearing system itself.

...

In conclusion, even if an immediate bank run due to Cyprus is avoided in the rest of the Eurozone, will all of Draghi's horses and all of Draghi's men be able to put together the broken egg of public confidence in deposit insurance, and more generally in the Eurozone's commitment to the integrity of its payments system?

You can read the full article over there, and comments are enabled on the site.

front-paged by afew

Comments >> (21 comments)

Austerity kills (part 2)

by Migeru Thu Mar 28th, 2013 at 03:35:54 AM EST

Reuters: EU in "denial" that sick economy costs lives, health experts say (March 27, 2013)

"There is a clear problem of denial of the health effects of the crisis, even though they are very apparent," said lead researcher Martin McKee of the European Observatory on Health Systems and Policies, a group backed by the World Health Organisation.

"The European Commission has a treaty obligation to look at the health effect of all of its policies but has not produced any impact assessment on the health effects of the austerity measures imposed by the troika."

...

Despite a devastating financial crisis, Iceland rejected austerity, following a referendum, and instead continued to invest in its social welfare system. As a result, the researchers found there had been no discernible effects on health since the crisis.

Iceland's economy has now returned to growth, but the recovery is patchy and inflation has remained stubbornly high.

The Lancet study is here:

Read more... (18 comments, 453 words in story)

A great week for Turkey

by Migeru Sun Mar 24th, 2013 at 09:54:50 AM EST

This has been a great week for Turkey. I won't say 'let me explain' because it explains itself:

Jerusalem Post: 'Syria crisis necessitated Turkey apology' (03/24/2013)

Netanyahu says fear that Damascus's chemical weapons will fall into the hands of terror organizations led to apology.
Take that, Avigdor Lieberman!

Then there was the Persian new year announcement:

Hurriyet: Leader of PKK in northern Iraq declares cease-fire (March/23/2013)

The jailed leader of the PKK in Turkey, Abdullah Öcalan, declared a cease-fire in a message conveyed during Nevruz festivities in Diyarbakır on March 21, to hundreds of thousands people. He also called on armed militants to withdraw from Turkish soil, indicating that these moves would mark a milestone for "a new era" and herald the building of a "new Turkey."

And the European Union's handling of Cyprus presents an opportunity for Turkey to advance its interests there, too.

(more below the fold)

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Il Gattopardo

by Migeru Fri Mar 1st, 2013 at 01:40:48 AM EST

One of the all-time greatest political quotations comes from the Italian novel Il Gattopardo: everything needs to change, so everything can stay the same. And the result of the Italian election indicates that the 20-year process of change initiated with Tangentopoli and Mani Pulite is coming to a close, leaving everything as it was before.

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How bad is it in New York City?

by Migeru Fri Nov 2nd, 2012 at 02:40:34 AM EST

Seeing some things on my twitter feed: @poemless

For the past several days I have observed noted disconnect between MSM and twitter re: amount, severity of #Sandy damage.
@poemless
Media portray it as inconvenient, people on twitter as harrowing. Why? I doubt anyone not on the East Coast comprehends the situation.
@themexican
Dire message from a fellow parent in my kid's school about the situation in Sheepshead Bay, Brooklyn: link removed ... Can anyone help?

Read more... (79 comments, 633 words in story)

There's no greater unknown unknown than that which one chooses not to see

by Migeru Mon Oct 29th, 2012 at 05:37:00 AM EST

A correspondent sends me notice of the latest paper by Jean Pisani-Ferry of the Bruegel think tank: The known unknowns and the unknown unknowns of the EMU (26th October 2012). There is even a related video on the Bruegel website!

Bruegel, as some people may remember, is hardly my favourite think tank...

And given that Jean Pisani-Ferry and his Bruegel think tank live off reinforcing the Eurocracy conventional wisdom, I am actually pleasantly surprised to find the following paragraph in there:

The second reason has to do with what the Maastricht treaty did not include, ie the prevention of non-fiscal imbalances. When thinking about possible threats that EMU should be defended against, policymakers in Maastricht looked back at past experience and identified two: inflation and fiscal laxity. Financial instability was at the time perceived as being of minor importance and, even though currency unification was expected to reinforce financial integration, no provision was envisaged to deal with the effects of private credit booms-and-busts. EMU was conceived as an economic and monetary union, not as a financial union. True, the EU could have relied on the Broad Economic Policy Guidelines (BEPGs), a catch-all procedure rooted in the treaty, but it was in fact a weak, non-binding and rather neglected procedure. This view proved to be short-sighted. While public indebtedness in the southern countries remained broadly stable or even declined during the first decade of EMU, private indebtedness financed by capital inflows skyrocketed, resulting in the previously described massive macroeconomic divergence.
Which basically means that the Eurozone policy response and the crisis diagnosis itself have been terribly flawed for 4 years and continue to be flawed. Not one of the Eurozone's policy developments purported to respond to the crisis would have made a difference to the private financial sector dynamics of the past 10 years had they been in place from the start.

