price stability

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Birth of the Euro by Otmar Issing

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

The ECB soon began to use the expression and to speak of its ‘two-pillar strategy’.62 It quickly became clear that we had been right on both counts: the ‘two pillars’ became a trademark, but also drew repeated criticism. 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.

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A central bank might create the wrong impression of attempting to explain away the actual level of inflation suffered by consumers. Such an impression would undermine confidence in the central bank. For these reasons, the ECB decided to define price stability in terms of the HICP. All the same, the ECB does utilise a whole range of other price indices to analyse developments in prices. 2. At first sight, defining price stability in terms of a suitable index looks straightforward: price stability is incompatible with either inflation or deflation and hence, given price stability, the rate of change in the index would be zero. Only then does money perfectly fulfil its role as unit of account and store of value.

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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. This is the contribution of monetary policy; this is spurring on investment, this is especially fostering building because long-term rates matter the most and [low] long-term rates are only achieved if people, if savers, believe that price stability will continue in the future. This is the main issue; it is inflationary expectations and not just achieving a one-off situation.

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

"World Economic Forum" Davos, Admiral Zheng, Alan Greenspan, 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, foreign exchange controls, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, Great Leap Forward, guns versus butter model, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, junk bonds, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low interest rates, low skilled workers, market clearing, Martin Wolf, mass immigration, Meghnad Desai, 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 and loan crisis, 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, We are all Keynesians now, women in the workforce, working-age population, Y2K, Yom Kippur War

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. 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.

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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.

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But if inflation moves away from the target by more than 1 percentage point … I shall expect you to send an open letter to me … setting out … the reasons why inflation has moved away from target … the policy action which you are taking to deal with it … [and] the period within which you expect inflation to return to the target.8 In other words, price stability is, like the UK prime minister, first among equals. Even for those central banks with more than one economic objective, price stability is typically the most important. The central bank’s job is thus to safeguard the value of the currency. Price stability matters because Adam Smith’s invisible hand works best free of distortions. But in both the American and British mandates, there is no explicit recognition that inflation is determined not just by domestic policies but also by developments elsewhere in the world, other than by reference to ‘shocks and disturbances’.

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

"World Economic Forum" Davos, Alan Greenspan, American energy revolution, Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, Bretton Woods, collective bargaining, credit crunch, energy security, energy transition, geopolitical risk, housing crisis, hydraulic fracturing, Ida Tarbell, index fund, Induced demand, interchangeable parts, invisible hand, joint-stock company, market clearing, market fundamentalism, megaproject, moral hazard, North Sea oil, oil rush, oil shale / tar sands, oil shock, peak oil, price discrimination, price elasticity of demand, price stability, sovereign wealth fund, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, transfer pricing, vertical integration

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. Texas and Oklahoma together accounted for 55 percent of all U.S. production in 1927.2 Their local economies became extremely dependent on healthy oil operations and state budgets relied on revenue from taxes on the industry. While wary of appearing to favor monopolies or interfering in the free market, state officials were just as anxious as drillers were about oil supply and price stability. Major discoveries in central Oklahoma in 1926, collectively named the Greater Seminole field, tipped oil prices into another super-bust cycle.

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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.

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–Saudi Deputy Crown Prince Mohammed bin Salman, April 21, 2016 CONTENTS Preface Acknowledgments Author’s Note INTRODUCTION: THE TEXAS PARADOX PART ONE: THE LONG STRUGGLE FOR STABILITY: 1859–1972 1. AND THEN THERE WAS LIGHT: FROM CHAOS TO ORDER IN THE KEROSENE ERA (1859–1911) 2. NO ROCKEFELLER, NO PEACE: BOOM-BUST RETURNS 3. WHY ARE OIL PRICES PRONE TO BOOM-BUST CYCLES? 4. THE TEXAS ERA OF PRICE STABILITY: U.S. SUPPLY CONTROLS AND INTERNATIONAL CARTELIZATION (1934–1972) PART TWO: THE OPEC ERA: 1973–2008 5. THE BIRTH OF OPEC: 1960–1969 6. OPEC TAKES CONTROL FROM TEXAS AND THE SEVEN SISTERS: 1970–1980 7. OPEC’S RUDE AWAKENING: 1981–1990 8. OPEC MUDDLES THROUGH: 1991–2003 9. TWILIGHT: OPEC’S POWER TO PREVENT PRICE SPIKES EBBS AND VANISHES: 2004–2008 10.

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

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, electricity market, 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, Greenspan put, 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, low interest rates, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, operational security, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, public intellectual, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, 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, subprime mortgage crisis, tail risk, 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).

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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.

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Lighthouses and national defense are canonical examples.14 Arguably, so is the macroeconomic stability that central banks exist to preserve, but in fact it is not quite so straightforward. As proves important in part IV, price stability—stability in the value of money—is a public good, but the stability of the financial system is slightly different. In both cases, no one can be excluded from the benefits; but, unlike price stability, financial-system stability is, in the jargon, rivalrous. Like common grazing ground, the resilience of the financial system can be “consumed,” leaving it depleted and, thus, reducing the flow of benefits over time.

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

Alan Greenspan, Albert Einstein, asset allocation, banking crisis, Bear Stearns, behavioural economics, book value, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, fake news, financial engineering, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, global macro, hindsight bias, Kickstarter, Long Term Capital Management, low interest rates, market bubble, Michael Milken, military-industrial complex, Money creation, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, price stability, reserve currency, risk free rate, Robert Gordon, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

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.

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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.

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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.

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

Keynes appeared to be suggesting that credit inflation, and not the inflation of consumer prices, was the true sign that interest rates were out of equilibrium – a position close to Hayek’s from which he soon reneged.fn13 ‘Better no credit control at all,’ proclaimed the German economist Wilhelm Röpke, ‘than one based on this treacherous and dangerous criterion [of price stability]!’66 Central bankers also came around to this view. In 1937, the Federal Reserve’s Objectives of Monetary Policy affirmed ‘the inadequacy of price stability as a guide to policy’. The Australian Monetary and Banking Commission concluded in the same year that ‘price fluctuations are little more than symptoms’ and that the monetary authorities should not attempt to regulate credit by reference to a selected price index.67 Most financial histories of the 1920s and its aftermath fail to mention contemporary criticisms of the Federal Reserve’s price stabilization policy and pass over the coup de whisky delivered to the US stock market after the Long Island meeting.

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Former Bank of England Governor Mervyn King, 2016 MONETARY STABILITY IN JAPAN IN THE 1980s The failure of Hayek’s interpretation of the 1920s’ boom and the aftermath to gain widespread acceptance explains why later generations of economists and policymakers returned so enthusiastically to the pursuit of price stability. Anna Schwartz, co-author of The Monetary History of the United States, proclaimed that ‘Monetary stability is a prerequisite of price stability, and price stability is a prerequisite of financial stability.’1 By 1995, when Schwartz wrote these words, it should have been clear from events then unfolding in Japan that something was desperately wrong with this dogma. Over the course of the twentieth century, Japan had experienced bouts of extreme monetary instability.

