Social Democracy for the 21st Century: A Post Keynesian Perspective Thu 2010-09-30 08:12 EDT

Would Keynes have endorsed Modern Monetary Theory/Neochartalism?

Lord Keynes

...what would Keynes have thought of neochartalism/modern monetary theory (MMT)? MMT developed from Abba Lerner's theory of functional finance, as well as G. F. Knapp's theory of chartalism, as propounded in his book The State Theory of Money...MMT tells us that the government is the monopoly issuer of its own currency. Hence the government is not revenue-constrained. Taxes and bond issues do not finance government spending. No entity with the power to create and destroy money at will requires anyone to ``fund'' its spending. Having said this, one must immediately say that, even though deficits are not ``financially'' constrained in the normal sense, they do face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, labour available (= unemployment level), and external balance...My discussion is based on the fundamental article by David Colander on this subject...``Lerner approached Keynes and asked: `Mr. Keynes, why don't we forget all this business of fiscal policy, public debt and all those things, and have some printing presses.' Keynes, after looking around the room to see that no newspaper reporters could hear, replied: `It's the art of statesmanship to tell lies but they must be plausible lies.' ''...

21st century; endorsed Modern Monetary Theory/Neochartalism; Keynes; Post Keynesian Perspective; social democracy.

Tue 2010-08-03 14:34 EDT

Rajiv Sethi: The Economics of Hyman Minsky [2009-12-03]

There has been a resurgence of interest in the economic writings of Hyman Minsky over the past few years, and for good reason...Minsky's theoretical framework combines a cash-flow approach to investment with a theory of financial instability...expectations of financial tranquility are self-falsifying. Stability, as Minsky liked to put it, is itself destabilizing...An essential feature of Minsky's financial instability hypothesis is that a long period of sustained stability gives rise to changes in financial practices which are not conducive to the persistence of stable growth...A sustained period of stability gives rise to optimistic expectations and a rise in speculative financing...if a large number of investments which are prompted by the availability of speculative finance are found to be inept, so that immediate cash flows are significantly lower than expected, then the need for short-term refinancing becomes acute while at the same time banks are less willing to roll over existing debt. A sharp rise in short-term interest rates occurs which can lead to present value reversals, a rush towards liquidity, a plunge in the prices of illiquid assets, both real and financial, and a corresponding drop in new investments...described as a credit crunch, a state of financial distress, or a financial crisis...

2009-12-03; economic; Hyman Minsky; Rajiv Sethi.

naked capitalism Fri 2010-07-16 16:15 EDT

What is Simon Johnson Smoking?

Simon Johnson...incorrectly celebrates a toothless provision in the Dodd-Frank bill as being tantamount to an anti-trust act for too big to fail banks...If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero...The problem is it not merely the size of these firms, but the fact that they control infrastructure that is deemed critical to modern commerce. I'll get into specifics in short order, but in some cases the firm owns critical plumbing outright; in other cases, it is so tightly networked to other firms that mucking with it very much runs the risk of taking down the rest of the grid...Citi runs a big corporate cash management/reporting system called GTS...And no one is going to dare tamper with JP Morgan's clearing business...The problem is that it would take a radical restructuring of the very biggest banks, the critically placed dealer firms, and the most important payment and clearing operations to make a real dent in systemic risk. The officialdom the political lacked the will to do so at the peak of the crisis, and there is no basis for fantasizing that it will suddenly develop more nerve now.

naked capitalism; Simon Johnson Smoking.

billy blog Mon 2010-06-14 18:13 EDT

The OECDs perverted view of fiscal policy

...the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks...

Billy Blog; fiscal policies; OECDs perverted view.

Jesse's Café Américain Sun 2010-05-09 08:30 EDT

Guest Post: The Perils of Credit Money Systems Managed by Private Corporations

Jesse

...The paper system being founded on public confidence and having of itself no intrinsic value, is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.The corporations which create the paper money cannot be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business. And when these issues have been pushed on from day to day until the public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given; suddenly curtail their issues; and produce an unexpected and ruinous contraction of the circulating medium which is felt by the whole community. The banks, by this means, save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people...Recent events have proved that the paper money system of this country may be used as an engine to undermine your free institutions; and that those who desire to engross all power in the hands of the few and to govern by corruption or force are aware of its power and prepared to employ it... Andrew Jackson, Farewell Address, March 4, 1837

