price stability

233 results back to index


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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

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

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

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: 436 words: 114,278

Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally

American energy revolution, Asian financial crisis, banking crisis, barriers to entry, Bretton Woods, collective bargaining, credit crunch, energy security, energy transition, housing crisis, hydraulic fracturing, index fund, Induced demand, interchangeable parts, invisible hand, joint-stock company, market clearing, market fundamentalism, moral hazard, North Sea oil, oil rush, oil shale / tar sands, oil shock, peak oil, price discrimination, price stability, sovereign wealth fund, transfer pricing

By the mid-1920s new crises loomed that would totally reshape the oil industry and usher in extensive supply regulation. 4 THE TEXAS ERA OF PRICE STABILITY U.S. Supply Controls and International Cartelization (1934–1972) In the late 1920s, domestic and global dynamics forced oil prices down. There were the new gushers in Texas and Oklahoma and a kerosene price war in India, an important market for refined Russian crude, became the site of an escalating contest between Royal Dutch Shell and Mobil1 that spread to American and British markets and forced all major marketing companies to reduce prices to maintain market share. These price busts set in motion a chain of events that by the early 1930s would result in the most aggressive system of supply regulation and cartelization ever seen—and usher in four decades of oil price stability the likes of which the world had never seen before or since.

Most historians and academics agree that the TRC and Seven Sisters achieved price stability by exercising market power—the ability to affect and sustain prices above levels that would obtain in purely competitive conditions—and that this stability allowed for an orderly and vast boom in global oil exploration, production, transportation, refining and marketing of oil. To exercise this power, suppliers must have a dominant position in the market. Between them, U.S. producers and concessions controlled by the Seven Sisters accounted for 95 percent of global crude production and 89 percent of proved reserves in 1948.152 Moreover, the Seven Sisters controlled about 57 percent of global refining capacity.153 While oilmen and oil states wanted to raise prices to support profits and investment, oil price stability was arguably a larger motivation.

But OPEC’s initial success in replicating the TRC’s role as supply regulator was not terribly promising. It depended on Saudi Arabia playing the swing producer role—which it abandoned spectacularly in 1985 and 1986, triggering a price collapse. Fortuitous supply cuts outside OPEC and stronger demand later in the decade enabled OPEC to enjoy relative price stability. The Gulf War further cemented Saudi Arabia’s primacy within OPEC. But the 1980s demonstrated that if the OPEC era was to achieve the goal of oil price stability producers and consumers craved, it would require either Saudi leadership or luck—or both. 8 OPEC MUDDLES THROUGH: 1991–2003 The first two decades of the OPEC Era were extraordinarily tumultuous and marked by price upheavals instead of stability. But the third decade would be different. Things were settling down into a less volatile “new normal” for OPEC and the oil market.


pages: 920 words: 233,102

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

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

Rather, it is that questions of purpose run deep in this field, placing a burden on elected legislators, especially if they seek to put policy beyond their own day-to-day reach (an issue we return to in chapter 11). Price Stability under Different Political Creeds Price stability, the traditional core purpose of central banking, is different. Although independent central banks are often seen as the embodiment of liberalism, or even neoliberalism, I want to argue that price stability can be seen as a legitimate goal for the state under both liberal and republican conceptions of politics and, subject to one qualification, under social democracy too. For liberals (progressive as well as conservative), the definition of price stability favored by former Fed chair Alan Greenspan seems to warrant its legitimacy: that it obtains when “economic agents no longer take account of the prospective change in the general price level in their economic decision-making.”44 That is almost the canonical liberal case for any measure or regime: that it helps to leave autonomous people (and businesses) free to pursue their private projects and well-being without interference (in this case from noise in the value of money).

For republicans, a means of embedding price stability should be attractive because it helps protect the people from the possibility of an arbitrary imposition of taxation through (unexpected) inflation. Republicans would want this to reflect the people’s wishes for stability as a collective good, rather than the outcome of a battle between competing interests. They would also desire an arrangement—an institution in the broad sense—that constrains the state from reneging on promises of price stability: insulation from domination by the state. On this view, price stability helps—is even necessary—to underpin the legitimacy of the state itself. Social democrats would probably pause to ask whether the state faced a trade-off between an objective of price stability and, broadly, jobs. Since the 1960s and 1970s, their view has probably shifted to accepting that if medium-term inflation expectations can remain anchored, the state has considerably more latitude to use monetary policy to stimulate demand to offset the effects on activity and jobs of adverse shocks to the economy’s cost structure (part IV).

Since the 1960s and 1970s, their view has probably shifted to accepting that if medium-term inflation expectations can remain anchored, the state has considerably more latitude to use monetary policy to stimulate demand to offset the effects on activity and jobs of adverse shocks to the economy’s cost structure (part IV). In other words, many social democrats would see the pursuit of price stability as a means to enabling state-controlled monetary policy to provide society with insurance against difficult macroeconomic circumstances, protecting people and communities from hardship. While insufficient on its own, they would not regard price stability as inconsistent with their values and goals; they would not be seeking price instability. In chapter 17, we will see that both they and liberal conservatives can look for more, but suffice to say now that all the great traditions of Western democracy can find something of value in price stability. The legitimacy challenge is whether we can get beyond a broadly settled purpose and frame a regime for delegation that meets our values in other respects.


pages: 358 words: 119,272

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Albert Einstein, asset allocation, banking crisis, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, floating exchange rates, Fractional reserve banking, full employment, hindsight bias, Kickstarter, Long Term Capital Management, market bubble, mortgage tax deduction, Myron Scholes, new economy, oil shock, price stability, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

In both periods, evidence of the pickup in demand, against a background of falling prices, became noticeable first in higher-quality, higher-priced goods. However, the most striking similarity in the two periods is that a positive chain of events began once evidence of price stability returned to the commodity markets. It is these price trends, evident from the headlines of the day, which provided the most accurate indicator that the bear market in equities was coming to an end. Price stability and the bear ‘Look, Bill, at that gorgeous black crepe. It’s only twelve dollars. Clothes are dirt cheap now.’ James T. Farrell, Judgement Day Signs of price stability, as in 1921, coincided with the bottom of the bear market in 1932. As in 1921, growing stability in selected commodity prices broadened to include more commodities and finally reached the wholesale price index.

An important indicator of the 1921, 1932 and 1949 bear market bottoms was the first evidence of increased demand for commodities appearing at lower prices. In 1949 as in 1921 and 1932 this provided a clear indication that deflation was ending. As it had been deflation that was crushing corporate earnings, it is not surprising that the equity market responded so positively to the first evidence of price stability. The rise in demand and prices happened at different times for different goods and commodities. In 1949, as in 1921 and 1932, a return of general price stability coincided with the end of the bear market in equities. As in 1921 and 1932, spreading demand for and price stability of selected commodities augured well for general price stabilisation. In 1949, as in 1921 and 1932, low levels of inventory in the system suggested that any price rises might be sustainable. It seems the tendency to overstock can impact even those industries with more predictable demand characteristics, as the Wall Street Journal reported on 19 May.

In such periods of price disturbance, there is great uncertainty as to both the level of future corporate earnings and the price of the key alternate low-risk asset - government bonds. This in turn leads to a decline in equity valuations. We have seen that all four of our bear-market bottoms occurred during economic recession. We have also seen that a return of price stability, following a period of deflation, signals the bottom of the bear market in equities. In particular, stabilising commodity prices augur more general price stability ahead and signal the rebound in equity prices. Of all the commodities, the change in the trend of the price of copper has been a particularly accurate signal of better equity prices. In assessing whether price stability is sustainable, investors should look for low inventory levels, rising demand for products at lower prices, and whether producers have been selling below cost. We have seen that a sell-off in government bonds accompanies at least part of the bear market in equities.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

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

Achieving price stability would be the only goal of the ECB. Unlike the Fed, which famously had a “dual mandate” of fostering both price stability and “maximum sustainable employment,” the ECB would not act specifically to improve employment prospects. The ECB’s focus on price stability was less controversial than the simple fiscal rules were. Some prominent voices, however, did object. Franco Modigliani, an MIT economics professor and Nobel laureate, along with his colleague and fellow Nobel laureate Robert Solow, warned that the ECB’s mandate would make it focus obsessively on keeping inflation low. Interest rates, therefore, would be too high. This, they said, was a problem because European unemployment rates were worryingly high, and a monetary policy that overemphasized price stability would make the unemployment problem worse.

Was the divergence the result of differences in the mandates—​ the objectives—​that the two central banks were set up to fulfill? The Fed had a dual mandate: to support employment and to maintain price stability.30 In contrast, the ECB’s only objective was to maintain price stability. However, these mandate differences do not explain why the Fed and the ECB went in opposite directions.31 The ECB was required to achieve price stability over the “medium term,” over a two-​year period during which slowing activity was likely to lower the inflation rate. Trying to bring inflation down instantly could only choke the economy and cause an unnecessarily painful economic downturn. In practice, therefore, central banks with a price stability objective act to counter recessions in the same way as the dual mandate Fed does. Even if inflation does rise temporarily in the effort to revive the after the bust, the denial 199 5 4 3 2 1 0 –1 –2 Jun 2007 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 United States Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Euro Area Figure 5.4a.

Nevertheless, the budget rule got locked in, periodically tweaked through administrative changes, but shielded by a protective stability ideology. The view was that even a bad rule is better than no rule. The ECB, set up to conduct the single monetary policy, reinforced the stability ideology through its commitment to price stability. Two Nobel Laureates in economics, Franco Modigliani and Robert Solow, warned that excessive commitment to price stability would restrain output growth and, hence, would raise the eurozone’s unemployment rate. Moreover, like the budget rule, price stability when pursued unthinkingly, can—​as it did during the eurozone’s financial crisis—​become a source of instability. But the ECB’s stability ideology is even more insulated from criticism than the budget rule, because the ECB is accountable to no one. Germans insisted on this, believing that otherwise governments would try to bend ECB policy in their own favor.


pages: 464 words: 139,088

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

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

In the twenty-five years before the Bank of England adopted an inflation target in 1992, prices rose by over 750 per cent, more than over the previous two hundred and fifty years.12 Inflation was simply taken for granted. Price stability seemed an unlikely state of affairs. Alan Greenspan, former Chairman of the Fed, defined price stability as when ‘inflation is so low and stable over time that it does not materially enter into the decisions of households and firms’.13 Alan Blinder, the Princeton economist who was Greenspan’s deputy at the Federal Reserve Board, put it even more clearly. Price stability, he said, was ‘when ordinary people stop talking and worrying about inflation’.14 In recent years, we have started to take price stability for granted; so much so that some people have become exercised about the possibility of deflation – when prices fall. Deflation is just as damaging as inflation.

The first is to ensure that in good times the amount of money grows at a rate sufficient to maintain broad stability of the value of money, and the second is to ensure that in bad times the amount of money grows at a rate sufficient to provide the liquidity – a reserve of future purchasing power – required to meet unpredictable swings in the demand for it by the private sector (see Chapters 2 and 3 respectively). Those two functions are rather simple to state, if hard to carry out. They correspond to the twin objectives of price stability and the provision of liquidity by a ‘lender of last resort’. Price stability – inflation targeting as a coping strategy Eighteenth-century thinkers, such as David Hume and Adam Smith, understood the relationship between the amount of money in circulation and the prices at which goods and services were bought and sold: ‘if we consider any kingdom by itself, it is evident, that the greater or less plenty of money is of no consequence; since the prices of commodities are always proportioned to the plenty of money’.11 In the long run, more money means higher prices.

So how can we design an institution to create the reasonable expectation that money will retain its value? By tying the currency to the mast of gold it seemed that price stability over a long period was attainable, as indeed it was for much of the nineteenth century. But even the gold standard could not override national sovereignty, and, when the costs (in terms of lost output and employment) of adhering to the standard appeared too high, governments suspended the convertibility of their currency into gold, as happened on several occasions in Britain and other European countries in the nineteenth century during financial crises. There was an underlying need to find a way to retain domestic control over the supply of money and liquidity while at the same time retaining a long-term commitment to price stability. Unfortunately, the switch from a fixed rule, such as the gold standard, to the use of unfettered discretion led to the failure to control inflation, culminating in the Great Inflation of the 1970s.


pages: 586 words: 160,321

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

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

The emphasis shifted first to credit growth, which was also seen as an early-warning indicator of financial imbalances, and then to a broad range of monetary and financial variables.6 The search for a new approach became evident in a high-level conference organized in 2006.7 Finally, the ECB restated its definition of price stability. When the euro was created, the ECB had taken the initiative of quantifying its definition of price stability, which the Maastricht Treaty left to the ECB’s Governing Council. It thus “took control” over that definition, whereas, for instance, in the United Kingdom that power belongs to the executive (the chancellor of the exchequer). The ECB initially decided that price stability would be achieved if inflation was below 2 percent. It was immediately confronted with a barrage of questions by economists and market participants. Did the definition imply that any number below 2 percent was acceptable? Was zero inflation consistent with price stability (the discussion of the harmonized index of consumer prices simply assumed that there would be some increase)?

The ECB’s representatives—and at the fore its president Jean-Claude Trichet—were most proud of their record in delivering an inflation performance superior to even the historic legacy of the stability-focused German Bundesbank. Perfectly in line with the ECB’s primary mandate of price stability, inflation had averaged 1.97 percent during the euro’s first decade. This illustrates a defining factor of the ECB’s economic principles: its primary objective, as written in the Treaty on the Functioning of the European Union, is to maintain price stability. This contrasts with the US Fed, for example, which has a dual mandate of both price and economic stability. This focus on price stability is a clear heritage from the Bundesbank, which adopted a hawkish position after the previous historical inflation episodes that Germans had experienced. Hence, historically at least, the ECB hasn’t been built around the principle of stabilizing the economy beyond prices: yet, as we will see, the crisis forced the ECB toward a move in that direction.

The rational business of negotiation strategies developed in the course of the European crisis intensified rather than resolved the clash of cultures. As the relentless logic of events went on, the French appeared ever more French and the Germans ever more German. The Maastricht Negotiations: Ambiguities and Master Plans The Maastricht Treaty—the document that provides the legal framework for the euro—lies at the root of the current problems. It assumed too simply that price stability was sufficient to ensure financial stability and that fiscal policy had no role to play in the provision of price stability. It allowed French and German thinkers and politicians to operate with incompatible visions of economic governance. In short, it was about what the treaty labeled “European Union,” but the Europeans looked as if they did not really intend or understand the concept of “union.” For some, Europe had now become a new sort of political entity, a postmodern, twenty-first century state in which the traditional principle of national sovereignty no longer applied.


pages: 381 words: 101,559

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

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, buy and hold, 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, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, 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, zero-sum game

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: 363 words: 98,024

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

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

Our experience in the mid-1970s, when weak anti-inflation efforts failed, and again in the early 1980s, when a much more sustained effort was required, were reminders enough of the importance of maintaining price stability once it is restored. Now the environment is quite different. The generation with direct experience of stagflation is passing on. In contrast, over the past thirty years we’ve maintained sufficient price stability to engrain expectations of little or no inflation into our thinking. Factors such as cheap imports from countries like China have helped, but our monetary authorities have clearly recognized the importance of maintaining price stability. There can be little question that those firmly grounded expectations have contributed enormously in allowing the United States to absorb huge budget deficits and a massive injection of official liquidity during and after the 2008 financial crisis without reawakening inflationary forces.

The simplicity of the target was seen as part of its appeal—no excuses, no hedging about, one policy, one instrument. Within a year or so the inflation rate fell to about 2 percent. The central bank head, Donald Brash, became a kind of traveling salesman. He had a lot of customers. I was reminded of the practical appeal when I read of a colloquy in a July 1996 FOMC meeting about the Federal Reserve’s “price stability” target. Janet Yellen asked then chairman Alan Greenspan: “How do you define price stability?” To me, he gave the only sensible answer: “That state in which expected changes in the general price level do not effectively alter business or household decisions.” Janet persisted: “Could you please put a number on that?” And so Alan’s general principle, to me entirely appropriate, was eventually translated into a number. After all, those regression models calculated by staff trained in econometrics have to be fed numbers, not principles.