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In 1927, Hayek was appointed the first director of the Austrian Institute for Business Cycle Research, having previously studied monetary policy in New York. Hayek thought that the policy of price stabilization – as advocated by Irving Fisher and others and implemented by Ben Strong at the Federal Reserve – was misguided, and lamented that Fisher’s Stable Money Association (a successor to the Stable Money League) had turned the ‘concept of price stabilization as the objective of monetary policy into a virtually unassailable dogma’.57 In a capitalist economy, Hayek said, continuous advances in productivity mean that consumer prices have a natural tendency to decline.

EuroTragedy: A Drama in Nine Acts by Ashoka Mody

Alan Greenspan, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, book value, Bretton Woods, Brexit referendum, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, fear index, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global macro, 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, land bank, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low interest rates, 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, precautionary principle, premature optimization, price stability, public intellectual, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Solow, short selling, Silicon Valley, subprime mortgage crisis, 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

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.

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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.

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The German position won the day because there appeared to be no other legitimate option. The proposed central bank’s independence necessarily came with a simple rule to determine the conduct of monetary policy. 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.

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

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, 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 engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, 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, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, 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.

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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.

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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. Attention turned to the idea of delegating monetary policy to independent central banks with a clear mandate to achieve price stability. Central banks were not born with independence, they had it thrust upon them – literally, in the case of Germany when, after the Second World War, the Allies imposed the model of an independent central bank.

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

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, 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, cross-border payments, currency peg, currency risk, 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, Future Shock, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Les Trente Glorieuses, low interest rates, Martin Wolf, mittelstand, Money creation, 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, Phillips curve, Post-Keynesian economics, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, tail risk, the payments system, too big to fail, Tyler Cowen, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

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.

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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.

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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.”

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

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, bank run, Bear Stearns, behavioural economics, 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, cross-border payments, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, deal flow, Deng Xiaoping, diversification, diversified portfolio, Dr. Strangelove, 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, Great Leap Forward, guns versus butter model, high net worth, income inequality, interest rate derivative, it's over 9,000, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, power law, price mechanism, price stability, private sector deleveraging, proprietary trading, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, short squeeze, sovereign wealth fund, special drawing rights, special economic zone, subprime mortgage crisis, 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, vertical integration, War on Poverty, Washington Consensus, zero-sum game

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. 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.

…

Once businesses and investors have greater certainty and price stability, they can then take greater risk on new investments. There is enough uncertainty in entrepreneurship without adding inflation, deflation, interest rates and exchange rates to the list of barriers standing in the way of innovation. The U.S. economy as guided by the Fed has seen continual asset bubbles, crashes, panics, booms and busts in the forty years since the United States left gold. It is time to diminish the role of finance and empower the role of commerce. Gold produces the greatest price stability in prices and asset values and therefore provides the best visibility for investors.

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., were extremely stable), there were few policy conflicts among nations, speculation was stabilizing (i.e., investment behavior tended to bring currencies back to equilibrium after being displaced), adjustment was quick, liquidity was abundant, public and private confidence in the international monetary system remained high, nations experienced long-term price stability (predictability) at low levels of inflation, long-term trends in industrial production and income growth were favorable and unemployment remained fairly low. This highly positive assessment by Gallarotti is echoed by a study published by the Federal Reserve Bank of St. Louis, which concludes, “Economic performance in the United States and the United Kingdom was superior under the classical gold standard to that of the subsequent period of managed fiduciary money.”

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

Alan Greenspan, anti-communist, Ayatollah Khomeini, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, central bank independence, corporate governance, Credit Default Swap, Donald Trump, fiat currency, financial engineering, financial innovation, fixed income, floating exchange rates, forensic accounting, full employment, Glass-Steagall Act, global reserve currency, income per capita, inflation targeting, liquidationism / Banker’s doctrine / the Treasury view, low interest rates, margin call, money market fund, Nixon shock, oil-for-food scandal, Paul Samuelson, price stability, proprietary trading, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Ronald Reagan, Rosa Parks, Savings and loan crisis, 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.

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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.

…

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.

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

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, 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 engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, 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, vertical integration, zero-sum game

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.

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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.

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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

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

"World Economic Forum" Davos, Alan Greenspan, Bonfire of the Vanities, Bretton Woods, business cycle, carbon tax, 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, It's morning again in America, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, plutocrats, price stability, rent control, Robert Solow, 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.

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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.

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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.

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

business cycle, central bank independence, classic study, flying shuttle, full employment, income inequality, James Hargreaves, James Watt: steam engine, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, low interest rates, means of production, planned obsolescence, 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

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.

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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.

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Inequality [>] 8. Economic Security [>] 9. The Paramount Position of Production [>] 10. The Imperatives of Consumer Demand [>] 11. The Dependence Effect [>] 12. The Vested Interest in Output [>] 13. The Bill Collector Cometh [>] 14. Inflation [>] 15. The Monetary Illusion [>] 16. Production and Price Stability [>] 17. The Theory of Social Balance [>] 18. The Investment Balance [>] 19. The Transition [>] 20. The Divorce of Production from Security [>] 21. The Redress of Balance [>] 22. The Position of Poverty [>] 23. Labor, Leisure and the New Class [>] 24. On Security and Survival [>] Afterword [>] Index [>] * * * INTRODUCTION TO THE FORTIETH ANNIVERSARY EDITION PUBLISHING A NEW EDITION of a book after forty years one faces a serious question: How much should one change to reflect later thought?

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, Alan Greenspan, American Society of Civil Engineers: Report Card, Apollo 11, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, bond market vigilante , book value, Bretton Woods, business cycle, capital controls, carbon tax, central bank independence, collective bargaining, 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, gentrification, Gini coefficient, global reserve currency, global supply chain, green new deal, high-speed rail, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, Modern Monetary Theory, mortgage debt, Naomi Klein, National Debt Clock, new economy, New Urbanism, Nixon shock, Nixon triggered the end of the Bretton Woods system, obamacare, open economy, Paul Samuelson, Phillips curve, Ponzi scheme, Post-Keynesian economics, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, San Francisco homelessness, shareholder value, Silicon Valley, Tax Reform Act of 1986, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

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.

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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.

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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.

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

airline deregulation, airport security, Alan Greenspan, Alvin Toffler, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, bond market vigilante , book value, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, classic study, 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, Dr. Strangelove, energy security, equity premium, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, Future Shock, Glass-Steagall Act, Greenspan put, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, Neil Armstrong, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Phillips curve, plutocrats, popular capitalism, price stability, RAND corporation, Reminiscences of a Stock Operator, rent-seeking, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, stock buybacks, subprime mortgage crisis, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tipper Gore, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, We are all Keynesians now, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

“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. 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.”

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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.

