price stability

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pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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

The quantitative definition of price stability The EU Treaty states quite plainly that the ECB’s primary objective is to ensure price stability. The wording leaves open the question of when price stability is achieved in concrete terms and by what measure this is to be judged. Since price stability cannot be achieved at any given moment, it remains unclear over what horizon the ECB seeks to reach price stability. Particularly for a new currency, a crucial factor was what expectations economic agents would form concerning the stability of the future currency. If confidence in the new currency were low, investors would demand an ‘inflation compensation’ and long-term interest rates would rise accordingly. In order to anchor inflation expectations at a low level, the ECB’s Governing Council decided to announce a quantitative definition of price stability. In so doing, the Governing Council entered into a commitment vis-à-vis the public 62 See the article in the Monthly Bulletin, January 1999, p. 47.

(Laughter) Hendrick (Party of European Socialists): It would seem that Mr Blinder is not on his own. Mr Duisenberg said this morning once price stability has been achieved and established in people’s minds, i.e. when the public no longer takes account of the actual prospect of inflation, there is room to gradually lower interest rates as long as this does not disadvantage price stability. That is Mr Duisenberg’s view from this morning and Mr Duisenberg, as you would agree, is a European. Are you saying that you are at odds with Mr Duisenberg? Issing: No, I am not at odds with him. We have, of course, had many discussions on that and my interpretation of this quote is that like me Mr Duisenberg was stressing the benefits of price stability for monetary policy. We have achieved price stability, which is reflected in the lowest interest rates we have seen for decades in Germany and the lowest ever since the Second World War in Italy and some other countries.

That the Treaty should have mandated the ECB primarily to ensure price stability is actually and above all self-evident: this is the real task of monetary policy. How should a central bank not be obligated to preserve the value of the money it puts into circulation? In times of low inflation (i.e. of stable money) it is, however, easy to forget the importance of this achievement or to take it for granted. That is why the case has to be made for price stability over and over again14 – and it is rendered all the more essential by the fact that discussion of other possible objectives of the central bank frequently reveals such an (implicit or explicit) disregard for price stability. The arguments on the importance of price stability are essentially ‘symmetrical’, that is, they apply both to a general rise in prices (inflation) and to a general decline (deflation).


pages: 561 words: 87,892

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

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

Through the 1970s as a whole, German and Swiss prices rose over 60 per cent – a very odd kind of price stability. The German and Swiss experiences show that if other countries allow inflation to run out of control or more generally do not have a commitment to sound money, even the very best performers find the achievement of price stability too difficult. Even if the ambition to achieve stable prices was there – a view some would debate – the ability was not. Monetary sovereignty doesn’t simply grow on trees. Theoretically, Germany and Switzerland might still have been able to achieve price stability had they allowed their currencies to appreciate sufficiently. What, however, counts as sufficient? To this day, central banks struggle with the competing claims of ‘internal’ price stability, as measured by consumer price inflation, and ‘external’ price stability, as measured by the exchange rate.

Even worse, in a world where prices of goods, services, labour and assets were increasingly being distorted by the gravitational pull of the emerging nations, the single-minded pursuit of price stability only increased the risks of economic instability. The next chapter explains why. CHAPTER FIVE PRICE STABILITY BRINGS ECONOMIC INSTABILITY For many years, policymakers have pursued low and stable inflation with virtuous zeal. Understandably, they have no desire to return to the dark days of the 1970s and early 1980s, a time when inflation in all its many forms was rampant and economic performance in the Western world was, at best, disappointing. Low and stable inflation is now typically seen as a necessary condition for economic stability. Yet, with the rise of the emerging nations, it is no longer so clear that the single-minded pursuit of price stability is delivering the goods. If anything, in a world where price disturbances in the West are increasingly the result of economic developments in the emerging world, the pursuit of price stability has contributed to mounting economic instability.

If anything, in a world where price disturbances in the West are increasingly the result of economic developments in the emerging world, the pursuit of price stability has contributed to mounting economic instability. Policymakers – governments, central bankers – like to take credit for the achievement of low inflation. Their institutions are specifically designed to prioritize price stability above all else, often based on the premise that price stability can easily be encapsulated in a single inflation target. This premise is wrong. Policymakers have chosen to ignore the ways in which emerging nations bend, twist and warp prices. The blinkered pursuit of low inflation in the West has been a mistake, leading to asset-price bubbles, economic booms and busts and excessive accumulation of debt. It is time for a rethink. That rethink must involve a better understanding of the role of emerging nations in determining inflation, both in the emerging world and in the West.1 BACK TO THE 1970S For those brought up in the 1970s, the achievement of price stability became the big macroeconomic prize.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

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Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, open economy, paradox of thrift, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus

In the classical gold standard period, the world had all the benefits of currency stability and price stability without the costs of multilateral overseers and central bank planning. Another benefit of the classical gold standard was its self-equilibrating nature not only in terms of day-to-day open market operations but also in relation to larger events such as gold mining production swings. If gold supply increased more quickly than productivity, which happened on occasions such as the spectacular discoveries in South Africa, Australia and the Yukon between 1886 and 1896, then the price level for goods would go up temporarily. However, this would lead to increased costs for gold producers that would eventually lower production and reestablish the long-term trend of price stability. Conversely, if economic productivity increased due to technology, the price level would fall temporarily, which meant the purchasing power of money would go up.

Conversely, if economic productivity increased due to technology, the price level would fall temporarily, which meant the purchasing power of money would go up. This would cause holders of gold jewelry to sell and would increase gold mining efforts, leading eventually to increased gold supply and a restoration of price stability. In both cases, the temporary supply and demand shocks in gold led to changes in behavior that restored long-term price stability. In international trade, these supply and demand factors equilibrated in the same way. A nation with improving terms of trade—an increasing ratio of export prices versus import prices—would begin to run a trade surplus. This surplus in one country would be mirrored by deficits in others whose terms of trade were not as favorable. The deficit nation would settle with the surplus nation in gold.

The act was an explicit embrace of Keynesian economics and mandated the Fed and the executive branch to work together in order to achieve full employment, growth, price stability and a balanced budget. The act set a specific numeric goal of 3 percent unemployment by 1983, which was to be maintained thereafter. In fact, unemployment subsequently reached cyclical peaks of 10.4 percent in 1983, 7.8 percent in 1992, 6.3 percent in 2003 and 10.1 percent in 2009. It was unrealistic to expect the Fed to achieve the combined goals of Humphrey-Hawkins all at once, although Fed officials still pay lip service to the idea in congressional testimony. In fact, the Fed has not delivered on its mandate to achieve full employment. As of 2011, full employment as it is conventionally defined is still five years away, according to the Fed’s own estimates. To these failures of price stability, lender of last resort and unemployment must be added the greatest failure of all: bank regulation.


pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

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Bonfire of the Vanities, Bretton Woods, clean water, collective bargaining, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, knowledge economy, life extension, lump of labour, new economy, Nick Leeson, paradox of thrift, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor

Most economists would agree that high-unemployment economies like Canada suffer from inadequate real wage flexibility; Fortin’s evidence suggests, however, that the cause of that inflexibility lies not in structual, microeconomic problems but in the Bank of Canada’s excessive anti-inflationary zeal. In short, the belief that absolute price stability is a huge blessing, that it brings large benefits with few if any costs, rests not on evidence but on faith. The evidence actually points strongly the other way: The benefits of price stability are elusive, the costs of getting there are large, and zero inflation may not be a good thing even in the long run. Suppose you reject both the miracle cures of the growth sect and the old-time religion of the stable-price sect. What policies would you advocate? A shibboleth-free policy might look like this: First, adopt as an ultimate target fairly low but not zero inflation, say 3 or 4 percent.

In the United States, powerful groups on both left and right now propagandize incessantly for the belief that we can grow our problems away; aside from creating the possibility that we will rediscover the joys of stagflation, this campaign seriously weakens our already faltering resolve to put our fiscal house in order. But the bigger risk is probably in Europe, where—despite a far worse employment performance than in the United States—the rhetoric of price stability goes largely unchallenged, and is likely to have growing influence over actual policy. In particular, what will happen if EMU comes to pass? The new European Central Bank will operate under a constitution that honors price stability above all else; more important, it will feel that it must demonstrate itself a worthy successor to the Bundesbank, which means that it will try to implement in practice the kind of policy the Bundesbank follows only in theory. The result will be that Europe’s unemployment problem, which would be severe in any case, will be seriously aggravated.

To be skeptical about the prospects for rapid growth is, it turns out, to run the risk of being identified with another, equally misguided camp: that which believes that controlling inflation is the only priority of policy, that nothing can be done to fight recession and unemployment. This belief, especially acute among central bankers, is arguably imposing huge, gratuitous economic pain in much of the world; the third piece here, “A Good Word for Inflation,” focuses mainly on Europe and makes the case against a single-minded emphasis on price stability, while the fourth essay argues that monetary passivity accounts for much (not all) of Japan’s economic malaise. Finally, in “Seeking the Rule of the Waves,” I made use of a book review assignment to say some things I always wanted to say about economics, history, and the reasons why the business cycle is surely nowhere near dead. Technology’s Wonders: Not So Wondrous Lately many business leaders and thinkers have become preoccupied with something called the Information Technology Paradox.


pages: 370 words: 102,823

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

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

In Bernanke’s view, it was largely due to the introduction of a successful monetary policy framework focused on ensuring price stability.29 In Britain, Chancellor of the Exchequer, and later Prime Minister, Gordon Brown declared that the Labour government (1997–2010) had aimed to avoid returning to the ‘boom and bust’ of previous eras. His confidence stemmed from his early decision to grant operational independence to the Bank of England in the conduct of a monetary policy. In his initial letter to the Bank of England, Brown wrote: ‘price stability is a precondition for high and stable levels of growth and employment, which in turn will create the conditions for price stability on a sustainable basis.’30 But the Great Moderation thesis was blown away by the global financial crisis. And in the past decade the failure of macroeconomic policy based on the orthodox theory of money has been laid bare.

Yellen, ‘Monetary policy and financial stability’, presented at the 2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, DC, http://www.federalreserve.gov/newsevents/speech/yellen20140702a.htm (accessed 4 May 2016). 42 The Federal Reserve is charged with carrying out a dual mandate that includes maximum employment and price stability. This stands in contrast to the ECB, which has a sole mandate to deliver price stability. 43 As Michael Woodford recently put it, ‘I worry that . . . [we] let Congress off the hook a little too easily’: http://www.stlouisfed.org/publications/Connecting-Policy-with-Frontier-Research/Michael-Woodford.cfm (accessed 4 May 2016). 44 Keynes, The General Theory, p. 372. 45 OECD, ‘Focus on top incomes and taxation in OECD countries: was the crisis a game changer?’

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


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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

“The Myth of the ‘Cashless Society’: How Much of America’s Currency Is Overseas?” Munich Personal RePEc Archive (MPRA) Paper 42169, University Library of Munich. ———. 2012b. “New Estimates of U.S. Currency Abroad, the Domestic Money Supply and the Unreported Economy.” Crime, Law and Social Change 57 (3): 239–63. Feldstein, Martin. 1999. “The Costs and Benefits of Going from Low Inflation to Price Stability.” In The Costs and Benefits of Price Stability, ed. Martin Feldstein. Chicago: National Bureau of Economic Research and the University of Chicago Press. ———. 2002. “The Role for Discretionary Fiscal Policy in a Low Interest Rate Environment.” NBER Working Paper Series 9203 (September). Cambridge, MA: National Bureau of Economic Research. Ferguson, Niall. 2008. The Ascent of Money. New York: Penguin. Feroli, Michael, David Greenlaw, Peter Hooper, Frederic S.

Money Laundering Risks Arising from Trafficking in Human Beings and Smuggling of Migrants. FATF Report (July), Paris. Available at http://www.fatf-gafi.org. Fischer, Bjorn, Petra Köhler, and Franz Seitz. 2004. “The Demand for Euro Currencies, Past, Present and Future.” European Central Bank Working Paper Series 330 (April). Frankfurt. Fischer, Stanley. 1996. “Why Are Central Banks Pursuing Long-Run Price Stability?” In Achieving Price Stability: A Symposium Sponsored by the Federal Reserve Bank of Kansas City, pp. 7–34. Jackson Hole, WY, August 29–31. Federal Reserve Bank of Kansas City. Fischer, Stanley, Ratna Sahay, and Carlos A. Végh. 2002. “Modern Hyper- and High Inflations.” Journal of Economic Literature 40 (3): 837–80. Fisher, Irving. 1933. Stamp Scrip. New York: Adelphi. Available at http://userpage.fu-berlin.de/roehrigw/fisher/.

This, of course, was nothing compared to the more than 1,000% inflation that the losing Confederacy suffered with its paper currency. During World War I, US inflation again soared to 19% in 1918.31 And then of course came the double-digit peacetime inflation of the 1970s. Indeed, there have been enough such episodes since the founding of the Federal Reserve Bank in 1913 that prices in the United States have increased thirtyfold.32 So much for the Fed’s mandate to achieve price stability. Still, the United States has had less cumulative inflation than most advanced economies over the same period. We return to the risks of high inflation in chapter 12. FROM GOLD-BACKED TO PURE FIAT PAPER CURRENCY Since its early days in China and the colonial United States, the evolution of paper money has taken other important turns, eventually spreading across the world. This chapter closes with a short summary of key events relevant to later discussion.


pages: 172 words: 54,066

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

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Asian financial crisis, banking crisis, Bernie Sanders, 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

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. A president committed to appointing governors who focused on employment at least as much as price stability could change the Fed’s orientation. It is much more difficult to see how the European Central Bank (ECB) could be restructured to force it to serve the interests of Europe’s workers rather than its financial sector.

He also acknowledged that there was little harm from moderate rates of inflation, meaning that if the Fed took this gamble and lost, there would be little cost associated with a rate of inflation that was stable, but slightly higher than the Fed’s target. I asked why the Fed shouldn’t take the virtually cost-free risk, and he responded by saying that the Fed is an institution that is committed to price stability. I pointed out that the Fed is also an institution that is committed to full employment, to which he replied that, “No one takes that commitment seriously.” When I suggested that he then also doesn’t need to take the commitment to price stability seriously, he responded, “Yes, I do.” [42] As a separate measure to slow consumption, Volcker also restricted the use of credit cards. At the time, the Fed had the ability to impose this type of credit control, but it does no longer. [43] New York Times, Times Topics

The percentage of factory workers and retail clerks who lose their job in a downturn is far higher than the percentage of doctors and lawyers. As a result, the workers who end up taking the biggest pay cuts in a downturn are those without college degrees and especially those without high school degrees.[18] High unemployment is a class-biased mechanism for fighting inflation. In effect it forces the less-advantaged groups in society to sacrifice to ensure that the more-advantaged can enjoy price stability – and a ready supply of low-cost labor to provide household help or serve them in hotels and restaurants. Weakening unions As another element of this process of upward redistribution, President Reagan took a number of steps to weaken the power of unions. Foremost was weakening the enforcement of labor laws that protect workers’ right to organize. While labor laws that protect management are still vigorously enforced (a union engaged in a secondary strike[19] can expect to have its officers jailed and its bank accounts seized), the enforcement of rules protecting the right to organize has become a joke.


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

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

In its former guise, macroprudential policy recognizes that a monetary policy designed to achieve price stability can encourage destabilizing developments in the financial system. The aim, then, is to prevent or at least reduce the undesirable consequences of such a development. In this guise, then, macroprudential policy is concerned with financial stability. It works by, for example, raising equity requirements of lenders or borrowers in a boom. In its latter guise, macroprudential policy is aimed at protecting the economy from the excesses of the financial system, in both boom and bust. It works by actions that curb lending. Macroprudential regulation borders on microprudential regulation at one end, and monetary policy at the other. In theory, targeting monetary policy at price stability and macroprudential policy at financial policy ought to work, at least in normal times.

The economic ideology of ‘Ordoliberalismus’, which had a profound influence upon the ‘social market economy’ introduced after the Second World War by Ludwig Erhardt, Germany’s immensely influential economics minister and subsequent chancellor, also gives German attitudes to economic policy special characteristics.21 This is a free-market ideology, which emphasizes constitutional rules, as against discretionary policy.22 It rejected the then highly influential Keynesian idea of discretionary macroeconomic stabilization from its inception, in favour of a central bank dedicated to price stability. While Germans have accepted a welfare state since the nineteenth century, under Erhardt’s influence they have also embraced the idea of market competition. One of the main roles of the state, in their view, is to promote competition. The solution to the Eurozone crisis from the German perspective, then, is to impose these principles throughout the Eurozone. That explains the emphasis on rule-making.

We do not know how much lower the dollar would have been if there had been no such intervention, but surely it would have been substantially weaker and US monetary policy would have consequently needed to be less expansionary. As Pettis puts it, ‘Excessive use of the US dollar internationally actually forces up either American debt or American unemployment.’31 Inevitably, the Fed chose debt over unemployment. Indeed, it is mandated to do so, because its task is to sustain the highest level of employment consistent with price stability (or, more precisely, stable and low inflation). Since the US has no exchange-rate policy and has been able to borrow freely in its own currency, and since, in addition, countries that target exchange rates usually do so against the dollar, the Federal Reserve has emerged automatically as the world’s macroeconomic balancer and the US economy as the one within which global balancing takes place.


pages: 257 words: 94,168

Oil Panic and the Global Crisis: Predictions and Myths by Steven M. Gorelick

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California gold rush, carbon footprint, energy security, energy transition, flex fuel, income per capita, invention of the telephone, meta analysis, meta-analysis, North Sea oil, oil shale / tar sands, oil shock, peak oil, price stability, profit motive, purchasing power parity, RAND corporation, statistical model, Thomas Malthus

The global push toward alternative energy sources and conservation was encouraged and accelerated by the high price of oil in 2008. High prices served to heighten awareness and fear of the dependence on oil resources residing in what many people view as potentially vulnerable, if not precarious, parts of the world and coming from secretive suppliers who administer cartel economic power. It should not be taken for granted that price stability is, in fact, best for OPEC to make money. Does price stability really maximize its profits? On the contrary, it is easy to imagine a world in which prices rise, plateau, and are then unexpectedly lowered by enhanced OPEC production. Consequently, non-OPEC investments in higher-cost and higher-risk oil exploration and production projects might stall and remain economically stranded as they suddenly become unprofitable. Because new technologies, including those that save energy, often are introduced at a premium price until they become widespread and products become commodity items, the strategy of a volatile oil market discourages the development of initially expensive alternatives to oil and conservation measures.

In fact, most of the oil used to initially fill the SPR in 1977 was Saudi Arabian light crude. In the long run, the wise use of an oil stockpile would provide greater price stability and greater Beyond Panic 219 security. The power of the OPEC cartel could be significantly tempered if most major oil-importing nations also built their own oil stockpiles, creating a de facto cartel consisting of non-OPEC members (perhaps called NOPEC). The US, as the consumer of about one-quarter of the annual global oil supply, is in a strong position to take the lead in countering OPEC reductions in exports and maintaining oil-price stability. Developing a US “economic petroleum reserve,” or national oil bank, would require 5.5 times the amount of oil stored in the SPR and an investment of perhaps $130 to $230 billion in oil purchases.

The seven oil-exporting countries listed above have an average corruption index of 2.2, with Nigeria having the best ranking of the group at 2.7. The relative political instability and lawlessness of these countries is perhaps an indication that they could not tolerate elimination of the significant income they obtain from oil exports. The point is that one potential unintended consequence of a reduction in oil use is social disintegration of some oil-exporting nations. How do oil price and price stability affect the future of transportation fuels? Consumers like inexpensive gasoline. In the US, the drop in gasoline price in 2009 to its long-term, historical average of $2.25 per gallon was a relief and economic benefit. However, at that price, the development of new, expensive offshore oil sources and alternative liquid fuels is not profitable. So the dilemma is that low prices are welcome but deter the creation of future supplies of transportation fuels.


pages: 334 words: 98,950

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

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

But since the rise of neo-liberalism, and its ‘monetarist’ approach to macroeconomics, in the 1980s, the focus of macroeconomic policies has radically changed. The ‘monetarists’ are called as such because they believe that prices rise when too much money is chasing after a given quantity of goods and services. They also argue that price stability (i.e., keeping inflation low) is the foundation of prosperity and, therefore, that monetary discipline (which is required for price stability) should be the paramount goal of macroeconomic policy. When it comes to developing countries, the need for monetary discipline is even more emphasized by the Bad Samaritans. They believe that most developing countries do not have the self-discipline to ‘live within their means’; it is alleged that they print money and borrow as if there were no tomorrow.

But this populist rhetoric obscures the fact that the policies needed to generate low inflation are likely to reduce the future earnings of most working people by reducing their employment prospects and wage rates. The price of price stability Upon taking power from the apartheid regime in 1994, the new ANC (African National Congress) government of South Africa declared that it would pursue an IMF-style macroeconomic policy. Such a cautious approach was considered necessary if it was not to scare away investors, given its leftwing, revolutionary history. In order to maintain price stability, interest rates were kept high; at their peak in the late 1990s and the early 2000s, the real interest rates were 10–12%. Thanks to such tight monetary policy, the country has been able to keep its inflation rate during this period at 6.3% a year.17 But this was achieved at a huge cost to growth and jobs.

The information is from Singh (1995), Table 8. 11 The average inflation rates were 12.1% in Venezuela, 14.4% in Ecuador and 19.3% in Mexico. The rates were 22% in Colombia and 22.3% in Bolivia. The data are from Singh (1995), Table 8. 12 The details are from F. Alvarez & S. Zeldes (2001), ‘Reducing Inflation in Argentina: Mission Impossible?’ http://www2.gsb.columbia.edu/faculty/szeldes/Cases/Argentina/ 13 Moreover, in the neo-liberal argument, economic stability is wrongly equated with price stability. Price stability is, of course, an important part of overall economic stability, but the stabilities in output and employment are also important. If we define economic stability more broadly, we cannot say that neo-liberal macroeconomic policy has succeeded even in its self-proclaimed goal of achieving economic stability over the past two and a half decades, as output and employment instabilities have actually increased during this period.


pages: 347 words: 99,317

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

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

But since the rise of neo-liberalism, and its ‘monetarist’ approach to macroeconomics, in the 1980s, the focus of macroeconomic policies has radically changed. The ‘monetarists’ are called as such because they believe that prices rise when too much money is chasing after a given quantity of goods and services. They also argue that price stability (i.e., keeping inflation low) is the foundation of prosperity and, therefore, that monetary discipline (that is required for price stability) should be the paramount goal of macroeconomic policy. When it comes to developing countries, the need for monetary discipline is even more emphasized by the Bad Samaritans. They believe that most developing countries do not have the self-discipline to ‘live within their means’; it is alleged that they print money and borrow as if there were no tomorrow.

But this populist rhetoric obscures the fact that the policies needed to generate low inflation are likely to reduce the future earnings of most working people by reducing their employment prospects and wage rates. The price of price stability Upon taking power from the apartheid regime in 1994, the new ANC (African National Congress) government of South Africa declared that it would pursue an IMF-style macroeconomic policy. Such a cautious approach was considered necessary if it was not to scare away investors, given its leftwing, revolutionary history. In order to maintain price stability, interest rates were kept high; at their peak in the late 1990s and the early 2000s, the real interest rates were 10–12%. Thanks to such tight monetary policy, the country has been able to keep its inflation rate during this period at 6.3% a year.17 But this was achieved at a huge cost to growth and jobs.

The information is from Singh (1995), Table 8. 11 The average inflation rates were 12.1% in Venezuela, 14.4% in Ecuador and 19.3% in Mexico. The rates were 22% in Colombia and 22.3% in Bolivia. The data are from Singh (1995), Table 8. 12 The details are from F. Alvarez & S. Zeldes (2001), ‘Reducing Inflation in Argentina: Mission Impossible?’ http://www2.gsb.columbia.edu/faculty/szeldes/Cases/Argentina/ 13 Moreover, in the neo-liberal argument, economic stability is wrongly equated with price stability. Price stability is, of course, an important part of overall economic stability, but the stabilities in output and employment are also important. If we define economic stability more broadly, we cannot say that neo-liberal macroeconomic policy has succeeded even in its self-proclaimed goal of achieving economic stability over the past two and a half decades, as output and employment instabilities have actually increased during this period.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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

They seemed to favor 1 percent a month, or 12 percent a year.13 The whole Fed team marketed “price stability” as its sole function. In 2005, St. Louis Federal Reserve Bank President William Poole responded to the question of whether the institution should identify and manage asset price bubbles: “I’m really a hardliner on this. . . . I think it is incompatible with a market economy to have a government agency setting asset prices that are meant to allocate capital.”14 Milton Friedman also lectured from the audience: “The role of the Fed is to preserve price stability. Period. . . . It should not be concerned with the asset markets as such, only as they affect indirectly—somehow—the price stability as a whole.”15 The professor’s argument turns on itself. Asset bubbles destabilize an economy.

(“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”13) There was no mention of manias or crashes. He used the word bubble only to imply that he was not anxious: “We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability.” 10 FOMC meeting transcript, December 19, 1995, p. 35. 11 Ibid., p. 37. 12 Ibid. 13 Speech available at http://www.federalreserve.gov/boarddocs/speeches/1996/ 19961205.htm. He was speaking in the midst of a stock market bubble, and almost everyone feared it or knew it, including the Federal Reserve. On November 25, 1996, the Wall Street Journal had reported: “Federal Reserve Board Chairman Greenspan isn’t talking about the stock market these days.

The longer a bubble is allowed to inflate, the more it encourages the build-up of other imbalances, such as too much borrowing and investment, which have the power to turn a mild downturn into something nastier.”7 Greenspan’s speech met some resistance, but was generally accepted as gospel. Still, he may have found the Jackson Hole speech was not quite the success he had expected. He launched a two-pronged attack from the podium for the rest of the year. First, an embellishment of his “can’t see a bubble” line. Second, a new emphasis on “price stability.” Speaking to the Economic Club of New York on December 19, 2002, the chairman rationalized his inaction from a different angle: “The evidence of recent years, as well as the events of the late 1920s, casts doubt on the proposition that bubbles can be defused gradually.”8 This contradicted the chairman’s “Gold and Economic Freedom” essay of 1966. It is reasonable to suppose he may have changed his mind.


pages: 275 words: 82,640

Money Mischief: Episodes in Monetary History by Milton Friedman

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Bretton Woods, British Empire, currency peg, double entry bookkeeping, fiat currency, financial innovation, floating exchange rates, full employment, German hyperinflation, income per capita, law of one price, oil shock, price anchoring, price stability, transaction costs

But then, as the easy ways of avoiding the controls are exhausted, distortions accumulate, the pressures suppressed by the controls reach the boiling point, the adverse effects get worse and worse, and the whole program breaks down. The end result is more inflation, not less. In light of the experience of forty centuries, only the short time perspective of politicians and voters can explain the repeated re-sort to price and wage controls (Schuettinger and Butler 1979). Institutional Reform to Promote Price Stability The repeated ups and downs in the price level have generated a vast literature offering and analyzing proposals for institutional reform designed to promote price stability. My own suggestions have centered on means of assuring that the quantity of money will grow at a relatively constant rate.* Recently, Robert Hetzel has made an ingenious proposal that may be more feasible politically than my own earlier proposals for structural change, yet that promises to be highly effective in restraining the inflationary bias that infects government.

.* I also hasten to add that this judgment is not intended either to denigrate or to praise the character or the intentions of the various parties in the long-running dispute. The pro-silver group contained silver producers seeking to promote their special interests, inflationists eager to seize any vehicle for that purpose, and sincere bimetallists who desired neither inflation nor deflation but were persuaded that bimetallism was more conducive to price stability than monometallism was. Similarly, the pro-gold group contained producers of gold, deflationists (pilloried by the free-silver forces as Wall Street bankers), and sincere believers that the gold standard was the only satisfactory pillar for a financially stable society. Motives and intentions matter far less than the outcome. And, in this as in so many other cases, the outcome was very different from that intended by the well-meaning advocates of the Coinage Act of 1873.