Central bank policy had become a matter of growing public debate. I liked my money and banking course. There seemed to be a lot of potential material available. But I had not yet lifted a finger to start. I remember my first visit to my designated faculty advisor, Professor Frank Graham. Unbeknownst to me, he happened to be one of the leading American scholars of international trade and was convinced that price stability was a key objective of public policy. When I told him about my idea and expressed concern that I might run out of time, he responded reassuringly: “Don’t worry, May is a long time off.” “But I’m scheduled for a February graduation.” “Oh! We’d better get started!” For once in my academic life I did. I holed up in a little carrel in the brand new Firestone Library and got to work. I studied the origin, the theory, and the practice of central banking, starting with Walter Bagehot, the mid-nineteenth-century British writer credited with defining the appropriate role of the long-established Bank of England as “lender of last resort.”


pages: 408 words: 108,985

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

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

This stagflation, as it came to be known, helped instill an inflation phobia among central bankers, who subsequently made two incorrect inferences: that the high inflation had caused the low growth and that if one kept inflation low, growth would be high. By the early 1990s, central bankers settled on solutions involving a strong legal mandate for price stability, independence of the central bank from control by elected officials, and sustained communication to markets that they would keep inflation muted. Thus, the European Central Bank states unequivocally: “The primary objective of the ECB’s monetary policy is to maintain price stability. This is the best contribution monetary policy can make to economic growth and job creation.” The ECB defines price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 percent. In the pursuit of price stability, the ECB aims at maintaining inflation rates below, but close to, 2 percent over the medium term.”1 The belief held that if the central banks played their role in macroeconomic stabilization, especially by muting inflation, then the market could do the rest and ensure high growth and efficient allocation of resources.

Germany had experienced hyperinflation in the 1920s, and this event cemented a post-1945 political consensus that the new Bundesbank had to ensure price stability above all else. In the eyes of many, hyperinflation was to blame for the weakening of Germany’s embryonic democracy. Yet Hitler and the rise of fascism were born, in an immediate sense, as a result of the high level of unemployment that was part of the global Great Depression of the 1930s—not of Germany’s hyperinflation of the 1920s. But given the consensus on inflation in Germany and some of its northern European allies, any European agreement on a common currency had to be rooted in a commitment to price stability. Moreover, these countries obsessed over fears that fiscal profligacy in southern Europe would somehow lead to EU-wide inflation and demanded the constraints on debt and deficits discussed in Chapter 1.

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


pages: 162 words: 51,473

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

"Robert Solow", Bonfire of the Vanities, Bretton Woods, business cycle, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

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: 293 words: 91,412

World Economy Since the Wars: A Personal View by John Kenneth Galbraith

business cycle, central bank independence, full employment, income inequality, James Hargreaves, James Watt: steam engine, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, means of production, price discrimination, price stability, road to serfdom, Ronald Reagan, spinning jenny, The Wealth of Nations by Adam Smith, Thorstein Veblen, union organizing, War on Poverty

There is no magic in the monetary system, however brilliantly or esoterically administered, which can reconcile price stability with the imperatives of production and employment as they are regarded in the affluent society. On the contrary, monetary policy is a blunt, unreliable, discriminatory and somewhat dangerous instrument of economic control. It survives in esteem partly because so few understand it, including so few of those—builders, smaller businessmen who must finance inventories, farmers—on whom it places the prime burden of its restraint. It survives, also, because an active monetary policy means that, at times, interest rates will be high—a circumstance that is far from disagreeable for those with money to lend.7 16. Production and Price Stability IN THE POLITICAL SPECTRUM of modern economic policy, monetary measures are the instrument of conservatives.

But if full employment and full use of capacity is taken as the norm of economic policy, as in modern times it is, then the rate of investment associated with full use of capacity is also normal. A policy which holds production below capacity in the interest of price stability inescapably sacrifices economic growth. IV So long as the use of fiscal policy is in unresolved conflict with other and prior economic goals, it will not be used with effective vigor, at least in peacetime. This conflict and the resulting inutility of fiscal measures are not yet widely conceded by economists. The textbooks still elucidate the use of fiscal measures as a device for ensuring price stability. They concede that we must settle for something less than completely full employment and that this will offer difficulties. But they assume that, given inflation, taxes can be increased.

That was because production was expanded along less stylized but far more effective dimensions than those related to improved resource allocation. Nor is it certain that the controls which would serve to arrest the wage-price spiral would have to be comprehensive. It is possible that very limited restraints will serve to reconcile capacity output and price stability. This is an important point to which this essay will return. The prices fixed by controls are already fixed by monopoly or oligopoly power. Here nothing decisive is changed. However, for the moment it is sufficient to note that price and wage control, as a way of reconciling price stability, maximum product and minimum unemployment, is in conflict, no less important if it is ostensible rather than real, with historic attitudes toward production. 3 V A word of summary is now in order. We are impelled by present attitudes and goals to seek to operate the economy at capacity where, we have seen, inflation must be regarded not as an abnormal but as a normal prospect.


pages: 338 words: 104,684

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

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

Couldn’t we achieve true full employment by asking the Fed to improve the way it runs monetary policy? Or maybe Congress could help fine-tune the economy with better real-time adjustments in government spending and taxation? Recall that the Fed chooses its own definition of full employment. For them, maximum employment is defined as the level of unemployment it believes is necessary to hit its inflation target. In other words, although it’s legally responsible for full employment and price stability, one goal takes clear priority over the other. If it takes eight or ten million unemployed people to stabilize prices, then that is how the Fed defines full employment. It’s counterintuitive to define full employment as a certain level of unemployment. But politically speaking, it is useful for the Fed as it means they get to claim success by defining away the very problem they were tasked to solve.

To the economists behind MMT, it reveals the shortcomings in the dominant approach to macroeconomic stabilization. A recession that could have been quickly reversed with the right fiscal prescription instead became the longest and most protracted downturn in the post–World War II era. To make sure that never happens again, MMT recommends a shift away from the current reliance on central banks to deliver on the twin goals of full employment and price stability. Inflation and Unemployment: The MMT Approach The economists behind MMT recognize that there are real limits to spending, and that attempting to push beyond those limits can manifest in excessive inflation. However, we believe there are better ways to manage those kinds of inflationary pressures and that it can be done without trapping millions of people in perpetual unemployment. In fact, we argue that it is possible to use true full employment to help stabilize prices.

At best, we might arrive at a closer approximation to full employment, but there would always be a significant cohort that remains locked out of employment. It’s also not enough to rely exclusively on Congress to adjust government spending and taxation to fight off inflation once it begins to accelerate. To supplement discretionary fiscal policy (the steering wheel), MMT recommends a federal job guarantee, which creates a nondiscretionary automatic stabilizer that promotes both full employment and price stability. Think of a poorly maintained roadway. You get a smooth ride until you encounter a pothole or a bump in the road. You can try to steer clear of hazards, but at some point, you’re destined to hit one. At that point, you could be in for a rough ride. If you’ve got a vehicle with good shock absorbers, they’ll buffer the impact, and you won’t get jostled around too much. But if the shock absorbers are weak, you’d better hang on!


pages: 1,242 words: 317,903

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

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

This seemed like a dodge. Maybe, if Yellen was still around when the United States next experienced a harsh recession, she would decide that there was actually a trade-off—in which case she might go back to worrying about unemployment rather than just targeting inflation. “Is long-term price stability an appropriate goal of the Federal Reserve System?” Greenspan pressed her. “Mr. Chairman, will you define ‘price stability’ for me?” Yellen parried. “Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions.” “Could you please put a number on that?” Yellen demanded. Now Greenspan himself was being called out for dodging. The committee laughed appreciatively. “I would say the number is zero, if inflation is properly measured.”

It was a striking turnaround: financial fragility now mattered less to him than controlling inflation. More than a year had passed since Black Monday, and the sustained tranquility of the stock market had taught him a lesson: if the imperatives of financial stability and price stability were pulling him in different ways, he could prioritize stable prices, knowing that if markets crashed he had the power to contain the damage. Moreover, the warning of the previous August stuck in his mind: if Wall Street came to believe that he was gun-shy, inflation expectations would rise, and it would take enormous effort to force them back down again. The future central-bank consensus—that price stability trumped other objectives—was not yet entrenched. But it was taking shape beneath the surface. After some back-and-forth around the table, Greenspan prevailed upon his FOMC colleagues to set their financial-stability concerns aside and raise the federal funds rate.32 A month later, on January 24, 1989, the chairman defended his move in testimony before the House of Representatives, and his tone made it clear that more tightening was coming.33 But the day after that testimony, Greenspan reaped the inevitable whirlwind.

In the 1960s, rising inflation had destroyed the gold standard and ushered in the era of discretionary monetary policy; as he had later argued to Reagan, it was wishful to think that a return to gold would restore price stability because inflation determined which monetary regime was feasible, not the other way around.20 Now, in the 1990s, falling inflation was opening up the possibility of an inflation target, which would reduce monetary discretion—even though, if inflation was falling anyway, the switch in monetary regime might have limited significance. But for now Greenspan’s mind was not focused on this history. After listening to Yellen revisit the merits of inflation targeting, the chairman asked for her bottom line on the Fed’s objectives. “To the extent that there is no trade-off,” Yellen replied, covering her back carefully, “then price stability, literally zero inflation, is good and we should go for it.” This seemed like a dodge.


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

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

In both countries, Keynesian economic management was validated by the wartime experience of full employment with relative price stability.9 Unlike in the previous conflict, the economic policymakers (at least Allied ones) seemed to know what they were doing. And no one in 1945 wanted to get back to the 1930s. In its 1944 Employment White Paper, the British Government accepted responsibility for securing ‘high and stable levels of employment’ by ensuring that ‘total expenditure on goods and services [is] prevented from falling to a level where general unemployment appears’. Pointedly, it emphasized the need for wage restraint and sufficient labour mobility as a condition of success.10 In the United States, the Full Employment Act, passed by Congress in 1946, made the Administration responsible for maintaining ‘a high employment level of labor and price stability’. There were similar, less explicit commitments in other countries.

Secondly, in 1717 Newton, as Master of the Mint, fixed the value of the pound at £3 17s 10½d per standard ounce of 22 carat gold, equivalent to a fine gold price of just under £4 4s 11½d. The Bank was obliged to convert its notes into gold on demand at this price. This remained sterling’s gold price for two hundred years, except for its suspension in the Napoleonic wars. Sound money triumphed, and the record was one of long-run price stability; between 1717 and the First World War, the average annual rate of inflation was just 0.53 per cent. But there were considerable short-run fluctuations; the average magnitude of annual price changes was 4.42 per cent.7 The establishment of the Bank of England and Newton’s rule made it much safer to lend to the state. The superior ability of the British state to mobilize the funds of its subjects for war was an important factor in its victories over France (a much more populous country) in the eighteenth century.

And even Keynes had to emancipate himself from the quantity theory before he felt he could accurately analyse the economic problem to which money gave rise. The key belief of the pre-1914 monetary reformers was that instability in the price level generates not just economic but social instability, by producing unanticipated shifts in the level of activity and distribution of wealth. The aim of economic policy ought therefore to be price stability. This policy prescription rested on the belief that, in a system of fiat money, the central bank has ultimate control over the quantity of money in circulation. If the central bank can control the quantity of money, either directly or indirectly, it has the power to make the price level what it wants it to be. And if it can make the price level what it wants it to be, it can control economic fluctuations.


pages: 370 words: 102,823

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

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, 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

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

“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

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

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: 257 words: 94,168

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

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: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

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: 524 words: 143,993

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

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

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: 665 words: 146,542

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

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

Hence, independence is a monetary principle integral to sovereignty, and not an operational rule transforming the central bank into some kind of automaton. The foundational texts should invest the central banks with the mission of maintaining price stability. But in all their great wisdom, these texts should hold back from specifying what price stability is. For this would deny the central bank its own capacity for judgement in the face of unforeseeable contexts. Independence is a symbol that works if the central bank can adopt flexible policies to respond equitably to a variety of imbalances, without being suspected of threatening price stability. Central bank independence is by nature a symbolic guarantee, but its practice inserts it deep into the economy. For this reason, it is fundamentally important that a constitutional order is legally formalised that avoids any confusion between the levels of representation and of action.

It is, therefore, up to monetary policy to fix the point around which agents implicitly coordinate their expectations. This means providing a framework that eliminates all balances outside of a range indicated by the central bank. This framework attaches itself to a renewed monetary doctrine: flexible inflation targeting.7 This means placing monetary policy’s short-term discretionary actions under the constraint of medium-term rules, thus assuring price stability. This stability is defined as a range of viable future inflation rates, within the scope of which the central bank’s actions enjoy the confidence of economic actors. Nonetheless, if central bank independence gives weight to the principle of guaranteeing the unit of account’s statistical value, this cannot be its exclusive concern. The growth principle is threatened by financial instability and wiped out in financial crises.

Various structural factors influenced choices over monetary regulation: the existence or otherwise of developed public debt titles markets; the degree of protection of the banking system, and thus its solidity faced with the risk of insolvency; the predominance of intermediated financing or recourse to capital markets; the extent and tightness of exchange controls; and the explicit regulation of interest rates by the authorities, as well as their implicit regulation by the banking oligopoly. These were nationally separate systems of limited openness. Within these systems, monetary policy was a backup for an economic policy seeking firstly to achieve full employment, and secondly to stabilise the balance of payments. Price stability was only considered in relative terms: for the most open countries it had to be made competitive with inflation in other countries, while for the largest countries – first of all the United States – it was considered in terms of arbitrating between inflation and underemployment. Monetary regulation was divided between two poles, or two regimes that could be combined in different ways. One of them, mostly prevalent in the Anglo-Saxon countries, acted on the structure of interest rates by directly influencing the price of the liquidities that the central bank made available to the economy.


pages: 334 words: 98,950

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

affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, business cycle, 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, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, 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

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, business cycle, 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, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, 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: 554 words: 158,687

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

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

, Working Paper no. 355, The Levy Economics Institute, 2002. 36 See Anna Schwartz, ‘Financial Stability and the Safety Net’, in Restructuring Banking and Financial Services in America, ed. William S. Haraf and Rose Marie Kushmeider, Washington, DC: American Enterprise Institute For Public Policy and Research, 1988; and Anna Schwartz, ‘Why Financial Stability Depends on Price Stability’, in Money, Prices and the Real Economy, ed. Geoffrey Wood, Northampton: Edward Elgar, 1998. See also Ben Bernanke and Mark Gertler, ‘Monetary Policy and Asset Price Volatility’, Economic Review 4, 1999. 37 Michael Bordo and David Wheelock, ‘Price Stability and Financial Stability: The Historical Record’, The Federal Reserve Bank of St. Louis Review 80:4, 1998, pp. 41–62. Michael Bordo, Michael J. Dueker, and David Wheelock, ‘Aggregate Price Shocks and Financial Instability: A Historical Analysis’, Working Paper 2000–005B, Federal Reserve Bank of St.

Note that Karl Case and Robert Shiller realized that bubble conditions were in place already by the early 2000s, but expected the situation to stabilize (‘Is There a Bubble in the Housing Market?’, Brookings Papers on Economic Activity 2, 2003). At the BIS, however, William White argued that central bank should ‘lean against the wind’ by raising interest rates when bubbles threatened, even if price stability and growth targets were not compromised (‘Procyclicality in the Financial System’, BIS Working Paper No. 193, 2006; ‘Is Price Stability Enough?’, BIS Working Paper No. 205, 2006). In contrast, Ben Bernanke, who became the head of the US Federal Reserve, argued that credit and asset bubbles should be allowed to follow their course, the authorities intervening aggressively only after the bubble would have burst (‘The Global Saving Glut and the U.S. Current Account Deficit’, 10 March 2005; ‘The Subprime Mortgage Market’, 17 May 2007).

