Finance

Last Thursday, the Fed announced its anticipated third round of balance-sheet expansion, at a fixed rate of about $40B per month “until [substantial] improvement [in unemployment] is achieved in a context of price stability”.

Would having more women in leadership have prevented the financial crisis?

This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model.

A Response to Heiner Flassbeck’s questions about the Institute’s Council on the Euro Crisis

Where’s the next economic crisis?

Paul De Grauwe raises very important questions on the institutional structure of Europe and how it must be modified to fortify the euro zone.

In what sense are central banks really independent? From whom are they independent? For whom in society do they deliver?

How must the European institutional structure be modified to fortify the euro zone?

In Friday’s FT, former Morgan Stanley trader Douglas Keenan traces banks’ LIBOR manipulations back to 1991, when he observed, from the futures desk, LIBOR fixings come in at levels different from where he new the market to be.

Stock flow consistent macroeconomic models suffer from the lack of a coherent estimation method due to the complicated nature of the modeling process.

The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework — the New Neoclassical Synthesis — grounded on the DSGE model.

This paper tracks the development of sectoral saving and borrowing in the US economy over the past 50 years.

Revised text of a presentation at the Conference on Microfoundations for Modern Macroeconomics, Columbia University, November 2010. I would like to thank Amar Bhidé, Roman Frydman, and Andy Haldane for helpful comments, and the Institute for New Economic Thinking for research support.

John Kay’s thought-provoking essay The Map is Not the Territory: An Essay on the State of Economics argues that economists have been led astray by excessive reliance on formal models derived from assumptions that bear too little similarity to the world we live in.

At the heart of the Eurocrisis lies a vicious circle where once there was a virtuous one.

After the recent election brought a center-right coalition to power, what’s next in the Greek crisis? Are we finally in the clear? Not so fast, Greek economist Yanis Varoufakis says. Varoufakis explains the real outcome we can except after Greek voters’ “contradictory verdict,” where 55% voted for anti-bailout parties yet a pro-bailout government resulted due to the nature of Greece’s electoral system.

Since September 2011, the Swiss National Bank has held a floor of 1.20 francs per euro.

Below is a revised version of a talk I gave at the New School University, at a conference to launch Lance Taylor’s latest book. The date of the event was April 28, 2011, more than a year ago, and the delay in revision was entirely my fault—overcommitment and pressing deadlines on many fronts. Sorry about that.

The Collapse of Free Market Macroeconomics

We investigate the effects of government spending on U.S. economic activity using a threshold version of a structural vector autoregressive model.

Here is a talk I gave recently at Wake Forest University.

The topic of this session of the INET conference is a question: does the effectiveness of fiscal policy in stabilizing an economy depend on the underlying economic context in which the policy is implemented?

In conversation recently, I was called upon to defend the claim that banks are in the business of creating and destroying private money.

When Paul Krugman paints John Maynard Keynes as a pioneering critic of dominant free-market economics, he exaggerates wildly, both about the rigidity of orthodoxy and about the pioneering character of Keynes’ critique.

Paper revised for the Institute’s Plenary Conference in Berlin

The text below is the comment I offered on Mr. Soros’ opening speech at INET’s Berlin Conference April 12, 2012. The text of Mr. Soros’ own speech is here. Video of the entire session is below—my bit starts at 55:00.

Financial stability, or the lack thereof.

The ongoing eurozone crisis has prompted many to argue that monetary union withoutfiscal union was bound to fail.

Leading thinkers from outside the developed countries look to the future, spotlighting the pitfalls and opportunities thatawait us.

Albeit the majority of the profession either ignores Minskyís Financial Instability Hypothesis (FIH) or considers it plainly wrong, at least since the mid-80’s a few influential economists —who have certainly not embraced any unorthodoxcredo —have grown more receptive to this idea and eager to incorporate it in their models, even if diluted and sometimes disguised in order to make it more palatable to the conventional “representative” macroeconomist

Elephant seals have got too big for their beaches. A large specimen might weigh over 8000 lbs (3700 kg).Their size has a simple evolutionary explanation. Large males fight for the right to mate with a whole beach full of females. For elephant seals it is, quite literally, winner-takes-all. And the key to winning is simple – size.