Fed behavior judged inflationary by the market would produce an immediate rise in yield on standard bonds and an increase in the difference between the yields on the standard and indexed bonds. Holders of standard bonds, but not indexed bonds, would suffer a capital loss. Indeed, all creditors receiving payment in dollars in the future would feel threatened. The ease of associating increases in expected inflation with particular monetary policy actions will encourage creditors to exert a pressure that would counteract political pressures to trade off price stability for short-term output gains. (1991, p. A14) In explaining his proposal, Hetzel notes: The long lag between monetary policy actions and inflation means that it is difficult to associate particular policy actions with the rate of inflation. Changes in expected inflation registered in changes in the difference in yields between standard and indexed bonds would provide an immediate and continuous assessment by the market of the expected effects on inflation of current monetary policy actions (or inactions).


pages: 330 words: 77,729

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

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, 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, laissez-faire capitalism, liquidity trap, means of production, microcredit, minimum wage unemployment, open economy, paradox of thrift, 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

He favored the gradual expansion of credit by the Federal Reserve and, as long as prices remained relatively stable, he felt there should be no crisis. Fisher, a New Era economist, had a great deal of faith in America's new central bank and expected the Federal Reserve to intervene if a crisis arose. Fisher Is Deceived by Price Stability According to Fisher, the key variable to monitor in the monetary equation was P, the general price level. If prices were relatively stable, there could be no major crisis or depression. Price stabilization was Fisher's principal monetary goal in the 1920s. He also felt that the international gold standard could not achieve price stability on its own. It needed the help of the Federal Reserve, which was established in late 1913 in order to create liquidity and prevent depressions and crises. According to Fisher, if wholesale and consumer prices remained relatively calm, everything would be fine.

From James Tobin to Milton Friedman, top economists have hailed Fisher as the forefather of monetary macroeconomics and one of the great theorists in their field. Mark Blaug calls him "one of the greatest and certainly one of the most colorful American economists who has ever lived" (Blaug 1986, 77). Fisher's entire career, both professional and personal, was devoted to the issue of money and credit. He invented the famed Quantity Theory of Money, and created the first price indexes. He became a crusader for many causes, from healthy living to price stability. He wrote over thirty books. He was a wealthy inventor (of today's Rolodex, or card catalog system) who became the Oracle on Wall Street, but was destroyed financially by the 1929-33 stock market crash. Fisher's failure as a monetarist to anticipate the greatest economic collapse in the twentieth century must lie squarely with his incomplete monetary model of the economy, and it was this defective model that led directly to the development of Keynesian economics, the subject of our next chapter.

When Somary expressed pessimism about the future of the stock market, Keynes declared firmly, "We will not have any more crashes in our time" (Somary 1986 [ 1960], 146-47). Somary had been trained in Austrian economics at the University of Vienna and knew that the New Era boom was unsustainable. But Keynes, like Irving Fisher, ignored the Austrians and pinned his hopes on the Federal Reserve and price stabilization. In late 1928, Keynes wrote two papers disputing that a "dangerous inflation" was developing on Wall Street, concluding that there was "nothing which can be called inflation yet in sight." Referring to both real estate and stock values in the United States, Keynes added, "I conclude that it would be premature today to assert the existence of over-investment. ... I should be inclined, therefore, to predict that stocks would not slump severely (i.e., below the recent low level) unless the market was discounting a business depression."

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

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

While the Fed had no explicit mandate to focus on the stock market, the effects of the run-up in prices seemed to me a legitimate concern. In quelling inflation, we had established that price stability is central to long-term economic growth. (In fact, one major factor causing stock prices to rise was investors' growing confidence that stability would continue.) Yet the concept of price stability wasn't as self-evident as it seemed. There were probably ten different statistical series on prices you could look at. For most economists, price stability referred to product prices—the cost of a pair of socks or a quart of milk. But what about the prices of incomeearning assets, like stocks or real estate? What if those prices were to inflate and become unstable? Shouldn't we worry about the price stability of nest eggs and not just the eggs you buy at the grocery store? It wasn't that I wanted to stand up and shout, "The stock market is overvalued and it will lead to no good."

There will come a point at which central bankers, as I note in chapter 25, will be pressed once again to contain inflationary pressures. Central bankers over the past several decades have absorbed an important principle: Price stability is the path to maximum sustainable economic *However, America's reputation has been s o m e w h a t diminished by t h e thwarting of high-profile foreign acquisitions—of Unocal, by a Chinese company, in 2 0 0 5 , and of a company that managed U.S. ports, by D u b a i Ports World, in 2 0 0 6 . t G i v e n t h e u p w a r d bias of measured prices, a 1 percent reported rate of price increase probably represents an economy with price stability. 389 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. T H E AGE OF T U R B U L E N C E growth.

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions, as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate, or become complacent about, the complexity of the interactions of asset markets and the economy. Admittedly, this was not Shakespeare. It was pretty hard to process, especially if you'd had a drink or two during the cocktail hour and were hungry for dinner to be served.


pages: 350 words: 109,220

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

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

Inflation targeting is an effort both to avoid a repeat of the inflationary 1970s and to employ the insights of scholars concerning the importance of public expectations about inflation. Some foreign central banks — including the European Central Bank, the Bank of England, and the Bank of Japan — are given one and only one explicit goal: price stability. The Fed, in contrast to most other central bankers, was instructed by Congress in 1977 to aim at both “maximum employment” and “stable prices.” Democrats in Congress warned Bernanke against any unilateral move to alter the Fed’s priorities, an admonition that Bernanke, like Greenspan before him, countered by maintaining that price stability was the road to maximizing employment and economic growth. 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.

He wanted to make the fourth branch of government more like the Supreme Court and less like a royal court where the king was surrounded by retainers. To that end, Bernanke thought the Fed should be more explicit and open about its objectives and thinking than it had been in Greenspan’s time. “The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue — even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been,” Bernanke wrote long before coming to Washington. He imagined a day when the Fed was so easy to understand and so open about its objectives and current views of the economy that a few words from the chairman at a congressional hearing or after-dinner speech wouldn’t move markets because they wouldn’t provide any new information. This would prove a naive hope, a misreading of the chairman’s role that would create confusion in the early stages of the Great Panic.

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


pages: 438 words: 109,306

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

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

This is partly because the ECB was always a political as much as a monetary construct, rooted in trade-offs and behind-the-scenes deals. As the most powerful central bank in Europe, the Bundesbank was extremely influential in the design of the ECB. The Bundesbank ensured that the ECB’s “primary objective,” as the ECB notes on its website, is to “maintain price stability” with inflation rates below 2 percent.11 (The Federal Reserve, in contrast, has a dual mandate of combating unemployment and inflation.) “The Germans take a very narrow view of the proper role of central banks, that it is to do almost exclusively with the preservation of price stability,” said William White. “That comes from their history and experience of hyperinflation.”12 To whom then is the ECB democratically accountable? In effect, nobody. The ECB’s Governing Council has direct control over the tools of monetary policy. It is prohibited from taking advice from Eurozone governments.13 The European Parliament has no meaningful authority over the ECB.

Borrowing in non–European Community currencies should be limited. There would be sanctions against countries that exceeded a budget deficit threshold (currently three percent). Crucially, the sanctions would apply not just to members of the future Eurozone, but to all European Union member states. The report called for European countries to take substantial steps toward economic convergence, budgetary discipline, and price stability, before moving decisively toward economic and monetary union. However it was unclear how this strict, common financial discipline would be imposed. A common monetary policy, based on a shared currency, demanded a common fiscal policy with shared rules for government taxation and spending, Lamfalussy argued in a memo in January 1989, but there were no plans for this: In short, it would seem to me very strange if we did not insist on the need to make appropriate arrangements that would allow the gradual emergence, and the full operation once the EMU is completed, of a Community-wide macroeconomic fiscal policy which would be the natural complement to the common monetary policy of the Community.15 As Harold James notes, Lamfalussy’s memo was both “apposite and intellectually compelling.”16 It neatly summarized the contradiction of a transnational currency with no transnational fiscal policy—a contradiction that remains unresolved and has both triggered and fueled the Eurozone crisis.

Montagu Norman may not have approved of a Europe-wide currency, but he would certainly have applauded the report’s demand that the ESCB must be completely independent from both national governments and European authorities. The Delors Report’s recommendations that the European Union should adopt a single currency and a unified monetary policy were accepted. The momentum toward monetary, economic, and political union was unstoppable. A new bank, the most powerful institution within the ESCB, would be created to define and implement monetary policy. The European Central Bank’s primary task would be to ensure price stability while remaining free of all political pressures. It sounded all too familiar. PART THREE: MELTDOWN CHAPTER FOURTEEN THE SECOND TOWER “European economic unity will come, for its time is here.” — Walther Funk, 19421 The Reichsbank president and BIS director was half right. European economic unity did indeed arrive, but it came sixty years after he predicted. Walther Funk lived to see two of the most important early milestones: the establishment in 1951 of the European Coal and Steel Community, Europe’s first supranational institution, whose loans were managed by the BIS, and the signing of the Treaty of Rome in 1957, when the six core countries—Germany, France, Italy, Belgium, Luxembourg, and the Netherlands—established the European Economic Community.


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

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, 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, 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: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, 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

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. It would take only a handful of believers in this theory—which is only partially right—to bring about the “Great United States Slump.” Indeed our concern regarding this future possibility was one of the primary motivations for writing this book.

He rose through the ranks, as assistant professor, associate professor, full professor, and even department chairman. His field was labor economics. He wrote the influential book The Economics of Trade Unions.1 In 1966 he left Chicago for Princeton, and shortly thereafter he began taking on increasing administrative responsibilities. He was eventually tapped by President Gerald Ford to be the director of the Council on Wage and Price Stability. He later returned to Princeton, where he became provost, and finally he served as president of the Alfred P. Sloan Foundation. Shortly before his death, Rees wrote a paper for a conference in honor of his old friend Jacob Mincer, also a distinguished labor economist of the Chicago School. (Rees himself had been honored by a similar conference three years earlier.) He used this occasion to look back on his former life as an economist.

There is a rule of thumb that comes from the estimation of Phillips curves: it takes a 2-percentage-point increase in unemployment to reduce inflation by 1%. 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.


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, 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, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Ponzi scheme, price stability, rent control, road to serfdom, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The Wealth of Nations by Adam Smith, Thorstein Veblen

And I have often thought since how fascinating it would have been to stage a debate between Friedman and Keynes.14 Friedman believes that Keynes’s most original contribution to economic theory was his “emphasis on the conflict between the stability of prices and the stability of exchange.”15 Like Keynes, Friedman believes that domestic price stability is more important than international exchange rate stability, though he would like to see both. Indeed, he believes that the surest, and perhaps only, way to achieve stable international exchange rates would be for all nations to have stable domestic price levels. The goals of domestic price stability and international exchange rate stability are thus in the long run not in conflict but in harmony. Friedman feels that a national economy is more stable than Keynesian analysis postulates. Investment (including by government in the form of deficit budgets) does not have nearly the multiplier effect on income that Keynes thought, whereby small changes in investment lead to large changes in income, nor do ups and downs in economic activity have as much effect on consumption as Keynes thought.

He made reference to the “inflationary pressure of abnormally high government expenditures”6; only later did he come to emphasize that inflation is always and everywhere a monetary phenomenon. Simons was not, incidentally, a consistent monetarist, if he is considered to have been a monetarist at all. He wrote in 1936 in “Rules versus Authorities in Monetary Policy,” speaking of the goal of price stabilization: “The task is certainly not one to be entrusted to banking authorities, with their limited powers and restricted techniques, as should be abundantly evident from recent experience. Ultimate control over the value of money lies in fiscal practices—in the spending, taxing, and borrowing operations of the central government.... [I]n an adequate scheme for price-level stabilization, the Treasury would be the primary administrative agency.”7 Later this would not be Friedman’s view at all of the mechanism through which inflation occurs.

Anna Jacobson Schwartz remains active at the National Bureau of Economic Research. His two best lifetime friends, George Stigler and Allen Wallis, died in 1991 and 1998 respectively. Friedman’s final position with respect to monetary policy was that it should seek stable aggregate prices. He favored neither inflation nor deflation. He became more optimistic with respect to the possibility of central banks as currently constituted to achieve price stability than he was in the past, believing that will is very important to control inflation. He feared that some decades hence, the world will forget what causes inflation and that all of the old, inaccurate purported causes of inflation (greedy employers, grasping employees, etc.) will return to the fore. If an epitaph were inscribed on his tombstone, he said it should read: “Inflation is always and everywhere a monetary phenomenon.”4 His final policy recommendation with respect to money is contained in a Hoover Institution publication, where he proposes that the “quantity of high-powered money—non-interest-bearing obligations of the U.S.


pages: 226 words: 59,080

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

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Edward Glaeser, Eugene Fama: efficient market hypothesis, 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, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, 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, Washington Consensus, white flight

This approach, popularized by the economist Steven Levitt, has been used to shed light on diverse social phenomena, ranging from the practices of sumo wrestlers to cheating by public school teachers, using careful empirical analysis and incentive-based reasoning.2 Some critics suggest that this line of work trivializes economics. It eschews the big questions of the field—when do markets work and fail, what makes economies grow, how can full employment and price stability be reconciled, and so on—in favor of mundane, everyday applications. In this book I focus squarely on these bigger questions and how economic models help us answer them. We cannot look to economics for universal explanations or prescriptions that apply regardless of context. The possibilities of social life are too diverse to be squeezed into unique frameworks. But each economic model is like a partial map that illuminates a fragment of the terrain.

These examples are a kind of strategic interaction, except that the interaction takes place between today’s self and the future self. The inability of today’s self to commit to the desirable pattern of behavior harms the future self. The generic solution to these problems is a strategy of precommitment. In the inflation example, the policy maker might choose to delegate monetary policy to an independent central bank that is tasked with price stability alone or is run by an ultraconservative banker. In the saving example, someone might ask an employer to make automatic deductions to a retirement plan. The paradox in these cases is that reducing one’s freedom of action can make one better off, defying the usual economic dictum that more choice is always better than less. But the paradox is only an illusion. What is a paradox for one class of models is often readily comprehensible within another class of models.

Fiscal stimulus would only lead to crowding out—cutbacks in spending on the part of the private sector. What made the “new classical approach,” as it came to be called, a winner—at least in academia—was not its empirical validation. The real-world fit of the model was heavily contested, as was the realism of some of the key ingredients. But shortly after the arrival of the new theory, in the mid-1980s the US economy entered a period of economic growth, full employment, and price stability. The business cycle looked to be conquered in this era of “great moderation.” As a result, the descriptive and predictive realism of the new classical approach seemed, from a practical perspective, not to matter a whole lot. The great appeal of the theory lay in the model itself. The microfoundations, the math, the new techniques, the close links to game theory, econometrics, and other highly regarded fields within economics—all these made the new macroeconomics appear light-years ahead of Keynesian models.


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)

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

This led to the reserves targeting scheme being dropped, with all reserves then remunerated at the policy rate. Because banks now had more reserves than they required, the need to borrow reserves on the interbank market was greatly diminished. Consequently, the overnight interbank lending rate now closely mirrors the policy rate. Controlling money creation through interest rates Currently, one of the Bank of England’s two core purposes is to maintain price stability, which in practice means keeping inflation at a target level of 2% a year. It does this by manipulating the short term interest rates at which banks lend reserves to each other on the interbank market. In this section we discuss how the central bank attempts to control inflation through interest rates, the transmission mechanisms from interest rates to inflation, and the effectiveness of the interest rate as a tool to limit the growth in money creation by banks.

The effect of an increase in interest rates on inflation will depend to an extent on whether the effect of increasing savers’ wealth cancels out the decrease in debtors’ wealth, or whether one dominates the other. Moreover, if savers and borrowers have different consumption patterns then the effect of increasing rates will be to increase the demand for the goods that interest earners buy, pushing up their prices. (Tymoigne, 2009) Fifth, the control of inflation by interest rates can place the two core central bank functions into conflict with each other, namely price stability and financial stability. For example, if asset price inflation is high, then it will take a large increase in the interest rate (above the rate of asset price inflation) in order to stem the rise in credit creation for asset purchase and burst the bubble. This is likely to create strong disruptive effects on the productive economy (possibly bankrupting firms). If this asset inflation is not spotted early, the likelihood will be that a large number of economic agents will be drawn into speculative positions (buying a house as an ‘investment’ is one example of how ubiquitous speculative behaviour has become).

Alternatively, the MCC may lend money to the banks to on-lend into the ‘real’ economy, in which case the decision over where the money is lent will be made, within broad guidelines, by the banks. 7.2 Deciding how much money to create: The Money Creation Committee (MCC) The decision over how much new money to create would be given to an independent body, to be known as the Monetary Creation Committee. As is the case today, the target of monetary policy will be the rate of inflation. However, in line with democratic principles, if Parliament deems targets other than price stability to be more desirable, it will have the ability to change the MCC’s mandate. In deciding the amount of money that would be added or removed from circulation, the MCC would broadly aim to change the growth rate of the money supply in order to keep inflation at around the 2% a year target. Creation of new money by the MCC will increase the amount of spending in the economy. 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).

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

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

Rich creditors lost out, even as national income for the most part continued to expand. In the second half of the twentieth century, both debtors and creditors could more happily live side-­by-­side thanks to persistently rising living standards. Rising incomes gave at least some creditors a reasonable return – banks and bondholders both did incredibly well as the inflationary 1970s gave way to the price stability of the 1980s and beyond – while debtors could sleep easily, knowing that higher living standards would easily allow them to pay off their debts, with both interest and little financial pain. Without growth, however, the relationship between creditors and debtors becomes a lot more problematic. The creditors want their money back, but the debtors may no longer have the ability to repay. Economic stagnation understandably leads to mistrust, to poorly functioning credit markets, to credit shortages and debt default.

He fled to London, Wilhelm I became German Emperor (in the Hall of Mirrors in Versailles, of all places), most of the German nations were united (thanks to Bismarck), Alsace-­Lorraine ended up in German hands, the revolutionaries of the Paris Commune had a fleeting taste 182 4099.indd 182 29/03/13 2:23 PM From Economic Disappointment to Political Instability of power and the French agreed to pay huge reparations – around $1 billion – to the Germans. Germany, thinking ahead to the creation of a new monetary system, wanted its reparations in gold, taking its lead from British developments earlier in the nineteenth century. During the Napoleonic Wars, the value of paper British money had declined rapidly: it was the early nineteenth-­century equivalent of abandoning a commitment to price stability and allowing inflation to surge. After the Congress of Vienna, however, Britain moved to a gold standard. By that stage, with war no longer an excuse, holders of government bonds were unwilling to accept the inflationary losses attached to their savings and the City of London was not prepared to tolerate the instability associated with high and variable inflation rates. A precious metal standard was the obvious solution.

Roosevelt, after all, managed to do so between 1933 and 1936, fulfilling the pledge made in his May 1933 fireside chat, even though the US economy was, by then, but a shadow of its former self. Roosevelt’s inflation was, of course, completely intentional. It is also possible, however, to end up with unintentional inflation. Few, for example, thought inflation was likely to accelerate at the end of the 1960s and certainly policy-­ makers themselves didn’t plan an inflationary pick-­up, yet that is exactly what transpired: across the developed world, two decades of price stability were followed by the inflationary upheavals of the 1970s. Could inflation return in current conditions? It seems unlikely. Even as central banks have attempted to reinvigorate economies through quantitative easing, inflation has mostly remained relatively well-­behaved. Where it has picked up – most obviously in the UK following sterling’s devaluation at the end of 2008 – it has been of a very unusual kind: prices have risen but wages have not followed suit.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

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3D printing, Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, Internet of things, inventory management, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, underbanked, WikiLeaks, Y Combinator, Y2K, Zimmermann PGP

In the first three months of that period you would have seen your gas bill plunge 90 percent, only to see it jump by 50 percent over the following four months. By contrast, the price of gasoline dropped and rose by no more than 12 percent in dollar terms over the same period. Extrapolating from the three-part textbook definition of “money” that we referenced in chapter 2, a currency must exhibit price stability if it is to function properly as a medium of exchange—in addition to proving itself a reliable store of value and an accepted unit of account. It’s hard to suggest that bitcoin now has anywhere near the price stability that’s needed. That’s a direct result of its fluctuation versus other currencies. In an extensive study of bitcoin’s price performance against various other currencies and assets, New York University professor David Yermack concluded that bitcoin is much better viewed as a commodity than as a currency.

To understand this argument we must recognize the role played in markets by traders, that special breed of investors who buy and sell assets in a short period to profit from price moves in either direction. In placing these short-term bets, traders provide much-needed “liquidity” to markets—defined as the degree to which investors can easily find buyers of an asset they want to sell or sellers of one they want to buy. As more traders enter the market, creating more prospective buyers and sellers, liquidity increases and prices stabilize. Ironically, though, it’s the volatility, not price gains, that first draws traders in, since that’s what creates profits. If prices are swinging around, traders can make more money being on either side of the trade. We saw this in the 1970s, when the collapse of the Bretton Woods system sent exchange rates haywire and banks rushed to set up highly profitable foreign-exchange trading desks.

Gox emerged, this time compelling it to suspend trading for two days on April 11, which then morphed into bigger legal problems. The bitcoin price plunged to $68 on April 16, where it seemed to find a floor, even though a month later the U.S. government froze Mt. Gox’s U.S. bank account in one of the first signs that Washington wanted to regulate this lawless, new digital currency. Throughout the summer, the price stabilized, sort of, oscillating within “only” a range of $65 to $130. Then U.S. law enforcement first arrived on the cryptocurrency scene. In late June 2013, reports emerged that the FBI had seized 11 bitcoins (then worth $800) from a drug dealer in what was seen as an initial “honeypot sting” on Silk Road. A month later, the Securities and Exchange Commission filed charges against Trendon Shavers, a Texan accused of running a bitcoin Ponzi scheme under the moniker pirateat40.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

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

Moreover, each government agreed to tie the quantity of money it printed to an agreed quantity of gold. Since no one can produce gold at will (with only small amounts being mined every year), this Gold Standard system seemed to guarantee a stable, almost constant, supply of money in each participating country. Despite many hiccups, especially during the First World War, during which it was suspended, the Gold Standard seemed to deliver the intended price stability. Indeed, inflation was kept at bay, even if we now know that this price stability was bought at the cost of lower growth and employment. Then the Crash of 1929 struck at a time when, because of the Gold Standard, governments’ hands were tied. Banks were failing, businesses were collapsing, workers were being laid off in droves, tax takes were falling fast, but the government could not create more money to help either labour or capital weather the storm.

Keynes’ proposal was not as impudent as it seemed. In fact, it has withstood the test of time quite well. In a recent BBC interview, Dominique Strauss-Kahn, the IMF’s then managing director, called for a return to Keynes’ original idea as the only solution to the troubles of the post-2008 world economy.3 But what was the nub of the proposal? It was to bring on the benefits of a common currency (trade facilitation and convenience, price stability, predictability in international trading) without suffering the main demerits that come when disparate economies are monetarily bound together. The lost opportunity The problem with currency unions, as Argentina was to discover in the late 1990s and Europe in the aftermath of the Crash of 2008, is the simple fact of life that trade and capital flows can remain systematically unbalanced for decades, if not centuries.

And now that the beast is gone, our world is in a state of permanent instability, chronic uncertainty and a never-ending slump. The missing mechanism Global capitalism cannot be stabilised on the basis of more investment, better gadgets, faster railways, smarter innovations. This is the error of vulgar Keynesians who think that if only the state spent and invested wisely, all would be well. Similarly, global capitalism will not regain its lost poise if central banks focus on price stability, and the task of rebalancing the world economy is left to the magical machinations of supply and demand. This is the even more menacing error of libertarians. The stability of global, but also regional, capitalism requires a global surplus recycling mechanism – a mechanism that markets, however globalised, free and well-functioning they might be, cannot provide. So, the question is: if America cannot supply the missing GSRM, and Europe is too busy disintegrating, who can?

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

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

On the other hand, Ecuador was exposed to the potentially destabilizing effects of acute intensification of the armed conflict in Colombia, a country that shares a long border with Ecuador. In this setting, and in one of the more dramatic experiments in recent monetary history, the Ecuadoran government decided, in January of 2000, to adopt, de facto, unilaterally, and apparently without much external consultation, the U.S. dollar as its national currency. This was a “policy of last resort,” an almost desperate move to restore some degree of monetary and price stability in a country that needed an urgent monetary anchor to stabilize expectations, avoid hyperinflation, stop uncontrolled currency depreciation, and enable resumption of normal economic and financial activity. Official dollarization had a political motivation as well. In late 1999, constitutionally elected President Mahuad was facing a sharp plunge in his popularity. His presidency was being challenged by a particularly adverse set of events: a severe economic crisis, an active and militant indigenous movement with radical political and economic demands, a badly divided and fragmented parliament, and a restive army.

The processes by which annual budgets are formulated, considered by the Congress, codified into a payments calendar, adjusted over the course of budget exercise for unforeseen events, and finally executed have various shortcomings. These arise in part from the practical difficulty of planning properly in an unstable context; institutional complexities in the planning and implementation phases; and long-standing problems in the processing of information. Once dollarization brings about price stability, the need to alter the budget in mid-year for unanticipated events should diminish. Since the mid-1990s, with World Bank support, the government has been developing and implementing a modern, computerized management information system. The system was officially inaugurated for a core group of public entities in May 2000, and implementation has been proceeding since then. When this system is complete, policymakers will be in a far better position to plan and oversee public resource allocation.

Moreover, Panama saves the cost of operating a central bank, which would be significant for a small developing economy. 3. Lessons from Panama’s Dollarization Panama adopted the dollar following its independence in 1904.3 Unlike many other Latin American economies, where debilitating cycles of inflation, exchange-rate depreciation, adjustment, and recession have hampered growth and intensified social conflict, Panama has maintained monetary and price stability and steady growth. Panamanian business has never experienced or ever had to cope with the fear of exchange-rate depreciation. In recent years, inflation rates in Panama have actually been below those of the United States. Although Panama has coped with external-debt problems and exogenous shocks, it has avoided traumatic balance-of-payments crises, as well as systemic banking or financial crises.


pages: 128 words: 35,958

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

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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, collective bargaining, declining real wages, full employment, George Akerlof, income inequality, inflation targeting, minimum wage unemployment, new economy, price stability, quantitative easing, Report Card for America’s Infrastructure, rising living standards, War on Poverty

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 European Central Bank has this commitment in its charter, and it is the official target for policy of the Bank of England. 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.

“The Establishment-Level Behavior of Vacancies and Hiring.” Quarterly Journal of Economics, Vol. 128, No. 2, pp. 581-622. Doucouliagos, Hristos, and T. D. Stanley. 2009. “Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis.” British Journal of Industrial Relations, Vol. 47, No 2, pp. 406-28. Feldstein, Martin. 1997. “The Costs and Benefits of Going From Low Inflation to Price Stability.” In Christina D. Romer and David H. Romer, eds., Reducing Inflation: Motivation and Strategy (Chicago: University of Chicago Press). http://www.nber.org/chapters/c8883.pdf Fischer, Stanley. 1981. “Towards an Understanding of the Costs of Inflation, 2.” In K. Brunner and A. Meltzer, eds. “The Costs and Consequences of Inflation,” Camegie-Rochester Conference Series on Public Policy, Vol. 15 (Amsterdam: North Holland).


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

If a politician suggested a numerical target for reducing unemployment, he would be committing treason in the war against inflation. A central banker would rather tie himself in verbal knots than admit that policies on interest rates might help create jobs. Today, inflation is the only macroeconomic variable for which governments set public targets. And central bankers focus on the sole objective of price stability in every speech. If central bankers can control inflation, states the official orthodoxy, then jobs, prosperity, and everything else will take care of itself, or more precisely, will be managed satisfactorily by market forces. To the extent that central bankers and finance ministers do care about jobs and economic growth, these concerns now have to be repackaged and disguised as arguments about long-term inflationary prospects.

