quantitative easing

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

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

Mortgage rates come down, homeowners with a mortgage are, as a result, better off, companies’ borrowing costs drop and, thus, spending begins to revive: if we all believe this, a rate cut can become a self-­fulfilling event. Quantitative easing, unfortunately, doesn’t offer the same intuitive message: for many, it sounds distinctly suspect, has no personal relevance and, thus, makes little difference to economic behaviour. And with economic performance far worse than the protagonists of quantitative easing expected, the credibility of such esoteric measures has steadily withered on the vine. 74 4099.indd 74 29/03/13 2:23 PM Stimulus Junkies One reason for increased scepticism relates to the impact of lower long-­term interest rates – thanks to quantitative easing – on pension fund deficits. As Charlie Bean, the Deputy Governor of the Bank of England, explained in a May 2012 speech: Quantitative easing does not inherently raise pension deficits. It all depends on the initial position of the fund, with the movement in liabilities and assets likely to be broadly comparable when a scheme is fully funded.

This is a form of financial repression, a way of ensuring that the government is able to rig credit markets to suit its own aims even if the economy as a whole may perform less well as a consequence. Quantitative easing may originally have been designed to improve economic performance but it has also allowed governments to raise debt on the cheap. With economic stagnation, quantitative easing has merely allowed governments to postpone the fiscal ‘day of 80 4099.indd 80 29/03/13 2:23 PM Stimulus Junkies reckoning’. And the longer stagnation persists, the worse the reckoning will eventually be. Quantitative easing is a useful way of masking persistent increases in government debt, as if those increases come at no economic cost. It is also, by implication, a useful way of allowing governments to muscle their way to the front of the credit queue: with the value of government bonds in effect ‘ring-­fenced’ by the actions of central banks, quantitative easing in a risk-­averse world will only encourage more and more investors to invest in government bonds.

So if a fund starts off relatively ‘asset poor’, the sponsors will now find it more costly to acquire the assets to match its future obligations . . . A corollary of this is that the cost of provisioning against additional pension entitlements being accumulated by currently serving staff unambiguously rises.6 This would, perhaps, be a small price to pay if, as a result of quantitative easing, the economy quickly recovered, allowing quantitative easing to be reversed. In that case, bonds held by the central bank as a result of quantitative easing would be sold back to the market, yields would rise and the pressure on pension deficits would be alleviated. Yet this hasn’t happened. Compared with a typical period of recession, during which interest rates fall rapidly only to rise swiftly thereafter, the absence of meaningful recovery leaves pension funds facing the prospect of permanently lower interest rates and, thus, growing difficulties in meeting their obligations.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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

A few key further points in the literature are introduced in an appendix to this chapter (grouped with other appendices at the end of the book), which gives a flavor of some of the issues that need to be taken into account. QUANTITATIVE EASING We now turn to alternative approaches that central banks have adopted to deal with the zero bound, short of negative rates. This section deals with the policies that the monetary authorities actually used during the financial crisis, namely, quantitative easing (QE) and forward guidance. Our purpose is to ask to what extent these various alternatives obviate the need for negative interest rate policy, or at least mitigate it to a large extent. Since the financial crisis of 2008, most advanced-country central banks, including the Federal Reserve, the ECB, the Bank of England, and the Bank of Japan, have engaged in massive and aggressive quantitative easing. The scale of the interventions has been extraordinary. The Federal Reserve’s balance sheet rose from around $700 billion at the outset of the financial crisis to a peak of more than $4 trillion and roughly 25% of GDP.

Some have argued that the zero bound hasn’t really turned out to be all that important, because central banks have found pretty good ways to get around it, using unconventional tools such as “forward guidance” and “quantitative easing.” The first involves telling investors that the monetary authorities intend to elevate inflation in the future, even if they cannot do it now. When it works, forward guidance succeeds in bringing down the real interest rate, even if the nominal interest rate is stuck at zero, since of course the real interest rate is the nominal interest rate minus the expected rate of inflation. A second idea is quantitative easing (QE). We discuss QE in much greater detail later in this chapter, but essentially it involves using short-term central bank debt to buy long-term assets, such as government debt, thereby bringing long-term government interest rates down.

