Archive for May, 2010

The cult of subprime central bankers

May 31, 2010 5 comments

from Dean Baker

The world is suffering from the worst downturn since the Great Depression. The crisis has left tens of millions unemployed in the U.S., Europe, and elsewhere. The huge baby boomer generation in the United States, now on the edge of retirement, has seen much of its wealth destroyed with the collapse of the housing bubble. 

It would be difficult to imagine a worse economic disaster. Prior periods of bad performance, like the inflation ridden seventies, look like mild flurries compared to the blizzard of bad economic news in which we are now enmeshed. 

None of this is new. People don’t need economists to tell them that times are bad. However, what the public may not recognize is that the same people who caused this disaster are still calling the shots. Specifically, there has been little change in personnel and no acknowledgment of error at the central banks whose incompetence was responsible for the crisis.  Read more…

Socializing Risk: The New Energy Economics

May 27, 2010 5 comments

from Frank Ackerman

Despite talk of a moratorium, the Interior Department’s Minerals and Management Service is still granting waivers from environmental review for oil drilling in the Gulf of Mexico, including wells in very deep water. Until last month, most of us never thought about the risk that one of those huge offshore rigs would explode in flames and then sink, causing oil to gush out uncontrollably and befoul the oceans. The odds seemed low, and still do: Aren’t there lots of drilling rigs in use, year after year? Twenty years ago, your elected representatives thought that you’d be happy to have them adopt a very low cap on industry’s liability for oil spill damages.  Read more…

Another Revere : “Europe’s debt crisis and Keynes’ green cheese solution”

May 26, 2010 2 comments

This one is from RWER contributor Thomas I. Palley.  To read it in full you will have to click the link at the bottom of page to the Financial Times.

Europe’s debt crisis and Keynes’ green cheese solution

By Thomas I. Palley

The great German physicist Max Planck remarked that “science advances one funeral at a time.” The situation is worse in economics, which is subject to regress, as happened when the valuable but imperfect insights of Keynesianism were supplanted by the ideological blinkers of neo-liberalism.  Read more…

Tonight’s Reveres

Once again nightriders are warning the world that its economy is on the edge.  And if they are not listened to this time, the plunge will be deeper and longer lasting than the last. Here are bites with links from two voices in the night.  They are worth reading in full, especially Kaletsky.  Read more…

“Greatest Twentieth-Century Economists” before the GFC

Four years ago the real-world economics review held the Greatest Twentieth-Century Economists Poll.  1.249 subscribers to the then post-autistic economics review voted.  The voting instructions specified “Greatest” as meaning “not who most influenced the economics profession or ideology, but rather who most added to our understanding of economic phenomena.”  In the real world, four years is sometimes a long time.  One wonders, and maybe we should find out, how different the results might be if we conducted the same or similar poll today, post-GFC.  Some of the names that appear in the top 20 now look like black comedy.  And Hyman Minsky is way down in 39th position with only 54 votes.

Results of the post-autistic economics review’s

Greatest Twentieth-Century Economists Poll  Read more…

Fictitious capital

May 25, 2010 1 comment
from David Ruccio
The current bank reform bills are an embarrassment. Less than two years after Goldman Sachs and the other giant financial institutions sent the world economy to the edge of the abyss, Congress and the Obama administration have made no attempt to either cap the size of the banks or to create a wall between the real and shadow banking sectors. 

Everyone understands that, and so they’re hoping that at least some provisions might avoid or at least contain the next financial crisis. Like the Collins Amendment, which would increase capital requirements on the largest banks.

One problem is, bankers and government officials—including the Treasury and the Federal Reserve—are fighting tooth and nail against the amendment.  Read more…

Why some countries are poor and some rich – a non-Eurocentric view

from Deniz Kellecioglu

The latest issue of Real-World Economics Review includes my paper “Why some countries are poor and some rich – a non-Eurocentric view”.  You may access it here ( Below is an abstract not previously included.  I hope many of you will read the article, recommend it to others, and perhaps use it in your research and/or lectures.  Also, this blog post provides a forum to discuss the article (comments section below).  Read more…

“Stiglitz implicitly accepts the orthodox view that . . .”

