Tag Archives: Financial crisis

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>


Europe’s Poor Need More Than Jobs

By Ive Marx – The idea that – to use a ubiquitous political slogan – “the best protection against poverty is a job” remains the mantra in the corridors of power right across Europe and indeed in Brussels. It is, alas, more tenet of faith than a statement of fact.

Unfortunately, things are not as simple. Employment growth never yielded the hoped-for reductions in poverty in the past (see here). There is no reason to expect that things will turn out any different this time.

First, many of the poor live in households where no adult has a job. Such “jobless households” often face severe financial hardship, including any children. In the past, employment growth never produced anywhere near commensurate drops in household jobless rates. Instead it tended to boost the number of double- or multi-earner households.

A second reason why more people in work does not automatically bring less poverty is that getting a job may not be enough for a household to escape poverty. Long considered a typically American phenomenon, there is now ample evidence that the “working poor” are to be found in significant numbers in every European country.

In conclusion: it is time to remind Europe’s politicians of the promises they made to bring poverty down. They seem to think that Europe’s buoyant labor markets will do the job. They will not. more>


Monopoly Now Wants You to Cheat—Just Like Real Capitalists


Cornered: The New Monopoly Capitalism & The Economics of Destruction, Author: Barry Lynn.

By Nick Cassella – The year was 1904, and Lizzie Maggie wanted to create a board game that acted as “a harsh criticism of wealth disparity.” Upset by the the inequality around her, Maggie aspired to ridicule and condemn the dire outcomes of unbridled capitalism. So she constructed the Landlord’s Game, which intended to educate players on the rules and regulations of realty and taxation. Eventually, it ended up being the precursor to the game-which-nobody-ever-finishes, Monopoly.

A long time has passed since then and it’s safe to say that Maggie’s hope has not been realized. Monopoly’s creator would look at today’s economic landscape and be disheartened.

It appears as if Hasbro is trying to draw attention to Monopoly’s original purpose by releasing a new “cheaters edition” this autumn.

The cheaters edition follows the rules of classic Monopoly, except this version encourages players to break them…They encourage players to cheat in various ways, from collecting rent on another player’s property or stealing money from the bank.



Updates from Chicago Booth

Google and Facebook have an effective duopoly on online advertising. For the average person, why is that a problem? Prices haven’t gone up. Why should we care?
By Luigi Zingales, Tyler Cowen – Most people don’t perceive that as a problem. The perceived price [for using Google or Facebook] is zero. It’s not really zero, because we are giving up our data in exchange. Google and Facebook’s market power in advertising increases the cost of advertising, which eventually will be reflected in the price of goods.

Antitrust in Europe is much more effective. Look at the price of cell phones and cell-phone services. They are a fraction of the price in the US, with better services. The EU is at the front end of enforcement of competition, while the US has become complacent. In the EU, they have a new directive requiring every bank to give customers access to their data at the customer’s request. That transfer creates competition because it reduces the friction and creates more opportunity for new entry. The monopoly that Facebook and Google have of our data, number one, prevents entry, and number two, gives them tremendous power. more>



Today, inflation. Tomorrow, crisis?

By Robert J. Samuelson – Until recently, inflation seemed to be dead or, at least, in a prolonged state of remission. It was beaten down by cost-saving technologies and a caution against raising wages and prices instilled by the Great Recession. From 2010 to 2015, annual inflation as measured by the CPI averaged about 1.5 percent, often too small to be noticed.

It’s doubtful that many economists believe that inflation is now so high. Remember those erratic month-to-month swings. But the pervasive nature of the inflation suggests that supply is shrinking compared with demand.

Inflation’s rebound seems to vindicate former Federal Reserve chair Janet L. Yellen, who argued that price increases were in hibernation, not the mortuary. Now, her successor, Jerome H. Powell, faces the tricky task of containing inflation without killing the economy.

What’s scarier is the possibility that higher inflation and interest rates will trigger a global financial crisis — some mixture of stock market collapses, bond and loan defaults and banking failures. more>


Is democracy essential?


Superpower: Three Choices for America’s Role in the World, Author: Ian Bremmer.

By Ian Bremmer – In advanced economies, young adults are more likely than older people to prefer technocracy to democracy. The study found that in the U.S., 46 percent of those aged 18 to 29 would prefer to be governed by experts compared with 36 percent of respondents aged 50 and older.

Perhaps most alarming was the revelation than one quarter of millennials agreed that “choosing leaders through free elections is unimportant.” Just 14 percent of Baby Boomers and 10 percent of older Americans agreed.

In a world where even the Communists are no longer communists (China’s state-capitalism is a far cry from Marx, to be sure), there’s no competing ideology forcing those who live in democracies to consider what life might be like without it.

