Publications
Jan Kregel
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Public Policy Brief No. 154 | February 2021
Let Us Look Seriously at the Clearing Union
This policy brief explores a route to remaking the international financial system that would avoid the contradictions inherent in some of the prevailing reform proposals currently under discussion. Senior Scholar Jan Kregel argues that the willingness of central banks to consider electronic currency provides an opening to reconsider a truly innovative reform of the international financial system, and one that is more appropriate to a digital monetary world: John Maynard Keynes’s original clearing union proposal.
Kregel investigates whether such a clearing system could be built up from an already-existing initiative that has emerged in the private sector. He analyzes the operations of a private, cross-border payment system that could serve as a real-world blueprint for a more politically palatable equivalent of Keynes’s international clearing union.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Working Paper No. 982 | January 2021The success of alternative payment systems has led to discussion of various proposals to replace money with a new technology-based system, though many lack a clear idea of what exactly is the “money” they seek to replace. We begin by presenting the explanation of money’s role in the economy embraced by most mainstream economists and policy analysts, based on the idea that money evolved out of the process of market exchange. An alternative explanation that looks on money as a part of the organization of production and distribution based on network clearing systems across balance sheets expressed in a common unit of account is then presented, distinguishing between a purely notional unit of account and means of settlement or discharge of debt. The final section addresses the possibility of a fundamentally different modern extension of this alternative approach that is not inspired by digital technology, distributed ledger accounting, or application operating on a mobile/cell phone system, but rather the actually existing system available from an internet telephone service provider that currently offers subsidiary domestic and international payment services whose operating procedures come close to replicating the alternative explanation of money mentioned above, with the potential to provide all the services of the existing payments system at lower costs and greater stability.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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Policy Note 2021/1 | January 2021While governments may consider implementation of John Maynard Keynes’s original clearing union proposal for the international financial architecture too difficult or radical, Senior Scholar Jan Kregel notes that the private sector has already produced a virtual equivalent of an international global monetary system. Currently, this system is employed as an extension of the international mobile telephone services provided by a private company, rather than a financial institution. The clearing system he describes provides an example of a possible solution that retains national currencies without requiring the substitution of the dollar with another national currency or basket of national currencies.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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Policy Note 2020/6 | October 2020As COVID-19 infection and test positivity rates rise in the United States and federal stimulus plans expire, Senior Scholar Jan Kregel articulates an alternative approach to analyzing the economic problems raised by the pandemic and organizing an appropriate policy response. In contrast to both the mainstream and some Keynesian-inspired approaches, Kregel advocates a central role for direct social provisioning as a means of equitably sharing the costs of quarantine under conditions of strict lockdown.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Public Policy Brief No. 150 | June 2020According to Senior Scholar Jan Kregel and Paolo Savona, attempting to maintain the status quo in the face of the introduction of some recent technological innovations—chiefly cryptocurrencies and associated instruments based on distributed ledger technology, the deployment of artificial intelligence, and the use of data science in financial markets—will create risks that increase instability and threaten national financial systems. In this policy brief, they analyze the impacts of these innovations on the present institutional environment and outline an appropriate regulatory framework. Kregel and Savona argue that a public monopoly on the issuance of cryptocurrency could promote financial stability and help repair the dissociation between finance and the real economy.Download:Associated Program:Author(s):Jan Kregel Paolo SavonaRelated Topic(s):
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Policy Note 2019/2 | May 2019Against the background of an ongoing trade dispute between the United States and China, Senior Scholar Jan Kregel analyzes the potential for achieving international adjustment without producing a negative impact on national and global growth. Once the structure of trade in the current international system is understood (with its global production chains and large imbalances financed by international borrowing and lending), it is clear that national strategies focused on tariff adjustment to reduce bilateral imbalances will not succeed. This understanding of the evolution of the structure of trade and international finance should also inform our view of how to design a new international financial system capable of dealing with increasingly large international trade imbalances.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Working Paper No. 928 | May 2019In the Western interpretation of democracy, governments exist in order to manage relations of property, with absence of property ownership leading to exclusion from participation in governance and, in many cases, absence of equal treatment before the law. Democratizing money will therefore ensure equal opportunity to the ownership of property, and thus full participation in the democratic governance of society, as well as equal access to the banking system, which finances the creation of capital via the creation of money. If the divergence between capital and labor—between rich and poor—is explained by the monopoly access of capitalists to finance, then reducing this divergence is crucially dependent on the democratization of money. Though the role of money and finance in determining inequality between capital and labor transcends any particular understanding of the process by which the creation of money leads to inequity, specific proposals for the democratization of money will depend on the explanation of how money comes into existence and how it supports capital accumulation.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Public Policy Brief No. 147 | March 2019As global market integration collides with growing demands for national political sovereignty, Senior Scholar Jan Kregel contrasts two diametrically opposed approaches to managing the tensions between international financial coordination and national autonomy. The first, a road not taken, is John Maynard Keynes’s proposal to reform the postwar international financial system. The second is the approach taken in the establishment of the eurozone and the development of its settlement and payment system. Analysis of Keynes’s clearing union proposal and its underlying theoretical approach highlights the flaws of the current eurozone setup.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Policy Note 2018/5 | November 2018
Minsky’s Forgotten Lessons Ten Years after Lehman
Ten years after the fall of Lehman Brothers and the collapse of the US financial system, most commentaries remain overly focused on the proximate causes of the last crisis and the regulations put in place to prevent a repetition. According to Director of Research Jan Kregel, there is a broader set of lessons, which can be unearthed in the work of Distinguished Scholar Hyman Minsky, that needs to play a more central role in these debates on the 10th anniversary of the crisis.
This insight begins with Minsky's account of how crisis is inherent to capitalist finance. Such an account directs us to shore up those government institutions that can serve as bulwarks against the inherent instability of the financial system—institutions that can prevent that instability from turning into a prolonged crisis in the real economy.
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Book Series | March 2018
Edited by Marcella Corsi, Jan Kregel, and Carlo D'Ippoliti
Edited by Marcella Corsi, Sapienza University of Rome, Levy Institute Director of Research Jan Kregel, and Carlo D’Ippoliti, Sapienza University of Rome, this new collection of 16 essays is dedicated to Alessandro Roncaglia and deals with the themes that “have characterized his work or represent expressions of his personality, his interests and method," particularly his contributions to the interpretation of classical political economists as a means for informing present-day policy.
Published by: Anthem PressAssociated Program:Author(s):Jan KregelRelated Topic(s): -
Public Policy Brief No. 144 | September 2017
A Radical Proposal Based on Keynes’s Clearing Union
In light of the problems besetting the eurozone, this policy brief examines the contributions of John Maynard Keynes and Richard Kahn to early debates over the design of the postwar international financial system. Their critical engagement with the early policy challenges associated with managing international settlements offers a perspective from which to analyze the flaws in the current euro-based financial system, and Keynes’s clearing union proposal offers a template for a better approach. A system of regional federations employing a clearing system in which members either retained their own currency or used a common currency as a unit of account in registering debits and credits for settlement purposes would preserve domestic policy independence and retain regional diversity.
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Policy Note 2017/2 | July 2017If the Trump administration is to fulfill its campaign promises to this age’s “forgotten” men and women, Director of Research Jan Kregel argues, it should embrace the broader lesson of the 1930s: that government regulation and fiscal policy are crucial in addressing changes in the economic and financial structure that have exacerbated the problems faced by struggling communities.
In this policy note, Kregel explains how overcoming the economic and financial challenges we face today, just as in the 1930s, requires avoiding what Walter Lippmann identified as an “obvious error”: the blind belief that reducing regulation and the role of government will somehow restore a laissez-faire market liberalism that never existed and is inappropriate to the changing structure of production of both the US and the global economy.
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Working Paper No. 877 | November 2016
Against the background of modern-day monetary proposals, ranging from a return to the gold standard to the wholesale abolition of currency, this paper seeks to draw implications from David Ricardo’s Proposals for an Economical and Secure Currency for plans to reform the operation of central banks and extraordinary monetary policy. Although 200 years old, the “Ingot plan,” proposed during a period in which gold convertibility was suspended, appears to be applicable to modern monetary conditions and suggests possible avenues of reform.
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Public Policy Brief No. 141 | March 2016
What We Could Have Learned from the New Deal in Confronting the Recent Global Recession
View More View LessTo the extent that policymakers have learned anything at all from the Great Depression and the policy responses of the 1930s, the lessons appear to have been the wrong ones. In this public policy brief, Director of Research Jan Kregel explains why there is still a great deal we have to learn from the New Deal. He illuminates one of the New Deal’s principal objectives—quelling the fear and uncertainty of mass unemployment—and the pragmatic, experimental process through which the tool for achieving this objective—directed government expenditure—came to be embraced.