Credit Money Systems Managed; Guest Post; Jesse's Café Américain; peril; private corporations.

zero hedge Fri 2010-04-23 20:02 EDT

An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility

Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent...

equity markets; Fed's interventions; overview; Primary Dealers Credit Facility; Zero Hedge.

naked capitalism Tue 2010-04-20 09:43 EDT

Satyajit Das: New & Old Greek Lessons

...Like many of the economically weaker EU members, Greece fudged the numbers to meet the qualifications for entry into the Euro. One example of this is the use of derivative transactions with Goldman Sachs to disguise the level of its real borrowing. Membership of the Euro also reduced the ability of Greece to manage its economy. It lost the ability to use its currency, via devaluations, to improve competitiveness and stimulate exports. It also lost the ability to set interest rates (now set by the European Central Bank (''ECB'')). It also cannot print its own currency to fund sovereign borrowing. Greece also has low levels of domestic saving...Greece's problems are probably incapable of solution and terminal. Temporary emergency funding may help meet immediate liquidity needs but do not solve fundamental problems of excessive debt and a weak economy...the optimal course of action for Greece may be to withdraw from the Euro, default on its debt (by re-denominating it in a re-introduced Drachma) and then undertake a program of necessary structural reform...The current debate misses the fact that the ``bailouts'' are mainly about rescuing foreign investors...

naked capitalism; new; Old Greek Lessons; Satyajit Das.

The Full Feed from HuffingtonPost.com Tue 2010-03-09 17:30 EST

Janet Tavakoli: Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold

Janet Tavakoli

Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these "financial weapons of mass destruction" levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull's-eye...

Ban U.S. Credit Derivatives; com; full Feeds; HuffingtonPost; Janet Tavakoli; Traders Demand Gold; WASHINGTON.

Jesse's Café Américain Mon 2010-01-18 09:56 EST

Franklin Roosevelt's First Inaugural Address: A Fitting Reminder For Our Crisis Today

Jesse

...I never read it in full, but like most people just remember the famous quote about fear. It's worth reading this. It shows a mindset in terrible, overwhelming times that was determined to set things right, not to take care of business, but to address the business of the people directly, and not only the immediate concerns of the crisis but the long term problems that caused the financial collapse in meaningful ways...

Crisis; fitting reminder; Franklin Roosevelt's; inaugural addresses; Jesse's Café Américain.

zero hedge Fri 2010-01-15 17:46 EST

Is The Mysterious "Direct Bidder" Simply China Executing 'Quantitative Easing' On Behalf Of The Federal Reserve?

...we make the claim that the Fed has now informally offloaded the Treasury portion of Quantitative Easing to China, which does so via the elusive Direct Bid. It also explains why the Fed has generically been much less worried about TSY purchases under Q.E. (a mere $300 billion out of a total $1.7 trillion in monetization). It does beg the question of just how much Chinese holdings of US Debt truly are, as this number is likely hundreds of billions higher than the disclosed $799 billion...if there is indeed an implicit understanding between Bernanke and his Chinese colleagues, it means that not only the housing market (via Agency and MBS security purchases), but the Treasury market as well, are both manipulated beyond recognition and implies that broad securities are massively overvalued due to the stealth purchasing of core "riskless" assets by the US and China, as investors look higher in the cap structure for yield. Lastly, implications for world trade are great, as Asian countries will have to deal not only with the Chinese behemoth, which will constantly seek to keep its currency as low as possible, thus exacerbating the rest of Asia's foreign trade balances, but that of the US itself. The immediate implication is that China (or the US for that matter) will likely not reflate their currencies out of their own volition any time in the foreseeable future. Look for a much weaker dollar in the coming months.

behalf; Direct bidders; Federal Reserve; mysteriously; Quantitative Easing; Simply China Executing; Zero Hedge.

zero hedge Mon 2009-12-28 15:12 EST

Quantitative Easing Has Been A Monetary Failure; Persistent Deflation Means More Fed Intervention Coming Soon

