central bank independence

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pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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accounting loophole / creative accounting, Bretton Woods, business climate, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, labour market flexibility, labour mobility, market fundamentalism, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

As you know, based on the report by our colleague, Christa Randzio-Plath, we have drawn up a whole series of proposals on which we would like to have your opinion over and above the written answers to our questionnaire, and would like to know how you view the possibility either of amending some of these points in the Maastricht Treaty or of inter-institutional agreements to improve the current situation, which would be in the direct interest of the independence of the Central Bank, which will only be independent if it does not become the scapegoat in public opinion. Issing: The last thing you mentioned, namely the Central Bank becoming the scapegoat, is an important problem. However, there are two aspects to this problem, since being the scapegoat can also mean that a central bank may be held responsible for mistakes made in other policy areas. On the first point: it is true that when the Maastricht Treaty was drawn up the Deutsche Bundesbank, alongside one or two others, was the only major central bank to have the benefit, the advantage if you will, of independence. The Maastricht Treaty has now made central bank independence an important element in the institutional arrangements for European monetary policy under the single currency.

This experience coincided with an increasing focus among economists on the role of expectations and of monetary policy credibility.8 While the topic of central bank independence had hardly been addressed at all (outside Germany), there was an obvious connection with recent research findings on the importance of monetary policy credibility: how could a central bank hope to win confidence in its policy if in its policy decisions it was obliged to a greater or lesser degree to act on the instructions of the government, the latter being guided not least by considerations of electoral tactics? 18 The literature on this topic has grown considerably over time. See, for example, A. Alesina and L. H. Summers, ‘Central bank independence and macroeconomic performance: some comparative evidence’, Journal of Money, Credit, and Banking, 25:2 (1993); O. Issing, ‘Central bank independence – economic and political dimensions’, National Institute Economic Review, 196, April 2006. 58 • The ECB and the foundations of monetary policy In Germany, central bank independence had originally been called for, not to say dictated, by the Allies (actually the Americans).

This independence of personnel is ensured via long-term contracts that cannot be prematurely terminated,6 as provided for under the Statute of the ECB. Members of the Executive Board have a term of office of eight years, with renewal explicitly excluded.7 When the question of the Statute of a future European Central Bank began to be discussed in the late 1980s, Germany was basically the only country whose central bank, the Deutsche Bundesbank, enjoyed independence. How did it come about that ultimately all EU 15 16 17 One way of nullifying central bank independence is to restrict the central bank’s financial resources or interfere in its internal powers of organisation. Removal from office would only be possible for reasons that have nothing to do with the exercise of the functions, for example in the case of criminal conduct. Reference has already been made to the special arrangements for the appointment of the first Executive Board.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, distributed ledger, Edward Snowden, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

In stage three, the central bank turns over any revenues in excess of its expenses to the government. It is all very civilized, and if the central bank has significant independence, the system is far more than window dressing, as we shall discuss at length in chapter 12. From an accounting point of view, however, the three-stage process boils down to the same thing as if the government just purchased goods directly with its money creation. (One can occasionally find autocratic and populist governments today that still sometimes do things the medieval way, dispensing with the niceties of open market operations and having the central bank ship truckloads of cash directly to the government to spend. The Kirchner era in Argentina (2003–2015) famously had little regard for central bank independence.) Although monetary seigniorage is perhaps the most natural way, there is also a second way to calculate seigniorage revenues, sometimes referred to as “opportunity cost seigniorage.”

And even if it managed to avert default, a sharp rise in real interest rates would almost certainly lead in the long term to a massive shrinkage in currency demand. THE POLITICAL ECONOMY IMPORTANCE OF SEIGNIORAGE The development of much greater central bank independence in many countries over the past three decades has been perhaps the single most transformative change in global macroeconomic policy since the breakup of the Bretton Woods system of fixed exchange rates in the early 1970s. Therefore it is important that the central bank not be turned into a political punching bag in a currency phaseout, as its profits will sharply decrease. Aside from being a modest but nice source of income for the government, seigniorage revenue has an important political economy function in supporting central bank independence. It turns the central bank into a huge profit center that earns far beyond what it needs to operate, enabling it to remit the rest back to the national treasury.

It is fair to ask, then: just how can this independence be preserved if revenues from paper currency creation are allowed to shrink? Central bank independence is a very important issue, but as long as we live in a world where electronic reserves at the central bank are the de facto unit of account and medium for settling interbank financial transactions, it seems likely that central banks will have more than enough revenues from electronic money to cover their operating costs in most circumstances. One way to protect central banks in their transition to a less-cash economy is to have a special Treasury issue to soak up a significant fraction of the currency, so the burden does not all fall on the central bank. Despite the challenges to central bank independence, the status quo, where central banks make vast extra profits by providing a key financing instrument for the underground and criminal activity worldwide, is hard to defend.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

Finn Kydland and Edward Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy 85, 2 (1977): 473–490. 67. For a good introduction to the politics behind central bank independence, see Adam Posen, “Central Bank Independence and Disinflationary Credibility: A Missing Link,” Oxford Economic Papers 50, 3 (1998): 335–359; Ilene Grabel, “Ideology, Power, and the Rise of Independent Monetary Institutions in Emerging Economies,” in Monetary Orders: Ambiguous Economics, Ubiquitous Politics, ed. Jonathan Kirshner (Ithaca, NY: Cornell University Press, 2003); Sheri Berman and Kathellen McNamara, “Bank on Democracy,” Foreign Affairs 78, 2 (April/May 1999): 1–12. 68. Posen, “Central Bank Independence.” 69. Brian Barry, “Does Democracy Cause Inflation? Political Ideas of Some Economists,” in The Politics of Inflation and Economic Stagnation, ed.

The capacity of any government to govern is reduced at the same time that the pressure for strong action grows.”65 Given these pathologies that are endemic to democracy, what must be done to save the liberal economy from the destructive forces of democracy? Banning democracy would be effective but might be unpopular. A second-best solution would be to have an institution that would effectively override such inflationary decision making. Luckily, such an institution already existed thanks to those ordoliberals, or neoliberals would have had to invent one: the independent central bank. Central Bank Independence Is the Solution During the Keynesian era, central banks almost everywhere were dependent creatures. That is, central banks were the financing agent for the national treasury: they cut the checks that the politicians said needed to be cut. As noted earlier, the one exception was Germany’s Bundesbank with its singular goal of stabilizing the price level, which was only made possible by its unique late-developer profile and equally unique ordoliberal instruction sheet.

Politicians are also heavily incentivized to focus on short-term measures, for the same reasons. But if politicians cannot, in the language that this literature spawned, “credibly commit” to a given policy, both voters and market agents will discount government policies and attempt to offset their effects, which will lead to greater economic instability and uncertainty. Kydland and Prescott argued that the key to solving this problem was for the central bank to be made independent from politicians and, in the manner of the Bundesbank, to be mandated to pay attention only to price stability. Critical here were a set of institutional reforms designed to shield the central bank from public scrutiny and central bankers from public recall or redress, while ensuring that these bankers are more conservative than the median voter to further protect the institution from populist demands.


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

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affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

Suttle (2003), ‘Corporate Financing Patterns and Performance in Emerging Markets’, mimeo., March, 2003, World Bank, Washington, DC. 21 OECD Historical Statistics (OECD, Paris), Table 10.10. 22 There is no evidence that greater central bank independence has any association with lower inflation, higher growth, higher employment, better budget balance or even greater financial stability in developing countries. See the evidence presented in S. Eijffinger & J. de Haan (1996), ‘The Political Economy of Central-bank Independence’, Special Papers in International Economics, No. 19, Princeton University and B. Sikken & J. de Haan (1998), Budget Deficits, Monetization, and ‘Central-bank Independence in Developing Countries’, Oxford Economic Papers, vol. 50, no. 3. 23 http://en.wikipedia.org/wiki/Federal_Reserve_Board 24 On the evolution of IMF policy in Korea following the 1997 crisis, see S-J.

This is all the more so when there is actually no clear evidence that greater central bank independence even lowers the rate of inflation in developing countries, let alone helps to achieve other desirable aims, like higher growth and lower unemployment.22 It is a myth that central bankers are non-partisan technocrats. It is well known that they tend to listen very closely to the view of the financial sector and implement policies that help it, if necessary at the cost of the manufacturing industry or wage-earners. So, giving them independence allows them to pursue policies that benefit their own natural constituencies without appearing to do so. The policy bias would be even worse if we explicitly tell them that they should not worry about any policy objectives other than inflation. Moreover, central bank independence raises an important issue for democratic accountability (more on this in chapter 8).

They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans. These involved intervention in hitherto unthinkable areas, like democracy, government decentralization, central bank independence and corporate governance. This mission creep raises a serious issue. The World Bank and the IMF initially started with rather limited mandates. Subsequently, they argued that they have to intervene in new areas outside their original mandates, as they, too, affect economic performance, a failure in which has driven countries to borrow money from them. However, on this reasoning, there is no area of our life in which the BWIs cannot intervene.


pages: 347 words: 99,317

Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity by Ha-Joon Chang

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affirmative action, Albert Einstein, banking crisis, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

Suttle (2003), ‘Corporate Financing Patterns and Performance in Emerging Markets’, mimeo., March, 2003, World Bank, Washington, DC. 21 OECD Historical Statistics (OECD, Paris), Table 10.10. 22 There is no evidence that greater central bank independence has any association with lower inflation, higher growth, higher employment, better budget balance or even greater financial stability in developing countries. See the evidence presented in S. Eijffinger & J. de Haan (1996),‘The Political Economy of Central-bank Independence’, ‘Special Papers in International Economics’, No. 19, Princeton University and B. Sikken & J. de Haan (1998), ‘Budget Deficits, Monetization, and Central-bank Independence in Developing Countries’, Oxford Economic Papers, vol. 50, no. 3. 23 http://en.wikipedia.org/wiki/Federal_Reserve_Board 24 On the evolution of IMF policy in Korea following the 1997 crisis, see S-J.

This is all the more so when there is actually no clear evidence that greater central bank independence even lowers the rate of inflation in developing countries, let alone helps to achieve other desirable aims, like higher growth and lower unemployment.22 It is a myth that central bankers are non-partisan technocrats. It is well known that they tend to listen very closely to the view of the financial sector and implement policies that help it, if necessary at the cost of the manufacturing industry or wage-earners. So, giving them independence allows them to pursue policies that benefit their own natural constituencies without appearing to do so. The policy bias would be even worse if we explicitly tell them that they should not worry about any policy objectives other than inflation. Moreover, central bank independence raises an important issue for democratic accountability (more on this in chapter 8).

They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans. These involved intervention in hitherto unthinkable areas, like democracy, government decentralization, central bank independence and corporate governance. This mission creep raises a serious issue. The World Bank and the IMF initially started with rather limited mandates. Subsequently, they argued that they have to intervene in new areas outside their original mandates, as they, too, affect economic performance, a failure in which has driven countries to borrow money from them. However, on this reasoning, there is no area of our life in which the BWIs cannot intervene.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, investor state dispute settlement, invisible hand, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

The deregulation agenda that financiers pushed in Europe and America was really about rewriting the rules and regulations of the financial market in ways that advantaged those in the financial markets at the expense of the rest of society. It was not about creating a financial market that would lead to faster and more stable growth, and that was why what emerged was lower growth and increased instability.40 THE NEOLIBERAL ARGUMENT FOR CENTRAL BANK INDEPENDENCE The neoliberal argument for central bank independence—the argument that prevailed at the time the ECB was established—seemed to be predicated on three critically flawed assumptions: first, that all that mattered was inflation; secondly, that fighting inflation through monetary policy was a purely technocratic matter; and thirdly, that central bank independence would strengthen the fight against inflation. I have already explained what was wrong with the first two hypotheses. The third hypothesis was based on a deep distrust of democracy. It was feared that democratic governments would be tempted to inflate the economy before an election.

