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The US Senate investigation of JPMorgan Chase’s Chief Investment Office (CIO), and more specifically of the operations of its Synthetic Credit Portfolio (SCP) unit — otherwise known as the “London Whale” trades — concluded with the release of their full report in March.   The report alleges that the CIO operated without a clear mandate and that its hedging activities were inappropriate.  Neither of these claims, says Jan Kregel, gets to the real problem with the London Whale episode: The problem arose when JPMorgan Chase created the equivalent of a shadow bank that funded the SCP’s short positions through what was in effect a Ponzi scheme. Further, while proprietary trading was involved in the losses, the real problem was that the bank was allowed to operate across all aspects of finance and the difficulties that this creates for efficient macro hedging. If we are to reduce systemic risk, not only must banks provide regulators with more detailed information on their balance sheet hedging, but it is also necessary to rethink the 1999 Financial Services Modernization Act, as it has led to banks that are too big to fail, manage, or regulate. Read the rest here.

Annie Lowrey recently renewed the ongoing discussion over whether the Federal Reserve’s attempts at reviving the economy through quantitative easing (QE) are exacerbating inequality.  The abbreviated version of the argument is that QE operates mainly through boosting asset prices, leading to gains in stocks and housing that largely benefit those at the top.  If that’s the case (Lowrey quotes Josh Bivens suggesting that one would also have to weigh any potential reductions in the unemployment rate from the Fed’s easing), it’s bad news for those who care about inequality, because for the next three years, monetary stimulus is the only game in town (it will be interesting to see whether Republicans continue to be skeptical of fiscal stimulus if they win the White House in 2016). Turning to fiscal policy, Ajit Zacharias, Tom Masterson, and Kijong Kim did a preliminary estimate (pdf) of the likely distributional impacts of the American Recovery and Reinvestment Act (ARRA).  They found that the Recovery Act would have a positive impact on employment (largely “palliative,” given the rapid rate of job loss at the time) and little overall effect on inequality.  A fiscal stimulus skewed more toward expenditure and less dominated by tax cuts than the Recovery Act could have a greater positive impact for low-income households and individuals. This is particularly the case if… Read More

This is how we came up with the official poverty line for the United States, back in the early 1960s:  essentially, we put together a very basic diet, figured out the monetary value, and multiplied by three.  If a family has less income than that number, adjusted for inflation, they’re poor. There are numerous problems with this measure, and the Census Bureau has since come up with an alternative, the Supplemental Poverty Measure (SPM), which they started reporting in 2011.  But there’s one very important item that’s left out of both the official and supplemental poverty measures:  time.  What does time have to do with poverty, you might ask?  The extent to which you find yourself tempted to ask that question is partly a reflection of how much we still take unpaid work and its products for granted in economic analysis, and more generally. Many of the products of household labor, like edible meals and basic healthcare and sanitation, are among those things absolutely essential to attaining a bare bones standard of wellbeing.  Providing these products and services in adequate amounts takes time.  If we don’t have the time to do this work ourselves, it’s often possible to buy substitutes on the market (housekeeping, day care, and so on), but either the time for unpaid work or the money to… Read More

Announcing two upcoming conferences, organized as part of the Levy Institute’s international research agenda and in conjunction with the Ford Foundation Project on Financial Instability, which draws on Hyman Minsky’s extensive work on financial governance, the structure of financial systems to ensure stability, and the role of government in achieving a growing and equitable economy: Financial Governance after the Crisis Rio de Janeiro, Brazil September 26–27, 2013 Among the key topics the conference will address are: designing a financial structure to promote investment in emerging markets; the challenges to global growth posed by continuing austerity measures; the impact of the credit crunch on economic and financial markets; and the larger effects of tight fiscal policy as it relates to the United States, the eurozone, and the BRIC countries. (see here for list of participants) The Eurozone Crisis, Greece, and the Experience of Austerity Athens, Greece November 8–9, 2013 Topics to be addressed include: the challenges to global growth and employment posed by the continuing eurozone debt crisis; the impact of austerity on output and employment; the ramifications of the credit crunch for economic and financial markets; the larger implications of government deficits and debt crises for US and European economic policies; and central bank independence and financial reform. (see here for list of participants)