May 22, 2010 7 comments

from Paul Davidson

My letter on the Stiglitz review of Robert Skidelsky’s Keynes: The Return of The Master is printed in the May 27, 2010 issue of the London Review of Books.

It reads as follows:

The Non-Existent Hand

Joseph Stiglitz criticises Robert Skidelsky, Keynes’s biographer, for not understanding Keynes’s theory, but in doing so reveals his own imperfect understanding (LRB, 22 April). The basis of his complaint is Skidelsky’s distinction between risk and uncertainty. Risk, Skidelsky explains, exists when the future can be predicted on the basis of currently existing information (e.g. probability distributions calculated from existing market data); uncertainty exists when no reliable information exists today about the future outcomes of current decisions, because the economic future can be created by decisions taken today. According to Stiglitz, this is a distinction without a difference, and ‘little insight’ into the causes of the Great Recession is gained from Skidelsky’s emphasis on uncertainty as opposed to risk.

But this is not what Keynes believed. Read more…

Why Deleveraging Hurts So Much

May 21, 2010 12 comments

from Jim  Stanford

Last Friday I had the honour of sharing the podium (and a good supper afterward) with Steve Keen, the awesome Australian economist who was recently named the winner of the “Revere Award” for most accurately forewarning of the global financial crisis.  In fact, that award was announced the same day we spoke together to the Politics in the Pub speaker’s series in Sydney.  Here is a link to a report and film clips (by Steve, on his Debtwatch blog site) of the night’s activities:

In his closing remarks to the group, Steve Keen walked through a very interesting arithmetic exercise to reveal the importance of new credit creation to overall aggregate demand conditions (and hence, in a demand-constrained real world, to growth and employment).  The simulation was largely lost on the crowd (which had imbibed heartily throughout the proceedings – that being the whole point of “Politics in the Pub”).  But it did spark my interest in following up.  (For Steve’s original math, check his Debtwatch bulletin #43, at the same blog site noted above.)

Here I recreate, with full credit and thanks to Steve Keen, the logic of his argument, utilizing Canadian data.  Read more…

How Do You Spell “Success”? A Look At “Internal Devaluation” in Greece, Latvia, and Argentina

May 20, 2010 1 comment

from Mark Weisbrot

As of today the idea that Greece might be better off leaving the euro and renegotiating its debt is considered by many to be unthinkable. Instead, the country is embarking upon a program of “internal devaluation” – in which it keeps the euro and lowers its real exchange rate by creating enough unemployment to drive down the country’s wages and prices.

Let’s compare this process to two other countries that have tried it – one which abandoned it after three and a half years – Argentina – and one that is continuing it – Latvia.  Read more…

Wynne Godley’s obituary

May 19, 2010 1 comment

Wynne Godley, finalist for the recent Revere Award and longtime head of the Levy Institute’s Macro-Modeling Team, died on May 13 at the age of 83. Much of his work focused on the use of accounting macroeconomic models to reveal structural imbalances. Professor emeritus of applied economics at the University of Cambridge, and a member of the British Treasury’s panel of “six wise men” in the 1990s, Godley was, says his obituary in the Times, “the most Read more…

It’s too bad Keynes didn’t write in English

May 19, 2010 20 comments

from Dean Baker

Keynes explained the dynamics of an economy in a prolonged period of high unemployment more than 70 years ago in The General Theory. Unfortunately, it seems that very few of the people in policymaking positions in the United States or Europe have heard of the book. Otherwise, they would be pushing economic policy in the exact opposite direction that it is currently headed.

Most of the wealthy countries have now made deficit reduction the primary focus of their economic policy. Even though the United States and many euro zone countries are projected to be flirting with double-digit unemployment for years to come, their governments will be focused on cutting deficits rather than boosting the economy and creating jobs.  Read more…


“Fire” by Lewis L. Smith – Analysis and photographs of the Gulf of Mexico disaster

I write to you from a disgraced profession

May 18, 2010 21 comments

The following is the text of  James Galbraith‘s written statement to members of the Senate Judiciary Committee delivered a few days ago.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.  Read more…

Doom and Gloom

from David Ruccio
Doom and gloom is the appropriate attitude toward capitalism’s ongoing crises. 