., Rewriting the Rules of the American Economy. 41 In the past, some governments may have tried to manipulate the economy before elections through monetary policy. But there are long and uncertain lags, making monetary policy not a very good tool for these purposes. Fiscal policy is, in fact, more effective. Some have suggested that, in the past, some central banks that were not independent at least attempted this kind of manipulation. Even if that is the case, the cure—making central banks so independent that they can easily be captured by the financial sector—is worse than the disease. There is, in fact, a wide range of institutional arrangements between full independence and being just another department of government. The governance of the ECB goes too far in the former direction. 42 The heyday of monetarism at central banks was in the 1980s and ’90s; inflation targeting was first explicitly adopted by New Zealand in 1984, and subsequently spread around the world.

Of course, Europe has recognized this, and it has slowly but steadily been moving toward greater democratic accountability—except on one front: the monetary union. If the euro is to be successful, it has to be an economic project that is consistent with, and even reinforces, other fundamental values. It has to strengthen democracy. But the euro has done the opposite. The most powerful institution in the eurozone is the European Central Bank, which was constructed to be independent—not answerable to or guided by elected leaders—another neoliberal idea that was fashionable at the time of the construction of the euro. Though it remains fashionable in some quarters, it is increasingly being questioned. As we will see in chapter 6, the countries that performed best during the global financial crisis were those with more accountable central banks. The actions of any central bank have large political and distributive consequences—seen most clearly in times of crises.

Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

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banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

Dollarization, from this perspective, was simply the formal recognition of this reality. The crisis experience also offers lessons about central bank independence. The revised constitution that took effect in August 1998 made the Central Bank independent. In March 1999, however, the government overrode the Central Bank’s views and carried out the banking holiday and deposit freeze, leading to the resignations of the institution’s president and some directors. The Central Bank remained without a president in mid-1999, during the crucial months following the freeze. In November 1999, when a new Central Bank administration tightened monetary policy, some government officials questioned this approach, but respected the Central Bank’s independence. In January 2000, however, with the exchange rate depreciating sharply, the government announced dollarization despite the Central Bank’s opposition.

In January 2000, however, with the exchange rate depreciating sharply, the government announced dollarization despite the Central Bank’s opposition. The Central Bank president and several directors resigned. One lesson of these events is that central bank independence is difficult to maintain under the pressures of acute crisis.29 No less important, as a practical matter, central bank independence involves more than directors being able to ignore ministerial wishes. Because of the economy’s advancing spontaneous dollarization, and because the attempt to sterilize the monetary expansion over the course of 1999 led the institution heavily into short-term debt—indeed, decapitalized the institution—the Central Bank had simply lost the power to carry out exchange-rate and monetary policy. Once this happened, of course, its directors’ “independence” ceased to matter in a practical sense.

In June 2000 the World Bank approved a US$150 million structural-adjustment loan with conditionality covering comprehensive tax reform, public-sector financial management, financial-sector reform, and social-sector expenditure protection. It also approved a US$10 million Financial Sector Technical Assistance Loan. 29. The decision to make the Central Bank independent in 1998 came at a bad moment, because the crisis conditions implied that financial markets were uncertain about whether the Central Bank would maintain its independence. Bibliography The word processed describes informally reproduced works that may not be commonly available through libraries. Arteta, Gustavo. 1999. “Opciones cambiarias para el Ecuador: El dilema de la elección.” CORDES (Coordinacion de Estudios de Desarrollo), Quito. Arteta, Gustavo, and Osvaldo Hurtado. 2002.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

Developing states, for their part, would be required to make “substantive changes in the legislative framework and in the practical powers of supervisors,” while the BIS committed itself to “a significant increase” in the resources it devoted to the training programs it offered, often in conjunction with the IMF and World Bank, for developing states’ banking supervisors.64 The concern with increasing states’ regulatory yardsticks, and even their capacities, went hand in hand with the push for central bank independence. Whether this was seen as countering the tendency of elected governments to bow to democratic pressures, or of authoritarian ones to serve their own self-interest, or both, the goal was to establish a regime of monetary credibility by institutionally embedding within states at least some of the discipline that had once been imposed by the gold standard.65 Central bank independence in the making of monetary policy was designed primarily to insulate them from domestic pressures, but at the same time it meant less independence from the concerns of other central banks in the coordination of monetary policies oriented towards stabilizing global financial markets and promoting capital flows.

It was a measure of how far the Accord had consolidated the strength of Wall Street that “within a very short time, the Treasury invited the dealer community to advise on its financing.” And insofar as the financial sector still had any lingering concerns that Keynesian commitments to the priority of full employment, and the use of fiscal deficits to that end, might prevail in the Treasury, they were allayed by the autonomy the Accord gave the Fed: “the pursuit of macroeconomic stabilization and price level stability [had become] the rationale for central bank independence.” The Accord was designed to ensure that “forces seen as more radical” within any administration would not be able to implement inflationary monetary policies.79 The roots of “monetarism”—understood not in the sense of policy determined by arcane measures of money supply, but in the sense of giving macroeconomic priority to “manipulating short-term interest rates to control aggregate demand and inflation”—thus really need to be located not in the 1970s but in the 1950s, during the supposed heyday of the Keynesian era.

But on this occasion it quickly and drastically reversed direction: its funds rate was reduced through the course of 1970 by five full points. The monetarists’ explanation of this volte-face as being due to the Fed’s lack of autonomy from the Nixon government and its short-term electoral calculations would leave a powerful ideological imprint, expressed as a generalized clarion call for “central bank independence”—a call that would become the touchstone for the restructuring of all states in the context of capitalist globalization. Yet what this episode really demonstrated was how trapped central banks had become by precisely the rapid development of financial markets which they had encouraged. With the realization that a tightening of monetary policy was having the effect of inducing a financial crisis, the central bank’s role as lender of last resort to keep the financial system afloat trumped the commitment to monetary restraint.


pages: 355 words: 63

The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics by William R. Easterly

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Andrei Shleifer, business climate, Carmen Reinhart, central bank independence, clean water, colonial rule, correlation does not imply causation, financial repression, Gini coefficient, Hernando de Soto, income inequality, income per capita, inflation targeting, interchangeable parts, inventory management, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, large denomination, manufacturing employment, Network effects, New Urbanism, open economy, Productivity paradox, purchasing power parity, rent-seeking, Ronald Reagan, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, trade liberalization, urban sprawl, Watson beat the top human players on Jeopardy!, Yogi Berra, Yom Kippur War

Examples include Angola, Guatemala, Indonesia, Nigeria, Pakistan, Sudan, Uganda,and Zaire.34 The institutional solutions leave us a good way short of definitively resolving the polarized politics that kills off growth. After all, a Polarized Peoples 279 society polarized by class or race will be less likely to create an independent central bank, an independent finance minister, and highquality institutions in the first place. But at least we have identified the incentives that government officials face in polarized societies as the root of bad policies. This is a big improvement over endless preaching at poor countries to change their policies. We know some institutional remedies that help matters, even if they are no panaceas. If only rule of law, democracy, independent central banks, independent finance ministers, and other good-quality institutions can be put place, in the endless cycle of bad policies and poor growth can come to an end. The Middle-class Consensus Aristotle said it best in 306 B.c.: ”Thus it is manifest that the best political community is formed by citizens of the middle class, and that those states are likely to be well-administered, in which the middle class is large.. ..

In Africa, the interest group deadlock has still not been broken in many countries, as countries enter into their fourth decade after independence. Still, never at a loss for words, economists have proposed some institutional arrangements that will create incentivesfor the government to pursue betterpolicies. One, which is most relevant for countries struggling with high inflation, is central bank independence.Recall that a war of attrition between interest groups prolongs high inflation.A central bank that does not belongto either group is more likely to stand up to interest group pressure for the credit creation that fuels inflation. An independent central bank is morelikely to share the burdenof stabilization among interest groups. Laws thatlimitcredittothegovernmentandcreate an independent board of governors are one way to define independenceof the central bank.

Easterly. 1999. ”Public Goods and Ethnic Divisions.” Quarterly Journal of Economics 114, no. 4 (November): 1243-1284. Alesina, Alberto, and Roberto Perotti. 1995. ”Fiscal Expansions and Adjustments in OECD Countries.” Economic Policy 20:205-248. Alesina, Alberto, and Dani Rodrik. 1994. ”Distributive Politics and Economic Growth.” Quarterly Journal of Economics 109, no. 2 (May): 465-490. Alesina, Alberto, and Lawrence H. Summers. 1993. ”Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence.” Journal of Money, Credit and Banking 25 (May): 151-162. Alfiler,Ma., and P. Concepcion. 1986. ”The Process of Bureaucratic Corruption in Asia: Emerging Patterns.” In Ledivina V. Carino, ed., Bureaucratic Corruption in Asia: Causes, Consequences, and Controls. Quezon City, Philippines: JMC Press. Anand, Sudhir, and S. M. R. Kanbur. 1993. ”The Kuznets Process and the InequalityDevelopment Relationship.”


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

Clearly, when its awesome power is put to good effect – as a lender of last resort to illiquid governments, for instance – it can be a force for good, but even so it urgently needs reform. The ECB is buttressed by a secular religion which holds that central-bank independence is sacred and ought to be inviolate. It is particularly beloved by federalists because it is a truly supranational European institution. Yet the general principle in a democracy is that power is exercised by elected authorities. When democratic authorities delegate power to unelected ones, that power ought to be exercised openly and accountably. Surely the ECB ought to be judged by its results? The conventional case for central-bank independence rests on three planks: common agreement that low inflation is a good thing; the absence of a trade-off between low inflation and other desirable goals such as low unemployment, high growth or financial stability; and the belief that independent central banks are better placed to deliver low inflation at lower cost than politicians are.

The Greek fiasco highlighted another design flaw – the absence of a mechanism for the orderly restructuring of sovereign debt in the eurozone (and globally for that matter) – and a political constraint: a fear of debt restructuring, out of a misguided desire to protect the banking sector, a mistaken belief that it would lead to a Lehman-style crisis and a moralistic view that debt contracts are sacrosanct. The panic in sovereign bond markets that resulted from the five policy mistakes revealed a major design flaw: that the ECB was not explicitly mandated to be a lender of last resort to governments in the EU treaties. It also revealed two important political constraints: a deep reluctance of the ECB to intervene to stabilise sovereign bond markets and a perception that a central bank that jealously guards its independence was in fact a prisoner of German politics. The overarching error was a misdiagnosis of the crisis as being primarily about excessive government borrowing and a lack of “competitiveness” in southern Europe for which the solution was immediate austerity and wage cuts. In fact, with the notable exception of Greece, it was primarily a banking crisis associated with excessive private borrowing for which the solution was bank restructuring, debt write-downs and policies to support investment and economic adjustment.

To what extent should the eurozone share fiscal risks by issuing common debt – and would it be better to issue Eurobonds guaranteed by all eurozone governments or create a common eurozone Treasury with tax-raising and borrowing powers? Last but not least, how does one prevent panic in government bond markets: will the ECB’s ad hoc, conditional OMT policy suffice, should it be formally mandated as a lender of last resort to illiquid but not insolvent governments, or is there another alternative? That brings us neatly to monetary policy. Most central banks now operate independently of governments day to day, but the ECB’s autonomy is exceptional. It decides both what its target should be – it has settled on consumer-price inflation of close to but under 2 per cent – and how it wants to try to achieve it. It can even choose to do nothing when it fails to meet its target: even though inflation has plunged to below 1 per cent, threatening deflation, it is sitting on its hands.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

The Limits of Social Democracy: Investment Politics in Sweden (Ithaca: Cornell University Press). Porter, Michael E. (1992). Capital Choices: Changing the Way America Invests in Industry CWsish-ington: Council on Competitiveness, and Cambridge, Mass.: Harvard Business School). Posen, Adam (1995a). "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," in Ben Bernanke and J. Rotenberg, eds., NBER Macroeconomics Annual 7995 (Cambridge: MIT Press). — (1995b). "Central Bank Independence and Disinflationary Credibility: A Missing Link?," Federal Reser\'e Bank of New York Staff Report No. 1 (May). Poterba, James M., and Andrew A. Samwick (1995). "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity 2, pp. 295-372. Poterba, James M., and Lawrence H.