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He summoned the entire membership of the Fed’s interest-rate-setting body, the Federal Open Market Committee (FOMC), over to the White House and did his best to frighten them. “The present emergency is the greatest this country has ever faced, including the two World Wars and all the preceding wars,” he menaced. But the central bankers stood their ground. Chairman McCabe objected that military power depended on economic power, and that this required price stability. The administration then tried to beat the central bankers into submission: it issued a public statement claiming that the Fed had pledged to defend the 2.5 percent borrowing-cost ceiling. But the Fed leaders countered by leaking their own account of the meeting, which pointedly excluded any such commitment.

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

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, 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, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, 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, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

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.

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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.

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Once it came to be accepted as prudent, for social reasons, to use monetary policy to mitigate dislocating economic fluctuations, all the unsettled questions in monetary theory were reopened. Was the money supply exogenous or endogenous? What was the transmission mechanism from money to prices? Was the task of the central bank to control currency or credit? Was it possible to combine price stability with exchange-rate stability? The context of these discussions was the radical volatility of prices, very different from the muted modulations of the previous century: post-war hyperinflation in some countries being followed by price collapses. John Maynard Keynes and Edwin Cannan debated the causes of the wartime and post-war inflations in a re-run of the Currency versus Banking School debates of the early nineteenth century.

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

Alan Greenspan, balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, carbon tax, Carmen Reinhart, central bank independence, circular economy, 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, degrowth, 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, Ford Model T, forward guidance, full employment, G4S, general purpose technology, 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 interest rates, low skilled workers, Martin Wolf, mass incarceration, military-industrial complex, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, ocean acidification, paradox of thrift, Paul Samuelson, planned obsolescence, Post-Keynesian economics, 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, Solyndra, Steve Jobs, stock buybacks, systems thinking, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, vertical integration, 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.

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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?’

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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.

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

To provide considerably greater stability than the present fiat-dollar regime, a revived U.S. gold standard would probably need to be part of a broader international revival.46 RULE-BOUND FIAT STANDARDS Given that the postwar fiat standards managed by discretionary central banks have generally failed to deliver the long-run price stability that was delivered by the gold standard, Finn Kydland and Mark Wynne (2002: 1) ask whether a better fiat regime is possible. They note that the “hard pegs” of dollarization or currency boards have proven successful at delivering more stable nominal environments in countries that have adopted them. But, they naturally ask, “What about the large country, the ‘peggee’? What rule or regime can a large country such as the United States . . . adopt to guarantee long-term price stability?” A well-known and very simple type of monetary rule is a fixed growth path for M2, as advocated by Milton Friedman in the 1960s.

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These stated objectives suggest criteria by which to assess the Fed’s performance, namely, the relative extent of pre– and post–Federal Reserve Act price level changes, pre– and post–Federal Reserve Act output fluctuations and business recessions, and pre– and post–Federal Reserve Act financial crises. For reasons already given, we do not attempt to address the Fed’s success at bank supervision. INFLATION The Fed has failed conspicuously in one respect: far from achieving long-run price stability, it has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed’s creation from what it had been at the time of the dollar’s establishment as the official U.S. monetary unit, to fall dramatically. A consumer basket selling for $100 in 1790 cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913.

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(Board of Governors of the Federal Reserve System 2009) More specifically, as Ben Bernanke (2006: 2) observed in a lecture several years ago, besides reducing the costs of holding money, stable prices allow people to rely on the dollar as a measure of value when making long-term contracts, engaging in long-term planning, or borrowing or lending for long periods. As economist Martin Feldstein has frequently pointed out, price stability also permits tax laws, accounting rules, and the like to be expressed in dollar terms without being subject to distortions arising from fluctuations in the value of money. Feldstein (1997) had, in fact, reckoned the recurring welfare cost of a steady inflation rate of just 2 percent—a cost stemming solely from the adverse effect of inflation on the real net return to saving—at about 1 percent of gross national product (GNP).5 As Bernanke’s remarks suggest, unpredictable changes in the price level have greater costs than predictable changes.

The Curse of Cash by Kenneth S Rogoff

Alan Greenspan, 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, Dr. Strangelove, 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, government statistician, 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, low interest rates, Modern Monetary Theory, Money creation, 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

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.

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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.

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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.

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

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

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

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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.

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The Fed’s banker-friendly organizational structure was not an accident; it was first and foremost intended to serve the banks and only secondarily to serve the larger public. The Fed’s culture is thoroughly intermeshed with the financial industry. While its legal mandate from Congress places an equal priority on the goals of price stability and full employment,[40] the Fed has maintained a much greater commitment to the former goal than the latter. In fact, current Fed Chairman Ben Bernanke has openly committed the Fed to targeting inflation at 2 percent, a policy which implies that the Fed would be willing to tolerate high jobless rates if it were concerned that more expansionary policy would raise the rate of inflation above its target.

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

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

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.

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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.

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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.

Panderer to Power by Frederick Sheehan

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, book value, Bretton Woods, British Empire, business cycle, buy and hold, California energy crisis, 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, Glass-Steagall Act, Greenspan put, guns versus butter model, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, McMansion, Menlo Park, Michael Milken, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, Robert Solow, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stock buybacks, 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.

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(“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.

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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.

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

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, 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, currency risk, 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, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, 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, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, 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, proprietary trading, 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, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, 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, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

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.

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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.

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First, this new orthodoxy gives enormous discretionary power to bureaucrats in managing the financial system in particular, which is the heart of the supposedly market economy. Second, the new orthodox doctrine does not resolve the confused relationship between the state and the private sector as suppliers of money. On the contrary, it reinforces that confusion. Third, the doctrine assumes that monetary policy can be targeted at price stability, while macroprudential policy is targeted at financial stability. More important, it is assumed that they will not get in each other’s way, with monetary policy sometimes undermining financial stability by encouraging excessive credit creation, and macroprudential policy undermining monetary policy by halting credit creation.

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

accelerated depreciation, Alan Greenspan, 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, circular economy, 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, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, 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, Suez crisis 1956, the payments system, the scientific method, tontine, 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.

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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.

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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.

Limitless: The Federal Reserve Takes on a New Age of Crisis by Jeanna Smialek

Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, bitcoin, Black Lives Matter, blockchain, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Colonization of Mars, coronavirus, COVID-19, crowdsourcing, cryptocurrency, decarbonisation, distributed ledger, Donald Trump, Fall of the Berlin Wall, fiat currency, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, George Akerlof, George Floyd, Glass-Steagall Act, global pandemic, Henri Poincaré, housing crisis, income inequality, inflation targeting, junk bonds, laissez-faire capitalism, light touch regulation, lockdown, low interest rates, margin call, market bubble, market clearing, meme stock, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nixon shock, offshore financial centre, paradox of thrift, price stability, quantitative easing, race to the bottom, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, short squeeze, social distancing, sovereign wealth fund, The Great Moderation, too big to fail, trade route, Tragedy of the Commons, working-age population, yield curve

It was under way in earnest while Greenspan was still the chair. He and Janet Yellen, then a member of the Fed’s Board of Governors, sparred collegially over the Fed’s price stability goal at the central bank’s July 1996 meeting, for instance. While Congress had instructed the central bank to stabilize prices, it had become clear that nobody really knew what that meant in practice. “Mr. Chairman, will you define ‘price stability’ for me?” Yellen had asked.[23] “Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions,” Greenspan replied.