In the search for a blueprint from the 1930s, Kregel suggests that too much attention has been paid to the measures deployed to shore up the banking system, and that the approaches underlying the emergency financial policy measures of the recent period and those of the 1930s were actually quite similar. The more meaningful divergence between the 1930s and the post-2008 policy response, he argues, can be uncovered by comparing the actions that were taken (or not taken, as the case may be) to address the real sector of the economy following the resolution of the respective financial crises.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
In the Media | June 2015Economia, June 23, 2015. All Rights Reserved.
All'interno del quadro economico internazionale, Jan Kregel, direttore del programma “Politica Monetaria” presso il Levy Economic Institute negli USA, analizza qual è stato il ruolo degli Stati Uniti all'interno della crisi economica. Uno degli elementi che viene messo maggiormente in evidenza, è l' importanza data al settore finanziario, rispetto all'economia reale: ciò ha portando ad una minore attenzione a problemi come la disoccupazione, che rappresenta ancora una delle questioni irrisolte dell'Europa, ma soprattutto dell'Italia.
Una volta che la crisi economica è scoppiata negli Usa, si è diffusa a macchia d'olio specie nel continente europeo, dove la forbice presente tra europa meridionale e settentrionale, si è notevolmente ampliata. A tale ritratto, Kregel, aggiunge anche un'attenta le politiche economiche messe in atto da Cina e Giappone e dalle loro ripercussioni sul sistema economico mondiale.
intervista videoregistrata: http://www.economia.rai.it/articoli/la-crisi-negli-usa-il-punto-di-vista-di-jan-kregel/30575/default.aspx -
Policy Note 2015/1 | February 2015
Financial Fragility and the Survival of the Single Currency
Given the continuing divergence between progress in the monetary field and political integration in the euro area, the German interest in imposing austerity may be seen as representing an attempt to achieve, de facto, accelerated progress toward political union; progress that has long been regarded by Germany as a precondition for the success of monetary unification in the form of the common currency. Yet no matter how necessary these austerity policies may appear in the context of the slow and incomplete political integration in Europe, they are ultimately unsustainable. In the absence of further progress in political unification, writes Senior Scholar Jan Kregel, the survival and stability of the euro paradoxically require either sustained economic stagnation or the maintenance of what Hyman Minsky would have recognized as a Ponzi scheme. Neither of these alternatives is economically or politically sustainable.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
One-Pager No. 48 | February 2015
Can Reform of the International Financial Architecture Support Emerging Markets?
View More View LessThe developed world’s policy response to the recent financial crisis has produced complaints from Brazil of “currency wars” and calls from India for increased policy coordination and cooperation. Chinese officials have echoed the “exorbitant privilege” noted by de Gaulle in the 1960s, and Russia has joined China as a proponent of replacing the dollar with Special Drawing Rights. However, none of the proposed remedies are adequate to achieve the emerging market economies’ objective of joining the ranks of industrialized, developed countries.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Public Policy Brief No. 139 | February 2015
Emerging Market Economies and the Reform of the International Financial Architecture
View More View LessBack to the Future
Emerging market economies are taking an ill-targeted and far too limited approach to addressing their ongoing problems with the international financial system, according to Senior Scholar Jan Kregel. In this policy brief, he explains why only a wholesale reform of the international financial architecture can adequately address these countries’ concerns. As a blueprint for reform, Kregel recommends a radical proposal advanced in the 1940s, most notably by John Maynard Keynes.Keynes was among those who were developing proposals for shaping the international financial system in the immediate postwar period. His clearing union plan, itself inspired by Hjalmar Schacht’s system of bilateral clearing agreements, would have effectively eliminated the need for an international reserve currency. Under Keynes’s clearing union, trade and other international payments would be automatically facilitated through a global clearinghouse, using debits and credits denominated in a notional unit of account. The unit of account would have a fixed conversion rate to national currencies and could not be bought, sold, or traded—meaning no market for foreign currency would be required. Clearinghouse credits could only be used to offset debits by buying imports, and if not used within a specified period of time, the credits would be extinguished, giving export surplus countries an incentive to spend them. As Kregel points out, this would help support global demand and enable a shared adjustment burden.Though Keynes’s proposal was not specifically designed for emerging market economies, Kregel recommends combining this plan with current ideas for regionally governed institutions—to create, in other words, “regional clearing unions,” building on existing swaps arrangements. Under such a system, emerging market economies would be able to pursue their development needs without reliance on the prevailing international financial architecture, in which their concerns are, at best, diluted.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Working Paper No. 833 | February 2015
A Blueprint for Reform
If emerging markets are to achieve their objective of joining the ranks of industrialized, developed countries, they must use their economic and political influence to support radical change in the international financial system. This working paper recommends John Maynard Keynes’s “clearing union” as a blueprint for reform of the international financial architecture that could address emerging market grievances more effectively than current approaches.Keynes’s proposal for the postwar international system sought to remedy some of the same problems currently facing emerging market economies. It was based on the idea that financial stability was predicated on a balance between imports and exports over time, with any divergence from balance providing automatic financing of the debit countries by the creditor countries via a global clearinghouse or settlement system for trade and payments on current account. This eliminated national currency payments for imports and exports; countries received credits or debits in a notional unit of account fixed to national currency. Since the unit of account could not be traded, bought, or sold, it would not be an international reserve currency. The credits with the clearinghouse could only be used to offset debits by buying imports, and if not used for this purpose they would eventually be extinguished; hence the burden of adjustment would be shared equally—credit generated by surpluses would have to be used to buy imports from the countries with debit balances. Emerging market economies could improve upon current schemes for regionally governed financial institutions by using this proposal as a template for the creation of regional clearing unions using a notional unit of account.
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Policy Note 2014/6 | December 2014Criticisms of the Federal Reserve’s “unconventional” monetary policy response to the Great Recession have been of two types. On the one hand, the tripling in the size of the Fed’s balance sheet has led to forecasts of rampant inflation in the belief that the massive increase in excess reserves might be spent on goods and services. And even worse, this would represent an attempt by government to inflate away its high levels of debt created to support the solvency of financial institutions after the September 2008 collapse of asset prices. On the other hand, it is argued that the near-zero short-term interest rate policy and measures to flatten the yield curve (quantitative easing plus "Operation Twist") distort the allocation and pricing in the credit and capital markets and will underwrite another asset price bubble, even as deflation prevails in product markets.Both lines of criticism have led to calls for a return to a more conventional policy stance, and yet there is widespread agreement that this would have a negative impact on the economy, at least in the short-term. However, since the analyses behind both lines of criticism are mistaken, it is probable that the analyses of the impact of the risks of return to more normal policies are also in error.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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Policy Note 2014/5 | November 2014
The Fed’s zero interest policy rate (ZIRP) and quantitative easing (QE) policies failed to restore growth to the US economy as expected (i.e., increased investment spending à la John Maynard Keynes or from an expanded money supply à la Ben Bernanke / Milton Friedman). Senior Scholar Jan Kregel analyzes some of the arguments as to why these policies failed to deliver economic recovery. He notes a common misunderstanding of Keynes’s liquidity preference theory in the debate, whereby it is incorrectly linked to the recent implementation of ZIRP. Kregel also argues that Keynes’s would have implemented QE policies quite differently, by setting the bid and ask rate and letting the market determine the volume of transactions. This policy note both clarifies Keynes’s theoretical insights regarding unconventional monetary policies and provides a substantive analysis of some of the reasons why central bank policies have failed to achieve their stated goals.
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Book Series | October 2014
By Jan A. Kregel. Edited by Rainer Kattel. Foreword by G. C. Harcourt.
This volume is the first collection of essays by Jan Kregel focusing on the role of finance in development and growth, and it demonstrates the extraordinary depth and breadth of this economist’s work. Considered the “best all-round general economist alive” (Harcourt), Kregel is a senior scholar and director of the monetary policy and financial structure program at the Levy Economics Institute, and professor of development finance at Tallinn University of Technology. These essays reflect his deep understanding of the nature of money and finance and of the institutions associated with them, and of the indissoluble relationship between these institutions and the real economy—whether in developed or developing economies. Kregel has expanded Hyman Minsky’s original premise that in capitalist economies stability engenders instability, and Kregel’s key works on financial instability, its causes and effects, as well as his discussions of the global financial crisis and Great Recession, are included here.Published by: Anthem PressAssociated Program:Author(s):Jan Kregel Rainer KattelRelated Topic(s): -
In the Media | August 2014Etorno Inteligente, August 22, 2014. All Rights Reserved.
