Category Archives: Banking

Crisis Of Globalization: Restoring Social Investment Is Key

By Robert Kuttner – Why is democracy under siege throughout the West? How much of the story is cultural or racial, and how much is economic? And can the slide into authoritarianism be reversed? I think it can.

In the remarkable three decades after World War II, the economy delivered for ordinary people and there was broad support for democracy. That era was unique in two key respects.

First, the economy not only grew at record rates for peacetime, but it also became more equal. Second—and not coincidentally—this was a period when raw capitalism was tightly regulated, on both sides of the Atlantic, economically and politically.

Banking was very limited in what products it could offer, and at what prices. It was almost like a public utility. There were no exotic securities like credit derivatives to deliver exorbitant profits and put the whole economy at risk. Globally, there were fixed exchange rates and capital controls, so bankers could not make bets against currencies and entire economies.

Organized labor was empowered. Unions were accepted as legitimate social partners and had substantial influence. This was true in both Europe and America.

In the years since then, political and financial elites have redefined trade agreements to mean not just reciprocal cuts in tariffs but broader changes in global rules to make it easier for banks and corporations to evade national regulation.

Laissez-faire, discredited and marginalized after 1929, got another turn at bat(ting). Hyper-globalization was a key instrument. And that reversion had economic and ultimately political consequences. more>

Fiscal Policy Remains In The Stone Age

By Simon Wren-Lewis – Or maybe the middle ages, but certainly not anything more recent than the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology, and talk about the need for fiscal expansion when nominal interest rates are stuck at the Zero Lower Bound or Effective Lower Bound.

When monetary policy loses its reliable and effective instrument to manage the economy, you need to bring in the next best reliable and effective instrument: fiscal policy.

The Eurozone as a whole is currently at the effective lower bound. Rates are just below zero and the ECB is creating money for large scale purchases of assets: a monetary policy instrument whose impact is much more uncertain than interest rate changes or fiscal policy changes (but certainly better than nothing). The reason monetary policy is at maximum stimulus setting is that Eurozone core inflation seems stuck at 1% or below. Time, clearly, for fiscal policy to start lending a hand with some fiscal stimulus.

You would think that causing a second recession after the one following the GFC would have been a wake up call for European finance ministers to learn some macroeconomics. Yet what little learning there has been is not to make huge mistakes but only large ones: we should balance the budget when there is no crisis. more>

Robots at the gate: Humans and technology at work


Barclays – Humans have often had a cautious relationship with new technology, particularly when it causes widespread disruption in the workforce. Yet historically, technological advances have not resulted in fewer jobs available to humans, but rather have led to the creation of new opportunities. Farriers and saddlemakers were hit hard when cars replaced horse carriages, but the petrol stations, mechanics, motels and related industries that sprung up created new, yet different, types of jobs.

More recently, the smartphone is a great example of technological advances creating new forms of work. Twenty years ago, mobile app developer was not a job; today, millions of such developers are at work around the world.

One of the most influential economists of all time, David Ricardo, flip-flopped on the issue. In 1821, he stated that while was a general good, he was now more worried about the substitution effect on labor. And the discussion was not always academic – the Luddite movement was an early example of workers resorting to violence to protest the use of technology in textile factories.

As the decades passed, the Industrial Revolution led to a visible, massive improvement in living standards. But the debate – on how technology affects work and whether it is an unequivocal positive – continued to wax and wane.

Machine learning represents a fundamental change. It is a subset of the much-abused term ‘Artificial Intelligence’ and is grounded in statistics and mathematical optimization. The computer is fed vast data sets and a few general parameters to point it in the right direction. Then, the machine executes simulations of how biological neurons behave, uses that to recognize recurring sequences in the data, and writes its own rules.

Suddenly, it is no longer limited to applying algorithms that
a human wrote; the machine is designing its own. more (pdf)>

The Failures of Globalism

BOOK REVIEW

Us Vs. Them: The Failure of Globalism, Author: Ian Bremmer.

By Gabrielle Levy – If the six and a half decades that followed the end of World War II were a triumph of globalism, an era of prosperity and peace as the world grew increasingly interconnected, the second decade of the 21st century has seen the rise of a new populism that has pushed back.

Convulsions of anger – at corrupt government elites, at the floods of refugees fleeing sectarian conflict, at the loss of jobs as workers are increasingly replaced by automation and artificial intelligence – culminated in the pair of 2016 events, Brexit and the election of Donald Trump as U.S. president, that turned conventional wisdom on its head.

