Tue 2010-10-12 16:01 EDT

billy blog >> Blog Archive >> Iceland ... another neo-liberal casuality

...For a real world example of the benefits of adopting a floating, sovereign, currency we can look to Argentina....At the time of the 2001 crisis, the government realised it had to adopt a domestically-oriented growth strategy. One of the first policy initiatives taken by newly elected President Kirchner was a massive job creation program that guaranteed employment for poor heads of households. Within four months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created jobs for 2 million participants which was around 13 per cent of the labour force. This not only helped to quell social unrest by providing income to Argentina's poorest families, but it also put the economy on the road to recovery. Conservative estimates of the multiplier effect of the increased spending by Jefes workers are that it added a boost of more than 2.5 per cent of GDP. In addition, the program provided needed services and new public infrastructure that encouraged additional private sector spending. Without the flexibility provided by a sovereign, floating, currency, the government would not have been able to promise such a job guarantee. Argentina demonstrated something that the World's financial masters didn't want anyone to know about. That a country with huge foreign debt obligations can default successfully and enjoy renewed fortune based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed. And then as growth resumes, renewed FDI floods in...sovereign governments are not necessarily at the hostage of global financial markets. They can steer a strong recovery path based on domestically-orientated policies -- such as the introduction of a Job Guarantee -- which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings...

Billy Blog; blogs Archive; Iceland; neo-liberal casuality.

Thu 2010-08-19 16:04 EDT

The AIG Bailout Scandal

William Greider

The government's $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG's collapse and subsequent rescue involved nearly all the critical elements, including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand--moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public. Three governmental investigative bodies have now pored through the AIG wreckage and turned up disturbing facts--the House Committee on Oversight and Reform; the Financial Crisis Inquiry Commission, which will make its report at year's end; and the Congressional Oversight Panel (COP), which issued its report on AIG in June. The five-member COP, chaired by Harvard professor Elizabeth Warren, has produced the most devastating and comprehensive account so far. Unanimously adopted by its bipartisan members, it provides alarming insights that should be fodder for the larger debate many citizens long to hear--why Washington rushed to forgive the very interests that produced this mess, while innocent others were made to suffer the consequences. The Congressional panel's critique helps explain why bankers and their Washington allies do not want Elizabeth Warren to chair the new Consumer Financial Protection Bureau...

AIG bailout scandal.

Sat 2010-07-24 15:55 EDT

The Path of Unemployment

Dean Baker

...The US, unlike most western European countries, is not set up to sustain long periods of high unemployment. Its system of social welfare is very much centered on work. This is most evident with health care. The vast majority of non-elderly people get their health care through employer provided health insurance. Individual policies tend to be very expensive, especially for people with any history of medical problems. When people lose their jobs, they generally lose their health care coverage as well...While the downturn has led to high and prolonged unemployment in the US, it has not had quite the same effect in Europe...several European countries, most notably Germany and the Netherlands, have adopted a policy of work sharing to limit unemployment...Under work-sharing schemes, instead of just paying workers for being completely unemployed, the government pays workers for being partly unemployed...Germany has been able to use this system to keep its unemployment rate from rising at all in the recession...In the US workers are seeing near double-digit unemployment with the implied loss of income and benefits, as well as the loss of self-esteem and social status that is associated with long-term unemployment. By contrast, workers in Germany and the Netherlands are adjusting to the falloff in demand with shorter workweeks and longer vacations...

path; unemployment.

Wed 2010-07-21 10:31 EDT

Social Democracy for the 21st Century: A Post Keynesian Perspective: Galbraith versus Krugman on Deficit Spending

In a recent post, Paul Krugman has criticised James K. Galbraith's view of deficit spending. The latter is obviously influenced by Modern Monetary Theory...Krugman has misunderstood Galbraith...Galbraith understands that there are real constraints on deficit spending, not phantom ``financial'' ones. Moreover, it is perfectly clear that Galbraith is talking about deficit spending during a period of high unemployment and low capacity utilization, and perhaps even in the face of a double dip recession. In his response to Galbraith, Krugman adopts the flawed quantity theory of money and attempts to prove mathematically what is perfectly obvious: that hyperinflation can result from continuous budget deficits that are monetized by the central bank. But, since Modern Monetary Theory already acknowledges that inflation is a real constraint on deficit spending, Krugman's analysis seems rather pointless.

