There is a long list of culprits when it comes to assigning blame for the financial crisis. This column argues economists are among the guilty, having succumbed to an intellectual virus of theory-induced blindness. It adds this calls for an intellectual reinvestment in models of heterogeneous, interacting agents, following in the footsteps of other social scientists. This will require a sense of academic adventure sadly absent in the pre-crisis period.VOX
I’m happy to announce imminent publication of my book Founding Finance: How Debt, Speculation, Foreclosures, Protests and Crackdowns Made Us a Nation. It’s from University of Texas Press, in the “Discovering America” series edited by Mark Crispin Miller (pub. date: October 15, 2012).Hysteriography
The subjects of the book will not all be news to readers of this blog. Founding Finance ranges like a bull in a china shop through those critical years 1765-1795, turning up dire conflicts among 18th-century Americans over finance and economics. These are the conflicts that, while shockingly little-known, I think played directly into – no, they were — the decisive arc of the American founding, the stuff that really made us who we are.
Little-known founding episodes that may sound eerily resonant:
- predatory lending in a real-estate bubble about to pop
- feverish speculation by upscale investors in dubious debt instruments
- foreclosure crises sending ordinary families into poverty and dependence
- popular uprisings against government complicity in wealth concentration
- militarized crackdowns on democratic approaches to finance
- and, of course, much, much more
This is not, in other words, another book about founding conflicts between Americans and England. We won that war.
This is about the founding war between some Americans and other Americans, a war over money, debt, and government’s role in public and private finance. A war we refuse to believe formed us, a war we’ve never stopped fighting.
There exist at least two approaches to economics:Thoughts on EconomicsThe first is the approach of the so-called neoclassical theory [in which the focus is on price theory], and the second is the approach of classical political economy [where the focus is on political theory].
- One focused on the allocation of given scarce resources among alternative ends.
- One focused on the conditions for the reproduction of society.
The wrong medicine is being applied to America’s economy. Having misdiagnosed the ailment, policymakers have prescribed untested experimental medicine with potentially grave side effects.Project Syndicate
The conference itself was a bit of a sleepy affair, with most of the other talks I attended being more literary criticism (e.g several quotes from Keynes, Minsky, and others, strung together and compared with recent events) than actual modeling.
My overall impression is that if this is all that heterodoxy has to offer as an alternative to mainstream economics, then the profession is in deeper trouble than I thought.Quantitative Finance: Foundations and Applications
My presentation at the UMKC Post Keynesian conference in 2012 where I prove that, given endogenous money, effective demand is income plus the change in debt, and show that this is compatible with sectoral balances.Steve Keen
Protesters surround parliament in Madrid, while thousands take to the streets of Lisbon in new anti-austerity protests.Al Jazeera
Before we can think clearly about regulation, we need to think clearly about another important word: narrative. A narrative is a story that organizes our experience and compels certain actions. We need narratives, because the real world is too complex to comprehend without simplification. Narratives are invariably distortions of the real world because otherwise they could not perform their simplifying function. The simpler and more compelling a narrative the better--but only if it compels us to do the right thing. When a narrative compels us to do the wrong thing, then it traps us like a prison that we cannot easily escape because of the way that the narrative has structured our experience. The only way to break out of a narrative prison is to challenge and replace the narrative. The new narrative will also be a simplification, but one that is hopefully better anchored in reality and compels us to do the right thing.Evolution — This View of Life
Traditionally, when it comes to reading behind the manipulated media's tea leaf rhetoric and timing major inflection points in the economy, the most accurate predictor are financial firms, whose sense of true economic upside (or downside) while never infallible, is still better than most. Yet unlike employment, which is usually a lagging, or at best concurrent indicator, one aspect that has always been a tried and true leading indicator, has been real estate demand, in this case rental contracts. Due to the long-term lock up nature of commercial real estate contracts, firms are far less eager to engage in rental transactions (and bidding wars) when they expect a worsening macroeconomic environment. Which is why news that office vacancy in Manhattan's Plaza district, the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South which is home to some of the nation’s most expensive and prestigious office towers, and where America's largest hedge funds and PE firms have their headquarters, has just risen to 12.3%, or a two year high, is probably the most troubling news for the economy and a real indicator of what to expect of the immediate future.Zero Hedge
Author Greg Palast follows the money trail leading up to Paul Ryan’s nomination.In These Times
And while it is impossible using historical data to extrapolate with precision what the current consolidated federal student loan default rate is, we do know that there is now $914 billion in federal student loans (which also was mysteriously revised over 50% higher by the Fed just a month ago). Using simple inference, all else equal (and all else has certainly deteriorated), there is now at least $122 billion in federal student loan defaults. And surging every day.Zero Hedge
We had our first seminar of the year today. It was by Professor Takeshi Amemiya of Stanford. Takeshi is best known for his econometric research on a wide range of topics, including a series of highly influential theoretical papers in the 1970s and 1980s. His more recent research has been in a very different area -- the economics of ancient Greece. The title of his talk was: "Economy and Economics of Ancient Greece and Ancient China"Economist's View
One of the things I took from the talk was how many of the ideas in Adam Smith's Wealth of Nations can be found in these ancient texts, concepts such as the division of labor, supply and demand, the role of prices, monopoly power, wealth accumulation, and so on.
