from Dean Baker
Federal Reserve Board Chair Janet Yellen made waves in her Congressional testimony last week when she argued that social media and biotech stocks were over-valued. She also said that the price of junk bonds was out of line with historic experience. By making these assertions in a highly visible public forum, Yellen was using the power of the Fed’s megaphone to stem the growth of incipient bubbles. This is an approach that some of us have advocated for close to twenty years.
Before examining the merits of this approach, it is worth noting the remarkable transformation in the Fed’s view on its role in containing bubbles. Just a decade ago, then Fed Chair Alan Greenspan told an adoring audience at the American Economic Association that the best thing the Fed could do with bubbles was to let them run their course and then pick up the pieces after they burst. He argued that the Fed’s approach to the stock bubble vindicated this route. Apparently it did not bother him, or most of the people in the audience, that the economy was at the time experiencing its longest period without net job growth since the Great Depression.
The Fed’s view on bubbles has evolved enormously. Most top Fed officials now recognize the need to take steps to prevent financial bubbles from growing to the point that their collapse would jeopardize the health of the economy. However there are two very different routes proposed for containing bubbles. Read more…
from Dean Baker
Floyd Norris has an interesting piece discussing Citigroup’s $7 billion settlement for misrepresenting the quality of the mortgages in the mortgage backed securities it marketed in the housing bubble. Norris notes that the bank had consultants who warned that many of the mortgages did not meet its standards and therefore should not have been included the securities.
Towards the end of the piece Norris comments:
“And it may well be true that actions like Citigroup’s were necessary for any bank that wanted to stay in what then appeared to be a highly profitable business. Imagine for a minute what would have happened in 2006 if Citigroup had listened to its consultants and canceled the offerings. To the mortgage companies making the loans, that might have simply marked Citigroup as uncooperative. The business would have gone to less scrupulous competitors.”
This raises the question of what purpose is served by this sort of settlement. Undoubtedly Norris’ statement is true. However, the market dynamic might be different if this settlement were different. Read more…
from Mark Weisbrot
Back in 1998, when middle-income Asian countries were hard hit by big capital outflows, there was an effort – joined by China, Japan, Taiwan and other countries—to put together an Asian Monetary Fund to offer balance of payments support. Washington vetoed the idea, insisting that all assistance had to go through the IMF. The result was a mess, including an unnecessarily deep regional recession, as the IMF failed to act as a lender of last resort, and then attached all kinds of harmful and unnecessary conditions to its lending.
But the world has changed a lot in the past 15 years. Last week the BRICS countries (Brazil, Russia, China, India, and South Africa) decided to form the Contingent Reserve Arrangement (CRA) and the New Development Bank (NDB), and the United States will not have a veto this time. These new institutions have the potential to become a game changer for the world economy.
The western media coverage of these events has been mostly dismissive, but that primarily reflects the concerns of Washington and its allies. They have had unchallenged sway over the decision-making institutions of global financial governance for 70 years, and the last thing they want to see is competition. But competition is exactly what the world needs here. Read more…
from Lars Syll
But I am unfamiliar with the methods involved and it may be that my impression that nothing emerges at the end which has not been introduced expressly or tacitly at the beginning is quite wrong … It seems to me essential in an article of this sort to put in the fullest and most explicit manner at the beginning the assumptions which are made and the methods by which the price indexes are derived; and then to state at the end what substantially novel conclusions has been arrived at …
I cannot persuade myself that this sort of treatment of economic theory has anything significant to contribute. I suspect it of being nothing better than a contraption proceeding from premises which are not stated with precision to conclusions which have no clear application … [This creates] a mass of symbolism which covers up all kinds of unstated special assumptions.
Letter from Keynes to Frisch 28 November 1935
from Lars Syll
How far the motives which I have been attributing to the market are strictly rational, I leave it to others to judge. They are best regarded, I think, as an example of how sensitive – over-sensitive if you like – to the near future, about which we may think that we know a little, even the best-informed must be, because, in truth, we know almost nothing about the more remote future …
The ignorance of even the best-informed investor about the more remote future is much greater then his knowledge … But if this is true of the best-informed, the vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing … This is one of the odd characteristics of the Capitalist System under which we live …
It may often profit the wisest to anticipate mob psychology rather than the real trend of events, and to ape unreason proleptically … (The object of speculators) is to re-sell to the mob after a few weeks or at most a few months. It is natural, therefore, that they should be influenced by the cost of borrowing, and still more by their expectations on the basis of past experience of the trend of mob psychology. Thus, so long as the crowd can be relied on to act in a certain way, even if it be misguided, it will be to the advantage of the better informed professional to act in the same way – a short period ahead.
from Peter Radford
One of the central beliefs held by people who advocate a market based worldview is that, somehow, markets are apolitical, they are antiseptic, they are objective. This is nonsense. It is dangerous nonsense.
That markets work according to rules does not make them objective or even impersonal. Rules are human constructs. Ergo markets are simple extensions of base human attitudes and are thus fraught with all the frailties that encumber all human activity.
