inflation targeting

90 results back to index


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, 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, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, 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, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

Much of this literature, though, is predicated on models with no financial market imperfections and no source of “Knightian uncertainty,” or “unknown unknowns,” that can create problems for any fixed rule. During the 1990s and into the 2000s, dozens of central banks adopted some form of inflation-targeting regimes.14 Today, inflation targeting has become the norm in central banking around the world, certainly in advanced economies, and to some extent also in emerging markets and even developing countries.15 Even the US Federal Reserve, long resistant to the trend, finally adopted inflation targeting under the leadership of Ben Bernanke, who, as an academic, had penned an important book on the topic in 2001 with Thomas Laubach, Frederic Mishkin, and Adam Posen.16 A central question, already raised in the text, is whether practitioners have taken inflation-targeting evangelism too far, and now the approach needs to be rethought to recognize the trade-off between flexibility and commitment, once thought to be solved.

How did policy interest rates collapse to zero? Certainly a part of the problem is that inflation-targeting evangelism—and there is really no other word for it—created institutions that were simply too inflexible to deal with the dramatic changes the world has experienced over the past 20 years. Inflation can be too low, and inflexible inflation-targetting regimes are not too good at dealing with it, especially as interest rates drift toward the zero lower bound, also known as the “liquidity trap.” The zero bound has become a stubbornly persistent problem for essentially three reasons. First and foremost, inflation has collapsed and inflation expectations along with it. Starting with New Zealand in 1989, most advanced-country central banks have gradually coalesced around an inflation target of about 2%, which in itself implies dramatically lower interest rates than when inflation averages 10%.

This is a big risk to take, especially when it is far from obvious that benefits from having more monetary bullets might turn out to be far less effective than expected (as explained above), when higher inflation targets are more difficult to make fully credible on a long-term basis, and when there are other significant distortions associated with higher inflation. Let’s not consign the 4% solution to the dustbin of intellectual history, however. Someday, maybe a sudden change in circumstances will necessitate a dramatic increase in defense spending that sets off an inflationary spiral. If and when that day ever comes, it will not be a pretty picture. But it will be an opportunity to rethink the inflation target, and which universe we really want to live in. Of course, once negative interest rates become feasible, it becomes unnecessary to raise inflation targets, and the central bank could even target 1% inflation, though for reasons just discussed, it would be better to preserve the 2% target.


pages: 128 words: 35,958

Getting Back to Full Employment: A Better Bargain for Working People by Dean Baker, Jared Bernstein

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, business cycle, collective bargaining, declining real wages, full employment, George Akerlof, income inequality, inflation targeting, mass immigration, minimum wage unemployment, new economy, price stability, publication bias, quantitative easing, Report Card for America’s Infrastructure, rising living standards, selection bias, War on Poverty

Given the large degree of uncertainty in the estimation of the NAIRU, there seems no justification for not trying to push down the unemployment rate as low as possible until there is clear evidence that labor market tightness is causing inflation. The logic of the 2.0 percent inflation target The central banks that control monetary policy in most wealthy countries have adopted a 2.0 percent inflation target as their main or only goal in the conduct of monetary policy. If a central bank fervently sticks to this goal, it will ignore all other considerations, such as the rate of growth of the economy, the level of unemployment, or even the prospective collapse of the financial system, to focus on maintaining the 2.0 percent inflation target. As a practical matter, there is probably no central bank that would place a greater priority on its 2.0 percent inflation target than on preventing the collapse of the financial system, but the stated and often legal commitment of central banks across the globe is to this 2.0 percent target.

The Federal Reserve under Ben Bernanke is ostensibly committed to a 2.0 percent inflation target, even though its mandate from Congress requires it to pursue both price stability and high employment.[19] Given the rapid spread of inflation targeting as the basis for central bank policy, it is worth asking where this urge originated. First, note that wealthy countries have generally had inflation rates well above 2.0 percent and still managed to maintain healthy growth rates. Table 3-1 shows the average inflation rate and the average growth rate for the 1960s, 1970s, and 1980s for seven developed countries, including the United States. Most of these countries had inflation rates that averaged well above 2.0 percent in each of these decades yet still maintained strong real growth. Clearly the 2.0 percent inflation target is not essential for maintaining growth.

For this reason, some view this literature as being less conclusive than the proponents of inflation targeting believe. Skeptics also question the rationale for a 2.0 percent inflation target as opposed to a 0.0 percent target. Advocates of the 2.0 percent target generally take the view that 2.0 percent measured inflation corresponds to 0.0 percent actual inflation, based on their belief that inflation is measured with a high-side bias. They argue that official measures of inflation like the consumer price index fail to pick up the benefits of new products and various quality improvements; they adjust for this by assuming that an official inflation rate of 2.0 percent means that actual inflation is close to zero (see e.g. Feldstein 1997). However, this assumption raises a fundamental problem with the sort of studies that the proponents of inflation targeting use as evidence to support this policy.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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

Given these criticisms, the linkage between the forecast and the monetary policy response becomes less clear: inflation targeting becomes extremely complex, the ‘charm’ of its seeming simplicity is lost, and communication becomes correspondingly difficult. Nothing exemplifies this better than the fact that, over time, it has been conceded that inflation targeting requires ‘judgement’.50 These considerations argued against an inflation-targeting strategy for the ECB. This certainly does not mean, however, that the ECB rejects inflation targeting lock, stock and barrel – quite the reverse.51 As will be shown in the next chapter, the strategy adopted by the ECB shares important elements with inflation targeting. Chief among them are the priority accorded to price stability, underscored by quantification of the target, and the importance of transparency.

They are only one input – albeit an important one – in the assessment of the future evolution of prices. Alongside these objections, one fundamental shortcoming of inflation targeting was a decisive factor in our decision, namely the fact that it completely ignores the relationship – borne out by overwhelming empirical evidence – between the growth of the money 50 51 Compare, as but one example, the two papers by the eminent proponent L. E. O. Svensson: ‘Inflation targeting as a monetary policy rule’, Journal of Monetary Economics, 43 (1999); ‘Monetary policy with judgement forecast targeting’, UCB, International Journal of Central Banking, 1:1 (2005). If one restricts the definition of inflation targeting to the common elements, then one could also call the ECB an inflation targeter. See O. Issing, ‘Inflation targeting: a view from the ECB’, Federal Reserve Bank of St Louis Review, 86 (2004).

All six candidates for the first appointments to the ECB Executive Board had been asked in advance to provide written 16 It was around 10 p.m. when my wife brought the telephone to me in the sauna. 30 • Historical background answers to a questionnaire with nineteen questions. In view of their fundamental significance, let me quote some of the questions and my answers: Question 8: Would you support the ECB being held accountable for realizing an explicit inflation target and over what time period? To what extent could a mixed targeting strategy (inflation target ⫹ money supply target) be defined and evaluated? The ECB is definitely accountable for the target of price stability. How this is formally achieved, whether with an embedded inflation target or an explicit inflation target, depends on the strategy that is still to be chosen. I have been involved in discussions on the strategy of the future European Central Bank from the outset, and have argued in favour of a mixed strategy whereby control of the money supply could be complemented by a wide-ranging analysis of the inflation outlook, including a model-based inflation forecast . . .


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

One was a numerical target for inflation, and a second was the establishment of a regime under which central banks could be held accountable for their decisions. From the outset, inflation targeting was conceived as a means by which central banks could improve the credibility and predictability of monetary policy. Since its adoption in New Zealand, Canada and the United Kingdom in the early 1990s, inflation targeting has spread to more than thirty countries around the world.22 The big central banks now all have an inflation target of 2 per cent, with the Federal Reserve adopting it in 2012 and the Bank of Japan in 2013. In the language of Chapter 4, delegating monetary policy to an independent central bank with an inflation target is a coping strategy. Its clarity and simplicity mean that the target provides a natural heuristic for central banks and the private sector alike.

The great attraction of an inflation target is that it is a framework that does not have to be changed each time we learn something new about how the economy behaves. Inflation targeting is about making and communicating decisions. It is not a new theory of how money and interest rates affect the economy. But, by anchoring inflation expectations on the target, it can in theory reduce the variability and persistence of inflationary shocks – and has done so in practice. And it has done so without pretending to commit to a rule that is incredible because it is not expected to last. Old problems and new instruments There are, however, deeper reasons to ask why central banks should worry only about consumer price inflation rather than the state of the real economy. Inflation targeting is designed to mimic the behaviour of a competitive market economy, one that exhibits none of the nominal or expectational rigidities that prevent prices from adjusting immediately.

Stability is like dieting – it is no good alternating between binge and starvation, boom and bust. It is necessary to follow a few principles consistently and in a sustained manner. Inflation targeting represented a healthy way of living for central banks charged with the task of ensuring monetary stability.33 Accountability and transparency provide the incentives for central banks to meet the inflation target. Such a framework of ‘constrained discretion’ is far removed from the world of 1930, when the Deputy Governor of the Bank of England explained to the Macmillan Committee that ‘it is a dangerous thing to start to give reasons’.34 An event in 2007 illustrates the change in the way in which monetary policy was conducted after inflation targeting was introduced and independence was granted to the Bank of England. At 12 noon on Thursday 10 May, Tony Blair announced his resignation as Prime Minister after ten years at Number Ten.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

Strangelove, a Germanic wheelchair-bound defense scientist propels himself alarmingly toward the camera and lays out the logic of nuclear deterrence: “Ze whole point of ze Doomsday Machine is lost if you keep it a secret!” Of course, the same doomsday logic holds for inflation targets: just as world-destroying weapons deter enemies only if their existence is well publicized, so an inflation target will work better if the public knows about it. By embracing an inflation target, a central bank aims to convince workers that their cost of living will not jump; therefore, they can go easy on their pay demands. Likewise, by embracing an inflation target, a central bank aims to convince bosses that input costs will be stable; therefore, they need not raise prices. Inflation targets, like nuclear arsenals, work by altering expectations and therefore behavior. In his preference for improvisation, in his wariness of a promise that might constrain his freedom, Greenspan had done the equivalent of building a doomsday weapon—in secret.24 • • • The Fed’s embrace of an unannounced inflation target set the stage for Greenspan’s next pivotal moment, which came later that same summer.

Now, if it was not returning to the earlier anchors, the Fed needed a new one. It should announce an explicit inflation target. Hoskins was airing an idea that would come to be embraced by central banks the world over. Only a few months later, at the end of 1989, New Zealand became the first convert, enshrining an inflation target in law and granting the central bank the independence from political interference that would make the target achievable.41 Given the pressure on the Fed from the Bush administration, the attractions of a New Zealand–style bargain were obvious: if the Fed formally committed to an inflation target, it would have a potent excuse to ignore White House demands for lower interest rates. But when Hoskins raised the idea of an inflation target in February 1989, he did not win the argument. Don Kohn, the head of the Fed’s Division of Monetary Affairs, pushed back.

During the FOMC debate eighteen months earlier, Yellen had resisted an inflation target because of the presumed sacrifice of jobs. Now, with falling inflation accompanied by falling unemployment, that sacrifice seemed to have evaporated. Eighteen months earlier, similarly, Yellen had argued that an inflation target might squander the Fed’s credibility because the Fed might announce a target and then miss it. Now, with inflation falling almost magically, the risk of missing seemed modest.19 Years later it would often be asserted that the Fed’s conversion to inflation targeting had brought inflation down. But causality flowed equally in the opposite direction. Falling inflation brought the FOMC to the point where it was ready to embrace inflation targeting. Greenspan might have reflected on the irony in this development.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

T h e R e q u i s i t e s of M a c r o e c o n o mic S ta b i l i t y [ 165 ] 166 APPENDIX TO CHAPTER 8 Inflation Targeting In this chapter, I have espoused the adoption of ‘flexible inflation targeting’ (FIT) in India. This appendix contains a brief discussion of the relevant issues. The core rationale of inflation targeting is that there is no long-​run growth benefit from inflation above a threshold rate. Many research studies have shown that in India this threshold rate is around 4 per cent a year. It makes sense, therefore, that the inflation target should also be 4 per cent a year (with a range of 2 per cent on either side for temporary deviations). The consumer price index (CPI) is a good index to define the inflation target because it is widely watched and understood, and acts as a major factor driving inflation via ‘second-​round effects’ (see below).

The consumer price index (CPI) is a good index to define the inflation target because it is widely watched and understood, and acts as a major factor driving inflation via ‘second-​round effects’ (see below). It also stands to reason that inflation targeting should be ‘flexible’ in the sense that the speed of approach to the inflation target should be left to the discretion (within limits) of a ‘monetary policy committee’ that oversees inflation targeting, acting via the RBI. This would enable the RBI to reduce the short-​run output cost of hitting the inflation target. The monetary policy committee, chaired by the Governor of the RBI, would have on it independent economists and government representatives, in addition to RBI officials. As Chapter 8 explains, this regime is now effectively in operation in India, though statutory backing is yet to come, and a monetary policy committee is yet to be appointed. Several objections have been levelled against FIT for India.

All these factors constrain monetary policy and/​or impede its smooth transmission. However, none of them are significant enough to make monetary policy powerless, and they should and could be reformed while the inflation targeting regime is in operation. They are not reasons to give up on inflation targeting but reasons to improve its functioning by eliminating the distortions. As regards the fiscal deficit, if it were too expansionary, the logic of the regime implies that monetary policy would be tightened, if necessary, to hit the inflation target. This would also have the side-​benefit of exposing the government to scrutiny. In other words, while it is certainly necessary to end fiscal dominance, inflation targeting may reinforce the pressure to end it. The third objection to FIT is that it would be inconsistent with exchange rate management, which may be required to maintain export competitiveness and a safe current account deficit.


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

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, 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, fixed income, 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, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, 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

From a purely inflation-­targeting perspective, it seems as though central bankers are doing the right thing. That, though, surely suggests that inflation targeting is too narrow an ambition. Hitting an inflation target when the economy is on the ropes is a bit like taking pleasure in one’s exercise regime even as the cardiologist tells you that you need a heart transplant. Inflation targeting is neither a necessary nor a sufficient framework for running the economy. It creates an illusion that monetary policy is somehow ‘neutral’ when monetary decisions are, all the time, creating both winners and losers. Moreover, it suggests that fiscal and monetary policies are entirely separate from one another when, in reality, they are not. It was a convenient illusion to uphold in the 1980s and 1990s, when policy-­makers attempted to lance the inflation boil of the 1970s. We now know that it was no more than an illusion.

On the rare occasions that they do, our policy-­makers will put things right. There may be bumps along the way but the path towards ever rising prosperity is nevertheless secure. After 60 years of ever rising income, policy-­makers’ confidence didn’t seem entirely misplaced. But after hubris came nemesis. Far from preventing the economic crisis, the pursuit of inflation targeting and a dependency on continued Keynesian-­style rescue operations from policy-­makers may have contributed to the West’s financial downfall. Take, for example, inflation targeting in the UK. In the early years of the new millennium, inflation had a tendency to drop too low, thanks to the deflationary effects on manufactured goods prices of 60 4099.indd 60 29/03/13 2:23 PM Fixing a Broken Economy low-­cost producers in China and elsewhere in the emerging world. To keep inflation close to target, the Bank of England loosened monetary policy with the intention of delivering higher ‘domestically generated’ inflation.

[is not] consistent with the remit given to the MPC which states that ‘the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output’. The MPC has stuck to its remit . . . 90 4099.indd 90 29/03/13 2:23 PM Stimulus Junkies . . . At some point Bank Rate will have to return to a more normal level. When that time comes, it will I know be a relief to many people dependent on income from savings.20 King’s argument was mostly couched in aggregate terms: inflation could have been brought down to a lower level but only at the expense of a bigger fall in activity that, in the Bank’s judgement, would have been not only unwelcome but also inconsistent with its inflation targeting remit. Yet there is something disconcerting about King’s remarks. If inflation was allowed to overshoot target post-­ crisis thanks to the effects of higher import prices, why wasn’t it encouraged to undershoot pre-­crisis when import prices were unusually soft?


pages: 561 words: 87,892

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

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, 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, fixed income, Francis Fukuyama: the end of history, full employment, G4S, 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, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, 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

It’s not very plausible. If inflation targeting requires people to be made worse off ‘up front’, it’s going to find fewer and fewer supporters. ‘Making room’ for the economic demands of the Chinese and the populations of other emerging nations was never going to be easy, but inflation targeting highlights the immediate problems associated with the developed world’s loss of control over commodity prices. Whether or not Western nations adhere to inflation targets in these circumstances may be a second-order question, given that rising commodity prices will make commodity-importing nations worse off, either through a squeeze on real spending power or through a return to 1970-style inflation accommodation. Nevertheless, seen through the framework of inflation targeting, the issue is made particularly stark.

The consumer price indices which normally are the focus of an inflation-targeting regime are based on a ‘typical person’s’ basket of goods and services. This immediately raises some awkward issues. The spending pattern of the wealthy Upper East Side resident will not match that of someone who hails from the mean streets of Detroit. What, then, does inflation refer to?4 Even if all US citizens were the same, what should be in the basket? Are volatile components, such as food and energy, to be included even when they might give misleading indications of inflation ‘in the long run’? How should changes in the quality of goods be accounted for? Should only goods and services be included or should the prices of assets also be included? Conventional measures of inflation – and conventional inflation targets – focus on consumer prices.

When prices are stable and believed likely to remain so, the prices of goods, services, materials and labor are undistorted by inflation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living.7 Or, for a more British flavour, the aims and objectives of UK monetary policy are set out, rather quaintly, in a letter from the Chancellor of the Exchequer to the Governor of the Bank of England. The April 2009 version instructed the Bank to: maintain price stability … the operational target for monetary policy remains an underlying inflation rate … of 2 per cent. The inflation target is 2 per cent at all times: that is the rate which the Monetary Policy Committee is required to achieve and for which it is accountable … the framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output. But if inflation moves away from the target by more than 1 percentage point … I shall expect you to send an open letter to me … setting out … the reasons why inflation has moved away from target … the policy action which you are taking to deal with it … [and] the period within which you expect inflation to return to the target.8 In other words, price stability is, like the UK prime minister, first among equals.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

The Fed then used openmarket operations to influence the federal funds rate, announcing a desired target for inflation and instituting rule-type behaviours to provide consistent signals to markets. (This became standard practice until 2012, when it adopted an explicit inflation target under Ben Bernanke.)37 The European Central Bank, established in 1997, was also given an inflation target, to be achieved by varying short-term interest rates. In Britain, targeting of money was discontinued in 1985. The British government briefly sought to discipline its unruly economy, first by shadowing the deutschmark, then by making sterling a member of the European Monetary System, but after a speculative attack on the over-valued pound forced it out of the Exchange Rate Mechanism in 1992, it followed the American lead. Initially, the inflation target was set in the range of 1–4 per cent. In 1997, the incoming Labour government, fearing that this was too loose to anchor inflationary expectations properly, especially as politicians still controlled interest rate setting, transferred control of monetary policy to the Bank of England, giving it a 2.5 per cent Retail Price Index inflation target (later reduced to the 2 per cent Consumer Price Index target we have today).

(The New Zealand plan had been to tie the salary of the central bank’s governor, Donald Brash, to the bank’s inflation performance, but this proved impracticable.) 188 t h e t h e ory a n d p r ac t ic e of mon e ta r i sm Figure 16 shows the start of money targeting in the UK in 1976. Inflation remained high and variable: it averaged over 12 per cent a year in the 1970s and nearly 6 per cent a year in the 1980s. The inflation record improved dramatically when inflation targeting was announced in 1992. The same pattern was seen the world over. Was it inflation targeting that ‘conquered’ inflation? Much depends on the weight one attaches to the fluctuating price of energy over the period 1973 to 1983. Figure 16. UK monetary policy and inflation38 30% 25% (RPI up to 1987, CPI from 1988) Bretton Woods Money Targeting Inflation Targeting DM3 20% ERM 15% 10% 5% RPIX CPI 300 250 06 04 02 08 20 20 20 20 98 96 94 00 20 19 19 19 90 88 92 19 19 19 84 82 80 86 19 19 19 19 76 74 72 78 19 19 19 19 19 70 0% Figure 17.