Ben Bernanke, in his speech about the Great Moderation in 2004, still felt obliged to pay lip service to the official doctrine that maintaining low inflation had been the key to the Fed’s success in stabilizing employment and economic growth. The truth, however, was that the Fed and other central banks gradually returned to the broad economic philosophies, if not the exact policies, abandoned in the 1970s. These policies were again directed, as they had been in the 1950s and 1960s, to achieving a reasonable balance between price stability, full employment, and steady growth. And for most of the twenty-year period after demand management was reinvented, the central bankers were remarkably successful in walking the tightrope between inflation and unemployment. Their success lasted right up until the autumn of 2008, when the Lehman crisis blew up the tightrope, the safety net, and most of the spectators in the circus tent. With this observation, it is time to consider the last and most controversial of the four megatrends: the financial revolution that triggered the Great Moderation’s spectacular demise.

CHAPTER SIXTEEN Economic Policy in Capitalism 4.0 THROUGHOUT THE THIRTY-YEAR PERIOD up to the bankruptcy of Lehman, most governments and central banks acknowledged only one official objective for macroeconomic policy: to control inflation. The single-minded focus on inflation held even though central bankers always understood that the relationship between money and inflation was much more subtle than official slogans proclaimed. With demand management neutered by the predominant monetarist economic doctrine, only one reasonable criterion for judging the success of macroeconomic policy seemed to remain: price stability. All the other goals of macroeconomic management that had dominated democratic politics from the 1930s until the late 1970s—achieving full employment, maximizing output growth, and keeping trade and government budgets in reasonable balance—were relegated by finance ministers and central bankers to their junior colleagues who controlled the ministries responsible for microeconomic issues such as trade policy, industry, and government budgeting.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

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asset allocation, backtesting, Black-Scholes formula, Bretton Woods, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, new economy, oil shock, passive investing, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

If you’d like more information about this book, its author, or related books and websites, please click here. For more information about this title, click here C O N T E N T S Foreword xv Preface xvii Acknowledgments xxi PART 1 THE VERDICT OF HISTORY Chapter 1 Stock and Bond Returns Since 1802 3 “Everybody Ought to Be Rich” 3 Financial Market Returns from 1802 5 The Long-Term Performance of Bonds 7 The End of the Gold Standard and Price Stability 9 Total Real Returns 11 Interpretation of Returns 12 Long-Term Returns 12 Short-Term Returns and Volatility 14 Real Returns on Fixed-Income Assets 14 The Fall in Fixed-Income Returns 15 The Equity Premium 16 Worldwide Equity and Bond Returns: Global Stocks for the Long Run 18 Conclusion: Stocks for the Long Run 20 Appendix 1: Stocks from 1802 to 1870 21 Appendix 2: Arithmetic and Geometric Returns 22 v vi Chapter 2 Risk, Return, and Portfolio Allocation: Why Stocks Are Less Risky Than Bonds in the Long Run 23 Measuring Risk and Return 23 Risk and Holding Period 24 Investor Returns from Market Peaks 27 Standard Measures of Risk 28 Varying Correlation between Stock and Bond Returns 30 Efficient Frontiers 32 Recommended Portfolio Allocations 34 Inflation-Indexed Bonds 35 Conclusion 36 Chapter 3 Stock Indexes: Proxies for the Market 37 Market Averages 37 The Dow Jones Averages 38 Computation of the Dow Index 39 Long-Term Trends in the Dow Jones 40 Beware the Use of Trend Lines to Predict Future Returns 41 Value-Weighted Indexes 42 Standard & Poor’s Index 42 Nasdaq Index 43 Other Stock Indexes: The Center for Research in Security Prices (CRSP) 45 Return Biases in Stock Indexes 46 Appendix: What Happened to the Original 12 Dow Industrials?

Finally, by 1982, the restrictive monetary policy of Paul Volcker, chairman of the Federal Reserve System since 1979, brought inflation and interest rates down to more moderate levels. One can see that the level of interest rates is closely tied to the level of inflation. Understanding the returns on fixed-income assets therefore requires knowledge of how inflation is determined. THE END OF THE GOLD STANDARD AND PRICE STABILITY Consumer prices in the United States and the United Kingdom over the past 200 years are depicted in Figure 1-3. In each country, the price level at the end of World War II was essentially the same as it was 150 years earlier. But after World War II, the nature of inflation changed dramatically. The price level rose almost continuously during that 60-year period, often gradually, but sometimes at double-digit rates as in the 1970s.

During the nineteenth and early twentieth centuries, the United States, United Kingdom, and the rest of the industrialized world were on a gold standard. As described in detail in Chapter 11, a gold standard restricts the supply of money and hence the inflation rate. But from the Great Depression through World War II, the world shifted to a paper money standard. Under a paper money standard there is no legal constraint on the issuance of money, so inflation is subject to political as well as economic forces. Price stability depends on the ability of the central banks to limit the growth of the supply of money in order to counteract deficit spending and other inflationary policies implemented by the federal government. The chronic inflation that the United States and other developed economies have experienced since World War II does not mean that the gold standard was superior to the current paper money standard.


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

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

In Europe, they could have demanded that Ireland not bail out its banks, rather than that it do so.38 They could have demanded that the Greek restructuring be done in a way that the CDSs paid off. Not even the leaders of the ECB would deny that they face such choices. But if trade-offs exist, the people making them need to be politically accountable. In Europe, the governance is even worse than in the United States. 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.

Research in economics over the past half-century has shown that not only is there a presumption that markets are not efficient and stable; it has also explained why that is so and what governments can do to improve societal well-being.33 Today, even market fundamentalists (sometimes also referred to as “neoliberals”) admit that there is a need for government intervention to maintain macro-stability—though they typically argue that government interventions should be limited to a rules-based monetary policy focused on price stability—and to ensure property rights and contract enforcement. Otherwise, regulations and restrictions should be stripped away. There was no economic rationale for this conclusion—it flies in the face of a huge body of economic research showing that there is a need for a wider role for government. The world has paid a high price for this devotion to the religion of market fundamentalism/neoliberalism, and now it’s Europe’s turn.

In this chapter I will describe the structural flaws in the ECB and how these flaws have translated into policy decisions, some of which have worked well, but others of which have weakened the eurozone economy and increased the divides within it. THE INFLATION MANDATE When the ECB was established in 1998 as part of the process that created the euro, it was constructed expressly to limit what it could do. It was given a single, clear mandate: to maintain price stability.2 This is markedly different from the mandate of the US Federal Reserve, which is supposed to not only control inflation but also promote growth and full employment. In the aftermath of the 2008 crisis, the Fed was given a further mandate—maintaining financial stability. It was ironic that this had to be added to the list, for the Federal Reserve was founded in 1913 to protect the integrity of the financial system after the panic of 1907.


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

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The Fed was not set up until 1913, in response to financial turmoil. Today, as the central bank of the fifty American states and the territories, and operating under delegated authority from Congress, the Fed has a mission to “provide the nation with a safe, flexible, and stable monetary and financial system.” The ECB became operational in 1999. Working with national central banks that are also part of the Eurosystem, its goal is to maintain price stability, safeguard the common currency, and supervise credit institutions (predominantly banks). To pursue their objectives, all central banks are empowered to manage the country’s currency and money supply with a view to delivering specified macroeconomic objectives—universally, that of low and stable inflation, as well as, in some cases, high employment and economic growth. In more recent years, a growing number of central banks have also been charged with supervising parts of the financial system and ensuring overall financial stability.

Their heads were increasingly telling them to stop this experimentation and start “normalizing” policies, but their hearts urged them to do even more, and to look for something new in their bag of tricks. No one that I know of had accurately foreseen the length and depth of this policy dilemma. From day one in the financial crisis, the hope had been that our courageous and responsive central banks would succeed in handing off the baton to high growth, robust job creation, price stability, and financial system soundness—either directly or, more likely, by buying enough time for the private sector to heal and for politicians to enable other policy-making entities to finally step up to their economic governance responsibilities. And with economic prosperity and jobs returning, the world would be able in the medium term to grow out of its debt problems, avoiding the need for disorderly deleveraging, devastating austerity, debt defaults, etc.

Needless to say, this battle was driven by two very different assessments of what constitutes the right destination. End investors, including pension funds and university endowments, trust their capital to hedge fund managers with the understanding that the latters’ fiduciary responsibility is to pursue profits. Not so for central banks. For them profitable market outcomes are not a destination. It could be part of the journey dedicated to achieving macroeconomic objectives, mostly focused on growth and price stability, but even then, not necessarily so. Of course, there is some limit beyond which it becomes totally unreasonable to divorce highly elevated asset prices from sluggish fundamentals. The closer you get to this limit—and I believe we have gotten quite close—and the more elusive genuine growth is, the greater the risk of a subsequent disruptive collapse in prices that not only rapidly converge down toward levels warranted by fundamentals but also overshoot them.

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

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

The initial system of one vote per council member is to be superseded, most probably during 2015, by an arrangement that will give the executive board six votes, add four votes that rotate among the five biggest euro members and give the rest, no matter how many there are, 11 votes in total (this change creates at least the theoretical possibility that the Bundesbank’s president might not always have a vote on the council). The ECB was modelled on the German Bundesbank but is in many ways even more powerful and independent. Its goal, fixed by the Maastricht treaty, is price stability (close to but below 2%), whereas the Federal Reserve, its American counterpart, is also required to pay attention to employment. Its operational independence in delivering the goal of price stability, which it defines itself, is also guaranteed by the same treaty. Unlike other central banks, it has no single government or finance ministry to interact with and report to, though its president testifies before the European Parliament and attends most meetings of the European Council and often EcoFin and the Eurogroup as well.

., The Passage to Europe, Yale University Press, 2013 Appendix 4 How The Economist saw it at the time May 1st–7th 2010 July 10th–16th 2010 November 20th–26th 2010 December 4th–10th 2010 January 15th–21st 2011 March 12th-18th 2011 June 11th-17th 2011 June 25th-July 1st 2011 October 29th-November 4th 2011 November 5th-11th 2011 November 12th-18th 2011 November 26th-December 2nd 2011 February 18th–24th 2012 March 31st–April 6th 2012 May 19th–25th 2012 May 26th-June 1st 2012 July 28th-August 3rd 2012 August 11th-17th 2012 November 17th-23rd 2012 March 23rd-29th 2013 May 25th–31st 2013 September 14th–20th 2013 October 26th-November 1st 2013 January 4th-10th 2014 Index 1974–75 global recession 10 A accession treaties 112 accountability 125–129, 162 Alliance of Liberals and Democrats for Europe (ALDE) 130–131 Alogoskoufis, George 42 Amsterdam treaty 111–112, 193 Anastasiades, Nicos 2, 86–88 Anglo Irish Bank 53 Ansip, Anders 104 Arab spring 145–146 Argentina 5, 50 Armenia 149 Ashton, Catherine 28, 43, 144 Asmussen, Jörg 51, 82 Austria 111, 127 influence 108 interest rates 93 Azerbaijan 149 Aznar, José Maria 17 B Bagehot, Walter 9 bail-in rules 83, 90–91, 165 see also Cyprus bail-outs national approval requirement 127 no-bail-out rule 45, 162, 163–165 Balkans war 143 Bank of Cyprus 86–87 Bank of England 47, 157 bank recapitalisation 58–59, 74–77, 84 Bankia 72 banking sector characteristics 35 banking supervision see financial supervision banking union 23, 74–75, 77, 83–85, 90–92, 106, 165, 195 see also deposit guarantees; financial supervision Barnier, Michel 41, 138 Barroso, José Manuel early days of crisis 41 European Commission 97, 98, 141, 172 Greece 3, 78 Italy 63 Batista, Paulo Nogueira 46 Belarus 149 Belgium 17, 100, 127 Berlusconi, Silvio euro currency view 151 Italy’s failure to reform 59, 60, 62–63 People of Freedom party (PdL) 107 resignation 64 Black Wednesday 16–17 Blair, Tony 28, 112 BNP Paribas 40 Bolkestein directive 137 bond yields 37, 38, 61, 70, 89 bond spreads 37, 42, 70, 80, 88 Bootle, Roger 1 Bowles, Sharon 98, 129 Brandt, Willy 10 Bretton Woods 9–10 Brown, Gordon 24, 41, 48, 102, 112, 144 Bruegel think-tank 35, 74, 163, 166 budget deficits Maastricht ceiling 15 timescales for meeting targets 88–89 see also stability and growth pact budgets annual, European 21, 27, 118 central 13, 168–170 federal 164, 168 fiscal capacity 84 Bulgaria 108, 113, 124, 126, 147 Bundesbank 16, 23, 157 C Cameron, David 14, 17, 64–65, 117–119, 132, 140 Cannes G20 summit (2011) 62–64 Capital Economics 1 Cassis de Dijon judgment 21 Catalonia 178 CEBS (Committee of European Banking Supervisors) 35 central banks, national 22–23 Centre for European Policy Studies 34 Centre for European Reform 34 CFSP (Common Foreign and Security Policy) 142, 144 China 33, 139, 167 Chirac, Jacques 18, 23, 100, 127 Christofias, Demetris 86 Churchill, Winston 7, 115, 161 Clark, Christopher 178 climate change 135–136 Clinton, Hillary 144 Cockfield, Arthur 13 Committee of European Banking Supervisors (CEBS) 35 Committee of Permanent Representatives (COREPER) 20 Committee of Regions 21 common fisheries policy 100, 138 Common Foreign and Security Policy (CFSP) 142, 144 community method 19, 21–22 Competitiveness Pact see Euro Plus Pact complacency pre-crisis 36–37 Constâncio, Vítor 34 constitution proposals 26–27 convergence criteria 14–16, 41, 112, 193 COREPER (Committee of Permanent Representatives) 20 COSAC (Conference of Community and European Affairs Committees of Parliaments of the European Union) 133 Council of Ministers 20, 121, 130 Council of the European Union see Council of Ministers Court of Auditors 21 Court of First Instance 21 Crafts, Nicholas 9 credit ratings (countries) 69, 77–78, 108 Crimea 150 Croatia 113, 143, 147 current-account (im)balances 25, 31, 88–89, 167–168 customs union, German 9 Cyprus accession 147 bail-out 2, 85–88 entry to euro 112 finances pre-crisis 30 Cyprus Popular Bank (Laiki) 86–88 Czech Republic 113, 118 D Dayton agreement 143 de Gaulle, Charles 9, 22, 96 de Larosière, Jacques 41, 74 Deauville meeting between Sarkozy and Merkel 51–52, 102 debt mutualisation 74, 103, 166–167 defence and security 8, 143, 145 deflation 92 Delors, Jacques 11, 37, 97 Delpla, Jacques 167 democratic accountability 125–129, 162 democratic deficit 121, 129–132, 162–163, 171–172 Denmark European participation 112 justice and home affairs (JHA) 111, 139 ministerial accountability 133 opt-outs 139 referendums 16, 27, 132 shadowing of euro 113 single currency opt-out 110, 115 UK sympathies 119 deposit guarantees 5, 40–41, 74, 77, 91 Deutschmark 10, 12, 16 devaluation, internal 31, 65–66 Dexia 72 Dijsselbloem, Jeroen 24, 87 double majority voting 20, 114 Draghi, Mario 156 appointment as ECB president 23, 68 crisis-management team 2 demand for fiscal compact 64 Long Term Refinancing Operations (LTRO) 68–70 outright monetary transactions (OMT) 78–81 pressure on Berlusconi 59 “whatever it takes” London speech 79 Duisenberg, Wim 23 E e-commerce 137 east–west divide 108 ECB (European Central Bank) bond-buying 47–49, 59–60 crisis-management planning 2, 4 delays 156 European System of Central Banks 22 liquidity provision 40–42, 68–70 outright monetary transactions (OMT) 79–81, 164, 175–176 role and function 22–24, 39–40, 170–171 supervision 6, 99, 175, 195 troika membership 160–161 EcoFin meetings 20, 114 Economic and Financial Committee 20 economic and monetary union (EMU) 11, 112 Economic and Social Committee 21 economic imbalances 30–34 The Economist on ECB responsibilities 15 fictitious memorandum to Angela Merkel 1 ECSC (European Coal and Steel Community) 7–8 EEAS (European External Action Service) 142, 144 EEC (European Economic Community) 8 EFSF (European Financial Stability Facility) 26, 48, 55, 60–61, 81, 194 see also ESM (European Stability Mechanism) EFSM (European Financial Stabilisation Mechanism) 48 Eiffel group 120, 129, 164 elections, European 121, 129–130 Elysée treaty 100 emissions-trading scheme (ETS) 135–136 EMS (European Monetary System) creation of 11 exchange-rate mechanism 16 membership 15 EMU (economic and monetary union) 11, 112 EMU@10 36 energy policies 136 enhanced co-operation 111 enlargement 33, 146–147 environment summits 135 Erdogan, Recep Tayyip 148 ESM (European Stability Mechanism) 194 establishment 26, 55, 80–81 operations 58, 75, 76, 91 Estonia 65, 108 ETS (emissions-trading scheme) 135–136 EU 2020 strategy 137 euro break-up contingency plans 2–3 convergence criteria 14–16, 41, 112, 193 crash danger 47–48 introduction of 4, 18 notes and coins 18 special circumstances 3–4 euro crisis effect on world influence 143–146 errors 155–161 focus of attention 135–141 Euro Plus Pact 55, 195 euro zone 4 economic dangers 175–178 increasing significance of institutions 113–114, 120 performance compared with US 154–155 political dangers 175–178 political integration 125 trust 173 Eurobonds 54, 59, 74, 166–167 Eurogroup of finance ministers 24, 114 European Banking Authority 114, 195 European Central Bank (ECB) bond-buying 47–49, 59–60 crisis-management planning 2, 4 delays 156 European System of Central Banks 22 liquidity provision 40–42, 68–70 outright monetary transactions (OMT) 79–81, 164, 175–176 role and function 22–24, 39–40, 170–171 supervision 6, 99, 175, 195 troika membership 160–161 European Coal and Steel Community (ECSC) 7–8 European Commission commissioners 19, 172 errors 160 future direction 171–172 influence and power 96–97, 99, 119, 125 intrusiveness 127, 140–141 organisation 19 presidency 131, 144 proposals for economic governance 50 European Community 12 European Council 20, 98–99 European Court of Human Rights 21 European Court of Justice 21 European Defence Community 8 European Economic Community (EEC) 8 European External Action Service (EEAS) 142, 144 European Financial Stabilisation Mechanism (EFSM) 48 European Financial Stability Facility (EFSF) 26, 48, 55, 60–61, 81, 194 see also European Stability Mechanism (ESM) European Financial Stability Mechanism 26 see also European Stability Mechanism (ESM) European Investment Bank 21 European Monetary Institute 22 European Monetary System (EMS) creation of 11 exchange-rate mechanism 16 membership 15 European Parliament 20–21, 97–98, 99, 100, 119, 121, 129–132, 171 European People’s Party 117, 127, 130–131 European Political Co-operation 142 European semester 25, 195 European Stability Mechanism (ESM) 194 establishment 26, 55, 80–81 operations 58, 75, 76, 91 European Systemic Risk Board 41 European Union driving forces for monetary union 12–13 expansion 26 historical background 7–12 treaty making 26–28 world influence 140, 142–150 European Union Act (2011) 117, 132 Eurosceptics 13, 123 Finns Party 124 Jobbik 125 League of Catholic Families 125 National Front 124 Party of Freedom (PdL) 124 UK Independence Party (UKIP) 118, 125, 140 excessive deficit procedure 24, 88–89, 194, 195 exchange-rate systems 3, 9–11 exchange rates 164 F Farage, Nigel 98, 118 Federal Deposit Insurance Corporation (FDIC) 77 Federal Reserve (US) 23, 47, 48, 157 federalism 19, 110, 116, 161–165, 168–170, 177–178 financial integration 35–36 financial supervision 195 ECB 6, 99, 175, 195 Jacques de Larosière proposals 41 national 23, 35 single supervisor 76–77, 83–84, 90 Finland accession 26, 111 Finns Party 124 influence 108 ministerial accountability 133 fiscal capacity 84 fiscal compact treaty 25–26, 64–65, 118, 194–195 fiscal policy, focus on 30–31 Five Star Movement 124, 126 fixed exchange-rate systems 3, 9–10 Foot, Michael 116 forecasts, growth 92 foreign policy 142–143 Fouchet plan 22 France credit rating 69, 103 current-account balance 168 EMS exchange-rate mechanism 16 excessive deficit procedure 89 GDP growth 32 and Greece 44 influence 100–104, 142–143 Maastricht deal 12, 16 public debt 159 public opinion of EU 123, 124 single currency views 16–17 unemployment 159 veto of UK entry 115 vote to block European Defence Community 8 freedoms of movement 8, 13 G Gaulle, Charles de 9, 22, 96 Gazprom 136 GDP growth 32 Georgia 149 Germany 2013 elections 90, 106, 125 bond yields 37, 89 Bundesbank 16, 23, 157 constitutional (Karlsruhe) court 45, 95, 128, 158 credit rating 69, 77–78 crisis management errors 155–156 current-account surplus 89, 105, 167–168 demands post Greek bail-out 50–51 economic strengths and weaknesses 14 GDP growth 32 and Greece 44 influence 100–106 Maastricht deal 12, 15–16 national control and accountability 128, 133 parliamentary seats 100 political parties 93, 125 public debt 159 public opinion of EU 123 unemployment 159 unification 16 Zollverein 9 Giscard d’Estaing, Valéry 11, 18, 26, 100 Glienicker group 163, 170 gold standard 9–10 Golden Dawn 124 government spending (worldwide) 4 governments, insolvency of 50 great moderation 31 Greece 2012 election 73, 126 bail-out deal 45–47, 56–58, 65–67, 70, 158 bond yields 37, 61–62 current-account balance 168 debt crisis 42–45 euro membership 18, 112, 115 finances post bail-out 93–94 finances pre-crisis 30, 71 GDP growth 32 potential euro exit 1–5, 81–83 public debt 159, 166 public opinion of EU and euro 113, 123, 124 referendum on bail-out 2, 61–62 unemployment 159 Gros, Daniel 34 H Hague, William 151 Haider, Jörg 127 Hamilton, Alexander 162, 167 Heath, Edward 10, 116 Heisbourg, François 104 Hollande, François 73–74, 89, 103–104, 127 proposed reforms 177 Hungary 41, 113, 126, 147 Hypo Real Estate 41 I Iceland 53, 147 ideological differences 114–115 IKB Deutsche Industriebank 40 immigration 139–140, 146, 147 impossible trinity 13 inter-governmentalism 96, 128, 174 interest rates 93, 164 internal devaluation 31, 65–66 International Monetary Fund (IMF) banking union 74 crisis-management planning 2, 4–5 Cyprus 86–87 errors 160–161 euro zone support 48 Greece 44–46, 56–57, 66, 83, 93–95, 160 Latvia 65 rainy-day funds 169–170 special drawing rights (SDR) 63 Iraq 143 Ireland 89, 110 bail-out 53–54, 56, 57, 89 bank crises 40, 71 bond yields 37, 47, 53, 61, 89 current-account balance 168 finances pre-crisis 30 GDP growth 32 influence 107 opt-outs 111, 139 public debt 159, 166 public opinion of EU 123 referendums 27, 28, 132 unemployment 159 Italy 2013 elections 107, 124, 126 bond yields 37, 61, 89 convergence criteria 17 current-account balance 168 danger of collapse 59 EMS exchange-rate mechanism 16 excessive deficit procedure 89 GDP growth 32 influence 100, 104, 107 interest rates 93 public debt 159, 166 public opinion of EU 123 single currency views 17 unemployment 159 J Jenkins, Roy 11 Jobbik 125 Juncker, Jean-Claude 98, 104, 177 candidate for Commission Presidency 131 EU 2005 budget crisis 28 Eurobonds 54 Eurogroup president 24 justice and home affairs (JHA) 139 K Karamanlis, Kostas 42 Karlsruhe constitutional court 45, 95, 128, 158 Kauder, Volker 105 Kerry, John 144 Kohl, Helmut 12, 18, 100 L labour markets 14, 33–34 Lagarde, Christine 51, 58, 62, 92 Laiki 86–88 Lamers, Karl 111 Lamont, Norman 17 Larosière, Jacques de 41, 74 Latin Monetary Union 9 Latvia 41, 65, 67, 88, 108 Lawson, Nigel 16 League of Catholic Families 125 legislative path 21–22 Lehman Brothers, ECB reaction to collapse 4 Letta, Enrico 107–108 Libya 143, 145 Lipsky, John 57 Lisbon treaty 28, 45, 194 foreign policy 142 institutions 20, 131 justice and home affairs (JHA) 139 subsidiarity 133 voting 20, 114 Lithuania 88, 113, 153 Long Term Refinancing Operations (LTRO) 68–70, 72 Luxembourg 77–78, 100, 108, 169 Luxembourg compromise 97 M Maastricht treaty 11–12, 15, 22, 142, 193 opt-outs and referendums 16, 110–111 MacDougall report (1977) 13, 169 Major, John 12, 111, 116 Malta 100, 112 Maroni, Roberto 34 Mayer, Thomas 1 McCreevy, Charlie 41 MEPs 20–21, 130 Merkel, Angela 2013 re-election 90 banking union 74–77 Cannes G20 summit (2011) 63–64 crisis response 40–41, 44 European constitution 28 fictitious memorandum to 1 future direction 178 power and influence 89, 102–106, 153 Sarkozy collaboration 60, 61–62, 102–103 support for Cyprus 86 support for Greece 5, 45, 49–52, 81–82 support for UK 118–119 union method 22, 128 voter support 125 Messina conference 8, 115 migration 139–140, 146, 147 Miliband, David 144 Mitterrand, François 11, 12, 18, 100 Mody, Ashoka 163 Moldova 149 Monnet, Jean 8, 152 Montebourg, Arnaud 104 Montenegro 147 Monti, Mario 64 influence 70, 75–76, 107 A New Strategy for the Single Market (2010) 137–138 Morocco 146 Morrison, Herbert 8 Morsi, Muhammad 145 Moscovici, Pierre 75 multi-annual financial framework 21, 27, 118 Mundell, Robert 12–13 mutualisation of debt 74, 103, 166–167 N national budgets 89, 125 National Front 124 NATO defence spending targets 145 European security 8 membership 110 Netherlands credit rating 77–78 excessive deficit procedure 89 influence 100, 108 ministerial accountability 133 UK sympathies 119 Nice treaty 194 no-bail-out rule 45, 162, 163–165 north–south divide 33–34, 108 Northern Rock 40 notes and coins 18 Nouy, Danièle 90 Nuland, Victoria 149 O Obama, Barack 63 official sector involvement (OSI) 83 OMT (outright monetary transactions) 79–81, 164, 175–176 Germany’s constitutional court judgment 95, 128 optimal currency-area theory 12–13, 14–15 Orban, Viktor 126 Osborne, George 117, 119 OSI (official sector involvement) 83 outright monetary transactions (OMT) 79–81, 164, 175–176 Germany’s constitutional court judgment 95, 128 P Pact for the Euro see Euro Plus Pact Papaconstantinou, George 43 Papademos, Lucas 64 Papandreou, George 56, 60 election 43 Greek referendum 61–62 resignation 2, 64 Party of Freedom 124 Poland 109, 113 Policy Exchange 1 political parties 124–125, 139–140 political union 10, 12, 133–134 Pompidou, Georges 10 Poos, Jacques 143 Portugal 110 bail-out 54, 57, 89–90 bond yields 37, 47, 53, 61, 89 public opinion of EU and euro 113 power, balance of 99–101 price stability goal of ECB 23 private-sector involvement (PSI) in debt restructuring 51–52 Prodi, Romano 17, 25, 97 Progressive Alliance of Socialists and Democrats (S&D) 130–131 public debt 15, 158–159 see also sovereign debt public opinion of EU and euro 121–124 Putin, Vladimir 149–150 Q qualified-majority voting 13, 20, 99, 121 negative qualified-majority voting 25, 195 quantitative easing (QE) 47, 15 R Rajoy, Mariano 70, 75–76, 127 recapitalisation, bank 58–59, 74–77, 84 redenomination 3–4, 153–154, 175 Reding, Viviane 139 referendums 27, 28, 121–122, 132 REFIT initiative 172 Regling, Klaus 26 Renzi, Matteo 107–108 rescue fund see European Stability Mechanism (ESM) resolution mechanism 90–91, 165, 195 single resolution mechanism (SRM) 195 single supervisory mechanism (SSM) 195 Romania 41, 108, 113, 124, 126, 147 Rome treaty 8, 97, 110, 193 Rösler, Philipp 78 Rueff, Jacques 9 Rumsfeld, Donald 143 Russia, influence on Ukraine 149–150 Rutte, Mark 77 S Samaras, Antonis 2, 78, 82, 93–94 Santer, Jacques 97 Sarkozy, Nicolas crisis response 40–41, 44 economic governance 49–50 European constitution 28 LTROs and the Sarkozy trade 69 Merkel collaboration 51–52, 60, 61–62, 102–103 Schäuble, Wolfgang 62, 75, 84, 90–91, 106, 111, 154 Schengen Agreement 110, 111–112 Schmidt, Helmut 11, 100 Schröder, Gerhard 18, 101, 127 Schulz, Martin 131 Schuman Day 8 Schuman, Robert 7–8 Scotland 112, 178 SDR (special drawing rights) 63 Securities Market Programme (SMP) 48, 79 services directive 34 Shafik, Nemat 65 Sikorski, Radek 109 Simitis, Costas 18 Simms, Brendan 179 single currency benefits 152 club within a club 112 driving forces 12–14 importance of 113 vision for 9 see also euro Single European Act 13, 193 single market 4, 137–138, 174–175 Sinn, Hans-Werner 101 six-pack 25, 50, 195 Slovakia 112 adoption of euro 41 influence 108 Slovenia 88–89, 112 influence 108 SMP (Securities Market Programme) 48, 79 snake in the tunnel 10 Solana, Javier 142 sovereign debt 165–166 see also public debt Spain 110 bail-out 70–73, 89 bank recapitalisation 84 bond yields 37, 89 CDS premiums 72 current-account balance 168 danger of collapse 59 excessive deficit procedure 89 finances pre-crisis 30 GDP growth 32 influence 107 public debt 159 public opinion of EU 123, 124 single currency views 17 unemployment 159 special drawing rights (SDR) 63 stability and growth pact 18, 24, 29, 50–51, 127, 194 Stark, Jürgen 59, 106 Steinbrück, Peer 43 Strauss-Kahn, Dominique 24, 44, 57 stress tests, bank 72, 175 subsidiarity 133, 141 Sweden 109, 111, 112 euro opt-out 18, 115 UK sympathies 119 Syria 145 Syriza 124 T Target II 157 Thatcher, Margaret 27, 110, 116 third energy package 136 Tilford, Simon 34 Tindemans, Leo 111 trade policy 138 Transatlantic Trade and Investment Partnership (TTIP) 138–139 treaty making and change 26–27, 173–174 Treaty of Amsterdam 111–112, 193 Treaty of Lisbon 28, 45, 194 foreign policy 142 institutions 20, 131 justice and home affairs (JHA) 139 subsidiarity 133 voting 20, 114 Treaty of Nice 194 Treaty of Rome 8, 97, 110, 193 Treaty on European Union (Maastricht treaty) 11–12, 15, 22, 142, 193 opt-outs and referendums 16, 110–111 Treaty on Stability, Co-ordination and Governance (TSCG) see fiscal compact treaty Tremonti, Giulio 54, 60 Trichet, Jean-Claude 151, 156 bond-buying 47–48, 52–53 crisis-management planning 2 early warnings 39–40 ECB president 23 IMF 44 Italy 59 True Finns 124 Turkey 132, 147, 148 Tusk, Donald 109, 114 two-pack 25, 89, 195 U UK Independence Party (UKIP) 118, 125, 140 Ukraine 149–150, 179–180 unemployment 158–159, 170 union method 19, 22 United Kingdom current-account balance 168 economic strengths and weaknesses 14 EMS exchange-rate mechanism 16 euro crisis reaction 117–118 euro membership 112 European budget contribution 27–28 European involvement 8, 10, 12, 115–119 future status 174–175 influence 100–101, 106, 109, 142–143 initial application to join EEC 9 opt-outs 110–111, 139 public opinion of EU 123 single currency views 17 United Left party 124 United States abandonment of gold standard 10 federalism model 177 foreign policy 143 performance compared with euro zone 154–155 Urpilainen, Jutta 77 V Van Gend en Loos v Nederlandse Administratie der Belastingen (1963) 21 Van Rompuy, Herman 98 crisis-management planning 3 Cyprus 87 European Council presidency 20, 28 Italy 63 roadmap for integration 74–75, 84, 173 support for Greece 43–45 Venizelos, Evangelos 57, 62 Verhofstadt, Guy 131 Véron, Nicolas 35 Vilnius summit 149 von Weizsäcker, Jakob 166 W Waigel, Theo 17–18 Wall Street flash crash 47 Weber, Axel 49, 56, 106 Weidmann, Jens 40, 80, 82 Weizsäcker, Jakob von 166 Werner report (1971) 10 Wilson, Harold 116 Wolfson Prize 1 World Bank 33 World Trade Organisation 138–139 Y Yanukovych, Viktor 149 Z Zapatero, José Luis Rodríguez 59, 62 Zollverein 9 PublicAffairs is a publishing house founded in 1997.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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

