Archive for September, 2012

A song for Jens Weidmann

September 30, 2012 Leave a comment

As part of a more pluralist approach to economics today a song in one of the lesser known dialects of the Northsa-area. Inspired by this interview with Jens Weidmann, who tells us that low and stable inflation is more important than financial stability, it is dedicated to the boss of the Bundesbank: “There is this train to nowhereland. And I’m the only one aboard…”

September core inflation in the Eurozone: down to 1,8% (graph).

September 28, 2012 Leave a comment

from Merijn Knibbe

The European Central Bank (ECB) targets consumer price inflation (CPI). CPI includes energy prices. These are quite volatile. In the long run CPI including energy (often called headline inflation) shows a larger increase than CPI excluding energy prices (often called core inflation) which means that when one wants to calculate the purchasing power of wages or the rise of the consumer price level in the long run, headline inflation is the preferred metric. But in the short run headline inflation is, because of these volatile energy prices, (much) less stable than the Core inflation (especially in troubled times, like the 2008-2012 period). Which means that for short and even medium term analysis of the purchasing power of wages or the development of the consumer price level, core inflation is the preferred metric.

Every month, Eurostat calculates a ‘flash’ estimate of inflation in that particular month which is published a few days before the monthly meeting of the governing council of the ECB, to enable the bankers to base their monetary decisions on up to date information. Up till now, this flash estimate only estimated headline information. Starting this month, it also contains information which enables one to calculate core inflation. Good news! Read more…

A funny thing happened on the way to the teaching of neoclassical economics

September 27, 2012 13 comments

from David Ruccio

I often explain to students that the most controversial topic in the history of economics is the theory of capital.

It’s controversial because a theory of capital is also a theory of profits—and, therefore, what explains the existence of profits, who gets the profits, whether or not they deserve to get the profits, and so on. And different economic theories, historically and today, have offered different answers to those questions.

The issues surrounding capital are important not only because they are central to any theory of capitalism (in which profit—money begetting more money—plays a key role) but also because they inevitably arise in political discourse, especially in a presidential election year (and especially when one of the candidates has received preferential treatment on his “capital income” via the tax code and most people pay a much higher rate on their “labor income”) and when, in the midst of the Second Great Depression, labor income is declining, capital income is becoming more concentrated, and the overall distribution of income is becoming more unequal.  Read more…

Trade rules should not constrain fixing global finance

September 26, 2012 Leave a comment

from Kevin P. Gallagher

Next week the World Trade Organisation (WTO) will consider a proposal by a group of emerging market and developing countries led by Ecuador requesting the WTO members to undertake a discussion on the relationship between recent financial regulatory reforms and global trade rules. Such a discussion is urgently needed to ensure that efforts to re-regulate global finance in the wake of the financial crisis are not constrained by trade commitments.

Whether it be in the form of preventing systemic risk, regulating securitisation, hedge funds, or credit rating agencies, revising accounting standards, or raising capital requirements, since 2009, there has been a significant effort across the globe to re-regulate the financial sector. The hope is that we will be able to prevent or better mitigate the next financial crisis and steer finance toward more productive and employment generating ends. Read more…


September 26, 2012 8 comments

Issue no. 61, 26 September 2012

You can download the whole issue as a pdf document by clicking   here

In this issue:

The optimal material threshold:
Toward an economics of sufficiency       2

Samuel Alexander    download pdf

The normative foundations of scarcity        22
Asad Zaman    download pdf

Degrowth, expensive oil, and the new economics of energy        40
Samuel Alexander    download pdf

Nash dynamics of the wealthy, powerful, and privileged:       52
America’s two-player, Darwin metaeconomy
L. Frederick Zaman    download pdf

Capital as power: Toward a new cosmology of capitalism       65
Shimshon Bichler and Jonathan Nitzan    download pdf

A warrant for pain:
Caveat emptor
vs. the duty of care in American medicine         85
Avner Offer    download pdf

Reassessing the basis of economics:
From Adam Smith to Carl von Clausewitz       100
Robert R Locke    download pdf

Mankiw’s attempted resurrection of marginal productivity theory       115
Fred Moseley    download pdf

The evolution of economic theory:
And some implications for financial risk management      125

Patrick Spread    download pdf

More on why we should bury the neoclassical theory       137
of the return on capital

Roy Grieve  download pdf   Read more…

The fallacy of ‘exogenous’ money – Jens Weidmann edition

September 25, 2012 1 comment

Update: see, about exogenous money and what might be called the ‘Weidmann fallacy’ also this speech by Jaime Caruana, general manager of the Bank for International Settlements.


from Merijn Knibbe
Jens Weidmann, boss of the Bundesbank, held a speech about money. The subject was highly interesting: money and inflation in Goethe’s ‘Faust’. The speech was interesting too – but for the wrong reasons. What’s the matter?