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But because the central bank is only distantly accountable to voters, and because its role in our economy has expanded so much, society needs to pay attention to the Fed’s abilities—and experts, the media, interest groups, and the broader public must keep pressure on lawmakers to appoint and confirm apolitical central bankers. Fed independence has always been important, but it now matters to more than just price stability. If elected officials were to place partisan loyalists on the Fed Board, the unconventional and emergency tools that the central bank used in 2020 to help stabilize markets and the economy could instead be leveraged to quietly circumvent the democratic process. Favored constituencies or even a handful of favored companies could be given cheap credit through the Fed even if it proves too hard to pass funding for those entities through Congress.

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The financial fiefdoms would be coordinated by a public supervising authority in Washington, the Federal Reserve Board, whose members would include five presidential appointees working alongside the comptroller of the currency and the Treasury secretary.[56][*6] The goal of the system was to smooth over seasonal disruptions in money flow both by centralizing reserves and by allowing the Fed banks to support short-term loans backed by agreements between suppliers and producers, called “real bills,”[57] to make sure that sufficient money was available at times when it was in high demand. The newly created Federal Reserve System was not especially powerful at its inception, nor did it have a spelled-out responsibility for either price stability or encouraging employment, which would go on to become its most well-known missions.[58] It was supposed to protect the system against painful panics and keep credit flowing by lending to member banks against good collateral when they needed cash to avoid a crunch. It was also intended to elevate the prominence of the little-used United States dollar in global trade.[59] Its ambitions more or less stopped there.

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

"there is no alternative" (TINA), "World Economic Forum" Davos, 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, export processing zone, falling living standards, Fellow of the Royal Society, financial deregulation, financial engineering, fixed income, foreign exchange controls, 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%.

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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.

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

"there is no alternative" (TINA), "World Economic Forum" Davos, 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, export processing zone, falling living standards, Fellow of the Royal Society, financial deregulation, financial engineering, fixed income, foreign exchange controls, 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%.

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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.

Angrynomics by Eric Lonergan, Mark Blyth

AlphaGo, Amazon Mechanical Turk, anti-communist, Asian financial crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, blockchain, Branko Milanovic, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collective bargaining, COVID-19, credit crunch, cryptocurrency, decarbonisation, deindustrialization, diversified portfolio, Donald Trump, Erik Brynjolfsson, Extinction Rebellion, fake news, full employment, gig economy, green new deal, Greta Thunberg, hiring and firing, Hyman Minsky, income inequality, income per capita, Jeremy Corbyn, job automation, labour market flexibility, liberal capitalism, lockdown, low interest rates, market clearing, Martin Wolf, Modern Monetary Theory, precariat, price stability, quantitative easing, Ronald Reagan, secular stagnation, self-driving car, Skype, smart grid, sovereign wealth fund, spectrum auction, The Future of Employment, The Great Moderation, The Spirit Level, universal basic income

This, plus a turn in economics to more microeconomic approaches provided the political representatives of capital – Kalecki’s “Powerful Block” – with their new software. We call this set of ideas “neoliberalism”. But to run this new software you had to do more than simply tweak the old hardware. You had to fundamentally reconfigure it once again. The new policy target for v.3.0 was not full employment – for that produced inflation – but “price stability” – that is, guarding against inflation at all costs. Although raising interest rates will crush inflation in the short term, to make this permanent hardware changes were needed that would destroy the ability of the system to generate inflation in the first place. There were four key hardware changes that took place in the 1980s, which took inflation out of the system permanently, restored the value of capital, and in doing so built the world that we grew up in.

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And so, over the course of the 1990s, this hardware modification spread across almost all the machines running the software for v.3.0 as central bank independence, and the rise of the central banker as the most powerful policy-maker in the land, spread across the OECD and beyond.21 The result was a system that was once again similar across those countries that produced common outputs, but those outputs were the complete opposite of v.2.0. Comparing versions 2.0 and 3.0 in a table can clarify this. Capitalism v.2.0 1945–80 Capitalism v.3.0 1980– Policy target: Policy target: Full employment Price stability (low inflation) Policy outcomes: Policy outcomes: Labour’s share of GDP at historic highs Capital’s share of GDP at historic highs Corporate profits low or stagnant Wages low or stagnant Inequality low Inequality high Markets mostly national Markets globalized Trade unions strong Trade unions weak Finance weak and immobile Finance strong and highly mobile Central banks weak and politicized Central banks strong and independent Legislatures strong Legislatures weak MARK: But as you stressed in the previous dialogue, Eric, one of the reasons v.3.0 lasted as long, if not longer, than v.2.0, was the fact that it worked.

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ERIC: In the absence of inflation, it is true that we have a great deal more fiscal and monetary flexibility. MMT economists don’t have a credible explanation of why inflation is dead. Hyman Minsky, their intellectual forefather, was completely wrong about inflation. Ironically, some of their policies might undermine price stability and end up limiting fiscal flexibility as a consequence. As you argued so forcefully in your book Austerity, and which has since become the consensus, aggressive fiscal and monetary stimulus should be used to counter recessions. But when the resources of the economy are fully employed, increasing the role of government requires resources to be taken from somewhere else.

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

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, 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, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, 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 interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, 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 Solow, 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

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.

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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.

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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).

Money Mischief: Episodes in Monetary History by Milton Friedman

Bretton Woods, British Empire, business cycle, classic study, currency peg, double entry bookkeeping, fiat currency, financial innovation, fixed income, floating exchange rates, foreign exchange controls, full employment, German hyperinflation, income per capita, law of one price, Money creation, money market fund, oil shock, price anchoring, price stability, Savings and loan crisis, systematic bias, Tax Reform Act of 1986, transaction costs

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.

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.* 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.

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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).

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

Albert Einstein, banking crisis, behavioural economics, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, foreign exchange controls, 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, low interest rates, means of production, Meghnad Desai, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, Tragedy of the Commons, unorthodox policies, Vilfredo Pareto, zero-sum game

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.

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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.

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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. ...

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

addicted to oil, air freight, airline deregulation, Alan Greenspan, Albert Einstein, asset-backed security, bank run, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon tax, central bank independence, collateralized debt obligation, collective bargaining, compensation consultant, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, currency risk, 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, Glass-Steagall Act, Hernando de Soto, income inequality, income per capita, information security, invisible hand, Joseph Schumpeter, junk bonds, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, low interest rates, 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, open immigration, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, Reminiscences of a Stock Operator, reserve currency, Right to Buy, risk tolerance, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, special economic zone, stock buybacks, stocks for the long run, Suez crisis 1956, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tipper Gore, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, We are all Keynesians now, 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?

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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.