21st century; deficit-spending; Galbraith versus Krugman; Post Keynesian Perspective; social democracy.

Fri 2010-06-18 10:37 EDT

Monetary Economics Review

Pablo Gabriel Bortz

Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, W. Godley and M. Lavoie, Palgrave/Macmillan, London, 2007...Acknowledging the existence of a complex institutional structure that includes households, firms, banks and governments (sometimes separated from the Central Bank), "our aspiration is to introduce a new way in which an understanding can be gained as to how these very complicated systems work as a whole"...the "new way" referred above is currently known as Stock-Flow Consistent modelling (SFC)...The main bid of Godley and Lavoie (G&L, from now on) is to show (successfully, one could note) that the SFC models make it necessary to fully articulate an accounting structure, avoiding "black holes", gaining in consistency, accuracy, and providing a common framework for the comparison of different models...one gets really convinced that it is the type of approach that makes it possible to analyse a great number of elements and complexities of the real world, as much as one wishes!...G&L adopt an institutional classification (households, firms, banks, government and the central bank). All the models presented in the book start with a "balance sheet" matrix, where all the assets and liabilities of each sector are described...

Monetary Economics Review.

Tue 2010-06-01 18:24 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 2

Bill Mitchell

Today, I offer Part 2 of my responses to the comments raised in the debate so far...Modern monetary theory does not use the term ``money'' in the same way as the mainstream because it creates instant confusion. As Scott said ``Money is always someone's liability, so better to be precise about whose liabilities we are talking about than saying money.'' That is why we emphasis fully understanding the asset-liability matches that occur in monetary systems. And that leads you to realise that transactions between government and non-government create or destroy net financial assets denominated in the currency of issue whereas transactions within the non-government sector cannot create net financial positions...So modern monetary theorists prefer to concentrate on what is going on with balance sheets after certain flows have occured rather than narrowly defining some financial assets as money and others not...There is no doubt that the non-government institutions can increase credit. Some slack analysts call this an increase in money. But the accurate statement is that, as a matter of accounting it increases the (in Scott's words) ``the quantity of financial assets and financial liabilities 1 for 1 in the non-govt sector. So, with private credit, there is BY DEFINITION no NET increase in private sector financial assets created.'' Once we understand that and note that typically the non-government sector seeks to net save in the currency of issue then modern monetary theory tells you that the public sector must run a deficit to underwrite this desired net saving or else see an output gap widen...Who is in control is an interesting question. Clearly, the government cannot directly control the money supply which renders much of the analysis in mainstream macroeconomics textbooks as being irrelevant. The Monetarists via Milton Friedman persuaded central banks to adopt monetary targetting in the 1980s and it failed a few years later -- miserably...Then you might like to consider it from the other angle -- a government which accepts responsibility for full employment can ``finance'' the saving desires of the non-government sector by increasing its deficit up to the level warranted by the spending gap (left by the full employment non-government savings)...Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition. The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns. In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending...to maintain high levels of employment and given that the public generally desire to hold some reserves of fiat money, the government balance will normally have to be in deficit...modern monetary theory demonstrates that if you want the non-government sector to net save...

Billy Blog; blogs Archive; Debate; reply Part 2; Spirit.