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Perfunctory Spanish regional election thread

by Migeru Mon Oct 22nd, 2012 at 01:42:42 AM EST

Sunday, 21 October, saw two simultaneous regional elections, in Galicia and in the Basque Country. The main result has been a collapse of the PSOE regional parties, conceding a larger absolute majority to the PP in Galicia, and second place in the Basque Country to EH-Bildu, the successor party of the ETA sympathiser parties that were illegal for the past decade, until ETA gave up a year ago.

El Pais: Popular Party to keep Galicia following a low-turnout race

  • PNV wins in Basque Country but without absolute majority
  • EH Bildu becomes second force in region
[editor's note, by Migeru] I don't have much time tonight so I'll post a results advance and I may promote information from the comments to the body of the diary if others pitch in.

Read more... (29 comments, 422 words in story)

[UPDATED] The Brussels Consensus: economic disaster in EU candidate countries (II)

by Migeru Mon Oct 15th, 2012 at 04:44:11 AM EST

From Eurointelligence last Friday (seen in the Salon):

Anti-austerity demonstration in Zagreb as EU states ratify Croatia's accession treaty

Between 5,000 and 10,000 people demonstrated in Zagreb's main St. Mark's square on Thursday against the government's austerity policies, with an estimated 1,500 going on to march towards the government building, reports Croatian tPortal (English Edition). The NY Times on Thursday reported on the European Parliament appearance of EU Commissioner for Enlargement Stefan Füle, who said that the Commission would "associate enlargement countries" to the enhanced economic governance of the eurozone as this would 'boost economic resilience' and foster job creation and growth 'before they join'.

(Croatia is slated to join the EU in July 2013, but has been maintaining a dirty Euro peg which puts it in a similar macroeconomic and political situation to mediterranean Euro countries. Krugman and Füle obviously disagree on the benefits of Eurozone macroeconomic policy for accession countries.)

Union leader Vilim Ribić spoke of class war, and said that one billion euros had been given up by public sector workers in three years and not one job had been created by the austerity policies which would hinder recovery and lengthen the crisis.

(more below the fold)

See also:

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Merkel's nationalegotism

by Migeru Sat Sep 29th, 2012 at 02:01:08 AM EST

Thursday evening, ZDF talkshow hostess Maybrit Illner invited "the" former Chancellor (as Helmut Kohl is out of commission) Helmut Schmidt and the current president Joachim Gauck to her show. Among the most intense moments is this:

"Warum noch an Europa glauben?" - ZDF.de "Why believe in Europe still?" - ZDF.de
Altkanzler Helmut Schmidt (SPD) hat der Bundesregierung erneut vorgeworfen, in der Europapolitik zu nationalegoistisch zu agieren. Wenn Bundeskanzlerin Angela Merkel (CDU) anderswo in Europa mit einer Hakenkreuzbinde karikiert werde, sei das "zum Teil ihre eigene Schuld", sagte Schmidt in der ZDF-Sendung "maybrit illner". Merkel habe in der Finanzkrise "eine viel zu starke Zentralisierung der ganzen Fragenkomplexe auf ihre Person vorgenommen".Former Chancellor Helmut Schmidt (SPD) has again reproached the Federal Government for acting too 'nationalegotistically' in European politics. If German Chancellor Angela Merkel (CDU) is caricatured elsewhere in Europe with a swastika, that is "partly her own fault," Schmidt said in the ZDF program "Maybrit Illner". [According to Schmidt], in the financial crisis Merkel has "centralized around her person the entire complex of issues."


The linked page contains video of the entire show, and a selection of (sanitised) quotes.

Read more... (35 comments, 1660 words in story)

Democracy in America

by Migeru Sun Sep 23rd, 2012 at 03:38:14 AM EST

The Twank said:

Received the CA voters guide in the mail today ... about 1/2 cm. thick. 11 propositions in all and I have NO interest in reading all the details. What to do ,,, what to do.  Look to who/what organization is for or against each one. For example, you NEVER see anyone with Republican in it ... Repubs are so unpopular in CA that they don't have the nerve/stupidity to identify themselves. So they go under codewords of "Chamber of Commerce" and "Taxpayer Watchdogs" hoping the rest of us are as stoooooooopid as they are. Fat chance! So it took me about 15 minutes to sift through all that bullshit ... not a problem. Anything with "Nurses" or "Teachers" in it is usually a go. Someone wants to repeal the death penalty in CA ... I want to extend it to all Repubs but who listens to me!!!
I was going to answer in a comment, but I figured this was good for a short diary, too.