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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." I didn't believe that. But I thought it important to put the issue on the table. 175 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 The concept of irrational exuberance came to me in the bathtub one morning as I was writing a speech.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, 9 dash line, AI winter, AlphaGo, artificial general intelligence, asset allocation, assortative mating, autonomous vehicles, bank run, banking crisis, basic income, Bear Stearns, Big Tech, bitcoin, Bletchley Park, blockchain, Boston Dynamics, Bretton Woods, British Empire, business cycle, business process, call centre, carbon tax, Carmen Reinhart, cashless society, central bank independence, collateralized debt obligation, Computing Machinery and Intelligence, coronavirus, COVID-19, creative destruction, credit crunch, crony capitalism, cryptocurrency, currency manipulation / currency intervention, currency peg, data is the new oil, David Ricardo: comparative advantage, debt deflation, decarbonisation, deep learning, DeepMind, deglobalization, Demis Hassabis, democratizing finance, Deng Xiaoping, disintermediation, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, energy security, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, eurozone crisis, failed state, fake news, family office, fiat currency, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, future of work, game design, geopolitical risk, George Santayana, Gini coefficient, global pandemic, global reserve currency, global supply chain, GPS: selective availability, green transition, Greensill Capital, Greenspan put, Herbert Marcuse, high-speed rail, Hyman Minsky, income inequality, inflation targeting, initial coin offering, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, Isaac Newton, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, knowledge worker, Long Term Capital Management, low interest rates, low skilled workers, low-wage service sector, M-Pesa, margin call, market bubble, Martin Wolf, mass immigration, means of production, meme stock, Michael Milken, middle-income trap, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Mustafa Suleyman, Nash equilibrium, natural language processing, negative equity, Nick Bostrom, non-fungible token, non-tariff barriers, ocean acidification, oil shale / tar sands, oil shock, paradox of thrift, pets.com, Phillips curve, planetary scale, Ponzi scheme, precariat, price mechanism, price stability, public intellectual, purchasing power parity, quantitative easing, race to the bottom, Ralph Waldo Emerson, ransomware, Ray Kurzweil, regulatory arbitrage, reserve currency, reshoring, Robert Shiller, Ronald Reagan, Salesforce, Satoshi Nakamoto, Savings and loan crisis, Second Machine Age, short selling, Silicon Valley, smart contracts, South China Sea, sovereign wealth fund, Stephen Hawking, TED Talk, The Great Moderation, the payments system, Thomas L Friedman, TikTok, too big to fail, Turing test, universal basic income, War on Poverty, warehouse robotics, Washington Consensus, Watson beat the top human players on Jeopardy!, working-age population, Yogi Berra, Yom Kippur War, zero-sum game, zoonotic diseases

Because a valid public policy goal is to maintain maximum sustainable employment, Congress charged the Fed with a mandate on top of price stability: keeping a lid on unemployment.8 When inflation and unemployment both worsened during the 1970s, senior officials said wait a moment; very loose monetary policies cause high inflation. We’ve all seen the cost of inflation. Let’s make central banks independent and give them only one key goal: price stability. Stable prices blunt inflation and negative consequences that debase the value of fiat currencies. Chastened by stagflation that proved so hard to defeat, many central banks—but not the Fed—restored the focus on price stability only. They proposed an inflation target that would encourage lending without jeopardizing price levels.

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Yet during the COVID-19 crisis, the direct monetization of fiscal deficits and debts became a de facto norm. The European Central Bank, launched in 1998 with a mandate to maintain price stability, has scrambled to redefine its purpose in an uncharted environment. “Crisis management has taken the central bank well beyond its strict treaty mandate,” the New York Times reported in 2010, when Jean-Claude Trichet was the bank’s president.14 “It has become much more difficult for Mr. Trichet to sum up its role with the mantra, ‘We have only one needle in our compass and that is price stability.’” Indeed, the Times reported that the ECB “has experienced what the US military calls ‘mission creep,’ shouldering responsibility—for lack of any other federal European institution—for stabilizing the eurozone economy and financial system.”

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In this chapter, we’ll look at a more subtle and insidious threat of financial instability and chaos. Instead of throttling back on their experiments and applying due caution, central banks have accelerated mission creep in the last few years. What, exactly, is the role of the Fed and other central banks? Once upon a time, they cared only about price stability. Then they set their sights on growth and unemployment. After the global financial crisis they started to care also about financial stability. Now they have also embraced “average inflation targeting,” using the tools at their disposal to try to reach an average rate of 2 percent over time, thus allowing the target to be overshot on a temporary basis.

Milton Friedman: A Biography by Lanny Ebenstein

Abraham Wald, affirmative action, Alan Greenspan, banking crisis, Berlin Wall, Bretton Woods, business cycle, classic study, 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, Modern Monetary Theory, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, price stability, public intellectual, rent control, road to serfdom, Robert Bork, Robert Solow, 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.

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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....

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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.

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

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, 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, Future Shock, 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, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, 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, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, 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, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

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.”

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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.)

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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.

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

airline deregulation, Alan Greenspan, Albert Einstein, bank run, barriers to entry, behavioural economics, Bretton Woods, business cycle, butterfly effect, capital controls, carbon tax, Carmen Reinhart, central bank independence, collective bargaining, congestion pricing, 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 elasticity of demand, price stability, prisoner's dilemma, profit maximization, public intellectual, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, 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.

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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.

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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.

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

accelerated depreciation, affirmative action, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, business logic, 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, digital divide, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, Glass-Steagall Act, 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, Robert Solow, 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

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.

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For example, according to a 1999 study for the Joseph Rowntree Foundation, the British social reform charity named after the famous Quaker philanthropist businessman, nearly two-thirds of British workers said they had experienced an increase in the speed or the intensity of work over the preceding five-year period. 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?).

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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. All of them are the results of the same free-market policy package. In the study cited above, Rogoff and Reinhart point out that the share of countries in banking crises is very closely related to the degree of international capital mobility.

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival by Charles Goodhart, Manoj Pradhan

asset-backed security, banks create money, Berlin Wall, bonus culture, Boris Johnson, Branko Milanovic, Brexit referendum, business cycle, capital controls, carbon tax, central bank independence, commodity super cycle, coronavirus, corporate governance, COVID-19, deglobalization, demographic dividend, demographic transition, Deng Xiaoping, en.wikipedia.org, Fall of the Berlin Wall, financial independence, financial repression, fixed income, full employment, gig economy, Gini coefficient, Greta Thunberg, housing crisis, income inequality, inflation targeting, interest rate swap, job automation, Kickstarter, long term incentive plan, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Martin Wolf, mass immigration, middle-income trap, non-tariff barriers, offshore financial centre, oil shock, old age dependency ratio, open economy, paradox of thrift, Pearl River Delta, pension reform, Phillips curve, price stability, private sector deleveraging, quantitative easing, rent control, savings glut, secular stagnation, shareholder value, special economic zone, The Great Moderation, The Wealth of Nations by Adam Smith, total factor productivity, working poor, working-age population, yield curve, zero-sum game

But if the authorities tried to take persistent advantage of that, in order to lower unemployment below the NRU, the result could only be to cause an ever-increasing rate of inflation. This concept, of a vertical long-run Phillips curve, was an important buttress for the subsequent move to Central Bank independence, with a mandate to concentrate on price stability via an inflation target. With such a Phillips curve, Central Bank measures to maintain price stability would not of themselves affect longer-run employment, growth or productivity, which were (in the long term) determined by supply-side factors, not by monetary, short-term demand-side policies.3 Thus, concentration on the control of inflation, via monetary policies, would be of itself beneficial, with no offsetting disadvantages.

