Archive for February, 2012

Housing and confidence: mixed messages

February 29, 2012 2 comments

from Peter Radford

I am busily preparing for the WEA conference on ethics next week, but yesterday’s mixed news is worth a brief comment.

Clearly the housing news in the United States is not great. The latest Case Shiller index report released this morning brings 2011 to a dismal close. Prices fell 1.1% in December, meaning that the year as a while lost about 4.0%. Prices are now down in the range they were in 2003, and the index has lost an enormous 33.8% since reaching its peak. Obviously real estate remains mired in a slump even though there are signs of life in starts and sales. The simple fact is that the mania that overtook housing created such an illusory boom – remember when all your friends were convinced that home prices never, ever, fall? – that we were bound to go through a prolonged period of countervailing disillusion. Reality is sometimes harsh and the real estate market is now approaching reality. Read more…

Round Up, and Returns

February 28, 2012 Leave a comment

from Peter Radford

I’ve been off line for a few days, so I ought to catch up with the news.

Which, it turns out, isn’t really news at all. The economy is right where we left it. Chugging along at an unspectacular pace, adding jobs at a modest rate, growing, but too quickly, and exposed to the exact same risks that beset it before. Our banks are still way too large relative to our economy, Europe still is dithering about in self-inflicted recession, and the Middle East is simmering back to one of its regular boils thus threatening oil supplies.

The more things change, the more they stay the same. Or something like that. Read more…

Peter Praet, novice at the ECB, tries to rewrite history as well as the present

February 28, 2012 Leave a comment

from Merijn Knibbe

Peter Praet, a new member of the board of the ECB, tells us in a recent speech that:

In many societies there was an excessive build-up of debt in recent decades: both sovereign debt and private sector debt (household & corporate). Warnings were voiced repeatedly, also by the ECB. But, the start of serious debt consolidation was continuously postponed, offloading on future generations. There was too much complacency, although many debt sustainability analyses showed that there was a limited period of time to truly address the problem. The crisis has cut the room for manoeuvre.

We can of course agree with most of this, see for instance this article by Mason and Jayadev about ‘debt dynamics’: indebtedness which leads to ever larger indebtedness, not just in remote Indian villages – but also in the USA. ‘Debt peonage’, is the apt phrase.

But is Praet right about the ECB? Read more…

Greece – bankrupt by any other name

February 28, 2012 Leave a comment

Update (2): information from Brussels via Peter Siegel’s ‘Brussels Blog‘. As the Finnish and Dutch parliaments still have to vote for the bailout (today and tomorrow) – Greek banks have no liquidity at the moment. Why did S&P not wait till tomorrow?

Update: the ‘rating’ mentioned in the press release is the downgrading of Greek bonds by Standard and Poor’s. See here and here.

From a press release from the ECB:

“28 February 2012 – Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

The Governing Council of the European Central Bank (ECB) has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations. This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.

At the same time, the Governing Council decided that the liquidity needs of affected Eurosystem counterparties can be satisfied by the relevant national central banks, in line with relevant Eurosystem arrangements (emergency liquidity assistance).”

Unemployment in Lithuania, a study about debt and the economics curriculum

February 25, 2012 6 comments

Updata: paragraph 1 states that ‘remittances were… a whopping 25% of total national income’. The source cited explicitly states this – but the source is wrong. Clicking on the full data set button of the source yields that remittances were 4,3% of GDP and 23,7% of ‘net wage fund ratio’, a phrase unknown to me but, if the gross/net difference is about 20%, the wages-share of income is about 0,5 and take home pay is about 50% of wages, might be something like net wages of laborers.

1. Unemployment in Lithuania. As a kind of follow-up of this post, a graph on unemployment in Lithuania. Unemployment is down with about 60.000 people which, for this country of 3 million people, is a lot (a very favourable development yes, but it’s still way to high). In the same period there was however a net emigration of about 100.000 people… An additional argument against austerity seems to be that it wrecks the ‘human capital’ of a nation as it makes people emigrate. Remittances of these people were, however, a whopping 25% of total national income – which also points to a solution for the Portuguese and Greek: get rich in Germany. At this moment, unemployment in Lithuania seems to be on the rise again, while GDP declined in the fourth quarter.