The marginal rationalization may work for a short period of time, but if the marginal qwere substantially higher than average q, several years of sustained investment should have brought up the ratio's value, and it didn't. It wasn't until the bull market that began in the early 1980s that <7 began to take off. Other analysts have argued that while ^ is a weak explanation of real investment, changes in stock prices do a better job (Barro 1990). But it may be that the stock market is simply a leading indicator of the business cycle, responding quickly to changes in interest rates and central bank policy, rather than being the independent cause of anything. Randall Morck, Andrei Shleifer, and Robert Vishny (1990) found that over the period 1960-1987, the stock market explained very little of the change in real investment once fundamentals like sales and profit growth were controlled for — relations that held for the stock market and economy taken as a whole, and for individual firms examined in detail.^° Introducing external financing — new stock and debt issues — added a bit of explanatory power to their equations, but not much, with new debt doing a better job than equity.

Or maybe the importance of the central bank is exaggerated. Unlike Britain and the United States, which suffer from loosely regulated financial systems and a shoot-from-the-hip stock market mentality, Japan and Germany have rather tightly regulated systems in which stock markets play a relatively unimportant role in both investment finance and corporate governance. Compared with these broader financial structures, the central bank's (in)dependence isn't quite so important. Populist critiques of the Fed tend to concentrate excessively on its autonomous powers while overlooking the influence of the financial markets on the central bankers: the Fed follows interest rate trends as well as leading them. The 1994 tightening offers a good example. Creditors began selling their bonds, driving up long-term interest rates, several months before the Fed jacked up the short-term rates in February.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

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banking crisis, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, late capitalism, means of production, moral hazard, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

One interesting example occurred in Italy in the 1990s, when the governors of the Bank of Italy, Guido Carli and Carlo Azeglio Ciampi, temporarily served as prime minister, finance minister and state president, after the party system collapsed in 1993 under the weight of corruption scandals during the ‘years of sludge’. Italy has a tradition of government by a strong central bank – one which Mario Draghi, governor of the Bank of Italy from 2006, after his time at Goldman Sachs, until his appointment as president of the ECB, continues today at EU level.3 In the 1990s, it should be noted, the extensive transfer of government powers from the discredited party system to a central bank independent of it was possible in part because fulfilment of the entry conditions for the European Monetary Union was seen as an overarching national interest. In Europe as in the United States, crisis therapy based on artificial money could be successful in the short run: that is, bankers’ bonuses and shareholders’ dividends might recover, and the risk premiums required by ‘the markets’ for the purchase of government securities might again be affordable after the central bank takes over the risk.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

TOWARD A MORE DEMOCRATIC CENTRAL BANK24 A central thesis of current conventional wisdom is that central banks should be independent. If they are subject to political forces, so the thinking goes, politicians will manipulate monetary policy for their short-run advantage at a long-run cost; they will stimulate the economy excessively before an election, with the price—higher inflation—to be paid after the election. Moreover, with an independent central bank committed to low inflation, markets will not build inflationary expectations into their behavior, so inflation will be contained, and there will be better overall economic performance. The failure of independent central banks The independent central banks of the United States and Europe didn’t perform particularly well in the last crisis.

There is a huge literature on the subject discussed in this section. My own views are set out in a lecture in memory of one of the great economists of the twentieth century, and the (first) Nobel Prize winner in economics, Jan Tinbergen, delivered at the Central Bank of Netherlands, “Central Banking in a Democratic Society,” De Economist 146, no. 2 (July 1998): 199–226, esp. 28. See also Alex Cukierman, Central Bank Strategy, Credibility, and Independence (Cambridge: MIT Press, 1992); and J. Furman, “Central Bank Independence, Indexing, and the Macroeconomy,” unpublished 1997 manuscript. 25. See chapter 3 for more details. 26. Edward M. Gramlich not only anticipated the bubble and its breaking but also argued forcefully that something should be done to avoid the foreclosures. The Fed did nothing on either front. See his book Subprime Mortgages: America’s Latest Boom and Bust (Washington, DC: Urban Institute, 2007). 27.

The data that the Fed was forced to reveal also showed that in the months after Lehman Brothers collapsed, large banks, like Goldman Sachs, were borrowing large amounts from the Fed, while simultaneously claiming publicly that they were in excellent health. None of this should be surprising: an independent central bank, captured by the financial sector, is going to make decisions that represent the beliefs and interests of the financial sector. Even if it were desirable to have a central bank that was independent from the democratic political process, the board should at least be representative and not dominated by members of the financial sector. Several countries do not allow those from the financial sector to serve on their central bank board—they see it as an obvious conflict of interest. There exists a wealth of expertise outside the financial sector. Indeed, those in the financial sector are attuned to making deals and are not experts in the complexities of macroeconomic interdependencies.


pages: 868 words: 147,152

How Asia Works by Joe Studwell

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affirmative action, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collective bargaining, crony capitalism, cross-subsidies, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, failed state, financial deregulation, financial repression, Gini coefficient, glass ceiling, income inequality, income per capita, industrial robot, Joseph Schumpeter, land reform, land tenure, large denomination, market fragmentation, non-tariff barriers, offshore financial centre, oil shock, open economy, passive investing, purchasing power parity, rent control, rent-seeking, Ronald Coase, South China Sea, The Wealth of Nations by Adam Smith, urban sprawl, Washington Consensus, working-age population

It was in this shake-out that Chung Ju Yung’s Hyundai obtained control of Kia and, with it, unassailable dominance of the automotive sector.29 What was different to every preceding crisis was that on this occasion the Korean government heeded IMF advice about structural changes to the financial system. The country acquired north-east Asia’s most ‘orthodox’ financial system, with an independent central bank, wholly independent commercial banks, large foreign-controlled banks and much increased rights for independent investors in stock and other markets. Despite a financial sector wobble over increased consumer debt in the early 2000s, so far the deregulated system has not produced another crisis. However it remains to be seen precisely how well timed Korea’s transition to an Anglo-Saxon financial system was.

The policy allowed already-wealthy pribumi families – the Indonesian term signifying the indigenous peoples of the archipelago, equivalent to the Malaysian term bumiputera – to make huge profits by importing luxury goods, or by selling their trading licences on to the ethnic Chinese or Dutch firms they were supposed to replace (like Om Liem’s).91 At the same time, the government licensed the proliferation of private banks that were unconstrained as to how they lent, and that were also allowed to borrow at will from the central bank. They funded whatever activities their owners saw fit – usually their own. Indonesia’s political and economic conditions deteriorated in the 1950s and Sukarno declared martial law in 1957, promising a more focused, state-led developmental effort. He removed remaining legal guarantees of central bank independence (just as Park Chung Hee would in 1961). He made the state banks almost completely dominant in the allocation of credit and focused them on supporting businesses that he nationalised from the Dutch. Bank Indonesia was told both to lend directly to favoured projects and to rediscount aggressively to the banking system. But credit allocation was still not linked to an industrial policy and to export performance.

The official discount rate of the central bank dropped from 7 per cent to 2 per cent in the same period. The Nikkei 225 Index was 3.1 times higher at its peak of just under 39,000 at the end of 1989 than in September 1985. The Urban Land Price Index peaked in September 1990 at just under four times the September 1985 level. 15. See Woo, Race to the Swift, p. 43. It was the US advisers who also oversaw the creation of an independent central bank which Park made very un-independent. 16. The consumer price index increased an average 17 per cent annually in the 1960s and 19 per cent annually in the 1970s. The peak of rediscounting was during the HCI drive in the late 1970s. 17. See Woo, Race to the Swift, pp. 113 and 157. She cites a 1980 survey which suggests that 70 per cent of household savings at that point were kept with illegal kerb lenders. The kerb financial system in the 1970s was perhaps 30 per cent of the size of the formal banking system (which also held corporate and government deposits), with the vast majority of loans from the kerb going to businesses.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population

Is QE really consistent with Britain’s 1997 anti-inflation macroeconomic settlement, by which the government gave the Bank of England independent control over interest rates? Is Britain’s economic predicament credibly consistent with a target inflation exceeded for most of the past half-decade. Can the target be altered without igniting inflationary expectations? And does Bank of England independence really mean anything now it’s the largest purchaser and holder of UK government debt? Fiscal dominance is in fact more the norm than full central bank independence. The independent central bank doggedly pursuing an inflation target may turn out to be a two-or-three decade fad. QE is a policy that is massive, controversial, remarkably redistributive, uncertain in its effect, and is now resulting in a myriad unintended consequences. There are diplomatic and political impacts. Few can claim to understand it fully. QE might work. It might even be working.

It started KfW, the state-owned business bank that offers cheap long-term loans to growing businesses. Germany’s sensitivity about its history in the first half of the twentieth century does much to explain its reluctance to assume an imperium in Europe in the early years of the twenty-first. German government officials point out that the main player in the crisis, the European Central Bank, although based in Frankfurt, is independent, not an organ of the German state. ‘We are not in the Troika,’ they insist, when asked if they are fed up with Greece. Ironically, no Germans today seem to remember the period of deflation and political extremism that accompanied Chancellor Brüning’s austerity policies of 1929–32, although there is a small exhibit on this at the Bundesbank museum. Arguably, those last years of the Weimar Republic provide the most relevant parallel to what is happening today in countries such as Greece (see here).

The experience of Spain and Ireland showed that the euro required oversight of the continent’s banking systems too. Both nations had descended into financial bedlam, despite mainly sticking to the euro’s Stability Pact. The problems had come in the banking system. The ECB was willing to step up. Yet it had absolutely no experience of banking supervision. Suddenly the ECB’s democratic deficit threatens to turn into a chasm. The origins of the need for central-bank independence over monetary policy have strong foundations. But is a strong political independence appropriate when the central bank is the driving force behind labour-reform policies, fiscal plans, and now continent-wide banking policy? By 2014, the ECB will face its first of a series of huge new tests. Lee Buchheit, the lawyer who helped Greece renegotiate its private sector debts (see here), feels it is going only one way: Official Sector Involvement.


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

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3D printing, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labor-force participation, Malacca Straits, Mark Zuckerberg, market bubble, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Peter Thiel, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

They began investing more wisely, including in supply networks, and stealing less. They also granted central banks more political independence, which they need to fend off easy-money populists. This movement got little public notice or support. There were no public movements to “Free the Central Banks!” Yet no single act could have done more to control basic prices for the man on the street. And now central bank independence has become an important measure of a national commitment to containing inflation. For much of the postwar era, in the political battles over central banks and easy money, the cause of fighting inflation often lost. Even in many emerging countries where the central bank was nominally independent—and the central bankers well understood the threat of inflation—they were not independent enough to resist public or private political pressure to keep interest rates and borrowing costs low.