But it was also interesting to see echoes of so many modern debates, e.g. about wealth inequality, taxes, etc., from so long ago. Here are a few quotes from the section "Economic Thoughts" in his slides (there is a timeline in the slides showing when each of the people quoted below lived)....
The Paul Ryan audiotape did not get the same attention as the Romney videotape. Yet I find it as damning....Grasping Reality with Both Invisible Hands
Greece’s far-right Golden Dawn party is increasingly assuming the role of law enforcement officers on the streets of the bankrupt country, with mounting evidence that Athenians are being openly directed by police to seek help from the neo-Nazi group, analysts, activists and lawyers say.
In return, a growing number of Greek crime victims have come to see the party, whose symbol bears an uncanny resemblance to the swastika, as a “protector”.The Raw Story
Barack Obama has revoked a Chinese company’s acquisition of four wind farms, citing national security for the first time in two decades against a foreign investor.The Raw Story
The executive order from the White House on Friday, against the privately held Ralls Corporation, follows accusations from Mitt Romney that Obama has failed to stand up to Chinese businesses.
It was only a matter of time for flippers to engulf the market once again. House flippers never really left but the magnitude hit a temporary lull during the housing crisis. Apparently all is well in SoCal once again and bubble 2.0 is back in full fashion. It is only a matter of time before the cable shows shift from the insane Canadian housing bubble and start filming our local neighbors taking a plunge into the new bubble market. Flipping at these levels can only exist in a partial mania like atmosphere. The constrained inventory and rising prices is pulling many people off the sidelines and I have heard this said a few times already, “I’m not missing the housing market this time!” Maybe it is the California sunshine that gets into our heads but we appear to have forgotten the housing bubble that just hit us a few minutes ago. Flippers are back in fashion and many hipster neighborhoods in SoCal and the Bay Area are bringing along a new party.Dr. Housing Bubble
Well, there's change on Wall Street alright, but not the kind you'd expect.
Pierpont Morgan was arguably the greatest financier of all time and in 1913 he built this structure at 23 Wall Street to serve as his bank's headquarters. In the years that followed this location would be the epicenter of global financial power.
So can we call it "hallowed" ground?
Wait...make that, Halloween gound!!
It's now a Halloween costume shop!
Pierpont must be rolling over in his grave!!
I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.
[NOTE: The redux notation in the title refers to re-edits of earlier blogs with the same title. At present, the updated Chapter starts from Aggregate demand – Part 5 (redux) and continues today. Earlier Parts in the Aggregate Demand series are redundant and should be ignored].Bill Mitchell — billy blog
There's one thing not happening today which should be. People are not ridiculing Nick Clegg, at least no more so than usual. But they should be, because one part at least of hisspeech yesterday was downright stupid:
Who suffers most when governments go bust? When they can no longer pay salaries, benefits and pensions? Not the bankers and the hedge fund managers, that’s for sure. No, it would be the poor....
Of course, this is plain wrong. In countries with their own central banks, governments cannot go bust because the central bank can simply print money to buy government debt: this is what QE is. Of course, this might or might not be a bad idea. But Clegg didn't argue this. He just made a prat of himself.
However, my point is not to condemn Clegg; I'll not flog that dead horse. Instead, it's to note that the MSM seem to have ignored this. His speech was reported with the usual post-conference bromides rather than along the lines of "Deputy Prime Minister shows himself to be crass idiot."This is the part of the post that will likely be most interesting to readers of MNE, but the rest of the post is where Dillow makes his point. Worth reading in full.