Portafolio / Colombia comete un gran error en perseguir el objetivo de entrar a la Organización para la Cooperación y el Desarrollo Económicos (Ocde), porque eso debe ser para países con un grado similar de desarrollo, dice el economista Jan Kregel, investigador del Levy Economics Institute of Board College de Estados Unidos.
El experto, relator de la Comisión de la ONU sobre la reforma al sistema financiero internacional, participa en la Décima Semana Económica de la Universidad Central.
Colombia ha basado su crecimiento en productos básicos. ¿Cómo mantener esa tendencia a largo plazo?
Lo que se puede predecir para una economía como la colombiana es una crisis externa sustantiva porque, si se mira el déficit externo, algo así como el 50 por ciento de las exportaciones de Colombia provienen del petróleo. Si hay una disminución de los precios, el primer impacto es empeorar el déficit externo y reducir los flujos financieros y habrá una presión fuerte sobre la tasa de cambio y la posición de los exportadores empeorará.
¿Qué debe el país hacer para reactivar la industria?
Hay un impacto de la enfermedad holandesa. Las exportaciones de materias primas han tenido una elevación de precios y han apreciado la tasa de cambio. Por eso, otras exportaciones son menos competitivas. Otro factor es la redistribución de las manufacturas globalmente. Si uno mira el impacto de las importaciones en la economía colombiana, hay un gran incremento de las compras a Asia.
¿Colombia tiene enfermedad holandesa?
Absolutamente sí. La enfermedad holandesa se puede clasificar de dos maneras: una es simplemente el impacto de los productos básicos, creando una mejora en los términos de comercio y un aumento de los ingresos del país. Pero el impacto de la tasa de cambio en la competitividad acaba con un incremento de los ingresos nacionales y al mismo tiempo se abaratan los bienes importados.
El peligro real de la enfermedad holandesa no está solamente en la tasa de cambio, sino que se ve en la distribución del consumo de productos nacionales a importados.
Una mejora en los precios de las materias primas es lo mismo que un incremento en los ingresos nacionales pero, al mismo tiempo, esto causa una apreciación en la tasa de cambio y el ingreso doméstico incrementado se va a gastar en bienes más baratos y estos son los importados. Entonces es un factor doble.
¿Es sano para Colombia ingresar a la Ocde?
Es un gran error. México y Corea cometieron el mismo error y ambos sufrieron crisis financieras sustantivas como resultado de esto. Si nos remontamos a las viejas teorías de los economistas estructuralistas, se alegó que una de las condiciones básicas para ingresar a cualquier tipo de acuerdo de esta naturaleza es que hubiese un nivel similar de desarrollo, de productividad y de competitividad.
Colombia va a entrar a la Ocde sin preocuparnos por competir con Estados Unidos, y estamos hablando de competir con México. La pregunta es si Colombia va a ser capaz de competir en los mercados internacionales con otros países en desarrollo que ya están en la Ocde y no parece prometedor. ¿Por qué se quiere entrar a la Ocde? Es básicamente para darles confianza a los inversionistas extranjeros para que inviertan en Colombia, pero esto implica empoderar más la enfermedad holandesa.
Pero Colombia es hoy uno de los países de Latinoamérica que más crece.
Es un crecimiento que desilusiona. No se puede mirar crecimiento sin empleo. Si se va a desarrollar la economía no importa qué tan alta sea la tasa de inversión ni qué tan alto sea el crecimiento si no se genera empleo. Si no se reduce el sector informal no se está generando desarrollo.
Pero el desempleo ha bajado…
Ha bajado, pero no es mucho y sigue siendo sumamente alto. Hay un problema de desempleo disfrazado que debe ser de 40 por ciento. La pregunta es ¿Por qué? La explicación proviene de la enfermedad holandesa y del impacto sobre el sector de manufacturas.
¿HAY QUE REGULAR MERCADOS?
La dificultad es que nunca habrá una regulación que dé estabilidad a los mercados financieros en el mundo, porque estos siempre van adelante de los reguladores.
La reglamentación está para reducir la rentabilidad de los bancos y estos existen solo si pueden tener utilidades sustanciales en su negocio.
Fernando González P. Subeditor Economía y Negocios
−−> Colombia comete un gran error en perseguir el objetivo de entrar a la Organización para la Cooperación y el Desarrollo Económicos (Ocde), porque eso debe ser para países con un grado similar de desarrollo, dice el economista Jan Kregel, investigador del Levy Economics Institute of Board College de Estados Unidos.
El experto, relator de la Comisión de la ONU sobre la reforma al sistema financiero internacional, participa en la Décima Semana Económica de la Universidad Central.
Colombia ha basado su crecimiento en productos básicos. ¿Cómo mantener esa tendencia a largo plazo?
Lo que se puede predecir para una economía como la colombiana es una crisis externa sustantiva porque, si se mira el déficit externo, algo así como el 50 por ciento de las exportaciones de Colombia provienen del petróleo. Si hay una disminución de los precios, el primer impacto es empeorar el déficit externo y reducir los flujos financieros y habrá una presión fuerte sobre la tasa de cambio y la posición de los exportadores empeorará.
¿Qué debe el país hacer para reactivar la industria?
Hay un impacto de la enfermedad holandesa. Las exportaciones de materias primas han tenido una elevación de precios y han apreciado la tasa de cambio. Por eso, otras exportaciones son menos competitivas. Otro factor es la redistribución de las manufacturas globalmente. Si uno mira el impacto de las importaciones en la economía colombiana, hay un gran incremento de las compras a Asia.
¿Colombia tiene enfermedad holandesa?
Absolutamente sí. La enfermedad holandesa se puede clasificar de dos maneras: una es simplemente el impacto de los productos básicos, creando una mejora en los términos de comercio y un aumento de los ingresos del país. Pero el impacto de la tasa de cambio en la competitividad acaba con un incremento de los ingresos nacionales y al mismo tiempo se abaratan los bienes importados.
El peligro real de la enfermedad holandesa no está solamente en la tasa de cambio, sino que se ve en la distribución del consumo de productos nacionales a importados.
Una mejora en los precios de las materias primas es lo mismo que un incremento en los ingresos nacionales pero, al mismo tiempo, esto causa una apreciación en la tasa de cambio y el ingreso doméstico incrementado se va a gastar en bienes más baratos y estos son los importados. Entonces es un factor doble.
¿Es sano para Colombia ingresar a la Ocde?
Es un gran error. México y Corea cometieron el mismo error y ambos sufrieron crisis financieras sustantivas como resultado de esto. Si nos remontamos a las viejas teorías de los economistas estructuralistas, se alegó que una de las condiciones básicas para ingresar a cualquier tipo de acuerdo de esta naturaleza es que hubiese un nivel similar de desarrollo, de productividad y de competitividad.
Colombia va a entrar a la Ocde sin preocuparnos por competir con Estados Unidos, y estamos hablando de competir con México. La pregunta es si Colombia va a ser capaz de competir en los mercados internacionales con otros países en desarrollo que ya están en la Ocde y no parece prometedor. ¿Por qué se quiere entrar a la Ocde? Es básicamente para darles confianza a los inversionistas extranjeros para que inviertan en Colombia, pero esto implica empoderar más la enfermedad holandesa.
Pero Colombia es hoy uno de los países de Latinoamérica que más crece.
Es un crecimiento que desilusiona. No se puede mirar crecimiento sin empleo. Si se va a desarrollar la economía no importa qué tan alta sea la tasa de inversión ni qué tan alto sea el crecimiento si no se genera empleo. Si no se reduce el sector informal no se está generando desarrollo.
Pero el desempleo ha bajado…
Ha bajado, pero no es mucho y sigue siendo sumamente alto. Hay un problema de desempleo disfrazado que debe ser de 40 por ciento. La pregunta es ¿Por qué? La explicación proviene de la enfermedad holandesa y del impacto sobre el sector de manufacturas.
¿HAY QUE REGULAR MERCADOS?
La dificultad es que nunca habrá una regulación que dé estabilidad a los mercados financieros en el mundo, porque estos siempre van adelante de los reguladores.
La reglamentación está para reducir la rentabilidad de los bancos y estos existen solo si pueden tener utilidades sustanciales en su negocio.