Read more…

Austerity Bites

February 23, 2012 Leave a comment

from Edward Fullbrook

Austerity and emigration: the case of Lithuania (graphs)

February 23, 2012 8 comments

The Baltic countries (Estonia, Latvia, Lithuania) were, after a huge bubble and severe slump caused by large inflow and subsequent outflow of Swedish capital, the first countries to embrace austerity and internal devaluation (2009). External devaluation, proposed by the IMF, was obstructed by Swedish banks. Internal devaluation policies led to an even deeper slump and skyrocketing unemployment. But also to a massive outflow of people. Statistics Lithuania happens to have excellent and up to data information about this.

In Lithuania, with about 3 million inhabitants the largest of the three states, net emigration increased from 8.000 in 2008 to 78.000 in 2010 (2,4% of the total population), to decline to a still impressive 39.000 in 2011 (source: Statistics Lithuania). Graph 1 and 2 show gross (!) emigration per age group (i.e. only the people who leave, not counting immigrants). Clearly, especially the young (healthy, dynamic and probably well-educated) people are leaving. The irony: the Lithuanians invested in this ‘human capital’, the Swedes and Germans will use it.

Read more…

What if the next Steve Jobs is Chinese?

February 22, 2012 3 comments

from Dean Baker

As Apple’s stock continues to hit record highs and its sales and profit reports exceed all expectations, Steve Jobs’ reputation as an entrepreneurial genius grows ever larger. He succeeded in developing products that people around the world very much want to buy. In this sense, Jobs stands out from the mediocrities that run most corporations and collect huge pay checks in the process.

It may be some time before another innovator comes along who can match Steve Jobs record, but we constantly see companies developing new products, even if few will have the same impact as the iPod or iPad. The United States continues to be at the forefront in innovation, but this will likely not always be the case.  It is worth asking whether we should care. This requires a clear-eyed assessment of the benefits to the country provided by innovators like Jobs. Read more…

Peter Praet, member of the board of the ECB: “ECB monetary policy was perfect”.

February 22, 2012 1 comment

from Merijn Knibbe

According to a recent speech of Peter Praet, a new member of the executive board of the European Central Bank (ECB):

“The sovereign debt crisis pointed to an imperfect implementation of economic – but clearly not monetary – governance in the euro area”

Hmmm. In other words: monetary governance was perfect…. But was it? Read more…

Greece and Those Wild and Crazy Guys at the ECB

February 21, 2012 13 comments

from Dean Baker

I have been following the European sovereign debt crisis since it first developed more than two years ago. It was evident from the beginning that the conditions on the debtor nations being demanded by the “troika” of the European Central Bank, the European Union, and the International Monetary Fund were both onerous and counterproductive.

This view has been confirmed by the fact that the debtor countries have missed target after target and that growth has consistently come in far below projections. (Actually, the crises countries have been contracting for much of the last two years.)  This could leave analysts guessing as to what economic reasoning lies behind the troika’s conditions.

Last week I got the answer when I had occasion to meet with a high-level EU official. There is no economic reasoning behind the troika’s positions. For practical purposes, Greece and the other debt-burdened countries are dealing with crazy people. Read more…

Argentina collapsed before default (graph)

February 21, 2012 4 comments

from Dean Baker

Ezra Klein’s WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina’s 20 percent decline in 1998 to 2002 and Latvia’s 24 percent decline in the current crisis.
The piece is a bit sloppy on one point, saying that Argentina’s decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina’s economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002.  Read more…

Debt: Where did it come from? (chart of the day)

February 21, 2012 3 comments

from David Ruccio

As the BBC explains,

There was a big build-up of debts in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector – companies and mortgage borrowers – who were taking out loans. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom. Read more…

Is this the Second Great Depression?

February 20, 2012 7 comments

from David Ruccio

Readers know that I have come to refer to the current crises of capitalism as the Second Great Depression.