And the Bank of Japan’s QE program has already reached 70% of GDP, proportionately far greater than in the United States. And if it maintains its current pace, the Bank of Japan’s QE program is on track to hit the 100% of GDP mark within 2 years. Quantitative easing has been the focus of extensive recent empirical research, though subject to the major constraint that experience so far has been limited.21 We will turn to this research shortly. In a nutshell, much of it basically constitutes event studies that look at the impact of quantitative easing announcements on market interest rates. There is almost certainly a transitory effect (even when the announcements are partly anticipated). But it is hard to know how long lasting the effects have been, basically because of the strong downward trend in long-term real interest rates after the financial crisis, a trend that seems to have its roots in many factors other than just central bank policy.


pages: 248 words: 57,419

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

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

Instead, it sold some of the government bonds in its portfolio to raise the cash it needed; and, in the third quarter of 2008, it obtained a $300 billion loan from the Treasury Department. Quantitative easing began near the end of 2008. From that point, the Fed began buying credit instruments from the banks and paying for them by depositing money (money freshly created for the purpose) into the accounts in which banks held their liquidity reserves at the Fed. As discussed in Chapter 1, those reserves had steadily dwindled to next to nothing by the time the crisis began. That suddenly changed. They jumped from $33 billion in mid-2008 to $860 billion by the end of that year. By September 2011 they had grown to $1.6 trillion. Quantitative Easing: Round One Quantitative easing is a euphemism for fiat money creation. The “quantity” referred to is the amount of fiat money in existence.

Currency manipulation, therefore, can be measured by the size of a country’s foreign exchange reserves. The value of the currencies that are not pegged can be highly volatile. Moreover, short-term currency movements are notoriously difficult to predict. Quantitative Easing and Asset Prices The immediate effect of quantitative easing is to push interest rates down and to push stock prices and commodity prices up. As just mentioned, in a capitalist system, when a government borrowed money it pushed up interest rates. That is no longer necessarily the case. Today, interest rates are determined not only by the demand for money but also by the supply of money. Consider the second round of quantitative easing. Between November 2010 and mid-2011, the Fed created $600 billion and used it to buy government bonds. That allowed the government to borrow money to finance its very large budget deficits without pushing up interest rates.

See also U.S. economy Election of 2012, issues of government spending and indebtedness Emotions, in Mitchell’s theory of business cycles Energy and energy prices. See also Solar initiative, proposed excluded from CPI in New Great Depression quantitative easing and England Equation of exchange European Central Bank Extended-baseline scenario, of Congressional Budget Office Fannie Mae: conservatorship of credit creation and decline in liquidity reserves quantitative easing and U.S. debt guarantees and FDIC Federal Reserve. See also Quantitative easing commercial bank reserves (1945–2007) end of gold standard, creation of fiat money, and expansion of credit policy actions regarding New Depression Federal Reserve Act of 1913 Fiat money: end of gold standard and creation of government deficit in 2013 and 2014 and Fiat Money Inflation in France (White) Financial sector: debt and lack of liquidity reserve requirements and credit expansion Fiscal stimulus, needed with additional quantitative easing Fisher, Irving theory of debt-deflation Fixed-interest-rate debt, in diversified portfolio Flow of Funds Accounts of the United States Food prices: deflation and excluded from CPI quantitative easing and Foreign causes, of credit expansion Bernanke’s global savings glut theory and central banks’ creation of fiat money and foreign exchange reserves possibility of end to China’s buying of U.S. debt Foreign exchange reserves.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Available at https://www.bbc.co.uk/news/business-15217615 4 TARP was a programme of the US government that helped to stabilise the financial system through a series of measures that included the TARP bailout programme, authorising $700 billion to bail out banks, AIG, and auto companies. It also helped credit markets and homeowners. Quantitative easing (QE) – or large-scale asset purchases – refers to monetary policy that entails a central bank creating money that is used to buy predetermined amounts of government bonds or other financial assets in order to inject liquidity into the economy. 5 Outright Monetary Transactions (OMT) is a programme of the European Central Bank under which the Bank makes purchases (outright transactions) in secondary, sovereign bond markets, under certain conditions, of bonds issued by euro area member states. 6 Balatti, M., Brooks, C., Clements, M. P., and Kappou, K. (2016). Did quantitative easing only inflate stock prices? Macroeconomic evidence from the US and UK. SSRN [online]. Available at https://papers.ssrn.com/sol3/papers.cfm?

Pension funds and insurance companies are vulnerable to liability mismatching as bond yields fall towards or below zero. This can result in some institutions taking too much risk to meet guaranteed returns, but it can also result in more demand for bonds as the yields fall, resulting in yet lower bond yields. Notes 1 See How quantitative easing affects bond yields: Evidence from Switzerland. Christensen, J., and Krogstrup, S. (2019). Royal Economic Society [online]. Available at https://www.res.org.uk/resources-page/how-quantitative-easing-affects-bond-yields-evidence-from-switzerland.html 2 See Gilchrist, S., and Zakrajsek, E. (2013). The impact of the Federal Reserve's large-scale asset purchase programmes on corporate credit risk. NBER Working Paper No. 19337 [online]. Available at https://www.nber.org/papers/w19337 3 See Christensen, J.