We have grown accustomed to regulating financial markets based on imagined, not real markets. Real markets are shaped by and co-evolve with institutional arrangements within two fundamental constraints: Imperfect knowledge and the threat of illiquidity.

The financial sector can support growth but it can also cause crisis. The present crisis has exposedgaps in economists’ understanding of this dual potential.

In the seemingly never-ending aftermath to the economic crisis that began in 2007, there is little disagreement that financial markets are characterized by instability rather than stability.

Many feel that due to its size and scale the financial system has become a burden on society rather than a servant to it. What are the key elements of a productive financial sector?

Taking a long‐run view from economic history, I make three points about instability in financial markets. First, I argue that economic historians have a relatively good understanding of the proximate causes of financial crises.

The topic of this session of the INET conference is a question: does the effectiveness of fiscal policy in stabilizing an economy depend on the underlying economic context in which the policy is implemented?

The effectiveness of fiscal stimulus in promoting economic recovery appears to depend upon many factors.

What creates instability in financial markets? How does the weight of debt, the structure of expectations, or radical uncertainty contribute to instability?

In the last few years the impact of income distribution on macroeconomic dynamics has received growing academic attention.

Long periods of unequal incomes spur borrowing from the rich, increasing the risk of major economic crises

Higher income inequality in developed countries is associated with higher domestic and foreign indebtedness

Does greater inequality produce more fragile economic dynamics? Does concentration of wealth and income make societies more prone to crisis? If so, why?

We analyze shareholders’ incentives to change the leverage of a firm that has already borrowed substantially. As a result of debt overhang, shareholders have incentives to resist reductions in leverage that make the remaining debt safer.

Budget cuts can be dangerous. Inspired by the wrenching experience in Greece, increasing attention is now being paid to the fact that austerity may fail to reduce the government deficit if the economy declines in response, as is likely in a liquidity trap (Delong and Summers 2012).

A country that produces goods of high quality at a competitive price is likely to be rewarded for its ingenuity with a trade surplus. Small countries often achieve great development success through export-led growth. At the same time, the entire economic system must be balanced.

These are truly testing times. The world economic order – capitalism – is being called into question following the Lehman crisis. The world’s best form of societal organization – democracy – is being challenged by the economic success of autocratic countries such as China and Singapore.

When the very fabric of society is threatened by prolonged austerity or a financial sector collapse, a deliberate re-structuring of debt may be necessary to restore the hopes of renewed prosperity.

After an era of vigorous expansion a downturn can reveal a large stock of debt relative to the economy’s capacity to service it.

What has been learned now that the Euro zone’s fault lines have been revealed? Where are Europe and the Euro zone today?

The Institute joined the Centre for International Governance Innovation, and the Mercator Research Institute on Global Commons and Climate Change in hosting its third-annual plenary conference in Berlin from April 12-15, 2012.

In modern economies, individuals and companies engage in innovative activities, discovering new ways to use existing physical and human capital, and new technologies in which to invest. The institutional and broader social context within which these activities take place also changes in novel ways.

With my remarks today on financial markets and the financial crisis, I do not make any claims to originality. Rather, they are intended as a reminder of certain circumstances that are already familiar to us, in one form or another.

The global economy is in turmoil. Societies are unstable and not anchored by faith in the system or social order.

The economics profession stands on the fragile foundation of presuppositions adopted by professional agreement rather than as a result of empirical observation.

The human brain relies on three devices for its decisions: emotion controls; addictive learning; and intellectual processing. Understanding the conditions under which the three devices are engaged is essential for conscious decision-making.

George Soros, Axel Leijonhufvud and Perry Mehrling in Berlin, Germany (2012).