Apparently, at least one person agrees with me. And, after reading Dean Baker’s latest, she sent me the following question (which she also posted as a comment on Baker’s post):

Professor – I am NOT an economist but WHY would Dean Baker deny that we ARE in a GREAT DEPRESSION – how rich is he?  Yes, I am so livid at this dribble, his fairytale, I did post a comment. Regards,

Let me attempt a brief answer (brief only because, as a professor, I have lots of grading to catch up on). . . Read more…

Revisiting the Second Great Depression and other Fairy Tales

February 18, 2012 9 comments

from Dean Baker

As President Obama’s re-election campaign heats up, there are several new accounts of his track record finding their way into print. One item for which he is undeservedly given credit is saving the country from a second Great Depression.

The political elites believe in the salvation from the second Great Depression myth with the same fervency as little kids believe in Santa Claus. And, it has just as much grounding in reality. Read more…

Some thoughts about the new Macro-Economic Imbalances Procedure of the European Commission (graph)

February 18, 2012 3 comments

Steve Keen has to change his website. On this site he states: “As an economist, I do something very unusual: I treat money seriously” and goes on to say that any serious analysis of money and a monetary economy has to include debt,

“But this “inconvenient truth” is omitted from economics–not because economists are deliberately hiding it, but because they have deluded themselves about the nature of money”.

But the tide is changing. The European Commission (EC) includes several stock and flow metrics of private and public debt in its new Macro-Economic Imbalances Scorecard (MIPS), which serves as part of the warning system of the MIP, the Macro-Economic Imbalances Procedure, which in its turn serves as a procedure to discipline ‘irresponsible’ countries. Read more…

Eurozone government deficit and debt (graphs).

February 17, 2012 2 comments

Is there any reason to panic about the Eurozone government deficit? No, there isn’t. The hysterical German economists are wrong – there is no reason to cut the pensions of European octogenarians at all. Not at all. The consolidated deficit (% GDP) is not that high and declining rapidly (graph 1) and consolidated Eurozone government debt (% GDP) is actually decreasing (graph 2).

Graph 1. Consolidated government deficit, Eurozone, 2-quarter moving average, source: ECB.

Read more…

David K. Levine is totally wrong on the rational expectations hypothesis

February 16, 2012 16 comments

from Lars Pålsson Syll

In the wake of the latest financial crisis many people have come to wonder why economists never have been able to predict these manias, panics and crashes that haunt our economies.

In responding to these warranted wonderings, some economists – like renowned theoretical economist David K Levine in the article Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics in the Huffington Post – have maintained that

it is a fundamental principle that there can be no reliable way of predicting a crisis.

To me this is a totally inadequate answer. And even trying to make an honour out of the inability of one’s own science to give answers to just questions, is indeed proof of a rather arrogant and insulting attitude.

The main reason Levine gives for his view is what he calls “the uncertainty principle in economics” and the “theory of rational expectations”: Read more…

A fervent plea on behalf of the wretched of the earth for 2012 and beyond

February 16, 2012 32 comments

from Geoff Harcourt

The interrelated capitalist world is in a state of crisis, unstable and almost out of control. The orthodox theory behind the lunatic policies being followed has little connection to the actual world it is meant to interpret and explain. Social unrest, prejudice, racism, self-interest, lack of compassion, anarchistic or worse forces are being unleashed: all the outcome of finance capital being out of kilter with industrial and commercial capital.  Read more…

Non-Equilibrium Social Science (a new EU network project)

February 15, 2012 4 comments

from Bruce Edmonds

An EU Coordinated action project called “Non-Equilibrium Social Science” (NESS) has now started.

The aim of NESS is to ensure that the social sciences are put on a proper footing for the 21st century. A key focus of the group is economics, where the equilibrium approach (though dominant) struggles to capture the economic realities we observe in the world today. But we are interested in all the social sciences. Read more…

Volcker and Banks

February 15, 2012 3 comments

from Peter Radford

We have reached a crucial point in our attempt to bottle up the banks. It looks as if they will win. That means the economy will lose, and the likelihood of a new crisis immediately jumps. Read your Minsky. And weep.

There is a looming deadline in the Dodd-Frank regulations that requires rules to go into effect to govern proprietary trading. As you all know by now I am ardently opposed to banks being allowed to speculate. I refuse to call speculation ‘banking’, which is a term I like to reserve for the very dull and prosaic process of credit extension based upon sober analysis. Read more…