Contemporary money malfunctioned as measure of value for much of the 1970s, but it is misleading to explain this phenomenon as simply the result of lax monetary policy and excessive creation of money. Rather, the malfunctioning of money is partly due to the complex processes linking real accumulation to the monetary circulation, as was discussed in Chapter 4. Inflation is also the outcome of poor performance by capitalist accumulation, rather than being simply the result of faulty monetary processes. Second, the underlying assumption of inflation targeting was that the achievement of price stability would also result in overall financial stability. This view was put across by Anna Schwartz and was adopted generally for much of the period of Great Moderation.36 For Schwartz, financial instability arises primarily from unexpected changes in the rate of inflation. If the central bank focused on keeping inflation low, it would thereby reduce the risk of lending booms (induced by high inflation) and recessions (induced by unexpected deflation or disinflation).


pages: 275 words: 82,640

Money Mischief: Episodes in Monetary History by Milton Friedman

Bretton Woods, British Empire, business cycle, currency peg, double entry bookkeeping, fiat currency, financial innovation, fixed income, floating exchange rates, full employment, German hyperinflation, income per capita, law of one price, money market fund, 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

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

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

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, 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, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, 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, zero-sum game

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: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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

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: 471 words: 97,152

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

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

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: 226 words: 59,080

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

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

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: 365 words: 88,125

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

"Robert Solow", affirmative action, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

Last but not least, in many (although not all) rich countries, the welfare state has been cut back since the 1980s, so people feel more insecure, even if the objective probability of job loss is the same. The point is that price stability is only one of the indicators of economic stability. In fact, for most people, it is not even the most important indicator. The most destabilizing events in most people’s lives are things like losing a job (or having it radically redefined) or having their houses repossessed in a financial crisis, and not rising prices, unless they are of a hyperinflationary magnitude (hand on heart, can you really tell the difference between a 4 per cent inflation and a 2 per cent one?). This is why taming inflation has not quite brought to most people the sense of stability that the anti-inflationary warriors had said it would. Now, the coexistence of price stability (that is, low inflation) and the increase in non-price forms of economic instability, such as more frequent banking crises and greater job insecurity, is not a coincidence.

There have been a huge number of financial crises, including the 2008 global financial crisis, destroying the lives of many through personal indebtedness, bankruptcy and unemployment. An excessive focus on inflation has distracted our attention away from issues of full employment and economic growth. Employment has been made more unstable in the name of ‘labour market flexibility’, destabilizing many people’s lives. Despite the assertion that price stability is the precondition of growth, the policies that were intended to bring lower inflation have produced only anaemic growth since the 1990s, when inflation is supposed to have finally been tamed. That’s where the money is – or is it? In January 1923, French and Belgian troops occupied the Ruhr region of Germany, known for its coal and steel. This was because, during 1922, the Germans seriously fell behind the reparation payments demanded of them by the Versailles Treaty, which had concluded the First World War.

Greater labour market flexibility is demanded because, from the point of view of financial investors, making hiring and firing of the workers easier allows companies to be restructured more quickly, which means that they can be sold and bought more readily with better short-term balance sheets, bringing higher financial returns (see Thing 2). Even if they have increased financial instability and job insecurity, policies aimed at increasing price stability may be partially justified, had they increased investment and thus growth, as the inflation hawks had predicted. However, the world economy has grown much more slowly during the post-1980s low-inflation era, compared to the high-inflation period of the 1960s and 70s, not least because investment has fallen in most countries (see Thing 13). Even in the rich countries since the 1990s, where inflation has been completely tamed, per capita income growth fell from 3.2 per cent in the 1960s and 70s to 1.4 per cent during 1990–2009.


pages: 350 words: 109,220

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

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

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: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

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

The fear of the German negotiators was that if banking supervision was elevated to the level of the Union then problems in the banking system would also be dealt with by the center. Given the small size of the Commission’s budget, this would likely imply a need for the European Central Bank (ECB) to provide support for troubled banks. Such responsibilities would be a distraction from the bank’s central objective of maintaining price stability and would encourage political lobbying about its decisions. To avoid this risk, Karl Otto Pöhl, President of the Bundesbank, pushed strongly for national supervision in the Delors Committee. By contrast, the British, who were generally the most skeptical of any move toward federation and obtained an opt-out from the single currency, were sympathetic to a Union-wide regulator. This reflected the size of the UK banking system, which was large even by European standards and therefore potentially costly to rescue.

In addition to rehashing old French concerns that weaker currencies were being forced to adjust even when they were not necessarily the source of any strains, the memorandum added a new twist by arguing that the liberalization of capital markets required a zone with a single currency, managed by a common central bank. The Balladur initiative created confusion in the German government. Hans-Dietrich Genscher, the “febrile” West German Foreign Minister, presented his own memorandum which emphasized the need for an independent European Central Bank pledged to price stability but without the traditional German emphasis on political and economic convergence.20 Finance Minister Stoltenberg responded with a more traditional plan that focused on the need for political union, while the Bundesbank argued that any plans for a future monetary union be channeled through the central banks themselves via the Council of Governors. Faced with this range of advice, Chancellor Kohl bucked his advisors and chose to back French plans to look into the feasibility of a monetary union.

This led to a less clear final paper, but avoided the radicalism that doomed the Werner Report. The Committee’s arrangements allowed agreement on two major sticking points in the Economist/Monetarist debate, the relationship of the central bank to political authorities and fiscal policy arrangements. On the former, the crucial moment was the decision by Governor de Larosière to support an independent central bank focused on price stability. Given the importance of this deviation from the typical French policy, he discussed this at a one-on-one meeting with President Mitterrand. According to his own account, he explained that if France wanted agreement with the Germans, we had to accept that monetary policy would be a single policy and that national central banks would be members of a system of central banks where all would have to be independent of governments.


pages: 438 words: 109,306

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

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, Kickstarter, Occupy movement, offshore financial centre, Ponzi scheme, price stability, quantitative easing, reserve currency, special drawing rights

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: 597 words: 172,130

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

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

At a time when numerous European countries were in what can only be called a depression, the ECB was tightening policy. Asked at his April press conference if the action would increase the stress on the peripheral countries, Trichet was almost dismissive. “I will only say that we are responsible for ensuring price stability for 331 million people, and all the decisions that we have taken since the very beginning of the euro, including today’s, have been designed to deliver price stability to 331 million people.” Sorry, Spain, you’re out of luck. In hindsight, those rate hikes in the spring and summer of 2011 might seem to be among the biggest monetary policy mistakes of the modern age. But when regarded in relation to Trichet’s negotiating strategy, both within the ECB Governing Council and with other European leaders, they look somewhat better.

This creates a conflict of interest between countries with weak economies and populist governments—read Italy, or Spain, or anyway someone from Europe’s slovenly south—and those with strong economies and a steely-eyed commitment to disciplined economic policy—read Germany. The weak economies want low interest rates, and wouldn’t mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost. Nor can Europe deal with “asymmetric shocks” the way the United States does, by transferring workers from depressed areas to prosperous ones. . . . The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments. European economists were well aware of this sort of commentary. What the Americans didn’t understand, they said, was that the common currency was only part of the story.

Overall prices had gone on a wild ride in the preceding years as the price of oil and other commodities soared in the summer of 2008, plummeted at the end of that year with the global economic crisis, and then rebounded in the spring and summer of 2009. But by the middle of 2010, fuel prices weren’t the problem. There were now enough jobless workers that few Americans were getting wage increases. And there were so many idle factories and empty office buildings that companies had room to expand without pushing up prices. Fed officials had years earlier agreed that “price stability” means that consumer prices rise around 2 percent a year. In the twelve months ended in June 2010, the consumer price index rose only 1.1 percent, and even less than that when the volatile food and energy categories were excluded. Perhaps more worrisome, investors and other economic decision makers were starting to conclude that very low inflation would be the new normal. Investors in the bond market were expecting inflation to average only 1.2 percent over the ensuing five years, based on the gap between bond yields that were and were not indexed to inflation.


pages: 479 words: 113,510

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

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

(Their e-mail addresses end in .gov, while District Bank employees’ e-mails end in .org.) The District Bank presidents occupy one stratum of the FOMC, with the Board of Governors one layer above. The FOMC’s vice chair, always the president of the New York Fed, is second-in-command. At the peak of the pyramid reigns the Fed chairman. By law—according to the 1977 amendment of the Federal Reserve Act—the FOMC has two mandates: maintain “price stability” and maximize employment. In other words, safeguard what a greenback can buy while employing as much of the population as possible. Its tools are short-term interest rates and the money supply. When I joined the Fed, the mystique was mesmerizing. No other institution in the world had such power, such prestige. However, once inside, I confronted an uncomfortable question: Why were so many of its highly-educated and well-paid economists oblivious as the worst financial crisis since the Great Depression was about to break over their heads?

In 1994, Yellen received the opportunity she had long been seeking when President Bill Clinton appointed her to a full fourteen-year term on the Fed’s Board of Governors. She described herself as a “non-ideological pragmatist,” and expressed her confidence in the positive contribution that “a predictable, well-executed monetary policy can make to economic growth.” She gave a succinct summary of her views of the Fed’s purpose in 1995, when the Fed was debating proposed legislation that would make price stability the central bank’s sole mandate at the expense of unemployment. “Who would be prepared to believe that the FOMC is single-mindedly going to pursue an inflation target regardless of real economic performance, if not even the Bundesbank is prepared to go that far?” she said, citing the German central bank’s efforts to minimize economic downturns. “So, that means that the targets are going to be perceived as a hoax. . . .

Eastern Standard Time, the Fed issues a press release with ten to twelve sentences explaining any changes it had made to the fed funds rate, who voted for and against the move and why, and a short statement about economic news that led to its decision. Throughout the crisis, it almost always included the promise that “the Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.” In Dallas, the statement was released at 1 P.M. I would run up the staircase to the break room television so I could watch as a reporter on CNBC read the statement and see how the markets reacted. I was usually the only person watching. As the crisis descended, the FOMC statement release became a highly anticipated moment for financial markets—and the pistol fired at the start of a race.


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

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

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

Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, buy and hold, 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, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Joi Ito, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Ross Ulbricht, 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, uber lyft, underbanked, WikiLeaks, Y Combinator, Y2K, zero-sum game, 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: 363 words: 107,817

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

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

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).


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

banking crisis, banks create money, barriers to entry, business cycle, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, 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, old-boy network, 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: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, 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, WikiLeaks, 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?


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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

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: 484 words: 136,735

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

"Robert Solow", bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, 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, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

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.


pages: 515 words: 142,354

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

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

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.


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

addicted to oil, asset allocation, backtesting, Black-Scholes formula, Bretton Woods, business cycle, buy and hold, 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, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, 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, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, 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, stocks for the long run, survivorship bias, 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.


pages: 470 words: 130,269

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman

Albert Einstein, American Legislative Exchange Council, anti-communist, battle of ideas, Berlin Wall, Bretton Woods, business cycle, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, different worldview, Donald Trump, experimental economics, Fall of the Berlin Wall, floating exchange rates, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, housing crisis, Internet Archive, invisible hand, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liberal capitalism, market fundamentalism, mass immigration, means of production, Menlo Park, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, RAND corporation, random walk, rent control, road to serfdom, Robert Bork, rolodex, Ronald Coase, Ronald Reagan, Silicon Valley, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, union organizing, urban planning, Vilfredo Pareto, Washington Consensus, zero-sum game, éminence grise

Hayek probably felt he had little choice but to answer the Treatise since it trod familiar Austrian ground and found the Austrian School’s insights wanting. Keynes theorized the concepts of money and credit and developed a set of applications that flew in the face of Austrian beliefs. As he stated in a 1928 précis, “It must be admitted that advocates of price stability, amongst whom I number myself, have erred in the past when their words have seemed to indicate price stability as the sole objective of monetary policy. . . . To speak or write in this way is to unduly simplify the problem.” The implications of this statement ran counter to the approach to price stability and self-adjusting monetary policy advocated by Mises, Machlup, and Hayek. It directly counteracted many of the ideas advanced in Hayek’s Monetary Theory.25 As could be expected, when Hayek delivered his LSE lectures and then visited Cambridge, he received a chilly welcome.

This usually meant popular interventions in the liberal media and behind-the-scenes advocacy work for government agencies and business groups. In articles written between 1931 and 1934 by a quartet of Austrians (Haberler, Hayek, Machlup, and Morgenstern), they argued against protectionism, exchange controls, and credit injections into the economy. They supported austerity in state expenditures and domestic price stability and deflation. A return to the gold standard and pro-trade policies were frequent suggestions. They believed that price flexibility and deregulated markets in production and employment, too, would spur recovery.21 As this brief sampling of activities demonstrates, the early 1930s were a fertile period for members of the Austrian School. They reestablished a distinctive corporate identity and featured prominently in European policy debates.

This arrangement was meant to reduce currency speculation and encourage foreign direct investment. The planners designed instruments to prevent currencies from drifting from their pegged value, which were enforced by the IMF and IBRD. Tensions arose between the United Kingdom and the United States during negotiations, however. The British favored a system more oriented toward growth and international liquidity; the Americans preferred price stability. The United States ended up dictating most terms, especially with respect to the IMF.73 The Bretton Woods agreement worked reasonably well into the early 1960s, when new concerns surfaced. The United States ran increasing balance of payments deficits, meaning that foreign states and investors held ballooning sums of US debt. If confidence in the US economy or the dollar waned, foreign actors would draw down US gold reserves.


pages: 128 words: 35,958

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

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

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: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

In November 2002 at a birthday celebration for Milton Friedman and Anna Schwartz, Friedman’s coauthor in the monumental Monetary History of the United States, the bible of monetarism, Bernanke promised: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”45 Given the association forged in the 1970s between monetarism and inflation fighting, one could easily confuse Bernanke’s promise with a conventional central banker’s commitment to price stability. Indeed, Bernanke was making a commitment to price stability, but what he was promising to prevent was deflation, not inflation. The lesson of the 1930s was that the Fed must act promptly not just to prevent the money supply expanding excessively but also to prevent bank failures from causing it to implode.46 On Bernanke’s watch there would be no deflation. That single-minded determination, embodied by the new Fed chair but shared across the US policy-making establishment, would define the response of monetary policy to the crisis.

The ECB’s independence was his highest value and he guarded it jealously. The ECB’s constitution provided plenty of safeguards. Its deliberations were shielded from public scrutiny by minimal transparency requirements. To prevent it from being put to work as a vehicle of fiscal policy, it was banned from monetizing newly issued government debt. Unlike the Fed, which had a dual mandate for price stability and maximum employment, the ECB had price stability as its only target. All this made the ECB the most remote of all the modern central banks.26 To call it apolitical would be a misnomer, because it, in fact, entrenched a conservative bias against inflation as the unquestionable doxa of Europe. Nor would it be fair to say that anti-inflation politics were the ECB’s only ambition. It also wanted to promote Europe as a financial center and the euro as a reserve currency, and that meant actively developing European debt markets.

IV In their defense, legalists at the ECB would argue that the central bank’s mandate gave it only one objective, price stability. They could derive from that an obligation to maintain the functioning of Europe’s financial markets and Europe’s banks. And Trichet would thus justify his interference in Greek and Irish affairs and more to come. What the ECB did not have was a mandate to concern itself with the economic welfare of the eurozone or its member states in any broader sense. It was a willfully simplistic and conservative interpretation.73 It was ruinous for the eurozone. The crisis would begin to be overcome only when the ECB began to step beyond it. The Fed never took such a narrow view. It had a mandate both to preserve price stability and to maximize employment. This was a legacy bequeathed by the more broad-gauge economic policy debate of the 1970s.


pages: 318 words: 77,223

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

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

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.


pages: 267 words: 74,296

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed by John Peet, Anton La Guardia, The Economist

bank run, banking crisis, Berlin Wall, Bretton Woods, business cycle, 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, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, 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: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

He used terms such as the ‘constant dollar’, ‘standardizing the dollar’, ‘unshrinkable dollar’ or the ‘commodity dollar’ to describe a dollar that could buy a constant amount of goods and services. His ‘commodity dollar’ would encourage the public to think about the purchasing power of a dollar when it came to setting prices and writing contracts. Fisher’s idea was in direct contrast to the gold standard, the de facto economic policy of the day. The gold standard required the dollar to be exchangeable for a fixed quantity of gold, but it had not always been successful at achieving price stability. His concept of the commodity dollar required a dollar to be fixed in value against a group of commodities (goods), and its gold content adjusted to maintain its purchasing power. He had observed that, between 1873 and 1896, the dollar’s value increased as American prices fell. Fisher argued that this led to a prolonged depression as the supply of money was determined by the amount of gold, so the money supply was growing at a slower pace than was needed for the number of transactions necessary to maintain growth in the economy.

However, in calling for the abandonment of the gold standard, Fisher had placed himself at odds with the consensus of political and business opinion. Those who opposed Fisher’s idea at least saw the logic, but did not believe it would be easy or practical to implement. They were also worried about undermining confidence in the operation of the gold standard, which already had been exposed as a fallible system of price stability. Tinkering with the gold standard was not a preferred option. Any admission that it was not perfect, or that the value of the dollar might require adjustment, was considered subversive and liable to undermine confidence in both the operation of the system and the value of the dollar. After failing to convince President Woodrow Wilson of the merits of his plan, Fisher believed that he had to garner public opinion.