Yet this concern was more than negated by the Fed’s interest-rate cuts in the wake of the Asian crisis to contain the LTCM collapse at home and avert a Brazilian default abroad, thereby contributing to the Dow Jones index reaching a level by 2000 that was three times what it had been just six years earlier. But as unemployment came down to 4 percent in 1999 (its lowest level in three decades), the Fed’s anti-inflation priority was temporarily reasserted, even in a context of price stability, and interest rates were raised six times by the first quarter of 2000. This was undertaken against opposition from a minority on the FOMC who argued that concerns a tight labor market would inevitably lead to inflation were, as the New York Federal Reserve’s William McDonough put it, “a fiction of our own minds,” and that it would be taken as evidence that “what we believe in is not price stability but a differentiation in income distribution that goes against the working people.”14 With the collapse in the NASDAQ high-tech stock index in March 2000, signaling the end of the dot.com bubble and the possibility of a recession, the Fed reversed course again and adopted a very loose monetary policy that continued through 9/11 and the Argentine financial crisis, bringing interest rates down from 6 to 2 percent in the course of 2001.

More broadly their concerns related to their ambition to replace London as the world’s international financial center.48 But above all Wall Street’s opposition reflected the concern that New Deal–type economists and technicians ensconced in permanent international institutions might have even greater autonomy from them than those in the Federal Reserve and the Treasury (especially since the Treasury clearly wanted the Fund to displace the Bank of International Settlements, which had been created by the bankers themselves).49 Moreover, given the Keynesian provenance of the Fund and the Bank, it was hardly surprising that bankers would be anxious lest full employment rather than price stability might become the priority for governments. Their anxiety about the inflationary implications of full employment was by no means an idle concern, and would indeed prove to be—as Michal Kalecki and Joan Robinson also predicted at the time—the central contradiction of Keynesianism in the postwar era. If there was ever a case where the advantages of relative autonomy were manifest, allowing a capitalist state to act on behalf of capital but not at its behest, it was in the extensive public campaign the US Treasury undertook to get the Bretton Woods agreement endorsed by Congress over the bankers’ opposition.

The achievement of near full employment within all the advanced capitalist states spurred the growing militancy of a new generation of workers who drove up wages, challenged managerial prerogatives, and forced a steady increase in social expenditures—all of which not only made it very difficult for capitalist states to resolve international economic imbalances through domestic austerity policies, but generated growing worries about price stability, productivity and profits. Because this was not a zero-sum game, and capital was also strong by virtue of its having been restored to health so effectively, the contradiction became intense amid rising inflation and class conflicts. Moreover, alongside this new balance of class forces in the advanced capitalist countries, the success of postwar decolonization of the old empires, so much encouraged by the new American empire, stoked the rise of economic nationalism in the “Third World” that challenged the international norms for the mutual interstate protection of capitalist property.


pages: 466 words: 127,728

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

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

Alongside this economic and political integration was an equally ambitious effort at monetary integration. At the heart of monetary union is the European Central Bank (ECB), envisioned in the 1992 Maastricht Treaty and legally formed in 1998 pursuant to the Treaty of Amsterdam. The ECB issues the euro, which is a single currency for the eighteen nations that are Eurozone members. The ECB conducts monetary policy with a single mandate to maintain price stability in the Eurozone. It also trades in foreign exchange markets as needed to affect the euro’s value relative to other currencies. The ECB manages the foreign exchange reserves of the eighteen national central banks in the Eurozone and operates a payments platform among those banks called TARGET2. At present, Europe’s most tangible and visible symbol is the euro. It is literally held, exchanged, earned, or saved by hundreds of millions of Europeans daily, and it is the basis for trillions of euros in transactions conducted by many millions more around the world.

Once the panic phase of a financially induced depression is over, the greatest impediment to capital investment is uncertainty about policy regimes related to matters such as taxes, health care, regulation, and other costs of doing business. Both the United States and the EU suffer from regime uncertainty. The Berlin Consensus is designed to remove as much uncertainty as possible by providing for price stability, sound money, fiscal responsibility, and uniformity across Europe on important regulatory matters. In turn, a positive business climate becomes a magnet for capital not just from local entrepreneurs and executives but also from abroad. This points to an emerging driver of EU growth harnessed to the Berlin Consensus—Chinese capital. As the Beijing Consensus collapses and Chinese capital seeks a new home, Chinese investors looks increasingly to Europe.

Gold standards are disfavored by those who do not create wealth but instead seek to extract wealth from others through inflation, inside information, and market manipulation. The debate over gold versus fiat money is really a debate between entrepreneurs and rentiers. A new gold standard has many possible designs and would be effective, depending on the design chosen and the conditions under which it was launched. The classical gold standard, from 1870 to 1914, was hugely successful and was associated with a period of price stability, high real growth, and great invention. In contrast, the gold exchange standard, from 1922 to 1939, was a failure and a contributing factor in the Great Depression. The dollar gold standard, from 1944 to 1971, was a middling success for two decades before it came undone due to a lack of commitment by its principal sponsor, the United States. These three episodes from the past 150 years make the point that gold standards come in many forms and that their success or failure is determined not by gold per se but by the system design and the willingness of participants to abide by the rules of the game.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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

No one was buying “the price is always right/state bad and market good” story when prices had been shown to be wrong by a few orders of magnitude and the state was bailing out the market. Furthermore, neoclassical policy was entirely focused on avoiding one problem, inflation, and providing one outcome, stable prices. It seemed to have very little to say about a world in which deflation was now the worry, and price stabilization meant raising, not lowering, inflation expectations. Helping such ideas along was the fact that, as Henry Farrell and John Quiggin put it, “There was a significant Keynesian party hidden in the academy,” and it found unexpected allies.7 Neoclassical economists and fellow travelers who were publicly reassessing their own beliefs during the crisis, such as Martin Feldstein and Richard Posner, joined prominent Keynesian economists such as Paul Krugman and Joseph Stiglitz in the campaign for stimulus, lending Keynesian ideas a new prestige.

But if politicians cannot, in the language that this literature spawned, “credibly commit” to a given policy, both voters and market agents will discount government policies and attempt to offset their effects, which will lead to greater economic instability and uncertainty. Kydland and Prescott argued that the key to solving this problem was for the central bank to be made independent from politicians and, in the manner of the Bundesbank, to be mandated to pay attention only to price stability. Critical here were a set of institutional reforms designed to shield the central bank from public scrutiny and central bankers from public recall or redress, while ensuring that these bankers are more conservative than the median voter to further protect the institution from populist demands. Such reforms would ensure that government attempts to spend against the cycle would not happen in the first instance because the politicians in question would know that the central bank has credibly committed to holding the line on prices by being both institutionally protected and politically conservative.67 Thus the bank can “credibly commit” in a way that the politicians cannot.

Meanwhile taxation was structured in such a way that it stimulated investment.39 These reforms were in turn coupled to a policy of centralizing labor market institutions and promoting the increasing concentration of business to ensure trust and cooperation over wages among labor market partners.40 Taken together, these initiatives facilitated an expansionary policy that worked through the supply side of the economy as well as the demand side, while taking the price-stability concerns of business seriously. As Swedish economist Rudolph Meidner said of economic policy in this period, the objective was to “maintain the market economy, to counter short-sighted fluctuations through anti-cyclical policies, and to neutralize its negative effects through fiscal policies. The rallying cry was full employment, economic growth, [a] fair division of national income, and social security.”41 The surprising thing was that it worked.


pages: 356 words: 103,944

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

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

Hence the Americans, unlike the British before them, ended up creating an institutional infrastructure for the international economy that would outlast their uncontested hegemony. The institutional embodiment of multilateralism in trade during the fifty years subsequent to the Bretton Woods Conference was the GATT. The GATT was only part of what was originally meant to be a more ambitious organization, the International Trade Organization (ITO). The proposed ITO included agreements on commodity price stabilization, international antitrust, and fair labor standards, but it floundered in domestic U.S. politics. The Congress worried that it encroached too much on domestic prerogatives. Even though the GATT was not constituted formally as a full-fledged organization like the IMF or the World Bank, it was managed by a small secretariat in Geneva. This allowed it to become de facto the multilateral forum overseeing global trade liberalization.

These financial market pressures ultimately condemned Britain’s return to the gold standard to failure. Once markets’ dynamics became intertwined with domestic politics, there was no hope that a world of smoothly functioning, self-equilibrating finance would lie within reach. Keynes identified another, more fundamental problem. Unfettered capital flows undermined not only financial stability but also macroeconomic equilibrium—full employment and price stability. The idea that the macroeconomy would self-adjust, without help from domestic fiscal and monetary policies, had been buried by the experience of the Great Depression and the chaos of the 1930s. Even in periods of relative calm, the combination of fixed exchange rates with capital mobility enslaved a country’s economic management to other countries’ monetary policies. If others had tight money and high interest rates, you had no choice but to follow suit.

Imports from abroad in turn would force domestic producers to become more competitive and productive. Deep integration with the world economy would solve Argentina’s short-and long-term problems. This was the Washington Consensus taken to an extreme, and it turned out to be right about the short term, but not the long term. Cavallo’s strategy worked wonders on the binding constraint of the moment. The Convertibility Law eliminated hyperinflation and restored price stability practically overnight. It generated credibility and confidence—at least for a while—and led to large capital inflows. Investment, exports, and incomes all rose rapidly. As we saw in chapter Six, Argentina became a poster child for multilateral organizations and globalization enthusiasts in the mid-1990s, even though policies like the Convertibility Law had clearly not been part of the Washington Consensus.


pages: 708 words: 196,859

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

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

Despite their role as national institutions determining credit policy for their entire countries, in 1914 most central banks were still privately owned. They therefore occupied a strange hybrid zone, accountable primarily to their directors, who were mainly bankers, paying dividends to their shareholders, but given extraordinary powers for entirely nonprofit purposes. Unlike today, however, when central banks are required by law to promote price stability and full employment, in 1914 the single most important, indeed overriding, objective of these institutions was to preserve the value of the currency. At the time, all major currencies were on the gold standard, which tied a currency in value to a very specific quantity of gold. The pound sterling, for example, was defined as equivalent to 113 grains of pure gold, a grain being a unit of weight notionally equal to that of a typical grain taken from the middle of an ear of wheat.

“I have a great respect for his ability and the freshness and versatility of his mind, but I am much afraid of some of his more erratic ideas, which impressed me as being the product of a vivid imagination without very much practical experience.” The hidden irony was that every one of Keynes’s main recommendations—that the link between gold balances and the creation of credit be severed, that the automatic mechanism of the gold standard be replaced with a system of managed money, that credit policy be geared toward domestic price stability—corresponded precisely to the policies Strong had instituted in the United States. During the war, the flow of gold into the United States had pushed up prices by 60 percent. When the fighting ended, but turmoil in Europe continued and the gold still kept arriving, Strong decided that it was time to abandon the conventional rules of the gold standard and insulate the U.S. economy from the flood of bullion.

The United States was, however, now so flush with gold that the solidity of its currency was assured. Led by Strong, the Fed had undertaken a totally new responsibility—that of promoting internal economic stability. It was Strong more than anyone else who invented the modern central banker. When we watch Ben Bernanke or, before him, Alan Greenspan or Jean-Claude Trichet or Mervyn King describe how they are seeking to strike the right balance between economic growth and price stability, it is the ghost of Benjamin Strong who hovers above him. It all sounds quite prosaically obvious now, but in 1922 it was a radical departure from more than two hundred years of central banking history. Strong’s policy of offsetting the impact of gold inflows on domestic credit conditions meant that as bullion came into the United States, it was, in effect, withdrawn from circulation. It was as if all this treasure that had been so painfully mined from the depths of the earth was being reburied.


pages: 283 words: 81,163

How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present by Thomas J. Dilorenzo

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banking crisis, British Empire, collective bargaining, corporate governance, corporate social responsibility, financial deregulation, Fractional reserve banking, Hernando de Soto, income inequality, invisible hand, Joseph Schumpeter, laissez-faire capitalism, means of production, medical malpractice, Menlo Park, minimum wage unemployment, Plutocrats, plutocrats, price stability, profit maximization, profit motive, Ralph Nader, rent control, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, statistical model, The Wealth of Nations by Adam Smith, transcontinental railway, union organizing, Upton Sinclair, working poor, Works Progress Administration

And in fact the studies show more than just a correlation; they explain why a higher degree of economic freedom (that is, a more capitalistic society) causes more prosperity. The seven components of the Fraser Institute’s index (which are virtually identical to those of the Wall Street Journal/Heritage Foundation index) are size of government, extent of government control of markets, degree of price stability, freedom to use foreign currencies, protection of property rights, freedom of international trade, and freedom of capital markets. The overall size of government as a percentage of an economy is important because every dollar that government spends must necessarily come from the private sector. If the government taxes, it takes money out of the pockets of consumers; if it borrows, it crowds out private borrowers (individuals, families, and businesses) and puts upward pressure on interest rates, which makes borrowing more expensive for private citizens; and if it prints money to finance its programs, it creates inflation, which reduces the value of all privately held wealth.

If oil companies are able to raise prices in such a manner, why don’t they do it all the time? Why only every several years? Why do they throw all that money away by holding prices down? And why are they incapable of stopping oil prices from falling? (During the 2000 presidential election vice presidential candidate Dick Cheney appeared on Meet the Press to say that oil and gas prices were too low and that some kind of government “price stabilization program” was needed. At the time, he had just left his position as a top oil industry executive.) The obvious answer to these questions is that the oil companies do not have the price-fixing powers that the mainstream media—and anticapitalist intellectuals—ascribe to them. Nevertheless, regulation has become a reality in the energy industry. Much of this regulation, in fact, has been supported by industry executives themselves.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, moral hazard, mortgage debt, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

At this writing, the federal government, in a desperate effort to speed the recovery, has spent or committed to spend (I include the stimulus package now wending its way through Congress, as it seems certain to be enacted) $7.2 trillion ($5.2 trillion by the Federal Reserve, $2 trillion by the Treasury Department), and has guaranteed another $2 trillion in loans and deposits. We are facing the certainty of a huge increase in the national debt and the possibility of a future inflation rate so high that, as in the early 1980s, the Federal Reserve will have to engineer a severe recession (by effecting a sudden sharp increase in interest rates) in order to restore price stability. Such a recession would be an aftershock, and hence a cost, of the present crisis. The aftershock would be all the greater if at the same time that interest rates were rising the government was raising taxes in order to trim an astronomical national debt. And suppose that to reduce the pain of a post-depression recession the Federal Reserve restarted the boom-and-bust cycle by forcing down interest rates.

Second to ideology as a factor that deflected attention from warnings and warning signs was the fact that taking action to reduce the risks warned against would have been costly, quite apart from the fierce opposition it would have aroused in leaders of the business community and their allies in government. Had the Federal Reserve caused interest rates to rise, this would have accelerated the bursting of the housing bubble—and then, since no one could be certain that it was a bubble, Congress and the Administration would have been blamed for the fall in home values and the increase in defaults and foreclosures. As long as the Federal Reserve adjusts interest rates just to maintain price stability and avert or soften recessions—raising interest rates to cool economic activity when inflation threatens and lowering them to stimulate economic activity when recession threatens—its actions are relatively uncontroversial and its political independence is therefore unchallenged. If in addition it tried to prick asset bubbles, as by curtailing bank lending when housing prices soar, it would raise political hackles.


pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

At the beginning of 2001, banks had to pay 6.25 percent interest on the money they borrowed; at the end of the year, they could get away with 1.75 percent-and they would not have to pay more until almost three years later. But this was not enough for the Fed, and the market players were clamoring for more to cope with the downturn. Basically, this desire to help the economy squares well with the task that the Fed has been given by Congress. Unlike most other central banks in the world, the Fed has a duty not only to maintain price stability but also to ensure that the unemployment rate is as low as possible and that long-term interest rates are low. This has made many European politicians view the Fed as a model. What's more, there was concern at the Fed that prices would start falling. One Fed governor who was an expert on the Great Depression, Ben Bernanke, convinced Greenspan and their colleagues that the country was at risk of entering a deflationary spiral as it had in the 1930s and as Japan had done in the 1990s.

In his description of that "free-bank system," Per Hortlund points out that during the 70 years of its existence, not a single billissuing bank failed, no bill owner lost a krona, and no bank had to shut its windows even for a single day-a "world record for bank stability."" The Swiss economist Peter Bernholz tells us that "a study of about 30 currencies shows that there has not been a single case of a currency freely manipulated by its government or central bank since 1700 that enjoyed price stability for at least 30 years running."" If we chop down the jungle of government support, protection, and requirements, investors and savers will be left to their own devices. That is tough. But thinking for yourself should be tough, because the intellectual exercise it provides will train skills that have lain dormant. And they are necessary. Just think about the hedgefund fraudster Bernard Madoff, who may have cheated his established and well-heeled clients out of an unbelievable $50 billion.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

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3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

The true conspiracy saga of how this law was passed in the United States on the eve of Christmas 1913, just before World War I, is the topic of Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (Westlake Village, CA: American Media, 1994). 228 NOTES 4. A governor of the Bank of England (a private company at that time) was being questioned by the British Parliament: “Can you please inform us about how much gold there is at the Bank of England?” “In ample sufficiency, Sir.” “Can you be more precise?” “No, Sir.” 5. L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (Cheltenham, England: Edward Elgar, 1998), viii–ix. 6. Steven D. Levitt and Stephen J. Dubner, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow, 2005), 15. 7. Eric Beinhocker, The Origins of Wealth: Evolution, Complexity and the Radical Remaking of Economics (Boston: Harvard Business School Press, 2006). Beinhocker is a senior advisor to McKinsey and Company, and was named by Fortune Magazine as “Business Leader of the Next Century.”

Wikipedia, the Free Encyclopedia. http://en.wikipedia.org /wiki /Agent-based _model. WIR Annual Report 2010. www.wir.ch. World Bank. “Public Attitude towards Climate Change: Findings from a Multi- Country Poll.” World Development Report 1020: Development and Climate Change. http://siteresources.worldbank.org /INTWDR2010 /Resources/Background-report.pdf. Wray, L. Randall. Understanding Modern Money: The Key to Full Employment and Price Stability. Cheltenham, England: Edward Elgar Publishing, 1998. Yeats, William Butler. The Collected Poems of W. B. Yeats. London: Wordsworth Editions, 1994. Yee, Lee Chyen, and Jim, Clare. “Foxconn to Rely More on Robots; Could Use 1 Million in 3 Years. Reuters News Agency, August 1, 2011. http://www .reuters.com /article/2011/08/01/us-foxconn-robots-idUST RE77016 B20110801. Yellen, John E. “The Transformation of the Kalahari !


pages: 488 words: 144,145

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

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

This served to confirm the Keynesian view of the growth that could be obtained via deficit spending—even if it were only nominal growth. Even in those uncertain days, there was plenty of comment about federal deficits, but soon the policy focus would swing back to inflation. The Fed under Chairman Martin consistently maintained support for price stability. This task was made easier by the election of President Dwight Eisenhower in 1952 and the fact that inflation moderated during his two terms in office. As Hertzel concluded: “Under Chairman Martin, the Fed’s overriding goals became price stability and macroeconomic stability.”11 There were also new calls for greater federal involvement in areas such as housing. In 1950, for example, the Truman Administration explicitly focused on housing as a key area of private investment, but with federal guarantees for the debt used to finance home purchases.

But Summers, Krugman, and many other liberal economists were wrong. In fact the relentless rate squeeze by the Fed and a lot of positively coincidental and mostly external trends broke the inflation in the United States, but did not really instill fiscal sobriety. But Paul Volcker broke the momentum of inflation and also took sufficient demand out of the economy to give the crucial impression of price stability. The underlying rate of inflation, represented by internal prices in the United States and the value of the dollar, remained high enough so that, in real terms, the cost of energy and particularly oil dropped for almost two decades to the end of the twentieth century. While the dollar rallied sharply from 1980 through 1985 because of the towering interest rate regime imposed by Volcker and the resulting rebound in U.S. standing with global investors, the overall trend continued to be one of steady inflation of the dollar and decreased purchasing power for U.S. consumers—except in the case of oil.


pages: 471 words: 124,585

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

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

Yet it would be wrong to see this as yet another case of a defeated regime liquidating its debts through inflation. What made Argentina’s inflation so unmanageable was not war, but the constellation of social forces: the oligarchs, the caudillos, the producers’ interest groups and the trade unions - not forgetting the impoverished underclass or descamizados (literally the shirtless). To put it simply, there was no significant group with an interest in price stability. Owners of capital were attracted to deficits and devaluation; sellers of labour grew accustomed to a wage-price spiral. The gradual shift from financing government deficits domestically to financing them externally meant that bondholding was out-sourced. 64 It is against this background that the failure of successive plans for Argentine currency stabilization must be understood. In his short story ‘The Garden of Forking Paths’, Argentina’s greatest writer Jorge Luis Borges imagined the writing of a Chinese sage, Ts’ui Pên: In all fictional works, each time a man is confronted with several alternatives, he chooses one and eliminates the others; in the fiction of Ts’ui Pên, he chooses - simultaneously - all of them.

In perhaps the most important work of American economic history ever published, Milton Friedman and Anna Schwartz argued that it was the Federal Reserve System that bore the primary responsibility for turning the crisis of 1929 into a Great Depression.84 They did not blame the Fed for the bubble itself, arguing that with Benjamin Strong at the Federal Reserve Bank of New York a reasonable balance had been struck between the international obligation of the United States to maintain the restored gold standard and its domestic obligation to maintain price stability. By sterilizing the large gold inflows to the United States (preventing them for generating monetary expansion), the Fed may indeed have prevented the bubble from growing even larger. The New York Fed also responded effectively to the October 1929 panic by conducting large-scale (and unauthorized) open market operations (buying bonds from the financial sector) to inject liquidity into the market.

While American home purchasers in the mid seventies anticipated an inflation rate of at least 12 per cent by 1980, mortgage lenders were offering thirty-year fixed-rate loans at 9 per cent or less.35 For a time, lenders were effectively paying people to borrow their money. Meanwhile, property prices roughly trebled between 1963 and 1979, while consumer prices rose by a factor of just 2.5. But there was a sting in the tail. The same governments that avowed their faith in the ‘property-owning democracy’ also turned out to believe in price stability, or at least lower inflation. Achieving that meant higher interest rates. The unintended consequence was one of the most spectacular booms and busts in the history of the property market. From S&L to Subprime Take a drive along Interstate 30 from Dallas, Texas, and you cannot fail to notice mile after mile of half-built houses and condominiums. Their existence is one of the last visible traces of one of the biggest financial scandals in American history, a scam that made a mockery of the whole idea of property as a safe investment.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

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Andrei Shleifer, asset allocation, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, index arbitrage, index fund, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, Sharpe ratio, short selling, transaction costs, Vanguard fund

ARBITRAGE IS NOT POSSIBLE DUE TO TRADING RESTRICTIONS A known mispricing may persist if institutional features limit trading. This is especially true for restrictions on short selling. For example, it is not possible to short-sell initial public offerings (IPOs) for a few days after the issue because shares are not available to borrow. The mispricing, if any, may persist for a few days, until short selling becomes possible. Again in the case of IPOs, the underwriters engage in price stabilization activities that can, in some cases, keep the price at an inflated level for almost a month. A case in point is the spin-off of Palm by 3Com. 3Com sold a fraction of Palm as an IPO in March 2000 but retained 95 percent of its shares. At that time it announced that it would spin off the remaining shares to 3Com shareholders at the rate of 1.5 Palm shares for every 3Com share. Even assuming that 3Com was worthless without Palm, 3Com’s share price should have been approximately 1.5 times Palm’s share price because a single 3Com share gave the right to own 1.5 Palm shares.