Those crises turned many politicians into anti-inflation warriors. The global revolution that freed central banks to target inflation began in tiny New Zealand. As described by the journalist Neil Irwin, it was triggered by a kiwi fruit farmer turned central banker named Don Brash, who had seen his uncle’s life savings wiped out by inflation in the 1970s and ’80s. New Zealand passed a law in 1989 granting its central bank independence from the political process and directing it to set a target for inflation. Unions screamed that the move could destroy jobs if large businesses were not able to borrow at cheap rates. Manufacturers called it “undemocratic.” One real estate developer demanded to know Brash’s weight so he could test a rope to hang him on. But the measure passed. New Zealand’s central bank became the first in the world to explicitly declare that fighting inflation would be its number-one priority, and within two years its inflation rate fell from near 8 percent to 2 percent.5 Inflation targets are effective if the central bank manages to prove to the public that it is serious—that it is prepared to increase the price of money and induce the pain necessary to control inflation.

The world’s central bankers and finance ministers meet every year at an IMF-sponsored summit, and at the 2015 gathering in Lima, Peru, the hallway chatter was full of complaints from emerging-world central bankers about political interference. This came as something of a surprise to bank officials from South Africa, because they don’t suffer from this kind of pressure themselves. Central bank watchers count South Africa as having one of the few central banks in the emerging world that exercises genuine independence, along with those in Chile, Poland, the Czech Republic, and perhaps a few others. The rest operate in a gray area. Most are officially committed to target inflation yet are still informally obliged to answer the phone when the president’s office calls asking for easy money. How Turkey Won the War, for a While The war on inflation played out in different ways in different countries, but the onset of inflation in the emerging world derived from a common set of pathologies.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

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accounting loophole / creative accounting, Airbnb, Ben Bernanke: helicopter money, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, market bubble, means of production, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, winner-take-all economy, Wolfgang Streeck

Whereas the rights of the state people are grounded in national political status, or citizenship, the market people of international finance derive their claim on public policy from commercial contracts, which in an encompassing global market, where lenders have alternatives, tend to take precedence. By providing its customers with liquidity, the financial industry establishes control over them, as is the very nature of credit. Financialization turns the financial sector into an international private government disciplining national political communities and their public governments, without being in any way democratically accountable. The power of money, wielded by central banks both independent from states and dependent for the success of their monetary policies on the cooperation of the private financial sector, takes the place of the power of votes, adding importantly to the decoupling of democracy from political economy that is the central requirement of the Hayekian model, if not of growth, then of profit growth. Commodification Unbound Together with the decoupling of democracy from political economy, which made the democratic process run dry while setting capitalism free to shift to a new, market-driven, non-egalitarian growth model, globalization caused a deep erosion of social regimes which had in the past more or less effectively limited the commodification of what Karl Polanyi has called the three ‘fictitious commodities’, labour, land and money.34 According to Polanyi, it is in the logic of capitalist development and its ‘utopia’ of a ‘self-regulating market’ that in order to continue its advance it must strive ultimately to commodify everything.

., where it is hard to see what neoliberal ‘reforms’ still remain to be implemented. 7See Armin Schäfer and Wolfgang Streeck, eds, Politics in the Age of Austerity, Cambridge: Polity 2013. 8Walter Korpi, The Democratic Class Struggle, London: Routledge and Kegan Paul 1983; and Crouch, Post-Democracy. 9This is the Public Choice view of fiscal crisis, as powerfully put forward by James Buchanan and his school; see for example Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy, Ann Arbor: University of Michigan Press 1962. 10One often forgets that most central banks, including the BIS, have long been or still are partly under private ownership. For example, the Bank of England and the Bank of France were nationalized only after 1945. Central bank ‘independence’, as introduced by many countries in the 1990s, may be seen as a form of re-privatization. 11Of course, as Colin Crouch has pointed out, neoliberalism in its actually existing form is a politically deeply entrenched oligarchy of giant multinational firms; see Crouch, The Strange Non-Death of Neoliberalism. 12See Daniel A. Bell, Beyond Liberal Democracy: Political Thinking for an East Asian Context, Princeton, NJ: Princeton University Press 2006; and Nicolas Berggruen and Nathan Gardels, eds, Intelligent Governance for the 21st Century: A Middle Way between West and East, Cambridge: Polity 2012. 13The expression ‘market-conforming’ is from Angela Merkel.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

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banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, mortgage debt, new economy, Northern Rock, paper trading, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

However, as the price for carrying the German government with him, the ECB’s president, Mr Mario Draghi, also announced that these ‘operations’ (which are now known as outright monetary operations, or OMT) would be conditional on further austerity, vouched for by inspectors. Thus, surreptitiously, Europe’s central bank sacrificed, on the altar of keeping on Germany’s ‘right side’, its most prized principle: central bank independence.13 Many a reader may protest that I left out of my short list of significant changes the June 2012 Summit Agreement according to which Europe’s leaders, at the insistence of the Italian and Spanish prime ministers, agreed to separate the continent’s banking crisis from the debt crisis. How would that separation be achieved? By unifying the banking systems of the eurozone countries, infusing them with capital from the ‘centre’ and desisting from counting these capital injections as part of the national debt of the countries in which the banks are domiciled.

Mr Mario Draghi’s choice of words, by which to signal unambiguously that he was talking about the Eurozone’s dismantling, was that there was now a serious ‘convertibility risk’ – by which he meant that there was a risk that all prices in the eurozone would be ‘converted’ to other, new, national (one presumes) currencies! 13. This loss becomes clear the moment one realises that the ECB has chosen to conduct monetary operations that will stop not when the ECB judges they must but when Brussels or the IMF say it should cease and desist. This is, if nothing else, ample proof that the fabled central bank independence was never a real principle but, rather, a pretext for never financing anyone other than ‘needy’ bankers. Postscript 1. These words were conveyed to us by Ron Suskind in his article in the New York Times Magazine, October 2004. Though not attributed, many believe they were spoken in the summer of 2002 by Karl Rove, a senior aide to President George W. Bush. 2. When my colleague Joseph Halevi and I published an article (the first to use the metaphor of the Global Minotaur) back in 2003, focusing on America’s growing ‘global imbalances’ – that is, its twin deficits – our point was ignored.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

Why such a private institution can be in charge of disbursing trillions of taxpayers’ dollars with no political oversight is another matter. That such an institution should be put in charge of consumer protection in the banking business is hard to understand unless Congress has been captured by the interests of the banking industry. A key ingredient of any meaningful and lasting reform is to make central banks more independent from the private banking sector. MONEY IS POWER 89 Otherwise, it is only a matter of time until the politically independent technocrats at the central banks help the banking sector to undo or circumvent the restrictions that fleeting public outrage has prevented them from blocking. Farhi and Tirole (2009) chide their fellow economists for having forgotten to push for the independence of central banks from banking interests over their successful campaign to reduce the governments’ control over central banks.

This requires that the public control a much larger part of the money creation and credit allocation process, and private banks a correspondingly smaller one. There certainly was a time when autocratic governments might be less trusted than private banks to provide a stable supply of a paper currency, and therefore they had to cooperate with private bankers. Times have changed. Today, governments need not be dependent on the good will of financiers. Governments observe the rule of the law. They made their central banks independent and gave them a clear and credible mandate to limit inflation. If fulfillment of this mandate is currently in question, this is not because governments have decided to cheat, but rather because excessive credit creation by the private banking sector has caused a major crisis that ruined public finances. If they wanted, democratic governments could take over a much larger part of the highly lucrative task of creating the money that the economy needs.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

The sole monetary ill that had been permitted into the New Keynesian theory was high or volatile inflation, which was deemed to retard the growth of GDP.25 The appropriate policy objective, therefore, was low and stable inflation, or “monetary stability.” Henceforth, governments should therefore confine their role to establishing a reasonable inflation target, and then delegate the job of setting interest rates to an independent central bank staffed by able technicians.26 On such grounds, the Bank of England was granted its independence and given a mandate to target inflation in 1997, and the European Central Bank was founded as an independent, inflation-targeting central bank in 1998. There is little doubt that under most circumstances, low and stable inflation is a good thing for both the distribution of wealth and income, and the stimulation of economic prosperity. But in retrospect, it is clear that “monetary stability” alone was far too narrow a policy objective as it was pursued from the mid-1990s to the mid-2000s.

So yes: I think the time has come to abandon the cult of inflation-targeting and revert to a broader idea of what monetary policy has to achieve—and to allow the central bankers a larger set of tools to attempt these more difficult goals.” “Give a bunch of unaccountable bureaucrats an even larger set of tools? Only a socialist could come up with that!” “Not so—that brings us to the second policy. Central banks shouldn’t be independent. Or at least, not like they are now. “On the alternative view of money, the question of who decides who should issue money and on what standard is, as we discovered, a vital one. And since money is the ultimate technology for the decentralised organisation of society, there is only one answer that works—the one given by Solon. Only democratic politics provides the sensitivity to current conditions and the legitimacy to deflect criticism that is necessary for money to work sustainably.

Mehrling cites this as an example of how diametrically opposed the worldviews of academic macroeconomics and academic finance had become by the mid-1990s, calling it “[f]or a macroeconomist … a shocking statement.” 25. High and volatile inflation is a macroeconomic ill in New Keynesian models essentially because in the presence of sticky prices, it generates inefficient relative price changes which reduce output to below its potential. 26. The idea of central-bank independence, unlike inflation targeting, is not associated specifically with New Keynesian theory—its origins lie in an earlier literature, notably Rogoff, 1985—though it was only once the New Keynesian approach had become the most widely used framework for policy-making that it achieved a concrete institutional impact. 27. Turner, 2012. 28. Minsky, H., “The Financial Instability Hypothesis: Capitalist Processes and the Behaviour of the Economy,” in Kindleberger and Laffargue, 1982. 29.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

This was a reaction to the excess inflation of the 1970s, a period during which central banks were too often required to do the bidding of their political masters. For a while, inflation was endemic, leading to losses for those on 77 4099.indd 77 29/03/13 2:23 PM When the Money Runs Out fixed monetary incomes – most obviously pensioners – and huge distortions to the price mechanism – Adam Smith’s ‘invisible hand’. By making central banks independent, and thus no longer subject to the temptations of the electoral cycle, the hope was that inflation would eventually be brought back under control, leaving the world a much happier place. The financial crisis has destroyed this separation of monetary church from state. By altering the yield on government debt, quantitative easing has, in effect, brought governments and central banks back together again.

Imagine, for example, that a central bank decides quantitative easing has become dangerously addictive and indicates to investors not only that the programme will be put on hold – which both the Federal Reserve and Bank of England have signalled from time to time – but that it will come to a decisive end. The likely result is a rise in government bond yields as the central bank’s underwriting comes to a conclusion. If, however, the economy is still weak, the rise in bond yields will surely be regarded as a threat to economic recovery. The government will then blame the central bank for undermining the nation’s economic health and the central bank’s independence will then be under threat. Far better, then, simply to continue with quantitative easing or even, perhaps, to expand the central bank’s remit. There are two ways of doing so. The first is for the central bank to buy a much wider range of assets – not just government paper but also asset backed-­securities, corporate bonds, foreign currency or maybe even equities. Central banks have dabbled in all of these areas in the past and many continue to do so today.14 There is, however, an obvious drawback.

King, Speech given by Governor of the Bank of England at the Civic Centre, Newcastle, 25 Jan. 2011. See my article ‘Uneasy Is the Banker Who Wears the Crown’, The Times, 27 Feb. 2012. A. Darling, Back from the Brink (Atlantic Books, London, 2011). R. Paul, ‘Our Central Bankers Are Intellectually Bankrupt’, Financial Times, 2 May 2012. M. Draghi, Introductory statement to the press conference (with Q&A) following the Governing Council meeting of the European Central Bank, Barcelona, 3 May 2012. Although Scottish independence might change all that. See my article ‘Rouble Poses Worrying Parallels for Euro Crisis’, Financial Times, 9 Aug. 2011. CHAPTER 5: THE LIMITS TO STIMULUS: LESSONS FROM HISTORY   1. J. M. Keynes, ‘The Economy Bill’ (Sept. 19, 1931)’, in Essays in Persuasion (Norton, New York, 1963).   2. From The Times, 11 Sept. 1931.   3. See, for example, an article by Ed Balls, the Shadow Chancellor of the Exchequer, titled ‘Don’t Repeat the 30s Folly’, Guardian, 18 July 2010, at http://www.guardian.co.uk/ commentisfree/2010/jul/18/deficit-­cuts-­dont-­repeat-­30s-­folly (accessed Jan. 2013).   4.