Regulations and reforms are also needed alongside lender of last resort facilities to curb potential moral hazard problems. In other words, if the central bank is always there to bail a bank out, then a bank has less of an incentive to act prudently. Regulation can reduce this risk. In this respect, he would have welcomed the new macroprudential regulatory powers given to central banks after the 2008 financial crisis to target financial stability alongside their existing mandate of price stability. Fisher’s final years The years 1933 to 1939 saw a period of frantic effort by Fisher to solve the country’s problems and his own financial doldrums. He failed at both. The country wasn’t following his recommendations, his own assets would never recover their value and his debts would never go away. By 1945, when his sister-in-law died and his debt to her of more than $1 million was forgiven, his life was winding down.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

He used terms such as the ‘constant dollar’, ‘standardizing the dollar’, ‘unshrinkable dollar’ or the ‘commodity dollar’ to describe a dollar that could buy a constant amount of goods and services. His ‘commodity dollar’ would encourage the public to think about the purchasing power of a dollar when it came to setting prices and writing contracts. Fisher’s idea was in direct contrast to the gold standard, the de facto economic policy of the day. The gold standard required the dollar to be exchangeable for a fixed quantity of gold, but it had not always been successful at achieving price stability. His concept of the commodity dollar required a dollar to be fixed in value against a group of commodities (goods), and its gold content adjusted to maintain its purchasing power. He had observed that, between 1873 and 1896, the dollar’s value increased as American prices fell. Fisher argued that this led to a prolonged depression as the supply of money was determined by the amount of gold, so the money supply was growing at a slower pace than was needed for the number of transactions necessary to maintain growth in the economy.

However, in calling for the abandonment of the gold standard, Fisher had placed himself at odds with the consensus of political and business opinion. Those who opposed Fisher’s idea at least saw the logic, but did not believe it would be easy or practical to implement. They were also worried about undermining confidence in the operation of the gold standard, which already had been exposed as a fallible system of price stability. Tinkering with the gold standard was not a preferred option. Any admission that it was not perfect, or that the value of the dollar might require adjustment, was considered subversive and liable to undermine confidence in both the operation of the system and the value of the dollar. After failing to convince President Woodrow Wilson of the merits of his plan, Fisher believed that he had to garner public opinion.

Regulations and reforms are also needed alongside lender of last resort facilities to curb potential moral hazard problems. In other words, if the central bank is always there to bail a bank out, then a bank has less of an incentive to act prudently. Regulation can reduce this risk. In this respect, he would have welcomed the new macroprudential regulatory powers given to central banks after the 2008 financial crisis to target financial stability alongside their existing mandate of price stability. Fisher’s final years The years 1933 to 1939 saw a period of frantic effort by Fisher to solve the country’s problems and his own financial doldrums. He failed at both. The country wasn’t following his recommendations, his own assets would never recover their value and his debts would never go away. By 1945, when his sister-in-law died and his debt to her of more than $1 million was forgiven, his life was winding down.


pages: 221 words: 46,396

The Left Case Against the EU by Costas Lapavitsas

anti-work, banking crisis, Bretton Woods, capital controls, central bank independence, collective bargaining, declining real wages, eurozone crisis, Francis Fukuyama: the end of history, global reserve currency, hiring and firing, neoliberal agenda, offshore financial centre, post-work, price stability, quantitative easing, reserve currency, Ronald Reagan, Washington Consensus, Wolfgang Streeck

There is nothing ‘natural’ or ‘spontaneous’ about the emergence of the euro in the contemporary international markets, and that is a source of both strength and weakness. To act as a world reserve currency the euro has had to gain global acceptability and credibility from scratch, and its institutional mechanisms were designed partly with this purpose in mind. The ECB and the Eurosystem were created with the express aim of ensuring price stability, which is necessary for the euro to act as a reserve of value. The global acceptability of the euro, on the other hand, encouraged the imposition of fiscal rigidity among member states, including the Growth and Stability Pact. The second aspect determining Germany’s conditional hegemony is that the euro was created in a period of rapid financialization of advanced economies, including leading countries such as Germany and France, and peripheral countries such as Portugal and Greece.

Financialization signifies the ascendancy of the private financial sector relative to the rest of the economy, and has characterized the development of capitalism during the last four decades.35 The non-financial sector in mature countries has performed comparatively poorly, marked by weak corporate investment and low productivity growth. Furthermore, there has been a growing involvement of households and individuals with the private financial sector to borrow for housing and consumption, but also to manage pensions, insurance, and other assets. The EMU has served the interests of large European multinationals and financial institutions under conditions of advancing financialization. Price stability and control over inflation is a sine qua non for lenders and for financial capital. A homogeneous internal market for borrowing supported by liquidity generated by a powerful central bank was necessary for European banks to spread their operations globally. Fiscal discipline is typically required by lenders and by banks alike to protect their loan advances. To gain competitive advantages in the world market, industrial capital requires labour ‘flexibility’, and the euro has been an outstanding instrument for imposing discipline on workers, particularly in the years of crisis.


pages: 466 words: 127,728

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

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

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: 354 words: 92,470

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

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

As Reagan put it – in a more memorable way than Hayek ever managed – ‘The nine most terrifying words in the English language are “I’m from the government and I’m here to help”.’5 Even then, the early years were touch and go: in 1981, Ronald Reagan sacked around 13,000 American air traffic controllers who went on strike in violation of the terms of their contracts, while even in her second term in office Margaret Thatcher was engaged in a ferocious battle with Britain’s coal miners. By the late 1980s, however, Reagan and Thatcher had won: the private sector had triumphed – at least philosophically – over the public sector, markets had succeeded where central planning had failed, macroeconomic policy was aimed at price stability, not full employment, and economic growth was to be achieved through ‘supply-side’ reform, not Keynesian-style demand management. Importantly, following Thatcher’s lead with her very early decision to abolish exchange controls, capital markets were to be subject to the discipline provided by international investors. There was to be no hiding place from the market and, by implication, no hiding place from international finance.

There was growing nervousness among the finance ministers regarding their ability to put on a united front: in particular, an uptick in inflationary pressures suggested that it would not be easy for Germany and Japan to keep interest rates low enough to encourage investors to move out of yen and DM into US dollars. Nevertheless, a deal was struck, and for a while the dollar stabilized. It wasn’t to last. Over the summer, as the effects on inflation of the earlier collapse in oil prices began to fade, the German Bundesbank became increasingly trigger-happy. Eventually, the high priests of German price stability decided to tweak interest rates a little higher. Madness then ensued. Baker had a public row with the German minister of finance, Gerhard Stoltenberg. With the US trade deficit still widening, the US dollar plunged. Within a few weeks, the US stock market had collapsed. For a short while, it appeared the game was up for international policy coordination. Yet markets had been too impatient.

The communiqué published at the end of the summit was full of confidence: We are undertaking an unprecedented and concerted fiscal expansion … We are committed to deliver the scale of sustained fiscal effort necessary to restore growth … Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability … We have provided significant and comprehensive support to our banking systems … We are committed to take all necessary actions to restore the normal flow of credit through the financial system … Taken together, these actions will constitute the largest fiscal and monetary stimulus … in modern times … We are confident that the actions we have agreed today, and our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth.


pages: 312 words: 93,836

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

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

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

In other words, LIBOR had become a key variable that was used in assessing the effectiveness of central bank policy in dealing with the financial crisis.31 If LIBOR reacted promptly to what central banks did, the policy measure was deemed successful. If it didn’t, the measure was seen as misplaced or insufficient. Some central banks went even further, making LIBOR a strategic policy tool in itself. Since January 2000, the monetary policy strategy of the Swiss National Bank has consisted of three elements: ‘a definition of price stability, a medium-term inflation forecast and – at operational level – a target range for a reference interest rate, the three-month Swiss franc LIBOR’.32 Norges Bank, the central bank of Norway, publicly announces its projected monetary policy rate and also the future three-month Norwegian krone risk premiums, based on the three-month NIBOR.33 All of this might seem like a paradox, considering that the Eurodollar market was created in order to avoid the jurisdiction of the central banks.