Certain events would put me into a position in which I could not go on with the old language games any further. In which I was torn away from the sureness of the game.CNBC NetNet
—Wittgenstein, “On Certainty”
Can economics be morally centered? And perhaps more importantly, should it be?
These are questions that society is grappling with in the face of the economics profession's failure to confront the global impact of exploding inequality within and between countries.Yahoo Finance
This is a warning for those who have bought the Promtheus edition of the Wealth of Nations by Adam Smith. It is abridged, and it seems to have been edited to the effect that Adam Smith appears as a market liberal. The following quotes are from the original book and are not found in the Prometheus edition.
A potent myth is being used to justify economic capture by a parasitic class.Monbiot.com
This is an edited and expanded transcript from a live phone interview by Dimitris Yannopoulos for Athens News, September 2012MichaelHudson.com
The assumptions underlying the current budget debate are erroneous. Historical analogies include “the earth is flat” and “the earth is the center of the solar system.” Chicken Little has returned, and the consequences are counter agenda for all parties.
The noble attempt by Congress to balance the budget will result in a weaker economy with a true depression a possibility. Every time there is a drop in the budget deficit, as a percent of GDP, the GDP growth rate drops a few quarters later. It is only after the deficit begins to expand again that the economy recovers. The historical correlation is 100%. Lowering interest rates, in an attempt to boost the economy, is seldom effective. Since the government is a net payer of interest, lower rates reduce spending, thereby increasing fiscal drag.
Governments are monopoly issuers of fiat currency. The incorrect , but prevalent, understanding is that issuers of fiat currency must tax, borrow, or otherwise raise revenue so they can spend it. Taxing and borrowing are considered “funding” operations. Consequently, the discussions revolve around how governments can raise “needed revenue” to fund spending. Revenue shortfalls are of great concern; witness the latest government shutdown.
Contrary to general perception, fiat money is driven by the fact that taxpayers need the government’s money to pay their taxes. By levying a tax, the government creates a need for its fiat currency. It creates this need, presumably, so it can obtain the real goods and services it desires via the spending of its currency.
From inception, the only source of money needed to pay taxes is the issuing government. The government cannot actually collect the tax it has levied, nor borrow any of its fiat currency, until it first spends, or otherwise provides, the funds.
A balanced budget, from inception, is therefore the theoretical minimum that a government can spend. The previous statement represents an accounting identity. If individuals and businesses desire to hold actual cash, that money must be “left over” after taxes are paid. All cash held by the public must be money provided by the government in excess of the need to pay taxes (deficit spending). This is also true for all dollars held by foreign central banks at the Fed. For these, and other structural reasons, the possibility of a balanced budget does not exist, and the current attempt to balance the budget will likely result in severe deflation. When the government does not spend enough to cover the total need for dollars created by taxes, the usual result is a recession and a concurrent shortfall in revenues. A deficit remains. Accounting identities have a way of being satisfied, one way or another.
Likewise, the government can borrow its currency only after it has provided it to the private sector. Government borrowing, therefore, functions to support interest rates, not as a funding operation. Nominal savings is not diminished, nor displaced - it is given a place to earn interest. If the government were to spend more than it subsequently collected in taxes, and did not offer securities for sale, the fed fund rate would immediately fall to 0% bid. Treasury spending is a reserve add. Selling securities, by the Fed or Treasury, is simply a reserve drain, a monetary operation. This underlies the empirical evidence that nations can run any debt ratios they want, in their own fiat currencies, and still “fund the debt.”
For all practical purposes, there is no such thing as a balanced budget. Singapore, for example, shows a budget surplus, but that does not include all government spending in excess of collected taxes. The central bank spends Singapore dollars to buy foreign currencies. This “off balance sheet” spending brings the consolidated spending to about 2% higher than collected taxes. The same happens in Czechoslovakia - fiscal policy is tight enough that the only way to get enough local currency to pay taxes is selling foreign currencies to the central bank. When the central bank makes the taxpayers “beg”, as evidenced by currency appreciation, the economy gets softer (Japan is another good example).
Consider inflation. Because the taxpayers need the government’s money, the government is able to define its currency by what it pays for goods and services. By changing what it pays, the government redefines its currency. Currently, the government fights inflation by maintaining an economy weak enough for the private sector to be under pressure to sell goods and services. This selling pressure keeps prices from rising.
