Rethinking the international financial architecture. The next WEA Conference

from Maria Alejandra Madi 

The existing international financial architecture, left over institutions from the Bretton Woods period, proved useless to prevent or warn against the 2007-2008 crisis, or even less, solve it. Only when a new presidential grouping (G20) meeting was called for in London in March 2009, the issues of how to coordinate countercyclical policies and inject resources into the economies were discussed. At that time, a UN high level Commission was created to propose reforms to the international financial architecture. The results of what became known as the Stiglitz Commission came to light in April 2010; the Commission’s recommendations were, however, shunned by some large UN member countries due to their rejection of the principle of global solutions for global problems. Indeed, some European countries and the US still insist on national solutions, that is on the use of local regulatory agencies in the international financial field.

Is the UK facing another financial crisis? (3 graphs)

from Steve Keen

Taken at face value, David Cameron’s warning this week about risks in the global economy sounds like it might be wonderfully prescient. Here’s the country’s economic chauffeur, carefully checking his instrument gauges, and sure enough, sees the same signs today that should have given us warning of the crisis of 2007-08. Time to apply the brakes.

There’s only one problem: the economic dashboard that Cameron relies upon did not warn of the crisis before it happened. Instead, that dashboard advised Cameron and other leaders around the world that everything was looking rosy, and that going full throttle was entirely safe.

The OECD’s Economic Outlook, published in May 2007, stated that its “central forecast remains indeed quite benign” as it predicted “a strong and sustained recovery in Europe”. Some dashboard that turned out to be.

Motor skills

Politicians are fond of car analogies when talking about the economy, because

The checkered past of Ben Bernanke

from Dean Baker

The retrospectives of Ben Bernanke on his leaving the Fed seem to be coming in overly positive. While there is much that is positive about his tenure as Fed chair, many of these accounts have a rather selective view of history.

The part that is clearly wrong is treating Bernanke as a bookish academic who got plucked down in the middle of a financial crisis that was not his making. While Bernanke had a distinguished academic career, he had been in the middle of the action in Washington since 2002. That was when he was selected to be a governor of the Fed. He served as a governor at Greenspan’s side until he went to serve as head of President Bush’s Council of Economic Advisers in June of 2005. After a brief stint as the chief economist in the Bush administration he returned to take over as chair of the Fed in January of 2006.

It was during the period that Bernanke was at the Fed and his tenure in the Bush administration that the housing bubble grew to such dangerous levels.

Taking asset bubbles seriously

from Dean Baker

Last month at an International Monetary Fund conference, former Obama economic advisor Lawrence Summers harshly criticized outgoing Federal Reserve Board Chairman Ben Bernanke for comments he made this summer. Bernanke had raised the possibility of tapering the Fed’s purchase of treasury bonds, which would cause interest rates to rise. With the economy facing a prolonged slump, Summers argued, Bernanke should not even have talked about raising interest rates.

While Summers is correct that the economy remains far below its capacity, and therefore policy should be focused on boosting employment for the foreseeable future, there was actually a real problem that may have sparked Bernanke’s taper talk. The housing market was again approaching the price levels seen during the housing bubble, whose collapse six years ago precipitated the downturn and the financial crisis.

At the end of the second quarter of this year, the inflation-adjusted value of the Case-Shiller national home price index was more than 20 percent above its pre-bubble level. It was only 8 percent below its 2002 level, the point at which economists first began warning of a housing bubble.

More important than the current level of prices was the rate of change. House prices nationwide were up 10.1 percent from their level a year ago. In several markets prices were rising considerably more rapidly, with rates of price increase of more than 30 percent. Even if house prices were not yet out of line with fundamentals by the time of Bernanke’s taper talk, they soon would be in the markets showing rapid double digit price increases.

In not Of?

from Peter Radford

Today’s New York Times has a reminder of the damage the crisis has done to the economy, and, more importantly, to enduring attitudes towards opportunity. The article summarizes the results of a survey conducted by Rutgers University.

The main thrust of the article is that this crisis was both deep and broad enough to involve almost eighty percent of the population in one way or another. Unemployment and its awful effects were that widely felt. People’s lives were often ruined permanently. The entire trajectory of some people’s lives will be changed forever. The damage is incredible. The downdraft from Wall Street’s extraordinary greed driven stupidity caught almost all Americans and has left enormous psychological as well as material scars.

Yet we still have not dealt with the causes and have not undertaken strong remedial action.

Why not?

Standard & Poor’s

from Peter Radford

It is good news that Standard & Poor’s is being sued by the government. S&P was complicit in the market rigging that led us to the bubble and the destruction of a boatload of wealth. It has escaped, thus far, any serious damage from its involvement in the creation of crisis and deserves to be taken down a peg or two. The amount of damages being sought is roughly equivalent to one year’s income of S&P’s parent company McGraw-Hill. That’s not enough to put the company out of business, but it is noticeable.

Anyone who is committed to a free market system will applaud the suit. Market rigging is about as serious a problem as can be imagined in a free market.

Geithner’s poor legacy (13 key things to bear in mind)

from Peter Radford

It’s my turn to comment on Tim Geithner’s unfortunate legacy at the Treasury Department.

I think that, by and large, that legacy has to be seen through the lens of Wall Street. He was an ally of Wall Street, he bent over backwards to help Wall Street, and will forever be associated with an overly cordial relationship with Wall Street bankers and sympathy for their self-inflicted plight.

The record is unequivocal: Geithner, whenever called upon to choose, chose to back Wall Street’s interests over those of the public at large. In this he simply follows in the footsteps of other Treasury Secretaries – Rubin and Paulson come to mind – who made the tragic mistake of conflating Wall Street and Main Street as if the two shared common cause.