That’s the perspective put forward by John B. Judis, in an article published recently in The New Republic. While he asserts that a “recovery has taken hold” (on the basis of what, the addition of 290,000 jobs in April?), the rest of his essay is devoted to arguing that global capitalism “will continue on the gradual downward slope that began in the 1970s.” In his view, continued economic instability will contribute to political instability and he is less than sanguine about the possible outcomes.  Read more…

Keen, Roubini and Baker win Revere Award for Economics

May 13, 2010 20 comments

Steve Keen (University of Western Sydney), receiving more than twice as many votes as his nearest rival, has been judged the economist who first and most cogently warned the world of the coming Global Financial Collapse. He and 2nd and 3rd place finishers Nouriel Roubini (New York University) and Dean Baker (Center for Economic and Policy Research) have won the inaugural Revere Award for Economics.  It is named in honour of Paul Revere and his famous ride through the night to warn Americans of the approaching British army.

Keen, Roubini and Baker have been voted to be, more than all others, the three economists who if the powers of the world had listened to, the Global Financial Collapse could have been avoided.

More than 2,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review. With a maximum of three votes per voter, a total of 5,062 votes were cast.  The voters were asked to vote for

the three economists who first and most clearly anticipated and gave public warning of the Global Financial Collapse and whose work is most likely to prevent another GFC in the future.

The poll was conducted by PollDaddy.  Cookies were used to prevent repeat voting.

Award Citations   Read more…

Economics Representations

from David Ruccio

An example I often use at the start of my introductory economics courses is a “man sitting on a street corner, with no job.” I ask the students to tell a story about the man: who he is, and why he has no job. As readers can imagine, they tell a wide variety of stories—imagining different ages and races, and different reasons why he has no (apparent) job. He’s alternately black, white, and hispanic; he’s young, old, and middle-aged; he either doesn’t have a job or he’s doing something illegal; and, if he doesn’t have a job, it’s because he’s lazy, uneducated, or the economy isn’t supplying enough decent jobs at decent wages. 
What I teach them is, first, different stories have different consequences, and, second, economics comprises many different stories—about that man and the economy more generally.

The world’s ten university economics departments most culpable for the Global Financial Collapse

May 6, 2010 16 comments

We have had the Dynamite Prize to identify the economists who contributed the most to causing the Global Financial Collapse.  But what about university economics departments?  Which ones are the most blameworthy?  It you have a short list and maybe supporting reasons, please comment.  If there is enough interest we can have a poll.

PS: If you have not yet voted for the Revere Award, please do so now.  Voting will close shortly.

The Greek Crisis and Our Parents’ Economics

May 6, 2010 6 comments
from Dean Baker
Keynes quipped in the General Theory that the world is ruled by the ideas of long dead economists. I was reminded of this comment when I heard a member of Germany’s parliament scornfully dismiss the suggestion that the European Central Bank should target a somewhat higher rate of inflation. This suggestion had been put forward by Oliver Blanchard, one of the world’s leading macroeconomists. Furthermore, he had proposed a higher inflation target in his role as the chief economist for the International Monetary Fund.

There is nothing wrong with disagreeing with an economist, no matter how prominent they are or where they work. But what was striking was the nature of the dismissal. The parliamentarian just asserted that: “inflation never solved anything.”   Read more…

Trading Away Financial Stability

From Kevin P. Gallagher

Pretend you are an investor that sees waning confidence in the eurozone and low interest rates in the United States on the one hand, and strong growth and rising interest rates in the developing world on the other. If you are like the rest of the herd you are putting your money in the developing world.

Now pretend you are a finance minister in an emerging market economy. In normal times you would more than welcome all the capital you could get. However, you have a fledgling financial system just showing signs of recovery from the global financial crisis. You are also just back from the annual International Monetary Fund meetings where you were warned that this “capital bonanza” may be causing currency, stock, real estate, and other asset bubbles in your economy. To stem those bubbles you raised interest rates – which only accentuated the incentive for foreign investors to pour speculative capital into your country.  Read more…