Benjamin Lawsky is the very first Superintendent of the New York Department of Financial Services (DFS), a regulatory body created in 2011 through the merger of the New York State Banking and Insurance Departments.  Lawsky spoke recently at the Levy Institute’s annual Minsky conference and he began with an appropriately Minskyan tune: There is a constant danger that putting a thumb in the dyke in one part of the financial system will cause a leak to spring somewhere else. It’s a danger that well-intentioned reforms could push risk to ever-darker corners of the financial system, to financial products not yet envisioned by even the most farsighted regulators. … This is not to say, as some have suggested, that the art of financial regulation is a futile endeavor. … It just means that we should approach the constantly evolving landscape of the financial sector with, in my opinion, a deep sense of humility about the capacity of any one set of reforms or safeguards to permanently preserve the stability of our kinetic, frenetic, global financial system. Hyman Minsky had definite views about how the financial structure should (and should not) be altered so as to create a more stable and prosperous capitalism, but he also emphasized that the work of financial regulation is never done.  It is part of the nature,… Read More

As noted, the Congressional Budget Office says that the federal deficit will shrink to 2.1 percent of GDP in two years and then start to grow again after 2015.  The most important factor contributing to the widening budget deficit over the next 10 years, according to the CBO, is not Social Security, or even Medicare, but a predicted rise in interest payments on the debt, as you can see here: The net interest projection is based on assumptions about what policy decisions the Federal Reserve will make in the future; in this case, the Fed is assumed to raise interest rates substantially.  The deficit tops out at 3.5 percent of GDP in 2023 in the latest CBO forecast (which is just above the 40-year average of 3.1 percent of GDP), but it continues to climb outside of the 10-year window, and this is what has many people concerned. Although much of the discussion of the long-term budget has been focused on “entitlements” and healthcare costs in particular, rising interest payments also play a key role in the CBO’s long-term forecast.  In fact, James Galbraith has argued that they play the key role in terms of arguments about the “sustainability” of the debt: The CBO’s assumption, which is that the United States must offer a real interest rate on the public debt… Read More

Whether it’s the terrible growth numbers in the eurozone (Eurostat), the revelation of spreadsheet errors in everyone’s favorite debt disaster study (for some of the non-spreadsheet-based problems with the Reinhart-Rogoff approach, see this 2010 working paper), or the fact that the US federal deficit is on track to shrink to a measly 2.1 percent of GDP in two years (CBO report here), the past couple months have offered up some embarrassing and inconvenient news for those who continue to push for austerity. Nonetheless, we’re unlikely to see any of this dramatically alter the budget debate, and the key to understanding why is to appreciate that there is a significant constituency among austerity supporters for whom most of this data is irrelevant.  It’s not just that this information isn’t likely to persuade them, but that for a certain species of austerian, it couldn’t possibly.  After four years of fiscal fear-mongering, it has become clear that for some ostensible austerity supporters, it was never really about the deficit. With last week’s updates, the CBO now predicts that the budget deficit will fall to 2.1 percent of GDP by 2015.  If that number means nothing to you, consider that the original Bowles-Simpson plan — the standard by which budget seriousness is measured in the press — called for a 2015 deficit of …… Read More

The Economic Crisis of 2008 and the Added Worker Effect in Transition Countries Tamar Khitarishvili Modeling the Housing Market in OECD Countries Philip Arestis and Ana Rosa González The Problem of Excess Reserves, Then and Now Walker F. Todd On the Franco-German Euro Contradiction and Ultimate Euro Battleground Jörg Bibow Currency Concerns under Uncertainty Sunanda Sen Indirect Domestic Value Added in Mexico’s Manufacturing Exports, by Origin and Destination Sector Gerardo Fujii-Gambero and Rosario Cervantes-Martínez Wages, Exchange Rates, and the Great Inflation Moderation Nathan Perry and Nathaniel Cline How the Fed Reanimated Wall Street Nicola Matthews Expanding Social Protection in Developing Countries Rania Antonopoulos