Economic History Review, 45(4), 703–730. Hatzius, J., Phillips, A., Mericle, D., Hill, S., Struyven, D., Choi, D., Taylor, B., and Walker, R. (2019). Productivity paradox v2.0: The price of free goods. New York, NY: Goldman Sachs Global Investment Research. Hayes, A. (2019, April 25). Dotcom bubble. Investopedia. How quantitative easing affects bond yields: Evidence from Switzerland. (2019). Royal Economic Society [online]. Available at https://www.res.org.uk/resources-page/how-quantitative-easing-affects-bond-yields-evidence-from-switzerland.html How to tame the tech titans. (2018). The Economist. Hutchinson, J., and Persyn, D. (2012). Globalisation, concentration and footloose firms: In search of the main cause of the declining labour share. Review of World Economics, 148(1). Jacques, M. (2009). When China rules the world: The end of the western world and the birth of a new global order.


pages: 756 words: 120,818

The Levelling: What’s Next After Globalization by Michael O’sullivan

"Robert Solow", 3D printing, Airbnb, algorithmic trading, bank run, banking crisis, barriers to entry, Bernie Sanders, bitcoin, Black Swan, blockchain, Boris Johnson, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, capital controls, Celtic Tiger, central bank independence, cloud computing, continuation of politics by other means, corporate governance, credit crunch, cryptocurrency, deglobalization, deindustrialization, disruptive innovation, distributed ledger, Donald Trump, eurozone crisis, financial innovation, first-past-the-post, fixed income, Geoffrey West, Santa Fe Institute, Gini coefficient, global value chain, housing crisis, income inequality, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, pattern recognition, Peace of Westphalia, performance metric, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

Third, and the difficult solution practically and politically, she might ask what drives national development and stability in the long term and set about creating a framework to implement those drivers. We can take each option at a time, starting with infrastructure.19 In the period since 2011 the policy narrative has been dominated by the role of quantitative easing as a mechanism to support growth and raise inflation. It has succeeded in tranquilizing financial markets and lowering interest rates. But quantitative easing has not worked well in boosting economic potential. To be fair, the aim of quantitative easing has not been to change economic potential, but such has been the amplitude of quantitative easing and the power of central banks that many politicians appear comfortable in allowing central banks to underwrite risks. In the United States, at least, there has been a debate on the possibility of launching large-scale physical infrastructure projects.

If interest rates rise, as they are beginning to as of this writing, the burden of this debt will weigh down economic activity and fuel future crises. One cause of so much debt accumulation since the 2009 crisis is the monetary policy of “quantitative easing” (QE), that is, the buying of bonds and other securities by central banks, something that would have been unthinkable to earlier generations of central bankers. Quantitative easing is the financial equivalent of morphine, helping take pain away. Medicinal morphine is not supplied to patients on a continuous basis, and it is not known to cure cancer, heart disease, or other ailments. Central bankers, however, appear to have a different view of the uses of financial morphine. A Westphalia for Finance Since 2009 central banks have aggressively pursued quantitative easing (and “zero” interest rates) in the hope of lowering borrowing costs and pushing up investment by companies and households.

This world treaty on financial risk could be crafted along the lines of existing large-scale environmental or nuclear weapons deals. Under this agreement, the world’s major central banks would agree—or rather, their political masters would agree for them—to use extraordinary measures like quantitative easing only in truly exceptional preset conditions of great market and economic stress. The effects would be that markets would properly price economic and political risks, politicians would therefore act to address those risks and fault lines, and, when extraordinary monetary policy needed to be launched, it would be more effective. By prohibiting quantitative easing or such extraordinary uses of the monetary toolbox (central banker speak for the many options they have invented to express their power), such a treaty would attune political leaders to the fact that the monetary comfort blanket could not be deployed against every threat and that governments would thus have to adopt a more proactive approach to avoiding and curing economic crises.


pages: 597 words: 172,130

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

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

August 27—Bernanke gives a speech at the Jackson Hole economic symposium, raising the possibility of a new round of quantitative easing to address a slowdown in the U.S. economy. October 18—In Deauville, France, German chancellor Angela Merkel and French president Nicolas Sarkozy walk on a seaside promenade and agree that private creditors must take losses in future bailouts. Trichet is stridently opposed to this approach, which causes a new wave of disruption in financial markets. October 23—Finance ministers and central bankers of the Group of 20 major world powers meet in Gyeongju, South Korea, where Bernanke explains the Fed’s expected new policy of quantitative easing to skeptical international policymakers. November 3—The Fed announces it will buy $600 billion in Treasury bonds in a second round of quantitative easing that will be widely known as QE2. It draws intensive criticism from American conservatives and the German, Chinese, and Brazilian governments.