Tue 2010-06-01 17:29 EDT

billy blog >> Blog Archive >> In the spirt of debate ... my reply

Bill Mitchell

...Steve Keen and I agreed to foster a debate about where modern monetary theory sits with his work on debt-deflation. So yesterday his blog carried the following post, which included a 1000-odd word precis written by me describing what I see as the essential characteristics of modern monetary theory. The discussion is on-going on that site and I invite you to follow it if you are interested. Rather than comment on all the comments over on Steve's site, I decided to collate them here (in part) and help develop the understanding that way. That is what follows today... We distinguish the horizontal dimension (which entails all transactions between entities in the non-government sector) from the vertical dimension (which entails all transactions between the government and non-government sector)...A properly specified model will show you emphatically that the horizontal transactions between household, firms, banks and foreigners (which is the domain of circuit theory) have to net to zero even if asset portfolios are changing in composition. For every asset created there will be a corresponding liability created at the same time...you will make errors if there is not an explicit understanding that in an accounting (stock-flow) consistent sense all these transaction will net to zero. In adopting this understanding you might abstract from analysing the vertical transactions that introduced the high-powered money in the first place, but never deny its importance in setting the scene for the horizontal transactions to occur. I think the differences between Steve's models and modern monetary theory are two-fold. First, I do not think that Steve's model is stock-flow consistent across all sectors. By leaving out the government sector (even implicitly) essential insights are lost that would avoid conclusions that do not obey basic and accepted national accounting (and financial accounting) rules. This extends to how we define money. Second, I think Steve uses accounting in a different way to that which is broadly accepted. It might be that for mathematical nicety or otherwise this is the chosen strategy but you cannot then claim that your models are ground in the operational reality of the fiat monetary system we live in. I have no problem with abstract modelling. But modern monetary theory is firmly ground in the operational reality and is totally stock-flow consistent across all sectors. If we used the same definitions and rendered Steve's model stock-flow consistent in the same way as modern monetary theory then Steve's endogenous money circuits would come up with exactly the same results as the horizontal dimensions in modern monetary theory. His results might look a bit different in accounting terms but most of the message he wishes to portray about the dangers of Ponzi stages in the private debt accumulation process would still hold.

Billy Blog; blogs Archive; Debate; reply; spirt.

Sat 2010-05-22 21:13 EDT

EconPapers: An Alternative View of Finance, Saving, Deficits, and Liquidity

L. Randall Wray

This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have "soaked up" global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve's pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of U.S. banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it's necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit. I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the U.S. current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held--as liquid or illiquid assets. U.S. current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy. [MMT]

alternative view; Deficit; EconPapers; finance; liquidity; save.

Sat 2010-04-24 08:59 EDT

Rent-A-Front: New Group Wages Stealth Battle Against Wall Street Reform | TPMMuckraker

TPM Media

...every indication is that Stop Too Big To Fail is an astroturf operation funded by corporate interests to give the appearance of grassroots opposition to reform..."These guys made the KGB look like amateurs, and I used to work in Russia quite a lot," says Simon Johnson, a former chief economist at the IMF, now at MIT, who is a prominent advocate of breaking up the big banks...the group pays lip service to the idea of breaking up the big banks while at the same time adopting "bailout fund" rhetoric used by Republicans, all the while devoting its resources to trying to kill financial reform altogether...Stop Too Big To Fail co-founder Bob Johnson...is president of Consumers for Competitive Choice (C4CC), which runs Stop Too Big To Fail...Before C4CC was Consumers for Competitive Choice it was Consumers for Cable Choice. That group was funded by big telecoms like Verizon and fought to deregulate the cable industry...the man who reached out to economist Simon Johnson about joining the Stop Too Big To Fail call was Oliver Wolf, a director with the DCI Group. DCI is the Washington public affairs firm that specializes in astroturf efforts and has worked for everyone from the Burmese junta to the tobacco industry.

front; New Group Wages Stealth Battle; renting; TPMmuckraker; Wall Street reforms.

The Money Game Fri 2010-03-19 12:38 EDT

Kenneth Rogoff's Sovereign Debt Warnings Are So Wrong, It's Like He's Living In A Different Time Period

Marshall Auerback

We've persistently taken the view that there is no economic doctrine, no magic number, which would imply a firm external constraint as far as public spending goes, when dealing with a sovereign government issuing debt its own floating rate, non-convertible currency. At some point, we may indeed have a resource constraint, or an inflation constraint, but not a national solvency issue. Yet the hysteria surrounding fiscal policy has moved from the realm of rational debate and metamorphosed into a matter of national theology...A sovereign government is never hostage to the dictates of financial capital because it no longer faces the external constraint that was always present under a gold standard regime. A nation that adopts its own floating rate currency can always afford to put unemployed domestic resources to work. Its government may issue liabilities denominated in its own currency (for interest rate maintenance reasons or to offer its savers an interest-bearing alternative to cash), and will service any debt it issues in its own currency...

different time periods; Kenneth Rogoff's Sovereign Debt Warnings; lively; Money game; wrong.

zero hedge Fri 2009-10-23 19:30 EDT

A Stern Opponent Of Funding The FDIC's Depleted Deposit Insurance Fund, And Monetization Is... Alan Greenspan?