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Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

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Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Or maybe the importance of the central bank is exaggerated. Unlike Britain and the United States, which suffer from loosely regulated financial systems and a shoot-from-the-hip stock market mentality, Japan and Germany have rather tightly regulated systems in which stock markets play a relatively unimportant role in both investment finance and corporate governance. Compared with these broader financial structures, the central bank’s (in)dependence isn’t quite so important. Populist critiques of the Fed tend to concentrate excessively on its autonomous powers while overlooking the influence of the financial markets on the central bankers; the Fed follows interest rate trends as well as leading them. For example, creditors began selling their bonds, driving up long-term interest rates, several months before the Fed jacked up the short-term rates last February.

Falling Behind: Explaining the Development Gap Between Latin America and the United States by Francis Fukuyama

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Andrei Shleifer, Atahualpa, barriers to entry, Berlin Wall, British Empire, business climate, Cass Sunstein, central bank independence, collective bargaining, colonial rule, conceptual framework, crony capitalism, European colonialism, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Hernando de Soto, income inequality, income per capita, labour market flexibility, land reform, land tenure, Monroe Doctrine, moral hazard, New Urbanism, oil shock, open economy, purchasing power parity, rent-seeking, Ronald Reagan, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, upwardly mobile, Washington Consensus

When American presidentialism was transplanted to Latin American countries, however, it worked only indifferently. How each formal set of institutional rules plays out in practice is thus highly dependent on the local social context, tradition, history, and the like. The fact that we cannot specify an optimal set of formal institutions does not mean that we have no knowledge of the likely impact of changes to formal institutional rules. A number of institutional reforms, like a central bank or judicial independence,33 have a clear logic and are broadly accepted as being desirable. Changes in electoral rules have broadly predictable effects. For example, there are a number of recent cases where electoral reform has produced desired results: • Chile, which always had a coherent party system, has been operating since 1988 under an electoral system that was designed to force the country’s four or five large parties into two broad Left-Right coalitions, which has in fact happened. 210 Institutional Factors in Latin America’s Development • Japan changed its single nontransferable vote (SNV) system to a mixture of single-member constituencies and proportional representation in 1994.

Central Banking and Fiscal Policy Perhaps the most enduring change across the region concerns institutional capacity to manage macroeconomic policy. It was noted earlier that few Latin American countries have sought to return to the poor monetary and fiscal policies of the 1970s and 1980s; this has been underpinned by greatly increased institutional capacity both on the part 284 Conclusion of central banks and on the part of finance ministries and budgeting authorities. Central bank independence has increased; the professionalism and levels of education of economic policy officials are in general substantially higher than a generation ago. Decentralization and Federalism Many countries, including Bolivia, Venezuela, Colombia, Peru, Argentina, and Brazil, have undertaken major reforms to shift responsibility and authority from central governments to local, municipal, and state governments.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, conceptual framework, corporate governance, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, payday loans, Plutocrats, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

While the 12 regional reserve banks had been chartered by the Congress in 1913, it was only with the creation of the Board of Governors of the Fed in 1927 that the central bank became a permanent fixture in Washington among the other agencies of the federal government. Once the Board was made part of the incestuous political community that is Washington, any notion that the central bank was independent of the Executive Branch of Government was quickly dispelled. And given the significant degree of political influence that the large New York banks have exercised over the political workings of Washington, the Fed Board quickly became entirely politicized. The significance of this development for the central bank and the independence of U.S. monetary policy will be discussed further in Chapter 6. A final point with respect to the Federal Reserve during this period has to do with the influence of the House of Morgan and its de facto agent Benjamin Strong, who served as the first governor of the Federal Reserve and chief executive of the Federal Reserve Bank of New York from 1914 until his death in 1928.

But Fed Chairman Thomas McCabe, who had replaced Marriner Eccles in 1948 when Truman declined to reappoint Eccles as Fed chairman, refused and thereby won back the independence of the central bank.9 The heroic faceoff between Eccles and McCabe against the populist political bullying from Treasury Secretary Snyder and Harry Truman was one of the great standup moments of the American central bank as an independent agency. Eccles in particular bore the full brunt of Truman’s populist anger, but refused to resign as a Fed governor. Though not reappointed as chairman, Eccles remained on the board and fought for the Fed’s independence during the remainder of his term as governor until he resigned in 1951. McCabe was pressured repeatedly by President Truman and Snyder to continue supporting artificially low interest rates, publicly and privately.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

The actual reforms undertaken have been uneven and incomplete, an IMF report complained in 2005: “More progress was made with measures that had low upfront costs, such as privatization, relative to reforms that promised greater long-term benefits, such as improving macroeconomic and labor market institutions, and strengthening legal and judicial systems.”24 Anne Krueger captured the verdict in the title of a 2004 speech: “Meant Well, Tried Little, Failed Much.”25 Developing countries had to work harder; so the thinking went. It wasn’t enough to slash import tariffs and eliminate barriers to trade; open trade policies had to be underpinned by extensive reforms in public administration, by labor market “flexibility,” and by international trade agreements. Macroeconomic stability had to be cemented by reforming fiscal institutions, giving central banks independence, and of course by better politics. Property rights required extensive reforms in governance and legal regimes. Free capital flows added their own long list of regulatory, supervisory, and macroeconomic prerequisites. Policy makers received a veritable laundry list of reforms, many of which required institutional changes that had taken developed countries decades, if not centuries, to accomplish.


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

If the debt is denominated in units over which the government has no control, such as gold or a foreign currency, there is a default risk even for government debt. The relevance of this risk is made all too clear by the data that Reinhart and Rogoff present. The government debt crises in the euro area provide a vivid example. There the debt is denominated in euros. The euro is the currency of the member states of the euro area, but this currency is issued (“printed”) by the European Central Bank, a supranational institution that is independent of national governments. If the government can pay its debt by means of money creation, there is no risk of default, but the money creation is likely to cause inflation that will make the money itself lose value in real terms. The risk of inflation might lead investors to prefer real estate or stocks. It will not, however, affect the choice between a government bond and a home mortgage, which are both equally affected by the decline in the value of money.

Reinhart and Rogoff (2009) emphasize the use of the printing press and the inflation it induces as a means by which governments can devalue their domestic debt. 39. Some of these safeguards and rules concern the status of the central bank, others the kinds of securities that central banks are allowed to accept as collateral or to buy. The most important institutional safeguard is to make the central bank independent of the government (see, e.g., Grilli et al. 1991, and Alesina and Summers 1993). Rules of conduct involve, for example, prohibitions against direct lending to governments, against buying shares in the stock market, or against lending to banks without collateral. The independence of the ECB and of the national central banks that are members of the European System of Central Banks, as well as a prohibition of direct central bank lending to governments, are central elements of the European Monetary Union, laid down in Articles 130 and 123 of the Treaty on the Functioning of the European Union.

National Bureau of Economic Research, Cambridge, MA. Akerlof, George A. 1970. “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84 (3): 488–500. Akerlof, George A., and Paul M. Romer. 1993. “Looting: The Economic Underworld of Bankruptcy for Profit.” Brookings Papers on Economic Activity 1993 (2): 1–73. Alesina, Alberto, and Lawrence J. Summers. 1993. “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence.” Journal of Money, Credit, and Banking 25 (2): 151–162. Alessandri, Piergiorgio, and Andrew G. Haldane. 2009. “Banking on the State.” Paper presented at the Federal Reserve Bank of Chicago’s 12th Annual International Banking Conference, September 25. Allen, William, Reinier Kraakman, and Guhan Subramanian. 2009. Commentaries and Cases on the Law of Business Organization, 3rd ed.


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The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money: store of value / unit of account / medium of exchange, mortgage debt, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Wave and Pay, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Countless books on money—including some rather good ones (Coggan 2011)—also begin here, and the orthodoxy is often repeated by governments and public agencies.8 Menger’s account of the evolution of money continues to thrive not only in economics textbooks, however, but also in the arena of monetary policy. According to Goodhart, for example, the Eurozone project was shaped by assumptions about the nature of money that were consistent with (and arguably, derived from) Menger’s theory from the outset. By design, the euro entailed breaking up the relationship between money and political authority by assigning the task of monetary creation to a central bank that would be rigorously independent (Goodhart 1998: 425). This method is meant to treat money as if it were a commodity: a creature of the market, not of sovereignty, law, or society. According to Goodhart, the euro’s design was informed by the theory of “optimal currency areas,” in which it is assumed—consistent with Menger’s theory—that money’s spatial domain can evolve on the basis of the progressive minimization of transaction costs (Goodhart 1998: 419).

Writing in the wake of the Bretton Woods collapse, Aglietta suggested that gold—specifically—had been the monetary analogue to religion.42 In this sense, Nixon’s decision to decouple the dollar from gold could be seen as an act of desacralization. Without a religious analogue such as gold, the global monetary system could not operate well because it is built on sovereignty, and therefore the threat of violence. Once gold loses its key role and money is desacralized, the central bank’s independence is judged in terms of its distance from private interests (creditors and debtors). Stable money depends on the central bank, whose role is to conceal the arbitrary nature of the monetary sign (Grahl 2000). According to Carlo Tognato, money retained its quasisacred character even after the demise of gold. Drawing on Durkheim and Bourdieu,43 Tognato assigns to money a pivotal role “in the consolidation of national space and in the production and reproduction of citizens within it” (Tognato 2012: 136).

What matters, however, is that in attempting to exercise its sovereignty the state is constantly embroiled in a struggle between creditors and debtors. Indeed, the ideal of stable money whose value is objective and above any such struggle is only ever a working fiction whose construction and maintenance is the outcome of a complex configuration of institutional and epistemological arrangements. Monetary policy and policy makers, central banks, and economists must appear to operate independently of political and class conflict. In other words, they must do everything in their power to obscure the social life of money: to wit, by acting as if the prevailing monetary standard were an objective thing. So who exactly are the creditors and debtors involved in this struggle? Besides the state, Ingham refers to three groups: producers, consumers (who are both debtors), and capitalists (who are creditors) (Ingham 2004b: 45, 195, 202).27 Empirically, of course, the constitution of these groupings is likely to be complex and fluid.


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After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

Probably not. Unlike a private bank, a central bank can even conduct its normal business with negative net worth. A few have actually done so. But a central bank with no capital cushion is potentially vulnerable if, in some year, it doesn’t earn enough revenue to pay its expenses. In such a case, the bank becomes beholden to its government for funds, and, if the government is hostile, central bank independence could be threatened. Needless to say, the Federal Reserve is unlikely to encounter such a problem for the foreseeable future. Its current net worth exceeds $55 billion, and its net profits (most of which it turns over to the Treasury) have lately been running around $75 billion to $80 billion per year.* That’s comparable to the combined profits of the entire oil and chemical industries.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, We are the 99%

In practice this was a source of considerable difficulty.17 If large deposits of gold or silver were suddenly discovered, as in Spanish America in the sixteenth and seventeenth centuries or California in the mid-nineteenth century, prices could skyrocket, which created other kinds of problems and brought undeserved windfalls to some.18 These drawbacks make it highly unlikely that the world will ever return to the gold standard. (Keynes referred to gold as a “barbarous relic.”) Once currency ceases to be convertible into precious metals, however, the power of central banks to create money is potentially unlimited and must therefore be strictly regulated. This is the crux of the debate about central bank independence as well as the source of numerous misunderstandings. Let me quickly retrace the stages of this debate. At the beginning of the Great Depression, the central banks of the industrialized countries adopted an extremely conservative policy: having only recently abandoned the gold standard, they refused to create the liquidity necessary to save troubled banks, which led to a wave of bankruptcies that seriously aggravated the crisis and pushed the world to the brink of the abyss.