How large a deficit is prudent? Let the market decide! This option has not even been considered. For example, the government could offer a job to anyone who wanted one, at some minimum rate of pay deemed appropriate, and let the deficit float. This would end unemployment and unemployment compensation, eliminate the need for minimum wage laws, and promote price stability. Employment (rather than unemployment) would define the currency and become the stabilizer. The price of labor would be stable. Private sector wages would be related to the benchmark of government employment. If the government labor force were larger than needed by the government, taxes could be lowered. This would result in fewer government workers and reduced government spending as the private sector hired these workers.
The Fed sets short term rates. Congress has ultimate control over the Fed. Short term rates go up because the Fed, and ultimately Congress, wants them to - not because of market forces. These rates are not determined by market forces. Treasury securities are not necessary unless the government wishes to support higher long term rates. Short term rates could be maintained simply by paying interest on excess reserves held at the Fed.
The Federal debt is all the money spent but not taxed. It was borrowed after it was spent, so the holders of the money might earn interest. The government pays interest, voluntarily, depending on how much it wants savers to be able to earn. Have you ever heard an owner of government securities say, “I wish the government would stop selling securities so I can get my money back!”?
The current budget debate is based on erroneous assumptions. Washington does not understand fiat money. Until it does, efforts to reduce the deficit will continue, and the economy will continue to underperform.EPIC | A Coalition of Economic Policy Institutions
Actor-centered sociology (ACS) begins in the intuition that social processes begin in the interactions of socially constructed individuals, and it takes seriously the idea that actors have complex and socially inflected mental schemes of action and representation. So actor-centered sociologists are keen not to over-simplify the persons who constitute the social domain of interest. And this means that they are generally not content with sparse abstract schemata of actors like those proposed by most versions of rational choice theory.
Agent-based modeling (ABM) is a collection of aggregative techniques aimed at working out the aggregate consequences of the hypothetical choices of a number of individuals interacting in a series of social environments. ABM models generally represent the actors' motivations and decision rules very abstractly -- sometimes as economic actors, sometimes as local optimizers, sometimes as heuristically driven decision makers. An ABM model may postulate several groups of actors whose decision rules are different -- predators and prey, landlords and tenants, bandits and generals. The goal is to embody a set of behavioral assumptions at the actor level and then to aggregate the results of the actions and interactions of these actors at a macro level. (Stephen Railsback's Agent-Based and Individual-Based Modeling: A Practical Introduction provides an accessible introduction.)
My question here is a focused one: do these apparently similar approaches to explaining social outcomes actually have as much in common as they appear to at first glance? And the answer I'll suggest is -- not yet, and not enough.Understanding Society
…So if anyone wants to continue to be very bullish about Chinese growth prospects over the next decade, it seems to me that he must address and answer these three questions:MacroBusiness
1. How much debt is there whose real cost exceeds the economic value created by the debt, which sector of the economy will pay for the excess, and what is the mechanism that will ensure the necessary wealth transfer?
2. What projects can we identify that will allow hundreds of billions of dollars, or even trillions of dollars, of investment whose wealth creation in the short and medium term will exceed the real cost of the debt, and what is the mechanism for ensuring that these investments will get made?
3. What mechanism can be implemented to increase the growth rate of household consumption?
Touching the exaction of penalties, when a man appears to have done anything which deserves a fine, he shall pay the fine, if he have anything in excess of the lot which is assigned to him; but more than that he shall not pay. And to secure exactness, let the guardians of the law refer to the registers, and inform the judges of the precise truth, in order that none of the lots may go uncultivated for want of money. But if any one seems to deserve a greater penalty, let him undergo a long and public imprisonment and be dishonoured, unless some of his friends are willing to be surety for him, and liberate him by assisting him to pay the fine.So we can see here, documentary evidence that the ancient Greeks were fully aware of how their fiscal policy of their 'nomisma' system, or what we call today a system of state currency, could effect economic output.
Theme: In the name of “progress,” the world is regressing to neoserfdom.MichaelHudson.com
The best way to reduce the federal deficit is through a combination of higher taxes and spending cuts, according to a group of economists.
The 236 members of the National Association for Business Economics recently surveyed say the country needs more fiscal stimulus through 2013, but by 2014 it should be time to throttle back. The reason for the delay: the sluggish nature of the country's economic recovery.