My answer below the fold.

Read more... (91 comments, 239 words in story)

European austerity: breast cancer edition

by Migeru Sat Sep 8th, 2012 at 09:11:04 AM EST

This is just going to be a quick lazy translation diary, because it comments itself.

Punts de Vista: Hagan el favor de irse muriendo, que hay que ahorrar: las mujeres pobres, primero

Cada día nos desayunamos o almorzamos con un nuevo recorte en la sanidad.  Y cada vez son más agresivos. Y más letales. El proceso que siguen en el PP para hacer que nos traguemos más suavemente la píldora empieza por lanzar un globo sonda, como el de hace un par de días sobre el REpago de las mamografías. Luego se echa humo con prestaciones de otro tipo, a poder ser que tengan algo que ver con la estética para que el conjunto pierda el carácter de recorte severo: por ejemplo, la eliminación de los pliegues después del tratamiento quirúrgico a las personas muy obesas que han perdido peso en poco tiempo...  O insinuaciones más insidiosas sobre que no se destinen fondos públicos a financiar los problemas de fertilidad  (poniendo casi siempre la raíz del problema en la mujer, cuando cada vez es menos el caso).  Lo importante es hacer una buena mezcla, levantar mucho polvo, para disimular lo fundamental: que las mujeres son de nuevo las víctimas propiciatorias de los hachazos sobre la sanidad. Ahora, amenazadas con perder el derecho a mamografías a no ser que REpaguen. ¡En cuantas casas con dificultades económicas incluso para poder comer, se podrá destinar dinero para una prevención tan necesaria que puede salvarlas de un cáncer de mama!

Soraya Sáenz de Santamaría pidió ayer que no se especulara sobre este tema "tan sensible para las mujeres", aunque admitió que se está revisando la cartera de servicios sanitarios y  que "una comisión de expertos" (¡ay, dios!) y las Comunidades Autónomas "trabajan" en el tema.... Con lo que vienen recomendando hasta la fecha los "expertos" de la FAES y las JONS,  y la mayoría de consejeros de Salud de las Comunidades (en lugar destacado,el de  Catalunya) ya nos podemos ir preparando.

Please get dying, we have to save: poor women first (September 8, 2012)
Every day we have breakfast or lunch with a new cut to health care. And they're ever more aggressive. And more lethal. The process followed by the PP to get us to swallow the pill starts by launching a trial balloon, such as the one a few years ago about repayment of mammograms. Then they spread smoke with other kinds of services, if possible having to do with plastic surgery so that the ensemble loses the character of a severe cut: for instance, the removal of folds after surgery for very obese people who have lost a lot of weight in a short time...  Or more insidious insinuations about not using public funds to finance fertility issues (always putting the root of the problem on women, which is less and less the case). What's important is to make a good mix, to kick up lots of dust, to hide the fundamental fact: that women are once again the victims of the hacking away at health care. Now, threatened with losing the right to a mammogram unless they pay. In how many homes with economic difficulties even to eat will they be able to devote money to such a necessary preventative measure that can save them from a breast cancer!

[Vicepresident] Soraya Sáenz de Santamaría asked yesterday [at the press conference after the cabinet meeting] not to speculate on this topic "so sensitive for women", though she admitted that the portfolio of health services is being revised and that "a committee of experts" (oh, God!) and the regional governments are "working" on the issue... With the recommendations so far coming from the FAES and JONS and the majority of the health councillors of Autonomous Communities (with the Catalan one in a prominent place) we can begin to get ready.

Notes: the blogger is Catalan, hence the swipe at the Catalan regional govenment; FAES and JONS is a pun on former PM Aznar's FAES "foundation" (a thonk-tink) and the old Falange party whose full acronym was "FE de las JONS".

Read more... (1 comment, 781 words in story)

Religion in society - pick two out of three?

by Migeru Wed Sep 5th, 2012 at 02:23:28 AM EST

In the context of the second saga-length thread about religion, I pointed out that

secularism, separation of church and state, and freedom of conscience are three separate concepts.

I was of the opinion that, by and large, the US had freedom of conscience and separation of church and state, but it wasn't a secular society; on the other hand, Europe tends to have freedom of conscience and a secular society but no separation of church and state.

Is this one of those cases where you can pick two out of three?

A third mode is where you have a secular society and no state church, but also no freedom of conscience (the "compulsory atheism" of "real existing socialism" in the erstwhile Soviet bloc).

