More about the pros and cons of microfinance

In this post I excerpted some articles about the problems with microfinance. See also this 2011 post by David Ruccio. Today a little more about this, also thanks to commenters Morgan and Bateman.

A) Microfinance can be beneficial as shown by Colvin and McLaughlin who investigate farmers cooperative banks around 1900 (when the rise of chemical fertilizer and an increasing use of other purchased inputs caused liquidity problems for many small farmers’. They show that the board members of these very local savings banks were as a rule not paid. Also: `What was the recipe for the success of Raiffeisen’s banking model? What made it possible for imitations of this German rural cooperative microfinance institution to work well in some European countries, but fail in others? This paper answers these questions with a comparison of Raiffeisenism in Ireland and the Netherlands. Raiffeisen banks arrived in both places at the same time, but had drastically different fates.

Anti-Greek media propaganda will come back to haunt Germany – A dire warning from 2011

from Norbert Häring

In June 2011, Spiegel Online conducted and published a remarkable interview with Albrecht Ritschl. Ritschl is one of Germany’s most renowned economic historians, teaching at the London School of Economics.  Already for years ago, he warned that Germany, being the worst debt offender in history, would ultimately regret it, if it insisted on behaving like the tough taskmaster of Athens and the rest of Europe. What Ritschl predicted is happening now. Greece is presenting us with huge unpaid bills from our dark past. Others might follow, if we are required to pay our long/evaded dues. Some highlights of what Ritschl said in the interview that was conducted by Yasmin El-Sharif:

The ECB sticks to the discredited 90%-debt-threshold-story with pathetic new evidence

from Norbert Häring

If you read the May Monthly Bulletin of the European Central Bank, you could be forgiven for thinking that the ECB has simply missed the widely publicized April debate around the mistakes Carmen Reinhart and Ken Rogoff made in the data analysis which formed the basis for the 90%-debt-level-threshold story. That story says that if the public debt to gdp ratio starts to exceed 90% growth goes down markedly. The ECB writes on page 95:

“Empirical literature has increasingly shown that high levels of debt (both public and private) are detrimental to growth. Some of these studies derive implicit thresholds for debt ratios and find that, beyond a certain level of debt which is maintained for a number of years, there is evidence that GDP growth remains subdued. While there is significant uncertainty surrounding such threshold estimates, there appears to be some empirical evidence that, on average, levels of public or private sector debt above 90% of GDP impair an economy’s growth.^11”

However,

Fix the Debt and a Wall Street Sales Tax

from Dean Baker

At this point everyone knows about Fix the Debt. It is a collection of corporate CEOs put together by Peter Peterson, the Wall Street private equity mogul. Ostensibly they want to reduce budget deficits and the national debt, but for some reason their attention always seems focused on cutting Social Security and Medicare. While some in this group will allow for minor tax increases, budget cuts are explicitly a priority, with these two programs firmly in their crosshairs.

Given that the stated goal of this group is to reduce budget deficits, it is worth asking why taxes don’t figure more prominently on their agenda. After all, the United States ranks near the bottom of wealthy countries in its tax take as a share of GDP. It is also worth asking why one tax in particular, a financial transactions tax, never seems to get mentioned in anything the group or its members do. 

Saving the Planet or ‘Fixing’ the Debt

from Dean Baker

Imagine Japan attacked at Pearl Harbor in December of 1941 and our political leaders responded by debating the best way to deal with the deficits projected for 1960. This is pretty much the way that Washington works these days.

The political leadership, including the Washington press corps and punditry, were already intently ignoring the economic downturn that is wreaking havoc on the lives of tens of millions of people across the country. Now, in the wake of the destruction from Hurricane Sandy, they will intensify their efforts to ignore global warming. After all, they want the country to focus on the debt, an issue that no one other than the elites view as a problem. 

USA National Debt Graph by President – Roosevelt to Obama

The green line shows what would have happened to the national debt if Reagan and the Bushes had balanced their budgets as Reagan claimed he would.  For more information go to http://zfacts.com/p/318.html

The absurdity of it all

from Peter Radford

It’s unavoidable. It’s inevitable. It was reckless. The burden was just too great. We promised too much. It’s the freeloaders. We can’t afford it anymore. The debt is crippling. If not now for our children. It was the government and those moral sapping social programs.

Somehow it’s always the government.

The absurdity is that these so-called causes of the crisis are still reverberating through media and elite channels. These same people have been warning us for years now that inflation is about to explode into Weimar like chaos and that our profligacy will be punished any day now by the astute players in the credit markets. Our constant need to borrow, so the story goes, will result in an adverse reaction: we will be forced to pay extreme rates to keep the cash flowing in. And all that money we have printed? Well that will certainly bring down the roof. Civilization is about to end. At least as we know it.