Economic statisticians basically use three different definitions of money: Read more…

Let’s not get ‘carried away’ by Bernanke’s latest twist

September 25, 2012 1 comment

from Kevin P. Gallagher

Ben Bernanke, chairman of the US Federal Reserve, should be applauded for boldly putting employment over price stability in his latest move to keep interest rates low and to purchase mortgage-backed securities. Bernanke’s critics (and Bernanke himself) have rightly said that monetary policy is not enough, however. To truly generate employment-led growth in the US, those critics say more fiscal policy is needed.

There is also a need for stronger financial regulation in order to ensure that financial institutions do not steer newfound liquidity into currency and commodity speculation in emerging markets and developing countries—speculation that can wreak havoc on developing countries’ financial systems and growth prospects. Such was the case during previous rounds of interest rate declines and quantitative easing in the US, and could occur again.  Read more…

World Economics Association – The next 3 years

September 24, 2012 1 comment

Dear WEA member,

Today, 16 months after launch, the WEA:

  • has a membership of 10,400;
  • has a membership with a wide geographical distribution, approximately as follows: Africa 9%, Asia 18%, Europe 33%, Latin American and the Caribbean 12%, Oceania 8%, and US and Canada 20%;
  • has published the first issues of its two new open-access and open-peer review journals, World Economic Review and Economic Thought;
  • has increased the subscription base of its pre-existing open-access Real-World Economics Reviewto 20,900;
  • has held its first online conference, with two more set to begin in September and November and with more lined up to follow;
  • has published 5 issues of its 12-page bi-monthly newsletter, and
  • has become a major presence in the world of economics.

Over the next 3 years the WEA expects: Read more…

Keynes on the psychology of finance

September 24, 2012 2 comments

from Lars Syll

To-day, in many parts of the world, it is the serious embarrassment of the banks which is the cause of our gravest concern …

[The banks] stand between the real borrower and the real lender. They have given their guarantee to the real lender; and this guarantee is only good if the money value of the asset belonging to the real borrower is worth the money which has been advanced on it.

It is for this reason that a decline in money values so severe as that which we are now experiencing threatens the solidity of the whole financial structure. Banks and bankers are by nature blind.  Read more…

The Eurozone banks should not pay for the ‘Frankfurter Folly’ (2 pictures)

September 24, 2012 Leave a comment

from Merijn Knibbe

1. Mario Draghi is XXX-smart.
2. And he participates in the present negotiations about conferring more supervisory tasks power on the ECB
2. No doubt, the next sentence in paragraph 4.5.1 of the “Proposal for a
COUNCIL REGULATION conferring specific tasks on the European Central Bank concerning policies relating to
the prudential supervision of credit institutions”
will not have escaped his attention:

Expenditures relating to the ECB’s supervisory tasks will be financed by charging fees from supervised institutions.

Hmm. Which expenditures? Read more…

Three changes in (official) ECB thinking

September 23, 2012 2 comments

As an addendum to this David Ruccio post about changes in thinking at central banks:

At least three mayor recent changes in official ECB statements can be witnessed:

1. The idea that keeping inflation low and stable is the best and only contribution the ECB can make to financial stability has become obsolete. At this moment, ‘financial stability’ even is the ‘second mandate’ of the bank and Draghi explicitly admits the possibility of a ‘bad equilibrium’ (governments have to pay high interest rates because they can’t pay their debts because they have to pay high interest rates). The role played by banks, irresponsible lending and the socialization of bank debts by irresponsible governments in bringing about bad equilibrium is acknowledged. ‘Financial stability’ is no longer equated with ‘low and stable inflation’.

2. Though the bank is officially still targeting money growth, board members like Joerg Asmussen frankly state that it’s targeting the interest rate instead.

3. The ECB now acknowledges that national differences as well as interactions and flows of capital between Eurozone nations do matter. It’s not just targeting Eurozone wide averages of the interest rate anymore.

These three changes are the intellectual foundation for its plan to buy bonds: the bank is not just responsible for the average interest rate but also for national rates, at least to the extent that large interest rate differences between countries make it more difficult for the bank to target the average rate. Also, high government bond rates may indirectly hamper cheap borrowing by companies and households in high rate countries, while these bond rates also may be too high (or low!) considering the economic ‘fundamentals’, because of a ‘bad equilibrium’.

More changes are needed.

First, the bank will have to start to target a broader metric of inflation like the GDP-deflator instead of the consumer price index.
Second, next to this it has to start to officially monitor asset price inflation, i.e. national house prices.
Third, to do this it will have to keep track of the monetary aggregates, but this time not the amount of ‘broad money’ (M-3), which it can’t control anyway, but one of its ‘counterparts’, money creation caused by ‘lending for house purchase’. This kind of lending has (according to the ECB statistics) often been the most important cause of the increase of the amount of money in the Eurozone and surely in some of the troubled nations, were out of control ‘lending for house purchase’ was one of the main causes of the housing bubbles. Though the ECB should monitor this, it is clear that national (tax-)policies are more important to keep irresponsible lending/borrowing in check than Eurozone-wide interest rates.