London: Centre for Policy Studies. 460 Index Italic figures refer to graphs and charts Abramovitz, Moses, 157, 158 the Acadamy and scholarship, 11–12, 13 ageing populations, 301–2, 371 AIG bail-out (2008), 325 Albermarle, Duke of, 78 Alesina, Alberto, 192, 231, 233, 241 anthropology, classical, 24 anti-Semitism, 30–31, 131 ‘Aquarius’ CDO structure, 326 Aquinas, Thomas, 28–9 Aristotle, 22, 23, 31 Asian Development Bank Institute, 327 ‘asset-backed commercial paper’ (ABCP), 326 ‘asset-backed securities’ (ABSs), 322–6, 327, 330 Attwood, Thomas, 48 austerity policy, 3, 49, 84, 114, 219, 225 and Bocconi School, 192, 231 and comparative recovery patterns, 241–4, 242, 243, 273, 273–4 cost of to British economy, 243–4, 244, 245 and financial folklore, 235–6 and inequality, 245–6 neo-classical errors, 232–3 Osborne’s crucial mistake, 229–30 Reinhart-Rogoff work, 232 theory behind, 228–35, 236–9 Austria, 91, 92 Austrian School, 46, 104, 192, 226, 296, 349–50 automation, 299, 370–71 Bagehot, Walter, Lombard Street (1873), 50 balance of payments, 103, 142, 143, 144, 145, 150, 152, 153, 159–60, 165, 332 balanced budget theory and gold standard, 56–7 and Keynesian economics, 126–7, 137–8, 142, 143–4, 146, 149–50, 151, 155 as mainstream until Keynes, 76, 95, 98 mandated by EU fiscal rules, 242–3 neo-Victorian reassertion of (from 1980s), 76, 114, 185, 193, 215, 221–2 nineteenth-century fiscal policy, 9, 29, 43, 76, 85, 87–8, 92 and post-2008 austerity policies, 223–4, 227–39, 242–6 461 i n de x balanced budget theory – (cont.) post-W W1 attempts to return to, 106–14 Roosevelt on, 130 Stiglitz’s balanced-budget multiplier, 235* Baldwin, Stanley, 108 Balogh, Thomas, 169 Bank of England 1950s view on monetary policy, 146 actions during 2008 crisis, 234–5, 253–4, 254, 257 Bank Charter Act (1844), 50 Bank Rate, 58, 101–2, 113, 115, 116, 145, 146, 249, 251, 253–6, 254, 261–2, 276 ‘Consols’ (consolidated debt), 43, 80–81 Currency School vs Banking School debate, 49–50 founding of (1694), 42–3, 80 given ‘operational independence’ (1998), 249, 272–3 imposes ‘Corset’ (1973), 168 inflation targeting, 188, 189, 249–53 and ‘law of reflux’, 46 as ‘lender of last resort’, 50, 249 ‘loss function’ for inflation target, 252 macroeconomic model (2004–10), 233, 310, 310–11 Monetary Policy Committee (MPC), 249, 254, 265, 275 during Napoleonic wars, 45–8 power over credit conditions, 105, 115–16 Prudential Regulatory Authority, 363 quantitative easing (QE) by, 254, 257, 259–62, 263–73, 274, 275–7, 276 Bank of International Settlements, 342–3 Bank of Japan, 271 Bank Rate after 2007–8 crisis, 254, 261–2, 279 during 2008 crisis, 253–6, 254, 278 and Bank of England, 58, 101–2, 113, 115, 116, 145, 146, 249, 251, 253–6, 254, 261–2, 276 and broad money monetarism, 186 in Cunliffe’s model, 54, 54–5, 102, 145 after First World War, 101–2 and inflation targeting, 188, 249, 251, 252, 358–9 and Keynes, 101, 102, 115, 166, 255* and managed gold standard, 71 in pre-crash USA, 340 and Radcliffe Report (1959), 146 set by independent central banks, 188, 249–50 and Thornton, 47, 278 transmission mechanism of, 250, 250–51 and Wicksell, 69, 70, 358–9 Banking School, 49–50 banks Austrian School’s 100 per cent reserve requirement, 350, 367 bail-outs, 30, 217, 223, 319–20, 364–5 ‘bank lending channel’, 64 Basel I (1988) and Basel II (2003), 320, 363 Basel III, 363, 364 capital adequacy requirements, 320, 363–4 capital/collateral requirements weakened, 320 collapse of in 2008 crisis, 217, 223, 319 and consolidated debt, 43, 80–81 continued bonuses after crash, 319–20 462 i n de x continued complaints by over regulation, 363–4, 367 creation of money by, 27, 34, 61, 67–8, 71, 311 damage inflicted by, 361–2 deposit and joint-stock banking, 92 deregulation, 307–9, 310–16, 318–22, 328, 332–3 development of modern system, 34 functional separation proposals, 362–3 funding of CR As by, 326–7, 329 Glass–Steagall overturned in USA (1999), 319 growth of unregulated sector, 168 late-medieval rediscovery of, 33–4 leverage concept, 317–18, 322 liquidity concept, 316–17 ‘living wills’, 365 LTROs (long-term refinancing operations), 257 macroprudential regulation, 363–5 maturity mismatch of SPVs, 326 ‘money multiplier’, 35, 64, 146, 179, 185, 258–9, 268–9, 277–8, 280 off balance-sheet assets, 318, 324, 325–6 post-crash reform agenda, 361–8 pre-crash orthodoxy, 5, 308–11 and quantity theory, 61, 64, 65–6, 67–70 reasons for regulation of, 316 reserve or liquidity requirements, 364 root of problem as greed, 365–6 solvency concept, 316–17 ‘stress testing’, 364 see also financial system Barber, Anthony, 167 Barings Bank demise of (1995), 366 rescue of (1890), 50 basic income guarantee, 371 Bavarian Banking Association, 266 Bayes’ theorem, 209 Bear Stearns, 217 ‘behavioural economics’, 388–90 Bernanke, Ben, 105, 179, 188, 248, 256, 275, 278, 334, 344 Besley, Tim, 226, 235 Bible, 30 Bismarck, Otto, 89, 92 Blanchard, Olivier, 230–31, 239 BNDES (Brazilian Development Bank), 354 Bocconi School, 192, 231 Bodin, Jean, 33 Boer War, 86 bond markets, 7, 90–92, 148, 186, 218, 219, 235, 246, 287, 341 Borio, C., 342–3 Brash, Donald, 188 Bretton Woods system, 16, 139, 159, 374–3, 381 collapse of in 1970s, 16–17, 162, 164–5, 166–7, 184 Brexit vote (June 2016), 257, 316*, 373 Britain, xviii adoption of Keynesian policy, 141, 142–3 austerity policy see austerity policy: cost to British economy bullionist vs ‘real bills’ controversy, 44, 45–9 centralization of tax collection, 80 Currency School vs Banking School debate, 44, 49–50 debate on post-crash policy, 225–8 deficit and public sector borrowing statistics (1956–2013), 156 Employment White Paper (1944), 141, 142 463 i n de x Britain – (cont.) final suspension of gold standard (1931), 113, 125 First World War borrowing, 95 fiscal experience (1692–2012), 77 forced out of ERM (1992), 188 GDP per capita growth (1919–2007), 154 ‘Geddes Axe’ (1920s), 108 and gold standard, 9, 42, 43, 44, 45–50, 53, 57–9, 80, 101 and Great Depression, 97, 98, 110–13 growth Keynesianism (1960–70), 148–9, 150–51, 152 industrial relations system, 147, 167–8, 169 inflation peak (1975), 166 inter-war cyclical downturns, 107, 113 and mercantilism, 78–81, 82 monetarism in, 185, 186–8, 189, 192–3, 249 nationalization in post-war period, 142, 158 post-crash bank liquidity ratios, 364 pre-crash housing bubble, 304 ‘prices and incomes policy’ in, 147, 150, 151, 167–8 public finances before 2008 crash, 224, 225 Public Sector Borrowing Requirement (PSBR), 155–6 public spending and tax revenue (1950–2000), 157 rearmament in late 1930s, 113 recession of early 1980s, 186–7 recoinage debate (1690s), 40, 41–3 return to gold standard (1925), 102, 103, 107 sharp rise in inequality since 1970s, 288–9, 299–300, 300 slow recovery from 2008 crash, 241, 242, 243–4, 245, 273, 273–4 ‘stop-go’ in post-war period (‘fine tuning’), 142–3, 145–6, 150, 152 victories over France (eighteenthcentury), 43, 80, 81 see also Bank of England; Conservative Party; Labour Party British Empire, 57, 58, 80 Brittan, Samuel, 225 Brown, Gordon, 193, 220, 221–3, 354, 357 and 2008 crash, 220, 223, 224 declares era of ‘boom and bust’ over, 215 ‘prudence’ as watchword, 226 Bryan, William Jennings, 52 budget deficit see balanced budget theory Buchanan, James, 198 Buffett, Warren, 326 Bundesbank, 140, 154, 257, 275 Bush, George W., 242 business schools, financing of, 13 Cairncross, A.


pages: 524 words: 143,993

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

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, break the buck, Bretton Woods, business cycle, 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, creative destruction, 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, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, 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, zero-sum game

Bernanke, ‘The Federal Reserve’s Response to the Financial Crisis’. 20. Ibid. 21. The Federal Reserve has a dual mandate: maximum employment and stable prices. While it currently takes inflation-targeting quite seriously, it is not as obsessed with this one objective as the ECB, which has an overriding objective of ‘price stability’. This is partly a matter of law. It is also partly a matter of national and institutional culture. The Bank of Japan operated without an inflation target until early 2013, when one was agreed with the government. Prior to that, the Bank of Japan argued that it could not achieve higher inflation with monetary policy. The Bank of England has an inflation target, but has, in practice, been prepared to consider activity levels as well, as has been shown by its willingness to accept overshooting of the target over many years, after the crisis of 2008–09. 22.

This is why the ‘first arrow’ of Prime Minister Shinzo Abe’s ‘Abenomics’ has consisted of achieving an inflation target of 2 per cent agreed between the government and the Bank of Japan in early 2013.62 Big difficulties may even arise in a low-inflation environment, rather than in a deflationary one if equilibrium real interest rates fall low enough. With inflation at 2 per cent, for example, the real short-term interest rate cannot be less than minus 2 per cent if one ignores the extreme possibility of negative nominal rates (which are feasible up to a point, though tricky to impose). Therefore, some economists, including Olivier Blanchard, chief economist of the International Monetary Fund, have argued that the now customary 2 per cent inflation target turned out to be too low in the crisis: thus, with short-term equilibrium rates possibly as low as minus 3 to minus 5 per cent in badly hit economies, inflation needed to be closer to 4 per cent in normal times.63 Finally, economies may end up in a state of sustained malaise.

Then use active monetary policy to mitigate any harmful effects of a downturn … [A] flexible inflation targeting framework (in conjunction with a cogent prudential policy) accomplishes exactly this goal. It induces a central bank to take the appropriate policy actions in response to financial market volatility and does so in a way that properly takes into account the real informational constraints the central bank faces. In particular, the central bank does not have to get into the business of figuring out fundamental market valuations. Nor does it have to figure out how the market will respond to policy actions or its perceptions of proper market valuations. Since, in my view, the Federal Reserve in recent years has acted as an implicit inflation targeter and done so in a way that has clearly mitigated any harmful effects from market volatility, it seems that recent events have only served to support our position.71 This point of view does not hold up so well a decade later.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The “Schwartz Hypothesis” has been tested by mainstream economists, who duly found a positive association between price instability and financial instability.37 However, it was also observed that financial asset price bubbles tended to occur as central banks applied the policy of inflation targeting.38 Consequently, arguments in favour of central bank pragmatism began to emerge in the 2000s emphasizing ‘flexible inflation targeting’ that also took into account financial asset prices. Nonetheless, the core of the inflation targeting approach remained intact, and no concrete steps were taken by central banks to prevent the huge bubble of 2001–2007 in the US and elsewhere. The ensuing crisis has left the policy of inflation targeting in tatters since it has become apparent that exclusive focus on price stability has actually exacerbated the risk of financial collapse. The certainties of the Great Moderation have vanished. Once it became clear that inflation targeting had failed, a debate emerged on the future role of central banks.39 The crisis has required urgent intervention by central banks, thus resulting in an even stronger role for central banking within financialized capitalism.

Taylor, ‘Discretion Versus Policy Rules in Practice’, Carnegie-Rochester Conference Series on Public Policy 39:1, 1993; see also Dale Henderson and Warwick McKibbin, ‘A Comparison of Some Basic Monetary Policy Regimes for Open Economies’, Carnegie-Rochester Conference Series on Public Policy 39:1, 1993. 35 The empirical literature on the Taylor rule is extensive although, after the crisis of 2007, it has become hopelessly dated. For work broadly supporting the rule see Ben Bernanke et al., Inflation Targeting: Lessons from the International Experience, Princeton University Press, 1999; Manfred J.M. Neumann and Jürgen von Hagen, ‘Does Inflation Targeting Matter?’, Federal Reserve Bank of St. Louis Review 84:4, July/August 2002; for differing critical perspectives see Philip Arestis and Malcolm Sawyer, ‘Inflation Targeting: A Critical Appraisal’, Working Paper no. 388, The Levy Economics Institute, 2003; Lars Svensson, ‘What Is Wrong with Taylor Rules? Using Judgement in Monetary Policy Through Targeting Rules’, Journal of Economic Literature 41:2, 2003; and Thomas I.

In the years of financialization state intervention has been driven by the express concern to limit the propensity of valueless money to generate inflation, and thus to perform inadequately as measure of value. Since the 1990s monetary policy has been set within the institutional regime of ‘central bank independence’ and has been summed up as ‘inflation targeting’, both of which are discussed in Chapter 5. The crisis of the 2000s has delivered a major blow to inflation targeting, but at the same time reaffirmed the power of the state to intervene in the financial sphere, pivoting on state-backed central bank money. Contemporary valueless world money: The dollar as quasi-world-money The severing of the link of credit money with gold after the collapse of Bretton Woods has had more severe repercussions in the international rather than the domestic monetary sphere for two fundamental reasons.


pages: 350 words: 109,220

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

Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, housing crisis, inflation targeting, information asymmetry, London Interbank Offered Rate, Long Term Capital Management, market bubble, money market fund, 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

Bernanke was not the first Fed chairman to consider inflation targets. In 1996, the Greenspan Fed had come close to a consensus on setting 2 percent as an internal inflation target. But while Bernanke advocated an explicit public inflation target, Greenspan had admonished Fed officials to keep the consensus quiet. “I will tell you that if the 2 percent inflation figure gets out of this room,” Greenspan told his colleagues, “it is going to create more problems for us than I think any of you might anticipate.” Greenspan prized flexibility and resisted rules that limited his discretion; Kohn and, later, Geithner sided with him. The Greenspan Fed’s semiannual reports to Congress avoided anything approaching specificity about the Fed’s goals. At one FOMC meeting, Fed governor Frederic Mishkin, a proponent of explicit inflation targeting, derided the reports as “sex made boring.”

Bernanke is proud of the expanded forecasts; he hopes that someday they may be seen as a significant innovation. However, his change initially was overshadowed by the beginning of the Great Panic, which, among other things, exposed the shortcomings of inflation targeting über alles. The targets provided no guidance for how the Fed should respond to the collapsing housing market or the financial calamity it triggered. As Blinder put it, the Fed essentially said: “Mr. Inflation, you’re going to have to wait, which is the opposite of inflation targeting.” But as the recession deepened and the inflation rate fell lower than the Fed thought desirable, the inflation target issue resurfaced — as a way for the Fed to assure everyone that it wouldn’t let inflation fall too low or let the economy lapse into a devastating deflation, where prices and wages fall and borrowers find it harder to repay their debts.

Bernanke thought Greenspan’s approach to monetary policy relied too much on the chairman’s discretion and not nearly enough on well-explained rules. Along with Geithner, Kohn long had been on the other side, defending Greenspan’s approach. Before Bernanke ascended to the throne, Kohn took the lead in making the public case against his inflation-targeting proposal, squaring off against Bernanke face-to-face at a St. Louis Federal Reserve Bank forum on the topic in 2004. Aware of skepticism about inflation targeting both inside the Fed and on Capitol Hill, Bernanke knew he couldn’t make progress without Kohn’s support. So Bernanke appointed Kohn to head a subcommittee to examine “communications” — a euphemism for “inflation targeting.” Bernanke knew that Kohn commanded enormous respect and affection among the Fed staff and policy makers, and he knew that Kohn was unfailingly loyal to the chairman, whoever it happened to be. By August 2007, Kohn had sold his house in northern Virginia and was planning to spend more time at his weekend place in Annapolis, Maryland.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

The Fed “is close to embarking” on another round of stimulus, the central bank “is likely to unveil” a program of Treasury bond purchases, the announcement “is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.” Unemployment stood at 9.6 percent, much higher than its goal of “maximum sustainable employment,” and inflation was still too low, running a bit over 1 percent. There was no formal inflation target in place at the time. But Bernanke had been relentlessly campaigning for the FOMC to adopt just such a target of 2 percent. Inflation targeting had triggered a lively discussion in 1996 between Greenspan and Yellen, then a governor. She aggressively challenged the chairman, saying that a little inflation “greases the wheels” of the labor market and her preferred target was 2 percent. She asked Greenspan his preference. Could he put a number on it? “I would say the number is zero, if inflation is properly measured,” Greenspan said.

CHAPTER 19 Spinning Fedwire FED STATEMENT WORD COUNT: 569 EFFECTIVE FED FUNDS RATE: 0.11% 10-YR TREASURY RATE: 1.88% FED BANKS TOTAL ASSETS: $4,500.06B DATE: 1/1/2015 While admirers of capitalism, we also to a certain extent believe it has limitations that require government intervention in markets to make them work. —JANET YELLEN, 2012 At the January 25, 2012, FOMC meeting, Bernanke was determined to push the FOMC to officially adopt the goal of a formal inflation target of 2 percent. That was like saying, okay guys, in addition to this straitjacket we’re already wearing—getting unemployment to a magic number—let’s strap on another one, even if we all agree that our inflation metrics are imprecise. Fisher argued against it. Bernanke got his way. In a historic vote, the FOMC set an official inflation target rate of 2 percent. A few months later, market watchers were puzzled by weird movements in some credit markets; gossip began circulating about a rogue trader everyone dubbed the London Whale for the large positions he was taking in credit default swaps.

She described herself as a “non-ideological pragmatist,” and expressed her confidence in the positive contribution that “a predictable, well-executed monetary policy can make to economic growth.” She gave a succinct summary of her views of the Fed’s purpose in 1995, when the Fed was debating proposed legislation that would make price stability the central bank’s sole mandate at the expense of unemployment. “Who would be prepared to believe that the FOMC is single-mindedly going to pursue an inflation target regardless of real economic performance, if not even the Bundesbank is prepared to go that far?” she said, citing the German central bank’s efforts to minimize economic downturns. “So, that means that the targets are going to be perceived as a hoax. . . . They are not going to be any more believable than I would be if I told my child that I was going to cut off his hand if he put it in the candy drawer.”


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

This can be counteracted, however, in two different ways. The first method, within the framework of control by prices, is to estimate the indicators of financial tensions and to adjust the policy interest rate according to these indications. The interest rate thus deviates from what it would have been if the central bank had strictly followed its own inflation target. The second method is to use the interest rate to maintain an inflation target and, in combination with this, to use quantitative tools to contain financial tensions. Both methods are means of limiting the excessive expansion of credit, and they can be either applied to banks in general or targeted at certain types of credit (for example, real estate) which have a particularly destabilising effect in certain circumstances. Different techniques can thus be applied in order to maintain oversight over credit.

Secondly, we can see in Figure 7.3 that the financial cycle is not positively correlated to the short-term macroeconomic cycle. In most countries, the financial cycle is greater in periodicity and extent. Monetary authorities have ignored this, in conformity with their postulate that finance is self-regulating. Given that the doctrine of inflation-targeting saw this as a univocal process – with one instrument (the short-term rate) used to work towards one objective (the inflation target) – it was impossible to interact with the financial cycle and thus to cushion the disequilibria that were building up within it. Thirdly, not all recessions in the business cycle can be explained in terms of a reversal in the financial cycle. Only the most serious crises in production are simultaneously combined with a reversal in the financial cycle.

When they do give up on this view, this leads to confusion about the meaning of the price movements they can observe, and suspicion when it comes to anticipating how prices will evolve in the future. The uncertainty leads to an anxious search for the surest support for liquidity. It is, therefore, up to monetary policy to fix the point around which agents implicitly coordinate their expectations. This means providing a framework that eliminates all balances outside of a range indicated by the central bank. This framework attaches itself to a renewed monetary doctrine: flexible inflation targeting.7 This means placing monetary policy’s short-term discretionary actions under the constraint of medium-term rules, thus assuring price stability. This stability is defined as a range of viable future inflation rates, within the scope of which the central bank’s actions enjoy the confidence of economic actors. Nonetheless, if central bank independence gives weight to the principle of guaranteeing the unit of account’s statistical value, this cannot be its exclusive concern.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Lord Adair Turner, in a Project Syndicate column ‘Helicopters on a Leash’, drew attention to this central issue: the risk that allowing any monetary finance will invite excessive use.37 But in addressing the issue, Turner cedes even more power to central bankers by proposing that they are ‘given the authority to approve a maximum quantity of monetary finance if they believe doing so is necessary to achieve their clearly defined inflation target’.38 There are two problems with this attempt at regulating the creation of finance: the first is the one outlined above, that technocrats will make critical decisions about the scale of finance available to all or some sectors of the economy. Second, the notion that ‘inflation targeting’ would once again be used to inform central bank decision-making is a truly backward step. Inflation targeting has long been discredited because pre-crisis central bankers focused myopically on inflation targets to the detriment of other indicators, in particular employment, but to the advantage of creditors whose assets (debt) are protected by inflation targeting. I am no defender of the private finance sector, as anyone familiar with my work will know, and I am also strongly in favour of capital control.

No, would be my answer, and for this reason: ‘involvement of the public in decisions about the allocation of money’, to quote Mary Mellor, is what happens when individuals apply to banks for loans, which, if granted, play a role in increasing the money supply. To remove this public involvement at a micro level in the creation of a nation’s money supply, and to instead rest this power with a small committee of men at the pinnacle of a central bank would to my mind be steps on to the road to an autocracy. Furthermore, centralising the control of the money supply with only ‘the inflation target’ as a constraint would place great financial and economic power in the hands of a few technocrats, most of whom are steeped in orthodox economic dogma. As a result of this dogma, it is these technocrats who all failed in their roles as ‘guardians of the nation’s finances’ before and during the crisis of 2007–09. Almost all of today’s central banking technocrats have demonstrated an inadequate response to the crisis.

Class Interests and the Moulding of Schools of Economic Thought 1This chapter is based on the paper What Are the Economic Possibilities for Our Grandchildren? drafted in collaboration with Dr Geoff Tily. It was delivered in Cambridge on 16 November 2015 by the author as one of the events organised by King’s College’s Politics Society to celebrate the five-hundredth anniversary of the completion of the stonework of King’s College Chapel. 2Mervyn King speech, ‘Twenty Years of Inflation Targeting’, Stamp Memorial Lecture, London School of Economics, 9 October 2012. 3P. Samuelson, Economics, 9th ed., New York: McGraw-Hill, 1973, quoted in Geoffrey Ingham, The Nature of Money, Cambridge: Polity Press, 2004, p. 15. My emphasis. 4Joseph Vogl, ‘Sovereignty Effects’, INET Conference Berlin, 12 April 2012, ineteconomics.org, accessed 6 June 2016. 5Michael McLeay, Amar Radia and Ryland Thomas, ‘Money in the Modern Economy: An Introduction’ and ‘Money Creation in the Modern Economy’, Bank of England Quarterly Bulletin Vol. 54(1), 2014, bankofengland.co.uk, accessed 6 June 2016. 6John Hobson, Imperialism: A Study, London: James Nisbet & Co., 1902, pp. 218–19.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial thriller, floating exchange rates, full employment, gig economy, inflation targeting, Just-in-time delivery, light touch regulation, liquidity trap, Martin Wolf, moral hazard, negative equity, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

So Major was a man with a mission, as the year-on-year increase in retail prices index rose from 7.7 per cent in January 1990 to 9.4 per cent in April and 10.9 per cent in September. He wanted inflation down but was saddled with the single club then so fashionable in Whitehall and Threadneedle Street. As we shall see, the next panacea to be sought by the Conservatives was to be inflation targets, but they were not resorted to until the current panacea, ERM entry, had also proved a failure. The irony was that Major and his Treasury officials considered introducing inflation targets in his one and only Budget, in March 1990: the problem was that, to be realistic, the target would have had to be set at such a high level as to be embarrassing. Major had two advantages over his predecessor in working on Mrs Thatcher. One was that she was in a Wildean situation, where to lose two Chancellors over the ERM would have qualified as carelessness.

I tend to say that it is too early to judge the success of independence. But it has to be admitted that, when it later became clear that the inflation target given to the MPC was symmetrical, one became less apprehensive. There was not a built-in deflationary bias. If inflation was likely to be lower than the target, then the MPC was obliged to take expansionary action. I was worried, and still am up to a point, about the democratic aspects of this – indeed, former deputy governor of the Bank of England Sir Paul Tucker has written a lengthy tome about the democratic legitimacy of central banks (Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State). The reassuring aspect of the arrangement is that it is the Chancellor who sets the inflation target. But, when it came to the separation of the regulatory and monetary functions of the Bank, this did not prove to be a happy divorce.

