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>
Posted in Banking, Business, CONGRESS WATCH, Economy, Education, History, Leadership, Media
Tagged Business, Capital, Congress Watch, Debt, Government, Greek, Leadership
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>
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>
Posted in Banking, Business, CONGRESS WATCH, Economy, History, Leadership, Media, Net, Regulations
Tagged Banking reform, Capital, Congress Watch, Credit, Debt, Financial crisis, Regulations, United States
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>
Posted in Banking, Business, Economy, Leadership
Tagged Banking reform, Capital, Credit, Currency, Debt, Financial crisis, Government, Monetary policy