As more and more pundits discuss the spectre of inflation, with gold flying to all time highs which many explain as an inflation hedge, not to mention stock price performance which is extrapolating virtual hyperinflation, the market "truth" as determined by Fed Fund futures and options is, and continues to be, diametrically opposite...Bernanke is very likely about to unleash Quantitative Easing 2: If the $1.7 trillion already thrown at the problem has not fixed it, you can bet that the Chairman will not stop here. Furthermore, as the Fed has the best perspective on the economy, which is certainly far worse than is represented, the Fed has to act fast before things escalate even more out of control. Which is why Zero Hedge is willing to wager that not only will the agency/MBS program not expire in March as it is supposed to, but that a parallel QE process will likely begin very shortly. The end result of all these actions, of course, is that the value of the dollar is about to plummet: when Bernanke announces that not only will he not end QE but that he will launch another version of the program, expect the dollar to take off on its one way path to $2 = €1. And when that happens, look for global trade to cease completely. In its quest to continue bailing out the banking system and rolling the trillions of toxic loans it refuses to accept are worthless (for if it did, equity values in the banking system would go, to zero immediately), the Fed will promptly resume destroying not only the US middle class, but the entire system of global trade built through many years of globalization. Look for America to end up in an insulated liquidity bubble in a few short years, trading exclusively with its vassal master: the People's Republic of China.

Fed Intervention Coming; Monetary Failure; Persistent Deflation Means; Quantitative Easing; Zero Hedge.

zero hedge Thu 2009-12-17 10:37 EST

Is Selling US CDS A Risk-Free Way To Short The Dollar?

There has been much conjecture on whether using CDS is an effective way to hedge against US default risk. Many theoreticians, especially those of the post-March lows variety, have sprung up and are speculating that buying Credit Default Swaps on the US is ultimately a futile and pointless endeavor. The main argument: a US default would likely mean that interconnected dealers won't recognize contracts on a US default event, as they themselves will be out of business. Even if they continued to exist, like cockroaches in a postapocalyptic world, the collateral which backs derivatives is mostly US Treasurys: the same obligations that would end up being massively impaired...the US CDS seller syndicate could easily be one of the key sources of dollar short funding: with sellers pocketing euros and immediately going to market and selling dollars...a dollar-short unwind would probably have repercussions in the US CDS market. Not only would the dollar spike, but paradoxically US credit risk would probably widen dramatically...any unwind at the heart of the prevalent risk trade now: the massive dollar carry, would impact virtually every investment product, quite possibly in self-referential feedback loops. If correct, it merely shows how much more the Fed has at stake in keeping the dollar depressed than merely getting mom and pop to buy Amazon at $130/share. Losing control of the carry trade will be the systemic equivalent of allowing Lehman's book to be marked-to-market: a potentially complete collapse in systemic confidence, which would have such far ranging implications as the $300 trillion interest rate derivative market. And when sudden volatility reaches this product universe which is 6 times bigger than world GDP, the events from last year will seem like a dress rehearsal.

CDS; Dollar; Risk-Free Way; sell; short; Zero Hedge.

Wed 2009-11-25 09:59 EST

Hussman Funds - Weekly Market Comment: "Should Come as No Shock to Anyone" - November 16, 2009

John P. Hussman

The big picture is this. There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed's position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed's actions, and can't make long-term loans with these funds anyway. Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government. This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

2009; comes; Hussman Funds; November 16; shocks; weekly market comments.

Jesse's Café Américain Thu 2009-11-19 10:51 EST

Tim Geithner's $14 Billion Gift of Taxpayer Funds to Goldman Sachs: Crisis Profiteering?

Jesse

Tim Geithner should be given the option to resign immediately, or be fired. He is either incompetent, too conflicted to do his job with the banks properly, or possibly both. Stephen Friedman should be investigated for $5.4 million in profits made through potential insider trading. His breach of fiduciary responsibility as chairman of the NY Fed is shocking. The entire integrity of the Federal Reserve bank should be called into question. There is no place for the Fed to be the primary regulator of the financial system given their penchance for secrecy and cronyism, and their inability to manage their own shop from such scandalous conflicts of interest...

14; Crisis Profiteering; gifts; Goldman Sachs; Jesse's Café Américain; taxpayer funds; Tim Geithner's.

zero hedge Thu 2009-11-19 10:38 EST

An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility

the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

equity markets; Fed's interventions; overview; Primary Dealers Credit Facility; Zero Hedge.