Eurogreen commented that maybe France is an example where the three features coexist.

And I am just now wondering whether the classification extends outside of Western (i.e. Mesopotamian) civilization. How about the Chinese and Hindu cultural matrices?

Comments >> (89 comments)

The Eurozone's giant sucking sound

by Migeru Wed Aug 29th, 2012 at 05:53:51 AM EST

Eurointelligence is running another column of mine: The Eurozone's giant sucking sound (28.08.2012)

As reported two weeks ago, Germany's current account surplus is projected to exceed 6% for 2012, likely triggering a warning from the European Commission. Such large German current account surpluses are not new, what's new is that since November 2011 the European Commission's Macroeconomic Imbalance Scorecard includes a 6% threshold on the three-year moving-average current account balance (the threshold for deficits is 4%). Here I will argue that Germany's persistently high current account surplus is dangerous for the stability of the Eurozone and corrective government action is needed (in principle concerted Eurozone government action, but in practice requiring that the German government 'own' the policy).
You can read it there, and comment here.

Previous columns:

Read more... (136 comments, 698 words in story)

Keynes, probability, asset pricing and the great clusterfuck

by Migeru Tue Jul 17th, 2012 at 07:01:15 PM EST

A long time ago, in a galaxy far away, Drew gave me his copy of Keynes' Treatise on Probability, which he had acquired at some point thinking it would be relevant to his economist education but which might be more profitable to me, who had an academic interest in probability theory and had read a number of classic works already. The book languished on my shelf (and travelled in a box, and was stacked on another shelf where it languished, and so on through three separate moves) until one day last week I decided to finally read it (in fact encouraged by a conversation I had with another participant in the Minsky Seminar last month). I think it was worth it, but then again I have weird tastes in reading material.

To Keynes, probability is a branch of logic: the theory of rational thought under uncertainty. Ordinary logic is just the subset of rational thought dealing with certain (or certainly false) propositions. I think this is a really interesting approach. Probability to Keynes is relative but not subjective. That is, probability is always relative to some data (or hypotheses), and so it is in a way subjective since each of us has different data/knowledge/experience, even different mental acuity. However, Keynes' probability is not subjective in the sense that a correctly formed probabilistic reasoning, being enunciated relative to explicit hypotheses, should be valid independently. Keynes writes at length about the problem of induction (reasoning from particular, though possibly numerous, observations to general statements) and he stresses that, contrary to what has been asserted by philosophers in the past, the fact that an inductive conclusion turns out to be false does not invalidate the inductive reasoning relative to the information available at the time the conclusion was formulated.

Anyway, back in 2009 in the context of a discussion of a journalistic piece about David Li's killer formula (the gaussian copula approach to CDS pricing) I said I should probably write a diary about the arbitrage pricing theory that underlies a lot of the ongoing Global Clusterfuck. At the time I was probably thinking that I might use the preface of a popular book on derivative pricing, Financial Calculus by Baxter and Rennie. They begin their book with a parable of the bookmakers intended to disabuse the reader from the get-go that market prices are expected future values. That's right: market prices are not average values as normally understood. However, after having read Keynes on Probability I don't have to infringe Baxter and Rennie's copyright or even retype their text from my hardcopy of the derivatives book, because I can simply lift a section from the Project Gutenberg version of Keynes...

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Central Banking 101: LTRO killed the EONIA heartbeat

by Migeru Sat Jul 7th, 2012 at 07:51:17 AM EST

Two weeks ago I attended the annual Minsky Summer Seminar at the Levy Institute. There, Scott Fullwiler of Krugman's flashing neon sign fame made a very nice presentation on Central Bank Operations. He was unfortunate enough to have to compete for the audience's attention with the Germany-Greece Euro 2012 quarterfinal, and he bravely disregarded Bob Barbera's advice to just talk for 5 minutes and then take everyone to the bar to watch the game. In the end I think he managed to keep everyone's attention as his presentation was really nice. You can now see the slides online: @stf18

My Prezi on central bank operations from the Minsky conference a few weeks ago http://prezi.com/bv0dpvapapht/m ...
The companion paper, for those interested, is Modern Central Bank Operations - The General Principles (June 1, 2008)
There are sharp differences between the two approaches that nonetheless remain. Among neoclassicals, the literature on central bank operations is not integrated into models of financial asset pricing or into the so-called "new consensus" model of the economy. Though the latter assumes interest-rate targeting, new consensus models are concerned with the strategy of monetary policy, not the tactics or daily operations; though well-established as a research topic for journal publications, monetary policy implementation remains "a side issue" in neoclassical monetary theory graduate textbooks like Walsh (2003) (Bindseil 2004, 1). Further, neoclassicals still do not consider money to be endogenously created in the banking system, as Marc Lavoie repeatedly notes; indeed, as Charles Goodhart has argued in a series of recent papers, there is in fact no private banking system whatsoever in the new consensus model (e.g., Goodhart 2008a).