What a difference twenty years makes. The man whose actions basically lead to the eradication of the American middle class in its aspirational pursuit of buying massive SUVs, Prada bags, and 3rd investment properties, compliments of cheap credit, in order to appear ever so much like the upper class yet ultimately drowning itself in debt, Alan Greenspan, is probably the most critical reason why America's debt service will be nearly 90% of GDP within several decades. The adoption of his actions by the current deranged operator of the reserve currency printing press, is merely a continuation of a multiple decade long process of keeping inflation contained at the expense of devaluing the US currency, as the global liquidity pyramid recently hit one quadrillion, and continues to grow exponentially, yet...

Alan Greenspan; FDIC's Depleted Deposit Insurance Fund; funds; monetize; Stern Opponent; Zero Hedge.

The Full Feed from HuffingtonPost.com Sat 2009-10-10 13:01 EDT

Elizabeth Warren: Serious Questions Remain About Obama's Loan Relief Plan

The Huffington Post News Editors

The Obama administration's effort to help homeowners avoid foreclosure may not achieve its goal of helping 3 million to 4 million borrowers and may simply delay mortgage defaults for many, a government watchdog group says. The Congressional Oversight Panel, charged with making regular assessments of the $700 billion financial rescue fund enacted last year, said the Treasury Department should consider whether to improve the current $50 billion program or adopt new programs to meet an expected rise in foreclosures fed by increased unemployment...

com; Elizabeth Warren; full Feeds; HuffingtonPost; Obama's Loan Relief Plan; Serious questions remain.

Sun 2009-09-20 14:12 EDT

America's Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession | The New America Foundation

Thomas Palley

This report traces the roots of the current financial crisis to a faulty U.S. macroeconomic paradigm. One flaw in this paradigm was the neo-liberal growth model adopted after 1980 that relied on debt and asset price inflation to drive demand. A second flaw was the model of U.S. engagement with the global economy that created a triple economic hemorrhage of spending on imports, manufacturing job losses, and off-shoring of investment. Deregulation and financial excess are important parts of the story, but they are not the ultimate cause of the crisis. Instead, they facilitated the housing bubble and are actually part of the neo-liberal model, their function being to fuel demand growth based on debt and asset price inflation. The old post-World War II growth model based on rising middle-class incomes has been dismantled, while the new neo-liberal growth model has imploded. The United States needs a new economic paradigm and a new growth model, but as yet this challenge has received little attention from policymakers or economists.

America's Exhausted Paradigm; Financial Crisis; Great Recession; Macroeconomic Causes; New America Foundation.

The IRA Analyst Sun 2009-09-13 12:14 EDT

House Testimony: The Trouble With Models Starts With Subjectivity

...we have now many examples where a model or the pretense of a model was used as a vehicle for creating risk and hiding it. More important, however, is the role of financial models for creating opportunities for deliberate acts of securities fraud..the widespread use of [VaR] statistical models for risk management suggest that financial institutions are subject to occasional "Black Swans" in the form of risk events that cannot be anticipated...We don't actually believe there is such a thing as a "Black Swan."...leaders in finance and politics simply made the mistake of, again, believing in what were in fact flawed models...Or worse, our leaders in Washington and on Wall Street decided to be short sighted and not care about the inevitable debacle...We need to simply ensure that all of the financial instruments in our marketplace have an objective basis, including a visible, cash basis market that is visible to all market participants. If investors cannot price a security without reference to subjective models, then the security should be banned from the US markets as a matter of law and regulation. To do otherwise is to adopt deception as the public policy goal of the US when it comes to financial markets regulation.

House testimony; IRA Analyst; models starting; subject; Troubles.