., 45 buy and sell orders, 208 ‘call-outs’, 24; symptom assessing, 25 ‘Can do More’, 144 Canada: dollar, 33; Foreign Exchange Committee, 179 Canary Wharf, London, 6 Cantor Fitzgerald, London office, 264 capital controls, abolishment, 133 Carr Futures, World Trade Centre office, 264 cash markets, importance loss, 139 cash squeezes, year-end, 44 cash-settled derivatives; benchmark need, 122–3; made market, 133 cassettes, history of, 110–11 CDOs (collateralised debt obligations), 11 central bank, 151; -banks unique relationship, 173; foreign exchange interventions, 233; inflation rate target, 70; LIBOR key variable, 53, 151; LIBOR use, 152; money pumping, 50; power, 174; power overestimated, 49, 54; price stability goal, 51; repos, 175; tips, 176; transparency, 40, 166–7; unexpected interest rate moves, 41; weakening of, 114 Channel 4 News, 11 Chase Manhattan, 131 Chemical Bank (JPMorgan Chase), 30 CIBOR (Copenhagen Interbank Offered Rate), 28, 78–9 Citibank, 29, 30, 58, 101, 153, 155, 182, 188, 193, 220, 223; benchmark manipulation fine, 160; ‘Scandi’ desk, 33; Tokyo dealing room, 196 CME (Chicago Mercantile Exchange), 123, 1288; Eurodollar futures, 126 collateral types, central banks lowering, 50 competition law, UK and EU, 222 complex structured products, valuation inability, 50 compliance departments banks, 253; post-scandals increase, 283 Cooke, Mr Justice, 282 copycat behaviour, market making, 202–3 Cosmopolis, 250 counterparties, confirmations, 18 Countrywide, 49 CPI, Inflation index, 149 credit: default swap market, 99; officers, 95; rating agencies, 96; risk, 137; risk measure for, 55 Crédit Agricole Indosuez, 37, 44, 58–9, 134, 155 Crédit Suisse, 153, 193, 221, 223; First Boston, 127 creditworthiness: ‘image problem’, 51; judgments on, 225; signals, 98, 99 cross-currency basis swap, LIBOR-indexed, 62 CRSs, 129 Darin, Roger, 115 dealing relationships, informal reciprocal, 227 dealing rooms, internal monitoring increase, 283 deceptive behaviour, LIBOR banks, 105; quotes post-crisis pressure, 106 Del Missier, Jerry, 77 Den Danske bank, 178 derivatives, ‘abstract’, 123–4; benchmark use, 150; borrowing and lending idea, 138; concrete type, 121; growing market, 79; interest rates, 30; LIBOR-indexed, 28, 71, 80, 104, 129; new instruments, 18; textbook explanation, 119–20; trade tickets, 141’usefulness’ of, 131 derivatives market: benchmark need, 119; LIBOR importance, 37; Scandanavia, 27 Deutsche Bank, 153, 193, 223; LIBOR controls deceptions, 183; LIBOR fine, 83 Diamond, Bob, 77 Dillon Read, 49 ‘discount windows’ lowering, 50 ‘dishonesty’, 249 Donohue, Craig, 128 dot-com bubble, 104 downgrades, credit rating agencies, 96 Dresdner Bank, 17, 155, 197 Duffy, Terry, 128 Easton Ellis, Bret, American Psycho, 236 economic data releases, examples of, 38 efficient market hypothesis, 195, 200–1; unrealistic assumption, 196 ‘emerging markets’, trading desks, 37 ERM (European Exchange Rate Mechanism) crisis, 31–2 Ermotti, Sergio, 213 EURIBOR (Euro Interbank Offered Rate), 14, 76–8, 126, 130; derivatives, 145; new unpredictability, 62; pre-Euro, 148 euro, the: Eurozone crisis, 109; launch of, 36 eurocurrency market, 113; central bank weakening, 111; deregulated, 114; Eurodollars, see below; fast growth of, 112; LIBOR derivatives replaced, 134 Eurodollar market, 113, 133, 152; advantages, 112; banks made, 117, 125; contracts standard maturity dates, 126; financial deregulation prompt, 116; futures, see below; gradual reduction of, 136; history of, 111; LIBOR rate making, 117, 129; rapid growth of, 115 Eurodollar futures, 125, 128, 265; bets on, 146; rationale for, 129; success of, 127 Euromoney, 135 European Banking Federation, 180 European Central Bank (ECB), 50, 109, 145 European Commission, 221 Euroyen LIBOR futures contract, 127 ‘Events’ central bank meetings, 40 excessive lending, inflationary fears, 114 exclusivity, self-perception, 269 expectations, games of, 103; overpriced stock, 104 ‘expert judgments’, banks LIBOR quotes, 278 Fama, Eugene, 195 ‘fat fingers’ errors, 253 FBI, USA, 192–3 FCA (Financial Conduct Authority), 183–4, 188, 219, 282; Fair and Effective Markets Review, 222; prohibited individuals list, 285 fear, rumours of, 266 Federal Reserve, see USA FIBOR (Frankfurt Interbank Offered Rate), 19, 127 financial crisis, Asia 1997, 36 financial crisis 2007–8; decent culture erosion explanation, 279; familiar analysis of, 114; financial market illuminating, 275; -LIBOR implications, 52, 111; money markets freeze, 109 financial markets: cartels, 222; deregulation 115–16; instruments liquidity, 43; misconceptions, 236; self-regulated, 113, 171; see also, money markets Finers Stephens Innocent, 3 Finland: USSR collapse impact, 20; USSR Winter War, 65 ‘firm policy’, interbank spread choosing, 229 fixed exchange rates, sustainability, 32 flat switch, 92–5 flow traders, 143 Forex, 1995 exam, 223; reciprocity endorsed, 227 FRAs (forward rate agreements), 28, 75, 91, 129–30; growth of, 148 Friday dress policy, 135 FSA (Financial Services Authority), UK, 1–2, 67, 77, 98, 105, 124, 163, 180, 243; prohibition orders, 4; suspension, 5 ‘Full Amount’ call, weakness indicator, 143 funding costs:, averages, 104; LIBOR signalling, 97; -market liquidity relation, 44 futures contracts: agricultural, 120; cash-settled, 125; transparent exchanges, 63 FX (foreign exchange) market, 172, 196, 245; bank price influence, 212; big banks domination/market concentration, 193, 195, 210, 212, 223, 234; ‘clear the decks’, 210; ‘community’, 190; ethical problem, 213; global banks 2014 fines, 188; interbank spread survey, 228; interest rate markets joining, 31; Japanese banks borrowing, 33; London ‘banging the close’; 209; non-public information grey zone, 224; order books, 7; reciprocity, 224; scale of significance, 126, 192, 232; spot market desk, 214, 217; standardised norms, 194; swap market, see below; ‘The Cartel’, 220; traders, see below; turnover scale, 212 FX swap market, 134, 137, 145, 146; interest rate speculation, 133; Japanese traders, 34; lower credit risk, 137, 144; 9/11 trading, 265; spot-prices, 31, 227 FX traders, 191; club mentality, 269; desks, 30; respect among, 269; secret code us, 219; ‘techniques’, 204; varied backgrounds, 216 Gelboim, Ellen, 153 gentlemen’s agreements, 141 ‘getting married to your position’, trading attitude, 257–8 global merchandise exports, growth, 112 Goldman Sachs, 49, 140, 193, 223, 272 Goodhart, Charles, 173 Greece, 2015 ATM queues, 109 Greenspan, Alan, 15, 51, 173–4 Greenwald, Bruce, 225 guilt, feelings of, 78, 169, 243, 259 Häyhä, Simo (‘White Death’), 65 ‘Hambros’, 194 Harley, Dean, 231 Hayes, Tom, 8, 13, 72, 92–3, 115, 238; prison sentence, 12 HBOS, 183 headhunters, 160 HELIBOR (Helsinki Interbank Offered Rate), 28 Hester, Stephen, 284 Hintz, Brad, 10 HSBC, bank, 27, 153, 155, 188, 193, 208, 213, 223; FCA fine, 219; FX trading, 116, 187; Group Management Training College, 187; Stockholm, 31 Hull, John, 150 Hunger Games series, 255 Hyogo Bank default, 33 ICAP, 86, 101, 175; LIBOR fine, 85 ICMA (International Capital Market Association), 174 IKB bank, 50; rollover problems, 49 illiquidity, temporary, 43 Indonesia, financial crisis, 36 Industrial Bank of Japan, 34 ‘industry’, financial, 154–5 information: LIBOR delays problem, 49, 54; big banks superior, 210 instincts, 226 interbank money market, 38; central bank influence, 39; efficiency estimate change, 109; lending fall, 111; LIBOR, see below interest rate(s): benchmarks, 14; central banks forecasts, 166; changes impact of, 38; derivatives, 17, 174; hedging, 128; movement, 42; short-term, 28, 133; swaps sizes, 142 International Code of Conduct and Practice for the, 216 International Monetary Market (IMM), 72; contracts conventions, 126; LIBOR fixings, 73–4 investment banks, risk takers, 272 Ireland, Financial Regulator, 4, 168, 281 IRS, interest rate swap, 129–30; short-term, 140 ISDA (International Swaps and Derivatives Association), 174; fix, 14 Japan: bank sector/system: crisis, 47, 81; dollars difficulty period, 34; fear premium, 36; Financial Services Agency, 101; FX market concentration, 193; FX ‘premium’, 35–6; safe perception change, 33; unique derivatives market, 36; yen market, 8, 45 JP Morgan/JP Morgan Chase, 92, 105, 153, 178, 188, 192–3, 220–3 Kahneman, Daniel, 255 Kerviel, Jérôme, 250 Keynes, J.M., General Theory of Employment, 102 Kipling, Rudyard, 127 KLIBOR (Kuala Lumpur), 37 Knight, Angela, 107 Lapavitsas, Costas, 6–7 layering, 204 Leeson, Nick, 250 ‘legacy issues’, 236 Lehman Brothers, 2, 10, 48–9, 59, 105, 162, 272; bankruptcy filing, 160; collapse of aftermath, 96 Lewis, Ken, 164 LIBOR, 19, 28, 76–7, 104, 127, 130, 147, 209, 234, 265; anti-competitive process, 186; banking lobby regulated, 180–1; ‘barometer of fear’, 96; benchmark significance, 192, 225; central banks perfection assumption, 49; controls deception, 184; crisis-induced ‘stickiness’, 106; crucial price, 13; daily individual quotes, 97; derivatives, see below; ‘Eurodollar futures’ origin, 126; FCA regulated, 282; ‘fear’ index, 15; fixing panels, see below; future direction of, 38; inaccuracy possibilities, 74; interbank money market gauge, 39; jurisdiction issue, 115; manipulation, 7, 12, 14, 78; manipulation impossibility assumption, 81; market-determined perception, 88, 149; mechanism, 104; minute change importance, 73; new unpredictability, 62; 1980s invention, 111; objective process ‘evidence’, 148; perception of, 119; players as referees, 80; post 2007 interest, 53; pre-2013 unregulated, 118; predicting difficulty, 70; regulatory oversight lack, 179; retail credit impact, 277; sanctioned secrecy, 181–2; savings and borrowings dominance, 107; scandal breaking, 81; state measure use, 151; three-months, 71; ‘too big to fail’, 279; use of limited post-scandal, 278 LIBOR derivatives market, 8, 45, 137–8, 232; autonomous development of, 111; banks made, 125; ‘community’, 190; -FX connected, 189; imaginary money market, 148; increased abstraction of, 144–6 LIBOR panel banks, 74–5, 79, 98, 118, 172, 282; -LIBOR implications, 52 big banks dominated, 173, 179–80; fixing process, 75; membership criteria, 184–5; punishment idea, 108; post-scandal membership, 186 LIBOR scandal, 77, 152, 167, 245; correctness attempts, 277; post- definition unchanged, 278; breaking of, 81; Wall Street Journal on, 238 LIBOR-OIS spread(s), 51, 54–5, 99, 151 LIFFE, 126–7 liquidity: and credit crunch 2008, 2; credit issues, 45; informal norms need, 284; provision ‘duty’ 229; risk, 42–3, 55, 70 Lloyds Bank, 153, 183; LIBOR fine, 83 long/short positions, 26 Lukes, Steven, 186 makers, price, 24 Malaysia, financial crisis, 36 Mankell, Henning, 235 ‘marked to market’ trading books, 62 market, the financial: ‘colour’ 202; ‘conventions’, 228–33; ‘courtroom’, 171; interbank spread choosing ‘image’, 229; liquidity risk, 42–3; making, see below; perfections of, 15; relationships dependent, 225–6; risks limits management failure, 281 market makers/making, 24, 72, 117, 201, 206, 217, 226–7, 257; ‘ability’, 185; cash-settled derivatives, 133; failure to manage, 281; NIBOR IRS, 132; profession of, 200; two-way price quoting, 228; visibility of, 202 Martin Brokers, 85 Mathew, Jonathan, 139 McAdams, Richard, 231 McDermott, Tracey, 282 Meitan Tradition, 100, 175 Merita Bank, 56 Merrill Lynch, 2–3, 8–9, 12, 46, 49, 59–60, 62, 64, 69, 92–3, 96, 140, 153, 155, 160–1, 164, 188, 272, 285; Bank of America takeover, 67; bonuses, 10, 162–3; financial centre, 48; International Bank Limited Dublin, 4; mismarking, 68; risk taking encouraged, 281; silence rule, 242 Midland Montagu (Midland Bank Stockholm Branch), 20, 22–3, 27, 29; Stockholm, 22, 29 ‘Millenium bug’ fears, LIBOR impact, 44 mismarking, 9 mistakes, fear of, 26 Mollenkamp, Carrick, 98 ‘monetary transmission mechanism’, 39 money market(s): decentralised, 224; freeze, 110; international basis, 112; ‘risk premium’, 42; stable illusion-making, 106; -state link, 224 Moody’s, 96 morals, 66; morality, 69 Morgan Stanley, 49, 193, 223, 272 mortgage bonds, 21 NASDAQ stock exchange, transparency, 220 New York 2001 attacks, 263 New York Times, 4, 9, 11, 163, 241, 243 NIBOR (Norwegian Interbank Offered Rate), 28, 72, 130–1; fixing dates, 76; inaccurate fixing, 74; IRS market, 132; new unpredictability, 62; one month IRS market, 136 nicknames, use of, 25–6 Nordbanken, nationalised, 27 Nordic bank branches, 30 Norges Bank, NIBOR use, 152 Norinchukin Bank, 153 Northern Rock, Newcastle queues, 109 Norway, banking system, 131 ‘objective’ fact, LIBOR, 149 ‘off-balance-sheet’, trading, 137–8 official interest rate, predicting, 38 OIS (overnight index swap), 51; see also LIBOR-OIS one month IRS market, 136 OPEC (Organization of the Petroleum Exporting Countries), US dollar surpluses, 113 options desk, FX, 214 ‘over-the-counter’ trades, 63 derivatives, 129, 134; interest rate options, 130; markets, 227 Philippines, financial crisis, 37 Philips, cassette launch, 111 PIBOR (Paris Interbank Offered Rate), 19, 127 post scandals, reforms, 282 price(s), as interactions, 200; brokers indications role, 87; ‘resolution hypothesis’, 218 primary dealers, 175, 178 privacy, individual rights to, 167 Rabobank, LIBOR fine, 83, 153, 282 RBC, bank, 223 RBS, bank, 92, 153, 185, 188, 192, 220–1, 223, 284; LIBOR scandal fine, 83 reciprocity: -and trust, 226, 284; informal agreements, 228 regret, fear of, 258 regulatory arbitrage: Eurodollar market prompting, 118; platform for, 114 ‘reputation’, 185 respect, among traders, 267 Reuters, 19, 79, 151; Dealing, 41, 195, 260; Dealing 2000–2, 29, 34, 194; indicative prices, 62; screen price, 53 risk, 135; buzz of, 261–2; limits breaking, 274; ‘loss aversion’, 255; managers, 253; organizational limits, 250; pressures for, 63 risk taking: addictive, 262; enjoyment of, 260; fear control, 263; increase, 73; individualistic, 262; reward anticipation, 254; reward interpretation, 259; supervision need, 253 risk takers, 270; respect among, 268–9 Robert, Alain, 260 ‘rogue traders’, 1, 237; ‘bad apples’ narrative, 237, 240, 246, 279; fame, 252; fascination with, 246; losses, 259; ranking list, 250; risk list, 251; scandals, 258; stigma, 247 rogue trading, 274; definitions, 249; labelling, 248; risk link, 250 Royal Bank of Canada, 153 RP Martins, 153 rules of the game, loyalty to, 25 ‘run-throughs’, 87–9, 226–7 Russia, financial crisis, 36 Ryan, Ian, 3, 9, 68 Sanford C.


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, declining real wages, European colonialism, fiat currency, financial innovation, German hyperinflation, housing crisis, implied volatility, intangible asset, Kickstarter, large denomination, manufacturing employment, margin call, market bubble, market fundamentalism, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, short selling, sovereign wealth fund, too big to fail, transaction costs, universal basic income, value at risk, yield curve

The cross-currents made the answer less than obvious. Throughout the month, policy makers repeatedly alluded to concerns for both economic growth and price stability. Bernanke called rising oil prices unwelcome, and Paulson emphasized that they would be “a real headwind” for the economy. With respect to the exchange rate, Bernanke emphasized that the Fed would “carefully monitor” its implications for inflation and inflation expectations, while Paulson even suggested that he “would never take intervention off the table.”28 The pickup in inflationary pressures prompted a shift of the Fed’s priorities from preventing debt and economic risks to growth and toward assuring price stability. As early as June 4, Bernanke noted that further interest-rate cuts were unlikely due to concerns over inflation, and suggested that the current policy rate was sufficient to promote moderate growth.29 A few days later Bernanke gave a speech noting that the rising commodity prices and the dollar’s depressed value posed a challenge for anchoring long-term inflation.

It was at this time that conflicts both within countries and between countries intensified, sowing the seeds of populism, authoritarianism, nationalism, and militarism that at first led to economic warfare and then military warfare in Europe in September 1939 and with Japan in December 1941. Second Half of 1932: Further Contractions and the Election of FDR By the summer, the big stimulation and relief to banks appeared to be helping. The downward spiral began to moderate, asset prices stabilized, and production actually increased in certain areas of the economy, like autos. From May through June, commodities, stocks, and bonds all bottomed. Markets for both stocks and bonds improved during the second half of the year. In August and September, the Dow Jones Industrial Average rallied to a peak of 80, almost double its July low. You can see trajectory of the Dow in the chart below. Time magazine’s August 8, 1932, edition claimed that the rally occurred because the gold outflow had finally ceased, rumors had spread about the country receiving foreign capital, and a railroad merger had been approved.

Reflecting on the market action in the months following the Fed’s rescue, we likened it to a “currency intervention that temporarily reverses the markets but doesn’t change the underlying conditions that necessitated the action.” Simultaneously oil prices continued to climb (hitting $130 in late May) and the dollar continued to fall. These moves added to the Fed’s dilemma, as it would have to balance keeping its policy accommodative to ward off an economic contraction and a further deterioration in financial conditions with concerns over price stability. The minutes of the Fed’s April meeting reflected this, with the committee acknowledging “the difficulty of gauging the appropriate stance of policy in current circumstances.” Two members even expressed “substantial concerns about the prospects for inflation” and warned that “another reduction in the funds rate…could prove costly over the long run.” It should be noted that using interest rate and liquidity management policies that affect the whole economy to deal with the debt problems of certain sectors is very inefficient at best.


pages: 193 words: 48,066

The European Union by John Pinder, Simon Usherwood

Berlin Wall, BRICs, central bank independence, centre right, collective bargaining, Doha Development Round, eurozone crisis, failed state, illegal immigration, labour market flexibility, mass immigration, Neil Kinnock, Nelson Mandela, new economy, non-tariff barriers, open borders, price stability, trade liberalization, zero-sum game

The ECB and the central banks of the member states are together called the European System of Central Banks (ESCB). The six members of the ECB’s Executive Board, together with the governors of the other central banks, comprise the Governing Council of the ECB; and none of these banks, nor any member of their decision-making organs, is to take instructions from any other body. The ‘primary objective’ of the ESCB is ‘to maintain price stability’ though, subject to that overriding requirement, it is also to support the Union’s ‘general economic policies’. The ECB has the sole right to authorize the issue of notes, and to approve the quantity of coins issued by the states’ mints. In response to German preference, the single currency was named the euro, rather than the French-sounding ecu. In order to ensure that only states which had achieved monetary stability should participate in the euro, five ‘convergence criteria’ were established, regarding rates of inflation and of interest, ceilings for budget deficits and for total public debt, and stability of exchange rates.

European Atomic Energy Community (Euratom): Established in 1957 alongside the European Economic Community to promote cooperation in the field of atomic energy; undertakes research and development for civilian purposes. European Central Bank (ECB): Responsible for monetary policy for the Eurozone. Based in Frankfurt, the ECB is run by an Executive Board. Its members and the governors of central banks in the Eurozone comprise ECB’s Governing Council. ECB and central banks together form the European System of Central Banks (ESCB), whose primary objective is to maintain price stability. None of these participants may take instructions from any other body. European Coal and Steel Community (ECSC): Launched by the Schuman Declaration of 9 May 1950, placing coal and steel sectors of six states (Belgium, France, Germany, Italy, Luxembourg, Netherlands) under a system of common governance. The European Economic Community and Euratom were based on the ECSC’s institutional structure.


pages: 356 words: 103,944

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

affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, 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, endogenous growth, 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, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, 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, Paul Samuelson, 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: 209 words: 53,236

The Scandal of Money by George Gilder

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

Transacting some 77 percent of the business are ten leviathan banks in Western countries. These tolls and fees are burdens on global trade and economic growth paid by the production sector of the economy to the financial sector. But it is the sum of all these activities—hedging, speculation, and derivatives—that accounts for the oceanic span of liquid and available currency services. As Friedman taught us, currency speculation can assure price stability. Speculation, in his view, could be destabilizing only if the speculators lost money. But money losers would eventually exit the market, leaving the profitable speculators (like those ten big U.S. banks full of computers and specialists) in charge, accurately arbitraging among the currencies and smoothing out the divergences. Thus, according to the experts, a massively speculative, oceanic market like currency trading, approaching the ideal of perfect competition, tends to an equilibrium of stable and accurate relative prices.

“E-Commerce Speeds Up, Hits Record High Share of Retail Sales,” MarketWatch (blog), August 15, 2014, http://blogs.marketwatch.com/capitolreport/2014/08/15/e-commerce-speeds-up-hits-record-high-share-of-retail-sales/. 3.Susan Vranica, “The Secret about On-Line Ad Traffic, One-Third is Bogus,” Wall Street Journal, March 23, 2014, http://www.wsj.com/articles/SB10001424052702304026304579453253860786362. 4.Nick Szabo, “Macroscale Replicator,” October 19, 1995. 5.Szabo’s blog, Unenumerated, is published online by Forbes.com. All the quotations here are from the Unenumerated archive. 6.Richard Vigilante, personal communication. CHAPTER 8: WHERE “HAYEKS” GO WRONG 1.Ferdinando M. Ametrano, “Hayek Money: The Cryptocurrency Price Stability Solution,” Social Science Research Network, revised July 5, 2015, http://ssrn.com/abstract=2425270, 54. Ametrano’s paper was shortlisted as a finalist for the Blockchain Awards, category Visionary Academic Paper, at the Bitcoin Foundation Conference 2014, but it lost to Nakamoto’s original breakthrough paper. 2.Ibid., 5–6. 3.Ibid., 10. 4.Ibid., 20; and Friedrich A. Hayek, Denationalization of Money—The Argument Refined, 3rd ed.


India's Long Road by Vijay Joshi

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

The government buys cereals from farmers at administratively-​set ‘procurement prices’ and sells them through the PDS at controlled ‘issue prices’. The targeting is very poor and the leakages are huge. The subsidy for rice and wheat is enormous and amounts to 1 per cent of GDP. As explained in Chapters 8 and 10, it would be far cheaper and more effective to give poor people cash or vouchers to buy food at market prices, with government intervention restricted to running a price stabilization scheme. NATIONAL GAIN FROM UNWINDING SUBSIDIES The above account covers only some of the most conspicuous subsidies but there are plenty of others, even if they do not figure explicitly in the budget. Elimination of all dysfunctional subsidies deserves to be a prime component of an intelligent reform agenda. These subsidies distort efficient resource allocation, give rise to massive leakages to intermediaries and black market operators, and are regressive in the bargain (i.e. they benefit the relatively rich more than the poor).