Besides all this, one should never underestimate the importance of fashion, in general, and the prevailing economic orthodoxy – Galbraith’s ‘conventional wisdom’. Then, most important at crucial turning points, are the challenges to the conventional wisdom, such as the rise of monetarism and what the present author would regard as extreme free market doctrines in the late 1970s and 1980s. After monetarism came the fashion for the European exchange rate mechanism, and then inflation targets. Recent history has been dominated by the banking crisis of 2007–09, with whose consequences we are still living – not least with the era of austerity that followed. The financial crisis took a complacent generation of economists and policymakers by surprise. Conquering inflation was supposed to be the ultimate achievement. And then came the Brexit referendum… CRISIS 1 1967: DEVALUATION: BEFORE AND AFTER The devaluation of 1967 followed a sequence of events in which the Conservatives under Reginald Maudling began a ‘dash for growth’ which ended in what became known as the Maudling boom, whose consequences Labour had to deal with.


pages: 550 words: 124,073

Democracy and Prosperity: Reinventing Capitalism Through a Turbulent Century by Torben Iversen, David Soskice

Andrei Shleifer, assortative mating, augmented reality, barriers to entry, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, centre right, cleantech, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, deskilling, Donald Trump, first-past-the-post, full employment, Gini coefficient, hiring and firing, implied volatility, income inequality, industrial cluster, inflation targeting, invisible hand, knowledge economy, labor-force participation, liberal capitalism, low skilled workers, low-wage service sector, means of production, mittelstand, Network effects, New Economic Geography, new economy, New Urbanism, non-tariff barriers, Occupy movement, offshore financial centre, open borders, open economy, passive investing, precariat, race to the bottom, rent-seeking, RFID, road to serfdom, Robert Bork, Robert Gordon, Silicon Valley, smart cities, speech recognition, The Future of Employment, The Great Moderation, The Rise and Fall of American Growth, too big to fail, trade liberalization, union organizing, urban decay, Washington Consensus, winner-take-all economy, working-age population, World Values Survey, young professional, zero-sum game

The systems imposed something like international uniformity on macroeconomic management and national financial regulation for the first time since Bretton Woods. In the system of inflation targeting, independent central banks were given responsibility for macroeconomic management and used interest rates to return deviations of inflation and unemployment to their target or equilibrium values. They did so in the common New Keynesian macroeconomic framework that we discussed above. Many policy-oriented macroeconomists agreed with Ben Bernanke’s assessment that this system was responsible for the Great Moderation in inflation and unemployment since the early 1990s. In addition, that inflation targeting should be carried out without international coordination was not disputed. Indeed, inflation targeting within the New Keynesian framework and without international coordination is still generally accepted.

(5) Macroeconomic management: as discussed in chapter 3, there has been a widespread move to central bank independence combined with inflation targeting or membership of the Eurozone. In addition, apart from the prolonged zero lower bound in the post-financial-crisis world when fiscal policy activism replaced or at least augmented monetary policy, governments have adopted some form of “consistent fiscal framework.” This usually includes delegation of budget-setting power to a finance ministry with veto power over individual spending ministries, as explained by Von Hagen and Hallerberg (1999) and Hallerberg (2004). These developments can be seen as a consequence of three concerns: first, as discussed in the previous chapter, where wage bargaining is to some degree coordinated, but not fully centralized, as in most of the advanced economies of northern Europe, central bank independence and inflation targeting generates wage restraint.

In a currency union like the Eurozone, the common central bank sets policies for all, and it cannot be beholden to any government. Third, in an advanced world in which product market competition is through variety and innovation, and in which knowledge-based companies are frequently networks of international subsidiaries, inflation and exchange rate movements are particularly costly and low inflation targeting (or at last equal inflation across advanced economies) offers some guarantee of exchange stability (as well as by definition low inflation). The data for inflation rates in relation to the adoption of inflation targeting is shown in figure 4.4 for four countries with high inflation in the 1980s (see chapter 3 for more on central bank independence). (6) Product market competition and cooperative labor. The above “public goods” of advanced capitalism in the information era are different from those complementary to the more organized, hierarchical, and centralized world of Fordism.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, means of production, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, quantitative easing, regulatory arbitrage, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

This is a Money-Credit Constitution, a politically embedded norm, which, at its most general, comprises an objective of broad monetary-system stability (coupling, say, an inflation target with a standard of resilience for the financial system); a Fiscal Carve-Out that recognizes that central banking has fiscal elements; and constraints on the structure and shape of private banking (and, suitably modified, other parts of the financial system). The objectives should be sufficiently clear to provide a shield against partisan or industry capture. This is not cosmetic, as can be illustrated by the proposals (aired while I was writing this book) for central banks to raise their inflation targets to 4 percent and/or to embark on helicopter money (a permanent injection of central bank money designed to raise the price level and, thus, relieve an overhang of debt through a period of unexpectedly high inflation).

Within a decade of that proclamation, the 1929 stock market crash, the unraveling of the gold standard, and the Great Depression were enough to see central banks stripped of responsibility, status, and power. They did not regain preeminence until the 1990s, when the International Monetary Fund and World Bank began prescribing independent central banks and the framework for price stability known as inflation targeting to the emerging-market economies rising around the world. But, as though revisiting their past, the Great Moderation they presided over turned nasty, twisting itself into the Great Financial Crisis and years—not yet behind us—of below-par growth. From Impotence to the Only Game in Town For the central bankers themselves, however, history has not repeated itself. Indeed, the contrast with the aftermath of the banking crisis, monetary disorder, and economic slump of the 1920s and 1930s could hardly be greater.

For the same reasons, the legislature should not prescribe procedures that make an independent trustee agency especially sensitive to particular interest groups.8 Having to consult widely, hear both sides of a case, and, crucially, give reasons makes it more obvious if an IA is becoming captured by particular sections of society. Even where, in line with DP1, the objective and the powers both seem clear, that leaves open whether the powers are used in pursuit of the prescribed objective and only that objective. An easy case would be a central bank with an inflation target of 2 percent and a power, among others, to create money by buying government bonds outright. Imagine that it buys bonds to expand the money supply (lower interest rates) when current inflation is well above target and, vitally, all measures of inflation expectations are for inflation to remain well above target over the medium to long term. That would be a clear misuse of power. But what is to happen in more nuanced cases?


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

"Robert Solow", affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, plutocrats, Plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

Therefore to neutralize the 0.75% cost increase to the firms, unemployment must rise by 1.5 percentage points.10 The Long Term If correct, natural rate theory has major consequences for monetary policy. If it is correct, there is little loss from very low inflation targets. Long-term price stability, with an inflation target of zero, can be achieved with no permanent ill consequences. On the average, over a long period of time unemployment will be unaffected by the choice of inflation target. If, on the other hand, natural rate theory is not true, so that there is a long-term trade-off between inflation and unemployment, a zero inflation target is poor economic policy. The calculated increase in the unemployment rate of 1.5% would make a significant difference. In human terms, for the United States such an increase would render jobless 2.3 million people—more than all the men, women, and children within the city boundaries of Boston, Detroit, and San Francisco combined.

In his view the costs of lowering inflation were temporary, but the benefits, because of the changed expectations, would be permanent. Crow defended his policies vigorously, to the point that the Canadian press described him as “combative” and “abrasive.”21 In 1994 he was replaced by Gordon Thiessen, who, in contrast, was unfailingly polite. But—true to his spots as a central banker who had learned his trade in the same Bank of Canada shop as Crow—Thiessen continued the very low inflation targets of the previous regime, for seven more years. This story should serve as a warning. Too much faith is placed today in natural rate theory. For the past quarter century the United States has had a sensible monetary policy, which carefully balances the twin goals of price stability and full employment. But we are in great fear of ideologues on a future Federal Reserve Board who will take natural rate theory as more than a useful parable, consider it their duty to define price stability as zero inflation, and see no great cost in achieving it.

Code, Title 15, Section 1021, the government “declares and establishes as a national goal the fulfillment of the right to full opportunities for useful paid employment at fair rates of compensation of all individuals able, willing, and seeking to work.” And furthermore “The Congress further declares that inflation is a major national problem requiring improved government policies.” (http://www.law.cornell.edu/uscode/15/1021.html). In times of crisis low inflation targets should not be difficult to achieve. 2. GDP was about $7 trillion in 1994 (Economic Report of the President 2001, Table B-1, p. 274). 3. Federal Reserve Table B16, Commercial Paper Outstanding (http://www.federalreserve.gov/DataDownload/Download.aspx?rel=CP&series=40f558d dc745a653699dbcdf7d6baef9&lastObs=24&from=&to=&filetype=csv&label= include&layout=seriescolumn&type=package). 4.


pages: 580 words: 168,476

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

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, business cycle, 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, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, 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%, wealth creators, women in the workforce, zero-sum game

Stiglitz, The Roaring Nineties: A New History of the World’s Most Prosperous Decade (New York: W. W. Norton, 2004). 44. Among the list of those who have officially adopted inflation targeting in one form or another are Israel, the Czech Republic, Poland, Brazil, Chile, Colombia, South Africa, Thailand, Korea, Mexico, Hungary, Peru, the Philippines, Slovakia, Indonesia, Romania, New Zealand, Canada, the United Kingdom, Sweden, Australia, Iceland, and Norway. The United States never fully adopted inflation targeting—as we have noted, the Federal Reserve’s mandate requires that it look also at the level of unemployment and the rate of growth. But over long periods of time, its policies have been little different from those of countries that have explicitly adopted inflation targeting. 45. This list is not meant to be exhaustive. Another hypothesis is that the best way to fight inflation—regardless of its source—was to increase interest rates.

The theory became deeply discredited just years after it was the rage among all the central bankers. As they quickly abandoned monetarism, they looked for a new religion consistent with their faith in minimal intervention in the markets. They found it in inflation targeting. Under this scheme central banks should pick an inflation rate (2 percent was a fashionable number), and whenever inflation exceeded that rate, they should raise interest rates. The higher interest rates would dampen growth, and thereby dampen inflation.44 The obsession with inflation Inflation targeting was based on three questionable hypotheses. The first is that inflation is the supreme evil; the second is that maintaining low and stable inflation was necessary and almost sufficient for maintaining a high and stable real growth rate; the third is that all would benefit from low inflation.45 High inflation—such as the hyperinflation that plagued Germany’s Weimar Republic in the early 1920s—is a real problem; but it is not the only economic problem, and it is often not the most important one.46 Inflation, as we have noted, has not been a major problem in the United States and Europe for a third of a century.

Even as the United States faced unemployment of 9 percent—and hidden unemployment that meant that the true unemployment was much higher—three “inflation hawks” on the Fed board voted to raise interest rates because of their single-minded concern with inflation. In 2008, shortly before the global economy collapsed, inflation targeting was put to the test. Most developing countries faced higher rates of inflation not because of poor macromanagement but because oil and food prices were soaring, and these items represent a much larger share of the average household budget in developing countries than in rich ones. In China, for example, inflation approached 8 percent or more. In Vietnam it reached 23 percent.47 Inflation targeting meant that these developing countries should have raised their interest rates, but inflation in these countries was, for the most part, imported. Raising interest rates wouldn’t have much impact on the international price of grains or fuel.48 As long as countries remain integrated into the global economy—and do not take measures to restrain the impact of international prices on domestic prices—domestic prices of food and energy are bound to rise markedly when international prices do.49 Raising interest rates can reduce aggregate demand, which can slow the economy and tame increases in prices of some goods and services, especially nontraded goods and services.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

But a larger theoretical question gnaws at the accepted convention of inflation targeting, even if it is improved through considering real growth as well. Is the primary outcome being targeted—inflation—really the underlying problem, or is it a symptom? Today in Zimbabwe or after the Great War in Europe inflation was the one-dimensional villain. But by the 1930s, and perhaps after the panic of 2008, the last stage of the disease of excessive leverage might be deflation, and inflation an intermediate condition, like syphilitic chancres that enter remission before severe systemic damage is done. The freezing of the credit markets in 2008 throws an inconvenient monkey wrench into the inflation-targeting orthodoxy of the high priests of central banking. Inflation targeting is like a surfer’s fancy maneuvers to optimize his ride on the crest of a building wave.

With the debate over gold-backed currency and bank reserves having been settled a century ago, its supreme sanction to print is now unquestioned.Voices of dissent have been marginalized, and proponents of the Fed’s dominion have been honored by being hired as consultants by the hundreds by the central bank. These chosen gurus have fanned out into academia to spread the orthodoxy and stamp out alternative views such as the Austrian School. In this chapter, the stultification of economic theory with an antigold bias is examined carefully. The modern precepts of central banking T 70 Flat-Earth Economics 71 are discussed, revealing how and why inflation targeting has become the primary policy rule, and what this means for financial markets over a very long stretch of time. Several provocative figures are presented that challenge the conventional wisdom surrounding economic growth, inflation, deflation, and money supply growth. With this grounding, the latter half of the chapter ventures into the academic papers that Fed Chairman Bernanke has cited in his theories about the Great Depression and its relevance to today’s meltdown.

The relationship appears to be robust with a curve fitted that explains 88 percent of the statistical variation (R-Squared = 88%).1 When credit growth is moderate, between 3 and 6 percent, real economic growth is solid. Remarkably, deflation isn’t all that bad. Rapid economic expansion can happen when the consumer price level is falling, as the 1879 resumption to the gold standard induced in the 1870-1890 period. Or, under a fiat system such as 1940-1970, an inflation level above the comfort zone of today’s inflation-targeting Fed governors might result. But it wouldn’t necessarily restrain economic output. With credit held in check, the increase in money tends to flow to productive areas of the economy. There is no question that some speculative excess spills over into the equity and real estate markets in 77 Flat-Earth Economics 6 1870–1890 Real GDP Growth (%) 5 1940–1970 4 1890–1913 1913–1929 3 f(x) 5.58E2*^3 1.08E0*^2 6.12E0* 5.88E0 R^2 8.77E1 corr(^3,y) 1.31E1, corr(^2,y) 9.79E3, corr(^1,y) 2.09E1 1970–2008 2 1929–1940 1 0 0 Figure 4.1 1 2 3 4 5 6 7 Money Supply Growth (%) 8 9 Money Supply & Real Economic Growth Sources: Historical Statistics of the United States; Federal Reserve System Data.


pages: 363 words: 107,817

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

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, 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, negative equity, 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

Depending on the state of the economy at the time, this may push up the inflation rate (the actual effect of money creation upon inflation and the output of the economy will be discussed in detail in Chapter 9). If inflation is above the target rate, then it is unlikely the MCC will choose to further increase the money supply. Note that the MCC’s decision will be based on the amount of additional money they consider necessary to meet the inflation target. Under no circumstances would they be creating as much money as the government needs to fulfil its election manifesto promises. With the MCC having direct control over the amount of money in the economy, the Monetary Policy Committee at the Bank of England would no longer be needed and could be disbanded. Currently the Monetary Policy Committee attempts to control bank lending – and therefore the quantity of broad money in the economy – by influencing the interest rate at which banks lend to each other on the interbank market.

In total, the MCC will be made up of nine members, which, with the exception of the Governor and the Deputy Governors, will serve three-year terms. How the Money Creation Committee would work Each month, the Money Creation Committee would meet and decide whether to increase, decrease, or hold constant the level of money in the economy. During their monthly meetings the MCC would decide upon two figures: The amount of new money needed in order to maintain aggregate demand in line with the inflation target (similar to the setting of interest rates today), and; The amount of new lending needed in order to avoid a credit crunch in the real economy and therefore a fall in output and employment (discussed in section 7.6). Both figures would be determined, as is the case now when setting interest rates, by reference to appropriate macroeconomic data, including the Bank of England’s Credit Conditions Survey (a survey of business borrowing conditions, outlined in Box 7.C).

It will be discussed further below. Box 7.B - What measure of inflation should the MCC target? In the current regime the Monetary Policy Committee targets a 2% inflation rate, as measured by the Consumer Price Index (CPI). However, the CPI does not include the cost of housing, even though housing is often the greatest portion of anyone’s cost of living. The absence of house prices in the measure of inflation targeted by the MPC meant that the Bank of England was able to claim, even in 2011, that it had successfully managed inflation over the last decade, whilst ignoring house price inflation that averaged 12% (and peaked at 18%) between 1997 and 2007 (Nationwide, 2012). Should the Monetary Creation Committee be required to include house price inflation in their measure of inflation? We believe this could be problematic.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, 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 Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, plutocrats, Plutocrats, private military company, Republic of Letters, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, scientific worldview, 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.

Certainly, the crisis proved that treating low and stable inflation as a sufficient condition for economic stability was a big mistake. The ultimate goal of monetary policy isn’t monetary stability, or financial stability, but a just and prosperous society; and no matter how distant that goal might be from the day-to-day business of central banking, it represents the only reliable guide to policy. 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.

As currently constituted, money’s promise looks irresistible—but only because, as Midas discovered, it is actually impossible. Confine that promise to sovereign money alone via the structural fix of narrow banking, and the incentive to mediate everything via money would be radically reduced. Shorn of its specious promise, monetary society would perhaps find natural limits—because Midas would grasp that human relations are just as valuable as financial ones from the outset.” “So: you’re going to bin fixed inflation targets and license money-printing in order to escape the debt hangover. You’re going to arm the central bankers to the hilt and tell them to keep firing until politicians tell them to stop. You’re going to make banking a branch of the civil service, and tell savers that if they want to earn a half-decent return on their nest eggs, they’d better be ready to take some losses as well. And if anyone complains about this marvellous new policy mix, you’re going to tell them not to worry because as well as preventing financial crises, it’s the only way of avoiding the fate of a deranged despot from story-time.


pages: 338 words: 104,684

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, Bretton Woods, business cycle, capital controls, central bank independence, collective bargaining, COVID-19, Covid-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, Gini coefficient, global reserve currency, global supply chain, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, mortgage debt, Naomi Klein, new economy, New Urbanism, Nixon shock, obamacare, open economy, Paul Samuelson, Ponzi scheme, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

The dual-mandate directs the Fed to pursue maximum employment and stable prices. Basically, Congress put the Fed in charge of jobs and inflation. Congress doesn’t tell the Federal Reserve how many jobs it’s expected to support or how much inflation is considered too much. The central bank is treated as independent in the sense that it gets to pick its own inflation target and decide for itself what maximum employment means.8 Like most central banks, the Federal Reserve has chosen a 2 percent inflation target.9 To keep from overshooting that rate, the Fed aims to keep just the “right” amount of unemployment in the system, much like Friedman prescribed a half century ago. The Federal Reserve can’t spend money directly into the economy, and it can’t tax money out of the economy either. Those powers are reserved for the fiscal authority—Congress.

Randall Wray, “Central Bank Independence: Myth and Misunderstanding,” Working Paper No. 791, Levy Institute of Bard College, March 2014, www.levyinstitute.org/pubs/wp_791.pdf. 9. The Federal Reserve targets PCE. If it hits its target exactly, then the average price of the basket of goods used to construct the PCE will rise by 2 percent per year. For more on this, see Kristie Engemann, “The Fed’s Inflation Target: Why 2 Percent?,” Open Vault Blog, Federal Reserve Bank of St. Louis, January 16, 2019, www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent. 10. See Dimitri B. Papadimitriou and L. Randall Wray, “Flying Blind: The Federal Reserve’s Experiment with Unobservables,” Working Paper No. 124, Levy Economics Institute of Bard College, September 1994, www.levyinstitute.org/pubs/wp124.pdf; and G. R. Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance (Cambridge, MA: Harvard University Press, 2011). 11.

More people were finding jobs, including many low-skilled and minority workers who often have the hardest time securing employment. In December of 2015, the Fed raised its interest rate target from 0 percent to 0.25 percent, even though the inflation rate remained below its 2 percent target. Over the next three years, the Fed raised its policy rate another eight times, despite persistently undershooting its inflation target. Some people criticized them for raising rates when inflation was clearly not expected to accelerate. But the Fed believed the rate hikes were justified to bring the unemployment rate back to its NAIRU estimates and preemptively keep inflation at bay. Although the Fed was trying to cool things off, unemployment continued to decline further below their estimates, and inflation didn’t accelerate.


pages: 515 words: 142,354

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

bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, business cycle, buy and hold, 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, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, 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 Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

America’s deepest recession since the Great Depression, with unemployment reaching 10.8 percent in 1982, in spite of a massive stimulus from fiscal policy with the large 1981 Reagan tax cut; and debt crises throughout the world in countries that had borrowed in the 1970s to offset the effects of the oil price rise, in the perhaps-reasonable belief that so long as interest rates remained within the realm of what had happened in the past, they could manage things. The result was the lost decade of the 1980s in Latin America. INFLATION TARGETING As this monetarism religion waned in the onslaught of overwhelming evidence that it did not provide good guidance—even ignoring its noxious side effects—a new religion took its place, inflation targeting.42 If inflation was the only thing that central banks should care about, it made sense for them to target their policies to inflation. Never mind about unemployment or growth—that was the responsibility of someone else. Countries around the world adopted this philosophy, and with conservatives loving rules, there developed a rule, named after John Taylor, with whom I taught at Princeton and Stanford, and who was to go on to be the under secretary of the Treasury for International Affairs in the Bush administration.

This is partly because financial markets have successfully sold the idea that independent central banks lead to better economic performance. Europe has taken this mantra to an extreme.30 The central question of governance is the extent of accountability of the ECB to democratic processes. There is, in fact, a wide range of degrees of de facto and de jure independence. In the UK, for instance, the government every year sets the inflation target, but that country’s central bank, the Bank of England, has independence in implementing the target. While in principle, the US Federal Reserve is independent, in fact, some of its central bankers have understood very much the limits of that independence: as Paul Volcker put it, “Congress created us, and Congress can uncreate us.”31 The crisis of 2008 provides perhaps the best test of the hypothesis of the virtues of central bank independence—and those countries without independent central banks performed far better than those with.

Europe pretended that it could get around the problem of governance by giving the ECB a simple mandate—ensuring price stability (also known as fighting inflation). Inevitably, there are going to be judgments about what price stability means (zero inflation or 2 percent or 4 percent), and in making those judgments policymakers will have to consider the consequences of different targets. If pursuing a 2 percent inflation target versus a 4 percent target were to lead to much slower growth, I doubt that many voters would support that target given the chance. There are winners and losers in most economic policies. In making their decisions, policymakers in the ECB have to make judgments with distributional consequences. These are not merely technocratic issues, like the best design of a bridge. Slightly higher inflation might lead to lower bond prices, even as it led to higher employment and wages.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

In order to understand this concept, we need to refresh our understanding of fractional banking, inflation, and the role played by central and commercial banks. Fractional reserve banking and debt-based money To understand the concept of fractional banking it is important to first acknowledge that although central banks and governments belong to the same ilk and work in unison with respect to the issuance of sovereign coin, it is the central bank that actually influences how much money to create based on the inflation targets and the interest rate. As of February 2015, 13 nations have pegged their currencies to the US Dollar and 17 to the Euro. Source: http://www.investmentfrontier.com/2013/02/19/investors-list-countrieswith-fixed-currency-exchange-rates/ 5 4 Chapter 1 ■ Debt-based Economy: The Intricate Dance of Money and Debt The reason for highlighting this distinction is because the central banks of most countries are independent enterprises and their monetary policy decisions do not have to be approved by a president or anyone else in the executive or legislative branches of government6 .