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Public Policy Brief No. 131 | April 2014
In the context of current debates about the proper form of prudential regulation and proposals for the imposition of liquidity and capital ratios, Senior Scholar Jan Kregel examines Hyman Minsky’s work as a consultant to government agencies exploring financial regulatory reform in the 1960s. As Kregel explains, this often-overlooked early work, a precursor to Minsky’s “financial instability hypothesis”(FIH), serves as yet another useful guide to explaining why regulation and supervision in the lead-up to the 2008 financial crisis were flawed—and why the approach to reregulation after the crisis has been incomplete.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Policy Note 2014/2 | February 2014
Lessons for the Current Debate on the US Debt Limit
In 1943, Congress faced unpredictably large war expenditures exceeding the prevailing debt limit. Congressional debates from that time contain an insightful discussion of how the increased expenditures could be financed, dealing with practical and theoretical issues that seem to be missing from current debates. In the '43 debate, Representative Wright Patman proposed that the Treasury should create a nonnegotiable zero interest bond that would be placed directly with the Federal Reserve Banks. As the deadline for raising the US federal government debt limit approaches, Senior Scholar Jan Kregel examines the implications of Patman's proposal. Among the lessons: that the debt can be financed at any rate the government desires without losing control over interest rates as a tool of monetary policy. The problem of financing the debt is not the issue. The question is whether the size of the deficit to be financed is compatible with the stable expansion of the economy.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
One-Pager No. 38 | June 2013The recent report by the Senate Permanent Subcommittee on Investigations on the operations of JPMorgan Chase’s Synthetic Credit Portfolio unit—aka the London Whale—has brought renewed attention to the risks of proprietary trading for insured banks, and provides depth to the larger risks inherent in the financial system after Dodd-Frank.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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In the Media | May 2013
Gli azionisti di JP Morgan al voto sulla doppia poltrona di Dimon. Le tre lezioni della "Balena"
View More View LessDi Elena Bonanni
FIRSTOnline, 21 Maggio 2013. Tutti i diritti riservati.
Gli azionisti votano oggi in assise sulla separazione delle cariche di presidente e ceo dopo gli scandali—Trema la doppia poltrona di Dimon—Le tre lezioni della balena di Londra dell'economista Jan Kregel (Bard College)—Il caso JPMorgan è diventato il terreno di gioco su cui si sta disputando la sfida sulla Volcker rule tra Senato e lobbies finanziarie
Il regno di Jamie Dimon non è imploso (per ora) sullo scandalo della Balena di Londra (ma non solo). L’ultimo re di Wall Street, come è stato soprannominato dal Financial Times, non dovrà dividere il trono con un nuovo presidente (solo il 32% ha votato a favore della separazione delle poltrone di ceo e presidente). Più scivolosa risulta invece la posizione di tre membri della Commissione sui rischi (David Cote, ceo Honeywell International; James Crown, presidente di Henry Crown and Company; Ellen Futter, presidente del Museo americano di storia naturale) che hanno ottenuto sostegno da meno del 60% dei soci.
CtW Investment group, che rappresenta i fondi pensione dei sindacati, ha già chiesto le loro dimissioni. Tra i soci “ribelli” è diffusa la convinzione che i tre direttori non abbiano le competenze e che la banca abbia bisogno di nuovi manager in grado di supervisionare il risk management. Un cambio della guardia e un miglioramento delle competenze può sempre essere utile. Così come è necessaria la sostituzione di chi non ha supervisionato bene. Oltre al trader Bruno Iksil, soprannominato “la Balena di Londra”, JP Morgan ha infatti già licenziato anche i vertici del Chief Investment Office, la divisione londinese responsabile delle perdite, compresa la numero uno Ina Drew. E ha fatto causa a Javier Martin-Artajo, il supervisore di Iksil.
Ma, nella realtà finanziaria di oggi, non sembra questa una soluzione sufficiente per evitare in futuro una nuova Balena. Né a JPMorgan né in qualsiasi altra istituzione finanziaria. Tutti si sono infatti focalizzati su “chi sapeva cosa e quando” e su chi era responsabile per aver dissimulato la situazione agli azionisti e alla comunità finanziaria. Ma nello studio “More swimming lessons from the london whale”, l’economista Jan Kregel (Bard College-New York), che analizza e amplia le conclusioni del report della Sottocommissione permanente per le indagini del Senato americano, rileva come il caso della Balena di Londra evidenzi implicazioni più importanti la stabilità del sistema finanziario.
Infatti, se i problemi fossero dovuti a incompetenza o stupidità, come suggerito dallo stesso ceo Dimon, allora la questione potrebbe essere risolta con la rimozione dei responsabili. “Da questo punto di vista—rileva Kregel—una volta che i responsabili vengono rimossi (come è successo) e le condizioni ripristinate (lo smantellamento dell’unità), tutta la questione può in effetti essere trattata se non come “una tempesta in una teiera”, come è stata inizialmente descritta da Dimon, come una goccia nel mare dei profitti di JPMorgan complessivi, come è stata successivamente presentata.
Dopo tutto, nessuno è perfetto e tutti fanno errori. Ma questa lettura farebbe perdere di vista le importanti questioni sistemiche sollevate dalle operazioni del Cio in generale e del Scp in particolare”. E che devono invece riportare l’attenzione sui rischi non risolti dalla normativa Dodd-Frank. A partire dalle stesse dimensioni delle istituzioni finanziarie troppo grandi perché il management possa sapere effettivamente cosa succede e troppo grandi per essere regolate, la prima delle tre lezioni che emergono dallo studio di Kregel sul report della Sottocommissione del Senato e che Firstonline ripercorre in una serie di articoli.
TROPPO GRANDE PER ESSERE SUPERVISIONATA
I documenti dell’indagine del Senato hanno dato disclosure aggiuntiva e più dettagliata sulle comunicazioni tra i trader del Synthetic credit Portfolio (Scp), i loro manager del Chief investment office (Cio) e il top management della banca. “Questi scambi—scrive Kregel—non solo riconfermano il fatto che il management ha dato una rappresentazione non corretta agli azionisti e ai regolatori dei dettagli e l’ampiezza delle difficoltà della divisione Chief investment office (Cio), ma ha anche reso chiaro che il management non aveva una comprensione approfondita delle operazioni del Scp o dei motivi delle difficoltà di questa divisione”.
Per l’economista i documenti suggeriscono che è altamente probabile che i diversi livelli di management accusati di aver diffuso false informazioni non avevano la più pallida idea delle operazioni dell’unità Scp e del perché fosse entrata in sofferenza: nessun a quanto pare si era accorto delle difficoltà del Scp fino all’inizio del 2012. “Le comunicazioni del primo trimestre del 2012—rileva Kregel—suggeriscono che il management stesse lottando per capire cosa stesse andando male anche quando approvò misure che nelle intenzioni avrebbero dovuto risolvere il problema”. Ma che invece causarono un deterioramento più veloce del valore del portafoglio dell’unità che chiaramente non era stato compreso.
Kregel rileva come né il Senato né l’indagine interna di JPMorgan sostengano l’idea che la banca fosse semplicemente troppo grande perché qualsiasi manager potesse avere conoscenza diretta delle operazioni multiple della divisione di cui era responsabile. E ovviamente non poteva neanche il boss di JPMorgan quando parlò della famosa “tempesta nella teiera”. Kregel spiega che ogni livello di management faceva affidamento sulle informazioni passate dai subordinati, i quali a loro volta avevano poca conoscenza diretta dell’unità che stavano gestendo, fino ai trader che per loro stessa ammissione non capivano le performance del portafoglio che loro stessi avevano creato e che furono poi sostituiti da individui con ancora meno comprensione delle difficoltà che stavano fronteggiando.
“La spiegazione più probabile della cattiva informazione relativa alla Balena—conclude Kregel—è un enorme fallimento del controllo e della regia manageriale che non è stato il risultato di un inganno deliberato ma piuttosto la risposta naturale di individui che erano pagati generosamente per assumersi la responsabilità ma che semplicemente non sapevano cosa stesse succedendo perché la taglia e la complessità dell’organizzazione lo rendeva impossibile—ancora una volta, la prova di una istituzione troppo grande da gestire efficacemente e a maggior ragione da regolare. Se la complessità è chiaramente una minaccia maggiore alla stabilità finanziaria rispetto alla grandezza, è di solito, ma non solo, la grandezza che porta alla complessità”. -
In the Media | May 2013
JPMorgan e la Balena, l'economista Jan Kregel: sostituire i responsabili non basta
View More View LessDi Elena Bonanni
FIRSTOnline, 21 Maggio 2013. Tutti i diritti riservati.