In my view, however, the unwillingness to lay out a precise path to the desired end—the repeated postponement of any discussion of the itinerary to be followed, the stages along the way, or the ultimate endpoint—may well derail the entire process. If Europe created a stateless currency in 1992, it did so for reasons that were not simply pragmatic. It settled on this institutional arrangement in the late 1980s and early 1990s, at a time when many people believed that the only function of central banking was to control inflation. The “stagflation” of the 1970s had convinced governments and people that central banks ought to be independent of political control and target low inflation as their only objective. That is why Europe created a currency without a state and a central bank without a government. The crisis of 2008 shattered this static vision of central banking, as it became apparent that in a serious economic crisis central banks have a crucial role to play and that the existing European institutions were wholly unsuited to the task at hand.

Given the power of central banks to create money in unlimited amounts, it is perfectly legitimate to subject them to rigid constraints and clear restrictions. No one wants to empower a head of state to replace university presidents and professors at will, much less to define the content of their teaching. By the same token, there is nothing shocking about imposing tight restrictions on the relations between governments and monetary authorities. But the limits of central bank independence should also be precise. In the current crisis, no one, to my knowledge, has proposed that central banks be returned to the private status they enjoyed in many countries prior to World War I (and in some places as recently as 1945).25 Concretely, the fact that central banks are public institutions means that their leaders are appointed by governments (and in some cases by parliaments). In many cases these leaders cannot be removed for the length of their mandate (usually five or six years) but can be replaced at the end of that term if their policies are deemed inadequate, which provides a measure of political control.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population, World Values Survey

To achieve this, the argument goes, the government should be shrunk to the minimum by cutting its spending (and thus taxes), deregulating markets and privatizing SOEs. In those few areas in which we still need the government, such as the provision of monetary stability or the regulation of natural monopolies, the policy process should be insulated from politics by granting political independence to the government agencies that actually do these things. An independent central bank and independent regulatory authorities of natural monopolies (e.g., gas, telecommunications) are the most frequently recommended examples. Market and Politics Government failures need to be taken seriously, but with a large pinch of salt Government failures are real and need to be taken seriously. The government failure argument has done a service to our understanding of the economy by reminding us that real-life governments are not as perfect as the textbook government.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

This is a salutary warning for central bankers in the aftermath of the crisis, since they are now committed to macro-prudential policymaking, which entails imposing counter-cyclical increases and decreases in banks’ capital buffers, as well as other forms of intervention such as quantitative controls on lending. The timing of such action is exceptionally difficult to judge. As for the regulators – whether sitting in central banks or existing independently outside them – they were struggling in the run-up to the crisis to understand huge changes in the structure of the financial system. Paid far less than the rocket scientists in the big banks who were devising new and complex financial instruments, they were, as always, one step behind and less well paid than the people they were trying to regulate. In the case of the British, they were also being urged by government ministers not to be too tough on the City of London, which appeared to have a unique capacity for creating employment and generating tax revenue in an industry where Britain appeared to enjoy a remarkable comparative advantage.

With growth faltering and government spending continuing to expand in the 1970s and 1980s despite less buoyant tax revenues, central banks financed this fiscal excess. The result was inflation without much addition to economic growth. While inflation helped reduce the debt, it caused widespread discontent – more shades of Faust, Part Two – not least because, as Milton Friedman remarked, inflation is taxation without legislation. So Keynesian policies became discredited and central banks, granted independence from the politicians, focused on low and stable inflation as their primary objective. Yet government deficit spending continued, thereby confirming the homespun wisdom of US President Calvin Coolidge, touched on in Chapter One, who warned: ‘Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.’204 The remorseless rise in public indebtedness was further exacerbated by rising life expectancy and falling birth rates, which made health-care and pension commitments more costly.


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The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, interest rate swap, Isaac Newton, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Bank of England and the Federal Reserve in the late 1970s and early 1980s, and continued with the spread of central bank independence and explicit targets in the 1990s. Just as importantly, as the Argentine case shows, some of the structural drivers of inflation have also weakened. Trade unions have become less powerful. Loss-making state industries have been privatized. But, perhaps most importantly of all, the social constituency with an interest in positive real returns on bonds has grown. In the developed world a rising share of wealth is held in the form of private pension funds and other savings institutions that are required, or at least expected, to hold a high proportion of their assets in the form of government bonds and other fixed income securities.


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Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

Modern central banks recognize the essential role of expectations—as well as their own limited understanding of what determines inflation expectations. Thus, central bankers always worry about an unhinging of inflation expectations that could reverse virtuous developments in recent decades. Some of this concern is self-serving but justifiable. Well-anchored inflation expectations depend crucially on central bank actions and credibility. In the past two decades, a growing number of central banks have become independent and/or have begun to explicitly or implicitly target a particular inflation rate. Inflation management is not the only goal for central banks, however [3]. Evolving inflation process For our understanding of inflation expectations and the IRP in the past 50 years it is important to note that the mountain shape of inflation levels since the mid-20th century was matched by similar uptrends and downtrends in inflation uncertainty and inflation persistence.

It is also conceivable that an emerging market (or China-specific) bubble will ensue as the secular handoff story garners more followers and as the loose monetary policy that is tailored for the needs of the weak developed economies is exported to the strong emerging economies. As always, the bubble would have a rational precipitating factor, but investors should remember that the link between economic growth and equity market returns is quite tenuous (see Chapter 16). The Scylla and Charybdis of deflation and inflation The disinflationary tailwinds of recent decades—from improvements in central bank independence and credibility as well as from deregulation, globalization, and the massive entry of Chinese workers into the competitive global labor market—may weaken and even turn into headwinds. Moreover, the solutions to some of the major challenges of the 21st century—global warming and the aging population of many countries—are arguably inflationary. In the shorter term, the financial crisis and the 2008–2009 recession, as well as the subsequent need for belt tightening, are deflationary in their impact.


pages: 438 words: 109,306

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World by Adam Lebor

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banking crisis, Basel III, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, central bank independence, corporate governance, corporate social responsibility, deindustrialization, eurozone crisis, fiat currency, financial independence, financial innovation, forensic accounting, Goldman Sachs: Vampire Squid, haute cuisine, IBM and the Holocaust, Occupy movement, offshore financial centre, Ponzi scheme, price stability, quantitative easing, reserve currency, special drawing rights, V2 rocket

Instead a consortium of commercial banks took up the shares: J. P. Morgan, the First National Bank of New York, and the First National Bank of Chicago. The real purpose of the BIS was detailed in its statutes: to “promote the cooperation of central banks and to provide additional facilities for international financial operations.” It was the culmination of the central bankers’ decades-old dream, to have their own bank—powerful, independent, and free from interfering politicians and nosy reporters. Most felicitous of all, the BIS was self-financing and would be in perpetuity. Its clients were its own founders and shareholders—the central banks. During the 1930s, the BIS was the central meeting place for a cabal of central bankers, dominated by Norman and Schacht. This group helped rebuild Germany.

The BIS’s assets may remain untouchable, but as more activists understand the bank’s role in the global financial system, its secrecy and elitism, they will increasingly question its operations, role, and need to exist. Such a shift in global perception of the BIS, and the demands to make it more accountable, will bring pressure on politicians, which will then be passed on to the central bank governors, who are independent but still appointed by governments. The controversy over the Argentine reserves could, in turn, corrode the basis of the bank’s soft power: its regulation and supervisory frameworks. Commercial banks, might, for example, ask why they should adhere to the Basel Committee’s banking rules, when the host bank itself is arguably protecting a central bank against its creditors? For now, at least, the BIS can rely on its powerful friends.


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Debt: The First 5,000 Years by David Graeber

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Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Ronald Reagan, seigniorage, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor

Even the CIA now ordinarily refers to such arrangements as “slavery,” though technically debt peonage is different. 17. Compare this to the deficit/military chart above, on page 366—the curve is effectively identical. 18. See dailybail.com/home/china-warns-us-about-debt-monetization.html, accessed December 22, 2009. The story is based on a piece from the Wall Street Journal, “Don’t Monetize the Debt: The president of the Dallas Fed on inflation risk and central bank independence” (Mary Anastasia O’Grady, WSJ, May 23, 2009.) I should add that in popular usage nowadays, “to monetize the debt” is generally used as a synonym for “printing money” to pay debt. This usage has become almost universal, but it’s not the original sense of the term, which is to turn the debt itself into money. The Bank of England did not print money to pay the national debt; it turned the national debt itself into money.


pages: 344 words: 93,858

The Post-American World: Release 2.0 by Fareed Zakaria

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affirmative action, agricultural Revolution, airport security, anti-communist, Asian financial crisis, battle of ideas, Berlin Wall, Bretton Woods, BRICs, British Empire, call centre, capital controls, central bank independence, centre right, collapse of Lehman Brothers, conceptual framework, Credit Default Swap, currency manipulation / currency intervention, delayed gratification, Deng Xiaoping, double entry bookkeeping, failed state, Fall of the Berlin Wall, financial innovation, global reserve currency, global supply chain, illegal immigration, interest rate derivative, knowledge economy, Mahatma Gandhi, Martin Wolf, mutually assured destruction, new economy, oil shock, open economy, out of africa, postindustrial economy, purchasing power parity, race to the bottom, reserve currency, Ronald Reagan, Silicon Valley, Silicon Valley startup, South China Sea, Steven Pinker, The Great Moderation, Thomas L Friedman, Thomas Malthus, trade route, Washington Consensus, working-age population, young professional

Of course, pervasive corruption and political patronage have corroded many of these institutions, in some cases to the point of making them unrecognizable. India has a remarkably modern administrative structure—in theory. It has courts, bureaucracies, and agencies with the right makeup, mandate, and independence—in theory. But whatever the abuses of power, this basic structure brings tremendous advantages. India has not had to invent an independent central bank; it already had one. It will not need to create independent courts; it can simply clean up the ones it has. And some of India’s agencies, like its national Election Commission, are already honest, efficient, and widely respected. If the Indian state has succeeded on some dimensions, however, it has failed on many others. In the 1950s and 1960s, India tried to modernize by creating a “mixed” economic model between capitalism and communism.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

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Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, buy low sell high, capital controls, central bank independence, Chance favours the prepared mind, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Every once in a while something like the Indonesian recap market or DROBNY GLOBAL CONFERENCE, MARCH 2003 Jim Leitner’s Favorite Trade: Inflation Index–Linked Housing Bonds from Iceland Where can you get high real yields in an economy with a budget and trade surplus, an independent central bank, and with inflation and interest rates coming down? Leitner pointed to Iceland, which has been largely neglected by the financial community. After five years of strong growth, the Icelandic economy is cooling fast.The central bank, made independent in 2001, has started cutting rates. The krona, which depreciated sharply a few years ago, is still pretty competitive despite having recovered by some 15 percent from the lows, and a very high trade deficit of a few years ago has been transformed into a surplus. On top of all this is the “Alcoa Project,” where a good deal of capital investment and capital inflow is scheduled to begin in the next year or so.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, labour market flexibility, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, new economy, North Sea oil, oil shock, open economy, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K

But friends kept urging us to go, and 179 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. T H E AGE OF T U R B U L E N C E recommended Venice. Finally I studied my calendar and suggested adding a honeymoon to the tail end of an international monetary conference meeting in Interlaken, Switzerland, in June, two months after our wedding. At the monetary conference, German chancellor Helmut Kohl gave a predictably dry luncheon speech. Central-bank independence and the revaluation of Germany's gold reserves were the topics. Afterward Andrea and I avoided flocks of reporters who wanted comments about the U.S. economic outlook and the prospects for the continuation of the Internet boom on the stock market. Even though they knew it was my policy not to give interviews, some asked Andrea to serve as a go-between, figuring that as a fellow journalist she might be willing to help.