There are important changes in how many developing countries are approaching the problem of poverty. Specifically in the area of “social protection” policy — policies intended to prevent or alleviate income insecurity and poverty — these changes are reflected in attempts to move beyond one-off interventions and “safety nets” to policies designed to address some of the underlying problems causing economic vulnerability in the first place. In a new policy brief, developed with support from the United Nations Development Programme, Rania Antonopoulos considers how women’s economic empowerment can be advanced in the context of this evolution in social protection policy.  She zeroes in on the ways in which social protection policies, while addressing income gaps, also shape women’s opportunities through the manner in which these programs “see” or “position” women (whether intentionally or not).  To explain how this “positioning” works, she points to three different policies for addressing food insecurity (all targeted at women): cash transfers, free delivery of food staples, and access to land plus subsidized seed and fertilizer.  While all these interventions are aimed at reducing food insecurity, Antonopoulos observes that “there are stark differences between them in terms of the process through which deprivation is addressed, and from a gender perspective, differences in the (implicitly) assigned positioning of the beneficiary”: The first addresses income poverty by enabling… Read More

A couple of weeks ago, I mentioned Hyman Minsky’s new book, Ending Poverty: Jobs, Not Welfare (there is also a Kindle version).  Take a look at the cover – Minsky looking like a bit of a rougue! I thought you might enjoy my powerpoint presentation, given at the Levy-Ford annual Minsky conference in NYC in mid-April. It summarizes some of the main arguments of the book. However, you really need the book – it is brilliant, and a good antidote to all the silly arguments made by economists that we “need” to keep tens of millions of Americans unemployed. As Keynes put it: “The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years….” (J. M. Keynes) Here’s the powerpoint.

The formation of the eurozone represents “the wildest experiment in financial history,” according to C. J. Polychroniou: the eurozone was to involve the inclusion of independent states, with highly diverse economic systems and cultural settings, that were required to give up national currency sovereignty in exchange for a “foreign” currency without the backing of a treasury or a central bank ready to act as lender of last resort in the event of a financial crisis. And with the eurozone mired in recession (the latest numbers from Eurostat are here) and a deep depression in Greece, it might look like a failed experiment.  But it only looks this way, Polychroniou suggests, if you think of economic growth and the wellbeing of the average worker as among the primary goals of the project.  The setup of the EMU is not the result of some set of technical errors or oversights.  It is consistent with a long-developing attempt, culminating in the Maastricht Treaty, at transforming a social market economy into a laissez-faire market economy:  “it stemmed,” Polychroniou writes, “from the very premises of the fundamentally neoliberal economic thinking that had begun to take hold of the mindset of European policymakers in the 1980s.”  If anything, he argues, the struggles in the eurozone, particularly on the periphery, are being seized on as an opportunity… Read More

That’s the implication of a James Pethokoukis post linked to here by Reihan Salam.  Let’s assume for the sake argument that a federal budget surplus does emerge in 2015 (yesterday’s CBO report projected the 2015 deficit would be a mere 2.1% of GDP).  Salam expresses concern that such a scenario would leave Republicans, who have been banging the austerity drum since inauguration day 2009, in a political and policy bind.  It would allow Democrats to declare “mission accomplished,” as Salam puts it, leaving Republicans with no agenda. One problem with this analysis is that it assumes the voting public would even recognize/concede the existence of a budget surplus.  If you’ve been paying any attention to US public affairs, you’ll have observed that the realm of empirical fact is a fiercely contested battlefield (see warming, global).  And on budget matters, as Dimitri Papadimitriou has pointed out, the battlefield is tilted in one direction:  “The deficit has arguably gained the distinction of being the single most widely misunderstood public policy issue in America. Just 6% (6!) of respondents in a recent poll correctly stated that it had been shrinking, which has in fact been the case for several years, while 10 times more, 62%, wrongly believed that it’s been getting bigger.” Now, it ought to be mentioned that no one should get… Read More