LE TRE LEZIONI DELLA BALENA DI LONDRA/1 Jamie Dimon ha superato il voto sulla doppia poltrona mentre la fronda degli azionisti "ribelli" chiede le dimissioni dei tre membri della Commissione rischi che non hanno superato il 60% dei consensi— Ma il problema di JPMorgan non è solo la sostituzione dei manager “incompetenti”—Lo spiega l'economista Jan Kregel.
Il regno di Jamie Dimon non è imploso (per ora) sullo scandalo della Balena di Londra (ma non solo). L’ultimo re di Wall Street, come è stato soprannominato dal Financial Times, non dovrà dividere il trono con un nuovo presidente (solo il 32% ha votato a favore della separazione delle poltrone di ceo e presidente). Più scivolosa risulta invece la posizione di tre membri della Commissione sui rischi (David Cote, ceo Honeywell International; James Crown, presidente di Henry Crown and Company; Ellen Futter, presidente del Museo americano di storia naturale) che hanno ottenuto sostegno da meno del 60% dei soci.
CtW Investment group, che rappresenta i fondi pensione dei sindacati, ha già chiesto le loro dimissioni. Tra i soci “ribelli” è diffusa la convinzione che i tre direttori non abbiano le competenze e che la banca abbia bisogno di nuovi manager in grado di supervisionare il risk management. Un cambio della guardia e un miglioramento delle competenze può sempre essere utile. Così come è necessaria la sostituzione di chi non ha supervisionato bene. Oltre al trader Bruno Iksil, soprannominato “la Balena di Londra”, JP Morgan ha infatti già licenziato anche i vertici del Chief Investment Office, la divisione londinese responsabile delle perdite, compresa la numero uno Ina Drew. E ha fatto causa a Javier Martin-Artajo, il supervisore di Iksil.
Ma, nella realtà finanziaria di oggi, non sembra questa una soluzione sufficiente per evitare in futuro una nuova Balena. Né a JPMorgan né in qualsiasi altra istituzione finanziaria. Tutti si sono infatti focalizzati su “chi sapeva cosa e quando” e su chi era responsabile per aver dissimulato la situazione agli azionisti e alla comunità finanziaria. Ma nello studio “More swimming lessons from the london whale”, l’economista Jan Kregel (Bard College-New York), che analizza e amplia le conclusioni del report della Sottocommissione permanente per le indagini del Senato americano, rileva come il caso della Balena di Londra evidenzi implicazioni più importanti la stabilità del sistema finanziario.
Infatti, se i problemi fossero dovuti a incompetenza o stupidità, come suggerito dallo stesso ceo Dimon, allora la questione potrebbe essere risolta con la rimozione dei responsabili. “Da questo punto di vista—rileva Kregel—una volta che i responsabili vengono rimossi (come è successo) e le condizioni ripristinate (lo smantellamento dell’unità), tutta la questione può in effetti essere trattata se non come “una tempesta in una teiera”, come è stata inizialmente descritta da Dimon, come una goccia nel mare dei profitti di JPMorgan complessivi, come è stata successivamente presentata.
Dopo tutto, nessuno è perfetto e tutti fanno errori. Ma questa lettura farebbe perdere di vista le importanti questioni sistemiche sollevate dalle operazioni del Cio in generale e del Scp in particolare”. E che devono invece riportare l’attenzione sui rischi non risolti dalla normativa Dodd-Frank. A partire dalle stesse dimensioni delle istituzioni finanziarie troppo grandi perché il management possa sapere effettivamente cosa succede e troppo grandi per essere regolate, la prima delle tre lezioni che emergono dallo studio di Kregel sul report della Sottocommissione del Senato e che Firstonline ripercorre in una serie di articoli.
TROPPO GRANDE PER ESSERE SUPERVISIONATA
I documenti dell’indagine del Senato hanno dato disclosure aggiuntiva e più dettagliata sulle comunicazioni tra i trader del Synthetic credit Portfolio (Scp), i loro manager del Chief investment office (Cio) e il top management della banca. “Questi scambi—scrive Kregel—non solo riconfermano il fatto che il management ha dato una rappresentazione non corretta agli azionisti e ai regolatori dei dettagli e l’ampiezza delle difficoltà della divisione Chief investment office (Cio), ma ha anche reso chiaro che il management non aveva una comprensione approfondita delle operazioni del Scp o dei motivi delle difficoltà di questa divisione”.
Per l’economista i documenti suggeriscono che è altamente probabile che i diversi livelli di management accusati di aver diffuso false informazioni non avevano la più pallida idea delle operazioni dell’unità Scp e del perché fosse entrata in sofferenza: nessun a quanto pare si era accorto delle difficoltà del Scp fino all’inizio del 2012. “Le comunicazioni del primo trimestre del 2012—rileva Kregel—suggeriscono che il management stesse lottando per capire cosa stesse andando male anche quando approvò misure che nelle intenzioni avrebbero dovuto risolvere il problema”. Ma che invece causarono un deterioramento più veloce del valore del portafoglio dell’unità che chiaramente non era stato compreso.
Kregel rileva come né il Senato né l’indagine interna di JPMorgan sostengano l’idea che la banca fosse semplicemente troppo grande perché qualsiasi manager potesse avere conoscenza diretta delle operazioni multiple della divisione di cui era responsabile. E ovviamente non poteva neanche il boss di JPMorgan quando parlò della famosa “tempesta nella teiera”. Kregel spiega che ogni livello di management faceva affidamento sulle informazioni passate dai subordinati, i quali a loro volta avevano poca conoscenza diretta dell’unità che stavano gestendo, fino ai trader che per loro stessa ammissione non capivano le performance del portafoglio che loro stessi avevano creato e che furono poi sostituiti da individui con ancora meno comprensione delle difficoltà che stavano fronteggiando.
“La spiegazione più probabile della cattiva informazione relativa alla Balena—conclude Kregel—è un enorme fallimento del controllo e della regia manageriale che non è stato il risultato di un inganno deliberato ma piuttosto la risposta naturale di individui che erano pagati generosamente per assumersi la responsabilità ma che semplicemente non sapevano cosa stesse succedendo perché la taglia e la complessità dell’organizzazione lo rendeva impossibile—ancora una volta, la prova di una istituzione troppo grande da gestire efficacemente e a maggior ragione da regolare. Se la complessità è chiaramente una minaccia maggiore alla stabilità finanziaria rispetto alla grandezza, è di solito, ma non solo, la grandezza che porta alla complessità”. -
Policy Note 2013/4 | April 2013In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold. An understanding of banks’ dual operations and of the relationship between two types of deposits—deposits of customers’ currency and coin, and deposit accounts created by bank loans—helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Public Policy Brief No. 129 | April 2013This policy brief by Senior Scholar and Program Director Jan Kregel builds on an earlier analysis (Policy Note 2012/6) of JPMorgan Chase and the actions of the “London Whale,” and what this episode reveals about the larger risks inherent in the financial system. It is clear that the Dodd-Frank Act failed to prevent massive losses by one of the world’s largest banks. This is undeniable evidence that work remains to be done to reform the financial system. Toward this end, Kregel reviews the findings of a recent report by the Senate Permanent Subcommittee on Investigations and expands on the lessons that we can draw from the evolution of the London Whale episode.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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In the Media | April 2013On April 5, Senior Scholar Jan Kregel was featured on the panel "China in the World: Growth, Adjustment, and Integration" at the INET (Institute for New Economic Thinking) conference "Changing of the Guard?" in Hong Kong. The conference, cosponsored by the Fung Global Institute and the Centre for International Governance Innovation, focused on some of today's most pressing global concerns, including economic inequality and financial instability, set against the backdrop of Asia's rising share of the world economy. Click here for the panel video (Kregel’s remarks begin at 28:00).
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In the Media | March 2013
March 27, 2013
“Rethinking the State” is a video project funded by the Ford Foundation and the Institute for New Economic Thinking (INET) with the aim of using the recent economic crisis to question assumptions behind economic theory and to rethink the role of the state, finance, and austerity in promoting growth and innovation. In the first of a series of interviews with leading economists, Senior Scholar Jan Kregel discusses the causes and consequences of the Greek crisis, and the ineffectiveness and side effects of austerity. Click here for the complete interview. More information on “Rethinking the State” is available from INET. -
In the Media | March 2013
“Exiting The Crisis: The Challenge of an Alternative Policy Road Map,” a policy forum oganized by the Athens Development and Governance Institute and the Levy Economics Institute of Bard College, was held at the Athinais Cultural Centre in Athens, Greece, March 8–9.