The interest rate that the commercial banks receive on the deposits they place at the central bank in the form of capital requirements thus naturally A theoretical summary of our example could extend to a factor of 10, thus creating $100,000 from a deposit of 10 $10,000. In reality, banks do not always use all their reserves this way and this factor will not be reached. 10 9 Chapter 1 ■ Debt-based Economy: The Intricate Dance of Money and Debt influences their willingness to lend money to consumers and to other banks (interbank lending). The central bank calculates this interest rate by enacting monetary policies which are aimed at meeting the inflation target set by the government. By keeping a stable consumer price inflation (generally around 2%), monetary policy tries to ensure a stable rate of credit and money creation. The interest rate is also not set by a chosen quantity of reserves. Rather, it is based on the price of credit, which is governed by supply and demand of credit. An increase in the demand for credit raises interest rates, while a decrease in the demand for credit decreases them.

The primary reason for the widespread belief that increased complexity of the financial market leads to better efficiency is because of the existing macroeconomic theories regarding the interconnection between financial markets and monetary policy. Over the past 30 to 40 years, the standard theories of economics have regarded and treated markets as a veil through which the monetary policy would permeate. The financial system was left to function as it was traditionally supposed to, holding deposits and issuing debt, and macroeconomists focused on controlling the economy via interest rates and inflation targets. This disconnection between macroeconomics and banking and financial markets have now gotten to the point that very little attention is actually paid to the way money and debt is created. This is representative even at the educational level, as most universities and business schools today do not focus a great deal of their curricula on banking and credit. Understanding the reason for this requires us to look at the way economics is looked at.


Not Working by Blanchflower, David G.

active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, Boris Johnson, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, estate planning, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, illegal immigration, income inequality, indoor plumbing, inflation targeting, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta analysis, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, Own Your Own Home, p-value, Panamax, pension reform, plutocrats, Plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

One way to get toward full employment would be, as Larry Summers suggests (2018), to raise the 2 percent inflation target that exists around the world, in the United States, Canada, and the UK, for example, to something higher. Other possibilities include price-level or nominal GDP targets, as set out by Wessel (2018), but these amount to much the same thing, currently, as they would keep rates lower for longer. Summers argues that the Fed’s logic in setting the target at 2 percent involves trading off what are seen as the costs of inflation and the benefits of avoiding deflation. In the last decade, he rightly points out, the costs of deflation have increased: “If deflation risks look considerably greater than they did in the 1990s and the costs of inflation look about the same, it follows that whatever inflation target was appropriate then is too low today” (2018, 2).

In contrast this is what I said: “For one member, the prospects for UK demand had clearly worsened over the month, increasing substantially the downside risk to inflation in the medium term. There was no evidence that inflation expectations were pushing up nominal pay growth. The slowdown might be amplified by financial institutions’ responses to increased financial fragility. A significant undershooting of the inflation target, in the medium term, at a time when output and employment would be well below potential, risked damaging the credibility of the monetary framework.”19 Rates were cut by 50 basis points at the next meeting. They were cut by 150 basis points in November; 100 in December; and 50 in January, February, and March 2009 to 0.50 percent. Seventy-five billion pounds of asset purchases were made in March 2009 and a further £50 billion in May that I voted for.

The minutes of the MPC meeting of August 6–7, 2008, where I voted for a 25 basis point cut and everyone else voted to do nothing, said, “The main questions for the Committee were the likely degree of persistence in inflation and how much spare capacity would be needed to offset that persistence.”28 That was not the main question. My view was different: “For another member, the downside risks to activity growth were greater than the majority view expressed in the Inflation Report. For this member, there was less risk of inflation being persistent and more risk of undershooting the inflation target in the medium term, because of rapidly slowing activity, so an immediate cut in Bank Rate was warranted.”29 Spotting the Recession By the spring of 2008 I was becoming increasingly frustrated that nobody much else had spotted the fact that the major economies were slowing fast. What was happening in New Hampshire was starting to happen in the UK and other European countries I was visiting.


pages: 566 words: 163,322

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

Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business cycle, 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, creative destruction, 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, John Markoff, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, lateral thinking, liberal capitalism, Malacca Straits, Mark Zuckerberg, market bubble, mass immigration, 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, Paul Samuelson, 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 Future of Employment, 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

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. This proof has the effect of anchoring inflation expectations, meaning that people no longer fear prices will spiral out of control, so businesses can plan for the future and workers don’t feel compelled to demand high wage raises, just to keep up with rising consumer prices. This is the confidence Brash inspired. This success story quickly spread in central banking circles. Canada was next to adopt an inflation targeting strategy, in 1991, followed by Sweden and Britain. Many of the central banks chose a 2 percent target to allow for some flexibility even though genuine price stability would imply zero inflation.

Many of the central banks chose a 2 percent target to allow for some flexibility even though genuine price stability would imply zero inflation. Citigroup estimates that fifty-eight countries (including the Eurozone members as one country) accounting for 92 percent of global GDP now have some sort of an inflation target. The qualification “some sort” is meant to cover banks like the U.S. Federal Reserve, which has a dual mandate to target both stable prices and maximum employment. When I began my career in the mid-1990s, I was struck early on by how quickly central bankers in the emerging world had come to embrace the new anti-inflation gospel. Having seen the damage inflation did to their own countries in the prior two decades, and the recent success of Volcker’s anti-inflation fight in the United States, they found religion.

If the pressure to match that victory made them dour, it also gave them a sense of belonging to a guardian priesthood, standing between the public and the ravages of rising prices. They all believed that a low and stable inflation rate was the best foundation for growth and that there was no trade-off between inflation and growth in the long term. Former Malaysian central bank governor Jaffer Hussein told me before the Asian financial crisis in 1997, “Good bankers, like good tea, are best appreciated when they are in hot water.” Chile was the pioneer of inflation targeting among the emerging nations, adopting a target in 1991. Many of its peers, including Brazil, Turkey, Russia, and South Korea, would follow, and though rising global competition and other factors clearly played a major role, targeting inflation helped the emerging world beat it. After Mexico adopted a target in 2001, the inflation rate went down from an average of 20 percent to around 4 percent.


pages: 614 words: 174,226

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

"Robert Solow", airline deregulation, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, ending welfare as we know it, financial deregulation, financial innovation, fixed income, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Growth in a Time of Debt, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Long Term Capital Management, low cost airline, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, oil shock, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, price stability, profit motive, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Ronald Coase, Ronald Reagan, Sam Peltzman, Silicon Valley, Simon Kuznets, starchitect, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus

Central bankers are members of a small and intimate fraternity — they gather every other month at the opulent offices of the Bank for International Settlements in Switzerland97 — and other countries soon moved to emulate New Zealand, granting their central banks the same combination of operational independence and an inflation target. By 1994, Australia, Canada, Chile, Israel, Spain, and Sweden were doing it. Brash took particular pleasure in advising Britain on the overhaul of its monetary policy regime in 1997. When the European Central Bank opened in 1998, it, too, adopted a 2 percent inflation target. The drive to eliminate inflation had become a religious phenomenon. Friedman’s elegant theory had been tested and found wanting, yet it didn’t seem to matter. The central bankers of the world, moving en masse, had decided that inflation was worse than unemployment. Alan Greenspan, the economist who succeeded Volcker as Fed chairman in 1987, resisted the adoption of an inflation target, but his objections were tactical. He was committed to keeping his foot on the neck of inflation, but he doubted the power of words.

When the Labour Party swept into power in 1984, the new finance minister, Roger Douglas, embarked on a free-market program inevitably dubbed “Rogernomics.” He floated the New Zealand dollar, he slashed farm subsidies, and — seeking to drive down inflation, which topped 15 percent in 1985 — he sent aides around the world to shop for a better approach to monetary policy. They brought back the next big thing, a policy so new no other nation had tried it. It was called inflation targeting.90 The idea was simple: instead of seeking to control inflation by targeting interest rates or the money supply, central banks should target inflation itself. Like modernist architecture, this was said to eliminate ornamentation, leaving a form of policy defined by its function. Economists were increasingly convinced that public expectations about inflation had the quality of a self-fulfilling prophecy.

He was committed to keeping his foot on the neck of inflation, but he doubted the power of words. At a meeting of the Fed’s policymaking committee in 1989, Greenspan dismissed a proposal to adopt an inflation target. Don Kohn, his trusted lieutenant, then serving as head of the Fed’s monetary affairs department, drew a contrast with President George H. W. Bush’s 1988 campaign promise not to raise taxes. “It’s what we do more than what we say,” he told Fed officials. “Read our actions rather than our lips.”98 What Greenspan tried to do was to eliminate inflation. As inflation fell below 3 percent in the 1990s, he insisted further declines would increase prosperity. “The lower the inflation, the higher the productivity growth rate,” Greenspan told Congress in 1994.99 His theory was that low inflation made it harder to raise prices, forcing companies to chase revenue growth by becoming more efficient.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

Giuseppe Mazzini, the Italian politician and thinker, argued that (republican) nation states were fully consistent with greater international cooperation, largely because they fostered universal values of duty and obligation.2 Karl Marx thought that – whichever state they came from – members of the proletariat should rise up against the bourgeoisie, a view that inspired the creation of International Socialism and the associated rejection of the ruling elites that had re-established their hold over power – via the Congress of Vienna – at the end of the Napoleonic era.3 Doubtless Marx would have been disappointed to discover that, on the eve of the First World War, the proletariat were attracted more to patriotism and jingoism than to the joys of cross-border working-class comradeship and the red flag.4 Some – but not all – of these ideas contributed to the creation of new arrangements and conventions: the International Court of Justice in The Hague, the Geneva Convention and – for an increasingly global monetary system – a near-universal adoption of the gold standard (adherence to the gold standard was the nineteenth-century equivalent of today’s industrialized countries opting for a 2 per cent inflation target: if everyone else opts for it, you’d be odd not to). Yet for all this apparently greater cooperation, progress was, at best, mixed. Closer linkages were intended only for the ‘civilized nations’ – the cosy club of Western colonial powers.5 ‘Barbaric nations’ – which included south-eastern European states and principalities that only won their independence from the Ottoman Empire towards the end of the nineteenth century – were to be treated as second-tier societies and, where necessary, forcibly occupied to allow the great powers to pursue their individual and collective interests.

For good measure, he added that ‘Realism maintains that universal moral principles cannot be applied to the actions of states.’19 This creates a seemingly paradoxical situation: a state has to look after the collective interests of its citizens, even if that means that those citizens, individually, might feel a grave injustice had been committed on their behalf.20 Yet the interests of the international statesman may not always align with the ‘national interest’, particularly if the statesman is now also a member of some international organization that provides him with a whole bunch of new incentives.21 At that point, the statesman’s role is in danger of becoming disturbingly ambiguous. Does the new international club provide a convenient scapegoat for the delivery of unpopular measures at home, as happened with the imposition of austerity measures in Southern European countries during the Eurozone crisis that began in 2010? Does the homogeneity of view associated with club membership – for example, adherence to the Washington Consensus or acceptance of inflation-targeting conventions – undermine otherwise legitimate protests at home? Does the new club limit the powers of domestic government through the growth of, for example, a supranational legal authority? And what happens if the views of the international statesman – and the new club he has now joined – are rejected by the nation he is supposed to represent? None of these issues is new. The scale of the problem is, however, bigger than ever before.

Yet it’s a bit like fighting a war with the Home Guard alone: the intention may be admirable, but the effectiveness is questionable – unless, that is, the burden of economic pain can be passed on to someone else. Prior to the global financial crisis, many economists used to argue that money was somehow ‘neutral’ over the long run: in other words, printing more of the stuff would only lead to higher inflation with no sustained impact on real economic activity – one reason why central banks mostly ended up adopting inflation targets.4 Post-crisis, it was no longer politically possible for central banks to focus simply on keeping inflation under control: they also had to worry about unemployment, growth, the exchange rate and financial stability (to be fair, the Fed had always had a so-called ‘dual mandate’, although operationally, it began to focus much more on inflation than on unemployment). Put another way, they were being asked to achieve both nominal and real goals, a collection of objectives totally inconsistent with the idea of neutrality.


pages: 475 words: 155,554

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

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, Boris Johnson, 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, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, 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, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, 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, WikiLeaks, working-age population, zero-sum game

If not, thus begins the self-fulfilling cycle of elevated expectations of inflation and rapid growth in prices. The Bank maintained its credibility, Sir Mervyn argues, by keeping its commitment to hit its inflation target, and promising to sell back the mountain of government debts it had amassed at some point in the future. The resale is much more than a simple financial transaction; the result would be to contract the money supply and raise longer-term interest rates for mortgages and businesses. So QE might look like monetisation of Britain’s debts, but as long as you confidently believe the debt will be resold into the market, it would not actually be ‘printing money’. But if it had been done at the behest of government, and the inflation target was being ignored, and you were more sceptical about a resale, then it is monetisation of debt – a modern version of letting the printing presses roll.

The ultimate tool for Júlíusdóttir was to join the European Union and the Eurozone, but after losing the April 2013 general election, this seemed off the agenda. In the absence of the EU option, other economic thinkers on the island think that the way forward for a small open economy like Iceland is to copy the Asian countries. Iceland should have a managed floating exchange rate, and a large build-up of foreign-exchange reserves. ‘It has served the Asians well,’ says Guðmundsson at the Central Bank. So that’s an end to inflation targeting, and for the banks an end to the European single market. A single market without a single safety net in banking was one of the causes of Iceland’s excess. ‘All of this was nonsense because there’s a huge difference between growing tomatoes or making shoes and banking. Banks make money out of maturity mismatches [e.g. between lending long-term and borrowing short-term]. It’s risky.’ The ethnic homogeneity of the population of Iceland makes it a much sought-after testing ground for genetic experiments.

The Bank pressed the button on more asset purchases, so-called ‘QE2’. As soon as this was announced, I rushed to Threadneedle Street. I asked the governor if the fact that inflation had been above target in sixty of the previous seventy-two months amounted to a backdoor abandonment of the targets he had so long cherished. ‘There’s absolutely no question of our commitment,’ he told me, referring to the inflation target. ‘We will not take risks with inflation, but if we had raised interest rates in the last two or three years significantly in order to bring inflation down closer to our target, we could have done that only by generating a really deep recession… That’s not part of our remit. And it would have been a disaster for the UK economy.’ Yet it is undoubtedly true that having an independent Bank of England gobbling up 30 per cent of the issuance of government debt has been useful for the Treasury during the crisis – and essential for George Osborne as his deficit numbers got worse rather than better during his austerity programme.


pages: 466 words: 127,728

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

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, business cycle, buy and hold, 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, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, 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 market fund, 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, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

In the Vietnam era, it took nine years for everyday Americans to focus on inflation, and an additional eleven years to reanchor expectations. Rolling a rock down a hill is much faster than pushing it back up to the top. More recently, since 2008 the Federal Reserve has printed over $3 trillion of new money, but without stoking much inflation in the United States. Still, the Fed has set an inflation target of at least 2.5 percent, possibly higher, and will not relent in printing money until that target is achieved. The Fed sees inflation as a way to dilute the real value of U.S. debt and avoid the specter of deflation. Therein lies a major risk. History and behavioral psychology both provide reason to believe that once the inflation goal is achieved and expectations are altered, a feedback loop will emerge in which higher inflation leads to higher inflation expectations, to even higher inflation, and so on.

While the Fed is focused on the intended effects of its policies, it seems to have little regard for the unintended ones. ■ The Asymmetric Market In the Fed’s view, the most important part of its program to mitigate fear in markets is communications policy, also called “forward guidance,” through which the Fed seeks to amplify easing’s impact by promising it will continue for sustained periods of time, or until certain unemployment and inflation targets are reached. The policy debate over forward guidance as an adjunct to market manipulation is a continuation of one of the most long-standing areas of intellectual inquiry in modern economics. This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties. This field took flight with a 1970 paper by George Akerlof, “The Market for ‘Lemons,’” that chose used car sales as an example to make its point.

The BOE is refreshingly candid about the fact that it is targeting nominal rather than real growth, although it hopes that real growth might be a by-product. Its official explanation on the bond purchases to carry out QE states, “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand. Despite this different means of implementing monetary policy, the objective remains unchanged—to meet the inflation target of 2 percent on the CPI measure of consumer prices.” The situation in Japan differs. Japan has been in what may be described as a long depression since December 1989, when the 1980s stock and property bubbles collapsed. Japan relied primarily on fiscal stimulus through the 1990s to keep its economy afloat, but a more pernicious phase of the depression began in the late 1990s. Japan’s nominal GDP peaked in 1997, declining almost 12 percent by 2011.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency peg, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Martin Wolf, mittelstand, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, the payments system, too big to fail, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

Firms and households have to hold more idiosyncratic risk and demand more money for precautionary reasons. The decline in money supply and increase in money demand causes disinflationary pressure. That is, inflation falls below expected inflation and below the inflation target. Relative to expectations, the value of money rises and so does the real (inflation-corrected) value of the banks’ liabilities; after all, the banks owe the savers money. This increase in the real value of money hurts the banks’ equity even further, necessitating yet more fire sales. In short, the liquidity and disinflationary spirals feed into each other, creating a vicious circle. Even the inflation rate in Germany was subdued and missed the ECB’s inflation target. Ireland’s banks were hit early on after the demise of Lehman Brothers, and the Irish inflation rate declined and even turned negative in 2009. The Greek crisis was initially primarily a fiscal (government debt) crisis.

The above mentioned Glorious Revolution in 1688 England is one example of such an (self-committing) institutional arrangement. Delegating authority to a credible independent institution is one answer to this problem. For example, an independent and conservative central banker, who is not bound by electoral considerations, could be put in charge. A conservative central banker can credibly stick to a specific inflation target, as he would not be tempted to engineer an inflation surprise to temporarily boost the economy.5 An institutional separation of authority was seen as a commitment tool to overcome the time-inconsistency problem. CENTRAL BANK INDEPENDENCE AND GERMANY’S EXPERIENCE IN THE 1970S In countries with independent central banks, inflation was less of a problem during the 1970s stagflation decade. The German Bundesbank acquired a reputation for achieving monetary stability at a time when the economy had to overcome two oil price shocks.

The IMF could not efficiently make its case because it was mired in an academic debate between researchers on the level of fiscal multipliers (the IMF argued that they were higher than expected, so fiscal consolidation should be more moderate and stimulus might prove more efficient). The fiscal debate provoked German anger, and a clear policy framework did not emerge. That clash followed another IMF “transgression” when its Research Department, and in particular the IMF’s chief economist Olivier Blanchard, pushed for a 4 percent inflation target as a way of giving monetary policy more leverage. This was another move that was very poorly received in Germany, where inflation worries are a major part of the political consensus. Structural policy was also a problem, as the IMF and the European Commission did not have the same priorities. The IMF took a hard line on structural reforms, and the ECB liked its toughness. The conciliation of the different positions of the troika resulted in numerous requirements—a shopping list—most of which could not be met.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, 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, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, 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, zero-sum game

Competition prevents countries from debasing their currencies, since the miscreants would be replaced by harder currencies like the dollar or yen. Thus, central banks also played a different role after the break-up of Bretton Woods. In the absence of an exchange-rate target, they no longer had the role of defending the external value of the currency (in the developed world at least). But they did become responsible for safeguarding the internal value of the currency, via inflation targets. The first formal adoption of an inflation target was by New Zealand, and other central banks followed suit. (In the US, the Federal Reserve targets no particular inflation rate but has a mandate to ensure price stability.) POLICY IN A WORLD OF FLOATING RATES The era of floating exchange rates, ushered in by the collapse of the Bretton Woods system, brought a whole new challenge for the global economy. In one sense, it was a relief.

In the bad old days of the 1960s and 1970s, central bankers had been perceived as being under the thumb of politicians. It is only natural for politicians to want lower interest rates and higher fiscal deficits. That helps to buy votes. But central banks failed to stop their excesses. Gradually, however, central banks were given the right to set interest rates without political interference. New Zealand set the tone in 1989, giving its bank independence along with an inflation target. In Britain, the Labour government handed over the responsibility for setting interest rates to the Bank of England in 1997. The Federal Reserve has had the right to set US rates from its foundation in 1913 and the European Central Bank has had the same ability since 1999. This freedom is not absolute. What governments have given, they can take away. They also have the right to appoint central-bank heads, which allows them to pick a sympathetic soul if they wish.

In August 2011, Rick Perry, a leading candidate for the Republican presidential nomination, described the prospects of another round of monetary easing by the Federal Reserve as ‘almost treasonous’. There are less dramatic alternatives. Governments could issue tax rebates, funded by the central bank, in the form of coupons. These coupons would have a ‘spend by’ date to prevent them from being saved, with the aim of pushing up spending in the short term. Or the central bank could announce an inflation target of 4 – 5 per cent, thereby creating the incentive for consumers to spend money before the value of their savings is eroded. QE or not QE? Instead, central banks have gone down the Bernanke route via ‘quantitative easing’ (QE), a concept referred to a number of times in this book. This involves the central bank buying assets from the private sector, and creating a credit at the seller’s bank.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

These fluctuations were primarily ascribed to wages and prices being sticky in the sense that they responded slowly to changes in economic slack. The challenge for policymakers was to minimize these temporary deviations from a slowly moving baseline. The central bank of each country was viewed as the main institution responsible for responding to such business cycle fluctuations. Its policies were ideally guided by an inflation target, since an overheating economy would generate upward inflationary pressures while an economy with too much slack would exhibit downward inflationary pressures. Most advanced country central banks tried to keep inflation at around 2 percent, which was seen as low enough to mean that the general public would not worry about the rise in prices (particularly as measured inflation is upwardly biased due to difficulties in measuring technological change) while allowing the nominal interest rate to stay well above its lower bound of zero.

This reflects an evolving belief that monetary policy is too blunt an instrument to support financial stability, which is better left to more focused and specialized policies and policymakers.2 Hence, while macroprudential policies have been elevated to new macroeconomic instrument, the basic pre-crisis assignment that financial regulators should take care of financial risks and that monetary policymakers should focus on stabilizing the business cycle has been largely maintained. Equally strikingly, central banks continue to use inflation targets as their basic framework, even though in the run-up to the crisis it was asset prices and trade deficits rather than inflation that most clearly pointed to overheating in the United States and the Euro area periphery. There are certainly macroeconomists who take a more eclectic view and think that monetary policy should also focus on financial imbalances, most notably in the Bank for International Settlements.

