Tag Archives: Debt

Four Lessons (Not) Learned From The Financial Crisis

By John T. Harvey – That’s fantastic. Good work, Presidents Bush, Obama and Trump. But just because we bailed the water out of the sinking ship doesn’t mean we patched all the holes. And while the former is a necessary first step, without the latter we won’t remain upright for long.

So what didn’t we fix that could still potentially cause a catastrophic leak? Too much. Here’s a short list of what we should have learned but didn’t.

  1. If you are going to bail someone out, bail out the debtor and not the creditor
  2. Financial institutions should be very closely supervised
  3. The market is not always right
  4. Deficit spending doesn’t cause inflation or bankruptcy

Most people assume that what financial institutions do is loan out other people’s money. That is, of course, part of what they do, but what is far more significant is the fact that they create money. I don’t just mean the intro-econ, money-multiplier story where banks make loans after the Federal Reserve injects new funds. In fact, that view is so wrong that economics professors are beginning to eliminate it from their curriculum (not nearly fast enough, but it’s getting there).

Rather, the standard scenario is one in which banks increase the money supply first by making loans to customers and then the Federal Reserve steps in second to supply the necessary reserves. Financial institutions make money out of thin air, not from someone’s savings, and if that leaves the system short of reserves then the Fed buys securities from banks. They do this to prevent interest rates from rising above their targeted rate and therefore the central bank accommodates rather than dictates when it comes to the supply of money. more>

Lessons From The Greek Tragedy Unlearnt

By Simon Wren-Lewis – Private banks were happy to lend to the Greek government because they mistakenly believed their money was as safe as if they were lending to Germany.

Other governments first delayed and then limited Greek default because they were worried about the financial health of their own banks. They replaced privately held Greek debt with money the Greek government owed to other Eurozone governments.

From that point voters would always want all their money back. In an effort to achieve that the Troika demanded and largely achieved draconian austerity and a vast array of reforms.

The result was a slump which crippled the economy in a way that has few parallels in history. Most economists understand that in situations like this it is ridiculous to insist that the debtor pays all the money back. For basic Keynesian reasons this insistence just destroys the ability of the debtor to pay: it is not a zero sum game between creditor and debtor. This is why so much of German debt was written off after WWII.

By July 2015 the Greek government was able to pay for its spending with taxes, so all it needed was loans rolled over. The Troika would only do that if the Greek government started running a large surplus to start paying back the debt i.e. further austerity. more>

Updates from Chicago Booth

Actively managed, but more index-like
Chicago Booth – Analyzing 2,789 actively managed mutual funds between 1979 and 2014, the researchers find that fund portfolios have become more liquid over time, largely as a result of becoming more diversified. Both components of diversification—balance and coverage—have risen sharply, especially since 2000. The level of coverage rose faster than the level of balance as mutual-fund managers poured ever more names into their portfolios.

The research captures the rise of closet indexing among active-mutual-fund managers, a phenomenon that may be caused by managers hewing toward the benchmark they are trying to outperform. While diversification has some benefits in terms of risk management and liquidity, the close resemblance of active portfolios to passive indexes might leave some investors wondering why they’re bothering to pay for active management given the ubiquitous availability of cheap, passive alternatives. more>

Why The Only Answer Is To Break Up The Biggest Wall Street Banks

By Robert Reich – Glass-Steagall’s key principle was to keep risky assets away from insured deposits. It worked well for more than half century. Then Wall Street saw opportunities to make lots of money by betting on stocks, bonds, and derivatives (bets on bets) – and in 1999 persuaded Bill Clinton and a Republican congress to repeal it.

Nine years later, Wall Street had to be bailed out, and millions of Americans lost their savings, their jobs, and their homes.

Why didn’t America simply reinstate Glass-Steagall after the last financial crisis? Because too much money was at stake. Wall Street was intent on keeping the door open to making bets with commercial deposits. So instead of Glass-Steagall, we got the Volcker Rule – almost 300 pages of regulatory mumbo-jumbo, riddled with exemptions and loopholes.

Now those loopholes and exemptions are about to get even bigger, until they swallow up the Volcker Rule altogether. If the latest proposal goes through, we’ll be nearly back to where we were before the crash of 2008. 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>

The Tax Cut Effect

By Andrew Soergel – The legislation heaped new debt onto a country already saddled with more than $20 trillion in outstanding obligations. But the overhaul was touted as an economic growth engine likely to drive investment and wage growth in America, eventually allowing the cuts to pay for themselves by virtue of a stronger economy.

The benefits of the income tax cut are really only now really beginning to hit and have yet to really show up in any significant way in spending figures or retail sales. It’s been estimated that, probably, the annual impact of all of that is somewhere north of $100 billion. And all of that money needs to go somewhere, so some of that will move into the spending category.

But we’re advocating on behalf of consumers and investors that they need to be thinking about how to maximize their finances so that they’re taking advantage of saving opportunities and to pay down debt.

Right now, we do see the benefits of the tax cut coming into individuals’ and corporations’ coffers. But as one who came from the Midwest, I’d seize upon a corny line and say “You need to make hay while the sun shines.” We’re in the ninth year of the economic expansion, and the bull market is nine years old as well. And these things will not last forever.

And we’re in a rising interest rate environment, where the cost of borrowing is rising and likely to rise. more>

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>

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>

Knee-jerk cynicism is a failure of critical reasoning

BOOK REVIEW

Enlightenment Now, Author: Steven Pinker.
The Better Angels of Our Nature, Author: Steven Pinker.

By Thu-Huong Ha – If we see that science and humanism have solved the world’s problems before, Pinker’s argument goes, we’ll see that the problems we face today can be solved again through science and humanism. This hope ought to inoculate us against cynicism.

Despite all this sanguinity, the book also contains plenty of exasperation. Pinker chastises: the mainstream media, liberals bemoaning the state of inequality, white nationalists, communists, anti-vaxxers, social justice warriors, “climate justice warriors,” and Nietzsche.

“Since the time of the Hebrew prophets, who blended their social criticism with fore-warnings of disaster, pessimism has been equated with moral seriousness,” Pinker writes.

“Journalists believe that by accentuating the negative they are discharging their duty as watchdogs, muckrakers, whistle-blowers, and afflicters of the comfortable. And intellectuals know they can attain instant gravitas by pointing to an unsolved problem and theorizing that it is a symptom of a sick society.” more>