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The over-riding concern, when Keynes was writing the General Theory, was to restore and to maintain reasonably full employment, not to control inflation. It is in some ways a measure of the success of Keynesian economics that since World War II, at least until the twenty-first century, the main problem that faced us was to combine reasonably full employment with price stability. Of course, the initial recovery to full employment at the end of the 1930s and early 1940s owed more to rearmament and World War II than to Keynesian economics. But after World War II and into the early 1950s, the initial major concern/expectation was that the advanced economies might fall back into a further bout of stagnation/deflation.

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Globalisation has been checked by populism, just at the time that demographic factors are swinging back to labour’s advantage. Meanwhile, those who extrapolate the recent past into the future, ignoring longer-run forces, are asserting that we will remain in secular stagnation. The slow-moving pendulum is about to swing back again. It may be that, for a year or two, we could combine even lower unemployment with price stability, but that will not last. The message of this chapter is that, not only is the long-run Phillips curve vertical at the NRU (u*), but also the position of u* is continuously and systematically shifting owing to longer-run demographic, political and economic forces. You ignore such trends at your peril.

Unfinished Business by Tamim Bayoumi

Alan Greenspan, algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, book value, 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, Glass-Steagall Act, Greenspan put, hiring and firing, housing crisis, inflation targeting, junk bonds, 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, Rubik’s Cube, Savings and loan crisis, 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.

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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.

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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.

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

Alan Greenspan, banking crisis, Basel III, Bear Stearns, 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, foreign exchange controls, forensic accounting, Glass-Steagall Act, Goldman Sachs: Vampire Squid, haute cuisine, IBM and the Holocaust, Kickstarter, low interest rates, Occupy movement, offshore financial centre, Ponzi scheme, power law, price stability, quantitative easing, reserve currency, special drawing rights

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.

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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.

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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.

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

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, 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 engineering, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, housing crisis, inflation targeting, information asymmetry, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, Michael Milken, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, Socratic dialogue, too big to fail

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.

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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.

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

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, 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 engineering, financial innovation, Flash crash, foreign exchange controls, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, low interest rates, market bubble, market design, middle-income trap, Money creation, money market fund, moral hazard, mortgage debt, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, Paul Samuelson, price stability, public intellectual, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Savings and loan crisis, 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.

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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.

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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.

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, 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 engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

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.

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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.

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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

Alan Greenspan, Albert Einstein, Apollo 11, Asian financial crisis, asset-backed security, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, bond market vigilante , 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, currency risk, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, Ford Model T, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, junk bonds, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, low interest rates, market clearing, mass immigration, Minsky moment, moral hazard, mortgage debt, Neil Armstrong, 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, risk free rate, Savings and loan crisis, seminal paper, 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

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.

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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.

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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.

Where Does Money Come From?: A Guide to the UK Monetary & Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson

bank run, banking crisis, banks create money, Basel III, Big bang: deregulation of the City of London, book value, Bretton Woods, business cycle, capital controls, cashless society, central bank independence, credit crunch, currency risk, double entry bookkeeping, en.wikipedia.org, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, Goodhart's law, Hyman Minsky, inflation targeting, interest rate derivative, interest rate swap, Joseph Schumpeter, low skilled workers, market clearing, market design, market friction, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Northern Rock, offshore financial centre, Post-Keynesian economics, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, Real Time Gross Settlement, reserve currency, Ronald Reagan, seigniorage, special drawing rights, the payments system, trade route, transaction costs

., (1964). Banks of the World: A History and Analysis. Paris: viii 39 Davies (2002). op .cit. p. 50 40 Innes, A.M., (1913). What is Money? Banking Law and Journal May: 377-408 41 Davies (2002). op. cit., p. 663 42 Wray, L. R., (1998). Understanding Modern Money: The Key to Full Employment and Price Stability, Chapter 3. Cheltenham: Edward Elgar p. 43 43 Grierson, P., (1977). The Origins of Money, London: Athlone Press, pp. 19-21 44 Wikipedia (n.d.) Retrievable from http://en.wikipedia.org/wiki/Wergeld 45 Greirson (1977). op. cit. p. 43 46 Innes (1913). op. cit. 47 Wray (1998). op. cit. Chapter 3 48 Innes (1913). op. cit. p. 398 49 Mosler, W., (2010).

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p=175 and http://www.neweconomics.org/blog/2012/07/05/quantitative-easing-a-wasted-opportunity 26 Peston, R., (n. d.). How Credit Easing Works, BBC News, http://www.bbc.co.uk/news/business-17437484 27 Graeber, D., (2011). Debt: The First 5000 years, Melville House Publishing: Brooklyn, New York 28 Wray, R., (1998). Understanding Modern Money: The Key to full-employment and price stability, Cheltenham: Edward Elgar 29 Innes, A. M., (1913). What is Money, Banking Law Journal (May 1913): 377-08. 30 Carruthers, B. G. and Babb, S., (1996). The Colour of Money and the Nature of Value: Greenbacks and Gold in Postbellum America, American Journal of Sociology, 1010:1556-91 31 Davies, G., (2002).

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International Review of Financial Analysis (In Press). Withers, H., (1909). The Meaning of Money. London: Smith and Elder World Bank, (1993). The East Asian Miracle, Economic Growth and Public Policy. Oxford: Oxford University Press Wray, L. R., (1998). Understanding Modern Money: The Key to Full Employment and Price Stability. Cheltenham: Edward Elgar ABOUT THE AUTHORS Josh Ryan-Collins is a Senior Researcher at nef (the new economics foundation) where he is leading a programme of research on the history and practice of monetary systems. He is studying for a PhD in finance at the University of Southampton. Tony Greenham is Head of Finance and Business at nef.

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

Airbnb, Alan Greenspan, altcoin, Apple Newton, bank run, banking crisis, bitcoin, Bitcoin Ponzi scheme, blockchain, Bretton Woods, buy and hold, California gold rush, capital controls, carbon footprint, clean water, Cody Wilson, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cross-border payments, cryptocurrency, David Graeber, decentralized internet, disinformation, disintermediation, Dogecoin, driverless car, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, Firefox, Flash crash, Ford Model T, Fractional reserve banking, Glass-Steagall Act, hacker house, Hacker News, 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 creation, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, off-the-grid, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, printed gun, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, 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, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, underbanked, Vitalik Buterin, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

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.