Even so, demand management, on its own, will not achieve low inflation in India today (or at least not without intolerable cost). There are two systemic supply-​side factors that create an inflationary bias. Firstly, there is the nature of state intervention in the food market. Such intervention is not necessarily a bad thing. In an economy that is subject to volatile swings in agricultural production, a price-​stabilization scheme run by the government makes good sense. A responsible government may also quite rightly [ 142 ] Stability and Inclusion 143 wish to protect the poorest people against food destitution. How would these tasks be organized in a rational system? The government would assure farmers a ‘procurement price’ (in other words a price at it which it stands ready to buy food from them) that is equal to an average of market prices expected to rule in good and bad years, thereby shielding them from price instability.

After years of public distribution of cereals, India remains a byword for malnutrition; and as many commentators have pointed out, this is more due to lack of balanced diets, and the prevalence of disease and poor sanitation, than low calorie intake. It is hard to resist the conclusion that the TPDS is ripe for abolition if a more efficient substitute could be found; and this leads to the thought that the objective of ensuring food security would be better achieved by making cash transfers to people, which they could use to buy food in the market. The state could continue with price stabilization via buffer stocks but it could get out of the business of distribution, in which the private sector has a comparative advantage. Up to two-​thirds of government spending on food subsidies could thus be saved and used for other socially desirable purposes. The second pillar of the social protection framework is the Mahatma Gandhi Rural Employment Guarantee Scheme (NREGS), initiated by an Act in 2006 and rolled out across the country by 2008.10 It guarantees, S a f e t y N e t s a n d S o ci a l P r o t e c t i o n [ 203 ] 204 as a legislated right, up to 100 days of employment a year to any rural household at a specified minimum wage indexed to the cost of living.


Not Working by Blanchflower, David G.

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

Without a clear guide to the objective of monetary policy, and a credible commitment to meeting it, any rise in inflation might become a self-fulfilling and generalised increase in prices and wages. And surely the lesson of the past fifty years is that, when inflation becomes embedded, the cost of getting it back down again is a prolonged period of sluggish output and high unemployment. Price stability—returning inflation to the target—is a precondition for sustained growth, not an alternative. Price stability was not a precondition for anything, let alone sustained growth. It turns out targeting inflation meant too many policymakers failed to spot the biggest recession in a generation. Since then we have continued to have a growth problem and a “too little” inflation problem. Deflation replaced inflation as the new problem central bankers faced, but they have failed to adapt.

The main reason that real wages haven’t risen is presumably that labor productivity has also been flat. There are obviously a number of deep factors driving the labor productivity puzzle, but we have to accept that real wages and labor productivity are closely linked. In addition, the labor share has been remarkably stable in this period. The nominal part of the wage story is presumably connected to the attainment of price stability. We simply do not expect price inflation to hit 10 percent anymore, and this may partly explain why a pay norm seems to have been anchored around 2 percent for several years around the world. In reality, the high level of labor market slack and the weakness of worker bargaining power are keeping pay and price inflation down. Full employment is a long way off. If it were anywhere close, wage growth would be back to pre-recession levels of 4 percent or even higher.

Janet Yellen in a speech in September 2017 raised the possibility that, indeed, the natural rate has fallen and perhaps by a lot: Some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected. For example, labor market conditions may not be as tight as they appear to be, and thus they may exert less upward pressure on inflation than anticipated. The unemployment rate consistent with long-run price stability at any time is not known with certainty; we can only estimate it. The median of the longer-run unemployment rate projections submitted by FOMC participants last week is around 4-1/2 percent. But the long-run sustainable unemployment rate can drift over time because of demographic changes and other factors, some of which can be difficult to quantify—or even identify—in real time. For these and other reasons, the statistical precision of such estimates is limited, and the actual value of the sustainable rate could well be noticeably lower than currently projected.6 At the press conference following the FOMC rate increase decision on March 21, 2018, the new Fed chairman Jay Powell in response to a reporter’s question as to whether he was satisfied by the current pace of wage growth said the following: As the market is tightened, as labor markets have tightened, and we hear reports of labor shortages that we see that, you know, groups of unemployed are diminishing, and the unemployment rate is going down, we haven’t seen, you know, higher wages, wages going up more.


pages: 708 words: 196,859

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

Albert Einstein, anti-communist, bank run, banking crisis, Bretton Woods, British Empire, business cycle, 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, money market fund, 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: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, 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, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, 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, zero-sum game

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: 398 words: 111,333

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham by Joe Carlen

Albert Einstein, asset allocation, Bernie Madoff, Bretton Woods, business cycle, business intelligence, discounted cash flows, Eugene Fama: efficient market hypothesis, full employment, index card, index fund, intangible asset, invisible hand, Isaac Newton, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, Robert Shiller, the scientific method, Vanguard fund, young professional

As Graham recalls of his initial flash of inspiration (ca. 1921) regarding this matter, “A better standard, I felt, was to give a designated bundle or ‘market basket’ of basic raw materials a monetary status equivalent to that which had always been accorded to gold.”12 Specifically, Graham advocated for a “commodity-unit” currency representing a basket of twenty-three commonly used commodities13—“the former 23 gr. of gold in the dollar are to be replaced by 23 small quantities of different basic raw materials.”14 In this manner, some of the stability enjoyed by gold producers during the 1920–1921 Depression could be experienced by those who supply/produce what Graham describes as the “tangible, basic goods that we use and need, in their proper relative amounts.”15 This would be a monetary system that would provide greater stability to the prices of basic foodstuffs (wheat, sugar, etc.), textiles (e.g., cotton), metals (e.g., copper), and other vital tangible elements of American production and consumption, such as rubber. In other words, just as gold had enjoyed greater stability by being the constituent element of the monetary unit (the dollar), by being elevated to constituent elements of the dollar, the price stability of the primary inputs of production would be enhanced considerably. The improved stability of these primary “inputs” would, in Graham's view, then ripple throughout the economy, leading to greater overall stability in pricing, production, consumption, profitability, and employment. During downturns, the government would purchase a reserve of this basket of goods (on an established proportional basis set by the government) from its suppliers to absorb excess capacity.

These are some of the reasons why it is somewhat surprising that, of the two economists, it was Hayek, of the less interventionist Austrian school, who gave Graham “strong support of the plan in its international application.”70 In fact, Hayek wrote a full-length article endorsing the plan titled “A Commodity Reserve Currency,”71 which was published in the June–September 1943 issue of the Economic Journal. As for Keynes, his support was more equivocal, as he considered rising prices to be more conducive to full employment than Graham's objective of price stabilization. Nonetheless, he did recognize the merit of other aspects of Graham's plans. As Keynes wrote in a personal letter to Graham, “On the use of buffer stocks as a means of stabilizing short-term commodity prices, you and I are ardent crusaders on the same side.”72 According to Kahn and Milne, “Ben exchanged a number of letters with John Maynard Keynes on this and other economic topics.”73 Whatever one's opinion of his plan may be, it is a testament to his extraordinary intellect and writing skills that Graham, with no formal economic training, could conceive, develop, and present his plan in such a way as to elicit considered (and, on balance, positive) responses from two of the greatest economists of the era (and, indeed, of modern history).

., 102 Morningstar, 166 Munger, Charlie, 54, 135, 138, 246, 252 Murray, Roger, 256 mutual funds, 94 names, “Americanization” of, 17 National Presto Industries, 306 National Transit, 148 “nature versus nurture,” 21 negative (inefficient) information volatility, 167 Newburger, Alfred, 76, 103 Newburger, Bob, 103 Newburger, Henderson, and Loeb, 76, 98, 103, 108 Newburger, Samuel, 104 “New Deal,” 184, 209 Newman, Douglas, 143 Newman, Jerry, 136, 143, 149 Newman, Mickey, 240 Newman and Graham LP, 234 New School for Social Research, 185 New York Institute of Finance, 36, 50, 156, 244 New York State Guard, 109 New York State War Finance Committee, 195 New York Stock Exchange, origins of, 102 Nippon Club in Manhattan, 113 Nomura, 258 “nonethnic” names, 100 Northern Pipe Line Company, 145–47 option warrants, 288 Orthodox Judaism, 18 over-the-counter houses, 149 overvaluation, 81 owner orientation, 134 panic selling, 172 Parikh, Parag, 173–74 partnerships vs. corporations, 183 “passive” investors, 84 Pat Dorsey/Sanibel Captiva, 257 Pennsylvania Savold, 116 performance, long-term, 52 Perlmeter, Stan, 253 Plymouth Cordage, 150 positive (efficient) information volatility, 167 Poulet, David, 259 Powers, Barnard, 116 price and value, divergence between, 129 price fluctuations, 171 price stabilization, 216 price-to-earnings ratio (P/E), 149 “price trending” methods, 107 price volatility, 45 principal, safety of, 36, 51 principles of corporate valuation, 159 property values, 96 qualitative and quantitative factors, distinction between, 81 qualitative factors, 54 quantitative analysis, 98 quantitative diagnostics, 96 Quirt, John, 292 Ranson, David, 217 Rea, James, 305 Rea-Graham fund, 305 reasoning, 38 Reiter, Charlotte, 236, 272–73, 295 “research and analysis,” 106 revenue-generating enterprise, 131 risk, minimizing, 49–51 Robert Hagstrom/Legg Mason Capital Management, 257 Roberts, Scott & Co., Inc., 305 Rockefeller, John D., 146 Rockefeller Foundation, 146–48 Roll, Richard W., 314 Roosevelt, Franklin Delano, 150–51, 184, 207, 293 Ross, Nikki, 137, 175 Ruane, Bill, 156, 230, 244 Ruane & Cunniff, 248 Rubel, David, 141 Russo, Mark, 259 Russo, Tom, 55 Safron, Edythe (Kenner), 198, 299 Sanders, Henry, 195 S&P 500, 93–94 Sarnat, Bernard, 20, 74–75, 183, 230 Sarnat, Gerry, 267 Sarnat, Rhoda, 20, 67, 266–67 Schaffer Cullen Capital Management, 257 Schloss, Edwin, 245 Schloss, Walter, 134–35, 244 Schroeder, Alice, 228–29 Schwartz, Anna, 205–206 screening tools, online, 92–93 screens for bond selection, 89–92 for defensive investors, 85–87 for enterprising investors, 87–89 Sears, Steven, 174 securities, 36 security analysis, system of, 38 security analysts, 40, 98 security-selection principles, 223 self-education, 58 selloff, 127 Semper Vic Partners LP, 259 Sequoia Fund, 50, 248–49 Seth Klarman/Baupost Group, 257 Sherman Anti-Trust Act, 145 Sherry (Siamese cat), 193–94 Sherry II (Siamese cat), 194 Sherry Netherland Hotel, 193 “shorting,” defined, 141–42 silent partner, 131 “sitting shiva,” 25 Skirball, Jack, 268 Slade, Helen, 195 Smith, Adam, 257–58, 292 Smith Barney, 232 Social Security, 293 Sonkin, Paul, 242 speculation, unsound, 51 “speculative enthusiasm,” 125 speculative investments, 130 Standard Oil (John D.


pages: 409 words: 118,448

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy by Marc Levinson

affirmative action, airline deregulation, banking crisis, Big bang: deregulation of the City of London, Boycotts of Israel, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, car-free, Carmen Reinhart, central bank independence, centre right, clean water, deindustrialization, endogenous growth, falling living standards, financial deregulation, floating exchange rates, full employment, George Gilder, Gini coefficient, global supply chain, income inequality, income per capita, indoor plumbing, informal economy, intermodal, invisible hand, Kenneth Rogoff, knowledge economy, late capitalism, linear programming, manufacturing employment, new economy, Nixon shock, North Sea oil, oil shock, Paul Samuelson, pension reform, price stability, purchasing power parity, refrigerator car, Right to Buy, rising living standards, Robert Gordon, rolodex, Ronald Coase, Ronald Reagan, Simon Kuznets, statistical model, strikebreaker, structural adjustment programs, The Rise and Fall of American Growth, Thomas Malthus, total factor productivity, unorthodox policies, upwardly mobile, War on Poverty, Washington Consensus, Winter of Discontent, Wolfgang Streeck, women in the workforce, working-age population, yield curve, Yom Kippur War, zero-sum game

Two weeks later, after a single face-to-face meeting between Carter and Volcker in the Oval Office and a lightning-fast Senate confirmation, the chairman’s office was filled with the smoke of Volcker’s cheap A&C Grenadier cigars. Not particularly at home in economic matters, Carter was unfamiliar with Volcker’s views in detail. Like every political leader everywhere, the president favored bringing down inflation, but he shared the widespread hope that if the Fed proceeded gradually, it might be able to achieve price stability without putting people out of work—and without endangering the president’s chances of re-election in 1980. The fact that the Fed had tried this approach for more than a decade, without success, did not alter the president’s opinion. Volcker had no such illusions. In a book published in 1978, he had warned of “limits on the ability of demand management to keep the economy at a steady full employment path,” an oblique way of saying that bringing down inflation would cost jobs.

This report was widely known as the Haberler Report after Gottfried Haberler, the chairman of the group of authors. High duties and taxes on coffee, tea, and cocoa beans, in some cases exceeding 60 percent of the value of the product, exemplified the barriers to tropical products; see Appendix, Table D. 20. For an economic discussion of such schemes, see David M. G. Newbery and Joseph E. Stiglitz, The Theory of Commodity Price Stabilization (Oxford: Oxford University Press, 1981), and David G. Gill et al., “Access to Supplies and Resources: Commodity Agreements,” American Society of International Law, Proceedings of the Annual Meeting 71 (1977): 129–144. 21. United Nations Conference on Trade and Development, The History of UNCTAD 1964–1984 (New York: UNCTAD, 1985), 56–58. 22. See, for example, M. Ataman Aksoy and Helena Tang, “Imports, Exports, and Industrial Performance in India, 1970–88,” World Bank Policy Research Working Paper WPS 969 (2001). 23.

See also banks/banking systems; Federal Reserve Central Europe, 29, 81 Chase Manhattan Bank, 91, 96 Chile, 43, 257–258; economy of, 37 China, 4, 265; hardship and poverty in, 21, 44; income per person in, 240; labor share in, 141–142 Chirac, Jacques, 210–211, 214–215 Churchill, Winston, 190 Citicorp. See First National City Bank Clean Air Act, 62 Club of Rome, 57 Coase, Ronald, 107 Cold War, 40–41 collective rationality, 32, 34 Commission on Industrial Competitiveness, 236 Committee for Economic Development, 26 Committee on Banking Regulations and Supervisory Practices, 93 commodity prices: stabilization of, 42–43 commonality: among developing countries, 41 communism, 63 Communist Bloc. See Soviet Bloc communist economies of 1970s: in Soviet Union, 161–162 Communist Party, in France, 201, 203, 204–205, 206, 210. See also political parties computers, 58, 64, 93, 117, 123, 264, 265, 266 concerted action (government and nongovernmental cooperation), 32–34 Congo, 44 conservatism: move to the right and, 10, 155–178 conservative economic policy, 179–182; discretion and, 180; employment and, 179, 180, 182; inflation and, 180–182; rules matter and, 179–180; of Thatcher, Margaret, 182–197.


pages: 305 words: 69,216

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

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, 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, money market fund, moral hazard, mortgage debt, Myron Scholes, 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: 471 words: 124,585

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

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, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, 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, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, 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, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, 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: 482 words: 121,672

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

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, 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, stocks for the long run, survivorship bias, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

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 2 percent or below 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 decades ahead, 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.