Speaking at the Athens forum on March 8, Senior Scholar Jan Kregel observed that, on a global level, productivity is higher than it’s ever been, yet policies have been imposed within the European Union that prevent large segments of its population from benefitting. Policies that bring about a resumption of income growth and employment are the only solution—a solution that is wholly dependent upon north-south cooperation.
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Working Paper No. 730 | August 2012
Diversity and Uniformity in Economic Theory as an Explanation of the Recent Economic Crisis
View More View LessMarket economies and command economies have long been differentiated by the presence of alternative choice in the form of diversity. Yet most mainstream economic theory is premised on the existence of uniformity. This paper develops the implications of this contradiction for the theory of prices, income creation, and the analysis of the recent financial crisis, and provides a critique of traditional theory from an institutionalist perspective developed by J. Fagg Foster.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
In the Media | August 2012
Interview with Jan Kregel
Money Radio, August 27, 2012. © 2012 CRC Broadcasting Company. All Rights Reserved.
Senior Scholar Jan Kregel talks about the LIBOR scandal and the impracticality of regulating banks that are “too big to fail” in this radio interview. Full audio is available here.
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Public Policy Brief No. 125 | August 2012
No Solution for Financial Reform
Before the law has even been fully implemented, the inadequacies of the regulatory approach underlying the Dodd-Frank Act are becoming more and more apparent. Financial scandal by financial scandal, the realization is hardening that there is a pressing need to search for more robust regulatory alternatives.
The real challenge for financial reform is to develop a vision for a financial structure that would simplify the system and the activities of financial institutions so that they can be regulated and supervised effectively. Some paths to such simplification, however, are not worth treading. Against the backdrop of renewed present-day interest in the Depression-era “Chicago Plan,” featuring 100 percent reserve backing for deposits, Senior Scholar Jan Kregel turns to Hyman Minsky’s consideration of a similar “narrow banking” proposal in the mid-1990s. For reasons that eventually led Minsky himself to abandon the proposal, as well as reasons developed here by Kregel that have even more pressing relevance in today’s political climate, plans for a narrow banking system are found wanting.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Policy Note 2012/10 | August 2012Every crisis reveals unexpected consequences of economic policies. The current euro crisis should be no exception. As European Union governments search for a solution, there are already a number of lessons to be learned. Senior Scholar Jan Kregel outlines the top six.
Download:Associated Program:Author(s):Jan Kregel -
Policy Note 2012/9 | August 2012
The Fix Is In—the Bank of England Did It!
As the results of the various official investigations spread, it becomes more and more apparent that a large majority of financial institutions engaged in fraudulent manipulation of the benchmark London Interbank Offered Rate (LIBOR) to their own advantage, and that bank management and regulators were unable to effectively monitor the activity of institutions because they were too big to manage and too big to regulate. However, instead of drawing the obvious conclusion—that structural changes are needed to reduce banks to a size that can be effectively regulated, as proposed on numerous occasions by the Levy Economics Institute—discussion in the media and political circles has turned to whether the problem was the result of the failure of central bank officials and government regulators to respond to repeated suggestions of manipulation, and to stop the fraudulent behavior.
Just as the “hedging” losses at JPMorgan Chase have been characterized as the result of misbehavior on the part of some misguided individual traders, leaving top bank management without culpability, politicians and the media are now questioning whether government officials condoned, or even encouraged, manipulation of the LIBOR rate, virtually ignoring the banks’ blatant abuse of principles of good banking practice. Just as in the case of JPMorgan, the only response has been to remove the responsible individuals, rather than questioning the structure and size of the financial institutions that made managing and policing this activity so difficult. Again, the rotten apples have been removed without anyone noticing that it is the barrel that is the cause of the problem. But in the current scandal, the ad hominem culpability has been extended to central bank officials in the UK and the United States.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
In the Media | June 2012
In audio clips from a forthcoming interview, Senior Scholar Jan Kregel argues that, to address the current crisis, there is a need for regulations that place limits on the activities of financial institutions. The market does not adjust by itself, says Kregel—it needs rules to function efficiently. Radio Audizioni Italiane. Clip 1. Clip 2.
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Policy Note 2012/6 | June 2012
What a Hedge Gone Awry at JPMorgan Chase Tells Us about What's Wrong with Dodd-Frank
What can we learn from JPMorgan Chase’s recent self-proclaimed “stupidity” in attempting to hedge the bank’s global risk position? Clearly, the description of the bank’s trading as “sloppy” and reflecting ”bad judgment” was designed to prevent the press reports of large losses from being used to justify the introduction of more stringent regulation of large, multifunction financial institutions. But the lessons to be drawn are not to be found in the specifics of the hedges that were put on to protect the bank from an anticipated decline in the value of its corporate bond holdings, or in any of its other global portfolio hedging activities. The first lesson is this: despite their acumen in avoiding the worst excesses of the subprime crisis, the bank’s top managers did not have a good idea of its exposure, which serves as evidence that the bank was “too big to manage.” And if it was too big to manage, it was clearly too big to regulate effectively.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
One-Pager No. 30 | May 2012
Hyman Minsky had particular views about how the regulatory system and financial architecture should be reformulated, and one of the many lessons we can learn from his work is that there is an intimate connection between how we think about the prospect of financial market instability and how we approach financial regulation. Regulation cannot be effective if it is simply based on “piecemeal” measures produced in response to the current “moment,” Minsky wrote. It needs to reformulate the structure of the financial system itself.
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Public Policy Brief No. 121 | November 2011
Who Pays for the European Sovereign and Subprime Mortgage Losses?
In the context of the eurozone’s sovereign debt crisis and the US subprime mortgage crisis, Senior Scholar Jan Kregel looks at the question of how we ought to distribute losses between borrowers and lenders in cases of debt resolution. Kregel tackles a prominent approach to this question that is grounded in an analysis of individual action and behavioral characteristics, an approach that tends toward the conclusion that the borrower should be responsible for making creditors whole. The presumption behind this style of analysis is that the borrower—the purportedly deceitful subprime mortgagee or supposedly profligate Greek—is the cause of the loss, and therefore should bear the entire burden.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Policy Note 2011/4 | May 2011
Was Keynes’s Monetary Policy, à Outrance in the Treatise, a Forerunnner of ZIRP and QE? Did He Change His Mind in the General Theory?
View More View LessAt the end of 1930, as the 1929 US stock market crash was starting to have an impact on the real economy in the form of falling commodity prices, falling output, and rising unemployment, John Maynard Keynes, in the concluding chapters of his Treatise on Money, launched a challenge to monetary authorities to take “deliberate and vigorous action” to reduce interest rates and reverse the crisis. He argues that until “extraordinary,” “unorthodox” monetary policy action “has been taken along such lines as these and has failed, need we, in the light of the argument of this treatise, admit that the banking system can not, on this occasion, control the rate of investment, and, therefore, the level of prices.”
The “unorthodox” policies that Keynes recommends are a near-perfect description of the Japanese central bank’s experiment with a zero interest rate policy (ZIRP) in the 1990s and the Federal Reserve’s experiment with ZIRP, accompanied by quantitative easing (QE1 and QE2), during the recent crisis. These experiments may be considered a response to Keynes’s challenge, and to provide a clear test of his belief in the power of monetary policy to counter financial crisis. That response would appear to be an unequivocal No.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
One-Pager No. 7 | November 2010
The stability of the international reserve currency’s purchasing power is less a question of what serves as that currency and more a question of the international adjustment mechanism, as well as the compatibility of export-led development strategies with international payment balances. Export-led growth and free capital flows are the real causes of sustained international imbalances. The only way out of this predicament is to shift to domestic demand–led development strategies—and capital flows will have to be part of the solution.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Public Policy Brief No. 116 | October 2010
An Alternative Perspective on Global Imbalances and International Reserve Currencies
View More View LessThe stability of the international reserve currency’s purchasing power is less a question of what serves as that currency and more a question of the international adjustment mechanism, as well as the compatibility of export-led development strategies with international payment balances. According to Senior Scholar Jan Kregel, export-led growth and free capital flows are the real causes of sustained international imbalances. The only way out of this predicament is to shift to domestic demand–led development strategies—and capital flows will have to be part of the solution.