Or maybe it’s that democracy in America no longer seems to be working. During the 1930s, economic depression led many to look abroad for alternatives to democracy and free-market capitalism.

American millennials have never stood in a bread line, but they have experienced the most severe financial crisis since the 30s, a dramatic widening of the gap between richest and poorest, a hollowing out of the middle and working classes, and a level of dysfunction and petty partisan hostility in Washington that seems to get worse by the week.

Then there’s the Trump effect. more>


The high cost of budgetary paralysis

By Alice M. Rivlin – It is both frightening and embarrassing that the world’s most experienced democracy is currently unable to carry out even the basic responsibility of funding the services that Americans are expecting from their government in the current fiscal year.

Limping from one short-term continuing resolution to another, combining individual appropriations bills into unwieldy omnibus bills that no one is able to study or even read, and threatening to close the government (or default on the debt) if certain conditions are not met are all symptoms of a deeply broken decision-making process.

The costs of budgetary dysfunction are high and rising, although not easy to quantify. Federal agencies, including the Department of Defense, cannot make plans that enable them to spend money efficiently.

The most worrisome cost of the Congress’s seemingly-endless wrangling over near-term federal funding is that it crowds out serious discussions of the daunting longer-term challenges that face the nation’s economy. more>


Post-Davos Depression

By Joseph E. Stiglitz – I’ve been attending the World Economic Forum’s annual conference in Davos, Switzerland – where the so-called global elite convenes to discuss the world’s problems – since 1995. Never have I come away more dispirited than I have this year.

The world is plagued by almost intractable problems. Inequality is surging, especially in the advanced economies. The digital revolution, despite its potential, also carries serious risks for privacy, security, jobs, and democracy – challenges that are compounded by the rising monopoly power of a few American and Chinese data giants, including Facebook and Google. Climate change amounts to an existential threat to the entire global economy as we know it.

Perhaps more disheartening than such problems, however, are the responses.

But, by the end of their speeches this year, any remaining illusion about the values motivating Davos CEOs was shattered. The risk that these CEOs seemed most concerned about is the populist backlash against the kind of globalization that they have shaped – and from which they have benefited immensely.

They may lack the candor of Michael Douglas’s character in the 1987 movie Wall Street, but the message hasn’t changed: “Greed is good.” What depresses me is that, though the message is obviously false, so many in power believe it to be true. more>


Why Don’t Free Markets Always Work?

By Peter Pham – Free markets are not always safe. If a state-run economy implements the free market, then it usually goes head over heels, and may even crash.

Over the last ten years, China’s state-controlled economy has been alleviating capital controls and freeing its market. Will the 1997 Asian financial crisis repeat itself?

After WW2 ended, savings and investment rates in most Asian nations were between 30 to 50 percent. That means governments were able to allocate as much funds as they pleased.

Japan, South Korea and other Northeast Asian countries preferred to invest in Asian Capital Development (ACD), where governments protect and control certain industries.

They funneled credit to sectors that are less profitable (in the short-run) such as agriculture and export-oriented manufacturing. The goal was to slowly and surely develop human capital. This process gave birth to globally competitive companies and increased foreign exchange reserves. more>


Can capitalism be saved from itself?

By Homi Kharas – 2018 may yet turn out to be the year when a great battle of ideas takes place between those who argue for unfettered markets and those who would try to save capitalism from itself.

The first battle is about getting prices right. Capitalism is a great engine, but the road it takes is signposted by prices.

Get the prices wrong and the engine moves fast but in the wrong direction. And, going into 2018, many prices are wrong.

A few examples: the price of carbon, the price of dumping plastic into oceans, and the price of unpaid family care. As a broad proposition, there is a paradox in our system; in most countries, labor is taxed and fossil fuels are subsidized, while politicians and citizens in these countries insist they want more jobs and less pollution. With carbon emissions rising to record levels and employment rates falling, the price distortions are taking a toll.

In 2017 alone, natural disasters cost America $306 billion—almost equal to what economic growth last year added to GDP ($364 billion).

The second battle is around competition. Capitalism delivers for society as a whole when there is strong competition. It delivers for individual companies and their shareholders when competition is weak.

Today’s economies are seeing more concentration. In the U.S., 75 percent of industries have become more concentrated over the past two decades, generating abnormal returns. With more companies enjoying economic rents from patent and copyright returns, competition is becoming harder to achieve and winner-take-all companies are emerging.

Individual countries are unlikely to drive systemic change—this is a case where collective action on a negotiated path forward is most desirable. Yet wholesale change is also the least likely scenario. more>