The sanitization of markets, by which I mean the constant effort to make them appear “natural” or “neutral” and thus “fair”, is an ideological cover that market ideologues desperately, and successfully, propagate. It is a cover to mask the consequences of this supposed naturalness and to give it the imprint of ethical cleanliness. After all if the outcomes of a market are simply those of nature working her course, who are we too argue?
Economists, or at least orthodox economists, are the great cheerleaders of this ruse to get us all to accept our fate. Over the course of the development of economics much work has been put in to the elucidation of the mechanics of markets. There is an overpowering sense of determinism in the result. Start here, crank the machinery, and let the outcomes just flop out. The market is such that any outcome is “correct”, because left untouched market machinery always hones in on the superior outcome. Thus the current distribution of income “must” be the correct one: the market created it and the market is always, unerringly, right. Read more…
from Lars Syll
Almost a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find mainstream economists that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight into their theories and models.
The standard view in economics – and the axiomatic probability theory underlying it – is to a large extent based on the rather simplistic idea that “more is better.” But as Keynes argues – “more of the same” is not what is important when making inductive inferences. It’s rather a question of “more but different.”
Variation, not replication, is at the core of induction. Finding that p(x|y) = p(x|y & w) doesn’t make w “irrelevant.” Knowing that the probability is unchanged when w is present gives p(x|y & w) another evidential weight (“weight of argument”). Running 10 replicative experiments do not make you as “sure” of your inductions as when running 10 000 varied experiments – even if the probability values happen to be the same. Read more…
from David Ruccio
According to a new study by Fabian T. Pfeffer, Sheldon Danziger, and Robert F. Schoeni,
Through at least 2013, there are very few signs of significant recovery from the losses in wealth experienced by American families during the Great Recession. Declines in net worth from 2007 to 2009 were large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their wealth. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.
from Steve Keen
The European Stability and Growth Pact is based on the principle that stability and growth are enhanced when government deficits are either minimised or eliminated. I want you to dispassionately consider an argument that reaches a different conclusion. It may sound like something you have heard before from others and already dismissed. But bear with me.
When considered from a strictly monetary point of view, an economy can be regarded as having five major sectors: households, firms, the government, the banks, and the external sector. To focus on money flows, I will diverge from mainstream economic theory by treating households as consisting exclusively of workers, while I will combine firms and their owners into the firm sector, and do likewise with banks and their owners. I also treat the central bank as part of the government sector, and I ignore capital and income flows between nations in this simple exposition.
Neither households nor firms can produce money, while the other three sectors are potential sources of money. As is now well known (though this fact is still contested by academic economists), banks create money by making loans:
Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. (Bank of England Quarterly Report 2014 Q1, Money creation in the modern economy.)
Governments can also create money by running a deficit (if it is financed by the central bank, or by bonds sold to banks in return for excess reserves). Money can also be created by running a balance of payments surplus (which in this simple exposition is exclusively a balance of trade surplus).
from Dean Baker
Many self-styled libertarians have been celebrating the rise of Uber. Their story is that Uber is a dynamic start-up that has managed to disrupt the moribund cab industry. The company now has a market capitalization of $17 billion.
While Uber’s market value probably depends mostly on its ability to evade the regulations that are imposed on its competitors, the company has succeeded in transforming the industry. At the least we are likely to see a modernized regulatory structure that doesn’t saddle cabs with needless regulations and fees.
Unfortunately, the taxi industry is not the only sector of the U.S. economy that can use modernization. The pharmaceutical industry makes the taxi industry look like cutting edge social media. The government imposed barriers to entry in the pharmaceutical industry don’t just raise prices by 20 or 30 percent, as may be the case with taxi fares, they raise prices by a factor or ten, twenty, or even one hundred (that would be 10,000 percent). Read more…
from Lars Syll
Walked-out Harvard economist Greg Mankiw has more than once tried to defend the 0.1 % by invoking Adam Smith’s invisible hand:
[B]y delivering extraordinary performances in hit films, top stars may do more than entertain millions of moviegoers and make themselves rich in the process. They may also contribute many millions in federal taxes, and other millions in state taxes. And those millions help fund schools, police departments and national defense for the rest of us …
[T]he richest 1 percent aren’t motivated by an altruistic desire to advance the public good. But, in most cases, that is precisely their effect.
When reading Mankiw’s articles on the “just desert” of the 0.1 % one gets a strong feeling that Mankiw is really trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they “deserve.”
Where does this view come from? Most neoclassical economists actually have a more or less Panglossian view on unfettered markets, but maybe Mankiw has also read neoliberal philosophers like Robert Nozick or David Gauthier. The latter writes in his Morals by Agreement:
The rich man may feast on caviar and champagne, while the poor woman starves at his gate. And she may not even take the crumbs from his table, if that would deprive him of his pleasure in feeding them to his birds.
Now, compare that unashamed neoliberal apologetics with what three truly great economists and liberals — John Maynard Keynes, Amartya Sen and Robert Solow — have to say on the issue: Read more…
The gap in the USA between the rate of growth of productivity (now at 11.4 percent) and that of wages (1.5 percent) continues to widen
from David Ruccio
The gap between the growth of productivity (now 11.4 percent higher than in January 2007) and that of wages (only 1.5 percent higher) continues to widen (according to Reuters).