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Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

I.1 - One hundred trillion Zimbawean dollar note So, while the hyperinflation was made possible by the printing of money, it is not the case that money printing always leads to high or hyper-inflations. Rather, it was the printing of money to finance expenditure, with no regard for the inflationary consequences, and following a collapse in the productive capacity of the economy, which pushed Zimbabwe into hyperinflation. Had Zimbabwe’s central bank been independent of politicians, and focused on price stability rather than facilitating government spending (with more careful control over the money supply), the hyperinflation would have been impossible. Two conclusions can be drawn from the Zimbabwe experience: There is a danger when those with the power to create money can also benefit from its creation. This is the basis for our argument that neither vote-seeking politicians nor profit-seeking bankers should be given the ability to create money.


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In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

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Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

All Fed officials speak English as a first language; the ECB does business in English, which is a second language for most of its leadership, and then has to translate its decisions into twenty-one other languages. The ECB has the advantage of clarity of mission: its legal mandate is to resist inflation and ensure stable prices. Period. The Fed’s legal mandate is broader and during a crisis more flexible: maximum employment and price stability. Both central banks are designed to be independent. The ECB’s independence is enshrined in a treaty, but it gets frequent, often hostile, public advice from European heads of state and finance ministers about what it should be doing with interest rates and whether it should be trying to talk the euro down to help European exports. The Fed’s independence is more by tradition than law, but — at least now — the president and his Treasury secretary rarely offer it advice in public.

Unhappy Union by The Economist, La Guardia, Anton, Peet, John

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bank run, banking crisis, Berlin Wall, Bretton Woods, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, Flash crash, illegal immigration, labour market flexibility, labour mobility, market fundamentalism, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

Viktor Orban’s centre-right Fidesz party won a smashing electoral victory in 2010 after the outgoing Socialist government became discredited. But Orban proceeded to rewrite the constitution in ways that cemented Fidesz’s dominance over Hungary’s institutions and its intimidating control of the country’s media. Although the EU has managed to get the government to rewrite provisions impinging on central-bank and judicial independence, it has found its leverage over the government worryingly limited. As was discovered as long ago as 2000, when the EU tried to freeze relations with an Austrian government that included the far-right Jörg Haider as a coalition partner, a country that is a full member is much less susceptible to outside pressure than an applicant. Moreover, Orban’s membership of the centre-right European People’s Party transnational group is often said to have restrained his fellow heads of government from being too harsh on him.


pages: 411 words: 114,717

Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma

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3D printing, affirmative action, Albert Einstein, American energy revolution, anti-communist, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, business climate, business process, business process outsourcing, call centre, capital controls, Carmen Reinhart, central bank independence, centre right, cloud computing, collective bargaining, colonial rule, corporate governance, crony capitalism, deindustrialization, demographic dividend, Deng Xiaoping, eurozone crisis, Gini coefficient, global supply chain, housing crisis, income inequality, indoor plumbing, inflation targeting, informal economy, Kenneth Rogoff, knowledge economy, labor-force participation, labour market flexibility, land reform, M-Pesa, Mahatma Gandhi, market bubble, megacity, Mexican peso crisis / tequila crisis, new economy, oil shale / tar sands, oil shock, open economy, Peter Thiel, planetary scale, quantitative easing, reserve currency, Robert Gordon, Shenzhen was a fishing village, Silicon Valley, software is eating the world, sovereign wealth fund, The Great Moderation, Thomas L Friedman, trade liberalization, Watson beat the top human players on Jeopardy!, working-age population

Poland has long been a regional trendsetter—in fact it was the first satellite state to break from the Soviet orbit. In recent years it has developed a strong education system that produces a talented workforce; a growing cadre of small to medium-sized companies that are competitive across Europe; well-run banks far stronger than those of its old nemesis, Russia; and good-quality consumer companies. The central bank is genuinely independent of political interference. In many ways these rising stars in the East look more solid than their Western models. With a population of thirty-eight million, Poland is the only nation in Eastern Europe with a domestic market large enough to generate economic growth, regardless of troubles in the rest of the world. Things are so much better right now that not only are Poles bringing their money home, they’re bringing themselves with it.

Erdogan is clearly ambitious to complete his basic project—freeing moderate Islam to be itself in Turkey—and he understands that strong economic growth has provided him the political power to promote that goal. The risk is that to achieve his grand aim he may now be pushing too hard to grow too fast, by continuing to invest public funds heavily and to keep interest rates low during a new boom. (Though the central bank is supposed to have independent control of interest rates, in countries like Turkey, signals from the top political leader are tough for the bankers to ignore.) The growth targets that made sense in 2002, when Erdogan took power, no longer make sense now that Turkey’s per capita income is over $10,000. Today confidence in Istanbul is sky high because of the economy’s admirable performance after the Great Recession of 2008.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce


pages: 226 words: 59,080

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Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed

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Albert Einstein, anti-communist, bank run, banking crisis, Bretton Woods, British Empire, capital controls, central bank independence, centre right, credit crunch, currency manipulation / currency intervention, Etonian, full employment, German hyperinflation, index card, invisible hand, Lao Tzu, large denomination, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, mobile money, moral hazard, new economy, open economy, Plutocrats, plutocrats, price stability, purchasing power parity, pushing on a string, rolodex, the market place

While they had then sounded a false alarm on a bubble in stocks, with the market still strong—the Dow was hovering close to 170—he knew that were he now to loosen monetary policy to bail out the pound, he risked severely splitting the Fed. In the summer of 1927, still weak from his recent illness, Strong decided that rather than go to Europe as he usually did, he would invite Norman, Schacht, and Moreau to the United States.39 Before the war, when the gold standard had worked automatically, the system had simply required all central banks, operating independently, to follow the rules of the game. Collaboration had not needed to go beyond occasionally lending one another gold. Ever since the war, as the gold standard had been rebuilt and evolved into a sort of dollar standard with the Federal Reserve acting as the central bank of the industrial world, Strong had found it useful to consult frequently with his colleagues—he generally used his summers in Europe as an occasion to meet all of his European counterparts.


pages: 310 words: 90,817

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Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, low skilled workers, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

Money supply was difficult to control and its relationship with the economy as a whole was nothing like as steady or predictable as monetarists had claimed. Nevertheless, policymakers were keen to stick to simple macroeconomic rules in the pursuit of underlying economic stability. Monetary targets were replaced by other targets, the most enduring of which have proved to be inflation targets (in the developed world) and exchange-rate targets (in the emerging world). Meanwhile, to rid policymakers of undue political influence, many central banks were granted independence, to a greater or lesser degree, from their ultimate political masters. Central bankers have become the high priests of price stability and pursue their beliefs with a theocratic orthodoxy. They believe not only that price stability is good but that its achievement is the single best ‘top-down’ way of delivering overall economic well-being. They also believe they have the tools to keep inflation under control at all times.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

Maintaining that trust is particularly crucial in the case of a nation and a currency that has been, and still is, at the heart of the international financial system.’14 Since the dollar is not backed by any ‘real’ commodity, the entity that controls its quantity must be committed to price stability to ensure that citizens and businesses continue to accept their paper money. Today, having been given greater independence in the overall conduct of monetary policy, most central banks are explicitly committed to the pursuit of price stability as part of their constitutional mandates. Despite what many commentators may believe, central banks do not independently and directly inject money into the economy. Almost all of the money we use today has been created by private banks through their lending. Central bank money in the form of reserves is held only by commercial banks and cannot get into the economy; central bank money in the form of paper notes does get into the economy, but only to satisfy the public’s demand for cash (as bank deposits are converted at ATM machines—changing the form of the money but not the quantity in the hands of the public).


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

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Bay Area Rapid Transit, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, money: store of value / unit of account / medium of exchange, offshore financial centre, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs

As Steil and his sympathizers see it, countries with their own currencies invariably walk in monetary step with their major trading partners: Mexico’s currency generally tracks to the U.S. dollar, Sweden’s krona closely follows the value of the euro, and so forth, and this is the case no matter how autonomous those countries’ central banks may think they are, and no matter how patriotic the artwork adorning their banknotes may be. As Olafur Isleifsson, a professor of business at Reykjavik University, told me: “We didn’t have monetary independence before. The central bank moves were all forced moves, like in chess. Monetary independence is a phantom.” I kept hearing this basic idea whenever I spoke with people about ending small sovereign currencies in favor of regional ones, but the debt fiascos in Europe show that this is anything but a definitive forecast of what lies ahead. For economists, this dispute cuts to the core of the most macro question there is: what monetary system offers the best route to a more prosperous future for the most people?


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional

That does not give them the same lifetime tenure as Supreme Court justices, but it does make it unlikely that any new president could pack the Federal Reserve with cronies. It is notable—and even a source of criticism—that the most important economic post in a democratic government is appointed, not elected. We designed it that way; we have made a democratic decision to create a relatively undemocratic institution. A central bank’s effectiveness depends on its independence and credibility, almost to the point that a reputation can become self-fulfilling. If firms believe that a central bank will not tolerate inflation, then they will not feel compelled to raise prices. And if firms do not raise prices, then there will not be an inflation problem. Fed officials are prickly about political meddling. In the spring of 1993, I had dinner with Paul Volcker, former chairman of the Federal Reserve.


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The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

We are following a number of indicators and different possible scenarios, waiting to see which seems to be getting the upper hand before taking a strong view in the markets. So you have multiple scenarios that you are tracking: (A) the world is okay; (B) the Great Depression; and (C) bad inflation? These are all possible scenarios. There is the inflation scenario and the deflation scenario. There is a protectionist scenario. There is a too much stimulus scenario, which is an inflationary scenario. There is a central banks getting less independent scenario. Since there are many different ingredients out there right now, many forces that we are not used to evaluating, we have to be patient. For the first time in centuries, Asia is the most important economic player on the margin. Right now, China is more important for the global economy than the U.S. But I have no idea whether Chinese growth rates are sustainable. We are just trying to follow the data and be ready once one of the scenarios becomes dominant.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, women in the workforce, yield curve


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey


pages: 309 words: 95,495

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Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, moral hazard, mortgage debt, mortgage tax deduction, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra

This helps to explain why every time the two top countries in Europe get on the same page about the ongoing debt debacle, they (sometimes referred to as Merkozey—a blending of the names of Nicolas Sarkozy, France’s President until May of 2012, and German Chancellor Angela Merkel) talk about treaties and “more Europe, not less.” The crisis is being addressed largely on the level of high politics—saving and expanding the “European Project”—rather than practical economic reality. And for good reason: there is no good answer to the problems the euro has created for the European economy from its inception. The European Project created a European Central Bank (ECB) with considerable political independence and a very high degree of professionalism to give credibility to the new currency. It did not give that bank powers to lend directly to governments, for the same reason that all other major central banks are so constrained, which is that politicians would turn them into piggy banks and inflate away the value of the money issued by the central bank. So-called central bank credibility is all that makes fiat money worth more than a tinker’s damn.


pages: 271 words: 52,814

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The Atlantic and Its Enemies: A History of the Cold War by Norman Stone

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affirmative action, anti-communist, Ayatollah Khomeini, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, British Empire, central bank independence, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, European colonialism, facts on the ground, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, illegal immigration, income per capita, interchangeable parts, Jane Jacobs, Joseph Schumpeter, labour mobility, land reform, means of production, Mikhail Gorbachev, new economy, North Sea oil, oil shock, Ponzi scheme, price mechanism, price stability, RAND corporation, rent-seeking, Ronald Reagan, Silicon Valley, special drawing rights, Steve Jobs, strikebreaker, The Death and Life of Great American Cities, trade liberalization, trickle-down economics, V2 rocket, War on Poverty, Washington Consensus, Yom Kippur War, éminence grise