., 233 Pets.com, 84 Philadelphia 76ers, 145 Phillips, Don, 400 Phoenix, University of, 169 Pittsburgh Steelers, 148 Polaroid, 68, 69, 161 Ponzi schemes: Internet investment as, 80, 242 of Madoff, 258–59 ZZZZ Best as, 74 portfolio management, 66, 160–61, 164, 170, 174–84, 261, 349–50, 351, 361–62, 366–67, 389, 398 see also “smart beta” Portfolio Selection (Markowitz), 197 portfolio theory, see modern portfolio theory positive feedback loops, 80 Pound, John, 253 PowerShares, 270, 281 Prechter, Robert, 151–52 present value, 32, 125n price-dividend multiples, 330, 340, 341, 343 price-earnings (P/E) multiples, 57, 64, 65, 126, 264, 274, 336, 344, 346–47, 394–95 of blue-chip stocks, 68 crash in (1970s), 340 cyclically adjusted (CAPE), 347, 387 of growth stocks, 121–23, 130–33, 406 of high-tech stocks, 81 inflation of, 64 performance and, 263, 396 see also performance, of common stocks (1970s); performance, of concept stocks Priceline.com, 83 price stability, 54 price-to-book value (P/BV) ratios, of stocks, 264, 270, 274 price-volume systems, 143–44 Price Waterhouse, 153 Princeton University, 161 probability judgments, 233–34, 238 Producers, The, 166 product asset valuation, 72 professional investors: limitations of, 162–63 profit-maximizing behavior, as argument against technical analysis, 116–17 profits, 339 in inflation, 339 measurement of, 339 profit-sharing plans, 304 Prohibition, 52 property taxes, 314 prospect theory, 243–45 prospectuses, warnings on, 59 PSI Net, 90 psychological factors in stock valuation, see castle-in-the-air theory; technical analysis Puckle Machine Company, 45 Puerto Rico, 404 purchasing power, effects of inflation on, 28–29, 125n, 307, 315 Purdue University, 82 Quandt, Richard, 140 quant, defined, 221n Quinn, Jane Bryant, 91 Qwest, 166 Radio Corporation of America (RCA), 48, 53 railroad industry, 91, 96 RAND Corporation, 197 Randell, Cortes W., 66–68 random events, forecasting influenced by, 164–65, 176 random walk: defined, 26–28, 139, 140 difficult acceptance of, 145–46 fundamental conclusion of, 154 summarized, 35–36 random-walk theory, 105–6, 266–67 assumptions of, 190, 229, 230 fundamental analysis and, 182–84 guide for, 291 and housing bubble, 105–6 index funds and, 379–80 role of arbitrage in, 248–49 semi-strong form of EMH, 26, 182–84 strong (broad) form of EMH, 26, 182–84 technical analysis and, 137–41, 154–57 weak (narrow) form of EMH, 26, 140, 183 Raptor, 94 rate of return: after inflation, 338 for bonds, 194–96, 307, 315–21, 342–43, 344, 345 in CAPM, 213–19 for common stocks, 194–96, 307 compounded, 351 diversification and, 198–200 expected, see expected rate of return future events and, 30, 343–48 high, for bearing greater risk, 194–96, 212–13, 350, 408 investment objectives and, 306–13 negative, 196 for real estate, 313 rebalancing to, 360 risk-free, 215–18 “small caps” vs.


pages: 246 words: 74,341

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

accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, 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, money market fund, 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.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

The magnitude of the late crises and the virulence of contagion are clues that financial globalization calls for an international regulation. However, the policies of world money are caught in a deadlock. On the one hand, the principle of mutual assistance founded at Bretton Woods has run its course economically and politically. Developed countries have opted out as far as macroeconomic adjustment is concerned. If any principle of co-responsibility takes grounds, it comes from compatible views of price stability in the system of independent central banks. But price stability does not preclude financial imbalances stemming from the vicious circle of credit over-expansion and speculative asset price appreciation. On the other hand, the whole institutional machinery that drives the Fund’s operations is still shaped according to the original philosophy. Meanwhile the political balance of powers makes it extremely difficult a change in paradigm. 58 Michel Aglietta Table 4.1 Synopsis of the Fund’s mandate Model of collective action Adjustment Liquidity Insurer in mutual assistance With exchange rate arrangement: Capital controls and current account balance Devaluation or revaluation if fundamental disequilibrium Quotas and tranches Macroeconomic conditionality in credit tranches GAB between G10 countries GAB extended to the benefit of any member Without exchange rate arrangement: Surveillance of macroeconomic policies Misalignment to equilibrium real exchange rate Issuer of a world currency Symmetrical adjustment of surplus and deficit countries Reserve accumulation or decumulation as an indicator of disequilibrium Keynes’s proposal to issue international reserve according to the banking principle extended SDR as a pure fiat money distributed according to quotas Legal restrictions in use Financial intermediary for development Structural adjustment: Financial liberalization and opening capital account Deregulation of labor and product markets Privatization and budget restructuring Ad hoc facilities (SAF, ESAF, STF) Concessionary terms Microeconomic conditionality International LOLR Crisis manager: Restoring confidence in international capital markets Prudential issues Early warning indicators of financial crises Emergency liquidity in capacity of an international LOLR NAB on the liability side Emergency lines of credit: SRF and CCL Lingering problems in the theoretical foundations of the new architecture The four models presented earlier can be associated in two groupings according to the overriding principle governing international relations.


pages: 303 words: 75,192

10% Less Democracy: Why You Should Trust Elites a Little More and the Masses a Little Less by Garett Jones

"Robert Solow", Andrei Shleifer, Asian financial crisis, business cycle, central bank independence, clean water, corporate governance, correlation does not imply causation, creative destruction, Edward Glaeser, financial independence, game design, German hyperinflation, hive mind, invisible hand, Jean Tirole, Kenneth Rogoff, Mark Zuckerberg, mass incarceration, minimum wage unemployment, Mohammed Bouazizi, open economy, Pareto efficiency, Paul Samuelson, price stability, rent control, The Wealth of Nations by Adam Smith, trade liberalization

They start by looking for ways to cure disease, then for ways to prevent disease, and may end their quest by searching for the best public health programs to encourage vaccinations or to create safer tap water. The search for deep causes, root causes, may take us in unexpected directions. Governments across rich countries have had widely differing rules about how to run monetary policy: gold standards, pegged exchange rates, vague promises of “price stability,” and many others. And they have different kinds of bureaucracies implementing those policies. Some are about as detached from democracy as an appointed judge, while others work directly for the nation’s prime minister and can be fired at any moment. Once monetary economists started looking into what kinds of government rules and government bureaucracies predicted economic success and which predicted economic tragedy, they found a repeated pattern: the more “independent” the nation’s central bank was from the political process, the better things typically turned out.

Harvard’s Alesina and Summers note that CBI is typically broken down into “political independence” and “economic independence.” They summarize political independence: Whether or not its governor and the board are appointed by the government, the length of their appointments [longer is more independent], whether government representatives sit on the board of the bank [a bad sign], whether government approval for monetary policy decisions is required [another bad sign] and whether the “price stability” objective is explicitly and prominently part of the central bank statute [a good sign—a sign of focus].³ Economic independence is different: it measures whether the central bank is permitted to say “No!” to the government. After all, many nations have been ruined by governments that forced the central bank to lend the government money on easy terms, setting off inflationary and even hyperinflationary spirals.


pages: 369 words: 128,349

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

3Com Palm IPO, Andrei Shleifer, asset allocation, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, survivorship bias, 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

"Robert Solow", 1960s counterculture, activist lawyer, affirmative action, airline deregulation, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, business cycle, 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, Gunnar Myrdal, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, liberal capitalism, Long Term Capital Management, manufacturing employment, market bubble, Martin Wolf, new economy, oil shale / tar sands, oil shock, open economy, Paul Samuelson, 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: 537 words: 144,318

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

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

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.


Making Globalization Work by Joseph E. Stiglitz

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, Gunnar Myrdal, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inventory management, invisible hand, John Markoff, Jones Act, Kenneth Arrow, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, new economy, 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, zero-sum game

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.6 Importantly, these governments made sure that the benefits of growth did not go just to a few, but were widely shared.7 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-a-day 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: 504 words: 139,137

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

activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, business cycle, buy and hold, 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, money market fund, mortgage debt, Myron Scholes, 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, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, 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.


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

3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business cycle, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, different worldview, 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, liberation theology, 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: 283 words: 81,163

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

banking crisis, British Empire, business cycle, 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, Norman Mailer, plutocrats, Plutocrats, price stability, profit maximization, profit motive, Ralph Nader, rent control, rent-seeking, Robert Bork, Ronald Coase, Ronald Reagan, Silicon Valley, statistical model, The Wealth of Nations by Adam Smith, transcontinental railway, union organizing, Upton Sinclair, wealth creators, working poor, Works Progress Administration, zero-sum game

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: 488 words: 144,145

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

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, 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, Paul Samuelson, 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: 310 words: 90,817

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

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

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

algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, buy and hold, commoditize, computerized trading, 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, stocks for the long run, stocks for the long term, transaction costs, two-sided market, zero-sum game

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: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

The main plank of Keynes’s theory is the assertion that aggregate demand ‒ measured as the sum of spending by households, businesses and the government ‒ is the most important driving force in an economy. Moreover, prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labour. Keynes asserted that free markets have no self-balancing mechanisms to counter this and achieve full employment, and therefore justified government intervention through public policies that aim to achieve full employment and price stability. Keynes’ ideas became widely accepted after the Second World War and provided the main inspiration for economic policy makers in Western industrialised countries. However, Keynesian economics began to fall out of favour in the 1970s as many economies experienced slow economic growth, high unemployment and rising inflation, a phenomenon which is often referred to as stagflation. This mixed economy in both housing supply and tenure was supported by strict financial regulations which restricted the amount of credit that could flow into the private housing market (see Chapter 5), and a tax regime designed to balance the economic position of homeowners and renters.

(Unpublished working paper). Chaloner, Justin, and Mark Pragnell. 2014. ‘Increasing Investment in Affordable Housing: Towards a Level Playing Field for Affordable Housing’. Capital Economics, 3 April. Chang, Ha-Joon. 2007. Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. New York: Bloomsbury. Cheshire, Paul. 2009. ‘Urban Containment, Housing Affordability and Price Stability-Irreconcilable Goals’. Cheshire, Paul. 2011. House of Commons CLG Select Committee, 10 October. Cheshire, Paul C. 2013. ‘Land Market Regulation: Market versus Policy Failures’. Journal of Property Research 30 (3): 170–88. Cheshire, Paul. 2014. ‘Turning Houses into Gold: The Failure of British Planning’. Centre for Economic Performance Working Paper No. 421. Cheshire, Paul, and Stephen Sheppard. 1998.


High-Frequency Trading by David Easley, Marcos López de Prado, Maureen O'Hara

algorithmic trading, asset allocation, backtesting, Brownian motion, capital asset pricing model, computer vision, continuous double auction, dark matter, discrete time, finite state, fixed income, Flash crash, High speed trading, index arbitrage, information asymmetry, interest rate swap, latency arbitrage, margin call, market design, market fragmentation, market fundamentalism, market microstructure, martingale, natural language processing, offshore financial centre, pattern recognition, price discovery process, price discrimination, price stability, quantitative trading / quantitative finance, random walk, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, Tobin tax, transaction costs, two-sided market, yield curve

There is definite empirical evidence of the path dependency of the price trajectory; a black swan event may be triggered at any time due to microstructure effects that are not linked to fundamental factors. Organised trading venues are exploring ways to prevent microstructure effects distorting price action, though without reaching a satisfactory solution so far. This chapter proposes a new method to achieve price stability. We suggest that the queuing system of limit order books rewards market participants by offering competitive two-way prices; model simulations presented here indicate that this might well enhance market stability. THE CURRENCY MARKET This section describes the currency market from a high-frequency trading (HFT) perspective. We give an overview of the overall landscape of the market and the relationships between the major 65 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 66 — #86 i i HIGH-FREQUENCY TRADING Figure 4.1 Structure of the venues in the currency market Saxo M XC nex Lava e urr Hotspot FX AII C Ba 88 rc % OAN DA Ga in F ti Ci % 88 UBS 14% EBS ECNs DB 20% Reuters US$1400 bn+ per day CME Group Currency Futures FCMs players.

Market-making strategies are designed to offer temporary liquidity to the market by posting bid and ask prices with the expectation of earning the bid and ask spread to compensate for losses from adverse price moves. In some trading venues, these types of strategies are incentivised with rebate schemes or reduced transactions fees. We shall explain later (see pp. 80ff) how such incentives can be used to make price discovery more robust and contribute to price stability. Statistical arbitrage strategies are a class of strategies that take advantage of deviations from statistically significant market relationships. These relationships can, for example, be market patterns that have been observed to occur with some reasonable likelihood. Mean reversion strategies assume that the price movement does not persist in one direction and will eventually revert and bounce back.


pages: 357 words: 95,986

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

3D printing, additive manufacturing, air freight, algorithmic trading, anti-work, back-to-the-land, banking crisis, basic income, battle of ideas, blockchain, Boris Johnson, Bretton Woods, business cycle, 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, Kickstarter, late capitalism, liberation theology, Live Aid, low skilled workers, manufacturing employment, market design, Martin Wolf, mass immigration, mass incarceration, 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, Paul Samuelson, Philip Mirowski, post scarcity, post-work, 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, The Future of Employment, 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: 322 words: 87,181

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

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

Restricting the exercise of sovereign power is not necessarily undemocratic. Political scientists talk about “democratic delegation”—the idea that a sovereign might want to tie its hands (through international commitments or delegation to autonomous agencies) in order to achieve better outcomes. The delegation of monetary policy to an independent central bank is the archetypal example: in the service of price stability, daily management of monetary policy is insulated from politics. However, even if selective limitations on sovereignty may enhance democratic performance, there is no guarantee that all limitations implied by market integration would do so. In domestic politics, delegation is carefully calibrated and restricted to a few areas where the issues tend to be highly technical and partisan differences are not large.

The linchpin of Argentina’s economic strategy after 1991 was the convertibility law, which legally anchored the peso to the US dollar at a one-to-one exchange rate and prohibited restrictions on capital flows. Argentine economy minister Domingo Cavallo had envisioned the convertibility law as both a harness and an engine for the economy. The strategy worked well initially by bringing much-needed price stability. But, by the end of the decade, the Argentine nightmare had returned with a vengeance. The Asian financial crisis and the Brazilian devaluation in early 1999 left the Argentinean peso looking decidedly overvalued. Doubts about Argentina’s ability to service its external debt multiplied, confidence collapsed, and before too long, Argentina’s creditworthiness slid below that of some African countries.


pages: 614 words: 174,226

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

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

The head of the Bundesbank, Karl Otto Pöhl, told one of New Zealand’s scouting parties that the explanation was simple: “Savers don’t yet know whether they can trust those French bastards.”91 In December 1989, New Zealand passed a law making price stability the sole responsibility of its central bank, sweeping away a 1964 law that, characteristically for its time, had instructed the central bank to pursue a laundry list of goals including economic growth, employment, social welfare, and trade promotion. The man picked to lead New Zealand’s experiment was an economist named Don Brash, who ran one of the nation’s largest banks and then one of its largest trade groups, the Kiwifruit Authority.92 His job description was simple: deliver inflation between 0 percent and 2 percent. If he failed, he could be fired.93 Brash was a believer in price stability. After reading Milton and Rose Friedman’s 1980 book, Free to Choose, which he described as “enormously influential” in shaping his views, he had invited the Friedmans to visit New Zealand for a speaking tour and escorted them around the country.94 In his new role, Brash made his own speaking tour, appearing before any group willing to listen.

Instead he advocated economic growth as the cure for inflation.30 The following month, just a few weeks before the election, Carter placed an order from the Samuelson-Solow menu, pledging to reduce unemployment to 4 percent and inflation below 4 percent by the end of his first term.31 Once in office, Carter backed up his rhetoric about unemployment by replacing Burns as Fed chairman with a handsome, pleasant manufacturing executive named G. William Miller, who sometimes laughed so hard at his own jokes that he couldn’t get to the punch line, and who passionately expressed a determination to stimulate job creation, particularly for minorities.32 Democrats also sought to write Keynesian economics more firmly into law by passing the Humphrey-Hawkins Full Employment Act in 1978, which enshrined “full employment” and “reasonable price stability” as the goals of fiscal and monetary policy. For proponents of activist economics, it seemed like a second sunrise, and they confidently predicted an economic revival. Instead it was the final act of the Keynesian era. Inflation rose inexorably during Carter’s first two years. Then the Iranian revolution sparked a second oil crisis and prices rose faster. By the summer of 1979, inflation once again topped 10 percent, while unemployment hovered persistently around 6 percent.