Aggarwal, Rajesh, Laurie Krigman, and Kent Womack. 2002. Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling. Journal of Financial Economics 66, 105–37. Allen, Franklin and Gerald R. Faulhaber. 1989. Signaling by Underpricing in the IPO Market. Journal of Financial Economics 23(2), 303–24. Asquith, Daniel, Jonathan D. Jones, and Robert Kieschnick. 1998. Evidence on Price Stabilization and Underpricing in Early IPO Returns. Journal of Finance 53(5), 1759–73. Beatty, Randolph P., and Jay R. Ritter. 1986. Investment Banking, Reputation, and the Underpricing of Initial Public Offerings. Journal of Financial Economics 15(1– 2), 213–32. Booth, James R., and Lena Chua. 1996. Ownership Dispersion, Costly Information, and IPO Underpricing. Journal of Financial Economics 41(2), 291–310.

It is believed that the drift occurs because informed traders break up their orders and spread them over several days to hide their superior information. References for Further Reading Affleck-Graves, John, Shantaram Hegde, and Robert E. Miller. 1996. Conditional Price Trends in the Aftermarket for Initial Public Offerings. Financial Management 25(4), 25–40. Asquith, Daniel, Jonathan D. Jones, and Robert Kieschnick. 1998. Evidence on Price Stabilization and Underpricing in Early IPO Returns. Journal of Finance 53(5), 1759–73. Bradley, D., B. Jordan, and J. Ritter, J. 2003. The Quiet Period Goes out with a Bang. Journal of Finance 58(1), 1–36. Busaba, Walid Y., and Chun Chang. 2002. Bookbuilding vs. Fixed Price Revisited: The Effect of Aftermarket Trading. Working paper, Department of Finance, University of Minnesota. D’Mello, Ranjan, and Stephen P.


pages: 497 words: 143,175

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies by Judith Stein

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1960s counterculture, affirmative action, airline deregulation, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, capital controls, centre right, collective bargaining, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, desegregation, energy security, Fall of the Berlin Wall, falling living standards, feminist movement, financial deregulation, floating exchange rates, full employment, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, Long Term Capital Management, manufacturing employment, market bubble, Martin Wolf, new economy, oil shale / tar sands, oil shock, open economy, payday loans, post-industrial society, post-oil, price mechanism, price stability, Ralph Nader, RAND corporation, reserve currency, Robert Gordon, Ronald Reagan, Simon Kuznets, strikebreaker, trade liberalization, union organizing, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor, Yom Kippur War

But Carter had pledged to decontrol oil completely by the end of 1980 at the Bonn summit of 1978. That promise made the second choice, eliminating the difference by September 30, 1981, attractive. Foreign policy obligations would be fulfilled if the deed was done by 1981, late by only one year. The domestic inflation watchers in the government—Schultze, OMB director James McIntrye, and Alfred Kahn, chair of the Council on Wage and Price Stability—opted for either 1981 or 1985. Those who wanted to encourage investment in energy advocated immediate decontrol. Treasury secretary Blumenthal urged complete decontrol on June 1, 1979, the first date possible according to the 1975 law.29 Schlesinger and most of the president’s foreign policy advisers agreed. They thought it would encourage production, improve the balance of trade, and strengthen the dollar.

Because inflation was not the result of wage increases but of rising prices in key sectors—energy, food, housing, and health care—Marshall argued that limiting wages and prices was not the best way to reduce inflation.45 He was overruled by Schultze.46 The president’s policy was aimed at “the major unions,” which “have to be brought back into line with the rest of the economy,” according to Barry Bosworth, director of the Council on Wage and Price Stability (CWPS), the monitoring agency.47 So the weight of any government wage and price controls fell on the industrial sector, already burdened by energy costs and foreign competition.48 Industrial labor was in the crosshairs of the government’s inflation policy. AFL-CIO head George Meany was incensed. The state of relations between the White House and labor can be measured by an AFL-CIO lawsuit which argued that requiring government contractors to accept Carter’s anti-inflation numbers was unconstitutional, lacking statutory authority.49 The wage maximum was arbitrary.

Business Council Business Roundtable Butler, Landon Butz, Earl Buy American Act Byrd, Robert Caddell, Patrick Calhoun, Michael Califano, Joseph Callaghan, James Canada “Capitol Compact,” Carey, Hugh Carswell, Harrold Carter, Jimmy; auto industry emergency Democratic primaries economic policies energy policy foreign policy and foreign trade industrial policy Iran and labor interests political rise presidential campaigns Castro, Fidel Caterpillar Tractor Center for Political Reform CEO earnings Cheney, Richard Chiles, Lawton China Chirac, Jacques Chisholm, Shirley Chrysler Church, Frank cities, depopulation of Civil Rights Act civil rights movement Clark, Dick Clean Air Act Clifford, Clark Clinton, Bill economic policies education policy and foreign trade governorship health care plan presidential campaign scandals Commission on International Trade and Investment Policy Commodity Futures Modernization Act Common Cause Common Situs Picketing Bill Communism Comprehensive Employment Training Act (CETA) Conable, Barber Congressional Black Caucus Connally, John Continental Oil Contract with America “Contract with America,” Cooper, Richard Cooper-Church Amendment corporate scandals Cost of Living Council Council of Economic Advisers (CEA) Council on International Economic Policy (CIEP) Council on Wage and Price Stability (CWPS) Cox, Archibald C. Cranston, Alan Cuba Culver, John Cuomo, Mario dairy industry, U.S. Daley, Richard Darman, Richard Davignon, Étienne Davis, Rennie Deere & Company Deering-Milliken Dees, Morris Defense Logistics Agency Democratic Leadership Council (DLC) Democratic National Committee (DNC) détente, U.S.-Soviet Dodd, Christopher Dole, Robert Douglas, Paul Dowd, Douglas Drudge, Matt Dukakis, Michael Dunlop, John Du Pont Durbin, Richard Durkin, John Eagleton, Thomas Eckes, Alfred Economic Opportunity Act Economic Planning Act Economic Policy Board Economic Revitalization Board Eisenhower, Dwight D.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, mortgage debt, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.9 CFTC and SEC continues: At 2:45:28 p.m., trading on the E-Mini was paused for five seconds when the Chicago Mercantile Exchange (“CME”) Stop Logic Functionality was triggered in order to prevent a cascade of further price declines. In that short period of time, sell-side pressure in the E-Mini was partly alleviated and buy-side interest increased. When trading resumed at 2:45:33 p.m., prices stabilized and shortly thereafter, the E-Mini began to recover. When the price of the S&P 500 neared the bottom, its liquidity dried up in the sense that the depth in limit order book almost completely vanished. Furthermore, the liquidity crisis in the S&P 500 spilled over to many other markets, partly because traders were arbitraging the relative mispricings that arose due to the falling S&P 500. Relative-value traders started buying the S&P 500 while shorting other securities, thus depressing prices in other markets (while supporting the S&P 500).

., buying long-term bonds) or increase the strength of such programs (e.g., buying more bonds per month or “tapering” such a purchase program)? To answer these questions, macro traders seek to understand each central bank’s objectives and policy constraints and to analyze the same economic data as the central bank. Central bank objectives differ across countries. In the United States, the Federal Reserve has a “dual mandate” of price stability and maximum employment. This dual mandate can be summarized by saying that the Fed sets the nominal interest rate Rf approximately according to the Taylor rule (Taylor 1993): where the output gap is the “percentage deviation of real GDP from its target,” meaning whether output is above or below its potential. One can simply think of the output gap as unemployment, more specifically, whether unemployment is below its “natural” level arising from job search delays and other things.2 The Taylor rule reflects that the Fed would like to keep inflation at 2% and the output gap at zero.

The Taylor rule is only an approximation of the actual behavior of the Fed, and several other parameter choices and extensions have been suggested, though none perfectly match the Fed’s actual choices. For instance, macro economists have noted that the Fed often acts with a certain amount of inertia, preferring to raise interest rates only gradually. Other central banks, such as the European Central Bank (ECB), have a single objective of price stability, that is, to keep inflation relatively constant (often around 2%). Countries with a pegged exchange rate must also use their monetary policy to achieve the exchange-rate objective, raising interest rates when the currency is falling in value and lowering interest rates when it is rising. Increasingly, central banks also have a financial stability goal. Global macro traders obsess about central bank actions for two reasons.

Making Globalization Work by Joseph E. Stiglitz

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affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, inventory management, invisible hand, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus

These policies focused on minimizing the role of government, emphasizing privatization (selling off government enterprises to the private sector), trade and capital market liberalization (eliminating trade barriers and impediments to the free flow of capital), and deregulation (eliminating regulations on the conduct of business). Government had a role in maintaining macro-stability, but the attention was on price stability rather than on output stability, employment, or growth. There was a large set of dos and don'ts: do privatize everything, from factories to social security; don't have the government involved in promoting particular industries; do strengthen property rights; don't be corrupt. Minimizing government meant lowering taxes—but keeping budgets in balance. In practice, the Washington Consensus put little emphasis on equity.

If the provinces of China were treated as separate countries—and with populations sometimes in excess of 50 million, they are far larger than most countries around the world— then most of the fastest-growing countries in the world would be in China' Importantly,; these governments made sure that the benefits of growth did not go just to a few, but were widely shared: They focused not only on price stability but on real stability, ensuring that new jobs were created in pace with new entrants to the labor force.. Poverty fell dramatically—in Indonesia, for example, the poverty rate (at the $1-aday standard) fell from 28 percent to 8 percent between 1987 and 20028—while health and life expectancy improved and literacy became close to universal. In 1960, Malaysia's per capita income was $784 (in 2000 U.S. dollars), slightly lower than that of Haiti at the time.

It was during this period that Latin American economic policies changed dramatically, with most countries adopting Washington Consensus policies. As high inflation broke out in many of the countries, the Washington Consensus's focus on fighting inflation made sense. Their governments had not been working well for them, and the appeal of the Washington Consensus—minimizing the role of government—was understandable. As countries like Argentina adopted the Washington Consensus policies, praise was heaped upon them. When price stability was restored and growth resumed, the World Bank and the IMF claimed credit for the success; the case for the Washington Consensus had been made. But, as it turned out, the growth was not sustainable. It was based on heavy borrowing from abroad and on privatizations which sold off national assets to foreigners—the proceeds from which were not invested. There was a consumption boom. GDP was increasing, but national wealth was diminishing.


pages: 537 words: 144,318

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

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

One of the more significant questions facing all investors is whether a three-decade tail wind for risk assets—due to falling inflation and declining interest rates—could be over, now that the main economic blocks (United States, Europe, Japan) have no inflation and near-zero interest rates. Fiscal deficits, increasing public sector debts, private sector deleveraging, and populist and protectionist politics around the globe all point to increased volatility and a move away from “price stability.” Still, real money accounts have an overwhelming proportion of their portfolio in equity and equity-like investments. The status quo for real money management is no longer tenable. It is not acceptable to obscure losses and volatility behind benchmarks, long-term time horizons, or relative performance numbers. Losing less than peers or benchmarks does not provide the annual cash flow needs of pensioners, universities, and charities.

Quantitative easing is the budgetization of monetary policy—essentially printing money—and the examination of global central bank balance sheets confirms that it is global in scope and massive in scale. We all know that (1) money is ultimately a confidence trick, so policy credibility is very important; and (2) inflation unequivocally erodes savings and capital in the long term, which is one of the main reasons that price stability became such a focal point the past two decades and one of the standards for judging convergence. The credibility and store of value anchors to fiat money are being questioned because the forces known to erode a currency’s purchasing power and confidence are being enacted on such a large scale globally. At the margin, a rational investor would be right to seek out alternative, nonmanipulable real assets.

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. Another source of alpha from policy makers is when there is some kind of regime in place that is at odds with valuation, whether it is a managed exchange rate regime or artificially low interest rates.


pages: 310 words: 90,817

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

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bank run, banks create money, British Empire, capital controls, Carmen Reinhart, central bank independence, currency peg, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Long Term Capital Management, market clearing, Martin Wolf, means of production, 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

Even in our model economy of only seven goods and services plus the monetary asset, it will now be extremely difficult for the money producer to inject precisely enough money to keep the agreed-upon statistical average stable or, as is more common today, to keep it advancing at a steady pace of, say, 2 percent per annum. 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.

See also money, paper money individualism industrial commodities Industrial Revolution inelastic money inelastic, elastic versus inflation commodity money and paper money and inflationary meltdown inflationism international policy coordination and interest interest rates rising international capital flows international market exchange International Monetary Fund (IMF) interventionism investing investment activity J Jackson, Andrew Jacobson Schwartz, Anna Jefferson, Thomas Jevons, William Stanley Jin Dynasty K Keynes, John Maynard Keynesianism Keynesians L laissez-faire Law, John Lehman Brothers lender of last resort lending activity, money as enhancer liquidity, tightening loan market, money injection via Long Term Capital Management M macroeconomics political appeal of problems with Malthus, Robert market economy Marx, Karl Massachusetts, paper money and medium of exchange money as multiple supply meltdown, inflationary Menger, Carl Mill, James Ming Dynasty misallocation of capital Mises, Ludwig von Monetarism monetary base monetary crisis theory Monetary History of the United States monetary intervention monetary policy Monetary Regimes and Inflation monetary stability, price level and monetization, of debt of government debt money as enhancer of lending activity bank versus individual ownership demand for evolution of functions of nationalization of origin of ownership of purpose of money balances money creation money demand money supply without wealth demand versus money injections even and nontransparent even, instant, and transparent price stability and uneven and nontransparent via loan market money production cost other goods versus money supply controlling expanding money demand without relative prices and N Napoleonic Wars NASDAQ nationalization, credit and money Neoclassical School of Economics New Deal Nixon, Richard M. North American colonies, paper money and O origin of money Overtone, Lord P paper money expansion, effects of paper money producer paper money systems, feasibility of paper money banks and collapse of competition in production confidence in economist and experiments with failures of history of inflation and state and parliamentary social democracy Peel Act Pitt, William policy coordination, inflationism and political control, money and Polk, James K.


pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

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algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, transaction costs, two-sided market

Selling snowballed even more when “internalizers”—firms that normally buy and sell with their own customers instead of sending customer orders to the exchanges—“began routing most, if not all, of these orders directly to the public exchanges where they competed with other orders for immediately available, but dwindling, liquidity...orders that were part of this surge account for about half of the trades that were executed at the most depressed and extreme prices.” The frenzy continued until “At 2:45:28 p.m., trading on the E-Mini was paused for five seconds when the Chicago Mercantile Exchange (CME) Stop Logic Functionality was triggered in order to prevent a cascade of further price declines. In that short period of time, sell-side pressure in the E-Mini was partly alleviated and buy-side interest increased. When trading resumed at 2:45:33 p.m., prices stabilized and shortly thereafter, the E-Mini began to recover, followed by the SPY.” After this trading pause in the futures market, the final report said, firms had “time to react and verify the integrity of their data and systems, buy-side and sell-side interest returned and an orderly price discovery process began to function.” Within minutes, most stocks “had reverted back to trading at prices reflecting true consensus values.”

The reason is high frequency traders searching for hidden liquidity. Some estimates are that these traders enter anywhere from several hundred to one million orders for every 100 trades they actually execute. This has significantly raised the bar for all firms on Wall Street to invest in computers, storage, and routing to handle all the message traffic. 3. NYSE specialists no longer provide price stability. With the advent NYSE Hybrid, specialist market share has dropped from 80% to 25%. With specialists out of the way, the floodgates have been opened to high frequency traders who find it easier to make money with more liquid listed shares. 4. Volatility has skyrocketed. The markets’ average daily price swing year to date is approximately 4% versus 1% last year. According to recent findings by Goldman Sachs, spreads on S&P 500 stocks doubled in October 2008 as compared to earlier in the year.


pages: 357 words: 95,986

Inventing the Future: Postcapitalism and a World Without Work by Nick Srnicek, Alex Williams

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3D printing, additive manufacturing, air freight, algorithmic trading, anti-work, back-to-the-land, banking crisis, battle of ideas, blockchain, Bretton Woods, call centre, capital controls, carbon footprint, Cass Sunstein, centre right, collective bargaining, crowdsourcing, cryptocurrency, David Graeber, decarbonisation, deindustrialization, deskilling, Doha Development Round, Elon Musk, Erik Brynjolfsson, Ferguson, Missouri, financial independence, food miles, Francis Fukuyama: the end of history, full employment, future of work, gender pay gap, housing crisis, income inequality, industrial robot, informal economy, intermodal, Internet Archive, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, late capitalism, low skilled workers, manufacturing employment, market design, Martin Wolf, means of production, minimum wage unemployment, Mont Pelerin Society, neoliberal agenda, New Urbanism, Occupy movement, oil shale / tar sands, oil shock, patent troll, pattern recognition, post scarcity, postnationalism / post nation state, precariat, price stability, profit motive, quantitative easing, reshoring, Richard Florida, rising living standards, road to serfdom, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Slavoj Žižek, social web, stakhanovite, Steve Jobs, surplus humans, the built environment, The Chicago School, Tyler Cowen: Great Stagnation, universal basic income, wages for housework, We are the 99%, women in the workforce, working poor, working-age population

Carbon markets required years to be built;12 volatility markets exist in large part as a function of abstract financial models;13 and even the most basic markets require intricate design.14 Under neoliberalism, the state therefore takes on a significant role in creating ‘natural’ markets. The state also has an important role in sustaining these markets – neoliberalism demands that the state defend property rights, enforce contracts, impose anti-trust laws, repress social dissent and maintain price stability at all costs. This latter demand, in particular, has greatly expanded in the wake of the 2008 crisis into the full-spectrum management of monetary issues through central banks. We therefore make a grave mistake if we think the neoliberal state is intended simply to step back from markets. The unprecedented interventions by central banks into financial markets are symptomatic not of the neoliberal state’s collapse, but of its central function: to create and sustain markets at all costs.15 Yet it has been an arduous and winding path from neoliberalism’s origins to the present, in which its ideas hold sway over those injecting trillions of dollars into the market.

Numerous members of what would become Thatcher’s administration passed through the IEA during the 1960s and 1970s.40 The outcome of the IEA’s efforts was not only to subtly transform the economic discourse in Britain, but also to naturalise two particular policies: the necessity of attacking trade union power, and the imperative of monetary stability. The former would purportedly let markets freely adapt to changing economic circumstances, while the latter would provide the basic price stability needed for a healthy capitalist economy. In the United States, too, think tanks and academic research groups were built to push for a broadly neoliberal agenda, the Heritage Foundation and the Hoover Institute being two of the most notable.41 The MIPR aimed to redefine political common sense by writing books on neoliberal economics that were intended for a popular audience, some of which eventually sold over 500,000 copies.


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

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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, 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, interest rate derivative, interest rate swap, 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, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

The Bank of England Act 1998, transferred responsibility for authorising the banks and supervision of the banking system from the Bank of England to the Financial Services Authority (FSA), a new single statutory regulator for the financial services industry. The Bank has retained responsibility for the stability of the banking system. Role today The Bank is responsible for the overall stability of the UK financial markets, and maintaining price stability. It also manages the UK’s gold and currency reserves on behalf of HM Treasury. The Bank can intervene in the money markets and, in accordance with government policy, occasionally in the foreign exchange market. It also oversees payment and settlement services under the Settlement Finality Directive adopted in May 1998. All the clearing banks keep accounts at the Bank of England and use them to settle differences between themselves in the clearing system, exchanging cheques written by each other’s customers, or moving credit.

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.

The Future of Money by Bernard Lietaer

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agricultural Revolution, banks create money, barriers to entry, Bretton Woods, clean water, complexity theory, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, Lao Tzu, Mahatma Gandhi, means of production, microcredit, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, reserve currency, Ronald Reagan, seigniorage, Silicon Valley, South Sea Bubble, the market place, the payments system, trade route, transaction costs, trickle-down economics, working poor

These tokens could be redeemed for participation in the annual hecatomb or sacred meal to be shared with the deities. The Arab scholar Ibn Khaldun claimed that 'God created the two precious metals, gold and silver, to serve as a measure of all commodities.. .' Without further need for intervention by any religious institution, gold and silver remained symbolically associated respectively with the sun and moon. For centuries, their prices stabilized mysteriously in a fixed ratio of 1/13.5, astrologically determined to reflect the heavenly cycles. These two metals remained divinely ordained currencies after the astrological justification was long forgotten. There are many people who, to this day, claim that 'real' money would be a return to the gold standard. Some even keep invoking its biblical origins." There is some irony in the fact that the almighty dollar is no exception to this mystical phenomenon.

The introduction of the euro will further reduce the room of manoeuvre for participating countries to decrease their unemployment levels in three converging ways. 1. Each government participating in the EMU is giving the levers of control over the euro money supply to the European Central Bank. The ECB will by definition be less responsive to the requirements of any one country's unemployment situation. 2. The Maastricht Treaty gives the ECB a single objective: to ensure price stability. Full employment is specifically not one of its official priorities. 3. Finally, the only other traditional tool available - the fiscal one has similarly been put under severe constraints. The maximum limit of 3% of government deficit financing is supposed to be a permanent one and most governments are adopting the euro with their spending at or dose to this straitjacket target limit. In practice this means again that little room for manoeuvre exists to reduce unemployment via the fiscal tools.


pages: 593 words: 189,857

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

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

“If we spent a million dollars a day every day since the birth of Christ, we wouldn’t get to $1 trillion,” said Congressman Darrell Issa, the top Republican on the House government oversight committee. “And we’re likely to lose far more than that.” But we didn’t. Our outcomes were not in line with the experience of other nations, in past crises or this crisis. They were much better. By that summer, we had not only averted a depression, our economy had started growing again. House prices stabilized. Credit markets thawed. And our emergency investments would literally pay off for taxpayers. Most Americans still believe we threw away billions or even trillions of their hard-earned dollars to bail out greedy banks. In fact, the financial system repaid all our assistance, and U.S. taxpayers have turned a profit from our crisis response, including our investments in all five of those financial bombs.

I was always pretty good about tuning out fear and focusing on my work, trying to preserve that impression of equanimity, but I had to make a conscious effort not to let the anger eat away at me. THE TRAJECTORY of the economy continued to improve for the rest of 2009, which is to say it shed jobs less rapidly—down to about two hundred thousand a month for September and October, averaging less than one hundred thousand a month in November and December. The economy actually began growing again in the summer, and expanded at an impressive 3.9 percent clip in the fourth quarter. Home prices stabilized. In December, Bank of America and Wells Fargo fully repaid their TARP funds, and even Citigroup paid us back most of what they owed; by year’s end, we had recouped about two-thirds of the federal outlays for bank rescues. I was finally confident that the U.S. portion of the financial crisis was over. The media seemed to recognize that, although it was curious how often that fact was reported in the passive voice, as if the crisis had simply ended of its own accord.

The third would be a struggle. Our first goal was to arrest the dizzying drop in home prices. The most important thing we did to stop the slide, other than our efforts to arrest the broader economic and financial free fall, was to stabilize Fannie and Freddie so that mortgage credit could keep flowing at a time when private capital was fleeing the sector. Even with unemployment rising and defaults increasing, home prices stabilized in mid-2009, and gradually began to rise in the following years. The end of the real estate slump helped avoid further damage to the typical family’s largest source of wealth and savings, and was critical to restoring the economy to growth. It wouldn’t have happened without our $400 billion lifeline for Fannie and Freddie. Our second objective, related to the first, was to keep mortgage rates as low as possible.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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

A real Ponzi scheme takes fraud; Bitcoin, by contrast, seems more like a collective delusion.”36 Viewed simply as a currency, Bitcoin’s biggest pitfall is likely to be price deflation (and, in extremis, hyperdeflation), not inflation. This would be the conclusion reached about Bitcoin from the perspective of modern monetary theory, as discussed in Chapter 3. As the blogger “Lord Keynes” notes, “without relative price stability and an elastic supply, Bitcoins are not a viable monetary unit for any large capitalist system.”37 Although almost every monetary scholar would agree with the point about price stability, those of a more “Austrian” persuasion—not to mention the designers of Bitcoin themselves—would disagree about elastic supply: the Bitcoin software is designed to avoid such elasticity, which is regarded as a weakness of the fiat monetary system. As a form of money, Bitcoin shares many of the flaws associated with gold, namely, its attractiveness to speculators and its inflexibility qua money.

Within academia, the view was advanced that the euro might even be a tool of identity creation (Risse, Engelmann-Martin, et al. 1999; Helleiner 2001; Risse 2003; Kaelberer 2004). In its practical design, however, the Eurozone was made to conform as far as possible to the classical view of money reflected in Schumpeter’s remarks as quoted above: namely, as a thing that operates purely on the basis of rational self-interest. For example, the European Central Bank was directed to focus on the purely technical question of price stability, free from cultural or political considerations. The ideal of a one-size-fits-all monetary policy applicable to all member states seemed entirely in keeping with this sanitized view of money as a culturally neutral landscape. If the euro was implicitly culturalist in its aspirations, then, it was dogmatically Mengerian in its design. In practical terms, it was as if the project had been steered by the classical, nineteenth century view of money as a radical leveler that bleaches all color from the world and corrodes every distinction it encounters (Helleiner 2001: 1–2).


pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

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accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, buy low sell high, capital asset pricing model, corporate governance, Daniel Kahneman / Amos Tversky, diversified portfolio, Eugene Fama: efficient market hypothesis, hiring and firing, index fund, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, the market place, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

.† There are different ways of classifying the funds. One is by the broad division of their portfolio; they are “balanced funds” if they have a significant (generally about one-third) component of bonds, or “stock-funds” if their holdings are nearly all common stocks. (There are some other varieties here, such as “bond funds,” “hedge funds,” “letter-stock funds,” etc.)* Another is by their objectives, as their primary aim is for income, price stability, or capital appreciation (“growth”). Another distinction is by their method of sale. “Load funds” add a selling charge (generally about 9% of asset value on minimum purchases) to the value before charge.1 Others, known as “no-load” funds, make no such charge; the managements are content with the usual investment-counsel fees for handling the capital. Since they cannot pay salesmen’s commissions, the size of the no-load funds tends to be on the low side.† The buying and selling prices of the closed-end funds are not fixed by the companies, but fluctuate in the open market as does the ordinary corporate stock.

The market quotations are always there for him to take advantage of when times are propitious—either for purchases at unusually attractive low levels, or for sales when their prices seem definitely too high. The market record of the public-utility indexes—condensed in Table 14-6, along with those of other groups—indicates that there have been ample possibilities of profit in these investments in the past. While the rise has not been as great as in the industrial index, the individual utilities have shown more price stability in most periods than have other groups.* It is striking to observe in this table that the relative price/earnings ratios of the industrials and the utilities have changed places during the past two decades. These reversals will have more meaning for the active than for the passive investor. But they suggest that even defensive portfolios should be changed from time to time, especially if the securities purchased have an apparently excessive advance and can be replaced by issues much more reasonably priced.

Finally we should comment on the much poorer showing made by our lists as a whole as compared with the price record of the S & P composite. The latter is weighted by the size of each enterprise, whereas our tests are based on taking one share of each company. Evidently the larger emphasis given to giant enterprises by the S & P method made a significant difference in the results, and points up once again their greater price stability as compared with “run-of-the-mine” companies. Bargain Issues, or Net-Current-Asset Stocks In the tests discussed above we did not include the results of buying 30 issues at a price less than their net-current-asset value. The reason was that only a handful, at most, of such issues would have been found in the Stock Guide at the end of 1968. But the picture changed in the 1970 decline, and at the low prices of that year a goodly number of common stocks could have been bought at below their working-capital value.