At bottom, that was what the monetarists in London and Washington were doing, and in 1981 there were indeed fears that civil peace might break down altogether. Where the monetarists faced difficulties, which were never really resolved, was in the external aspect of inflation. In conditions of free trade and money movement, inflation could be imported. The German Bundesbank, with the lessons of 1923 and 1948 well within living memory, was naturally concerned to keep inflation down, and was independent, in so far as any central bank can be independent. On occasion it had arguments with governments, and on the whole it won them. However, whatever the Bundesbank did, it could not stop foreigners buying Marks, and increasing the domestic money supply; Germany, too, suffered inflation in the 1970s, though at a considerably lower rate than did England. Now, the British had acquired, of all oddities, a petro-currency. Oil had been found in the North Sea, and the rise in oil prices meant that it was worth exploiting, expensive and difficult as this clearly was.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, working poor, yield curve

I suppose the countervailing idea is that if nobody makes these arguments, they don’t get made. central banks The institutions that stand at the heart of the modern state’s financial system. They set interest rates, have the power to print money to increase the amount in circulation, and play a supervisory role over the financial system. (In the UK this role was taken away in 1997 and given back in 2013.) Part of the idea of having a central bank is that it is independent from political interference; that’s the theory, though the practice is often different. The three most important central banks are the US Federal Reserve, the European Central Bank, and the People’s Bank of China. CFTC The Commodities Futures Trading Commission, the body that regulates the US trade in commodities and their derivatives. It’s fair to say that not many people overseas had ever heard of it before they began writing them large checks for the misdeeds of their banks in the Libor scandal: $325 million from RBS, which is 82 percent owned by the taxpayer.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

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accounting loophole / creative accounting, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, global reserve currency, Guggenheim Bilbao, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, new economy, New Urbanism, Occupy movement, peak oil, phenotype, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, short selling, Silicon Valley, special economic zone, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

When the euro came into being, the individual states surrendered their monopoly power over their currencies to a set of supra-national institutions (the European Central Bank) dominated by Germany and to a lesser degree by France. The second caveat is that this monopoly right of the state over the currency can be subcontracted, as it were, to merchant and banking capitalists through the chartering of central banks that are nominally independent of direct democratic or state political control. This is the case with the Bank of England, the US Federal Reserve and the European Central Bank. These powerful institutions exist in a liminal space between the state and the private banks. They are institutions which, along with the Treasury Departments of the state government, form the state–finance nexus that has long functioned as the ‘central nervous system’ for regulating and promoting capital.


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The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, Flash crash, floating exchange rates, forward guidance, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, invisible hand, jitney, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

I find this implausible, for one major reason: every bit of documentary evidence points to the conclusion that Bernanke subscribes to one of the two major neoliberal catechisms on money. One, the one Bernanke rejects, associated with Hayek and the so-called libertarians like Ron Paul, is that the Fed is the devil, and that it should be replaced with free banking and pure market control. It would be a little hard to become chairman of the Fed while toeing that line, so Bernanke endorses the Friedmanite alternate: the central bank should be “independent” of all democratic control, preferably run by like-minded neoliberals, but only the market can recognize a bubble, so don’t try to rein in the speculators, but simply clean up afterward by lending freely to the rich people who created the problem in the first place. It is the old neoliberal two-step all over again: Rick Perry and Ron Paul can offer the groundlings red meat by threatening to beat up on Bernanke, and keep the base rabidly opposed to anything that looks suspiciously like the guv’mint; but the major players understand that they need Bernanke (or someone like him) on the inside to support their remunerative activities and ward off anything that smacks of nationalization.


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Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, open economy, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

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affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond


pages: 413 words: 119,379

The Looting Machine: Warlords, Oligarchs, Corporations, Smugglers, and the Theft of Africa's Wealth by Tom Burgis

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Berlin Wall, blood diamonds, BRICs, British Empire, central bank independence, clean water, colonial rule, corporate social responsibility, crony capitalism, Deng Xiaoping, Donald Trump, F. W. de Klerk, Gini coefficient, Livingstone, I presume, McMansion, megacity, offshore financial centre, oil shock, open economy, purchasing power parity, rolodex, Ronald Reagan, Silicon Valley, South China Sea, sovereign wealth fund, structural adjustment programs, trade route, transfer pricing, upwardly mobile, urban planning, Washington Consensus, WikiLeaks

As the plundering started to run out of control, Sanusi compiled a dossier showing that scams involving NNPC, the national oil company that serves, like Sonangol to the Angolan Futungo, as the engine of Nigeria’s looting machine, were bleeding a billion dollars a month from the treasury.60 When Sanusi went public with his allegations in early 2014 Jonathan forced him out of the central bank, dealing a blow to the independence of one of the few Nigerian institutions with the power to check the excesses of the country’s rulers – though he could not prevent Sanusi’s appointment as Emir of Kano, an influential position in the North’s religious hierarchy. A short, wiry man with a penchant for bow ties, Sanusi understood that Nigeria’s petro-politics lay beneath the violence that was mounting across the nation, including the barbaric insurgency in the North launched by the jihadists of Boko Haram.


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Second World: Empires and Influence in the New Global Order by Parag Khanna

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Admiral Zheng, affirmative action, anti-communist, Asian financial crisis, Bartolomé de las Casas, Branko Milanovic, British Empire, call centre, capital controls, central bank independence, cognitive dissonance, colonial rule, complexity theory, crony capitalism, Deng Xiaoping, Dissolution of the Soviet Union, Donald Trump, Edward Glaeser, energy security, European colonialism, facts on the ground, failed state, flex fuel, Francis Fukuyama: the end of history, friendly fire, Gini coefficient, global reserve currency, global supply chain, haute couture, Hernando de Soto, illegal immigration, income inequality, informal economy, invisible hand, Islamic Golden Age, Khyber Pass, knowledge economy, land reform, low skilled workers, means of production, megacity, Monroe Doctrine, oil shale / tar sands, oil shock, open borders, open economy, Pax Mongolica, pirate software, Plutonomy: Buying Luxury, Explaining Global Imbalances, Potemkin village, price stability, race to the bottom, RAND corporation, reserve currency, rising living standards, Ronald Reagan, Silicon Valley, Skype, South China Sea, special economic zone, stem cell, Stephen Hawking, Thomas L Friedman, trade route, trickle-down economics, uranium enrichment, urban renewal, Washington Consensus, women in the workforce

By what magic has Colombia clung to the second world rather than fragmenting, as third-world Afghanistan has? The comparison with Venezuela provides part of the answer. Colombia was the Spanish viceroy’s home, Venezuela his barracks. Rather than Bolívar, it was Bolívar’s trusted commander Francisco Santander who imparted the strong institutions of the presidency, the courts, and the central bank in Colombia. “Arms have given you independence, but the law will give you liberty,” he declared. Whereas Venezuela has experienced decades of fluctuating stability, Colombia has steadily evolved from its state of total poverty in the 1930s to legal and economic modernity. Except for the mid-1950s, Colombia boasts a century of entirely legitimate democratic transfers of power. Uribe’s reelection in 2006 made him the only Andean leader to win a second term since the days of Bolívar.


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Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

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asset-backed security, bank run, barriers to entry, Bretton Woods, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor

Certainly department stores, with their own credit systems, wanted no part of it. Small retailers, already facing difficulties, must have been dubious, despite the opportunity to lure customers back in. Such a novel program as the Charg-It system was not unique, but more of an incremental improvement over existing wartime department store practices that many banks were discovering.65 Biggin’s Charg-It system was not the only centralized, bank-run charge credit program independently created in the early 1950s, and all the rest relied on the same factors: offering department store credit techniques in exchange for hefty cuts of the revenue. Like the Charg-It plan, they were created for cash stores outside the downtown to compete with the large credit-granting department stores.66 These credit programs, though resulting from innovative bankers seizing the opportunities of the moment, only became possible because of the spread of department store credit practices.


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Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Nate Silver, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

Asian and European markets were in disarray, too. A Financial Times headline summed up the situation: “New Panic Is Proof of Big League Crisis.” Ben and the ECB’s Jean-Claude Trichet, with my encouragement, worked with Mervyn King at the Bank of England and several other central bankers to launch the first-ever coordinated global interest rate cut. That was a remarkable act of cooperation for central banks that had always prized their independence and sovereignty, but it didn’t stop or even slow the collapse of the global markets. In the United States, private credit was now virtually unavailable. The financial system was increasingly unable to play its most basic role in the economy: facilitating the flow of money from those who wanted to lend to those who wanted to invest or consume. The run on money market funds after Lehman, followed by the broader run on the banking system that consumed WaMu and Wachovia, had spilled into the unsecured commercial paper market where businesses with strong credit histories could raise money to finance their day-today operations.


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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

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Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Benoit Mandelbrot, Bernie Madoff, Black Swan, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money: store of value / unit of account / medium of exchange, moral hazard, natural language processing, open economy, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

This is true everywhere precious metal money is used, but it was particularly severe in Holland at this time for several reasons. The Thirty Years War required enormous expenditures, which were often financed by debasement of coins. Holland had a small, open economy, meaning that coins flowed into it from all over Europe; when people send coins, they send the lightest ones, the most debased ones. Finally, central authorities were weak in Holland, so individual state banks and independent mints were able to get away with more debasement than was tolerated in other countries. This did not amount to a large problem for someone who wanted to sell goods and buy other goods immediately with the proceeds. But a tulip was a far better store of value. It was a reasonably good medium of exchange as well, especially as the amount of trading increased and tulip futures were introduced.


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Panderer to Power by Frederick Sheehan

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Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, Long Term Capital Management, margin call, market bubble, McMansion, Menlo Park, mortgage debt, new economy, Northern Rock, oil shock, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War

Leuchtenburg, The Perils of Prosperity, 1914–1932 (Chicago: University of Chicago Press, 1958), pp. 41–42. 15 FOMC meeting transcript, July 2–3, 1996, p. 55. This page intentionally left blank APPENDIX The Federal Reserve System The Federal Reserve Act was passed in 1913; the body first met in August 1914. Literalists insist that the Federal Reserve is not a central bank; scholars insist that the Federal Reserve is a federal agency independent of political control. These distinctions blur actual practices. The Federal Reserve is the only authorized issuer of currency in the United States. The president nominates all Federal Reserve governors. Many tussles between politicians and the Federal Reserve are discussed in this book. Except during the early Volcker years, the politicians won. The Federal Open Market Committee (FOMC) decides the Federal Reserve’s monetary policy.


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The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

The inevitable result is more and more money and cheaper and cheaper dollars.’29 The conclusion of this dispute between the White House and the Federal Reserve about its independence and the conduct of monetary policy was the Accord of 4 March 1951. The day on which this agreement was signed has been described as ‘Federal Reserve Independence Day’.30 A former head of the Goldman Sachs economics team has even written of ‘an epic struggle between a US president who stood on the verge of a nuclear war, and a central bank that was seeking to establish its right to set an independent monetary policy’. He even paints this ‘victory over fiscal dominance’ as the ‘moment when the modern, independent Fed came into existence’.31 The Fed’s official historian, Allan H. Meltzer, likewise suggested that the Accord of 1951 released ‘the Federal Reserve from Treasury control’ and began the ‘evolution toward the modern Federal Reserve’.32 It was perhaps inevitable that the new Chairman of the Governors of the Federal Reserve would be the same William McChesney Martin who at the tender age of forty had been Chairman of the Export-Import Bank.


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