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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.

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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.

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

Alan Greenspan, 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, Greenspan put, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land bank, land reform, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, Post-Keynesian economics, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, Savings and loan crisis, seigniorage, shareholder value, short selling, South Sea Bubble, technological determinism, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

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.

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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).

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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.

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, Future Shock, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, Money creation, 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

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.

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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.

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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.

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, Alan Greenspan, AOL-Time Warner, banking crisis, Bear Stearns, 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, Easter island, endogenous growth, eurozone crisis, financial engineering, financial innovation, first-past-the-post, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, 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, low interest rates, market fundamentalism, Mexican peso crisis / tequila crisis, military-industrial complex, Money creation, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, 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, Suez crisis 1956, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

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.

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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.

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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.

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, book value, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, Carmen Reinhart, central bank independence, classic study, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, democratizing finance, 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, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, 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, low interest rates, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, military-industrial complex, 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, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, proprietary trading, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, scientific management, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, stock buybacks, structural adjustment programs, subprime mortgage crisis, Tax Reform Act of 1986, 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, vertical integration, very high income, Washington Consensus, We are all Keynesians now, Works Progress Administration, zero-coupon bond, zero-sum game

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.

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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.

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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.

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, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, 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, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

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?

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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.

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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.

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

"World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, classic study, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, eat what you kill, Edward Glaeser, electricity market, 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, foreign exchange controls, full employment, geopolitical risk, George Akerlof, global rebalancing, Goodhart's law, Great Leap Forward, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, long and variable lags, Long Term Capital Management, low interest rates, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, military-industrial complex, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, Paul Volcker talking about ATMs, 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 Solow, Ronald Reagan, Savings and loan crisis, seminal paper, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, systems thinking, 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.

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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.

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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.

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

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, 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, Great Leap Forward, 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, low interest rates, 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, Ronald Reagan, Savings and loan crisis, 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

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.

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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.

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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.

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

"World Economic Forum" Davos, Abraham Wald, 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, low interest rates, market fundamentalism, mass immigration, means of production, Menlo Park, military-industrial complex, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, public intellectual, 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

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.

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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.

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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.

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, Alan Greenspan, American Society of Civil Engineers: Report Card, Asian financial crisis, business cycle, collective bargaining, declining real wages, full employment, George Akerlof, high-speed rail, income inequality, inflation targeting, low interest rates, mass immigration, minimum wage unemployment, new economy, Phillips curve, 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.

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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).

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

"there is no alternative" (TINA), "World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, bread and circuses, break the buck, Bretton Woods, Brexit referendum, BRICs, British Empire, business cycle, business logic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, company town, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, 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 engineering, 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, high-speed rail, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, low interest rates, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, military-industrial complex, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, opioid epidemic / opioid crisis, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, post-truth, predatory finance, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, 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

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.

…

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.

…

The losses needed either to be pushed down to the investors all across Europe who had profited from the banks’ unsustainable business models or to be raised to the level of a coordinated European bailout. Extend-and-pretend on a national basis merely turned banking crises into fiscal crises, which widened uncertainty while deflecting attention from the real issue. 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.

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

"World Economic Forum" Davos, 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, electricity market, eurozone crisis, Fall of the Berlin Wall, financial engineering, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, low interest rates, market fundamentalism, Money creation, 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.

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

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, 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, driverless car, Erik Brynjolfsson, eurozone crisis, fear index, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, geopolitical risk, 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, low interest rates, 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, Sheryl Sandberg, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

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.

…

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.

…

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.

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

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, 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, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, 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 interest rates, low-wage service sector, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, 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 Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, 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

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.

…

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.

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

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, 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, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, 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 interest rates, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, 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 Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, 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

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.

…

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.

Samuelson Friedman: The Battle Over the Free Market by Nicholas Wapshott

2021 United States Capitol attack, Alan Greenspan, bank run, basic income, battle of ideas, Bear Stearns, Berlin Wall, Bretton Woods, business cycle, California gold rush, collective bargaining, coronavirus, corporate governance, COVID-19, creative destruction, David Ricardo: comparative advantage, Donald Trump, double helix, en.wikipedia.org, fiat currency, financial engineering, fixed income, floating exchange rates, full employment, God and Mammon, greed is good, Gunnar Myrdal, income inequality, indoor plumbing, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, light touch regulation, liquidity trap, lockdown, low interest rates, Machinery of Freedom by David Friedman, market bubble, market clearing, mass immigration, military-industrial complex, Money creation, money market fund, Mont Pelerin Society, moral hazard, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, paradox of thrift, Paul Samuelson, Philip Mirowski, Phillips curve, price mechanism, price stability, public intellectual, pushing on a string, quantitative easing, rent control, road to serfdom, Robert Bork, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, seminal paper, Simon Kuznets, social distancing, Tax Reform Act of 1986, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, trickle-down economics, universal basic income, upwardly mobile, urban renewal, War on Poverty, We are all Keynesians now, Works Progress Administration, zero-sum game

What should be avoided, he declared, were “unpredictable and erratic changes of direction in prices” which were “as disturbing to economic growth as to economic stability.” And that “past experience,” which he failed to elaborate upon, “suggests that something like a 3 to 5 per cent per year increase in the stock of money is required for long-term price stability,”43 though how he came to arrive at such precise figures he also omitted to explain. How could a steady 3 to 5 percent increase in prices be achieved? As he had already argued, the time delay between attempting to alter the quantity of money in an economy and the resulting effect on prices was at best guesswork.

…

He agreed that “pressures to increase the money supply to serve some presumed short-term objective are a basic source of inflationary pressure,” and that “excessive monetary expansion is a sufficient condition for inflation,” and “no important inflation can be sustained without money rising substantially faster than real income [i.e., incomes adjusted for inflation].” He agreed that “there is always some rate of monetary growth (perhaps zero) that will in principle achieve price stability. But still, I don’t think we can draw much comfort from those principles as a full explanation of where we are and a guide as to how to proceed.” He took as an example the acceleration in inflation since the 1960s. The rise in prices in the 1970s, for instance, was driven by “the oil situation, some crop failures, the spread of unions into some new areas, and shortages in particular industries that ran up against capacity pressures before the economy as a whole reached full employment.”

…

The rise in prices in the 1970s, for instance, was driven by “the oil situation, some crop failures, the spread of unions into some new areas, and shortages in particular industries that ran up against capacity pressures before the economy as a whole reached full employment.” Rather than invoke monetary changes to explain the persistent high inflation, “we have to ask ourselves about the nature of the economic, social, and political forces and attitudes that seem to have aggravated the difficulties of reconciling full employment with price stability.” Then came a warning. For central bankers to strictly limit the money supply according to some automatic formula, as Friedman advocated, might end up as an affront to democracy. Central banks could always resist inflationary pressures by simply refusing to provide enough funds to finance them, but such an approach would conflict with the goals of economic growth and full employment that were important national goals.