The new paradigm in the 1980s emphasized a market-orientated approach in which the role of the government was to provide a stable backdrop against which the private sector could flourish. This approach, associated with the pro-market philosophy of Prime Minister Margaret Thatcher of the United Kingdom and President Reagan of the United States, envisaged a limited role for government policies. The desire to get the government out of the way of private enterprise meant that independent central banks limited themselves to achieving the narrow objective of an inflation target. Similarly, other policy instruments were focused on providing a predictable environment in their own areas of expertise—government debt, financial stability, and potential growth. The North Atlantic crisis challenged this paradigm as a lightly regulated private sector turned out to be at least as capable of generating macroeconomic crises as government activism. If the economic instability and low growth of the 1970s was a product of overly active government policies, then the even more destructive crisis that erupted in 2008 was a product of too much confidence in the self-stabilizing properties of private financial markets.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

But after the Labour Government won the May 1997 general election, Chancellor Gordon Brown, to the country’s surprise, gave the Bank of England full responsibility for monetary policy, which became statutory when the Bank of England Act came into force on 1 June 1998. By this move, which meant independence for the central bank, the Labour Government answered concerns that government had a political agenda and so should not be given responsibility for setting interest rates and addressing inflation. Inflation targeting The chancellor, acting for the Treasury, defines price stability and sets the annual inflation target, and the Bank has the task of keeping inflation at the target set by the government. Its tool is the power to change the repo rate. This is the short-term rate at which the Bank of England lends to banks for repurchase agreements. It is for practical purposes synonymous with the term base rate. Under extreme circumstances, the government can instruct the Bank on interest rates for a limited period.

Markets are more efficient than they were in the 1960s and 1970s, _______________________________________ THE BANK OF ENGLAND 13  when employees routinely bargained through their unions for high wages linked to inflation expectations. Rising commodity prices contributed to the demand spiral. When inflation is high, prices become detached from value, and the economic outcome is suboptimal. Central banks such as the Bank of England traditionally fear that the inflationary environment could become embedded. Inflation targeting, as practised by the Bank of England, has had a clear impact across the world in helping to keep inflation expectations low. But some critics suggest it has encouraged the public to take on more debt. The Monetary Policy Committee On the request of Chancellor Brown, the Bank has established a Monetary Policy Committee, known as the MPC, to make interest rate decisions. It consists of the Governor of the Bank of England, who is appointed for a fiveyear term by the Chancellor of the Exchequer, and two deputy governors, also appointed for five years, as well as the Bank’s chief economist, the executive director of market operations, and four external members who have mainly been economists.

This is still published but may not be in the foreseeable future because it is no longer used much for practical purposes, although the RPI is still used for the indexation of pensions, state benefits and index-linked gilts. If inflation should be more than 1.0 per cent above or below the 2.0 per cent a year CPI target, the Governor of the Bank must write an open letter to the Chancellor explaining why inflation has missed the target and what the Bank will do to bring inflation back within the inflation target parameters. The governor wrote such a letter in April 2007, which was the first since the government handed monetary policy control to the Bank in 1997. In deciding on interest rates at its monthly meeting, the MPC considers a wide range of economic indicators and surveys, including the CPI, earnings growth, the Purchasing Managers’ Index, producer prices, gross domestic product, retail sales, house prices and the performance of sterling.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

Indeed, all of these ripple effects from a mandate that was fixated on price stability, which had no focus on employment, inevitably meant that the average unemployment rate was higher than it would have been otherwise, regardless of whether there was a financial crisis. In this scenario, there would always be a greater gap between actual and potential output. Inflation targeting, entailing increasing interest rates whenever inflation exceeds or even approaches the 2 percent target, ensured this outcome. Three widespread beliefs dominated thinking of the time. The first we have already noted: if only monetary authorities stopped inflation, the private sector could take care of the rest by ensuring high growth and full employment. The second was that monetary authorities should be given simple rules to implement, rules like inflation targeting or the even simpler monetarist rule that prevailed for years, before it was discarded: just increase the money supply at the rate of growth of the real economy.

What follows are some ideas that might create the flexibility that the ECB and European monetary policy so desperately need: ■ Use the discretion that Maastricht does provide. Price stability at the ECB currently means below but close to 2 percent. But this number is not specified by the Maastricht Treaty; it is an interpretation. Why is it not zero? Why not 3 percent? There is no legal answer to these questions. It is a matter of judgment. Setting a higher inflation target could help close the deep fissures between the European core and periphery. It could also broaden the interpretation still further to state that price stability means inflation “not below 1 per cent and not above 4 per cent,” thus providing more room within which it could exercise discretion. ■ Use core inflation metrics. Unlike the Federal Reserve, the ECB bases policy on headline inflation (the rate of increase in overall prices) rather than on core inflation (inflation in the economy that excludes the volatile food and energy sectors).

The ECB undertook a valuable research exercise in 2015 and 2016, which showed that unorthodox monetary policy (such as quantitative easing) helped to expand aggregate demand in these periods of economic weakness.6 If central bankers can anxiously scan the horizon for wages that rise too fast and threaten to push prices higher, they can surely do so for persistently low inflation, deflation, and disinflation. ■ Make any inflation target symmetrical, or even biased toward preventing deflation, since periods of high unemployment are associated with deflationary pressures. If inflation dips too low, market participants need to understand that the ECB will react as strongly as it would if inflation threatened to rise, by providing strong monetary stimulus. For too long since the financial crisis, deflation has stalked the European economy, but the ECB dithered in making its goal to raise inflation clear.


pages: 312 words: 93,836

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, price stability, profit maximization, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Y2K

We watched every step the central banks took, scrutinised every word they said – anything that could provide a clue to the future direction of LIBOR. The interest in LIBOR, however, was mutual. Just as much as it mattered to traders, it mattered to central bankers. This is why. Assume that the UK inflation rate falls, and the Bank of England therefore decides to lower the base rate (the official interest rate used for lending to other banks) to meet its inflation target of 2 per cent. The interest rate cut is supposed to be transmitted immediately to the interbank money market rate (where banks lend to each other). Unless people think that the Bank of England will change its mind and reverse the rate cut the following day (or week or month), banks will probably decide to lower the one-week rate, the one-month rate, the three-month rate, and perhaps even interest rates with longer maturities.

Unless people think that the Bank of England will change its mind and reverse the rate cut the following day (or week or month), banks will probably decide to lower the one-week rate, the one-month rate, the three-month rate, and perhaps even interest rates with longer maturities. Then, as banks compete with each other for customer business, they lower the interest rates they charge for variable rate loans, overdrafts, and so on. Rates offered to savers are also lowered and mortgages might get a touch cheaper. As the lower interest rates gradually filter through to the real economy, inflation begins to creep up towards the Bank of England inflation target of 2 per cent.2 This process, the ‘monetary transmission mechanism’, can be seen as the channel through which a specific interbank money market rate – the three-month rate, say – is generated. The central bank does not determine the three-month interbank money market rate. The banks do. However, the central bank has considerable power to influence it. How do banks know what the Bank of England base rate is?

When the Federal Reserve realised that the interest rate cuts announced during the autumn were not filtering through to the money markets, it introduced the Term Auction Facility (TAF), an arrangement whereby US-based banks could borrow from the Federal Reserve without using the discount window. Similar market movements were observed in other currencies, with central banks across the developed world resorting to comparable measures. Central banks found themselves in a difficult position as the symmetry of the monetary transmission mechanism had broken down. Price stability through inflation targeting had gradually become more important than financial stability as a central bank goal. However, the former goal no longer applied. Having become more transparent themselves, central banks now had to rely on information and signals provided by the banks and the markets. The key indicator, the ‘LIBOR–OIS spread’, provided evidence of severe stress in a range of currencies and markets. The overnight index swap (OIS) was a derivative instrument that was indexed to the ‘risk-free’ central bank interest rate.


pages: 537 words: 144,318

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

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, 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, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, 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, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

Central banks changing the manner in which they conduct policy can be a source of alpha. People think of inflation targeting as the Holy Grail, but that cachet has applied for less than a decade. For example, the National Bank Act in Switzerland formalized the Swiss National Bank’s (SNB) independence and mandate in the constitution only in 2003, which is frankly like yesterday in the big picture. You could argue that inflation targeting has worked as planned, but that it also led to the crisis of 2008. Because people thought that price stability was here forever, they started levering up, and asset prices exploded. An example where alpha may result from policy change going forward is central banks moving away from inflation targeting, whereby they perhaps target inflation and credit growth. That would generate volatility and change how risk premia are valued.

The synchronization of global economies is really what drove the reduction in volatility across global markets over the past decade. Increased synchronization is quite easy in a low inflationary or declining inflationary environment. But if you move to an environment with credit and balance sheet problems, like the one we are in now, you can have much greater policy divergence. Every major central bank in the world over the last 10 years has been inflation targeting, and this may well cease to be the driver going forward. The ECB may target inflation, whereas the Fed may target growth, for example. Congress is already trying to pass legislation to end the Fed’s independence. Of course, the Fed is not really independent anyway, but this kind of policy divergence will drive real economic divergence, which, in turn, will drive volatility and broader change.

See European Central Bank Economic crash (2008) banks, problems foresight Economic cycle, driver (location) Economic entity, presence Economic leverage, accounting leverage (contrast) Economy, double dip (hypothesis) Efficient frontier leverage, relationship Efficient markets, disbelief Electorate-adjusted El-Erian, Mohamed Emerging markets bearish markets bubble collapse corporate bonds, usage decoupling equities, selection Employee pension scheme, capital allocation End of the Line, The (Lynn) Endowment Model flaws invalidation orientation portfolio resemblance Endowments cash level Commodity Hedger process decrease in-house trading staff, absence problems Energy, usage Equities bubble/overvaluation performance risk, commodity risk (contrast) risk premium, faith risky assets Equity assets, U.S. public/private pension ownership Equity bubble, conditions Equity-centric portfolio, endorsement (Swensen) Equity concentration risk, awareness Equity index futures, usage Equity-like instruments, usage Equity multiples (1980-2000) Equity-oriented portfolios, decrease Equity returns, Harvard/Yale endowments (contrast) Equity Trader, The adaptability call blow-ups, avoidance business entry CalPERS operation core positions trading, indices/options (usage) discipline, lessons environment differentiation focus fundamentals, understanding future adaptability hedge fund operation, worries outlook interview investor meetings lessons manager, investor base (impact) market environment identification momentum trades, options (usage) performance, randomness P&L, trading portfolio construction positioning, understanding private deals, execution profit-taking process real money fund management research team, usage risk framework transition rules, discovery socialism, concern sovereign wealth fund operation stockholder understanding stocks, shorting/ownership (contrast) taxes, hedge traders competition hiring criteria trades ideas, origination quality risk/reward, change trading accounts, problems decisions, policy makers (impact) disaster preplanning sharpness style, implementation worldview Euro, two-year Euro interest rates European Central Bank (ECB) inflation targeting European Currency Unit (ECU) basket European Exchange Rate (ERM) European Monetary Unit (EMU) European Union, breakage (potential) Excess demand, control Excess return, valuation Exchange rate valuation, P/E multiples (relationship) Exchange-traded funds (ETFs) allowance usage Export land model Extreme scenarios, protection (purchase) Faber, Mark Family office manager Fat-tail events Favorite Trade concept format, Plasticine Macro Trader disapproval Federal Reserve Funds, target rate (2008) independence, cessation Feedback, impact Ferguson, Niall Fiat currencies, impact Fiat money, cessation Filipino Diaspora Finance, diversification (impact) Financial bubble, risk Financial instruments, usage Financials, future Financial stocks (2007-2008) Financing problems Firm-level risk management Fiscal policy easing role, impact underestimation Fiscal stimulus China impact Fixed income trading, focus Fixed income volatility trade Flexibility, value (example) Fordham Law School, support Forecast combinations, improvement Forecasting model parameters, estimation Foreign currency diversification, usage Foreign Direct Investment (FDI) Forward fixed income Forward price, spot price (contrast) Forward-starting volatility Friedman, Milton Front contracts, physical commodities Fundamental investing/research, time frames (matching) Fundamentals, understanding Fund management, skill Fund performance, indicator Future benefit obligations, earnings Future correlations, usage FX forwards G3/G7 liquid rate, arbitrage opportunity (absence) G7 demand G7 economies, problems G10 policy General Theory of Employment, Interest, and Money, The (Keynes) German Schatz contracts Global adjustment period Global dollar carry trade Global economy, weakness Global equities decrease markets, decline Global fund management industry Global governments, financial system (backstopping) Globalization, meaning Global macro approach Global macro funds, factors Global macro hedge fund managers Global warming, carbon dioxide (impact) Gold (1979-1980) (1999) (2000-2009) (2004-2009) pension fund base currency safety Good leverage, classification Government bonds bull market (1985-2009) leverage, change LIBOR positions, leverage safety Government debt, funding Government default risk Government stimulus, payment Grantham, Jeremy Great Britain, ERM absence Great Depression spending, decrease taxes, increase Great Macro Experiment.


pages: 566 words: 155,428

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

"Robert Solow", Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, 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, money market fund, 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

It looks like a weak reed on which to stand. That said, it seemed to work pretty well in 2009, 2011, and 2012. Raise the Inflation Target A very different sort of unconventional monetary policy, suggested years ago by Paul Krugman for Japan and more recently by Ken Rogoff (and Krugman again) for the United States, is to raise the central bank’s target inflation rate. The idea here is that real interest rates, not nominal interest rates, matter most for spending decisions. Since the real interest rate is the nominal interest rate minus the expected rate of inflation, higher expected inflation should lead to lower real interest rates. Unlike other unconventional monetary policies, posting a higher central bank inflation target is not supposed to work on spreads at all. Rather, it is supposed to shift the whole structure of real interest rates down.

Besides, it may be difficult for a central bank to deliver higher inflation when its economy is depressed. In fact, one reaction to Krugman’s suggestion for Japan back in 1998 was, How in the world can the Bank of Japan (BOJ) make a credible promise to create 4 percent inflation? In fact, it has been hard-pressed to achieve even 1 percent inflation. Neither the BOJ in 1999–2000 nor the Fed in 2011–2012 was receptive to the suggestion that it post a higher inflation target. Reduce the Interest Rate Paid on Reserves A third form of unconventional monetary policy is to reduce the interest rate that the Fed pays banks on their excess reserves—perhaps even to a negative number, which would amount to charging a fee for holding excess reserves. This option requires some explaining, starting with some vocabulary. (Sorry!) Banks hold reserve balances—essentially, checking accounts—at the Fed.

See Mortgages; Subprime mortgages Home Owners’ Loan Corporation (HOLC), 324–26 Home-price bubble, 31–40 bank losses on (2007–2011), 44 down payments during, 47 economic media on, 33, 35, 39–40 evolution of, 32–35, 39–40 Federal Reserve, blaming for, 38–39 and home as investment fallacy, 36–38 home price collapse, 89 interest rates, impact on, 33, 38 leverage, impact on, 37–38 and refinancing, 38 remains left by, 35 Home prices historical view (1890–2012), 31–33 indices of, 17–18, 31–34 peak (2006–2007), 17–18 Home value fundamental value, 30 leverage against, 37–38, 47–49 time value of money applied to, 29–30 Hope for Homeowners, 329–30 Hope Now Alliance, 328 Household debt increase in (2000–2008), 49 mortgage indebtedness, 49 Hubbard, Glenn, 326–27 Hypo Real Estate Bank, decline and bailout of, 169–70 Iceland, financial crisis, 168, 170, 410 Illiquidity. See also Liquidity crisis defined, 103–4 versus insolvency, 103–4 IndyMac, 330–31 Inflation of asset prices. See Bubbles core inflation, 15n, 375 and Fed exit, 374–75, 378 and nominal/real interest rates, 376–78 relationship to employment, 15n, 375 Inflation target, increasing, 245 Information and efficient markets hypothesis, 64–65, 103 and free-riding, 285–86 Insolvency defined, 103 versus illiquidity, 103–4 Insurance company bailout. See AIG (American International Group) Insurance contract, credit default swaps (CDS) as, 66–67, 132 Interest rates and bond prices, 40 cuts, Keynesian view, 210–12 expectations theory of yield curve, 222–23 funds rate cuts (2007), 91–93, 95, 172 funds rate cuts (2008), 221–23, 352, 372 and high federal debt, 395 and home-price bubble, 33, 38 and inflation, 376–78 low, Fed policy, 38, 46 nominal and real, 376–78 normalizing, future view, 372–74, 378, 431 on repurchase agreements (repos), 53 risk premium.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Central banks heavily got into the business of influencing expectations and the deployment of other people’s money. As noted in the Financial Times’s editorial, “Monetary policy steers the economy through its effect on sentiment as much as any financial channel such as interest rates.”5 Central banks initially opted for public inflation targets. The process started a quarter of a century ago in New Zealand, where, battling persistent high inflation, the central bank adopted a highly publicized inflation target of zero to 2 percent after it was approved by parliament. Looking back on the history of an action that started a worldwide phenomenon, Neil Irwin of The New York Times observed that this seemingly little step constituted a huge communication revolution back then: “At the time, the idea of a central bank simply announcing how much inflation it was aiming for was an almost radical idea.

., American Government and Politics: Deliberation, Democracy, and Citizenship (Andover, MA: Cengage Learning, 2011). 5. “Central Banks Lift the Veil on More of Their Secrets.” Financial Times, December 14, 2014, http://www.ft.com/intl/cms/s/0/64d1c072-8206-11e4-a9bb-00144feabdc0.html. 6. Neil Irwin, “The Goal of 2% Inflation, Rethought,” New York Times, December 21, 2014, http://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-2-inflation-target-became-global-economic-gospel.html. 7. “Central Banks Lift the Veil on More of Their Secrets,” Financial Times, December 14, 2014, http://www.ft.com/intl/cms/s/0/64d1c072-8206-11e4-a9bb-00144feabdc0.html. 8. Nicholas Lemann, “The Hand on the Lever,” New Yorker, July 2014. 9. Binyamin Appelbaum, “Q. and A. With Charles Plosser of the Fed: Raise Rates Sooner Rather Than Later,” New York Times, January 30, 2015, http://www.nytimes.com/2015/01/30/upshot/q-and-a-with-charles-plosser-of-the-fed-raise-rates-sooner-rather-than-later.html. 10.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

This was the policy package of the Great Moderation. The anti-inflation stance of the Central Bank entailed making it independent of the fiscal authority. Central Bank independence became a mark of the sincerity of a government. Gordon Brown, on taking office as Chancellor in the New Labour government in 1997, immediately gave the Bank of England autonomy in determining interest rates in pursuit of an inflation target. We had come a long way from the euthanasia of the rentier. Economists do not do fieldwork as anthropologists do, nor do they, on the whole, experiment in a laboratory as natural scientists do. There is a branch called “experimental economics” but it has not changed the nature of the subject to any great extent. But economists do confront published data. The time series of data on income, consumption, investment and so forth are available on an annual or quarterly basis.

House price bubbles came to be a frequent phenomenon in the postwar years. Land being in fixed supply, a Ricardian prediction would be a rise in value of land relative to other commodities. House prices rose because the value of the land on which they stood was rising. Inflation had become a fact of life during the postwar years from the mid-1960s onward till the 1990s, before Central Banks and governments began to adopt inflation targets to keep it under control. House prices were thus rising along with all prices, but also relatively more because of land scarcity. Yet the expectation of a perpetual rise in house prices was to prove a fatal weakness in advanced economies. It was predicated upon inflation being a permanent fact of life. The Asian Crisis of 1997 Elsewhere, the search for stability in foreign exchange markets continued as more and more countries began to experience significant trade and capital movements.2 This was a new development for most of them, because they had previously run highly protected and sheltered economies.

(i) Phillips curve (i), (ii), (iii), (iv), (v), (vi), (vii) Friedman’s challenge (i) Friedman’s version (i) Phillips’ historical study (i) Pigou, Arthur Cecil (i), (ii), (iii) equation (i) “The Classical Stationary State” (i) Piketty, Thomas (i), (ii) Pitt, William (younger) (i) point of maximum efficiency (i) policy, responses to (i) politics, effect of economic change (i) population aging (i), (ii) growth (i), (ii), (iii), (iv) Malthus’ law (i) portfolio selection (i) Post-Keynesians (i) postwar economic order, planning for (i) poverty, urban (i) precautionary motive (i) precious metals acquisition of (i) as indicators of wealth (i) predictive modeling (i), (ii) preemptive tax cut (i) preference shocks (i) price, as value (i) price levels, new classical model (i) price rises 1492 to 1589 (i) and inflation (i) post-World War I (i) vs. value (i) price takers, vs. price setters (i) price volatility, Smith’s theory (i) prices agricultural (i) determination (i) empirical analysis of asset prices (i) and productivity (i) sticky (i) Prices and Production (Hayek) (i) pricing, monopoly power (i) Prince, Chuck (i) Principle of Motion (i) Principles of Economics (Marshall) (i) private spending, control of (i) privatization (i) problems, concealment by accounting (i) productivity and price of goods (i) and prosperity (i) professionalization, of economics (i) profit (i) dependence on market (i) effects of progress (i) vs. interest (i) maximization (i) realization of (i) as unearned income (i) profit rates, and unrestricted movement of capital (i) profit squeeze (i) profitability (i) progress, effects on profit (i) Progressive Movement, United States (i) prospect of recovery (i) prosperity (i), (ii), (iii) protectionism (i), (ii) public debt (i) as intergenerational (i) Keynesian models (i) public policy, inflation targeting (i) purchasing power parity (PPP) theory (i) quantitative easing (i) see also liquidity injecting quantity theory of money (i), (ii), (iii) railroads (i), (ii) Rajan, Raghuram (i), (ii) random events (i), (ii), (iii) rate of profit, and unrestricted movement of capital (i) rates of return, ex ante/ex post calculations (i) rational expectations (RE) (i), (ii), (iii) ready cash (i) Reagan, Ronald (i) real balance effect (i) real interest parity (i) real wages (i), (ii), (iii), (iv), (v), (vi), (vii) see also money wages; wages recapitalization, banks (i) reconstruction (i), (ii) recovery, prospect of (i) redistribution (i) regulation of banks (i) financial and commodity markets (i) UK approach (i) Reinhardt, Carmen M.


pages: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Albert Einstein, algorithmic trading, Andrei Shleifer, autonomous vehicles, bank run, banking crisis, basic income, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, disintermediation, Donald Trump, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, full employment, George Akerlof, germ theory of disease, German hyperinflation, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, market bubble, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, publish or perish, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

The dynamics of this worldwide narrative epidemic likely provide the best explanation for these epochal changes in trend of the two major economic variables, inflation and interest rates. The end of the wage-price spiral narrative was marked by changes in monetary policy and the advent of newly popular ideas: the independent central bank5 and inflation targeting6 by central banks. The independent central bank was designed to be free from political pressures, which organized labor tries to exploit. Inflation targeting was designed to place controlling inflation on a higher moral ground than appeasing political forces. The moral imperative here was strong. On its face, the wage-price spiral may seem purely mechanical. However, many believed it was caused by the greedy (immoral) behavior of both management and labor. President Dwight Eisenhower referred to the spiral in his 1957 State of the Union address: The national interest must take precedence over temporary advantages which may be secured by particular groups at the expense of all the people.… Business in its pricing policies should avoid unnecessary price increases especially at a time like the present when demand in so many areas presses hard on short supplies.