Unless.

Correction to “What House Price Falls Really Look Like”

from Steve Keen

Who says Twitter is just fluff? Well, I did before Max Keiser and Stacy Herbert persuaded me to sign up. I’ve since realized that it’s rather like a modern version of the old-fashioned news wire services for the public. Choose who to follow, and they’ll keep you updated on things that interest you. If that happens to be Kylie’s waistline or Kurt’s fidelity, that’s your problem, not Twitter’s.

One Tweet that I received told me something that didn’t seem right from my own data: that CPI-deflated US house prices were now within reach of their long-term average (i.e., 1890 till now). From my figures—which I had cobbled together from Robert Shiller’s first edition “Irrational Exuberance” data supplemented by the S&P Case-Shiller Index, adjusted for inflation—prices had fallen a lot, but still had a long way to go.

So I went

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

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.

Debt Britannia (with 16 graphs)

from Steve Keen

As much as I criticize the US of A for its economic management, I can’t fault its statistical agencies on the collection and dissemination of data: data is readily available and almost always in an easily accessible format. That, and the fact that it’s the world’s biggest economy, is why most of my analysis is of the US. Australia’s ABS deserves similar accolades for making data readily accessible and relatively easy to locate.

The UK data source, the Office of National Statistics, is almost impenetrable by comparison—it’s the statistical system that Sir Humphrey Appleby would design. It gives the appearance of accessibility, yet either drowns you in so much data in response to any query that you give up, or which, when you get to what you think you want, returns rubbish.

Chart of the day: Public vs. private US debt to GDP ratios

from Steve Keen

Separating out private sector and public sector debt in the USA 

Krugman considers Baker (with graphs)

Paul Krugman has a column on Dean Baker’s post David Brooks is projecting his self indulgence again.  It includes a couple of interesting graphs.  Note that Krugman excludes from consideration financial debt.

Below are two series, both expressed as percentages of GDP: total domestic nonfinancial debt (public plus private), and U.S. net foreign debt, as measured by the negative of the net international investment position:

David Brooks is projecting his self indulgence again

from Dean Baker

Undoubtedly projecting from the fact that he can draw a nice 6-figure income for little obvious work, David Brooks complained in his column:

” Today, the country is middle-aged but self-indulgent. Bad habits have accumulated.”

For the most part the column is a confused diatribe against the Obama administration’s economic policies with a lecture on moral rectitude thrown in for good measure. He starts by condemning the efforts to stimulate the economy by telling readers:

Krugman considers Koo

Paul Krugman devotes his New York Times column to Richard Koo‘s RWER paper The world in balance sheet recession: causes, cure, and politics.  It includes the following.

Richard Koo’s RWER paper “has gone viral on the Web” says the New York Times”.

Richard Koo’s RWER paper The world in balance sheet recession: causes, cure, and politics already looks set to become a classic.  In its first two weeks it was full-text downloaded over 30,000 times from www.paecon.net.  Koo’s paper, reports the New York Times, “has gone viral on the Web”

Here are some key passages from Koo’s paper. 

Monetary innovations for eco-friendly production and economic stability

Discussions about improved prudential regulation, changing the incentives that players in the financial sector face and the possibility of a financial transactions tax as means of reviving the economic system have tended to overlook innovative monetary proposals that focus on changing the nature of credit money itself. Some of these have come from outside academic economics and aim to promote eco-friendly paths of economic recovery. In this post I hope to stir up some discussion by presenting a guide to some of these proposals and

Non-financial companies’ net debt to earnings (EBIT) by country

(Source: LSR)  http://www.citywire.co.uk/money/chart-of-the-day

 

Greg Mankiw gets it wrong on the US budget

from Dean Baker

Mankiw told readers that:

“to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare.”

Actually, all we in the US have to do is to fix our private health care system. 

Why Steve Keen is even more right than he thinks

From Merijn Knibbe

According to Steve Keen quite a few academic economists do not agree with him that (changes in) debt matter, for changes in demand:

“even after showing empirical evidence on the impact that rising and then falling private debt had on the economy both now and during the Great Depression, I couldn’t convince several of the academics in the audience of the importance of private debt: they kept coming back to “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”. 

Why Poland and Sweden escaped the crisis, to an extent, and some other Baltic states didn’t

from Merijn Knibbe

Introduction: the real lesson of the graphs below is that ‘investment booms’, induced by large flows of (international) capital, have to be prevented.  And they can be prevented. Poland seems to have managed this by having an ‘outdated’ financial system, which disabled the free flow of foreign capital (and yes, according to graphs 2 and 3 a land tax might help, too).

Paul Krugman recently