The Left Case Against the EU by Costas Lapavitsas

anti-work, antiwork, banking crisis, Bretton Woods, capital controls, central bank independence, collective bargaining, declining real wages, eurozone crisis, financial engineering, Francis Fukuyama: the end of history, global reserve currency, hiring and firing, low interest rates, machine translation, 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.

…

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.

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

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, 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, Dr. Strangelove, Edward Snowden, eurozone crisis, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global macro, global reserve currency, global supply chain, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Herman Kahn, high-speed rail, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, junk bonds, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, megaproject, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, operational security, plutocrats, Ponzi scheme, power law, price stability, public intellectual, 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, Solyndra, 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

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.

…

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.

…

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.

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

"World Economic Forum" Davos, 9 dash line, Admiral Zheng, air freight, Alan Greenspan, 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, Brexit referendum, 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, currency risk, 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, Global Witness, Great Leap Forward, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, Jeremy Corbyn, joint-stock company, Kickstarter, Long Term Capital Management, low interest rates, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, middle-income trap, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, post-truth, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Savings and loan crisis, 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 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.

…

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.

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

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, 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, foreign exchange controls, 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, Post-Keynesian economics, price stability, profit maximization, proprietary trading, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, Suez crisis 1956, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, work culture , 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.

…

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.

Big Debt Crises by Ray Dalio

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, 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, currency risk, declining real wages, equity risk premium, European colonialism, fiat currency, financial engineering, financial innovation, foreign exchange controls, German hyperinflation, global macro, housing crisis, implied volatility, intangible asset, it's over 9,000, junk bonds, Kickstarter, land bank, large denomination, low interest rates, manufacturing employment, margin call, market bubble, market fundamentalism, military-industrial complex, Money creation, 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, risk free rate, Savings and loan crisis, short selling, short squeeze, sovereign wealth fund, subprime mortgage crisis, too big to fail, transaction costs, universal basic income, uptick rule, value at risk, yield curve

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.

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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.

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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.”

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 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.

…

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

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, bank run, banking crisis, Bear Stearns, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, classic study, 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, export processing zone, 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 interest rates, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, Multi Fibre Arrangement, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, precautionary principle, price stability, profit maximization, race to the bottom, regulatory arbitrage, Savings and loan crisis, savings glut, Silicon Valley, special drawing rights, special economic zone, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

The 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.

…

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.

…

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.

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, Alan Greenspan, bank run, behavioural economics, 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, currency risk, Daniel Kahneman / Amos Tversky, decentralized internet, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, guns versus butter model, Home mortgage interest deduction, impact investing, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jeff Bezos, John Bogle, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, low interest rates, Marc Andreessen, Mark Spitznagel, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, obamacare, OSI model, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reality distortion field, 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, Skinner box, smart grid, Solyndra, 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

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.

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“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.

India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, book value, Bretton Woods, business climate, capital controls, carbon tax, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, Cornelius Vanderbilt, 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, foreign exchange controls, 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, low interest rates, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price elasticity of demand, 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, Tragedy of the Commons, transaction costs, universal basic income, urban sprawl, vertical integration, working-age population

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.

…

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.

…

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: Where Have All the Good Jobs Gone? by David G. Blanchflower

90 percent rule, active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Lives Matter, Black Swan, Boris Johnson, Brexit referendum, 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, driverless car, estate planning, fake news, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, high-speed rail, illegal immigration, income inequality, independent contractor, indoor plumbing, inflation targeting, Jeremy Corbyn, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, opioid epidemic / opioid crisis, Own Your Own Home, p-value, Panamax, pension reform, Phillips curve, plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, The Theory of the Leisure Class by Thorstein Veblen, 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.

…

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.

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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.

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

Alan Greenspan, 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, Ford Model T, full employment, gentleman farmer, German hyperinflation, Glass-Steagall Act, index card, invisible hand, Lao Tzu, large denomination, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, mobile money, money market fund, moral hazard, new economy, open economy, plutocrats, price stability, purchasing power parity, pushing on a string, rolodex, scientific management, 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.

…

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.

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

Abraham Maslow, Albert Einstein, asset allocation, Bernie Madoff, book value, 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, John Bogle, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, the scientific method, Vanguard fund, young professional

., 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.

Austerity: The History of a Dangerous Idea by Mark Blyth

"there is no alternative" (TINA), accounting loophole / creative accounting, Alan Greenspan, balance sheet recession, bank run, banking crisis, Bear Stearns, Black Swan, book value, 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 engineering, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Greenspan put, Growth in a Time of Debt, high-speed rail, 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, low interest rates, market bubble, market clearing, Martin Wolf, Minsky moment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, Phillips curve, Post-Keynesian economics, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Solow, savings glut, short selling, structural adjustment programs, tail risk, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, Two Sigma, 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.

…

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.

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

affirmative action, airline deregulation, Alan Greenspan, 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, flag carrier, floating exchange rates, full employment, George Gilder, Gini coefficient, global supply chain, Great Leap Forward, guns versus butter model, high-speed rail, income inequality, income per capita, indoor plumbing, informal economy, intermodal, inverted yield curve, invisible hand, It's morning again in America, Kenneth Rogoff, knowledge economy, late capitalism, Les Trente Glorieuses, linear programming, low interest rates, manufacturing employment, Multi Fibre Arrangement, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, North Sea oil, oil shock, Paul Samuelson, pension reform, Phillips curve, 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.

…

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 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.

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

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, 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.

…

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.

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

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, 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, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, 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 free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

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.

…

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.

…

., 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.

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

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, 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, classic study, 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, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, 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, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, 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, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

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 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.

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, Japanese asset price bubble, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, low interest rates, market bubble, Meghnad Desai, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Post-Keynesian economics, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

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.

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

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, 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, Greenspan put, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, National Debt Clock, new economy, Northern Rock, Own Your Own Home, precautionary principle, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

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.

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

Andrei Shleifer, Asian financial crisis, Brexit referendum, business cycle, central bank independence, clean water, corporate governance, correlation does not imply causation, creative destruction, Edward Glaeser, fake news, financial independence, game design, German hyperinflation, hive mind, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jean Tirole, Kenneth Rogoff, low interest rates, Mark Zuckerberg, mass incarceration, military-industrial complex, minimum wage unemployment, Mohammed Bouazizi, Neil Armstrong, open economy, Pareto efficiency, Paul Samuelson, price stability, rent control, Robert Solow, The Wealth of Nations by Adam Smith, trade liberalization, Tyler Cowen

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.

…

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.

Making Globalization Work by Joseph E. Stiglitz

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, benefit corporation, Berlin Wall, blood diamond, business process, capital controls, carbon tax, 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, Garrett Hardin, Gini coefficient, global reserve currency, Global Witness, Great Leap Forward, 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 interest rates, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, negative emissions, 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, Seymour Hersh, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, Tragedy of the Commons, trickle-down economics, union organizing, Washington Consensus, zero-sum game