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

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Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, capital asset pricing model, cognitive dissonance, compound rate of return, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, feminist movement, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, mental accounting, meta analysis, meta-analysis, p-value, pattern recognition, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, statistical model, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

One story that has been making the rounds since the 1950s is as follows: “The Ten Commandments contain 297 words. The Declaration of Independence has 300 words, Lincoln’s Gettysburg Address has 266 words, but a directive from the government’s Office of Price Stabilization to regulate the price of cabbage contains 26,911 words.” The truth is the Office of Price Stability never made such a directive. Nevertheless, the tale had such appeal, it remained alive despite the agency’s efforts to convince the public it was false. Even the dissolution of the Office of Price Stability did not stop the story. It was merely modified so that the directive was described as a “federal directive.”64 The story would not die because of its irony and the plausibility of long-winded bureaucrats. Elliott’s Tale The power of a good story may explain the enduring appeal of the Elliott Wave Principle (EWP), one of TA’s more grandiose conjectures.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, mortgage tax deduction, new economy, Own Your Own Home, passive investing, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, The Myth of the Rational Market, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

I am not promising you stock-market miracles. Indeed, a subtitle for this book might well have been The Get Rich Slowly but Surely Book. Remember, just to stay even, your investments have to produce a rate of return equal to inflation. Inflation in the United States and throughout most of the developed world fell to the 2 percent level in the early 2000s, and some analysts believe that relative price stability will continue indefinitely. They suggest that inflation is the exception rather than the rule and that historical periods of rapid technological progress and peacetime economies were periods of stable or even falling prices. It may well be that little or no inflation will occur during the first decades of the twenty-first century, but I believe investors should not dismiss the possibility that inflation will accelerate again at some time in the future.

The crash itself, in his view, was precipitated by the Federal Reserve Board’s policy of raising interest rates to punish speculators. There are at least grains of truth in Bierman’s arguments, and economists today often blame the severity of the 1930s depression on the Federal Reserve for allowing the money supply to decline sharply. Nevertheless, history teaches us that very sharp increases in stock prices are seldom followed by a gradual return to relative price stability. Even if prosperity had continued into the 1930s, stock prices could never have sustained their advance of the late 1920s. In addition, the anomalous behavior of closed-end investment company shares (which I will cover in chapter 15) provides clinching evidence of wide-scale stock-market irrationality during the 1920s. The “fundamental” value of these closed-end funds consists of the market value of the securities they hold.


pages: 399 words: 155,913

The Right to Earn a Living: Economic Freedom and the Law by Timothy Sandefur

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barriers to entry, big-box store, Cass Sunstein, clean water, collective bargaining, corporate governance, corporate social responsibility, Edward Glaeser, housing crisis, joint-stock company, Joseph Schumpeter, labour mobility, minimum wage unemployment, positional goods, price stability, profit motive, race to the bottom, Ralph Nader, RAND corporation, rent control, Silicon Valley, The Wealth of Nations by Adam Smith, trade route, transaction costs, Upton Sinclair, urban renewal

The government cannot confiscate any of my produced raisins for the benefit of their program.”101 But the Department of Agriculture fined Horne more than $1,000 per day for each violation of its orders, and when Horne and his wife were found guilty, they were penalized $275,000 for selling their raisin crop as they chose. There is virtually no empirical or theoretical justification for the “price stabilization” rationale behind agricultural adjustment laws.102 In fact, research shows that such schemes have “conveyed few longterm benefits to the industry” and “reduced . . . long-run grower returns” on investment.103 Consumers pay the price, but even the alleged beneficiaries—family farms—do not really benefit much. Most of the benefits go to large agribusiness concerns.104 Even aside from the fact that these programs take from the poor and give to the rich, small farmers also suffer because they are blocked from implementing new, innovative ways to compete with large conglomerates.

Mahon, 258–59 Pepsi company, job security rules, 233–34 permanent and aggregate interests of the community, 91, 93 Perry, Arthur Latham, 118 Petition of Right, 21 Planned Commercial Zones, 161–62 Populist Era corporations and monopolies during, 39–44 economic freedom argument, 123 Munn and, 102 Postal Reorganization Act of 1970, 57, 58 post–Civil War America. see Populist Era Postrel, Virginia, 206 Pound, Roscoe, xiv–xv, 12, 104, 107–8, 118–19 Powell, Thomas Reed, 11 Powers, Kim, 152 Powers v. Harris, 152–55, 159, 162, 188, 289 predatory pricing schemes, 179–82 price stabilization schemes. see agricultural adjustment programs privacy rights, 282 private agreements monopoly-like, 22–23 see also contracts; specific types of agreements privileges, corporate, 28, 29, 31, 33–35 Privileges and Immunities: A Reference Guide to the United States Constitution (David S. Bogen), 288 privileges and immunities clause, 4 Corfield and, 40–41 dormancy, 43–44 overruling, revival, reversal of, 287–92 right to make and enforce contracts, 288–89 Slaughterhouse and, 41–44 states’ rights and, 40–41 productive work, 3 professions barriers to entry, 63, 141 licensing, 23, 63, 99–100, 145–56 restricted entry, 22, 23 restricting or eliminating competition, 289–90 unskillfulness, 23 Progressive Era, xiv–xv, 44–50 eminent domain and, 32 misconceptions about, 47–49 regulation of business and economy, 13, 15, 123–27, 136–37 Supreme Court, 15, 279. see also specific justices 371 Index Progressivism agenda, ideology, and philosophy, 11, 12–13, 44–50, 279–81 assault on economic liberty, 11–16, 44–50, 279–81, 290, 292 changing American political philosophy, 44–50 criticism of and attack on Lochner, 107–10, 121 doctrines, 279–81 economic freedom argument, 123–27 free speech and, 191–92 majority over individuality, 11, 44–45, 109–10, 121, 279, 292. see also collective decisionmaking notion of individual freedom, 116–17 pro-government presumption, xiii–xiv, 11–13, 44–50 rational basis test and, 125–27 rights as permissions, 95, 109, 116–17, 279, 282–83 socialist nature of, 46, 123–27 visionary zeal to do gooders, 13, 46 Prohibition, legacy of, 183–84 property corporate, 34 regulation as secondary to, 272–73 property redistribution government redistributive programs, 283 Progressivism and, 13 property rights, xvii, 24–25 of criminals, 259 givings theory and, 272–74 land-use regulation, 160. see also zoning laws, protectionism and Locke on, 273 ownership as separate from right to use, 257 partial property rights in other people, 290–91 Rehnquist and Roberts Courts, 277–78 right of use of property or land, 257, 271 see also regulatory takings Property Rights from Magna Carta to the Fourteenth Amendment (Bernard Siegan), 283 Prosser, William, 76 protection of the public. see public interest or public welfare protection of unenumerated rights, 93–94 372 protectionism, xvi, 141–44, 173–74 agricultural adjustment programs, 164–70, 174 barriers to entry, 141 contracts clause and, 154 dormant commerce clause and, 153–54 franchise acts and, 170–73, 174 as legitimate state interest, 289 licensing laws, 145–59, 174 necessity of new business and certificates of necessity, 143–44 public choice theory and, 289–90 tariffs, 141 taxi industry example, xi–xiii, xiv, xv, xvi, 143–44, 286 zoning laws, 159–63, 174 public choice theory, 289–90 public contracts, 69–73 public interest or public welfare contracts clause, 75–81 Liebmann and, 142–43 Munn and Nebbia and, 101, 125–27. see also rational basis test Powers and, 152–55, 159, 162, 289 seizure of property. see eminent domain doctrine; regulatory takings public nuisance, xvii Blackmun on, 240 common or public right definition, 241 reasonable and lawful conduct, 243–45 reasonableness and unreasonableness, 240–41, 242 regulatory takings and, 258 tort law abuse, 239–45 public policy, manipulation of contracts and, 214, 215, 220–24 public use, synonymous with public benefit, 255 Pumpelly v.


pages: 376 words: 118,542

Free to Choose: A Personal Statement by Milton Friedman, Rose D. Friedman

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affirmative action, agricultural Revolution, air freight, back-to-the-land, bank run, banking crisis, Corn Laws, Fractional reserve banking, full employment, German hyperinflation, invisible hand, labour mobility, means of production, minimum wage unemployment, oil shale / tar sands, oil shock, price stability, Ralph Nader, RAND corporation, rent control, road to serfdom, school vouchers, Simon Kuznets, The Wealth of Nations by Adam Smith, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration

For example, in one massive building in Washington some government employees are working full-time trying to devise and implement plans to spend our money to discourage us from smoking cigarettes. In another massive building, perhaps miles away from the first, other employees, equally dedicated, equally hard-working, are working full-time spending our money to subsidize farmers to grow tobacco. In one building the Council on Wage and Price Stability is working overtime trying to persuade, pressure, hornswoggle businessmen to hold down prices and workers to restrain their wage demands. In another building some subordinate agencies in the Department of Agriculture are administering programs to keep up, or raise, the prices of sugar, cotton, and numerous other agricultural products. In still another building officials of the Department of Labor are making determinations of "prevailing wages" under the Davis-Bacon Act that are pushing up the wage rates of construction workers.

The growth of the bureaucracy, reinforced by the changing role of the courts, has made a mockery of the ideal expressed by John Adams in his original (1779) draft of the Massachusetts constitution: "a government of laws instead of men." Anyone who has been subjected to a thorough customs inspection on returning from a trip abroad, had his tax returns audited by the Internal Revenue Service, been subject to inspection by an official of OSHA or any of a large number of federal agencies, had occasion to appeal to the bureaucracy for a ruling or a permit, or had to defend a higher price or wage before the Council on Wage and Price Stability is aware of how far we have come from a rule of law. The government official is supposed to be our servant. When you sit across the desk from a representative of the Internal Revenue Service who is auditing your tax return, which one of you is the master and which the servant? Or to use a different illustration. A recent Wall Street Journal story (June 25, 1979) is headlined: "SEC's Charges Settled by a Former Director" of a corporation.


pages: 497 words: 150,205

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

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

Yet in practice, most people care as much, if not more, about low unemployment, rising living standards and stable credit as they do about low inflation – and the ECB should take this into account in its decision making. Focusing exclusively on keeping inflation (too) low has come at the expense of financial stability and living standards, while privileging creditors over debtors. At the very least, then, the ECB needs a broader mandate that takes account of both asset-price and consumer-price inflation, financial and price stability, as well as growth and employment. It also needs to be more accountable to democratic authorities – the European Parliament as well as a committee of national parliamentarians. There also needs to be more cooperation between elected fiscal authorities and unelected monetary ones. Closer coordination would ensure better economic outcomes, while the ECB ought to take account of the views of elected governments.

, Vox.eu, 20 December 2011 http://www.voxeu.org/article/global-savings-glut-or-global-banking-glut 41 High-Level Expert Group on Reforming the Structure of the EU Banking Sector, chaired by Erkki Liikanen, 2 October 2012 http://ec.europa.eu/internal_market/bank/docs/highlevel_expert_group/report_en.pdf Table A1.2: total number and assets of monetary financial institutions by country (March 2012) 42 OECD, Debt of financial corporations, as a percentage of GDP, DBTS12GDP 43 OECD, Household debt as a share of gross disposable income, DBTS14_S15GDI In the UK it rose from 112.39 per cent in 2000 to 174.15 per cent in 2007, that is by a factor of 1.55; in the Netherlands it rose from 163.72 per cent in 2000 to 242.37 per cent, that is by a factor of 1.48. 44 See Nationwide House Price Index, http://www.nationwide.co.uk/hpi/historical.htm and http://www.cotizalia.com/cache/2008/07/03/46_europa_preocupa_mucho_ajuste_inmobiliario_espana.html 45 Philippe Legrain, Aftershock: Reshaping the World Economy After the Crisis, Little, Brown: 2010 46 Nouriel Roubini with Stephen Mihm, Crisis Economics: A Crash Course in the Future of Finance, Allen Lane: 2010 47 Charles Kindleberger, Manias, Panics and Crashes, Wiley: 1978 48 Philippe Legrain, Open World: the Truth about Globalisation, Abacus: 2002 49 Financial markets were deemed efficient in the sense that prices set by the market were “right” since they were determined by rational investors acting on all available information and mistakes were rapidly corrected by other profit-seeking investors. 50 As Bill White has observed, in the 1980s the fight against high inflation was justified on the grounds that it was ‘necessary’ for macroeconomic stability. Then, somehow, it morphed into the belief that price stability was ‘sufficient’ for such stability. 51 For example, gross capital flows both within the eurozone and into and out of it nearly tripled between 2002 and 2007. Source: Philip Lane, "Capital Flows in the Euro Area", European Economy, Economic Papers 497, April 2013. Capital flows in and out of Britain also soared. 52 See Hélène Rey’s excellent “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, paper presented at Jackson Hole, August 2013. http://www.kansascityfed.org/publicat/sympos/2013/2103Rey.pdf 53 For example, in the Mais Lecture at Cass Business School on 11 May 2006, Trichet said: "It is sometimes argued that the convergence in euro area government bond spreads which was seen in the run-up to Monetary Union is evidence that the process of financial integration may be detrimental to the functioning of market discipline, the latter being the influence exerted by markets on governments by pricing different risks of default.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve

To the extent the government can artificially repress the prices of automobiles and television sets, it will increase the pressure on prices for food, fuel, and housing. Since government will usually be able to influence the prices of luxuries more than of necessities, with a given money supply controls will always tend to raise the prices of necessities dominant in the budgets of the poor. This effect was evident under both the Nixon and Carter efforts for price stabilization. In general the most important effect of the government attempt to shield itself and its clients from uncertainty and risk is to place the entire system in peril. It becomes at once too rigid and too soft to react resourcefully to the new shocks and sudden challenges that are inevitable in a dangerous world. Supporting the future, though theoretically simple, provides plenty of challenges for human governance.

Parkinson’s Corollary partial equilibrium fallacy Patterson, Orlando Paul, Rand Paul, Ron Paul, Saint Paulson, John Peace of Utrecht Peirce, Charles pensions perfect competition perks Perry, George Peterson, Pete Peugeot Citroen Phelps-Brown, Sir Henry photography Piore, Michael Planet of the Apes (film) planning sector Podhoretz, Norman Poland Polanyi, Michael Poles political philosophy politicians politics egalitarianism in as insurance leadership in marketplace of of persecution Polyconomics Population Bomb populism Portuguese Posner, Richard post-industrial age Post Office Department postwar baby boom generation potlatching poverty and the poor belief in wealth as cause of capitalism as cause of male misconceptions of Third World welfare programs and See also War on Poverty; Welfare Pratt, Larry prejudice, racial and ethnic. See also Discrimination price-level theory price pyramid price stabilization primary sector jobs Prince Charles printing, innovations in private enterprise. See Capitalism; Entrepreneurs and entrepreneurship producing power purchasing power and productivity decline in in government growth in insurance small business x-efficiency in product-liability suits professional schools Progress and Poverty (Henry George) progressive taxation promotion barriers property taxes Proposition 13, 49, 200-20 1 Protection, business demands for Protestants, white.


pages: 464 words: 117,495

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder

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additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy low sell high, Checklist Manifesto, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania

Also, we can't call the pattern of lower indicator tops after the bottom C a divergence. The lower tops reflect a gradual weakening of the uptrend with the passage of time. In order to count as a divergence, MACD-Histogram has to cross and recross its zero line. Bearish divergences occur in uptrends—they identify market tops. A classical bearish divergence occurs when prices reach a new high and then pull back, with an oscillator dropping below its zero line. Prices stabilize and rally to a higher high, but an oscillator reaches a lower peak than it did on a previous rally. Such bearish divergences usually lead to sharp breaks. A bearish divergence shows that bulls are running out of steam, prices are rising out of inertia, and bears are ready to take control. Valid divergences are clearly visible—they seem to jump at you from the charts. If you need a ruler to tell whether there is a divergence, assume there is none (Figure 23.4).

(Chart by Tradestation) Technical Analysis with Fundamentals 2007—Ford was on the ropes when the new CEO arrived—the man who earlier spearheaded saving Boeing. In the heady atmosphere of a bull market, Ford seemed to have a shot at recapturing its $30 high. I saw a false downside breakout coupled with a bullish divergence and bought. I then grimly held through the bear market. 2011—Ford spiked above its monthly channel, which was narrower at that time, tracing a kangaroo tail, while monthly MACD weakened. I took profits. 2011—as monthly prices stabilized in their value zone, I repurchased my position. Fundamental analysis can help you find a stock that may be worth buying. Use technical analysis to time your entries and exits. Be prepared to buy and sell more than once during a major uptrend. Swing Trading While major trends and trading ranges can last for years, all are punctuated by short-term upswings and downswings. Those moves create multiple trading opportunities, which we can exploit.


pages: 251 words: 63,630

The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World by Shaun Rein

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business climate, credit crunch, Deng Xiaoping, Donald Trump, facts on the ground, glass ceiling, high net worth, illegal immigration, income per capita, indoor plumbing, job-hopping, Maui Hawaii, price stability, quantitative easing, Silicon Valley, Skype, South China Sea, Steve Jobs, thinkpad, trade route, trickle-down economics, upwardly mobile, urban planning, women in the workforce, young professional

It is an understatement to say he was angry at the calls of U.S. government officials (like New York Senator Chuck Schumer) for China to let its currency appreciate, or that he was frustrated with Federal Reserve chief Ben Bernanke’s decision to increase the money supply through quantitative easing. These wrongheaded policies, he said, just caused more investors to flee the greenback and switch their investment portfolios to commodities or foreign markets, where there were greater possibilities to receive higher returns, and which further increased Bob’s input prices. He did not see commodity prices stabilizing in the near future until the greenback regained its strength and the debt situation in the eurozone stabilized. Breaking it down further, Bob showed how an appreciating renminbi cut into his company’s profits. If salaries, rents, and commodity prices went up at a conservative 10 percent a year, and the renminbi appreciated 5 percent annually, that meant his overall costs would rise 15 percent a year.


pages: 142 words: 45,733

Utopia or Bust: A Guide to the Present Crisis by Benjamin Kunkel

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anti-communist, Bretton Woods, capital controls, Carmen Reinhart, David Graeber, declining real wages, full employment, Hyman Minsky, income inequality, late capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, mortgage debt, Occupy movement, peak oil, price stability, profit motive, savings glut, Slavoj Žižek, The Wealth of Nations by Adam Smith, transatlantic slave trade, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration

Thus the generation-long ascendancy of financial capital has expressed itself in a preference for a monetarist or Friedmanite definition of full employment, one in which the dangers of inflation have been oversold at the expense of the unemployed, wage-earners, and industry too. Even now, in what is if anything a deflationary climate, an unreasoning fear of inflation dominates public debate. In 1978, Congress made it an explicit purpose of the Federal Reserve to promote full employment, as well as price stability. (The European Central Bank, by contrast, is tasked only with stabilizing prices.) The goal of full employment is inscribed in our financial system. It should now become a political demand with which to counter efforts by the Obama administration and congressional Republicans to fight mass unemployment by means of tax credits for employers. If it is not already obvious that these pitiful initiatives, not even sincere enough to qualify as wishful thinking, are knowingly inadequate to the problem they pretend to address, that will be plain enough in the months and years ahead.

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

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Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, Nick Leeson, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus

While there have historically been many forms of legitimacy, in today’s world the only serious source of legitimacy is democracy. There is another respect in which good governance and democracy are not so easily separated. A good state institution is one that transparently and efficiently serves the needs of its clients—the citizens of the state. In areas like monetary policy, the goals of policy are relatively straightforward (that is price stability) and can be met by relatively detached tech- the missing dimensions of stateness 27 nocrats. Hence central banks are constructed in ways that deliberately shield them from short-term democratic political pressure. In other sectors like primary and secondary education, the quality of the public agency’s output greatly depends on the feedback it receives from the ultimate consumers of government services.


pages: 230 words: 62,294

The Coffee Book: Anatomy of an Industry From Crop to the Last Drop by Gregory Dicum, Nina Luttinger

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California gold rush, clean water, corporate social responsibility, cuban missile crisis, Edward Lloyd's coffeehouse, European colonialism, Honoré de Balzac, illegal immigration, land reform, land tenure, open economy, price stability, Ray Oldenburg, The Great Good Place

On these exchanges, participants can agree to a sale of coffee at a set price at a given time in the future. When the time arrives, that price is locked in, regardless of what is happening in the market. In this way, large buyers can use the futures market to “hedge” their purchases. Hedging means taking a futures position opposite to their actual purchasing, so, no matter what happens in the market, they will both win and lose, and thereby obtain price stability. Because the coffee supply can be so drastically altered by weather, the ability to absorb future risk in this way is an important component of a smoothly running market. In July, during the Brazilian winter, coffee traders worldwide monitor the weather there much more closely than the weather in their own backyards. At the slightest hint or even rumor of a frost a frenzy of trading can erupt, sending traders scurrying around amid a frantic din of yelling and screaming.


pages: 278 words: 82,069

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

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

And now we learn from Bob Woodward’s new book, excerpted recently in the Washington Post, that Fed chair Alan Greenspan persuaded Bill Clinton to drop the modest public investment agenda he campaigned on in favor of hair-shirt deficit-cutting. Who is this Fed, and can anything be done about it? To financiers’ eyes, the economy has just got too strong for comfort. Though current inflation rates are about as low as any we’ve seen in the past thirty years, there’s profound worry among bankers and Fedsters that this relative price stability is about to end. Such price hawks are convinced that the U.S. economy cannot grow at a rate faster than 2.5 to 3.0 percent a year—quite slow by historical standards—without lapsing into a sickly inflation. If unemployment gets too low, meaning much below current levels, then workers might develop an attitude problem, and the twenty-year decline in real hourly wages might be reversed, however briefly.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, 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, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, moral hazard, mortgage debt, paradox of thrift, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

And that would be a relatively easy adjustment on Spain’s part—not easy, just relatively easy. But the Germans hate, hate, hate the idea of inflation, thanks to memories of the great inflation of the early 1920s. (Curiously, there is much less memory of the deflationary policies of the early 1930s, which are what actually set the stage for the rise of you-know-who. More in chapter 11.) And perhaps more directly relevant, the ECB’s mandate calls on it to maintain price stability—period. It’s an open question how binding that mandate really is, and I suspect that the ECB could find a way to rationalize moderate inflation despite what the charter says. But the mind-set is certainly one in which inflation is considered a great evil, no matter what the consequences of a low-inflation policy may be. Now think about what this implies for Spain—namely, that it has to get its costs in line through deflation, what is known in eurojargon as “internal devaluation.”

Exploring Everyday Things with R and Ruby by Sau Sheong Chang

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Alfred Russel Wallace, bioinformatics, business process, butterfly effect, cloud computing, Craig Reynolds: boids flock, Debian, Edward Lorenz: Chaos theory, Gini coefficient, income inequality, invisible hand, p-value, price stability, Skype, statistical model, stem cell, Stephen Hawking, text mining, The Wealth of Nations by Adam Smith, We are the 99%, web application, wikimedia commons

Price and demand Second, while the price fluctuates with the demand, it actually decreases over time until it stabilizes at a price between $5 and $5.50. Notice this corresponds with the cost of creating goods, which we set at $5 at the beginning of the simulation. The logic in the Producer class’s produce method prevents the price from ever dropping below the cost. This is the reason why the price stabilizes at around $5. But why does the price drop at all? This is due to the market economy again. Remember that the consumer always buys the cheapest goods first. This means the producer with the higher prices will have unsold goods, which in turn forces the prices to go down. The end results are that the average price goes down until it nears the cost of producing the goods. Finally, we see the invisible hand!


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John von Neumann, Joseph Schumpeter, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, naked short selling, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

While we see that four scholars worked independently to develop the link between the mean return and the variance of a security and its market price, we will forever associate this new methodology of the Capital Asset Pricing Model (CAPM) with the great mind William Sharpe. 4 A Roadmap to Resolve the Big Questions 5 However, while Sharpe’s insights helped us better understand how an individual security is priced, the greatest need for the rapid pricing of securities was in the derivatives market. This new financial market, once the sleepy domain of farmers and food processors concerned about price stability for the future delivery of agricultural commodities, now represents an annual market value that rivals the combined size of the world’s economies. There is now a much greater volume of trading in these derivatives, in commodities futures and in options markets, in credit default swaps and mortgage-backed securities, in foreign exchange futures and bond futures than in the traditional market for corporate securities.


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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3D printing, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, ethereum blockchain, fiat currency, friendly fire, game design, Isaac Newton, Julian Assange, litecoin, M-Pesa, mobile money, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, quantitative easing, railway mania, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, War on Poverty, web application, WikiLeaks

‘From the perspective of being good money, Bitcoin fails the unit of account property because we don’t natively price products and services with Bitcoin. Rather we look to a fiat standard like the US dollar and we convert the value of the Bitcoin to actually price goods and services. The argument people tend to use is that, well, it’s still a small economy, if it got really large people would price things with it. ‘The other problem is that I don’t think there’s ever going to be price stability with Bitcoin. ‘First, there are a lot of innovative pressures. There’s tons of competition, there’s over 300 altcoins and there’s always new technology being invented. So that does have a very significant effect on the price of Bitcoin. ‘Second, we have rapid demand changes. Suddenly there are loads of buyers, everyone wants to get into Bitcoin, then just as suddenly they don’t. It’s very volatile.


pages: 279 words: 72,659

Gaza in Crisis: Reflections on Israel's War Against the Palestinians by Ilan Pappé, Noam Chomsky, Frank Barat

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Ayatollah Khomeini, Boycotts of Israel, British Empire, desegregation, European colonialism, facts on the ground, failed state, friendly fire, ghettoisation, Islamic Golden Age, New Journalism, price stability, too big to fail

The pro-oil lobby in America lost its impact when, in 1973, the Arab oil-producing states declared their famous embargo. But when it transpired that this step was not, as declared, meant to assist the Palestinians but rather to bring up oil prices, the embargo became a fleeting episode. After all, such aggressive tactics in the world of business are the bread and butter of the capitalist system. And when prices stabilized, to the satisfaction of all concerned, the oil-producing Arab states began formulating a definite pro-American policy. The lesson was clear: American administrations found they could ensure oil flow from Saudi Arabia and, at the same time, categorically reject any sensible peace proposals made by the Saudi crown for solving the Arab-Israeli conflict. (This was the case, for example, in 1981 when King Fahd offered a peace proposal that included recognition of the right of Israel to exist alongside an independent Palestinian state.)


pages: 264 words: 74,313

Wars, Guns, and Votes: Democracy in Dangerous Places by Paul Collier

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dark matter, deskilling, failed state, moral hazard, out of africa, price stability, structural adjustment programs

Meltdown in Cote d’Ivoire 157 Since Houphouët-Boigny ran a one-party state, it looked as if he could afford to play it long, but in the event, his risky strategy was derailed by economic shocks. In 1980 the world price of cocoa and coffee collapsed and the price of imported oil rocketed. The ensuing economic crisis was partly met by borrowing: by 1993 debt had accumulated to $15 billion. Even with this massive borrowing, average incomes duly collapsed by around a third. Poverty soared. The politics compounded these economic problems. The tax on cocoa had been disguised as a price stabilization scheme: the price was guaranteed, but at a level that had been below the world price. As world cocoa prices fell to levels nobody had anticipated, the price guarantee duly kicked in: the cocoa-producing immigrants were being subsidized instead of taxed! To keep the political deal in place the civil service continued to expand, exacerbating the collapse of the private economy. Whereas in 1980 half the urban workforce had proper jobs, by the early 1990s three in four were scratching a living informally: the urban poor were set to be a powerful political force.