The biggest piece, I think, has already happened. When globalism started, after World War II was over, the United States recognized that we never want to have a flight like that again, so we’ve got to do something about it. We’re going to rebuild our former enemies – the Germans, the Japanese – and we’re going to build the United Nations.

More broadly, as it continues, it’s going to be a lot of opposition to the United States sending troops fighting in other people’s battles, like we’ve seen in Afghanistan and Iraq and Syria. It’s going to be a lot less support for immigration into the U.S., unless you’ve got a skill set or a lot of money, and we’re already seeing that start to happen.

And it’s possibly going to lead to more trade disputes, certainly in terms of big technology, where, instead of having one global free market, we end up having much more fragmentation of a marketplace with more strategic sectors.

And some of that is because the United States is not willing to promote free multilateral trade organizations, but some of it is because the Chinese are building an alternative system that has no global free trade at all.

It’s all just going to be linked to Beijing. So when you put that all together, you start to see what the future of this world will look like.

Globalization can turn a virtuous cycle into a vicious one – where globalization improves people’s lives, only to raise their expectations. That, in turn, raises frustrations when those expectations are met.

In China, the growing middle class and the rising wages risk threatening the very economic engine – cheap labor – that made that progress possible. Can developing countries avoid this trap? more>

The Troubling Transformation Of The EU

By Hans Kundnani – There are two quite different ways of thinking about the Commission’s proposals. For Macron, they were part of a vision for a “Europe qui protege” in which there would be greater “solidarity” between citizens and member states.

In the context of this vision, the new European Monetary Fund would be a kind of embryonic treasury for the eurozone. But many in Germany, including Wolfgang Schäuble, seem to support the same idea for entirely different reasons. They see it as a way to increase control over EU member states’ budgets and more strictly enforce the eurozone’s fiscal rules and thus increase European “competitiveness”. If that vision were to prevail, “more Europe” would mean “more Germany” – as many of the steps that have been taken in the last seven years since the euro crisis began have.

These different visions illustrate the way that deepening European integration is not automatically or inherently a good thing. In fact, steps such as turning the ESM (European Stability Mechanism) into a European Monetary Fund may form part of a troubling transformation of the EU that goes back to the beginning of the euro crisis.

It is as if the EU is in the process of being remade in the image of the IMF. It increasingly seems to be a vehicle for imposing market discipline on member states – something quite different from the project that the founding fathers had in mind and also quite different from how most “pro-Europeans” continue to imagine the EU.

Indeed, it is striking that, in discussions about debt relief for crisis countries, the European Commission has often been even more unyielding than the IMF. As Luigi Zingales put it in July 2015: “If Europe is nothing but a bad version of the IMF, what is left of the European integration project?” more>

Updates from Chicago Booth

The good and bad of blockchain
By Rose Jacobs – There’s a drawback: blockchains have the potential to increase collusion, according to Chicago Booth’s Lin William Cong and Zhiguo He.

The researchers’ modeling, part of their research into how blockchains might affect competition, suggests that the way blockchains work as a decentralized ledger involves distributing more information, which could make it easier for competitors to quietly and often tacitly collude to keep prices high, ultimately to the detriment of consumers. But Cong and He propose a few potential remedies.

Blockchain is less well-known than Bitcoin but may have more staying power. Its main functionality is providing “decentralized consensus,” say Cong and He. In most societies and economies, parties in a contract rely on a government, court, or other third-party arbitrator to essentially oversee and enforce rules in private contracts—to provide consensus, as the researchers put it. Blockchain provides that function in a more decentralized manner by generating, storing, and distributing the record of rules and regulations.

Blockchain idealists would have all transactions stored on one chain—the one that already exists, thanks to Bitcoin. This would create a massive, democratic, stable, and unified public record. But most companies don’t buy into this vision.

Critics say this is because they want to control the chains, keeping out new competitors by using private or “permissioned” blockchains. more>

Related>

Three Cheers for Financial Repression

By Tom Streithorst – “Financial repression.” It sounds terrifying, right? It smacks of authoritarian bureaucrats sucking the life-blood out of hard-working, innovative makers and doers.

Umm, no. That’s not even close. It’s about bondholders. Economists started using the term in the 1970s when bondholders were losing money because inflation exceeded the interest rate.

These days, it’s market forces more than government policy that push real interest rates below zero. Whether you call it a savings glut or secular stagnation, our collective desire to save far exceeds our collective desire to invest. Savers want safe assets more than borrowers want to invest in productive capacity.