How an Economy Grows and Why It Crashes by Peter D. Schiff, Andrew J. Schiff

Bretton Woods, business climate, currency peg, hiring and firing, indoor plumbing, offshore financial centre, price stability, Robert Shiller, Robert Shiller, technology bubble

The idea would be that the Fed could expand or contract the amount of money in circulation to correspond with economic activity. It was thought that such movements could hold prices steady through good times and bad. Even if such a mission were a good idea to begin with, it’s easy to see that the Fed has utterly failed in accomplishing it. Over the past 100 years, the dollar has lost more than 95 percent of its value. So much for price stability! The truth is that the Fed now exists for the sole purpose of providing the inflation necessary to allow the government to spend more than it collects in taxes. During the Depression, President Roosevelt decided to devalue the dollar against gold. In order to pull this off, the government had to control the entire gold market, and for a time the government made it illegal to own gold coins.


The Future of Money by Bernard Lietaer

agricultural Revolution, banks create money, barriers to entry, Bretton Woods, business cycle, clean water, complexity theory, corporate raider, 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 Future of Employment, the market place, the payments system, Thomas Davenport, 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: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Airbnb, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, global reserve currency, high net worth, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, market bubble, market clearing, means of production, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, zero-sum game

In the case of government money, on the other hand, the money supply increases through the expansion of the supply by the central bank and commercial banks, and contracts through deflationary recessions and bankruptcies, while the demand for money can vary even more unpredictably depending on people's expectations of the value of the money and the policies of the central bank. This highly volatile combination results in government money being unpredictable in value over the long term. Central banks' mission of ensuring price stability has them constantly managing the supply of money through their various tools to ensure price stability, making many major currencies appear less volatile in the short run compared to gold. But in the long run, the constant increase in the supply of government money compared to gold's steady and slow increase makes gold's value more predictable. Sound money, chosen on a free market precisely for its likelihood to hold value over time, will naturally have a better stability than unsound money whose use is enforced through government coercion.


pages: 368 words: 32,950

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

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

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.


pages: 593 words: 189,857

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

Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, 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, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, 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, selection bias, 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.


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

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, 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, Paul Samuelson, 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, source of truth, statistical model, stocks for the long run, 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.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, market fundamentalism, means of production, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

This latter possibility was clearly understood and was taken into account at that time given the prevailing assumption that there were unused resources in the economy. It had been important in allowing the large increase in military spending to fight World War II and later to counter the Soviet challenge. In the years after World War II, the US Federal Reserve Bank had been instructed, by the Full Employment Act of Congress of 1948, to promote, as one of its objectives, “maximum employment, production, and purchasing power,” while paying attention to price stability. Because by 1948 public spending in the United States had collapsed to 11.6 percent of GDP, there was great concern among Keynesian economists that the Great Depression would return. The confidence that some economists have in the existence of the aforementioned two “free lunches” in today’s economies has made it possible to call for large increases in public spending both in the United States and in European countries, in the belief that these increases can be achieved at almost zero costs, while producing great benefits by injecting needed demand in economies facing “great stagnation.”

In the early decades after World War II, major goals of economic theory and of the work of economists were, first, to look for and to identify areas in which private markets had failed, or could fail; and, second, to study ways in which governments could intervene and correct the market failures, through public spending, tax expenditures, or other ways. The important goals, besides the stabilization of national income at full employment, were the elimination or reduction of economic risks for citizens; some 50 Termites of the State redistribution of income, in order to achieve a more equitable income distribution; and the maintenance of growth and price stability. These goals were to be achieved with the recently discovered Keynesian countercyclical policies, with the help of new social programs, and with progressive tax systems, while allowing the economies to continue working as significantly free market economies. Some of the political wishes, such as those mentioned in the Beveridge Report of 1942 and in Roosevelt’s fireside chat of 1944, became government promises, and the promises were slowly transformed into concrete policies that created “entitlements” or “bills of rights” for citizens.

Over the years, several authors, including Buchanan, Alesina, von Hagen, Poterba, Tabellini, and Persson, have argued that political arrangements such as fiscal federalism and fiscal decentralization; proportional or nonproportional representation by political parties in parliaments; the frequency of elections; the choice of presidential versus nonpresidential types of governments; the role and power of the ministry of finance compared to those of spending ministries; the rules that apply to the budgetary process – for example, whether it starts with top-down macroeconomic constraints, which reflect a collective view on priorities, or whether it allows a bottom-up process, by which pressures for spending are determined through the political influence of different ministers – whether parliaments can modify the content of budgetary proposals or whether they must vote on the whole budget; whether the central bank is truly independent; whether its mandate relates only to the maintenance of price stability or involves other objectives, such as employment, financial stability, assistance in the financing of governments, and so on – all of these arrangements have a significant impact on fiscal and macroeconomic outcomes. Various situations have been modeled, often using strong assumptions and sophisticated game theories, and have also been subjected to empirical testing (see, inter alia, Tabellini and Persson, 2000; Poterba and von Hagen, 1999).


pages: 416 words: 118,592

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

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, 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, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, 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, stocks for the long run, survivorship bias, The Myth of the Rational Market, the rule of 72, 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: 376 words: 118,542

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

affirmative action, agricultural Revolution, air freight, back-to-the-land, bank run, banking crisis, business cycle, Corn Laws, Fractional reserve banking, full employment, German hyperinflation, invisible hand, means of production, minimum wage unemployment, oil shale / tar sands, oil shock, price stability, Ralph Nader, RAND corporation, rent control, road to serfdom, Sam Peltzman, 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: 464 words: 117,495

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

additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy and hold, buy low sell high, Checklist Manifesto, computerized trading, 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, zero-sum game

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: 670 words: 194,502

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

3Com Palm IPO, accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, money market fund, 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, stocks for the long run, survivorship bias, the market place, the rule of 72, 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.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, 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, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, 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, Veblen good, Wave and Pay, Westphalian system, 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).


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

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, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, 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, Westphalian system

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: 482 words: 125,973

Competition Demystified by Bruce C. Greenwald

additive manufacturing, airline deregulation, AltaVista, asset allocation, barriers to entry, business cycle, creative destruction, cross-subsidies, deindustrialization, discounted cash flows, diversified portfolio, Everything should be made as simple as possible, fault tolerance, intangible asset, John Nash: game theory, Nash equilibrium, Network effects, new economy, oil shock, packet switching, pets.com, price discrimination, price stability, selective serotonin reuptake inhibitor (SSRI), shareholder value, Silicon Valley, six sigma, Steve Jobs, transaction costs, yield management, zero-sum game

At the same time, it has passively off-loaded its suspect borrowers to its aggressive competitor, whose own loan portfolio is now more likely to experience a higher level of defaults and a reduction in profitability. Though it may take some time, this lesson to the aggressive rival is likely to curb its tendency to offer discounts in the future. Any selective response designed to keep better customers while letting the marginal ones escape will have similar effects. An industry whose firms are equipped to meet price cutting with selective responses should enjoy greater price stability than industries where firms cannot be selective. The other side of the coin is that selectivity can be an offensive tool as well, and companies that can poach their rivals’ best customers are going to do so, and thus encourage price competition. Selectivity can take a second form. Companies responding to aggressive price behavior should pick their spots. The temptation in a price war is to attack a noncooperative rival where the rival is weakest, and weakest often means where the rival has a small market share and limited distribution.

If the competitor responds, it, and not the incumbent, bears the disproportionate costs of the price war. Indeed, it may even be worthwhile to introduce—or threaten to introduce—a new product into a competitor’s market solely for the purpose of letting the competitor know how painful price wars can be. What should be kept in mind is that attacking rivals is a tactic whose goal is to restore price stability and enhance industry cooperation, not an end in itself. Like many things of value, cooperative arrangements are easier to break than to mend. The second component of a tactical adjustment in a prisoner’s dilemma situation, signaling for a joint return to higher prices, is difficult to accomplish. If all managers were rational and focused on profitability, they would see the wisdom of rescinding a price decrease as soon as their competitors responded with their own lower prices.


pages: 142 words: 45,733

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

anti-communist, Bretton Woods, business cycle, capital controls, Carmen Reinhart, creative destruction, David Graeber, declining real wages, full employment, Hyman Minsky, income inequality, late capitalism, liberal 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, zero-sum game

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.


The New Enclosure: The Appropriation of Public Land in Neoliberal Britain by Brett Christophers

Boris Johnson, Capital in the Twenty-First Century by Thomas Piketty, Corn Laws, credit crunch, cross-subsidies, Diane Coyle, estate planning, ghettoisation, Hernando de Soto, housing crisis, income inequality, invisible hand, land reform, land tenure, land value tax, late capitalism, market clearing, Martin Wolf, New Journalism, New Urbanism, off grid, offshore financial centre, performance metric, Philip Mirowski, price mechanism, price stability, profit motive, Right to Buy, Skype, sovereign wealth fund, special economic zone, the built environment, The Wealth of Nations by Adam Smith, Thorstein Veblen, urban sprawl, wealth creators

Notes Index List of Figures 1.1UK net worth by type, 2016 (£ billion) (Source: Office for National Statistics) 1.2UK net worth by type, 1995–2016 (Source: Office for National Statistics) 2.1References to ‘surplus land’ and ‘surplus property’ in UK Parliament, by decade (Source: Hansard) 2.2Approximate shares of British landownership by area, late 1970s (Source: Author) 4.1Current public-land disclosure initiatives (England and Wales, except otherwise stated) (Source: Author) 5.1Net annual sales of Forestry Commission land, 1982–2015 (Source: Forestry Commission) 5.2Estimated public landownership in contemporary Britain by area (thousand hectares) (Source: Author) 5.3Capacity of disposed land vs. unimplemented permissions (Source: Local Government Association; National Audit Office) 5.4UK real land and house price indices, 1892–2008 (Source: P. Cheshire, ‘Urban Containment, Housing Affordability and Price Stability – Irreconcilable Goals’, SERC Policy Paper 4, 2009, p. 9, at eprints.lse.ac.uk) 5.5UK annual housing rental payments, 1985–2015 (Source: Office for National Statistics) 5.6UK real estate sector: gross value added by sub-category, 2005 and 2014 (Source: Office for National Statistics) 5.7UK private non-financial corporations: operating surplus, 1998–2014 (Source: Office for National Statistics) List of Abbreviations ASI Adam Smith Institute BLP Berwin Leighton Paisner BRB British Railways Board BTC British Transport Commission CABE Commission for Architecture and the Built Environment CPS Centre for Policy Studies CLT Community land trust DCLG Department for Communities and Local Government DEFRA Department for Environment, Food & Rural Affairs DHSS Department of Health and Social Security EFA Education Funding Agency FTE Full-time employee GLA Greater London Authority GLC Greater London Council GPA Government Property Agency GPU Government Property Unit GVA Gross value added HCA Homes and Communities Agency HDV Haringey Development Vehicle IEA Institute of Economic Affairs IFRS International Financial Reporting Standards IPPR Institute for Public Policy Research LCC London City Council LGA Local Government Association LSA Land Settlement Association MoD Ministry of Defence MoJ Ministry of Justice NAO National Audit Office NEF New Economics Foundation NHS National Health Service OFT Office of Fair Trading OGC Office of Government Commerce ONS Office for National Statistics PACE Property Advisers to the Civil Estate PLI Public Land Initiative PRS Property Repayment Services PSA Property Services Agency PSC People with Significant Control register RBS Royal Bank of Scotland RIFW Regeneration Investment Fund for Wales RLA Redundant Lands and Accommodation Acknowledgements My first and most important thanks are to my family: Agneta, Elliot, Oliver and Emilia.

By the end of 2008, the price of land had fallen further still – the Office for National Statistics (ONS) estimates that the value (and hence price) of UK land fell fully 23 per cent in just those explosive twelve months (see Figure 1.2). Extreme volatility in land prices, needless to say, does not make for smooth economic planning and management. As the IPPR researchers observed, volatility in land and housing markets is ‘intimately connected to instability in the economy as a whole’.3 Figure 5.4 UK real land and house price indices, 1892-2008 Source: P. Cheshire, ‘Urban Containment, Housing Affordability and Price Stability – Irreconcilable Goals’, SERC Policy Paper 4, 2009, p. 9, at eprints.lse.ac.uk The second, connected, phenomenon reflecting and transmitting inefficiencies in the land market is clearly unproductive allocations of land – ‘misallocations’, one might call them. Research carried out in 2012 for the mayor of London by the development analysts Molior, for instance, found that, in London, nearly half of unimplemented residential planning permissions were in the hands of ‘non-builders’ (‘firms that we cannot see building a scheme themselves’, such as investment companies and the like), and that the latter controlled 55 per cent of the planning pipeline.4 Such speculative holding can be described as many things, but ‘highest and best use’ of the land is obviously not one of them.


pages: 459 words: 138,689

Slowdown: The End of the Great Acceleration―and Why It’s Good for the Planet, the Economy, and Our Lives by Danny Dorling, Kirsten McClure

Affordable Care Act / Obamacare, Berlin Wall, Bernie Sanders, Boris Johnson, British Empire, business cycle, capital controls, clean water, creative destruction, credit crunch, Donald Trump, drone strike, Elon Musk, en.wikipedia.org, Flynn Effect, full employment, future of work, gender pay gap, global supply chain, Google Glasses, Henri Poincaré, illegal immigration, immigration reform, income inequality, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, James Dyson, jimmy wales, John Harrison: Longitude, Kickstarter, low earth orbit, Mark Zuckerberg, market clearing, Martin Wolf, mass immigration, means of production, megacity, meta analysis, meta-analysis, mortgage debt, nuclear winter, pattern recognition, Ponzi scheme, price stability, profit maximization, purchasing power parity, QWERTY keyboard, random walk, rent control, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, sexual politics, Skype, Stephen Hawking, Steven Pinker, structural adjustment programs, the built environment, Tim Cook: Apple, transatlantic slave trade, trickle-down economics, very high income, wealth creators, wikimedia commons, working poor

For instance, a sudden housing price acceleration such as the one that occurred in the early 1970s is now extremely unlikely. All prices were rising rapidly then: not just housing, but wages as well. In contrast, housing price falls in the near future would not be remarkable given the general direction of the long-term trends and the falls in both the 1990s and the last decade. The long-term trend is toward price stability, back toward negligible quarterly change. How on earth is it possible, given how much housing prices have risen in recent decades, to say that the rise is slowing? Well, there are at least two ways to look at this. First, in 2017, 2018, and 2019, the U.K. housing market clearly slowed down, however it is graphed. More important, any rise was very slow as compared to the long term. Almost every decade since the 1970s has seen a smaller proportionate rise in U.K. and U.S. housing prices compared with the decade before it.

Soon we might even start thinking of a house as a home—not as a retirement investment for the wealthy. Before we return to the subject of house prices, consider something a little different—gold. In figure 52 the gold price timeline has not been adjusted for inflation, and so the price appears to rise and rise. But each period of increase is always abruptly brought to a halt by a crash, followed normally by a period of price stability for a few years when the price appears to oscillate around a fixed point, before it again begins to climb upward. Today that oscillatory point in the global price of gold is around $1,250 an ounce. The price of gold is interesting because gold is seen as a safe haven, a little like property. When times are uncertain money floods into gold, because gold, it is assumed, will keep its value (and you can try to hide your gold from the tax authorities).


pages: 517 words: 139,477

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

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

As shown in Figure 5-1, the price of gold and the price level were very closely linked during this period. That is because the 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 desire of central banks to limit the growth of the supply of money in order to counteract deficit spending and other inflationary forces that result from government spending and regulation.9 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.

Great Britain suspended the gold standard during both the Napoleonic Wars and World War I, but in both cases it returned to the gold standard at the original exchange rate. The United States temporarily suspended the gold standard during the Civil War, but it returned to the standard after the war ended.6 The adherence to the gold standard is the reason why the world experienced no overall inflation during the nineteenth and early twentieth centuries. But overall price stability was not achieved without cost. Since the money in circulation had to equal the quantity of gold held by the government, the central bank essentially relinquished control over monetary conditions. This meant that the central bank was unable to provide additional money during economic or financial crises. In the 1930s, adherence to the gold standard, which had restrained the government from pursuing inflationary financial policies, turned into a strait-jacket from which the government sought to escape.


Britannia Unchained: Global Lessons for Growth and Prosperity by Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore, Elizabeth Truss

Airbnb, banking crisis, Carmen Reinhart, central bank independence, clockwatching, creative destruction, Credit Default Swap, demographic div