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, clean water, conceptual framework, constrained optimization, continuous double auction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, helicopter parent, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, winner-take-all economy

They settled on an initial money supply of ten million shares and allowed bidders to squirrel away their currency to make a single big purchase, which was of particular value to the smaller food banks. One unexpected consequence of becoming a market designer was that Prendergast found himself playing the role of central banker. Central bankers manage money supply, and they do so in large part to keep prices steady. Price stability was also a major concern of small food banks: since they made relatively infrequent purchases, historical prices provided them with guidance on how much to bid. For the Federal Reserve (the United States’s central bank), this involves too many complications to enumerate here—from figuring out how many one hundred dollar bills in circulation are hiding under Russian mobsters’ floorboards to estimating the rate at which bills flow through the economy to assessing investors’ beliefs about future money supply (which may make them spend, or stuff more bills in mattresses), and so on and so forth.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

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Airbnb, bank run, banks create money, Bernie Madoff, bitcoin, Bretton Woods, Carmen Reinhart, correlation does not imply causation, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Uber for X, War on Poverty, yield curve

The answer lies in the basic truth that the dollar, whether fixed to gold or floating, is always and everywhere a “ruler”—a measure of value. Bartley, Brookes, and Reagan made basically the same point: that the price of oil in dollars tends to revert to one-tenth, one-twelfth, or one-fifteenth of an ounce of gold. This is important because, as Forbes noted in 2006, during the last period of dollar-price stability, whereby the greenback was defined as 1/35th of an ounce of gold, the price of oil hardly fluctuated. With gold stable in dollars, so was the price of oil stable in dollars. Indeed, monetary economist Nathan Lewis has pointed out that from 1982 to 2000, “the dollar’s value was crudely stable vs. gold around $350/ oz.”17 What is interesting about the period he describes, one in which the global economy boomed, is that there were no notable advances in oil-extraction techniques.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

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asset-backed security, barriers to entry, big-box store, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial innovation, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Plutocrats, plutocrats, price stability, Ronald Reagan, statistical model, technology bubble, transaction costs, women in the workforce

By the early 1970s, only twelve states still had fair-trade laws on the books.6 In 1975, President Gerald Ford finally ended the forty-year experiment in manufacturer-controlled pricing with the Consumer Goods Pricing Act, “enabling,” as he wrote in his signing statement, which sounds oddly like an advertisement, “consumers in all 50 States to shop for the best products at the lowest possible prices.”7 There was not a clean end to the fair-trade laws, but there was a clear rise in free-market pricing in the 1950s and 1960s that allowed discounters to take advantage of lower manufacturing costs. Without price stability, manufacturers had to look for other ways to cut costs—such as manufacturing overseas—to maintain profitability. Even with such movements, manufacturing profits took a hit, which in turn made other forms of investment, such as finance, more appealing. The discount store grew so fast not only because of its prices but because of the way it changed how Americans shopped. Incomprehensible as it is, self-service in stores did not exist until 1917, when an enterprising southern grocer named Clarence Saunders reorganized his store, Piggly Wiggly, to allow customers to select their own food from the shelves.


pages: 840 words: 202,245

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

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, 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, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, 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

The explanation was essentially identical to the one that Volcker and Weidenbaum subscribed to when they developed Nixon’s wage-price freeze. Schultze might have advised outright wage and price controls, but the failure of Nixon’s ill-conceived program made that politically impossible. Instead, the Carter advisers proposed a voluntary system of wage and price restraints for business and labor starting in April 1977. Barry Bosworth was put in charge of the Council on Wage and Price Stability, the commission that had been formed earlier under Nixon, which would administer the new voluntary restraints. By the time the program went into effect in the spring, Carter backtracked on his stimulus proposal. The economy, he thought, seemed to be reviving, as retail sales strengthened in April and inflation rose slightly for a couple of months. Carter’s reaction to the short-term data reflected his oversensitivity to inflation and his overmanagement; a little patience would have served him well.

., 1.1, 3.1, 3.2, 4.1, 6.1, 6.2, 6.3, 8.1, 9.1, 9.2, 9.3, 10.1, 11.1, 11.2, 13.1, 13.2, 14.1, 14.2, 14.3, 14.4, 14.5, 15.1, 15.2, 15.3, 16.1, 16.2, 16.3, 17.1, 17.2, 17.3, 17.4, 18.1, 18.2, 18.3, 18.4, 18.5, 19.1, 19.2 Connally, John, 3.1, 3.2 Conrad, Kent Conscience of a Conservative, The (Goldwater), prl.1 conservatism, itr.1, prl.1, prl.2, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 7.1, 7.2, 10.1, 11.1 consumer prices, 2.1, 2.2, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 6.1, 8.1, 9.1, 11.1, 11.2 Consumer Product Safety Commission, prl.1, 3.1, 11.1 consumer protection, itr.1, prl.1, 2.1, 3.1, 11.1, 14.1, 19.1, 19.2 consumer spending, 2.1, 2.2, 3.1, 3.2, 6.1, 14.1, 19.1 Continental Illinois, 6.1, 11.1 Control Data Cornwall Capital, 15.1, 19.1 Corrigan, Gerald Council of Economic Advisers (CEA), 2.1, 2.2, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 7.1, 9.1, 14.1 Council on Wage and Price Stability Countrywide Financial Services, 14.1, 18.1, 18.2, 18.3, 19.1, 19.2, 19.3 Courtright, Hernando Cox, Christopher Cox Communications, 12.1, 12.2, 12.3 credit cards, 1.1, 11.1, 16.1, 16.2, 16.3, 17.1, 18.1, 18.2 credit default swaps (CDSs), 19.1, 19.2, 19.3, 19.4 credit markets, 1.1, 1.2, 2.1, 6.1, 11.1, 12.1, 14.1, 14.2, 15.1, 15.2, 17.1, 18.1, 19.1, 19.2, 19.3, 19.4, 19.5, 19.6 credit ratings, 6.1, 6.2, 12.1, 16.1, 17.1, 17.2, 17.3, 17.4, 19.1, 19.2, 19.3, 19.4, 19.5 Credit Suisse First Boston, 17.1, 17.2 crisis of 2008, x, 6.1, 12.1, 12.2, 14.1, 14.2, 14.3, 19.1, 19.2, 19.3 crop failures, 3.1, 3.2, 9.1, 9.2, 9.3 Curie, Marie, 2.1, 19.1 currencies, 1.1, 1.2, 1.3, 2.1, 2.2, 2.3, 3.1, 3.2, 3.3, 6.1, 6.2, 6.3, 6.4, 11.1, 14.1, 15.1, 15.2, 15.3, 15.4, 15.5, 15.6, 15.7, 15.8, 15.9, 17.1; see also dollar, U.S.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Like Elvis, who claimed in his line of work that knowledge of music was not strictly necessary, Greenspan did not need to know much about economics.16 In oracular pronouncements, Greenspan excelled at “lacquering a slate of ignorance with a thin coating of knowledge.”17 At a July 1996 meeting, discussing the target rate of inflation, Governor Janet Yellen argued for 2 percent. Greenspan waffled about price stability. Asked to define the term, Greenspan said that it was “the state in which expected changes in price level do not effectively alter business or household decisions.” Pressed further, Greenspan expressed preference for zero inflation, correctly measured. The consensus was for 2 percent incorrectly measured. Greenspan cautioned the other governors not to reveal the target.18 In 1998, Greenspan told the U.S.

Alan Greenspan (2007) The Age of Turbulence: Adventures in a New World, Allen Lane, London: 360, 361. 5. Ben Bernanke “The economic outlook” (5 May 2005), Testimony to the Joint Economic Committee, US Congress. 6. “Savings versus liquidity” (11 August 2005) The Economist. 7. Robin Harding “Bernanke says foreign investors fuelled crisis” (18 February 2011) Financial Times. 8. Fisher, Irving “The debt-deflation theory of great depressions” (1933) Econometrica: 337–57. 9. William White “Is price stability enough?” (April 2006) Bank of International Settlements. 10. Gillian Tett of the Financial Times coined the phrase; see Gillian Tett “Should Atlas still shrug?” (15 January 2007) Financial Times. 11. The phrase “new liquidity factory” was coined by Mohamed El-Erian. 12. Total outstanding volumes of derivative contracts are greater, around $600 trillion (see Chapter 14). The figure here is adjusted for double counting of derivative volumes and the estimated portion that is used for hedging. 13.


pages: 780 words: 168,782

Strange Rebels: 1979 and the Birth of the 21st Century by Christian Caryl

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anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, colonial rule, Deng Xiaoping, financial deregulation, financial independence, friendly fire, full employment, income inequality, industrial robot, Internet Archive, land reform, land tenure, Mahatma Gandhi, means of production, Mikhail Gorbachev, Mohammed Bouazizi, Mont Pelerin Society, new economy, New Urbanism, oil shock, open borders, open economy, Plutocrats, plutocrats, price stability, rent control, road to serfdom, Ronald Reagan, single-payer health, special economic zone, The Chicago School, union organizing, upwardly mobile, Winter of Discontent, Xiaogang Anhui farmers, Yom Kippur War

That meant that some revenues would still have to be increased, and Howe did it by raising taxes on consumption. The budget accordingly provided for a sharp rise in value-added tax, which now rose to 15 percent. This point also gave Thatcher cause for nervousness. As she was perfectly aware, the hike in VAT would add several percentage points to retail prices, thus contributing to inflationary pressures. This was not the only factor that looked likely to undermine price stability. In its final months the Callaghan government had agreed on substantial pay hikes for public-sector unions, and during her campaign Thatcher had agreed to respect her predecessor’s pledges. Just as expected, inflation rose. The consumer price index jumped from 11 percent in the summer to 20 percent by the end of 1979. Thatcher and Howe believed that they knew the solution. It was Milton Friedman who had declared—with bracing but controversial clarity—that “inflation is always and everywhere a monetary phenomenon.”

It was Milton Friedman who had declared—with bracing but controversial clarity—that “inflation is always and everywhere a monetary phenomenon.” In the view of Friedman and other monetarists, the notion that governments could tame inflation by demand-side methods, like tinkering with wage and price controls, was utterly illusory. The acolytes of monetarism insisted instead that government’s task was to ensure price stability by restraining the supply of money in circulation—or, to use the more populist formulation, to slow down the rate at which government printing presses were turning out banknotes. Thatcher’s team was not breaking entirely new ground here. Key members of the Callaghan government’s economic team—above all his own chancellor, Denis Healey—had already accepted the basic monetarist premise. So, too, had the directors of the Bundesbank, the central bank that had presided over West Germany’s economic miracle (and thus represented a prominent foreign model for the Thatcherites).


pages: 756 words: 228,797

Ayn Rand and the World She Made by Anne C. Heller

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affirmative action, Albert Einstein, anti-communist, Bolshevik threat, conceptual framework, greed is good, laissez-faire capitalism, Milgram experiment, Mont Pelerin Society, New Journalism, open borders, price stability, profit motive, rent control, rolodex, Ronald Reagan, Silicon Valley, the scientific method, theory of mind, Thorstein Veblen, transcontinental railway, upwardly mobile, wage slave, War on Poverty, Works Progress Administration, young professional

Alan Greenspan and Martin Anderson, later a member of the Nixon administration and an advisor to Ronald Reagan, occasionally added their views on economic issues, including a defense of the gold standard by Greenspan that, in combination with his lifelong admiration for Rand, came back to haunt him when he was named chairman of the Council of Economic Advisers under Gerald Ford and chairman of the Federal Reserve Board under Ronald Reagan. (Nixon had divorced the dollar from the gold standard in 1971, completing a separation begun by FDR.) He never lost his respect for gold. “I have always harbored a nostalgia for the gold standard’s inherent price stability,” he wrote in his 2007 memoir, The Age of Turbulence. Other scholarly young Rand devotees, including Peikoff, Hessen, Reisman, and Barbara Branden, contributed essays on problems in philosophy and history, book reviews, and commentary on current events. There were few or no outside contributors. She, her supporters, and The Objectivist Newsletter campaigned for Senator Barry Goldwater’s presidential bid in 1964, hopeful that the most conservative candidate since Calvin Coolidge might at last acquire the authority to roll back FDR’s social-welfare legislation.

primarily because its purpose: May 4, 1946 (JOAR, p. 479). She wasn’t convinced: MYWAR, p. 211. composing essays was child’s play: Harry Binswanger, “Recollections of Ayn Rand.” clarity and logic: MYWAR, p. 297. warns against defining national emergencies too broadly: Ayn Rand, “The Ethics of Emergencies,” TON, February 1963; reprinted in TVOS, p. 49. “for the gold standard’s inherent price stability”: The Age of Turbulence, p. 481. she endorsed Goldwater: TON, October 1963 and March, July, September, and October 1964. helped to found the club and magazine: Author interview with JKT, May 21, 2004. famous Goldwater rally: This took place on May 12, 1964. “It made his points in his voice”: Unpublished taped interview with Barbara Weiss, conducted by BB, September 25, 1983. took the document to Goldwater’s temporary office: Author interview with BB, October 14, 2007.


pages: 273 words: 93,419

Let them eat junk: how capitalism creates hunger and obesity by Robert Albritton

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Bretton Woods, California gold rush, clean water, collective bargaining, computer age, corporate personhood, deindustrialization, Food sovereignty, Haber-Bosch Process, illegal immigration, immigration reform, invisible hand, joint-stock company, joint-stock limited liability company, land reform, late capitalism, means of production, offshore financial centre, oil shale / tar sands, peak oil, price stability, profit maximization, profit motive, South Sea Bubble, the built environment, union organizing, Unsafe at Any Speed, upwardly mobile

Furthermore, when we look at the historical record, it appears that capitalism has actually had an easier time relating to agrarian systems of forced labour than systems of self-employment. For example, capitalism managed to relate to the southern US slave economy quite effectively in the first half of the nineteenth century. In contrast, the great depression wreaked havoc with the American system of family farms, and it was only very significant state intervention carried out by President Roosevelt in the 1930s that re-established a degree of price stability at levels which enabled some farming families to survive. After World War II, with the enormous upswing of the mechanization and chemicalization of agriculture, and with enormous state support, the American food system became increasingly capitalist at every step of food provision from field to table. In this chapter I have presented reasons why pure capitalism, at its competitive best, necessarily fails to effectively manage agriculture or feed people well through its “self-regulating markets”.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

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3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, invisible hand, Isaac Newton, Kenneth Rogoff, late fees, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, post-oil, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, working poor

But with prices this low, investments in hard-to-find oil and hard-to-make substitutes began to look tenuous, so tens of billions of dollars’ worth of new energy projects were canceled or delayed. Yet the industry had been counting on those projects to maintain a steady stream of liquid fuels a few years out, so worries about a future supply crunch began to make headlines.31 It is the financial returns on their activities that motivate oil companies to make the major investments necessary to find and produce oil. There is a long time lag between investment and return, and so price stability is a necessary condition for further investment. Here was a conundrum: low prices killed future supply, while high prices killed immediate demand. Only if oil’s price stayed reliably within a narrow — and narrowing — “Goldilocks” band could serious problems be avoided. Prices had to stay not too high, not too low — just right — in order to avert economic mayhem.32 The gravity of the situation was patently clear.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

And in the opaque language that he had perfected, he came as close as a central banker can to saying he thought stocks were overvalued: But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? … We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability…. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.17 In his autobiography, Greenspan admits wondering whether the market would understand what he was getting at.18 It did—and ignored him!


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

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Affordable Care Act / Obamacare, bank run, banking crisis, Bernie Madoff, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, moral hazard, obamacare, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve

FDIC insurance is pro-cyclical; that is, it increases both the size of the bubble (the misinvestment) and the magnitude of the bust. In the short term, the Federal Reserve can be important in controlling liquidity risk. Healthy banks can borrow cash from the Federal Reserve, using their sound assets (typically government bonds) as collateral. This cash inflow can be used to meet depositors’ demands. In the long term, however, the existence of the Fed magnifies risk. The Fed has the dual goals of price stability and low unemployment. As previously described, the Fed often overexpands the money supply to eliminate natural market corrections, and this effectively provides a major incentive for banks to take more risk. The Fed reduces short-term liquidity risk at the expense of increasing credit risk. There is an interesting contrast between the early years of the Great Depression and the recent financial crisis.


pages: 261 words: 103,244

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

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

The main difference, of course, is that the proceeds of money printing by agents of the government go to the government and the proceeds of money creation by banks go to the banks (Fisher 1936/2009). Economists acted as key allies of the bankers. They let the ideas of Fisher and Simons fade into oblivion and spent all their effort devising strategies to keep central banks from printing “too much” money while almost completely ignoring the dangers of money creation by banks for price stability and financial stability. The less money central banks create, the more leeway there is for private banks to create money. With the public finances of many industrial countries ruined by the need to bail out banks and the economy, governments are overdue in reclaiming the power to control the amount of money in circulation and to reduce net taxation using the profits from creating that money. As Fisher and Simons already made clear, this would not at all mean socializing banking.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, moral hazard, mortgage tax deduction, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

The underlying theory, set out in Greenspan’s famous 1996 “irrational exuberance” speech, was that the Fed should not attempt to head off bubbles, but instead should focus on helping the economy recover when those bubbles popped: “[H]ow do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? … We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability.”36 This position was an endorsement of the Efficient Markets Hypothesis and the idea that the Fed should not attempt to determine if prices are accurate, but should leave that function to the markets. Wall Street appreciated Greenspan’s monetary policy, because it meant that he would not raise interest rates preemptively to choke off a boom (unless that boom was also creating higher inflation).


pages: 339 words: 100,075

Pump Six and Other Stories by Paolo Bacigalupi

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Columbine, hiring and firing, price stability, profit maximization

That he would send money and food back to his blighted land that now existed only in his mind, in his dreams, and in half-awake hallucinations of deserts, red and black saris, of women in dust, and their black hands and silver bangles, and their hunger, so many of the last memories of hunger. He had fantasized that he would smuggle Gita back across the shining sea, and bring her close to the accountants who calculated calorie burn quotas for the world. Close to the calories, as she had said, once so long ago. Close to the men who balanced price stability against margins of error and protectively managed energy markets against a flood of food. Close to those small gods with more power than Kali to destroy the world. But she was dead by now, whether through starvation or disease, and he was sure of it. And wasn't that why Shriram had come to him? Shriram who knew more of his history than any other. Shriram, who had found him after he arrived in New Orleans, and known him for a fellow countryman: not just another Indian long settled in America, but one who still spoke the dialects of desert villages and who still remembered their country as it had existed before genehack weevil, leafcurl, and root rust.


pages: 397 words: 112,034

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

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

No individual bank was responsible for the monetary excesses of that period or can be blamed for the subsequent collapses in asset prices. It would be wrong for bankers and their regulators to set capital ratios to anticipate such violent asset price movements. To summarize, US commercial banks appear to have significantly more capital now than at the end of 2008. Assuming that American house prices stabilize or continue rising, the US banking system is far from being bust. If regulators attempt to impose further large increases in capital requirements, the banking industry and its customers would be right to resist. Contrary to the impression given by the media, a good case can be made that the crisis in the United States—the country that is supposed to have been the main culprit for the disaster—has been institution specific rather than general and systemic.


pages: 364 words: 99,613

Servant Economy: Where America's Elite Is Sending the Middle Class by Jeff Faux

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back-to-the-land, Bernie Sanders, Black Swan, Bretton Woods, BRICs, British Empire, call centre, centre right, cognitive dissonance, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, David Brooks, David Ricardo: comparative advantage, falling living standards, financial deregulation, financial innovation, full employment, hiring and firing, Howard Zinn, Hyman Minsky, illegal immigration, indoor plumbing, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, Long Term Capital Management, market fundamentalism, Martin Wolf, McMansion, medical malpractice, mortgage debt, Naomi Klein, new economy, oil shock, Plutocrats, plutocrats, price mechanism, price stability, private military company, Ralph Nader, reserve currency, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, school vouchers, Silicon Valley, single-payer health, South China Sea, statistical model, Steve Jobs, Thomas L Friedman, Thorstein Veblen, too big to fail, trade route, Triangle Shirtwaist Factory, union organizing, upwardly mobile, urban renewal, War on Poverty, We are the 99%, working poor, Yogi Berra, Yom Kippur War

In a full-employment economy with a healthy industrial sector, workers whose wages are rising can afford to pay high prices for services and pay rising taxes. But with the offshoring of the high-productivity sectors, the source of rising wages shrinks. Add the ideological resistance to tax increases and the undercutting of the bargaining position of labor, and you have a formula for wage stagnation. Add in economic policies that favor price stability over full employment and you have a formula for wage decline. Still, Pollyanna will not be suppressed. Like Alan Blinder, the few pundits who have looked toward the personal service future tell us to cheer up. “The people of the future will be richer than the people of today,” writes Matthew Yglesias. And as rich people, they will be able to pay for people to do things for them. “Nicer restaurants are more labor-intensive than cheap ones, and the further up the scale you go, the more specialized skills (think sommelier) come into play.”


pages: 353 words: 98,267

The Price of Everything: And the Hidden Logic of Value by Eduardo Porter

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Asian financial crisis, Ayatollah Khomeini, banking crisis, barriers to entry, Berlin Wall, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, clean water, Credit Default Swap, Deng Xiaoping, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, Ford paid five dollars a day, full employment, George Akerlof, Gordon Gekko, guest worker program, happiness index / gross national happiness, housing crisis, illegal immigration, immigration reform, income inequality, income per capita, informal economy, invisible hand, Jean Tirole, John Maynard Keynes: technological unemployment, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, loss aversion, low skilled workers, Martin Wolf, means of production, Menlo Park, Mexican peso crisis / tequila crisis, new economy, New Urbanism, pension reform, Peter Singer: altruism, pets.com, placebo effect, price discrimination, price stability, rent-seeking, Richard Thaler, rising living standards, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, stem cell, Steve Jobs, Stewart Brand, superstar cities, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, transatlantic slave trade, transatlantic slave trade, ultimatum game, unpaid internship, urban planning, women in the workforce, World Values Survey, Yom Kippur War, young professional

An examination of the prices of slaves underscores how the institution slowed productivity growth. The price of a slave in South Carolina rose from about $110.37 in 1720 to about $307.54 in 1800. But that increase barely matched the rate of inflation. In real terms, slave prices remained flat. But, as economists point out, the price of slaves should represent the stream of profits that farmers expected from their labor. Price stability thus suggests that this expected stream did not grow very much. Substitute illegal immigrants for slaves, and similar patterns emerge in the United States today. For decades American farmers have relied on cheap immigrant labor to tend their crops. In 1986, they pressed to pass the Immigration Reform and Control Act, which legalized nearly 3 million illegal immigrants. After that, their investments in laborsaving technology froze.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, invisible hand, Isaac Newton, iterative process, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, moral hazard, mortgage debt, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning

Professor Viscusi is widely regarded as one of the world’s leading authorities on cost-benefit analysis, and his estimates of the value of risks to life and health are currently used throughout the federal government. He has served as a consultant to the U.S. Office of Management and Budget, the Environmental Protection Agency, the Occupational Safety and Health Administration, the Federal Aviation Administration, and the U.S. Department of Justice. He was deputy director of the Council on Wage and Price Stability in the Carter administration. He also served on the Science Advisory Board of the U.S. Environmental Protection Agency for seven years and is currently on the EPA Homeland Security Committee. Professor Viscusi is the founding editor of the Journal of Risk and Uncertainty, now housed at Vanderbilt. He is also the founding editor of the journal Foundations and Trends: Microeconomics. Dennis E.


pages: 219 words: 15,438

The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett, Lawrence A. Cunningham

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compound rate of return, corporate governance, Dissolution of the Soviet Union, diversified portfolio, dividend-yielding stocks, fixed income, index fund, invisible hand, large denomination, low cost carrier, oil shock, passive investing, price stability, Ronald Reagan, the market place, transaction costs, Yogi Berra, zero-coupon bond

Do you really expect the fees of this expert (the local "franchise-holder" in his or her specialty) to be reduced now that the top personal tax rate is being cut from 50% to 28%? Your joy at our conclusion that lower rates benefit a number of our operating businesses and investees should be severely tempered, however, by another of our convictions: scheduled 1988 tax rates, both individual and corporate, seem totally unrealistic to us. These rates will very likely bestow a fiscal problem on Washington that will prove incompatible with price stability. We believe, there- 202 CARDOZO LAW REVIEW [Vol. 19:1 fore, that ultimately-within, say, five years-either higher tax rates or higher inflation rates are almost certain to materialize. And it would not surprise us to see both. • Corporate capital gains tax rates have been increased from 28% to 34%, effective in 1987. This change will have an important adverse effect on Berkshire because we expect much of our gain in business value in the future, as in the past, to arise from capital gains.


pages: 364 words: 101,193

Six Degrees: Our Future on a Hotter Planet by Mark Lynas

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accounting loophole / creative accounting, Climatic Research Unit, Deng Xiaoping, failed state, ice-free Arctic, nuclear winter, oil shale / tar sands, peak oil, price stability, South China Sea, supervolcano

Of course, famines already occur in today's world, even though there is enough food for everyone in a global sense. As aid agencies frequently complain, the issue is poverty, not just drought. But if one thing is certain, it is that famines are more likely in a world with less food to go round overall. With increasing competition over diminishing harvests, prices will soar on world markets during lean years. Food price stability in the two-degree world will depend on northern land areas being opened up to new crops rapidly enough to replace yield losses in hotter, drier areas to the south. With assiduous planning and adaptation, the world need not tip into serious food deficit. However, if the temperature rises past two degrees, preventing mass starvation will be increasingly difficult, as future chapters will show.


pages: 339 words: 88,732

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson, Andrew McAfee

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, access to a mobile phone, additive manufacturing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, American Society of Civil Engineers: Report Card, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, barriers to entry, Baxter: Rethink Robotics, British Empire, business intelligence, business process, call centre, clean water, combinatorial explosion, computer age, computer vision, congestion charging, corporate governance, crowdsourcing, David Ricardo: comparative advantage, employer provided health coverage, en.wikipedia.org, Erik Brynjolfsson, factory automation, falling living standards, Filter Bubble, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, full employment, game design, global village, happiness index / gross national happiness, illegal immigration, immigration reform, income inequality, income per capita, indoor plumbing, industrial robot, informal economy, inventory management, James Watt: steam engine, Jeff Bezos, jimmy wales, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Khan Academy, knowledge worker, Kodak vs Instagram, law of one price, low skilled workers, Lyft, Mahatma Gandhi, manufacturing employment, Mark Zuckerberg, Mars Rover, means of production, Narrative Science, Nate Silver, natural language processing, Network effects, new economy, New Urbanism, Nicholas Carr, Occupy movement, oil shale / tar sands, oil shock, pattern recognition, payday loans, price stability, Productivity paradox, profit maximization, Ralph Nader, Ray Kurzweil, recommendation engine, Report Card for America’s Infrastructure, Robert Gordon, Rodney Brooks, Ronald Reagan, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Simon Kuznets, six sigma, Skype, software patent, sovereign wealth fund, speech recognition, statistical model, Steve Jobs, Steven Pinker, Stuxnet, supply-chain management, TaskRabbit, technological singularity, telepresence, The Bell Curve by Richard Herrnstein and Charles Murray, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Tyler Cowen: Great Stagnation, Vernor Vinge, Watson beat the top human players on Jeopardy!, winner-take-all economy, Y2K

The first mobile phones bought and sold in the developing world were capable of little more than voice calls and text messages, yet even these simple devices could make a significant difference. Between 1997 and 2001 the economist Robert Jensen studied a set of coastal villages in Kerala, India, where fishing was the main industry.10 Jensen gathered data both before and after mobile phone service was introduced, and the changes he documented are remarkable. Fish prices stabilized immediately after phones were introduced, and even though these prices dropped on average, fishermen’s profits actually increased because they were able to eliminate the waste that occurred when they took their fish to markets that already had enough supply for the day. The overall economic well-being of both buyers and sellers improved, and Jensen was able to tie these gains directly to the phones themselves.


pages: 357 words: 99,684

Why It's Still Kicking Off Everywhere: The New Global Revolutions by Paul Mason

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back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, capital controls, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, low skilled workers, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional

In 1848, inflation correlated closely with revolt: the higher the cost of bread, the more revolutionary the outcome. In 2011, Tunisia, Yemen and Lebanon experienced price hikes which, in 1848, would have been prompted expectations of violent revolution; Egypt, Jordan and Palestine, meanwhile, were off the scale. Saudi Arabia stood exactly where England had stood as Europe raged 150 years ago: with food price stability and minimal unrest.21 Commodity price inflation, as all global agencies agree, hammers the poor. It turns the ‘acceptable’ poverty of $2 a day into utter destitution. And the problem is that it has become endemic. Every economic recovery now sparks a commodity boom, mainly because of structural factors which currency manipulation by rich countries only exacerbates: population growth, rising demand in India and China, resource scarcity and the impact of climate change.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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