The question if the ECB should also become responsible for low unemployment, like the Fed, is very important. But considering the design of the Eurozone it’s indeed not up to the ECB to answer this question. The changes mentioned above are however completely within its mandate.

Work of the devil—really?

September 23, 2012 Leave a comment

from David Ruccio

Just the other day, I was explaining to students how, over time, the “common sense” in mainstream economics changes. Sometimes quite radically.

Anatole Kaletsky explains how “the upheavals now happening in central banking represent a tectonic shift that could transform the economic landscape as dramatically as the financial earthquake four years ago.”

To see why, we must go back in history 40 years, to the early 1970s. Maintaining full employment was at that time regarded as the main objective of all economic policy, and this had been the case for roughly 40 years, since the Great Depression. But Read more…

Sometimes a graph says more than a thousand words (25 countries – inequality and mobility)

September 22, 2012 2 comments

from Lars Syll

you thought that inequality was no problem, I think you should take a look at this graph:

Read more…

Joerg Asmussen and other people’s money

September 21, 2012 7 comments

The news is already all over the place: total building costs of the new ECB buildings in Frankfurt won’t be about 850 million but about 1,2 billion (or about 700.000,– per employee, according to my data).

1. Oops. That’s about the same amount of money as in the original 2008 budget…
2. But the really interesting thing: Joerg Asmussen is the board member who’s responsible. Yes, the same Joerg Asmussen who, according to the speeches published by the ECB, is the board member most eager to cut other people’s wages, most scornful about over-optimistic government budgets and most enthusiastic about the blessings of austerity. Outside Frankfurt.

But at least the ECB is honest about it.

Chicago school teachers give us all a lesson

September 21, 2012 2 comments

from Dean Baker

We don’t know the final terms of the settlement yet, but it appears that the Chicago public school teachers managed to score a major victory over Rahm Emanuel, Chicago’s business oriented mayor. Testing will not comprise as large a share in teachers’ evaluations as Emanuel had wanted; there will be a serious appeals process for teachers whom the school district wants to fire’ and laid-off teachers will have priority in applying for new positions.

If these seem like narrow self-interested gains for the teachers and their union, think again. Teaching in inner city schools is a difficult and demanding job.  Read more…

Are you 13% better off than you were last year? (26 photos)

September 20, 2012 1 comment

from David Ruccio

Is your net worth 13 percent higher this year than in 2011?

Mine is certainly not. I doubt yours is, either. But, according to the latest information on the Forbes list of the richest 400 Americans [ht: ja], their net worth did grow by that amount—to $1.7 trillion. It’s an amount that “far outpaced that of the economy overall, helping widen the chasm between rich and poor.”  Here below, with photos and details, are the richest 26. Read more…

Greg Mankiw’s stochastic mumbo jumbo on rising inequality

September 20, 2012 5 comments

from Lars Syll

Harvard economist and George Bush advisor Greg Mankiw is having problems with explaining the rising inequality we have seen for the last 30 years in both the US and elsewhere in Western societies. He writes: Read more…

The European Central Bank should OF COURSE publish the minutes of meetings the Governing Council a little bit faster

September 19, 2012 Leave a comment

from Merijn Knibbe

* The Bank of Japan does it after three weeks

* The Fed does it after three weeks

* The Bank of England does it after two weeks

* And the ECB does it after 1560 weeks…

At this moment there is, suddenly, a discussion going on about the question if the ECB should publish the minutes of the meetings of the Governing Council a little bit faster. Should we even talk about this?


Poverty and exploitation

September 19, 2012 4 comments

from David Ruccio

What would happen if the concept of exploitation became the entry point into our analyses of poverty?

According to Thomas B. Edsall, Matthew Desmond, an assistant professor of sociology at Harvard, asked exactly that question at a recent symposium on inequality at Yale:

If exploitation long has helped to create the slum and its inhabitants, if it long has been a clear, direct, and systematic, cause of poverty and social suffering, why, then, has this ugly word — exploitation — been erased from current theories of urban poverty?  Read more…

Ergodicity and randomness in economics (wonkish)

September 19, 2012 5 comments

from Lars Syll

To understand real world ”non-routine” decisions and unforeseeable changes in behaviour, ergodic probability distributions are of no avail. In a world full of genuine uncertainty – where real historical time rules the roost – the probabilities that ruled the past are not those that will rule the future.

When we cannot accept that the observations, along the time-series available to us, are independent … we have, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply … I am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed … We should always ask ourselves, before we apply them, whether they are appropriate to the problem in hand. Very often they are not … The probability calculus is no excuse for forgetfulness. Read more…