FT Alphaville has picked up on my friend James Sweeney’s latest, and since James cites the latest writings by other friends Zoltan Pozsar, Manmohan Singh, as well as my own most recent, the piece reads like a discussant’s comments on a shadow banking symposium.

Last week the central banks of China and Australia announced the creation of a $31bn currency swap line

Entangling alliances or entangling leagues are nothing to the entanglements of cash owing—Keynes

Discussion of the results of the ECB’s LTRO2 has revolved around the question of hoarding, specifically whether banks are using the newly-created reserves to fund new lending.

Fundamentally, the ECB is trying to keep the ongoing sovereign debt crisis from turning into a full-fledged bank credit crisis.

Perry and I extend our apologies for the unplanned hiatus. By way of breaking radio silence, it seems appropriate to check in on our two favorite banks.

A money view of SDRs

From a money view perspective, the central issue is settlement of TARGET balances between national central banks within the Eurozone, and the key is to understand TARGET balances as a kind of interbank correspondent balance.

The current account still matters, but other things do too, and maybe more. In light of recent focus on gross flows, here and elsewhere, I want to argue for the language of the balance of payments.

The title is the same as that of Maury Obstfeld’s Ely Lecture, delivered Jan 6 at the AEA meetings in Chicago. Yours truly was at the meetings mainly to deliver a paper on “Three Principles for Market-Based Credit Regulation”, about which more in a later post. And for most of the rest of the time I was locked in a hotel room interviewing candidates for an assistant professor slot at Barnard College (which gave me a good overview of the current state of macroeconomics, again fodder for a later post).

A correspondent sends us to a column of Paul Krugman’s that asserts that “nobody understands debt”. Fair enough.

When I started this blog, almost exactly one year ago today, my thought was to provide commentary on the financial events of the day, using the Financial Times as my primary source of information about those events.

This research project studies the endogenous emergence of systemic risk and bubble-and-burst dynamics and the transmission of financial shocks to the real economy.

This research project constructs a new theory of the relationship between law and finance through using case studies drawn from the global financial crisis as analytical windows for determining deficiencies of established theoretical frameworks

This research project develops a comprehensive research agenda to formulate proposals that will help make the financial sector sustainable and facilitate a transition to sustainable economic development.

As we prepare to digest the implications of this week’s ECB move, it seems worthwhile to take a look at the monetary economics of fixed exchange rates.

[The following guest post is by John Whittaker, from whom we have learned much of what we know about how the European payments system works. See his terrific papers here and here, both of which reward close study. He has been looking over the last couple Money View posts, and the comments to those posts, and has this to say.]

Why is the IMF getting involved in the Eurocrisis, and why is its involvement taking the form of lending to individual member states of the Eurozone?

The ECB has always been the protagonist of the eurozone crisis story.

The fact of the matter is that European bank funding markets are collapsing onto the ECB balance sheet.

Bloomberg’s reporters continue their diligent work looking back on the Fed’s lending in the subprime crisis.

Europe is embarked on a grand experiment, managing modern financial crisis without a dealer of last resort, so refusing to follow the lead of the 2008 Fed.

A week ago, Mark Carney, chairman of the Financial Stability Board, warned of emerging global consequences of the escalating eurozone crisis.

My first TV chat show performance:

The crisis has exposed the failure of economic models to deal sensibly with endogenously generated crises propagating from the financial sectors to the real economy, and back again.

Okay, so here is the statement, but what does it mean? Felix Salmon offers an unnamed advisor’s flowchart. Let’s see if Money View thinking can do better.

Last week Goldman Sachs published a note in favor of the Fed’s adopting a formal nominal GDP target, while Fed-watchers caught a whiff of a possible change in policy in the works.

Plumbing Matters

Focus on quantities

First ECB, then EFSF

Forget the G7, Watch the C5

At its core, this rolling crisis is really about financial globalization.

Financial Globalization versus the Nation State

While waiting for TALF

Can the renminbi displace the dollar as the world’s international money?