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Working Paper No. 602 | June 2010The use of government fiscal stimulus to support the economy in the recent economic crisis has brought increases in government deficits and increased government debt. This has produced an interest in sustainable government debt and the role of deficits in the economy. This paper argues in favor of a concept of "responsible" government policy, referring to positions held by Franklin and Marshall Professor Will Lyons. The idea is that government should be responsible to the needs and desires of its citizens, but that this should go beyond physical security and education, to economic security. Building on the fallacy of composition and misplaced concreteness, it suggests that in an integrated macro system an increased desire to save on the part of the private sector will be self-defeating unless the government acts in a responsible manner to support those desires. This can only be done by government dissaving via an expenditure deficit. The outstanding government debt simply represents the desires of the public to hold safe financial assets, and can only be unsustainable if the public’s desires change. The government should always be responsive to these desires, and adjust its expenditure policy.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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One-Pager No. 2 | May 2010
What We Can Do Today to Straighten Out Financial Markets
Congress is currently debating new regulations for financial institutions in an effort to avoid a repeat of the recent crisis that brought the banking system to the brink. Some of those proposed changes would be valuable. But what nobody seems to have noticed is that the government already has the power to address some of the most important factors that contributed to the crisis. Today, right now, Washington could change a few key rules and prevent a repeat of the rampant speculation, and possible fraud, that led to so much trouble this last time around.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Public Policy Brief Highlights No. 107A | April 2010
No Going Back: Why We Cannot Restore Glass-Steagall's Segregation of Banking and Finance
View More View LessThe purpose of the 1933 Banking Act—aka Glass-Steagall—was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation.
Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act’s restrictions on securities trading (deregulation). He concludes that a return to the Act’s simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks’ ability to compete with other financial institutions. Moreover, fundamental reform—the conflicting relationship between state and national charters and regulation—was bypassed by the Act.
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Working Paper No. 586 | February 2010
The current financial crisis has been characterized as a “Minsky” moment, and as such provides the conditions required for a reregulation of the financial system similar to that of the New Deal banking reforms of the 1930s. However, Minsky’s theory was not one that dealt in moments but rather in systemic, structural changes in the operations of financial institutions. Therefore, the framework for reregulation must start with an understanding of the longer-term systemic changes that took place between the New Deal reforms and their formal repeal under the 1999 Financial Services Modernization Act. This paper attempts to identify some of those changes and their sources. In particular, it notes that the New Deal reforms were eroded by an internal process in which commercial banks that were given a monopoly position in deposit taking sought to remove those protections because unregulated banks were able to provide substitute instruments that were more efficient and unregulated but unavailable to regulated banks, since they involved securities market activities that would eventually be recognized as securitization. Regulators and the courts contributed to this process by progressively ruling that these activities were related to the regulated activities of the commercial banks, allowing them to reclaim securities market activities that had been precluded in the New Deal legislation. The 1999 Act simply made official the de facto repeal of the 1930s protections. Any attempt to provide reregulation of the system will thus require safeguards to ensure that this internal process of deregulation is not repeated.
Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Working Paper No. 585 | February 2010
The extension of the subprime mortgage crisis to a global financial meltdown led to calls for fundamental reregulation of the United States financial system. However, that reregulation has been slow in implementation and the proposals under discussion are far from fundamental. One explanation for this delay is the fact that many of the difficulties stemmed not from lack of regulation but from a failure to fully implement existing regulations. At the same time, the crisis evolved in stages, interspersed by what appeared to be the system’s return to normalcy. This evolution can be defined in terms of three stages (regulation and supervision, securitization, and a run on investment banks), each stage associated with a particular failure of regulatory supervision. It thus became possible to argue at each stage that all that was necessary was the appropriate application of existing regulations, and that nothing more needed to be done. This scenario progressed until the collapse of Lehman Brothers brought about a full-scale recession and attention turned to support of the real economy and employment, leaving the need for fundamental financial regulation in the background.
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Public Policy Brief No. 107 | January 2010
No Going Back: Why We Cannot Restore Glass-Steagall's Segregation of Banking and Finance
View More View LessThe purpose of the 1933 Banking Act—aka Glass-Steagall—was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation.
Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act’s restrictions on securities trading (deregulation). He concludes that a return to the Act’s simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks’ ability to compete with other financial institutions. Moreover, fundamental reform—the conflicting relationship between state and national charters and regulation—was bypassed by the Act.
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Policy Note 2009/11 | December 2009
Past experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking—a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered “too big to fail” are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of “too big to fail” is simply aggravated. Thus, the current thrust of government regulatory reform—increased capital and liquidity requirements, and further legislation—is unlikely to lessen the systemic risks these institutions pose.
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Public Policy Brief Highlights No. 102A | September 2009
Is the B Really Justified?
The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China–a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today’s richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group.
Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.
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Public Policy Brief No. 102 | August 2009
Is the B Really Justified?
The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China–a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today’s richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group.
Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.
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Policy Note 2009/8 | June 2009
The demand for reform of the financial system has focused on the dollar’s loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances.
In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the US consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.
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Public Policy Brief Highlights No. 100A | April 2009
It’s That “Vision” Thing: Why the Bailouts Aren’t Working, and Why a New Financial System Is Needed
View More View LessThe Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector.
Senior Scholar Jan Kregel compares the current situation with the Great Depression, and finds an absence of New Deal measures and institutions in the current rescue packages. The lessons of the Great Depression suggest that any successful policy requires fundamental structural reform, an understanding of how the financial system failed, and the introduction of a new financial structure (in a short space of time) that is designed to correct these failures. The current crisis could have been avoided if increased household consumption had been financed through wage increases, says Kregel, and if financial institutions had used their earnings to augment bank capital rather than bonuses.
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Public Policy Brief No. 100 | April 2009
It’s That “Vision” Thing: Why the Bailouts Aren’t Working, and Why a New Financial System Is Needed
View More View LessThe Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector.
Senior Scholar Jan Kregel compares the current situation with the Great Depression, and finds an absence of New Deal measures and institutions in the current rescue packages. The lessons of the Great Depression suggest that any successful policy requires fundamental structural reform, an understanding of how the financial system failed, and the introduction of a new financial structure (in a short space of time) that is designed to correct these failures. The current crisis could have been avoided if increased household consumption had been financed through wage increases, says Kregel, and if financial institutions had used their earnings to augment bank capital rather than bonuses.
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Working Paper No. 558 | April 2009
Managing the Impact of Volatility in International Capital Markets in an Uncertain World
View More View LessInternational financial flows are the propagation mechanism for transmitting financial instability across borders; they are also the source of unsustainable external debt. Managing volatility thus requires institutions that promote domestic financial stability, ensure that domestic instability is contained, and guarantee that international institutions and rules of the game are not themselves a cause of volatility. This paper analyzes proposals to increase stability in domestic markets, in international markets, and in the structure of the international financial system from the point of view of Hyman P. Minsky’s financial instability hypothesis, and outlines how each of these three channels can produce financial fragility that lays the system open to financial instability and financial crisis.
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Working Paper No. 557 | March 2009
Third Time a Charm? Or Strike Three?
United States financial regulation has traditionally made functional and institutional regulation roughly equivalent. However, the gradual shift away from Glass-Steagall and the introduction of the Financial Modernization Act (FMA) generated a disorderly mix of functions and products across institutions, creating regulatory gaps that contributed to the recent crisis. An analysis of this history suggests that a return to regulation by function or product would strengthen regulation. The FMA also made a choice in favor of financial holding companies over universal banks, but without recognizing that both types of structure require specific regulatory regimes. The paper reviews the specific regime that has been used by Germany in regulating its universal banks and suggests that a similar regime adapted to holding companies should be developed.
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Policy Note 2008/5 | October 2008
As the House Committee on Financial Services meets to hear the expert testimony of witnesses concerning the regulation of the financial system, the measures that have been introduced to support the system are laying the groundwork for a new domestic financial architecture. Hyman Minsky suggests that the basic principle behind any reformulation of the regulatory system should limit the size and activities of financial institutions, and should be dictated by the ability of supervisors, examiners, and regulators to understand the institutions’ operations. Following Minsky’s preference for bank holding company structures, Senior Scholar Jan Kregel proposes the creation of numerous types of subsidiaries within the holding company. The aim would be to limit each type of holding company to a range of activities that were sufficiently linked to their core function and to ensure that each company was small enough to be effectively managed and supervised.
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Policy Note 2008/4 | October 2008
A Simple Proposal to Resolve the Disruption of Counterparty Risk in Short-Term Credit Markets
View More View LessThe impaired risk assessment caused by the collapse of mortgage-backed securities is the major problem threatening the stability of the American financial system, yet it is not clear that removing these assets from institutional balance sheets, as the government has proposed, will make it easier to assess counterparty risk in short-term credit markets. Resolving the disruption of counterparty risk should be the first objective of policy, argues Senior Scholar Jan Kregel, since these markets provide basic liquidity support for institutions operating in the broader financial markets.