Storytelling Sociology: Narrative as Social Inquiry. Boulder, CO: Lynne Rienner Publishers. Bernanke, Ben S. 1983. “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression.” American Economic Review 73(3):257–76. ________. 2015. The Courage to Act: A Memoir of a Crisis and Its Aftermath. New York: W. W. Norton. Bernanke, Ben, Thomas Laubach, Frederic Mishkin, and Adam Posen. 1998. Inflation Targeting: Lessons from the International Experience. Princeton, NJ: Princeton University Press. Bernstein, Michael J., Steven G. Young, Christina M. Brown, Donald M. Sacco, and Heather M. Claypool. 2008. “Adaptive Responses to Social Exclusion: Social Rejection Improves Detection of Real and Fake Smiles.” Psychological Science 19(10):981–83. Bettelheim, Bruno. 1975. The Uses of Enchantment: The Meaning and Importance of Fairy Tales.

., as, 127; preference for one’s country or ethnic group, 102; quotes associated with, 102; Reagan’s free-market revolution and, xii; Reagan’s supply-side rhetoric and, 51; shoeshine boy narrative and, 236–37; substituted as originator of a quote, 102; substituted for different target audience, 101; substituted to increase contagion, xii; Trump as, xii; Virginia Woolf as, 26; William Jennings Bryan as, 168 Centennial Exhibition of 1876, 177 central bank: end of wage-price spiral narrative and, 261; inflation targeting by, 261, 262; words and stories that accompany actions of, xvi. See also Federal Reserve Cents and Sensibility (Morson and Schapiro), 16 chaos theory, 299–300 Chaplin, Charlie, 195 charitable giving in US, declining from 2001 to 2014, 272 Chase, John C., 181 Chase, Stuart, 185 chemical reactions, rate equations for, 290, 321n3 Cheney, Dick, 44 Chudley, Jody, 236 Chwe, Michael Suk-Young, 303n9 Cicero, 34, 46 Civil War, US: anger at those profiting during, 265–66; depression prior to, 111; emotional power of narratives and, 14; narrative describing first shots of, 81; panic of 1857 in run-up to, 115; Uncle Tom narrative and, 33 Cobden, Richard, 110 co-epidemics: of diseases, 294–95; of diseases with narratives, 23; of narratives, 28, 110, 225, 322n9 (see also constellations of narratives) Coinage Act of 1834, 157 Coinage Act of 1873, 157, 165 Coin’s Financial School (Harvey), 161, 162 Cole, Harold L., 132 collective consciousness, 60 collective memory, 60 communications technology.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

These examples represent economics at its best. There are many others: Game theory has been used to set up auctions of airwaves for telecommunications; market design models have helped the medical profession assign residents to hospitals; industrial organization models underpin competition and antitrust policies; and recent developments in macroeconomic theory have led to the widespread adoption of inflation targeting policies by central banks around the world.1 When economists get it right, the world gets better. Yet economists often fail, as many examples in this book will illustrate. I wrote this book to try to explain why economics sometimes gets it right and sometimes doesn’t. “Models”—the abstract, typically mathematical frameworks that economists use to make sense of the world—form the heart of the book.

Preston McAfee and John McMillan, “Analyzing the Airwaves Auction,” Journal of Economic Perspectives 10, no. 1 (Winter 1996): 159–75; Alvin E. Roth and Elliott Peranson, “The Redesign of the Matching Market for American Physicians: Some Engineering Aspects of Economic Design,” American Economic Review 89, no. 4 (1999): 748–80; Louis Kaplow and Carl Shapiro, Antitrust, NBER Working Paper 12867 (Cambridge, MA: National Bureau of Economic Research, 2007); Ben Bernanke et al., Inflation Targeting: Lessons from International Experience (Princeton, NJ: Princeton University Press, 1999). 2. Steven D. Levitt and Stephen J. Dubner, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow, 2005). CHAPTER 1: What Models Do 1. Ha-Joon Chang, Economics: The User Guide (London: Pelican Books, 2014), 3. 2. David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, NJ: Princeton University Press, 1997). 3.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

Among the measures were the following: • Using newly printed money to buy “unconventional” assets like long-term bonds and private debts • Using newly printed money to pay for temporary tax cuts • Setting targets for long-term interest rates—for example, pledging to keep the interest rate on ten-year bonds below 2.5 percent for four or five years, if necessary by having the Fed buy these bonds • Intervening in the foreign exchange market to push the value of your currency down, strengthening the export sector • Setting a higher target for inflation, say 3 or 4 percent, for the next five or even ten years Bernanke pointed out that there was a substantial body of economic analysis and evidence for the proposition that each of these policies would have a real positive effect on growth and employment. (The inflation-target idea actually came from a paper I published in 1998.) He also argued that the details probably weren’t all that important, that what was really needed was “Rooseveltian resolve,” a “willingness to be aggressive and experiment—in short, to do whatever was necessary to get the country moving again.” Unfortunately, Chairman Bernanke hasn’t followed Professor Bernanke’s advice. To be fair, the Fed has moved to some extent on the first bullet point above: under the deeply confusing name of “quantitative easing,” it has bought both longer-term government debt and mortgage-backed securities.

A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any action along the lines I’ve advocated. It’s not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard’s N. Gregory Mankiw and Columbia’s Glenn Hubbard, are committed Republicans but also quite Keynesian in their views about macroeconomics. Indeed, early in the crisis Mankiw argued for a sharp rise in the Fed’s inflation target, a proposal that was and is anathema to most of his party. His proposal caused the predictable uproar, and he went silent on the issue. But we can at least hope that Romney’s inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic/Keynesian nature. I know, I know, hoping that a politician is in fact a complete fraud who doesn’t believe any of the things he claims to believe is no way to run a great nation.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, 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, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, 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, stocks for the long run, 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, zero-sum game

It was by no means true that central banks had, in the past, targeted only the prices of goods and services (a glance through William McChesney Martin’s speeches is a case in point), but now, if one were to hear a Fed official, economist, or the media, this sole focus was writ in stone. Speeches by Federal Reserve governors linked deflations with depressions. We needed inflation. This was new to the FOMC’s table of woes, but now the man who wrote the book (at least part of it) was sitting at the table: Inflation Targeting: Lessons from the International Experience (Princeton University Press, 1999).11 According to Professor Bernanke the economy needed positive price inflation to prevent deflation. Now was the time to test his thesis on a laboratory of 300 million Americans. Besides writing, Bernanke talked. On November 21, 2002, Federal Reserve Vice Chairman Ben Bernanke stood at the Washington National Economists Club’s podium and delivered a fearful message: “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” 10 Sidney Homer and Richard Sylla, History of Interest Rates, 4th ed.

Bank of America President Ken Lewis said that the worst of the housing slump was just about over: “We’re seeing the worst of it.”31 Stanley O’Neal, CEO of Merrill Lynch, earned his bonus the following day, stating that subprime defaults were “reasonably well contained.”32 It would be unfair to blame the Federal Reserve chairman for the institution’s somnolence. From public comments at the time, all of the governors seemed as unenlightened as Bernanke. In January 2007, Frederic Mishkin, former (and future) professor of economics at Columbia University andan author, with Ben S. Bernanke, of Inflation Targeting: Lessons from the International Experience (the two were considered the intellectual heavyweights at the Fed); stated: “To begin with, the bursting of asset price bubbles often does not lead to financial instability. . . . There are even stronger reasons to believe that a bursting of a bubble in house prices is unlikely to produce financial instability. . . . [D]eclines in home prices generally have not led to financial instability.”33 29 Saskia Scholtes and Gillian Tett, “Worries Grow about the True Value of Repackaged Debt,” Financial Times, June 28, 2007. 30Ben S.

By that time, the Implode-O-Meter Web site listed 126 imploded mortgage companies, including 10 that closed up shop the same week.37 Yet, Bernanke told a group of central bankers and economists in October that he had no way of knowing if there had been a housing bubble.38 33 Frederic S. Mishkin, “Enterprise Risk Management and Mortgage Lending,” speech at the Forecaster’s Club of New York, New York, January 17, 2007; in addition to Mishkin and Bernanke, there were two other authors of Inflation Targeting (Princeton, NJ.: Princeton University Press, 2001): Thomas Laubach and Adam S. Posen. 34 Kevin Warsh, “Hedge Funds and Systemic Risk: Perspectives on the President’s Working Group on Financial Markets,” Hearing of the House Financial Services Committee, July 11, 2007. 35 Ibid. 36 Randall S. Kroszner, “Analyzing and Assessing Banking Crises,” speech at the Federal Reserve Bank of San Francisco Conference on the Asian Financial Crisis Revisited, San Francisco (via videoconference), September 6, 2007. 37The Fed followed with a surprising announcement.


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Among many choices, including the gold standard, Friedman has favored a "monetary rule" whereby the money supply (usually M2) is increased at a steady rate equal to the long-term growth rate of the economy. One of the problems with Friedman's monetary rule is how to define the money supply. Is it Ml, M2, M3, or what? It is hard to measure in an age of money market funds, short-term CDs, overnight loans, and Eurodollars. Notwithstanding theoretical support for a monetary rule, central bankers have largely focused on "inflation targeting," that is, price stabilization and interest rate manipulation, as a preferable method. The Shadow of Marx and the Creative Destruction of Socialism The Herculean efforts of Milton Friedman, Friedrich Hayek, and other libertarian economists were not the only reason neoclassical economics has made a stupendous comeback. The other reason is the collapse of Marxist-inspired Soviet communism and the socialist central planning model in the early 1990s.

They are sharply critical of free-trade agreements and the potential loss of jobs to producers in China, Mexico, and other developing countries. The central role of government monetary policy is a global concern. Fiscal policy may have been dethroned as a stabilization tool, but central bank policy might fail to do its job in maintaining macroeconomic stability. Monetary authorities have been known to blunder, overshooting their interest-rate or inflation targets. Their response to every crisis, whether it be a currency crisis or economic downturn, seems to be to adopt an "easy money" policy by injecting liquidity into the system and cutting interest rates below the natural rate. The result has been an increasing structural imbalance and asset bubbles in stocks, real estate, and other sectors. How far they can go with such unstable policies without creating a major global financial crisis remains to be seen.


pages: 261 words: 86,905

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

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, 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, Myron Scholes, negative equity, 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, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

The Reserve Banks also participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy.33 The whole idea of a central bank has been controversial in US history, with antifederal critics correctly arguing that it would have immense and to some extent undemocratic power—which, it turns out, is exactly why a central bank proved necessary, since without it the financial system kept suffering from unmanageably severe crises. The Fed is in general opaque and secretive about its own processes; while it was for years assumed to have an inflation target, it was only in January 2012 that the governor of the Fed, Ben Bernanke, made the target explicit at 2 percent. fiat money The kind of money that is easy to get your head around is money that has something real behind it, some physical thing that you can exchange for your cash. Once upon a time your banknotes had behind them the weight, literally, of gold: you could in theory turn up at a bank and exchange your cash for a specific quantity of the precious metal.

(In the Middle Ages and early modern period, when there was no understanding of inflation as a process, people came up with all kinds of wild speculation about rising prices, blaming profiteers, the king’s evil counselors, witchcraft, the Jews.) There is, however, consensus that a degree of inflation is a good thing, because it gives some wiggle room to adjust growth by means of interest rates: if inflation is nonexistent and interest rates have already been cut, then the government has no obvious way of stimulating growth. For this reason, the inflation target in the USA and the UK is 2 percent and in the euro area the target is “close to but below 2 percent,” the idea being that this confers stability in prices without the risk of deflation. Higher inflation than that is problematic for reasons that are clear from history and were accurately predicted by John Maynard Keynes, in his critical account of the Versailles treaty: By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

Regulating the Private Banking System Since the financial crisis, there has been a growing recognition of the need for what is now known as “macroprudential policy” — or regulation intended to curb systemic risk in the financial system.7 Such policies aim to ensure banks do not create too much debt, either relative to the size of the economy, or relative to the amount of capital they hold. It will be important for an incoming socialist government to use these policies to constrain the power of the private banking system, reduce debt levels, and control asset prices. The overarching regulation should be shaped around a new target for the Bank of England: an asset price inflation target.8 The Bank should use new and existing regulatory tools to monitor domestic asset prices and control the amount of credit in the system to mute the ups and downs of the financial cycle. Knowing that banks are likely to lend too much when times are good, and lend too little when they are bad, the Bank should guide the private sector’s lending behaviour by using dynamic regulatory interventions.

In the absence of a democratic pushback, the decisions of the independent Bank of England and other technocratic institutions responsible for supervising the finance sector, have come to reflect the interests of the powerful finance sector. If the UK’s most important economic institutions are not democratised, then the powerful will use their control over our governing economic institutions to thwart a transition to democratic socialism. The Bank of England must therefore be reformed and democratised. The introduction of an asset price inflation target for the FPC should be accompanied by a change in the MPC’s remit: rather than simply monitoring consumer price inflation, the MPC should monitor the output gap — the gap between current demand in the economy and potential supply. These committees would have to work together very closely to monitor both consumer and asset price inflation and ensure they are coordinating their interventions to maximise their effectiveness.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low cost airline, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, Plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

They could innovate and grow their balance sheets however they chose, inventing new instruments along the way, and now even the capital they were obliged to hold to sustain confidence could be fudged to meet national rather than international norms. They had been given the wink. A monster was about to be spawned. Turbo finance The implosion of the Communist Bloc and the triumph of liberal capitalist democracy initiated a further intensification of globalisation and the high-water mark of the Washington consensus. However, although the main contours were agreed – rolling back the state, deregulation, balancing budgets, setting inflation targets, privatisation and generally extending the ‘magic of the market’, as Ronald Reagan had famously dubbed it – there was still room for debate. Some economists, such as Jagwad Bhagwati, had impeccable free trade credentials but still had doubts about financial deregulation. For them, free trade should have been first in the sequence of priorities; deregulating finance, on account of its attendant risk, last.

The banks, as much as the governments, had become sources of liquidity creation as long as there were providers of cash for any given collateral and counter-parties ready to hedge the risks in the derivative markets. As everybody was individually guarding against risk, luminaries like Alan Greenspan claimed that the system as a whole was not risky, even as it created a growing mountain of credit and debt. Moreover, inflation targeting would ensure that there was no consequent inflation. All of these assumptions exploded to devastating effect in 2008. If the 1980s were the decade of interest and currency swaps, the 1990s were the decade of securitisation, and the 2000s the decade of credit default swaps. The great investment banks vied with each other to find the most innovative diversification and hedging techniques. Hedging risk has always had a dual character.

Moreover, the British will be deleveraging at the same time as the other countries in the study. The chances of growing out of trouble through export will thus be small. Meanwhile, the option of default would wreck the country’s international financial standing (and it has not been adopted as a strategy in Britain since the fourteenth century). Thus only two options remain: inflation and belt-tightening. Unless the Bank of England’s 2 per cent inflation target is abandoned, the decade therefore begins with the economy facing a prolonged six–seven-year period of belt-tightening, dramatically lower credit growth and subdued GDP growth. The institute cites Japan as a warning of what might happen – as does Richard Koo, chief economist of Japan’s Nomura Research Institute.7 For more than a decade of his professional life, Koo has been exploring the fallout of Japan’s 1989–92 credit crunch on the $5 trillion Japanese economy.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, market clearing, Martin Wolf, means of production, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

In a modern economy with millions of goods and services and ongoing changes in preferences and in economic conditions, initiated by innovation and entrepreneurial activity, the task is even more difficult. Defenders of paper money and price stabilization will argue that the money producer can still identify certain trends in such variables as economic growth and wealth and, therefore, in money demand. If only the money producer forecasts these trends correctly, he stands a good chance of achieving stability over the medium to long term. Most inflation-targeting central banks today allow for a certain amount of near-term volatility around their aimed-at inflation rate, anyway. But again, for as long as money demand develops in a stable and somewhat predictable fashion, it does not pose a particular challenge for a commodity currency of fixed supply either. If we assume that an economy experiences a steady rise in the demand for money of about, for example, 2 percent per annum, in a commodity money system with an essentially fixed money supply everybody could simply adjust monetary calculations for the tendency of an ongoing deflation of 2 percent per year.

For the fiat money producer to avoid this effect, he would have to anticipate sudden (nonlinear) changes in money demand before they impact money’s purchasing power. He would have to know of a coming change in the demand for money before even the individual economic agents know of it. This is theoretically and practically an impossibility. If, for example, a sudden rise in money demand occurs, it will immediately cause a drop in the price average. As a result, the money producer will undershoot his inflation target for a period, but there is no reason for him to compensate this effect with increased money production in the next period. First, the change in money demand may have reasonably been a one-off event, rather than a trend change. Second, the shock of a move in the price level has now occurred and additional money creation will not undo it. And third, the overall demand for and supply of money are again in equilibrium.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

If the government authorities want their warnings to be effective, they need to provide their cautionary statements early enough to forestall some of the excesses of the euphoric period and late enough so the statements are credible. One metaphor from a former chairman of the Federal Reserve is that authorities are reluctant to take the ‘punch bowl away from the party just as the party is getting going’ because of the unfavorable public reactions. The modern tradition is that the central banks develop their monetary policies to moderate the increases in the consumer price level or some other price level index; ‘inflation targeting’ became their new mantra. The policy question is whether the central bankers should ignore the increases in the prices of real estate and stocks if they are far above their long-run equilibrium values. Attempting to convince the speculators through statements alone generally has been futile. Financial distress Distress is widely discussed in connection with financial crises. The term is imprecise: one meaning is a state of suffering and another is of a hazardous situation.

The appreciation of the yen from 240 to the US dollar in 1985 to 130 in 1988 led to downward pressure on prices of goods and services.25 A major question is whether central bankers should be concerned with asset prices. Most central bankers choose stability of the goods price level as the target of monetary policy,26 whether it be wholesale prices, the consumer price index, or the gross domestic product deflator is not a critical issue. Most recently the policy mantra has been inflation targeting – central banks aim to achieve an inflation rate no higher than 2 percent. If, however, the implosion of a bubble in stocks and/or real estate leads to a significant decline in bank solvency, should the central banks be concerned with asset prices? In one view, asset prices should be incorporated into the general price level because, in a world of efficient markets, they forecast future prices and consumption.27 But this view assumes that asset prices are determined by the economic fundamentals and are not affected by the herd behavior that leads to a bubble.

Morier 163 excessive leverage concept 30 exchange rates 2, 293 floating 2, 165, 178, 186, 187, 229, 250, 279, 291 pegged 2, 6, 16, 17, 98, 168, 190, 229, 244, 246, 250, 277, 291 see also foreign exchange Exchequer bills 197, 200, 210–12 expectations adaptive 39–40 rational/irrational 39–40, 84–5 fallacy of composition 42, 213, 231 Fannie Mae 24, 87, 195, 263, 299, 300 Fastow, Andrew and Lea 132 Fauntleroy, Henry 141 Federal Deposit Insurance Corporation (FDIC) 65, 127, 210, 251, 262, 265, 270 Federal Reserve Act 1913 (US) 65, 224 Federal Reserve Bank of New York 82, 168, 208, 223, 227, 245, 246, 249, 252 Great Depression and 78–9, 99, 104, 167–8, 223 Federal Reserve Board 19, 77, 168, 183, 223, 227 Federal Reserve System 20, 65, 89, 91, 203, 251 Volcker shock, 1979 284 Federal Savings and Loan Insurance Corporation (FSLIC) 24, 127, 210 Fidelity group 104 financial deepening 259 financial distress 84–5, 90–4, 162, 166 swindles/fraud and 144 financial liberalization see deregulation financial regulation 174 bank regulation/supervision 193–4 Finland 121, 157, 280, 285 First Bank of the United States 219 First Jersey Securities 47, 138 First Republic Bank of Dallas 210 First World War see World War I Fisher, Irving 18, 27, 44 Fisk, Jim 46, 139, 165 Fordyce, Alexander 58, 96, 142 foreign exchange 1, 2, 35, 120, 148 see also exchange rates foreign exchange crises 2, 3, 6–7, 250 Foxwell, H.S. 101–2, 226 France 55, 63, 92 1825 crisis 235–6 1826–32 speculation 49–50 1836–39 crisis 89, 162 1857 crisis 89 1882 crash 74–5, 97 Alsace crisis, 1827–28 161, 204 Paris vs London 239–40 see also Bank of France; French Revolution Franco-Prussian indemnity 54, 165 Franklin National Bank, New York 3, 44, 103, 251 fraud see swindles/fraud Freddie Mac 24, 87, 195, 263, 299, 300 Frederick II of Prussia 54, 160, 200 French Revolution, 1789–95 53–4, 96 Friedman, Milton 41, 197, 209 on Great Depression 78–9, 81, 154–5, 215 G-5 256 G-7 252, 256 gambling 59, 60, 89, 140 see also swindles/fraud Garber, Peter M. 111 Garnier-Pagès, Louis Antoine 213 Genoa Conference, 1922 77 Germany 157–8, 165–6 1925 depression 21, 50, 53, 167–8 Berlin 112, 145, 160, 165, 237 Berlin crisis, 1763 200 Cologne 3, 163–4, 251, 278 Dawes loan to, 1924 242 Hamburg see Hamburg Maklerbanken 63 the mark 77, 78, 241 Reichsbank 91, 93, 224, 238 see also Prussia Gibbons, James S. 94, 150 Glass-Steagall Act 1932 (US) 91, 144, 150–1, 168–9, 194, 298 Global Crossing 119 Glyn, Mills & Co. 207 Goddefroy, Gustav 144 gold 3, 4, 14, 31, 43–4, 48, 63, 82, 91, 93, 164, 168, 230, 235, 238–9, 242, 245, 246, 247, 275 exchange standard 77–8, 83, 154 panic, 1869 46, 165 standard 66, 73, 79, 242, 243 gold agio, in US 46, 155, 165 gold discoveries 48–9, 60, 164 gold parity 2, 43 gold prices 1869 panic 46, 165 1970s surge 43–4 gold-exchange standard 77–8, 83, 154 Goldman Sachs 120, 270 Goldschmidt, Jacob 217, 244 Gould, Jay 46, 165 grain prices see corn prices Granger movement 101 Grasso, Richard 135 Great Britain 1636 bubble 11 1772 crisis 96 1810 crisis 160 1825 crash and panic 88, 92, 105 1864 crisis 97 1872–73 financial distress 238 1886 crisis 73 1907 financial distress 94, 119, 167–8 1931 crisis 244, 246 Cabinet Committee on Economic Information 243 Glorious Revolution, 1688 53 railway booms 45, 225 Scotland 81, 224 see also Bank of England Great Depression, 1928–33 causes of 21, 63, 76, 78–80, 89, 154, 167–9, 240–6 credit expansion and 78ff as international 167–9 Keynesian view of 79–80 lenders of last resort and 227, 228 monetarist view of 79–80 Greece 170, 171, 274, 275, 287 Greenspan, Alan 10, 19–20, 29, 90, 99, 183, 186, 191, 223, 227 Grill, Carlos and Claes 72 Grubman, Jack 22, 119, 137, 139 guarantee of liabilities 206–8 Guinness, Arthur and Co. 49 Guy, Thomas 100 Hamburg 50–1, 160 1836–39 crisis 236 1857 crisis 205–6, 236–7 Hansen, Alvin H. 35, 78 Harrison, George 223, 227 Hatry, Clarence 142 Hawtrey, R.G. 103, 162, 242–3 on IMF 330n44 Hayek, Friedrich 81 HealthSouth 119, 135, 152 hedge finance 29, 69 hedge funds 20, 55–6, 74, 86, 95, 121, 136–7, 150, 199, 262 see also Long-Term Capital Management (US) Herstatt AG, Cologne 3, 251, 278 Holland (the Netherlands) 59, 62 1763 crisis 235 Amsterdam see Amsterdam tulipmania, 1636 11, 17, 59, 109–11 home-equity credit 68–9 Hong Kong 85, 178, 233 Hoover, Herbert 154, 167, 195–6 Howson, Susan 242, 225 Hoyt, Homer 111–2 Hudson, George 147 Hungary 165, 242 Hunt, Bunker 94 Huskisson, William 211–12 Hyndman, H.M. 305n33 Iceland 4, 10, 20, 28, 36–7, 121, 154, 186, 187, 287 ImClone 135 India 54, 130, 139, 164 Indonesia, 1990s asset price bubble 1, 6, 8, 11, 24, 104, 126, 180, 253 inflation in 1970s 81, 282–3 hyperinflation 98, 241 in US 282–3 inflation rates 4–5, 181, 282–6 inflation targeting 115 information availability 303n10 ING (bank) 4 initial public offerings (IPOs) 56, 181 Innovation financial 51, 55–6, in credit expansion 62–5, 66, 69–77, 131 technological 18, 27, 56, 181 insiders see outsiders/insiders insider trading 120 installment credit 63, 69 Insull, Samuel 148 interest rates 44, 174, 284 on international loans 35–6 on junk bonds 71 panics and 49–50, 54–5, 82, 106 in Ponzi finance 29 International Bank for Reconstruction and Development (IBRD) see World Bank International Monetary Fund (IMF) 104, 202, 247–8 General Arrangements to Borrow 248 R.G.


