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The Financial Times got its hands on a confidential “debt sustainability analysis” that was circulated among eurozone finance ministers.  The gist of the analysis is that the austerity measures being imposed on the Greek population will depress growth so brutally that the government will almost certainly not meet its debt reduction targets: …even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out. It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors. In other words, the latest rescue plan for Greece could be classified (if one were feeling deeply generous) under the category of “buying time.”  But buying time for what exactly? In this policy brief, Dimitri Papadimitriou and Randall Wray tell us that the eurozone must ultimately move in one of two directions:  either toward a coordinated breakup or toward the development of some real fiscal and monetary policy capacities, which means having the European Central Bank step up as… Read More

Dylan Matthews had a piece on Modern Monetary Theory in the Washington Post yesterday that featured Levy Institute scholars James Galbraith and Randall Wray.  WaPo also put together a “family tree” that displays some Post Keynesian and New Keynesian lineages. The piece has been bouncing around the internet, first with some supportive comments by Jared Bernstein (he critiques the political viability of being able to control inflation through tax increases and insists on the long-term challenge we face due to rising health care costs).  Both Dean Baker and Kevin Drum ask what’s so special about MMT, with Drum suggesting a focus on views about inflation.  According to Drum, this is the central question: So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. If that’s the right estimate, then you could argue that we’ve been doing OK for the past few decades. But if full employment is really more consistent with an unemployment rate of 4%, then we’ve been wasting an awful lot of productive capacity for nothing. … Of course, you… Read More

It has been recognized for well over a century that the central bank must intervene as “lender of last resort” in a crisis. In the 1870s Walter Bagehot explained this as a policy of stopping a run on banks by lending without limit, against good collateral, at a penalty interest rate. This would allow the banks to cover withdrawals so the run would stop. Once deposit insurance was added to the assurance of emergency lending, runs on demand deposits virtually disappeared. However, banks have increasingly financed their positions in assets by issuing a combination of uninsured deposits plus very short-term nondeposit liabilities (such as commercial paper). Hence, the GFC actually began as a run on these nondeposit liabilities, which were largely held by other financial institutions. And here is where the issue gets complicated. As I argued in a previous blog post, banks and other institutions relied largely on “rolling over” short-term liabilities (often, overnight). But when reports about the quality of bank assets began to surface as subprime mortgage delinquencies rose, financial institutions began to worry about the solvency of the issuers of the liabilities. As markets came to recognize what had been going on in the securitization market for the past half-decade, “liquidity” dried up—no one wanted to hold uninsured liabilities of financial institutions. In truth, it was… Read More

The people at Bloomberg appear to have made a curious error on their website yesterday.  They have attributed an op-ed to Amity Shlaes that was almost certainly not written by her.  You see, Amity Shlaes is a well-known skeptic of Keynes and all things Keynesian, having written the bible for those who like to claim that the New Deal made the Great Depression worse.  (For a nice takedown of such claims, as well as Shlaes’ contributions in particular, see this Levy Institute policy brief.) The Bloomberg op-ed in question contends that the Obama administration’s intention to withdraw militarily from Afghanistan and other places will devastate those countries’ economies.  This is because, according to the op-ed, establishing US military bases in foreign countries boosts economic growth there. The real Amity Shlaes would have carefully instructed us that such public interventions not only cannot increase economic growth (even in the context of a downturn) but will actually decrease it (the New Deal, you see, is what made the regular ol’ Depression “Great”). Now if this was written by Amity Shlaes, it is a peculiar way of announcing her conversion.  But let’s not quibble over ceremony.  If it is indeed Shlaes, let’s follow her lead.  In order to boost the growth rate in a time of economic malaise here at home, we should… Read More

If it controlled its own currency, the usual thing for a country like Greece to do in these circumstances would be to devalue.  Since it doesn’t control its own currency, Greece is being “asked” to pull off an internal devaluation, or as C. J. Polychroniou puts it: Essentially, what they agreed to are additional measures that are specifically designed to reduce the standard of living for the majority of the working population as a means of improving the nation’s competitiveness. Aside from firing civil servants, the new memoranda are all about major private sector wage cuts and an overhaul of labor rights. This is from Polychroniou’s newest one-pager, “The New European Economic Dogma,” released yesterday.  Polychroniou takes on what he regards as the flawed ideology behind the policies that are being dumped on the Greek people; policies motivated by an ambiguous and, says Polychroniou, toxic conception of “competitiveness.” Read the one-pager here.

April 11–12, 2012 Ford Foundation, New York City A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation This Spring, leading policymakers, economists, and analysts will gather at the New York headquarters of the Ford Foundation to take part in the Levy Institute’s 21st Annual Hyman P. Minsky Conference. This conference will address, among other issues, the challenge to global growth represented by the eurozone debt crisis; the impact of the credit crunch on the economic and financial markets outlook; the sustainability of the US economic recovery in the absence of support from monetary and fiscal policy; reregulation of the financial system and the design of a new financial architecture; and the larger implications of the debt crisis for US economic policy, and for the international financial and monetary system as a whole. Visit the Levy Institute website for more information and online registration. A list of participants is below the fold.