This is disappointing, naturally, since the evidence published in the recent neoclassical literature on central bank operations has in fact been remarkably consistent with the endogenous money view of central bank operations. The horizontalist view that central banks only target interest rates directly (not reserve or monetary aggregates) and can do so as precisely as desired has been in particular repeatedly supported by this literature. While the relevant literature could fill several volumes, of special note here is the book by Ulrich Bindseil (2004), former Head of the ECB's Liquidity Management Section, which describes in substantial detail the operations of the Fed, ECB, and Bank of England in a manner that very nearly resembles the horizontalist story.

The purpose of this chapter is to describe ten general principles of modern central bank operations. These ten principles are not intended to be exhaustive or comprehensive; neither are the discussions of the individual principles necessarily exhaustive. Rather, these principles represent "what every economist should now be expected to know" given the large quantities of orthodox and heterodox research in this area and the empirical or anecdotal evidence contained in speeches and publications of central bank officials. As noted already, this research generally confirms the earlier points made by Moore (1988) and other authors associated in one way or another with the horizontalist literature

So hopefully (hah!) that settles the debate on endogenous money creation. Anyway, I think the single most important point (here I'll quote from the flashing neon sign blog) is that
a central bank defends the payments system every day, every hour, every minute, at some price.  This is the essence or fundamental truth of central banking, and anyone who fails to grasp it doesn't understand central bank operations
The price here is the rate that the central bank targets. In the US it's the federal funds rate, and in the Eurozone that's probably the overnight interbank rate known as EONIA. And what's being defended is a safe and sound payment and clearing system, which is the lynchpin (though not the be-all and end-all) of financial stability. However, it appears that the ECB has been doing a crap job of targeting EONIA, or at any rate they are lazy. It's also possible that the ECB has been targeting money aggregates, which would be the ECB's own (and worrying) flashing neon sign. Seriously, does this look like the ECB has been targeting a rate?

For an explanation of the various rates in this chart (EONIA, deposit, marginal, etc) I refer you to my earlier post Central Banking 101: the EONIA heartbeat (February 26th, 2011). The present post will be based upon updating the charts from that article with the last 16 months of data: from February 2011 to June 2012. Much has happened in that time and I'll comment on all that below the fold. I encourage you to read the old post at this point.

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Neokeynesians vs. Postkeynesians

by Migeru Mon Jul 2nd, 2012 at 05:31:02 AM EST

A few days ago, Brad DeLong wrote a piece on Project Syndicate complaining about freshwater economists' refusal to admit that the last five years of economic history run counter to "new classical" economic theory: The Perils of Prophecy (Project Syndicate, 27 June 2012)

Of course, we historically-minded economists are not surprised that they were wrong. We are, however, surprised at how few of them have marked their beliefs to market in any sense. On the contrary, many of them, their reputations under water, have doubled down on those beliefs, apparently in the hope that events will, for once, break their way, and that people might thus be induced to forget their abysmal forecasting track record.
It is commendable that Brad DeLong has been honest about "marking his beliefs to market"
But we - or at least I - have gotten significant components of the last four years wrong. Three things surprised me (and still do). The first is the failure of central banks to adopt a rule like nominal GDP targeting or its equivalent. Second, I expected wage inflation in the North Atlantic to fall even farther than it has - toward, even if not to, zero. Finally, the yield curve did not steepen sharply for the United States: federal funds rates at zero I expected, but 30-Year US Treasury bonds at a nominal rate of 2.7% I did not.
However, the following paragraph where he enumerates representatives of "we historically-minded economists"
So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.
prompted Steve Keen to cry What utter self-serving drivel, Brad Delong! (June 30th, 2012)
Where to begin? For starters, "the last five years" includes June 2007-just before the commencement of the financial crisis. But this time, people like Wynne Godley, Ann Pettifors, Randall Wray, Nouriel Roubini, Dean Baker, Peter Schiff and I had spent years warning that a huge crisis was coming, and had a variety of debt-based explanations as to why it was inevitable. By then, Godley, Wray and I and many other Post Keynesian economists had spent decades imbibing and developing the work of Hyman Minsky.
(Keen continued after the fold)

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Your take on this week's news

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Your take on this week's news

 Open Thread 14 - 20 August

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Threading something is better than remembering something

 Open Thread 7-13 August

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I wish I were a thread again, half-savage and hardy, and free

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