Power Systems: Conversations on Global Democratic Uprisings and the New Challenges to U.S. Empire by Noam Chomsky, David Barsamian

affirmative action, Affordable Care Act / Obamacare, Albert Einstein, American ideology, Chelsea Manning, collective bargaining, colonial rule, corporate personhood, David Brooks, discovery of DNA, double helix, drone strike, failed state, Howard Zinn, hydraulic fracturing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Julian Assange, land reform, Martin Wolf, Mohammed Bouazizi, Naomi Klein, Nelson Mandela, new economy, obamacare, Occupy movement, oil shale / tar sands, pattern recognition, Powell Memorandum, quantitative easing, Ralph Nader, Ralph Waldo Emerson, single-payer health, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, Tobin tax, union organizing, Upton Sinclair, uranium enrichment, WikiLeaks

But the European Central Bank is rigidly adhering to austerity programs, under mostly German influence. The U.S. Federal Reserve, at least in principle, has a dual mandate: one of them is to control inflation, the other is to maintain employment. They don’t really do it, but that’s the mandate. The European Central Bank has only one objective, to control inflation. It’s a bankers’ bank, nothing to do with the population. They have an inflation target of 2 percent, and you’re not allowed to threaten that.1 In fact, there is no threat of inflation in Europe. But they insist on not carrying out any stimulus or anything like quantitative easing or other measures that might increase growth. The effect is that the weaker countries in the European Union are never going to be able to get out of their debt under these policies. In fact, debt levels are getting worse.


pages: 209 words: 53,236

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, bank run, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, Home mortgage interest deduction, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, Jeff Bezos, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, money: store of value / unit of account / medium of exchange, mortgage tax deduction, obamacare, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, smart grid, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

Because of the buildup of mountains of debt and contingent liabilities across the globe under the management of central banks, there seems to be no direct legislative path to a gold standard today. The Byzantine emperors of the world monetary system have already sold out the future many times. Quantitative easing—the direct manipulative intervention in securities markets, buying some and spurning others—has become routine. Inflation has become policy. Under the guise of “inflation targeting,” nearly every central bank has adopted an official resolve to depreciate the purchasing power of its currency. The entire world is adopting Pravda money. As Steve Forbes points out, “2% inflation [Fed Chairman Janet Yellen’s target] is effectively a 2% tax hike, an increase in the cost of living.”6 How can that stimulate the economy? Even Larry Parks of the Foundation for the Advancement of Monetary Education has written, “Promulgating the gold standard today is the monetary equivalent of the ‘Charge of the Light Brigade’: defeat is assured.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

Asian financial crisis, banking crisis, Bernie Sanders, business cycle, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Silicon Valley, too big to fail, transaction costs

By contrast, even sharp divergences from full employment, which cause enormous suffering and massive losses of potential output, are not viewed as a serious failure by the interest groups to whom the Fed is accountable. However bad the situation with the Fed, it is worth noting that it is likely the most democratic of the world’s central banks, both in its levers of control and its mandate. Most other major central banks operate with a single mandate, to maintain price stability, which is generally specified as a 2 percent inflation target. These banks make no apology for the persistence of high rates of unemployment. It is officially not their job. In terms of democratic accountability, it is possible to see how the Fed could be restructured to pursue policies that were more favorable toward the working population. In principle, Congress could strip the banks of their special power in determining the Fed’s agenda by making all the Fed officials in decision-making positions presidential appointees subject to congressional approval.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Inflation and deflation would therefore impact different households according to their individual financial positions. The corporate sector would benefit from mild inflation. It owes $7.3 trillion in debt on a gross basis and more than $5 trillion on a net basis after deducting its credit market assets and its deposits. Moreover, businesses generally do benefit from mild inflation, which is thought to “grease the wheels” of the profit-making process. That is one of the reasons the Fed’s inflation target rate is 2 percent rather than 0 percent. The assets and liabilities of the government-sponsored enterprises (GSEs) roughly net off to zero, which suggests they would neither win nor lose from mild inflation or mild deflation. Finally, the sector described as the rest of the world (i.e., non-Americans) would clearly be harmed by inflation and would benefit from mild deflation. That sector is a net creditor to the amount of $6.1 trillion.


pages: 597 words: 172,130

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"Robert Solow", Ayatollah Khomeini, bank run, banking crisis, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial innovation, Flash crash, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, market bubble, market design, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, Paul Samuelson, price stability, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

He married Anna Friedmann, a Wellesley grad who would go on to be a seventh-grade Spanish teacher, and they moved first to California and then to New Jersey, where he became a star economist at Princeton. He wrote important papers on the intersection of finance, economics, and monetary policy, exploring the policy failures that created the Great Depression and emerging as an advocate of “inflation targeting,” or establishing a goal for how much prices should rise and adjusting monetary policy accordingly. But even as he produced outstanding academic work, Bernanke began to discover his talent for guiding groups of people to a decision. A skilled listener and persuader, he became economics department chair at Princeton in 1996. It is a thankless job, with all the responsibilities of leadership but little explicit power—high-powered academics, after all, don’t like being told what they should teach or research.

“I think that, in my job as president”: Mario Draghi, press conference, September 6, 2012, http://www.ecb.int/press/pressconf/2012/html/is120906.en.html. “this precious stone set in the silver sea”: Mervyn King, Speech to the South Wales Chamber of Commerce, October 23, 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech613.pdf. “Is not the mere existence of general unemployment”: Mervyn King “Twenty Years of Inflation Targeting,” Stamp Memorial Lecture, London School of Economics, October 9, 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech606.pdf. IMAGE CREDITS 1: Kungl. Myntkabinettet (The Royal Coin Cabinet) 2: Hulton Archive/Getty Images. 3: AP Photo/Staff/Putnam 4: Bettmann/Corbis/AP Images 5: AP Photo/Chick Harrity 6: © European Commission Audiovisual Library 7: Bloomberg/Getty Images 8: © Bank for International Settlements 9: Federal Reserve photo, Britt Leckman 10: Federal Reserve photo, Britt Leckman 11: Brendan Smialowski/Getty Images 12: Bloomberg/Getty Images 13: Bloomberg/Getty Images 14: Pete Souza/Official White House photo 15: AP Photo/Remy de la Mauviniere 16: AP Photo/Virginia Mayo 17: © European Central Bank, Frankfurt am Main, Germany 18: © European Central Bank, Frankfurt am Main, Germany 19: © European Central Bank, Frankfurt am Main, Germany 20: AP Photo/Phillippe Wojazer, Pool, File 21: John Stillwell/PA Wire 22: AP Photo/The Canadian Press, Fred Chartrand 23: AP Photo/The Canadian Press, Fred Chartrand 24: Bloomberg/Getty Images 25: © European Central Bank, Frankfurt am Main, Germany 26: © European Central Bank, Frankfurt am Main, Germany 27: © European Central Bank, Frankfurt am Main, Germany 28: © European Central Bank, Frankfurt am Main, Germany 29: © European Central Bank, Frankfurt am Main, Germany 30: AP Photo/Ng Han Guan INDEX The page numbers in this index refer to the printed version of this book.


pages: 286 words: 79,305

99%: Mass Impoverishment and How We Can End It by Mark Thomas

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, additive manufacturing, Albert Einstein, anti-communist, autonomous vehicles, bank run, banks create money, bitcoin, business cycle, call centre, central bank independence, complexity theory, conceptual framework, creative destruction, credit crunch, declining real wages, distributed ledger, Donald Trump, Erik Brynjolfsson, eurozone crisis, fiat currency, Filter Bubble, full employment, future of work, Gini coefficient, gravity well, income inequality, inflation targeting, Internet of things, invisible hand, Jeff Bezos, jimmy wales, job automation, Kickstarter, labour market flexibility, laissez-faire capitalism, light touch regulation, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, Nelson Mandela, North Sea oil, Occupy movement, offshore financial centre, Own Your Own Home, Peter Thiel, Piper Alpha, plutocrats, Plutocrats, profit maximization, quantitative easing, rent-seeking, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, smart cities, Steve Jobs, The Great Moderation, The Wealth of Nations by Adam Smith, wealth creators, working-age population

As the Bank of England explained: The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies… Quantitative easing [QE] was first used by the MPC [Monetary Policy Committee of the Bank of England] in March 2009. In other words, the Bank of England absolutely has the power – and exercised its power when it wanted to avoid undershooting the inflation target – to create money out of nothing (and without even the expense of printing banknotes). In fact, the then Governor of the Bank of England, Mervyn King, explained in 2009 in the aftermath of the Global Financial Crisis: The sheer scale of support to the banking sector is breathtaking. In the UK, in the form of direct or guaranteed loans and equity investment, it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy.


The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Asian financial crisis, asset-backed security, backtesting, bank run, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, debt deflation, distributed ledger, diversification, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, labor-force participation, Long Term Capital Management, Lyft, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk/return, sharing economy, short selling, sovereign wealth fund, Uber and Lyft, uber lyft, yield curve

Change in monetary arrangements, therefore, is not unprecedented, and the political nature of the process means that the resulting system ends up being a somewhat lagged reflection of society’s key economic concerns. In the last two decades, those concerns have been low inflation, financial market stability, and as much growth as possible without sacrificing the first two goals. Our monetary system has been altered in an attempt to meet those objectives; central banks have been freed from direct government control, and most now have specific inflation targets. The system has also evolved organically in response to changes in the financial markets they attempt to Beyond the Vanishing Point 219 manage. For example, quantitative easing would once have been heretical, but now it is widespread and accepted. Taking this perspective, we can expect the current monetary system to change if it fails to meet its implied objectives of achieving low inflation, market stability, and growth—or if another objective, such as ameliorating wealth inequality, becomes paramount.


pages: 290 words: 76,216

What's Wrong with Economics? by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

People have ‘risk profiles’; interest rates measure ‘appetite for risk’; government bonds are ‘risk-free’ (except if they are Greek!), asset prices measure risk aversion and rational expectation and so on. Yet turn to the financial press, and we learn that the one thing businesses can’t stand is ‘uncertainty’, that they are always calling on governments to ‘end uncertainty’ about this or that. Inflation-targeting was devised to ‘end uncertainty’ about the future course of prices. What on earth is going on? The reason why ‘Knightian uncertainty’ has proved more acceptable to the profession than ‘Keynesian uncertainty’ is that Knight confined it to ‘disequilibrium’ situations, whereas for Keynes uncertainty determines the nature of the equilibrium itself. In his book Risk, Uncertainty and Profit (1921), Knight explains profit as a reward for entrepreneurship, or innovating a new product, and by definition there can be no probabilities attached to the success or failure of an innovation, because an innovation is a new event.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, business cycle, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, MITM: man-in-the-middle, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Extreme speculative excesses arose in other areas while Friedman’s anti-inflation heirs were in charge—in high-technology stocks in the late 1990s and mortgage finance in the 2000s, to take but the starkest examples. Friedman’s assurance that financial deregulation would work turned into an empty promise, with disastrous consequences. Since the early 1980s, the financial markets have been far more unstable than in the 1950s and 1960s. There had been dissenters among mainstream economists who thought the inflation target was too low, but their advice went untaken by those running policy. By 2010, this was changing. Economists at the International Monetary Fund, for example, suggested the annual target for inflation could be raised from 2 percent to 4 percent. “Nobody knows the cost of inflation between 2 and 4 percent,” wrote the IMF chief economist and former MIT professor Olivier Blanchard, who once fully expressed his faith in the benefits of the Great Moderation.

Bernanke, “The Great Moderation,” Speech, February 2004, http://www.bis.org/review/r040301f.pdf. 61 THERE HAD BEEN DISSENTERS: George A. Akerlof, William T. Dickens, and George L. Perry, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31 (2000–2001), pp. 1–60. 62 “NOBODY KNOWS THE COST”: On Blanchard’s inflation targeting, see Chris Giles, “IMF Experts Spell Out Policy Flaws,” Financial Times, February 12, 2010, p. 3; Akerlof, Dickens, and Perry, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” p. 1. 63 RATHER, HIS SOCIAL POLICY WAS DRIVEN: Friedman, Capitalism and Freedom, p. 169. 64 “THE GREAT ADVANCES OF CIVILIZATION”: Ibid., p. 5. 65 “THE GREAT ACHIEVEMENT OF CAPITALISM”: Ibid., p. 169. 66 “I HAVE ALWAYS BEEN IMPRESSED”: Friedman and Friedman, Two Lucky People, pp. 217–18.


pages: 272 words: 83,798

A Little History of Economics by Niall Kishtainy

"Robert Solow", Alvin Roth, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, central bank independence, clean water, Corn Laws, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, market clearing, market design, means of production, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

The Banque de France was cut loose from the politicians in 1994, nearly 200 years after it was set up by Napoleon to restore financial order after the turmoil of the French Revolution. At a ceremony to mark its independence, its governor looked forward to a new era of a steady economy. When the Bank of England became independent in 1998, a committee of experts began meeting every Wednesday. They’d take a vote on whether to raise or lower interest rates to hit the inflation target. Some economists even recommended linking the salaries of central bank governors to the rate of inflation. When New Zealand made its central bank independent it did something similar by saying that it could sack the governor if the bank missed the target for inflation. Many economists believe that central bank independence led to low inflation and steady growth. It was a big turnaround from the 1970s era of stagflation (high inflation and high unemployment).


pages: 298 words: 89,287

Who Are We—And Should It Matter in the 21st Century? by Gary Younge

affirmative action, Berlin Wall, British Empire, call centre, David Brooks, equal pay for equal work, F. W. de Klerk, failed state, feminist movement, financial independence, glass ceiling, global village, illegal immigration, inflation targeting, invisible hand, liberal capitalism, mass immigration, Mikhail Gorbachev, moral panic, phenotype, Ronald Reagan, Rosa Parks, Skype, Steven Levy, upwardly mobile, Wolfgang Streeck, World Values Survey

They are selected in rounds of horse trading by national governments on the basis of political patronage. Indeed, the European Parliament, the only directly elected component of the EU, cannot initiate legislation. This explains why turnout for EU elections has been in steep decline since their inception. For the first elections, 62 percent showed up; by 2009, numbers were down to 43 percent. The European Central Bank, in particular, has almost completely unfettered power. It sets its own inflation target, publishes neither the minutes nor the voting record of its rate-setting meetings and, while its president appears at hearings before the European Parliament, the parliament has absolutely no power over him or her. “What democratic control do European citizens possess?” asks Sue Wright in Community and Communications. “Voting out the European Parliament changes nothing because it has little power.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business cycle, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, disruptive innovation, double helix, factory automation, financial deregulation, financial innovation, fixed income, full employment, game design, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, invisible hand, job automation, John Markoff, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, mass immigration, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

Other progressive notions include metrics that look beyond economic growth to the human benefits that economic growth is supposed to provide. Stiglitz and fellow economist Amartya Sen, for example, proposed targeting such real-life measures as individual incomes, the availability of health care, and the quality and accessibility of education.8 Others want existing government metrics (such as the Federal Reserve’s inflation target) adjusted to match new, more socially progressive goals. Liberal economists such as Dean Baker and Paul Krugman, for instance, have argued that the current emphasis on keeping inflation low, through “austerity” cuts to government spending, is one of the reasons that unemployment has remained so high. “It’s not that we just get a natural [high] rate of unemployment,” Baker says. “We got there because of fiscal policy.”


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

"Robert Solow", affirmative action, banking crisis, Berlin Wall, Bretton Woods, business cycle, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Sam Peltzman, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

Friedman’s view in the middle 1960s was that a regime of generally stable prices is the best public policy. To accomplish this goal, he recommends a fixed annual increase in the money supply, variously estimated (in part based on the money aggregates used) at 2 to 5 percent, about equal to long-term growth in the economy. He opposes discretionary manipulation of the money supply—a view that, in his call for inflation targeting, the new Federal Reserve chairman Ben Bernanke endorses more than his predecessor, Alan Greenspan, did. Friedman emphasizes the long-range benefits of a consistent monetary policy and stable aggregate prices. The quantity theory of money is, in Friedman’s view, a theory of the demand for money. If demand for money as an asset and for transactions were not relatively constant, then changes in the quantity of money would not have the effect on prices that they do have.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, 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, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, 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, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, 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, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

William McChesney Martin, chairman of the Federal Reserve from 1951 to 1970, famously summed up this concern when he said that the job of the Fed was ‘to take away the punchbowl just as the party gets going’ – that is, to tighten policy by, for example, raising interest rates or imposing curbs on bank lending. This concern for financial stability fell victim to academic fashion in the 1980s and 1990s when the rise of professional economists in the central banking fraternity increasingly led to the adoption of inflation targeting as the single objective of monetary policy. The new conventional wisdom held that if the level of consumer or product prices was kept stable, financial crises were unlikely to occur and that intervention to prevent bubbles was unnecessary. Who were central bankers anyway to second-guess efficient markets? As Alan Greenspan, a later chairman of the Fed, remarked to the US Congress as the dot.com bubble of the late 1990s neared its peak: ‘Bubbles generally are perceptible only after the fact.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

As we saw in the previous chapter, well-functioning democracies often delegate rule-making power to quasi-independent bodies when the issues at hand are technical and do not raise distributional concerns; when logrolling would otherwise result in suboptimal outcomes for all; or when policies are subject to myopia, with heavy discounting of future costs. Independent central banks provide an important illustration of this. It may be up to elected politicians to determine the inflation target, but the means deployed to achieve that target are left to the technocrats at the central bank. Even then, central banks typically remain accountable to politicians and must provide an accounting when they miss the targets. Similarly, there can be useful instances of democratic delegation to international organizations. Global agreements to cap tariff rates or reduce toxic emissions are indeed valuable.


pages: 261 words: 103,244

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

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, working-age population, World Values Survey

Simons and his young disciple Milton Friedman advocated taking away the power of banks to create money with their proposed “100 percent banking.” Irving Fisher did the same with his “100 percent money” proposal. Where Simons’ group and Fisher parted was that the 100 percent banking school argued in favor of increasing the amount of money by a fixed percentage every year, while Fisher proposed a politically independent currency commission that would determine a degree of money expansion that was consistent with a preset inflation target (Huber 2007). Milton Friedman would later become famous and highly influential with his proposal of a monetary rule, even though (or perhaps because) he had given up on the demand to control the issue of money by banks. He simply proposed to increase the amount of money created by the central bank by a fixed percentage every year. He chose to ignore the insight of the 100 percent banking school, which he had earlier belonged to, that banks can expand and shrink the amount of fiat money they create on top of this central bank money in a way that needs to be controlled by either central banks or the government.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

A 26 percent allocation to European equities represented an 8 percent increase over 2004, although the allocation to emerging markets remained unchanged at 5 percent. The U.S. allocation dropped to 35 percent, a 24 percentage-point decrease from 2004. In the 2005 portfolio, the regional fixed-income portion was allocated in inverse proportion to the firm’s assessment of regional central banks sticking 150 UNDERSTANDING ASSET ALLOCATION to inflation targets. Europe led the way in this respect, with a 77 percent fixedincome allocation in the conservative portfolio. This allocation was virtually unchanged from 2004. Reflecting increased uncertainty regarding monetary policy and risk/reward tradeoffs, however, the firm reduced the fixed-income allocations for the portfolio’s two remaining regions: the U.S. and Asia. At 63 percent, the U.S. allocation came in 12 percentage points lower than it did in 2004, while Asia’s fixed-income allocation was reduced to 68 percent for 2005 from 82 percent in 2004.


pages: 348 words: 98,757

The Trade of Queens by Charles Stross

business intelligence, call centre, illegal immigration, index card, inflation targeting, land reform, profit motive, Project for a New American Century, seigniorage

There were rumors about the meat-packing plant, about the cat and dog food. And the cops weren't much better. Shakedown money every Tuesday, free coffee and bagels at the corner, and you better hope they liked your face. And that was the local cops, and the old-time local hoods, who didn't shit in their backyard 'case someone took exception, you know where I'm coming from?" Fleming just squatted on his heels and took it, like a giant inflatable target for all her frustration. "Yes, I know where you're from," he said quietly when she ran down. "Keep a low profile and don't rock the boat and you think maybe you can get by without anyone hurting you. But where I'm coming from—that's not an option anymore. It's not Miriam's fault that she's descended from them and has their ability, not her fault about those bombs—she tried to warn me. There are back channels between governments: That was before my boss's boss decided to burn me.


pages: 363 words: 98,024

Keeping at It: The Quest for Sound Money and Good Government by Paul Volcker, Christine Harper

anti-communist, Ayatollah Khomeini, banking crisis, Bretton Woods, business cycle, central bank independence, corporate governance, Credit Default Swap, Donald Trump, fiat currency, financial innovation, fixed income, floating exchange rates, forensic accounting, full employment, global reserve currency, income per capita, inflation targeting, liquidationism / Banker’s doctrine / the Treasury view, margin call, money market fund, Nixon shock, Paul Samuelson, price stability, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Ronald Reagan, Rosa Parks, secular stagnation, Sharpe ratio, Silicon Valley, special drawing rights, too big to fail, traveling salesman, urban planning