The assumption was that if banks had a sufficient cushion of capital – the funds originally advanced by shareholders and subsequently enhanced by the bank’s retained profits – there would be no problem with liquidity. That might be true, but given that the banks had run down their capital to a negligible sliver, the assumption was both heroic and irrelevant. A growing discussion is taking place, too, about the case for leaning against the wind – that is, raising interest rates more than would be necessary to maintain price stability in the short and medium term in order to curb a dangerous increase in banks’ risk appetite or to dampen overheating asset prices. As for waving sticks and spitting into the wind, the points show a realistic appreciation of the difficulty of influencing markets. This is a salutary warning for central bankers in the aftermath of the crisis, since they are now committed to macro-prudential policymaking, which entails imposing counter-cyclical increases and decreases in banks’ capital buffers, as well as other forms of intervention such as quantitative controls on lending.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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

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. Governments did not have to devote time and resources to defending a particular currency level. They could give other economic issues, like unemployment and growth, more priority.


pages: 391 words: 102,301

Zero-Sum Future: American Power in an Age of Anxiety by Gideon Rachman

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Asian financial crisis, bank run, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Bretton Woods, BRICs, capital controls, centre right, clean water, collapse of Lehman Brothers, colonial rule, currency manipulation / currency intervention, deindustrialization, Deng Xiaoping, Doha Development Round, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, global reserve currency, greed is good, Hernando de Soto, illegal immigration, income inequality, invisible hand, Jeff Bezos, laissez-faire capitalism, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, offshore financial centre, open borders, open economy, Peace of Westphalia, peak oil, pension reform, Plutocrats, plutocrats, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, trickle-down economics, Washington Consensus, Winter of Discontent

In 2009, Christopher DeMuth, head of the American Enterprise Institute, a leading conservative think tank in Washington, identified the restraint of domestic spending as one of four key elements of Reaganism: the others were tax cuts, “stable money” (low inflation), and deregulation.7 Indeed, Reagan’s deregulation of price in the oil and gas industry on his first day in office was just the start. On the same day he imposed a hiring freeze on all federal agencies. The following day he abolished the Council on Wage and Price Stability.8 The deregulatory impulse was also controversially extended to environmental legislation and to the financial sector.9 The new president also quickly took on the unions. In the summer of 1981, about seven months into his first term, Reagan clashed with air-traffic controllers in a dispute that hugely disrupted air travel across the country. (I remember it well, since I was stranded at JFK Airport as an eighteen-year-old student trying to get back to Britain for my first term at university.)


pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, American Society of Civil Engineers: Report Card, asset-backed security, Bakken shale, banking crisis, BRICs, British Empire, business process, business process outsourcing, call centre, Carmen Reinhart, clean water, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, Frederick Winslow Taylor, high net worth, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop, illegal immigration, index fund, intermodal, inventory management, Kenneth Rogoff, labor-force participation, LNG terminal, low skilled workers, Mark Zuckerberg, Martin Wolf, Maui Hawaii, McMansion, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, Plutocrats, plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, Silicon Valley, Silicon Valley startup, six sigma, Skype, sovereign wealth fund, Steve Jobs, superstar cities, the High Line, transit-oriented development, Wall-E, Yogi Berra, Zipcar

In 2011 the volume of existing home sales rose for the first time since 2005, rising to 4.26 million from 4.19 million in 2010. While prices continued to fall, inventory came down, from 4.04 million in July 2007 to 2.38 million in December 2011. That constituted a 6.2-month supply at the prevailing sales rate.1 These levels aren’t healthy by a long shot, but they’re much closer to healthy and represent a vast improvement. Price stability and appreciation don’t just stop the pain; they add to wealth and improve banks’ balance sheets. Keep in mind that this improvement has come in the absence of any serious change in government policy. There will come a day when housing isn’t a drag. In fact, that day may be here. In the third and fourth quarters of 2011 residential investment contributed 0.03 and 0.25 percentage points to the rate of economic growth, respectively.


pages: 417 words: 109,367

The End of Doom: Environmental Renewal in the Twenty-First Century by Ronald Bailey

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3D printing, additive manufacturing, agricultural Revolution, Albert Einstein, autonomous vehicles, Cass Sunstein, Climatic Research Unit, Commodity Super-Cycle, conceptual framework, corporate governance, credit crunch, David Attenborough, decarbonisation, dematerialisation, demographic transition, diversified portfolio, double helix, energy security, failed state, financial independence, Gary Taubes, hydraulic fracturing, income inequality, invisible hand, knowledge economy, meta analysis, meta-analysis, Naomi Klein, oil shale / tar sands, oil shock, pattern recognition, peak oil, phenotype, planetary scale, price stability, profit motive, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, Stewart Brand, Tesla Model S, trade liberalization, University of East Anglia, uranium enrichment, women in the workforce, yield curve

More generally, having a defined tax rate makes it easy for firms in developed and developing economies alike to predict the future impact of climate policy on their bottom line—something that is considerably harder to do when the government is handing out permits every year. A tax avoids the messy and contentious process of allocating allowances to countries internationally and among companies domestically. For example, nations could negotiate a much more transparent treaty than the Kyoto Protocol and establish a system of globally harmonized domestic carbon taxes. Harmonized taxes offer relative price stability, and taxes on carbon emissions can be raised gradually and predictably over time so that governments, industries, and consumers can all see what the price of carbon-based fuels will be over future decades and can make investment and purchase decisions accordingly. Nordhaus further argues that carbon markets are “much more susceptible to corruption” than are tax schemes. “An emissions-trading system creates valuable tradable assets in the form of tradable emissions permits and allocates these to different countries,” writes Nordhaus.


pages: 326 words: 103,170

The Seventh Sense: Power, Fortune, and Survival in the Age of Networks by Joshua Cooper Ramo

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Airbnb, Albert Einstein, algorithmic trading, barriers to entry, Berlin Wall, bitcoin, British Empire, cloud computing, crowdsourcing, Danny Hillis, defense in depth, Deng Xiaoping, Edward Snowden, Fall of the Berlin Wall, Firefox, Google Chrome, income inequality, Isaac Newton, Jeff Bezos, job automation, market bubble, Menlo Park, natural language processing, Network effects, Norbert Wiener, Oculus Rift, packet switching, Paul Graham, price stability, quantitative easing, RAND corporation, recommendation engine, Republic of Letters, Richard Feynman, Richard Feynman, road to serfdom, Sand Hill Road, secular stagnation, self-driving car, Silicon Valley, Skype, Snapchat, social web, sovereign wealth fund, Steve Jobs, Steve Wozniak, Stewart Brand, Stuxnet, superintelligent machines, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, too big to fail, Vernor Vinge, zero day

They had not helped the middle class as much as needed, and they had flooded the market with supply and then finally distorted prices to an unrecognizable level. In a speech in 2014, Larry Summers, the former Treasury secretary and perhaps America’s most pedigreed economist, summed up the problem this way: “I think it is fair to say that six years ago, macroeconomics was primarily about the use of monetary policy to reduce the already small amplitude of fluctuations about a given trend, while maintaining price stability.” In other words, the main preoccupation of figures like Bernanke and Summers and Yellen was trying to keep lemonade prices within a manageable bound. But by 2014, that had changed. “Today, we wish for the problem of minimizing fluctuations around a satisfactory trend,” Summers said. His real concern, he vouchsafed in that speech, was that the system had undergone what is known as hysteresis: a term for a moment when something breaks and can never be put back together again.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

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asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, merger arbitrage, moral hazard, mortgage debt, paper trading, passive investing, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra

Strauss gave Rubin some “early political advice” that he remembered: “Let me tell you about Washington, Bob, I could call President Carter once a week and just say anything—even talk about the weather. After that, I could walk around town telling people that I had just been talking to the President today and, while it would mean nothing substantively, it would have meaning in Washington. That’s just the way this city works.” As the Carter administration was nearing its end, Rubin got a payoff of sorts in the form of a job offer at the White House to head up the Council on Wage and Price Stability, which was part of the effort to bring inflation under control. Rubin explored the opportunity. “Few notions were more appealing to me than seeing the world from inside the White House,” he wrote. He went down to Washington, met with the relevant people, but decided against taking the job. “I was left with the impression that that job wasn’t positioned to work, in terms of either staffing and authority within the administration or its conceptual approach,” he continued.

Gerald Corzine, Joanne Dougherty, 14.1, 14.2 Corzine, Jon, 12.1, 12.2, 13.1, 14.1, 15.1, 17.1, 18.1 background of double role of early mistakes at Goldman Sachs of as Friedman’s successor, 14.1, 14.2, 14.3 goals and aspirations of health problems of loyalty to LTCM deal and, 16.1, 16.2, 16.3, 16.4, 16.5 Maxwell lawsuit and mergers desired by, 16.1, 16.2 and move to go public, 14.1, 15.1, 15.2, 15.3, 15.4, 16.1, 16.2, 16.3, 16.4, 16.5, 17.1 1994 losses and, 14.1, 14.2, 14.3, 15.1, 15.2, 15.3, 16.1 “palace coup” against, 16.1, 17.1, 17.2 Paulson’s relationship with, 14.1, 14.2, 15.1, 16.1, 16.2, 16.3, 16.4, 16.5, 16.6, 16.7, 16.8, 17.1 positive thinking of, 15.1, 15.2 Coster, F. Donald cough syrup Coulson, Frank Council of Foreign Relations Council on Wage and Price Stability Countrywide, 18.1, 18.2, 18.3, 22.1 Coyne, Herbert, 9.1, 9.2 Coyne, Marty Cramer, James, prl.1, 10.1, 17.1, 24.1, 24.2 C. R. Anthony, 7.1, 7.2 credit-card receivables, 18.1, 18.2 credit-default swaps (CDSs), 18.1, 18.2, 19.1, 19.2, 20.1, 20.2, 20.3, 21.1, 21.2, 23.1, 23.2, 23.3 Credit Suisse Group, 12.1, 20.1 credit support agreement Credit Support Annex CS-1, 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7 Cuckney, John Cullman family Cunningham, Bill Cunningham, Jeffrey Cunningham, Mary Curran, Paul, 11.1, 11.2 currencies, 16.1, 16.2 see also specific currencies Daily Mirror, 14.1 Daily Word, 5.1 Dauphinot, Clarence Davies, Gavyn Davies, Joseph Davilman, Andrew, 21.1, 23.1 Davis, Charles “Chuck” Davis Polk & Wardell Day, H.


pages: 586 words: 159,901

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

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

While there may be no neat mathematical trigger point when strength translates into inflation, tight markets — whether measured by the percentage of total factory capacity that's in use, or the percentage of the workforce unemployed by the (inadequate and misleading) official measure, or the ratio of actual GDP to its long-term trend growth rate — tend to lead to a higher inflation rate. The reverse is also true, which is why the long and deep recession of the early 1980s — much longer and deeper than policymakers had tolerated in the 1970s — "broke the back" of inflation, as the cliche runs. It also broke more than a few workers, but to Wall Street, that was mere collateral damage in a holy war for price stability. Liberals and populists often search for potential allies among industrialists, reasoning that even if financial interests suffer in a boom, firms that trade in real, rather than fictitious, products would thrive when growth is strong. In general, industrialists are less than sympathetic to these arguments. Employers in any industry like slack in the labor market; it makes for a pliant workforce, one unlikely to make demands or resist speedups.


pages: 415 words: 103,231

Gusher of Lies: The Dangerous Delusions of Energy Independence by Robert Bryce

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Berlin Wall, Colonization of Mars, decarbonisation, en.wikipedia.org, energy security, energy transition, financial independence, flex fuel, hydrogen economy, Just-in-time delivery, new economy, oil shale / tar sands, oil shock, peak oil, price stability, rolodex, Ronald Reagan, Silicon Valley, Stewart Brand, Thomas L Friedman, Whole Earth Catalog, X Prize, Yom Kippur War

Available: http://www.eia.doe.gov/emeu/cabs/Saudia_Arabia/Oil.html. 50 GUSHER OF LIES countries, including Venezuela, have agitated for higher prices, the Saudis have generally sought to stabilize global oil prices at levels that are good for both consumers and producers. This fact was made clear by Saudi oil minister Ali al-Naimi in 2006 during a speech in Washington, when he said: Energy security cannot be maintained when prices are at extremes— too low or too high. Truly sustainable energy security for consumers and producers requires three conditions—price stability, supply and demand reliability, and affordability. These are the three pillars of sustainable energy security. Affordability applies to both consumers and producers. If producers are forced to sell their energy resources at a low price, they eventually cannot afford to make the capital investments required to maximize long-term capacity. On the other hand, producers undermine their own security when their resources are not affordable to consumers.


pages: 574 words: 164,509

Superintelligence: Paths, Dangers, Strategies by Nick Bostrom

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agricultural Revolution, AI winter, Albert Einstein, algorithmic trading, anthropic principle, anti-communist, artificial general intelligence, autonomous vehicles, barriers to entry, bioinformatics, brain emulation, cloud computing, combinatorial explosion, computer vision, cosmological constant, dark matter, DARPA: Urban Challenge, data acquisition, delayed gratification, demographic transition, Douglas Hofstadter, Drosophila, Elon Musk, en.wikipedia.org, epigenetics, fear of failure, Flash crash, Flynn Effect, friendly AI, Gödel, Escher, Bach, income inequality, industrial robot, informal economy, information retrieval, interchangeable parts, iterative process, job automation, John von Neumann, knowledge worker, Menlo Park, meta analysis, meta-analysis, mutually assured destruction, Nash equilibrium, Netflix Prize, new economy, Norbert Wiener, NP-complete, nuclear winter, optical character recognition, pattern recognition, performance metric, phenotype, prediction markets, price stability, principal–agent problem, race to the bottom, random walk, Ray Kurzweil, recommendation engine, reversible computing, social graph, speech recognition, Stanislav Petrov, statistical model, stem cell, Stephen Hawking, strong AI, superintelligent machines, supervolcano, technological singularity, technoutopianism, The Coming Technological Singularity, The Nature of the Firm, Thomas Kuhn: the structure of scientific revolutions, transaction costs, Turing machine, Vernor Vinge, Watson beat the top human players on Jeopardy!, World Values Survey

With demand from fundamental buyers slacking, the algorithmic traders started to sell the E-Minis primarily to other algorithmic traders, which in turn passed them on to other algorithmic traders, creating a “hot potato” effect driving up trading volume—this being interpreted by the sell algorithm as an indicator of high liquidity, prompting it to increase the rate at which it was putting E-Mini contracts on the market, pushing the downward spiral. At some point, the high-frequency traders started withdrawing from the market, drying up liquidity while prices continued to fall. At 2:45 p.m., trading on the E-Mini was halted by an automatic circuit breaker, the exchange’s stop logic functionality. When trading was restarted, a mere five seconds later, prices stabilized and soon began to recover most of the losses. But for a while, at the trough of the crisis, a trillion dollars had been wiped off the market, and spillover effects had led to a substantial number of trades in individual securities being executed at “absurd” prices, such as one cent or 100,000 dollars. After the market closed for the day, representatives of the exchanges met with regulators and decided to break all trades that had been executed at prices 60% or more away from their pre-crisis levels (deeming such transactions “clearly erroneous” and thus subject to post facto cancellation under existing trade rules).70 The retelling here of this episode is a digression because the computer programs involved in the Flash Crash were not particularly intelligent or sophisticated, and the kind of threat they created is fundamentally different from the concerns we shall raise later in this book in relation to the prospect of machine superintelligence.


pages: 386 words: 122,595

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

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

Yet economists do agree that effective monetary policy matters; the Fed must feed just the right amount of credit to the economy to keep it growing steadily. Getting it wrong can have disastrous consequences. Robert Mundell, winner of the 1999 Nobel Prize in Economics, has argued that bungled monetary policy in the 1920s and 1930s caused chronic deflation that destabilized the world. He has argued, “Had the price of gold been raised in the late 1920s, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution, and no World War II.”1 The job would not appear to be that complicated. If the Fed can make the economy grow faster by lowering interest rates, then presumably lower interest rates are always better. Indeed, why should there be any limit to the rate at which the economy can grow? If we begin to spend more freely when rates are cut from 7 percent to 5 percent, why stop there?


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

In an ideal world, Ben Bernanke would give a speech acknowledging the Fed’s failures and blunders in which he was complicit, and pledge to return the Fed to its traditional role, which a former Fed chairman, William McChesney Martin, famously defined as “taking away the punch bowl just when the party gets going.” This is unlikely to happen, and change may have to be imposed on the Fed policymakers. At the moment, their so-called dual mandate is to ensure “maximum sustainable employment and price stability.” Morgan Stanley’s Stephen Roach has suggested that Congress alter the Fed’s mandate to include the preservation of financial stability. The addition of a third mandate would mesh with the Fed’s new regulatory role as the primary monitor of systemic risk, and it also would force the central bank’s governors and staff to think more critically about the financial system and its role in the broader economy.


pages: 401 words: 112,784

Hard Times: The Divisive Toll of the Economic Slump by Tom Clark, Anthony Heath

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Affordable Care Act / Obamacare, British Empire, Carmen Reinhart, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, deindustrialization, Etonian, eurozone crisis, falling living standards, full employment, Gini coefficient, hiring and firing, income inequality, interest rate swap, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, low skilled workers, mortgage debt, new economy, Northern Rock, obamacare, oil shock, Plutocrats, plutocrats, price stability, quantitative easing, Ronald Reagan, science of happiness, statistical model, The Wealth of Nations by Adam Smith, unconventional monetary instruments, War on Poverty, We are the 99%, women in the workforce, working poor

Certainly, that has sometimes happened in hard times past – and in the much more recent past than the 1930s. When recession hit the US at the start of the 1980s, the immediate impulse was, on balance, for collectivism in social policy. That is not how we remember things, partly because after the inflationary 1970s came a period of conservative ascendency in macroeconomics – high interest rates and consequent unemployment came to be regarded as an acceptable levy to pay for price stability, a big break from the post-war years. We remember the early 1980s as a right-wing time, too, because a deeply conservative president, Ronald Reagan, went on to secure re-election in the economic upswing. But a question that was repeatedly asked in the General Social Survey (GSS) – recorded in the graph opposite – shows that the proportion of Americans who supported redistributing (by taxing the wealthy and assisting the poor) rose from 43% in 1980 to 49% in 1984.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, Long Term Capital Management, moral hazard, mortgage debt, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

The first thing you’d want to do is tweak those inflation figures, so that inflation looked stable whereas in fact is was galloping away at 10% or more a year. You’d want to cover your manipulation in plenty of complicated talk about statistics, but the talk wouldn’t signify a string bean. The second thing you’d want to do is to start churning out new dollar bills. You’d print like crazy. You wouldn’t talk about trashing the currency, of course; you’d talk about price stability, about quantitative easing, about Operation Twist and bringing down the long end of the yield curve. Ideally, too, you’d have someone in charge who really believed in the value of what he was doing, someone who didn’t really live in the real world. Maybe a professor of something. A guy who had studied a period of history from eighty years ago and who’s been yearning all his life to save the world using techniques which might or might not have worked back then, but which certainly don’t make sense in the present day.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, high net worth, income inequality, investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, means of production, moral hazard, mortgage debt, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Plutocrats, plutocrats, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, Winter of Discontent, working poor, Yom Kippur War

But low or near-zero real interest rates are good news for borrowers, and good for the economy because they minimise the deadweight costs. Not surprisingly, powerful rentier interests lean on governments to prioritise limiting inflation. Of course, since borrowers are also consumers, unless their incomes keep abreast of inflation, they lose out from inflation on the prices of consumer goods. The neoliberal governments of the 1980s and 1990s covertly supported rentiers by publicly supporting consumers’ interests in price stability. But there’s one kind of inflation that rentiers love: asset inflation; this is neoliberalism’s dirty secret. It redistributes wealth from those who lack assets and have to rely on earned income to those who have them and can use them to get unearned income. Value-skimming Rent, interest, profit from production and capital gains from asset inflation are not the only sources of unearned income.


pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

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Asperger Syndrome, bank run, Basel III, call centre, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Exxon Valdez, factory automation, full employment, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, income inequality, jimmy wales, job automation, late fees, London Whale, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, price stability, Ray Kurzweil, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Steve Jobs, Stuxnet, the payments system, too big to fail, Vanguard fund, wage slave, Y2K

On the mountainous Gargano peninsula in Italy’s rustic southeast, he was struck by locals’ use of gettoni, or tokens, in pay phones—because the value of lira coins was falling so fast that phone booths couldn’t keep pace. By his late teens, Mr. Weidmann said recently, he had “inhaled” the Bundesbank view: Central banks exist to defend a currency against politicians’ cravings for easy money. Germany’s obsession with price stability is often said to stem from 1920s hyperinflation under the Weimar Republic. But for modern Germany’s economic elite, it is rooted in a more recent experience: the postwar success of West Germany. In Germans’ collective memory, the Bundesbank’s refusal to make politicians’ life easy by printing money was critical. Though the Bundesbank briefly bought German bonds amid a recession in 1975, it soon stopped, and West Germany emerged with less inflation, debt, and unemployment than most other Western countries.


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

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affirmative action, Amazon Mechanical Turk, banks create money, big-box store, Bretton Woods, car-free, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, new economy, New Urbanism, Norbert Wiener, peak oil, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional

Getting out too late could mean owing more on a house than it was currently worth. Thanks to the way the federal government promoted home ownership, suburbanites learned to become more racist as a means of financial survival. It wasn’t enough just to turn races against one another for the sake of a housing market tilted toward real-estate speculators. The very design of the neighborhood had to incorporate this bias toward segregation and isolation for the sake of price stability. These practices were fully institutionalized by 1934, when the Federal Housing Administration was set up, ostensibly to jump-start the construction industry and put people back to work. The sole strategy of the FHA, however, was to insure long-term mortgages: a bank would still make the loan, but the FHA would back it up if the borrower defaulted—much as the Fed is now insuring the “liquidity” of failing predatory mortgage lenders.


pages: 387 words: 112,868

Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper

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4chan, Airbnb, Apple's 1984 Super Bowl advert, banking crisis, bitcoin, blockchain, Burning Man, capital controls, Colonization of Mars, crowdsourcing, cryptocurrency, David Graeber, Edward Snowden, Elon Musk, Extropian, fiat currency, Fractional reserve banking, Jeff Bezos, Julian Assange, Kickstarter, life extension, litecoin, lone genius, M-Pesa, Mark Zuckerberg, Occupy movement, peer-to-peer lending, Peter Thiel, Ponzi scheme, price stability, Satoshi Nakamoto, Silicon Valley, Simon Singh, Skype, slashdot, smart contracts, Startup school, stealth mode startup, the payments system, transaction costs, tulip mania, WikiLeaks

Regardless of what the Lemon board wanted to do, Wences said, “I would advise you to invest as much money as you can stomach losing.” He told O’Brien to buy coins at Mt. Gox, but to move the coins off Mt. Gox as soon as the order went through. “It is either going to be worth zero or worth five thousand times what it is today.” IN THE DAYS that followed, Mt. Gox reopened for business and the price stabilized around $100. But many believed that the recent price crash proved the flaws in the whole concept. Felix Salmon, a financial columnist at Reuters, wrote a widely circulated article pointing out that the volatile price of Bitcoin made it nearly impossible to use for its most basic purpose, as currency. If consumers didn’t know whether a Bitcoin would be worth $10 or $100 tomorrow they would be unlikely to spend their coins and merchants would similarly be unlikely to accept them.


pages: 444 words: 151,136

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

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Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, capital asset pricing model, 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, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, moral hazard, mortgage tax deduction, naked short selling, 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, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

In the medieval era families such as the Riccis and the Medicis extended credit to customers and accepted an additional fee for the time value of money, but the paper this created was not expanded beyond the value of goods sold. Such credit was non-inflationary, and it also benefitted commerce through the substitution of a less bulky medium of exchange.3 The Gold Standard What in fact is the classical notion of a gold standard, and how well did we adhere to that ideal? The classical gold standard holds considerable appeal because it produced an extraordinary interlude of per capita income growth and price stability in the 19th century. However, the gold standard has been honored more in the breach than the observance historically, even in that hallowed time. Under a classical gold standard countries hold stocks of gold in reserve, and they are ready to see these exported to settle up surpluses of paper foreign currency that gets accumulated through trade imbalances. There need not be a central bank, per se, but a government must stand prepared to buy or sell gold to maintain a steady value of its currency.4 In the United States, banks cartelized to temporarily issue clearinghouse paper in times of panic; central banks existed in Europe that were lenders of last resort.


pages: 497 words: 153,755

The Power of Gold: The History of an Obsession by Peter L. Bernstein

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Albert Einstein, Atahualpa, Bretton Woods, British Empire, California gold rush, central bank independence, double entry bookkeeping, Edward Glaeser, falling living standards, financial innovation, floating exchange rates, Francisco Pizarro, German hyperinflation, Hernando de Soto, Isaac Newton, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, large denomination, liquidity trap, money: store of value / unit of account / medium of exchange, price stability, profit motive, random walk, rising living standards, Ronald Reagan, seigniorage, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

They therefore recommended that the central bank continue to hold nearly half of its total gold stock and that "the separated portion of gold is to be sold in small steps."27 Despite this bow to potential popular anxieties, the entire spirit of the report rests in its unquestioning confidence that the forecasting and managerial skills of the directors and staff of the central bank would perform a better job than obeisance to the gold stock in "the priority of maintaining price stability." This view was by no means revolutionary doctrine in 1997-on the contrary, it represented mainstream thinking. Nevertheless, this was the Swiss, not the British or the Americans or some minor-league country. The Swiss were legendary in their attachment to gold and in their aversion to holding currencies of countries whose devotion to the constant struggle to keep inflation in check was less passionate than theirs.

Year 501 by Noam Chomsky

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anti-communist, Bartolomé de las Casas, Berlin Wall, Bolshevik threat, Bretton Woods, British Empire, capital controls, colonial rule, corporate governance, cuban missile crisis, declining real wages, Deng Xiaoping, deskilling, Dissolution of the Soviet Union, European colonialism, experimental subject, Fall of the Berlin Wall, Howard Zinn, invisible hand, land reform, land tenure, means of production, Monroe Doctrine, non-tariff barriers, offshore financial centre, Plutocrats, plutocrats, price stability, Ralph Nader, Ralph Waldo Emerson, RAND corporation, Ronald Reagan, Simon Kuznets, strikebreaker, structural adjustment programs, the scientific method, The Wealth of Nations by Adam Smith, trade liberalization, trickle-down economics, union organizing, War on Poverty, working poor

In the capital, Melvin Burke writes, “street vendors and beggars contrast with the fancy boutiques, posh hotels and Mercedes-Benzes.” Real per capita GNP is three-fourths what it was in 1980, and foreign debt absorbs 30 percent of export earnings. As a reward for this economic miracle, the IMF, Interamerican Development Bank, and the G-7 Paris Club offered Bolivia extensive financial assistance, including secret payments to government ministers. The miracle that is so admired is that prices stabilized and exports are booming. About two-thirds of export earnings are now derived from coca production and trade, Burke estimates. The drug money explains the stabilization of currency and price levels, he concludes. About 80 percent of the $3 billion in annual drug profits is spent and banked abroad, mainly in the US, providing a lift to the US economy as well. This profitable export business “obviously serves the interests of the new illegitimate bourgeoisie and the ‘narco-generals’ of Bolivia,” Burke continues, and “also apparently serves the United States national interest, inasmuch as money laundering has not only been tolerated by the United States but has, in fact, been encouraged.”


pages: 566 words: 163,322

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

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

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. 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.


pages: 475 words: 155,554

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

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

Every few days Draghi would offer a rhetorical sacrifice at the Teutonic monetary altar. Yet he was doing something rather less in keeping with German sensibilities. After that meeting in December 2011, I asked him why he did not simply do what was standard practice in London and Washington and ‘print money’ by buying government debt on a massive scale? ‘We have a treaty,’ he replied, ‘and the treaty states what our primary mandate is, namely to maintain price stability. Also, the treaty prohibits monetary financing. I am old enough to remember that, when this treaty was written in the early 1990s, some of the countries around that table were actually doing what you suggest doing now, namely some of the central banks of these countries were financing the government expenditure of their governments through money creation, and the consequences were there for all of us to see.


pages: 527 words: 147,690