Is it any wonder, then, that income inequality continues to rise?
from David Ruccio
from Dean Baker
We usually think of charities as being a story where money flows down from those on top to those who are most in need. But in our vibrant 21st century economy, charity often flows in the opposite direction, with rest of us subsidizing the incomes of very rich. That is the implication of several recent news stories.
For example, we have John Sexton the president of New York University. The university was recently in the news because of a story reporting that workers building its Abu Dhabi campus are often beaten and have their wages stolen. This campus is part of an ambitious expansion plan designed by Sexton, who reportedly makes $1.5 million a year and stands to pocket a “longevity bonus” of $2.5 million if he stays into 2015.
The University of Chicago is another school where the president, Robert Zimmer, appears to be doing rather well financially. Mr. Zimmer’s compensation for 2013 was reportedly $1.9 million after having spiked to $3.4 million the prior year. This compensation comes in spite of the fact that the school has an operating deficit and may be at risk of a credit downgrade.
A study by the Institute for Policy Studies found that student debt and low-paid faculty increased more rapidly at the universities with the 25 highest paid presidents than the national average. At the very least this suggests high presidential pay is not associated with scoring well in terms of either holding down student debt or minimizing the share of adjunct faculty. Read more…
from David Ruccio
Here is a free 800 page book from the World Economics Association
Paul D. Egan and Philip Soos
In Bubble Economics, Paul Egan and Philip Soos explore a depressed Australia in the 1840s, 1890s and 1930s. They detail recurrent patterns of boom-bust credit and asset cycles which heralded financial instability, particularly following speculation in commercial and residential land markets.A financial stability model is put forward to predict economic downturns which is based on Georgist, post-Keynesian and behavioural finance schools of economic thought, informed by data from 1830 to 2013. The trends in Australia’s current trade settings, residential property market and banking sector are ominously similar to the key precursors to Australia’s ‘Great Depression’ of the 1890s – a recession or depression may now be imminent. Egan and Soos expose ‘rentier economics’ in the land down under and discard the dominant neoclassical paradigm, bringing a fresh perspective to the intense debate about Australia’s economic future.
from Steve Keen
I’ve spent the past two weeks in Europe, with speaking engagements in Italy, Greece and Austria. This was my first visit to Greece, and my first chance to get an admittedly superficial tourist’s view of what a country with Great Depression levels of unemployment looks like.
It didn’t look like anything in particular until the drive from Athens, Greece’s capital and largest city, to Thessaloniki, its second largest. Then it struck me: the roads were near empty — as the toll booth shown in Figure 1 illustrates. My host Nikos reckons he has done a million kilometers over the years on this 500km drive, and he confirmed that roads which were now virtually empty were once full of cars, and especially trucks — that mobile sign of a thriving economy.
Figure 1: A toll booth on Greece’s main highway at about 5pm: no vehicles in either direction
This is a very different manifestation of economic stagnation than the mental picture I had of it from the historical record of the Great Depression, when the overwhelming impression was of crowds: crowds lined up at soup kitchens, crowds outside dole offices. Today, the 28 per cent of Greek’s workforce that is unemployed is mainly at home (if they have homes), and surviving on electronically transmitted dole payments. The social organisation of the unemployed that marked the Great Depression is not apparent today — though the political shifts are beginning. Read more…
from David Ruccio
With 217,000 new jobs created in May, the U.S. economy is finally—finally, after 50 months!—back to the pre-recession employment level.
Except it isn’t. Not by a long shot. Not when we consider the “jobs gap”—which we can calculate in one of two ways: by the amount of time it will take at this rate to get back to pre-recession employment levels while also absorbing the people who enter the labor force each month (4 years) or by the difference between payroll employment and the number of jobs needed to keep up with the growth in the potential labor force (6.9 million jobs). Read more…
from David Ruccio
from Edward Fullbrook
The Boston Consulting Group (BCG) is a leading player in what is called “the global wealth-management industry” and which in effect is plutonomy’s tactical cavalry in financial markets. BCG have just “released” a report disclosing that in the year 2013 the wealth of the world’s people worth $100 million or more increased 19.7 percent. That compares, they say, to 3.7 percent for the wealth of sub-millionaires. Naturally they are overjoyed at this latest redistribution.
“Wealth” meaning what? Like most people and as also with the symbol “capital”, they use “wealth” to stand for two different things, and also like most people, economists especially, they often lose track of which referent they are trying to talk about. But we can overlook that here because the 19.7 percent and 3.7 percent refer to financial wealth and, with exceptions, that is all plutonomists and their agents really care about.
The report documents how the upward redistribution of wealth to the 0.1 percent and especially to the 0.01 percent is accelerating, in other words, how the plutonomist programme (pre-Piketty it was never reported by mass media) is now restructuring the world at an even faster rate. Here is a taster of how they see the next five years. Read more…