Geithner is a limited person who, having been brought up in the Reagan era, sees nothing wrong with the stranglehold big finance has on the economy. Big gigantic banks betting on both sides of the street, propped up by taxpayer subsidies, and with ineffective, duplicative, and outdated oversight are, in his eyes, perfectly fine.  They represent no threat to our economy. They simply need a periodic tweak, a tad more capital, and a little nudge now and again and they will steer their rivers of cash towards socially beneficial ends.

In all this Geithner is the living epitome of the group thinks that grips our elite whenever it tries to confront the perpetual problems that our big banks create. 

Economists tend not to be very good at economics

from Dean Baker

The $ 1.2 Trillion Health Care Tax
Economists tend not to be very good at economics, which is one of the main reasons that the world is facing such a prolonged downturn. Few economists were able to recognize the enormous imbalances created by housing bubbles in the United States and elsewhere, nor to understand that the collapse of these bubbles would lead to a prolonged period of stagnation in the absence of a vigorous response by governments.

Economists’ grasp of economics has not improved since the start of the downturn. There is little agreement within the profession on the appropriate way to bring the economy back to its potential level of output. Nor is there even agreement as to whether this is possible.

Many Happy Returns? 5 years of crisis

from Steve Keen

On this day 5 years ago, the global economic crisis began. The trigger was the decision by BNP to suspend redemptions from funds that were linked to the US housing market. Those of us who had been expecting a debt-deflationary crisis
and warning about it
for some time (see also here and here) could never have picked the trigger itself—that would have been prophecy, not prediction—but very rapidly it was clear that this was it.  

Sandy Weill said what?

from Peter Radford

I must be getting old. Too old to understand English anymore. Sandy Weill, architect of Citibank’s ill advised growth, and long time advocate of the form of universal banking that brought about the crash, has just pronounced on the state of banking.

And called for the break up of the big banks.

Pinch me please.

Or at least roll the drums.

This is an astonishing volte face for someone who championed the elimination of Glass Steagall. More than that. He engineered a merger between Citi and an investment bank that was illegal at the time, so he had to get the law changed in order to complete the deal. He was that involved in shaping the modern banking scene. He was one of the fiercest opponents of regulation. He was outspoken, hard charging, and the very essence of the kind of banker who now dominates the industry. The mega banks were, in large part, his creation. 

The Premonitory Five: Godley, Wray, Forstater, Mosler and Bell

from Edward Fullbrook

The neoclassical mainstream won infamy for remaining oblivious of the impending Global Financial Collapse, whereas Keen, Roubini, Baker and Hudson won fame for analytically foreseeing it and giving ample warning.  Now a “policy note” from the Levy Economics Institute documents analytical warnings of the European Union’s current debt crisis given separately a decade or more ago by five economists:  Wynne Godley (1997), L. Randall Wray (1998), Mathew Forstater (1999), Warren Mosler (2001) and Stephanie Bell (2002).  Below are relevant passages from each of the five.  These two huge examples illustrate how economics could serve, rather than dis-serve, society if the profession were to become in the main science-based rather than faith-based. 

Banking and orthodox economics: an ugly brew

from Peter Radford

Nothing that has emerged about the JP Morgan losses announced last week has altered my original conclusion. This was a basic failure of governance, of regulatory oversight, and of control. Oh, and of orthodox economics. Again.

Yes there were rules in place to prevent such losses. They were ignored. Vanity, hubris, call it what you will, stopped the bank from exercising self-restraint. What appeared to be highly risky, complex, and very large transactions were allowed to take place despite the fact that they were risky, complex, and very large.

The bank thought it was more clever and sophisticated than it was. It turns out to have been dumb. Very dumb.

The oddity here is that these kinds of dumb plays are what brought the banks to their knees back in the crisis. Obviously no one at JP Morgan learned the lesson.

Revisiting the Second Great Depression and other Fairy Tales

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.

Volcker and Banks

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.

Meanwhile, in Europe… Unemployment hits a record, differences larger than ever (Nov 2011, graph)

from Merijn Knibbe

According to last weeks Eurostat unemployment report the EZ unemployment rate did not change in November, compared with the month before (10,3%). The number of unemployed in the European Union however increased with 55.000 to a new record. According to the press release, ‘Compared with November 2010, unemployment rose by 723 000 in the EU27 and by 587 000 in the euro area’. But averages do not serve us well when we look at either the European Union or the Eurozone, as differences between countries are still increasing (graph). When we look at a somewhat longer period we see employment rates converging up to 2008. After about january 2008, i.e. quite some time before ‘Lehmann’, rates in Ireland and Spain start to explode and differences bertween countries became larger than ever.

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.

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

There is no Eurozone…. (charts)

from Merijn Knibbe

Two graphs on the Euro-conundrum:

1. It’s not about deficits. Germany did, until 2011, not have smaller deficits than Italy. And the Eurozone has a much smaller consolidated deficit than the UK (or the USA, for that matter). But nobody talks about the end of the pound (or the dollar) and the UK. And everybody talks about the end of the Euro and Italy-as-we-know-it (while Italy does have a primary surplus, by the way). Technical note: the graph shows a four quarter moving average of government deficits.

Punishment and reward in economics

from David Ruccio

The discipline of economics has an extraordinary system of punishments and rewards, which is regulated by a combination of external surveillance and internal monitoring.

Some mainstream economists (like Alan S. Blinder and David Card [ht: sg]) are severely punished for stepping just a bit out of line, like arguing that some jobs will be lost as a result of external trade or that minimum jobs do not cause unemployment.

Will the euro be destroyed by ideologues?

from Dean Baker

We could be living through the last days of the euro. That is not a happy thought. While there were many negative aspects to the rules governing the European Central Bank and the eurozone economies, no one can want to see the economic chaos that will almost certainly follow the collapse of the euro.