Perhaps an increase to 3 percent to provide a slight stimulus if the economy seems too sluggish? And, if 3 percent isn’t enough, why not 4 percent? I’m not making this up. I read such ideas voiced occasionally by Federal Reserve officials or IMF economists, and more frequently from economics professors. In Japan, it seems to be the new gospel. I have yet to hear, in the midst of a strong economy, that maybe the inflation target should be reduced! The fact is, even if it would be desirable, the tools of monetary and fiscal policy simply don’t permit that degree of precision. Yielding to the temptation to “test the waters” can only undercut the commitment to stability that sound monetary policy requires. The old belief that a little inflation is a good thing for employment, preached long ago by some of my own Harvard professors, lingers on even though Nobel Prize–winning research and experience over decades suggests otherwise.


pages: 355 words: 63

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

"Robert Solow", Andrei Shleifer, business climate, business cycle, Carmen Reinhart, central bank independence, clean water, colonial rule, correlation does not imply causation, creative destruction, endogenous growth, financial repression, Gini coefficient, Gunnar Myrdal, income inequality, income per capita, inflation targeting, interchangeable parts, inventory management, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, large denomination, manufacturing employment, Network effects, New Urbanism, open economy, Productivity paradox, purchasing power parity, rent-seeking, Ronald Reagan, selection bias, 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

Lower interest rates on government debt reduce the budgetdeficit but also reduce the reserves available when the pension plan begins to run deficits later in its life cycle.28The government will have to honor the net pension liabilities, so the negative real interest rate scheme just redistributes spending from today to tomorrow.29 There aresimilar tricks thegovernmentcanperform on other reform conditions. To meet an inflation target, the government can keep the budget deficit unchanged but substitute debt financing for money creation.It can keep doing this until the debt burden becomes too great and lenders are no longer willing to lend.Then the government isforced to resort to printing money and inflation allover again. But this time money creation and inflation proceed at a higher rate, because the government now needs to service the debt that accumulated in the meantime.30 All the government has accomplished is to lower inflation today at the cost of higher inflation tomorrow.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

It is important to remember, too, that when people say gold is doing well, what they often mean is that gold is simply maintaining its value while the value of their currency or other assets are falling. Gold should not necessarily be thought of as a long-term investment, but as a long-term insurance policy protecting against bad economic events. It is a fact of modern life that central banks have inflation targets that are greater than 0 percent (the Federal Reserve, for example, targets 2 percent inflation but it's been over 4 percent since the early 1970s). This inflation causes your money to lose value. Over time, all paper currencies will lose value; it's just a question of whether a paper currency loses value quickly or slowly. Gold protects you when a currency is losing value quickly in a period of rising inflation.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, microservices, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, WikiLeaks, women in the workforce

Where complex financial markets lead to speculation and make the velocity of money needlessly high, they can be tamed. The following measures would be more effective if undertaken globally, but it’s more likely, given the scenario spelled out in chapter 1, that individual states will have to implement them, and with some urgency. They are: Nationalize the central bank, setting it an explicit target for sustainable growth and an inflation target on the high side of the recent average. This would provide the tools to stimulate a socially just form of financial repression, aimed at a controlled write-down of the massive debt overhang. In a global economy made up of states, or currency blocs, this is going to cause antagonism but ultimately, as under Bretton Woods, if a systemic economy did it, other countries would have to follow suit.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

"Robert Solow", accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, 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, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, 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, twin studies, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

Germany, in particular, is by far the country that has used inflation most freely (along with outright debt repudiation) to eliminate public debt throughout its history.10 Apart from the ECB, which is by far the most averse to this solution, it is no accident that all the other major central banks—the US Federal Reserve, the Bank of Japan, and the Bank of England—are currently trying to raise their inflation targets more or less explicitly and are also experimenting with various so-called unconventional monetary policies. If they succeed—say, by increasing inflation from 2 to 5 percent a year (which is by no means assured)—these countries will emerge from the debt crisis much more rapidly than the countries of the Eurozone, whose economic prospects are clouded by the absence of any obvious way out, as well as by their lack of clarity concerning the long-term future of budgetary and fiscal union in Europe.

The choice to do so was no doubt in the interest of government bondholders but unlikely to have been in the general interest of the British people. It may be that the setback to British education was responsible for the country’s decline in the decades that followed. To be sure, the debt was then above 200 percent of GDP (and not barely 100 percent, as is the case today), and inflation in the nineteenth century was close to zero (whereas an inflation target of 2 percent is generally accepted nowadays). Hence there is hope that European austerity might last only ten or twenty years (at a minimum) rather than a century. Still, that would be quite a long time. It is reasonable to think that Europe might find better ways to prepare for the economic challenges of the twenty-first century than to spend several points of GDP a year servicing its debt, at a time when most European countries spend less than one point of GDP a year on their universities.12 That said, I want to insist on the fact that inflation is at best a very imperfect substitute for a progressive tax on capital and can have some undesirable secondary effects.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

In an April speech in Brussels, ECB Governing Council member and chief economist Jürgen Stark insisted that the ECB must stick to “a policy uncompromisingly geared to pursuing price stability.”82 Central bankers know that there is no such thing as “uncompromising” pursuit of price stability. Stark was not speaking about the ECB’s mandate for price stability, which, properly interpreted, required only that the ECB’s 2 percent or less inflation target be achieved “over the medium-​term.” In the meantime, the ECB’s task was to support economic activity so that the inflation rate did not fall too low and create new pathologies. Stark’s “uncompromising” voice was that of an unaccountable ideologue who refused to heed the gush of evidence and the counsel of outsiders who suggested a change of course. To “outside observers” who called for monetary stimulus, Stark repeated a worn and misdirecting refrain, used earlier in the decade by his predecessor Otmar Issing.

To those who were worried that inflation would flare up if the Fed printed money to buy the government’s bonds, Rogoff said that fear of inflation was “like worrying about getting the measles when one is in danger of getting the plague.” To the contrary, he explained that setting the goal of raising the inflation rate to 5-​6 percent a year was desirable because higher inflation rates would help households and businesses unwind their “epic debt morass.”132 Note that Rogoff was addressing all central banks. The Fed—​although unwilling to raise its inflation target to 5-​6 percent—​made the big move, thus setting the benchmark for the others. On Tuesday, December 16, the Fed slashed its policy rate by 75 basis points down to 0–​0.25 percent.133 With no more room to lower rates, the Fed also began “forward guidance,” a promise to keep its policy interest rate at “exceptionally low levels for some time.”134 But the most ambitious policy the Fed announced that day was its quantitative easing (QE) program.


pages: 397 words: 112,034

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

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, 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, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, 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, Westphalian system, WikiLeaks, women in the workforce, yield curve

Ultimately it is not the form per se, but rather the consistency of the principles and the spirit that animates the operational culture that will ensure the success or the failure of the new administration. Meanwhile, with regard to the direction of macroeconomic policy, much debate and controversy rages both within the ANC Alliance as well as throughout broader society. Key components of the macroeconomic policy such as inflation targeting, liberalized international trade, and free-floating foreign exchange policies have been particularly questioned. In part, this is a reflection of the “coalition nature of the ruling party.” Over the years since 2000, and under President Mbeki, the “ANC Alliance coalition” demonstrated political tension, but operationally economic policy was dominated by the ANC, with little direct control exercised by the other “coalition partners”—COSATU (Congress of the South African Trade Unions) and the SACP (South African Communist Party).


pages: 411 words: 114,717

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

3D printing, affirmative action, Albert Einstein, American energy revolution, anti-communist, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, business climate, business cycle, business process, business process outsourcing, call centre, capital controls, Carmen Reinhart, central bank independence, centre right, cloud computing, collective bargaining, colonial rule, corporate governance, creative destruction, 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, land reform, M-Pesa, Mahatma Gandhi, Marc Andreessen, market bubble, mass immigration, megacity, Mexican peso crisis / tequila crisis, Nelson Mandela, 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, zero-sum game

Even where politicians do have a say, many societies have already learned how painful double-digit inflation can be, making the fight against inflation politically popular. Since 1990, when New Zealand’s central bank became the first in the world to declare explicitly that fighting inflation would be its number one priority, twenty more have followed suit, and many nations, including Poland, the Czech Republic, the Philippines, Indonesia, and Turkey, have seen marked declines in inflation after adopting an inflation target. Since the 1980s the share of emerging markets running inflation in the double digits has fallen from 47 percent to 7 percent. In the long run that trend seems likely to continue. In the coming years we can expect the least misery in breakout nations and the most in nations where slowing growth will drive up the unemployment measure in the misery index, rather than the inflation component.


Poisoned Wells: The Dirty Politics of African Oil by Nicholas Shaxson

Asian financial crisis, Berlin Wall, blood diamonds, business climate, clean water, colonial rule, energy security, Exxon Valdez, failed state, Fall of the Berlin Wall, Hernando de Soto, income per capita, inflation targeting, Kickstarter, Martin Wolf, mobile money, Nelson Mandela, offshore financial centre, old-boy network, Ronald Reagan, Scramble for Africa, Yom Kippur War, zero-sum game

Karin Lissakers, a former U.S. executive to the IMF, said that even in 1994, when she joined the IMF, the word “corruption” did not appear in their texts: the IMF’s founding documents said it was an economic, not a political, organization. Corruption is political, so they had no mandate to bother with it. It should be clear by now how insane this stance was. Who gets rich in the Nigerian free-for-all depends not on the central bank’s inflation targets or the optimum budget balance, but on who gets the government contracts. “The IMF is looking at an economic model, when it should be looking at a 214 Global Witness political model,” a former Angolan planning minister once told me. “This has nothing to do with a capitalist system. This is not about production, but about a cake to fight for.” In a well-ordered western country, economics and politics are separate.


pages: 388 words: 125,472

The Establishment: And How They Get Away With It by Owen Jones

anti-communist, Asian financial crisis, bank run, battle of ideas, Big bang: deregulation of the City of London, bonus culture, Boris Johnson, Bretton Woods, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, don't be evil, Edward Snowden, Etonian, eurozone crisis, falling living standards, Francis Fukuyama: the end of history, full employment, G4S, glass ceiling, hiring and firing, housing crisis, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, James Dyson, laissez-faire capitalism, light touch regulation, market fundamentalism, mass immigration, Monroe Doctrine, Mont Pelerin Society, moral hazard, Neil Kinnock, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, old-boy network, open borders, plutocrats, Plutocrats, popular capitalism, profit motive, quantitative easing, race to the bottom, rent control, road to serfdom, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, stakhanovite, statistical model, The Wealth of Nations by Adam Smith, transfer pricing, union organizing, unpaid internship, Washington Consensus, wealth creators, Winter of Discontent

‘It’s more a kind of shared attitudes, not being able to say certain things, certain things being beyond the pale,’ he says of the power of the City. ‘Ideology is very important, and I don’t know where economics fits in exactly, but undoubtedly there was an ideology which Brown bought which is that the City didn’t need much regulation. And because it was self-regulating, there was “efficient market theory”, and therefore, all you needed was an inflation target.’ This ideology, of course, originates with the outriders who had been so sidelined until the late 1970s. The beliefs of the intellectuals and economists who met at Mont Pe`lerin in 1947 had become the religion of City traders, bankers and politicians alike. The market flourished best when the state kept its nose out, went the mantra, and therefore the City should be left to make its huge profits in peace.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, 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, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

But few monetary economists or central bankers share this obsession with the metal (and for that reason they often arouse the ire of the cranks). The monetary model favoured in the era of financialisation has been very different from the doctrines of the gold standard, and involves rigorous adherence to a pre-announced target. The chosen target changes according to the fashion of the time. In the 1980s money supply growth was the preferred indicator, then inflation-targeting came into vogue. The scale of indebtedness that emerged in the global financial crisis led many to favour commitment to a path of debt reduction. At the time of writing, forward guidance – a supposedly binding conditional declaration of future intentions – is coming to the end of its brief moment in the sun. These strategies of commitment to declared goals have intellectual and ideological attractions.


pages: 502 words: 128,126

Rule Britannia: Brexit and the End of Empire by Danny Dorling, Sally Tomlinson

3D printing, Ada Lovelace, Alfred Russel Wallace, anti-communist, anti-globalists, Big bang: deregulation of the City of London, Boris Johnson, British Empire, centre right, colonial rule, Corn Laws, correlation does not imply causation, David Ricardo: comparative advantage, deindustrialization, Dominic Cummings, Donald Trump, Edward Snowden, en.wikipedia.org, epigenetics, Etonian, falling living standards, Flynn Effect, housing crisis, illegal immigration, imperial preference, income inequality, inflation targeting, invisible hand, knowledge economy, market fundamentalism, mass immigration, megacity, New Urbanism, Nick Leeson, North Sea oil, offshore financial centre, out of africa, Right to Buy, Ronald Reagan, Silicon Valley, South China Sea, sovereign wealth fund, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thomas Malthus, University of East Anglia, We are the 99%, wealth creators

They tend to see Britain’s increased prosperity in the latter part of the nineteenth century as the result of the 1846 repeal of the Corn Laws, ushering in more free trade, rather than acknowledging the effects of the growth of empire abroad and the introduction of public health Acts at home. They generally favour as little state intervention as possible – other than measures to contain inflation, as inflation eats away some of the accumulated wealth of the rich. In contrast, in June 2018 Labour’s shadow Chancellor John McDonnell proposed altering the central mandate of the Bank of England from controlling inflation to aiding productivity. He explained that inflation targeting had both helped precipitate the financial crisis of 2008 and, since then, exacerbated a deflationary bias. Private bank lending is skewed towards consumption, as the Bank of England now itself belatedly acknowledges, and to property speculation (which the Bank of England does not yet acknowledge), rather than investment. Giving the Bank a new and different mandate to direct and guide lending towards productive investment to raise both incomes and productivity is an alternative to the Brexiteers’ belief that the market left alone is the solution.8 At the extreme, some of the more gung-ho Brexiteers claim that free trade in future will help even if other countries impose World Trade Organization tariffs on Britain but the British impose no tariffs in return.


pages: 385 words: 128,358

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

Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, 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, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, 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, zero-sum game

What I argued at the time was that they should have been willing to take these asset price imbalances into account more concretely in terms of monetary policy. THE CENTRAL BANKER 169 The sort of thing one might have done when UK house prices were heading into bubble territory would have been to announce to the British public that you’re not just going to set interest rates on the basis of your two-year forecast for inflation. Rather, you’re going to take a longer-term view. After all, the government has given you a brief to hit the inflation target at all times, not just a two-year horizon.You know that if you allow a bubble to be created, you’re storing up instability for later. To prevent that instability, in principle, interest rates could have been held higher than they were and higher than was necessary for inflation to hit the target two years out. The defense to the public could have been, “Fine, we’re undershooting the target on a two-year horizon, but that’s because we are much more focused on stability over time.”


pages: 495 words: 138,188

The Great Transformation: The Political and Economic Origins of Our Time by Karl Polanyi

agricultural Revolution, Berlin Wall, borderless world, business cycle, central bank independence, Corn Laws, currency manipulation / currency intervention, David Ricardo: comparative advantage, Fall of the Berlin Wall, full employment, inflation targeting, joint-stock company, Kula ring, land reform, land tenure, liberal capitalism, manufacturing employment, new economy, Panopticon Jeremy Bentham, price mechanism, profit motive, Republic of Letters, road to serfdom, Ronald Reagan, the market place, The Wealth of Nations by Adam Smith, trade liberalization, trade route, trickle-down economics, Washington Consensus, Wolfgang Streeck, working poor, Works Progress Administration

We tell developing countries about the importance of democracy, but then, when it comes to the issues they are most concerned with, those that affect their livelihoods, the economy, they are told: the iron laws of economics give you little or no choice; and since you (through your democratic political process) are likely to mess things up, you must cede key economic decisions, say concerning macroeconomic policy, to an independent central bank, almost always dominated by representatives of the financial community; and to ensure that you act in the interests of the financial community, you are told to focus exclusively on inflation—never mind jobs or growth; and to make sure that you do just that, you are told to impose on the central bank rules, such as expanding the money supply at a constant rate; and when one rule fails to work as had been hoped, another rule is brought out, such as inflation targeting. In short, as we seemingly empower individuals in the former colonies through democracy with one hand, we take it away with the other. Polanyi ends his book, quite fittingly, with a discussion of freedom in a complex society. Franklin Deleano Roosevelt said, in the midst of the Great Depression, “We have nothing to fear but fear itself.” He talked about the importance not only of the classical freedoms (free speech, free press, freedom of assemblage, freedom of religion), but also of freedom from fear and from hunger.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

The index the Federal Reserve has used as its prime inflation indicator is the personal consumption expenditure (PCE) deflator, which is a price index calculated for the consumption component of the GDP accounts. The PCE deflator differs from the consumer price index in that the PCE deflator uses a more up-to-date weighting scheme and includes the cost of the employer-paid as well as the employee-paid medical insurance. The PCE deflator generally runs about ¼ to ½ percentage point below the CPI and is the index that the Fed refers to in its 2 percent inflation target. Employment Costs Other important releases bearing on inflation relate to labor costs. The monthly employment report issued by the BLS contains data on the hourly wage rate and sheds light on cost pressures arising in the labor market. Since labor costs average nearly two-thirds of a firm’s production costs, increases in the hourly wage not matched by increases in productivity will increase labor costs and threaten to cause inflation.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

"Robert Solow", accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Andrei Shleifer, anti-communist, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Berlin Wall, Bob Noyce, Branko Milanovic, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, credit crunch, Credit Default Swap, crony capitalism, currency peg, debt deflation, Deng Xiaoping, discovery of the americas, Donald Trump, Erik Brynjolfsson, European colonialism, eurozone crisis, falling living standards, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Frederick Winslow Taylor, full employment, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, global supply chain, global value chain, Gordon Gekko, greed is good, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, TaskRabbit, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, Yom Kippur War, zero-sum game

Consumers and business had to believe that the central bank could deliver low inflation. As a result, they would ask for limited wage rises and would only push the prices of products up slowly. The result would be that the target was delivered. State of independence Credibility required making central banks more independent, a trend that started with New Zealand in 1989 and saw Britain, Japan and the euro zone all following suit. These banks were given an inflation target and left to get on with the job of meeting it. Central banks hired vast hordes of economists, sought out new data, interviewed businesses and consumers for evidence of their outlook, and published detailed forecasts for growth, unemployment and inflation. For a long while, this approach seemed to work perfectly. The 1990s and early 2000s were dubbed the era of the “great moderation”, with inflation low and the economy stable.


pages: 807 words: 154,435

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

"Robert Solow", Airbus A320, Albert Einstein, Albert Michelson, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Benoit Mandelbrot, bitcoin, Black Swan, Bonfire of the Vanities, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, easy for humans, difficult for computers, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Hans Rosling, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, Moneyball by Michael Lewis explains big data, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, oil shock, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, popular electronics, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, World Values Survey, Yom Kippur War, zero-sum game

It will come as a surprise to many that the forecasting models used by most central banks had no ability to explain borrowing or lending as the models had no place for banks, ignored most financial assets, and assumed that all people were identical. In short, these models assumed an economy shorn of a financial system, and an economic crisis originating in the financial system was therefore impossible. Such a small-world model might generate insights into the role of central bank independence and inflation targets, but it could not sensibly answer the question ‘What is going on here?’ in the financial crisis. 23 The pretence that every important macroeconomic issue could be explained in terms of a single model was a major error. Radical uncertainty and non-stationarity go hand in hand. There is no stable structure of the world about which we could learn from past experience and use to extrapolate future behaviour.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, 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, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, 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, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, 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, zero-sum game

The countries were Brazil, Chile, China, the Czech Republic, Hong King, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Poland, Russia, Singapore, and Thailand. 63 Christopher Rude, “The Role of Financial Discipline in Imperial Strategy,” Socialist Register 2005, London: Merlin, 2004, esp. pp. 90–1. 64 See Porter, Globalization and Finance, p. 64; and Bank of International Settlements, “Strengthening Banking Supervision Worldwide,” p. 4. 65 For a comprehensive analysis of the “new monetary policy consensus” that gave rise to the push for central bank independence and inflation-targeting regimes in developing countries, see the independent report for the UNDP by Alfredo Saad Filho, “Pro-Poor Monetary and Anti-Inflation Policies: Developing Alternatives to the New Monetary Policy Consensus,” Centre for Development Policy and Research Discussion Paper 2405, School of Oriental and African Studies, London, 2005. 66 Volcker and Gyohten, Changing Fortunes, p. 181. 67 Baker, Group of Seven, p. 79. 68 For an earlier discussion of this in the context of a critique of Robert Cox’s “outside-in” approach to the shift in the hierarchy of state apparatuses, see Panitch, “Globalization and the State.” 69 See John Williamson, “Did the Washington Consensus Fail?


pages: 1,088 words: 228,743

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

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, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, 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, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, 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, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, 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, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, 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, zero-sum game

[2] It is important to stress that the presence (even once) or absence of hyperinflation makes a huge difference to asset performance histories. For example, postwar hyperinflation in Japan destroyed wealth much more effectively than the 1930s’ Great Depression in the U.S. or the 1990s’ lost decade in Japan. Japanese equities lost nearly all of their value within a year but managed to recover postwar losses by 1960. For nominal assets the losses were more permanent. [3] Empirical Taylor rules show that inflation-targeting central banks also apply countercyclic demand management, even if they don’t have the Fed’s dual mandate on inflation and employment. In an expectations-augmented Phillips curve model, wage and price rigidities justify some real effects from monetary policy, albeit temporary. Eventually, inflation expectations adjust and in the long run monetary stimulus only raises inflation. Friedman’s quote about inflation being always a monetary phenomenon is true in the sense that sustained inflation needs central bank accommodation (money supply growth sustainably outpacing money demand growth).


pages: 1,013 words: 302,015

A Classless Society: Britain in the 1990s by Alwyn W. Turner

Berlin Wall, Bob Geldof, Boris Johnson, British Empire, call centre, centre right, deindustrialization, demand response, Desert Island Discs, endogenous growth, Etonian, eurozone crisis, facts on the ground, Fall of the Berlin Wall, falling living standards, first-past-the-post, Francis Fukuyama: the end of history, friendly fire, full employment, global village, greed is good, inflation targeting, lateral thinking, means of production, millennium bug, minimum wage unemployment, moral panic, negative equity, Neil Kinnock, Nelson Mandela, offshore financial centre, old-boy network, period drama, Ronald Reagan, sexual politics, Stephen Hawking, upwardly mobile, Winter of Discontent, women in the workforce

And third was the question of what the new committee’s frame of reference should be, the factors that they should bear in mind when setting interest rates. It was not, as it turned out, a particularly wide remit. Brown set the Bank the sole task of achieving an inflation rate of 2.5 per cent; no other considerations – unemployment, for example, or economic growth – were to be taken into account. Again, there was little new here. In the wake of Black Wednesday, Lamont had set an inflation target of between 1 and 4 per cent, to be reduced to 2.5 per cent by the end of the parliamentary term, an ambition that had very nearly been met; inflation was running at 2.6 per cent when the Tories left office. Brown was merely continuing the established Conservative policy; New Labour had bought into monetarist doctrine and inflation took precedence over all other aspects of the economy. But if the chancellor believed his primary responsibility to be the control of inflation, and yet had handed over that duty to an unelected body, then what, one was entitled to ask, was the point of the chancellor?