C. J. Polychroniou refers here to the fact that private sector salary cuts are part of the “rescue package” recently approved by the Greek Parliament.  Asked to comment at the Foreign Policy blog, Dimitri Papadimitriou explains why this attempt at internal devaluation won’t work. In an interview for Bloomberg Radio Papadimitriou also stresses that these measures are politically untenable (although approved by the Parliament, whether they will actually be implemented is another question).  In the interview Papadimitriou goes on to say that European policymakers are merely trying to shield the rest of the eurozone from Greece so that the beleaguered country can eventually be shown the door.  While policymakers’ rhetoric suggests they are unequivocally committed to ensuring that Greece remains in the Union, Papadimitriou argues that their actions suggest otherwise.  Without any serious investment in kickstarting Greek growth—Papadimitriou references what was done with East Germany following reunification—what we’re looking at here are not serious attempts to keep the eurozone intact. Listen to or download the Bloomberg interview here.

C. J. Polychroniou has a new one-pager that starts off by noting the asymmetries in the approaches taken by governments in the US and Europe to the 2007-08 crash and its aftermath:  featuring bold public interventions to save the banking and financial systems but relatively limited measures for the millions of unemployed.  He then turns his sights to the latest 130 billion euro Greek “rescue” package and, in the context of a series of such packages and their accompanying austerity demands, Polychroniou suggests that Greece is being pushed too far: It is high time for Greece to put an end to the EU farce that has now turned into a real tragedy. The nation should refuse to accept another lethal injection and threaten immediate default. At this juncture, there is no other way out. Read it here.

From a peak of 4.5 million workers in 2008, Greece has already lost 500,000 jobs. Our first chart shows that the country is already in its worst condition since the beginning of the century in terms of the share of the working age population who have a job (our projections are based on the last monthly data for 2011). It is hard to see how laying off another 150,000 workers from the public sector, as requested for a new international loan, will help Greece to recover. In the next chart we compare government tax revenues to employment, where tax data are from the sectoral accounts of Greece. Although the recent data revision to sectoral accounts are less pessimistic than the former release, we should expect the fall in employment to produce a corresponding fall in government revenues, with adverse effects on government deficits and debt. What Greece needs are policies to create jobs. (all data from El.Stat.)

No matter what happens on Sunday, when the Greek parliament is scheduled to vote on the latest bailout package, on Monday Greece will wake up in the grip of an employment crisis (20 percent unemployment, with a near 40 percent youth unemployment rate).  In the Huffington Post Dimitri Papadimitriou tells us what we can (and can’t) do about it. Depending on the Greek private sector alone to produce enough jobs to stave off these socially corrosive levels of unemployment is unrealistic.  Drawing from a report on the Greek labor market recently produced by the Levy Institute, Papadimitriou lays out the case for direct public service job creation.  As Papadimitriou points out, Greece is currently experimenting with a similar, small-scale version of the idea: … a better option is being tried on a small scale: A labor department direct public service job creation program with an initial target of 55,000 jobs. Participants are entitled to up to five months of work per year, in projects — implemented by non-governmental organizations — that benefit their communities. A similar, streamlined, Interior department program, this one without NGO participation, will generate up to 120,000 openings. This approach is the Greek government’s best shot at slowing the nosedive in employment, and at circumventing further catastrophe. The plans have been designed to specifically address and avoid… Read More

(Click to enlarge.) See the blue line in the upper half of the figure above? That line shows the portion of personal income made up of wage and salary disbursements, as a percentage of total personal income.  (As the figure notes, I’ve subtracted social insurance contributions such as Social Security taxes. Also, employer contributions to Social Security, private pensions, etc., have been completely ignored in my calculations.) I have been looking into the possible effects on consumer spending of changes in the composition of income. Please click on figure if you want to see a larger version.

(cross posted at EconoMonitor) Yves Smith at Naked Capitalism has long been skeptical of the negotiations by the State Attorneys General and the banksters over the foreclosure frauds (see here). And while I had held out some hope that California and New York would either refuse to join, or would insist on good terms, today’s announcement of the settlement makes it clear that the banksters had their way. I expect that the US Attorney General, Eric Holder and HUD Secretary Shaun Donovan played important roles in making sure the bank frauds would only get little slaps on the wrist. Some of the details are not clear, but apparently the 750,000 people who had their homes stolen from them will get a mere $2000 a piece in compensation. That is how this Administration values homeownership. Yep, a bankster can take your home and you might get two thousand bucks–and with that you can pay first and last month’s rent on a cheap, run-down apartment if you are willing to live in a low rent city. It also gives you some idea of the cost of buying out 49 states: $2.75 billion. Yep, that is all that the states get out of this settlement. They’ll look the other way and let you move in, completely destroy property records and proceed to steal the homes of your citizens… Read More