Don’t cry for the rentier class. For the past forty years (ever since Federal Reserve Chairman Paul Volcker manufactured a brutal recession in order to eliminate 1970s inflation) economic policymakers have concentrated on ensuring the profitability of the bond market more than just about anything else. They focused their attention on financial stability and low inflation rather than the traditional goal of promoting full employment.

Consequently, the financial sector has quadrupled in size relative to the rest of the economy, the rich absorb most of the benefits of growth, and workers’ real wages have stagnated or even declined. Financialization has made wealthholders richer than ever, but it hasn’t done much for the rest of us.

What is good for the bankers has not been good for the economy as a whole. more>

How Bitcoin Ends

By Douglas Rushkoff – Bitcoin was a clever idea. Idealistic, even. But it isn’t working out quite as its developers imagined. In fact, once all the coin has been mined, bitcoin will simply reinforce the very banking system it was invented to disrupt.

Watching the bitcoin phenomenon is a bit like watching the three-decade decline of the internet from a playspace for the counterculture to one for venture capitalists. We thought the net would break the monopoly of top-down, corporate media. But as business interests took over it has become primarily a delivery system for streaming television to consumers, and consumer data to advertisers.

Likewise, bitcoin was intended to break the monopoly of the banking system over central currency and credit. But, in the end, it will turn into just another platform for the big banks to do the same old extraction they always have. Here’s how.

Central currency is not the only kind of money that ever existed. For many centuries, gold and other precious metals served as money.

In essence, bitcoin is money built and maintained by nerds, based on the premise that good nerds will outnumber the bad nerds. Sure, bad actors can dedicate all of their processing power to fake transactions, but they will be outnumbered by those who want the token to work properly.

What is the incentive for people to spend millions of dollars on computers and power once there’s no more kickback of coin? more>

Why Amartya Sen remains the century’s great critic of capitalism

BOOK REVIEW

The Moral Economists: R H Tawney, Karl Polanyi, E P Thompson and the Critique of Capitalism, Author: Tim Rogan.

By Tim Rogan – Critiques of capitalism come in two varieties. First, there is the moral or spiritual critique. This critique rejects Homo economicus as the organizing heuristic of human affairs. Human beings, it says, need more than material things to prosper. Calculating power is only a small part of what makes us who we are. Moral and spiritual relationships are first-order concerns. Material fixes such as a universal basic income will make no difference to societies in which the basic relationships are felt to be unjust.

Then there is the material critique of capitalism. The economists who lead discussions of inequality now are its leading exponents. Homo economicus is the right starting point for social thought. We are poor calculators and single-minded, failing to see our advantage in the rational distribution of prosperity across societies. Hence inequality, the wages of ungoverned growth. But we are calculators all the same, and what we need above all is material plenty, thus the focus on the redress of material inequality. From good material outcomes, the rest follows.

But then there is Amartya Sen. Every major work on material inequality in the 21st century owes a debt to Sen.

But his own writings treat material inequality as though the moral frameworks and social relationships that mediate economic exchanges matter. Famine is the nadir of material deprivation.

But it seldom occurs – Sen argues – for lack of food.

To understand why a people goes hungry, look not for catastrophic crop failure; look rather for malfunctions of the moral economy that moderates competing demands upon a scarce commodity. Material inequality of the most egregious kind is the problem here. more>

How capitalism without growth could build a more stable economy

By Adam Barrett – On a finite planet, endless economic growth is impossible. There is also plenty of evidence that in the developed world, a continued increase of GDP does not increase happiness.

Back in 1930 the economist John Maynard Keynes predicted that growth would end within a century – but he was unclear whether a post-growth capitalism was really possible.

Today, mainstream economic thinking still considers growth to be a vital policy objective – essential to the health of a capitalist economy. There remains a concern that ultimately, a capitalist economy will collapse without growth.

I recently published new research that suggests a different view – that a post-growth economy could actually be more stable and even bring higher wages. It begins with an acceptance that capitalism is unstable and prone to crisis even during a period of strong and stable growth – as the great financial crash of 2007-08 demonstrated.

I found that an end to growth reduces profits for business owners.

Therefore, if it remains relatively easy for money to flow across borders, then investors might abandon a post-growth country for a fast-growing developing country. Also, businesses are beholden to shareholders keen on growth as a means to rapid profit accumulation.

Some mainstream commentators and economists are now predicting a transition to a post-growth era, whatever our environmental policy – which means the study of post-growth economics is a field which itself will grow. more>