Thu 2009-11-19 10:09 EST

The downfall of Washington Mutual - Puget Sound Business Journal (Seattle)

Kirsten Grind

WaMu suffered through not one but two bank runs in its final months. The first run was many times larger than the run that felled California lender IndyMac in July 2008, though neither shareholders nor the public knew about it. WaMu survived that run, and the second run was tapering off when regulators moved in and shut the bank, citing the run as the reason. In addition, WaMu's top executives, led by CEO Alan Fishman, were trying to sell the bank after federal regulators imposed a deadline, only to discover that they were being undermined by those same regulators, executives say. The government's plan to seize the bank, if it became known beforehand, would cause potential buyers to immediately cool their heels, because buying after a government takeover would be a lot cheaper than even the desperate private purchase deal that Fishman was seeking.

downfall; Puget Sound Business Journal; Seattle; Washington Mutual.

naked capitalism Thu 2009-10-08 16:47 EDT

Latvia in Crisis; Threatens to Stiff Swedish Banks With Mini-Jubilee

Latvia and to a lesser extent Estonia and Lithuania had a massive and unsustainable current account deficit...Foreign benefactors have just put the choke collar on Latvia. The government was unable to roll over its debt this week...Sweden on Tuesday put pressure on the tiny Baltic nation to fulfill required spending cuts, threatening to withhold payments [from a] euro rescue loan put together by Nordic countries...But Latvia does not appear to be ready to accede to Sweden's demands. The immediate cause for concern is that Latvia will simultaneously devalue its currency and provide a mechanism for its consumers to partially default on mortgages held by foreign banks.

Crisis; Latvia; Mini-Jubilee; naked capitalism; Stiff Swedish Banks; threatens.

Wed 2009-10-07 10:31 EDT

Beijing's derivative default stance rattles banks

Reuters

For banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like...Air China, China Eastern and shipping giant COSCO -- among the Chinese companies that have reported huge derivatives losses since last year -- had issued almost identical notices to banks.

Beijing's derivative default stance rattles banks.

naked capitalism Sun 2009-09-20 11:53 EDT

Financial Reform: Not happening but the need is clear

Edward Harrison of Credit Writedowns

If you are looking for reform in the financial sector, the moment has passed. And only to the degree that the underlying weaknesses in the global financial system are made manifest and threaten the economy will we see any appetite for reform amongst politicians. So, as I see it, the Obama administration has missed the opportunity for reform...Steve Keen, an Australian economist whose theories are heavily influenced by Hyman Minsky, has a cogent analysis of the true structural deficits in the current economic model...today we have finally reached a level of debt which is so great that another reflation is impossible. The collapse is now....unlike Keen, I am not convinced the time is now...What I would like to see is economic thought leaders developing a blueprint of a financial crisis strategy which tackles both the immediate crisis issues (liquidity) and the structural, regulatory and monetary issues that create financial volatility (solvency). When crisis does occur, I believe it will be systemic in nature due to the forces Keen so lucidly explains. Therefore, a blueprint which is 1) heavy on tactics and, 2) if implemented in a real systemic crisis, is likely to work, builds credibility. This is political capital which will carry over to longer-term preventive strategies and reforms.

clear; Financial reform; happened; naked capitalism; needed.

Jesse's Café Américain Sun 2009-08-30 12:00 EDT

A Run On the Funds: Majority of Cerberus Investors Want Out -- Now

Jesse

When investors or depositors ask for the immediate withdrawal of 71% of their money there is only one thing to call it: a run on the bank.The selling in the markets is still quiet, and overshadowed by some of the visible bubbles in financial assets and rosy headlines. The bank bailouts are working, but only to produce a false Spring to lure in the last of the greater fools.

Cerberus Investors Want; funds; Jesse's Café Américain; major; running.

ClubOrlov Wed 2009-08-26 11:24 EDT

Definancialisation, Deglobalisation, Relocalisation

kollapsnik

This talk was presented at The New Emergency Conference in Dublin, on June 11, 2009. ``we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours'' ``Most of the wealth is in very few private hands right now. Governments and the vast majority of the people only have debt. It is important to convince people who control all this wealth that they really have two choices. They can trust their investment advisers, maintain their current portfolios, and eventually lose everything. Or they can use their wealth to reengage with people and the land in new ways, in which case they stand a chance of saving something for themselves and their children. They can build and launch lifeboats, recruit crew, and set them sailing.'' 1. Good morning. The title of this talk is a bit of a mouthful, but what I want to say can be summed up in simpler words: we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours. I will take as my point of departure the unfolding collapse of the global economy, and discuss what might come next. It started with the collapse of the financial markets last year, and is now resulting in unprecedented decreases in the volumes of international trade. These developments are also starting to affect the political stability of...

ClubOrlov; Definancialisation; Deglobalisation; relocalisation.