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Working Paper No. 533 | April 2008
Over the last two centuries in Latin America a Washington Consensus development strategy based on integration in the global trading system has dominated both domestic demand management and industrialization "from within." This paper assesses the performance of each from the point of view of the impact of external conditions, and the validity of its underlying theory. It concludes by noting that replacing the Consensus will require not only reform of the international financial architecture but also a return to the integrated policy framework represented in the Havana Charter.
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Working Paper No. 530 | April 2008
This paper traces the evolution of housing finance in the United States from the deregulation of the financial system in the 1970s to the breakdown of the savings and loan industry and the development of GSE (government-sponsored enterprise) securitization and the private financial system. The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system.
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Working Paper No. 528 | February 2008
The Role of Catching Up by Late-industrializing Developing Countries
While the traditional approach to the adjustment of international imbalances assumes industrialized countries at a similar level of development and with similar production structures, such imbalances have historically been the result of a process of catching up by late-industrializing developing countries. This may call for an alternative approach that assesses how these imbalances can be managed in order to support developing countries’ efforts to achieve successful industrialization and integration into the global trade and financial system. In this light, the paper presents an alternative explanation of the existence and persistence of the currently high levels of imbalances and suggests reasons why they may persist in the medium term.
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Public Policy Brief Highlights No. 93A | January 2008
Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the US Subprime Mortgage Market
View More View LessIn this brief, Senior Scholar Jan Kregel reviews Hyman P. Minsky’s concept of financial fragility—in short, that the structure of a capitalist economy becomes more fragile over a period of prosperity—and concludes that the current crisis is in fact the result of insufficient margins of safety based on how creditworthiness is assessed in the new “originate and distribute” financial system.
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Public Policy Brief No. 93 | January 2008
Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market
In this brief, Senior Scholar Jan Kregel reviews Hyman P. Minsky’s concept of financial fragility—in short, that the structure of a capitalist economy becomes more fragile over a period of prosperity—and concludes that the current crisis is in fact the result of insufficient margins of safety based on how creditworthiness is assessed in the new “originate and distribute” financial system.
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Working Paper No. 523 | December 2007
This paper contrasts the economic incentives implicit in the Keynes-Minsky approach to inherent financial market instability with the incentives behind the traditional equilibrium approach leading to market stability to provide a framework for analyzing the stability induced by the recent changes in bank regulation to modernize financial services and the evolution of financial engineering innovations in the US financial system. It suggests that the changes that have occurred in the profit incentives for bank holding companies have modified the provision of liquidity to the financial system by banks, and the way credit assessment has moved from banks to other actors in the system. It takes the current experience in financial instability created by the expansion, through securitization, of the mortgage market as an example of these changes.
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Working Paper No. 520 | November 2007
Ragnar Nurkse was one the pioneers in development economics. This paper celebrates the hundredth anniversary of his birth with a critical retrospective of his overall contribution to the field, in particular his views on the importance of employment policy in mobilizing domestic resources and the difficulties surrounding the use of external resources to finance development. It also demonstrates the affinity between Nurkse’s theory of mobilizing domestic resources and employer-of-last-resort proposals.
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Working Paper No. 305 | July 2000
Can European Banks Survive a Unified Currency in a Nationally Segmented Capital Market?
View More View LessThe euro was expected to become a substitute for the American dollar as an international currency. However, compromises made during its creation make it a less than perfect substitute in the medium term. Among these compromises was the application of macro convergence and micro diversity in financial markets and supervision at the national level. This now prevents the creation of a unified capital market and places EU banks at a disadvantage when competing with US banks in global markets. There were also peculiarities in the integration process that led to a single currency in the United States that suggest further institutional changes will be necessary.
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Working Paper No. 298 | March 2000
Why Inflation Won't Bring Recovery In Japan
Paul Krugman has argued that Japan is in a liquidity trap and that it can recover only if the central bank there follows a policy of "credible inflation." This paper argues that Krugman's proposal, which is similar to what Fisher proposed during the Depression, is based on a different interpretation of the liquidity trap from that proposed by Keynes. As a result, his policy recommendations can result in neither the elimination of the trap nor in Japan's economic recovery.
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Working Paper No. 294 | February 2000
From Inertial Inflation to Fiscal Fragility
This paper argues that the Brazilian crisis differs from the standard Minsky crisis in that it is Brazil's government that is engaging in Ponzi financing while private sector balance sheets are relatively robust. However, attempts to stabilize the economy through high interest rates and expenditure cuts may quickly produce private sector fragility. This is the dilemma faced by Brazilian economic policy today.
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Working Paper No. 246 | August 1998
Applications to Asia
Four factors in the current financial crisis in Asia have surprised observers. First, although capital flows in Asia appeared stable, the crisis was precipitated by the reversal of the very large proportion of short-term lending. Second, although Asia appeared to be an example of the maxim that capital flows to the region with the highest rates of return, now it appears that risk-adjusted returns were lower in Asia than in other regions. Third, although the foreign lending banks are the most sophisticated operators in global finance, they seem to have had difficulty assessing risk. Fourth, contrary to the belief that foreign equity investors will not liquidate their positions in response to currency devaluation, the equity and foreign exchange markets collapsed together. According to Visiting Scholar Jan Kregel, these four factors may be explained by the role of derivatives contracts in the flow of funds to Asia.
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Working Paper No. 235 | May 1998
The Difference between Balance of Payments Crises and Debt Deflations
What was different about the collapse of the Asian emerging markets in 1997? The free fall of the Mexican peso and the collapse of the Mexican Bolsa produced a "Tequila effect" that spread through most of South America. But it did not create a sell-off in the global financial markets similar to that which occurred on 27 October 1997. Normally, sharp declines in prices in emerging equity markets produce a "flight to quality," in which international investors shift their funds back into developed-country markets and local investors seek to protect their wealth by diversifying into developed-country assets. Yet the collapse in the Asian emerging markets, that started in Thailand, spread to the other second-tier Newly Industrialising Economies (NIEs), and eventually extended to the first-tier NIEs produced the largest absolute declines ever experienced in the major developed-country equity markets. If equity markets can suffer from what Alan Greenspan has called "irrational exuberance," the Asian crisis suggests that they may also suffer from "irrational pessimism." Yet there is much to indicate that in this case the financial markets in Japan, Europe, and the United States were quite rational in assessing the global implications of the financial crisis in Asia.
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Working Paper No. 234 | April 1998
A Minsky Crisis Happened in Asia
The title of Visiting Senior Scholar Jan Kregel's working paper is a reference to Hyman P. Minsky's book Can “It” Happen Again? The Minskian “it” is the debt deflation scenario that led to the Great Depression, and Kregel makes the case that the recent Asian crisis is just such a scenario.
Minsky defined three types of financing. Hedge financing is a position in which a firm's expected cash flow always exceeds the financing costs and operating expenses by a wide margin of safety. Speculative financing is a position in which a firm has a positive net present value, but the expected cash flow will not be sufficient to meet all financial commitments in all periods. Ponzi financing is a position in which a firm has to borrow funds just to meet its current cash flow commitments. According to Minsky, a change in macroeconomic variables, such as the interest rate, can change a firm's financial position from hedge to speculative or even to Ponzi by reducing the present value of the firm's current cash flow and increasing its cash flow commitments. A bank will respond to a deterioration of the financial position of its debtors by reducing lending and attempting to recall lending. If so, firms will find themselves in Ponzi positions and will be forced to sell assets just to meet their current cash flow commitments. Selling assets creates a generalized downward pressure on output and asset prices. Thus, the term “debt deflation.”
According to Kregel, the above scenario could also result from a depreciation in the exchange rate if firms have a high proportion of imported inputs or foreign debt—and this is precisely what happened in Asia in 1997.
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Working Paper No. 161 | May 1996
In the postwar period prior to 1990 policy proposals aimed at reducing the instabilities associated with increased capital flows focused on increasing market efficiencies so that nominal variables would reflect real conditions in the economy. However, those in charge of financial resource flows applied theories largely unconcerned with fundamentals, resulting in such financial market instabilities as volatility in the foreign exchange market. Andrew Cornford, of the Global Interdependence Division of UNCTAD (United Nations Conference on Trade and Development), and Jan Kregel, of the University of Bologna, examine the policies of the postwar period and the reasons for their failure to produce economic stability. They then explore the means by which instability might be reduced.
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