"In times of depression, when equipment is largely idle and much labor is unemployed, expansion of credit which may effectively stimulate prices, and thus bring about increased employment of equipment and labor with a corresponding enlargement of output is to be regarded as normal and healthy. Such expansion should be called “inflation”. Expansion becomes “overexpansion” or “inflation” when it tends to carry prices beyond the level at which the maximum output is insured through reasonably full employment of available equipment and labor. Similarly, contraction becomes excessive when it forces a lowering of prices below the level of maximum output and leads to shut-downs and unemployment. In short, that level of prices is to be regarded as 'normal' which brings about maximum output through full employment of equipment and labor, and it is from this level that credit movements, in so far as they may be considered responsible should be judged."
What we need instead, today, is a candid review of what central banks cannot do. Yes, they can usually forestall panic. Yes, for better or worse they can keep zombie banks alive. No, they cannot bring on economic recovery or solve any of our deeper economic problems, from unemployment and foreclosures in America to unemployment and economic collapse in Greece and elsewhere. The sooner we stop thinking of central bankers as wizards and magicians, the better.The Guardian (UK)
The greater the local production component, the higher the subsidy created by an undervalued currency. The more labor intensive the manufacturer, the greater the subsidy created by low wages. And finally the more capital intensive the producer, the more it benefits from artificially low interest rates.
The mechanisms also distribute the costs in different ways. An undervalued currency hurts households in proportion to the value of imports in their total consumption basket. Low wages hurt workers. Low interest rates hurt households in proportion to the amount of their savings as a share of income.
Because they boost economic growth at the expense of households, these three mechanisms cause the economy to grow much faster than household income. This is the root of China’s unbalanced economy – household income has grown so much more slowly than the economy that household consumption over the past three decades has collapsed as a share of GDP. Rebalancing in China means by definition, however, that the household consumption share of GDP must rise, and the only effective way to do this is by raising the household income share of GDP. Revaluing the currency is one way of doing so. It increases the real income of households by reducing the cost of imports, and it raises local production costs for manufacturers.
But it is not the only way. Raising Chinese wages increases household income too, while increasing labor costs for manufacturers. Finally, allowing interest rates to rise benefits households by increasing the return on savings, and it raises costs for capital-intensive manufacturers....
This is ultimately what rebalancing means. One way or another as China rebalances it will lose competitiveness abroad because it must raise the cost of production in favor of household income. In exchange, however, China’s domestic market will become a bigger source of demand as Chinese households benefit from rebalancing. Over the long term Chinese growth will be much healthier and the risk of a Chinese debt crisis much reduced, but over the short term, unless there is an unlikely surge in global demand, China cannot both rebalance and improve its trade performance.China Financial Markets
I’ve always sided with endogenous money because it is supported by the evidence. If anyone can offer me contrary evidence about the above or other relevant hypotheses, I’ll be happy to listen. But economist-y special pleading about how, even though exogenous money is wrong, the economy behaves as if it is right, or about how I’m not allowed to refute ‘centuries of theory,’ is simply not enough when the evidence is this strong.Unlearning Economics
I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.Bill Mitchell — billy blog
Please read this blog as a continuation of last week’s – Aggregate demand – Part 4 (redux) – which sought to consolidate the edits to date on this Chapter’s material.
A government can be said to be fiscally responsible when it taxes and spends at a level that sustains full output and employment. Doesn't matter what the arbitrary level of taxation, spending or deficits are; what matters is the outcome. Simply cutting spending for the sake of cutting spending is not fiscally responsible behavior of government, especially a currency issuer.
But his [Dalio's] most worrisome observation was on something that few people really want to discuss, which is the connection between economic weakness and social unrest, and what happens historically when depressions drag.Business Insider
Ryan called Romney "inarticulate" for characterizing 47 percent of Americans as moochers. How would Ryan say it better? They're "collectivists."AlterNet
Lying just beneath Mitt Romney's dismissal of nearly half the electorate at a high-dollar fundraiser in May is an admission not as immediately damaging, but perhaps more important in the long run.
Romney told his donors back then that his campaign's political calculation assumes people who do not pay federal income taxes will not be interested in a candidate who proposes tax cuts. But that ignores the decades-long argument that the GOP has employed on behalf of tax cuts -- that wealth in the private sector will "trickle down"and spur economic growth, and therefore benefit everybody. If trickle-down economics is true, Romney should have no problem selling it to all the people who will supposedly benefit.
Unless he doesn't buy it either.The Huffington Post