See Carney, Mark; King, Marvyn; Norman, Montagu Great Depression actions, 55, 60 imperialism, connection to, 10, 28–31 inflation, differing views of, 252–53 interest rate cuts (2009), 162–63 under Labour, limited powers, 234–35, 237–38, 242 location of, 30–31 MPC, King leadership of, 123, 239 MPC meetings, structure of, 239–40, 246 Northern Rock PLC crisis and bailout, 125–28 Osborne, new role proposed by, 247–48 Panic of 1866 bailout by, 27–28, 32–34 political independence, 121–22 quantitative easing (2009), 238–41 quantitative easing (QE2), 334–36, 340 Soros/Druckenmiller and devaluation of pound, 72–74 strong action, lack of, 138–39, 387–88 value of pound sterling (1992), 72 Bank of Greece, governor. See Provopoulos, George Bank of Japan, 86–94 Bernanke on, 84–85, 88–89 currency swaps with ECB (2011), 349–50 Hayami as governor, 87, 89–92 post–World War II power of, 86 quantitative easing by, 90–91, 255 zero-interest-rate policy, 87–88, 90–92 Bank of the Estates of the Realm, 24 Bank of the United States (1791), 37 Banque de France, 55, 115 Barclays, 154 Barker, Kate, 7, 122, 243, 247, 250 Barwell, Richard, 122 Bastasin, Carlo, 316–17 Bater, Jeff, 254 Bean, Charles, 97, 124, 142, 240–41 Bear Stearns bailout, 133–34, 139 collapse of, 132–33 Beck, Glenn, 256, 276 Beer Hall Putsch, 52–53 Benton, Thomas Hart, 38 Bérégovoy, Pierre, 77 Berlin Wall, end of, 76–77 Berlusconi, Silvio bombastic remarks of, 223, 299, 319–20 and ECB bailout conditions, 319–21, 346 successor to.

See Zhou Xiaochuan policymaking secrecy, 363–64, 373–74 Zhou reforms/programs, 369–73, 375–76 Perry, Rick, 327–28 Peston, Robert, 127 Peterson, Pete, 62 Pianalto, Sandra, 258 PIIGS nations, 213 Pimlott, Daniel, 249–50 Plosser, Charles, 192, 196, 258, 264, 275, 330, 332, 337, 385 Pooling, 74–75 Portugal financial crisis, 296–98 deficit reduction, 220, 353 ECB bond buying program, 287, 295 Posen, Adam, 247, 250, 252–53, 334, 337, 390 Powell, Jay, 385 Price increases. See also Inflation self-perpetuation of, 65–66, 134–35 Privatization Greece, 309–16 Italy, 319 Provopoulos, George, 201–2, 203, 215 Quantitative easing by Bank of England (2009), 238–41 by Bank of England (2011), 334–36, 340 by Bank of Japan (2000), 90–91, 255 by Fed (QE1), 263 by Fed, second round. See Quantitative easing (QE2) goals of, 238–39, 255 Quantitative easing (QE2), 255–80 Bernanke briefing in South Korea about, 273–74 economic rationale for, 259–61, 263–65, 267–70 effectiveness of, 279–80, 328 execution of purchase, 277–78 FOMC meeting on, 254–55, 274–76 goals of, 255, 374–75 implementation strategies, 272–73 negative reaction to, 256–58, 274, 275–76, 278–80, 328–29, 374–75 portfolio balance channel, 331 risks of, 267, 271–72, 274 Quantum Fund, 73 Rajan, Raghuram, 107–8 Rajoy, Mariano, 348 Ranieri, Lewis, 5 Raskin, Sarah Bloom, 275 Real estate prices.


pages: 381 words: 101,559

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

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

When these factors finally did converge, in 2010, the result would be the international monetary equivalent of a tsunami. CHAPTER 6 Currency War III (2010–) “The purpose . . . is not to push the dollar down. This should not be regarded as some sort of chapter in a currency war.” Janet Yellen, Vice Chair of the Federal Reserve, commenting on quantitative easing, November 16, 2010 “Quantitative easing also works through exchange rates.... The Fed could engage in much more aggressive quantitative easing . . . to further lower . . . the dollar.” Christina D. Romer, former Chair of the Council of Economic Advisers, commenting on quantitative easing, February 27, 2011 Three supercurrencies—the dollar, the euro and the yuan—issued by the three largest economies in the world—the United States, the European Union and the People’s Republic of China—are the superpowers in a new currency war, Currency War III, which began in 2010 as a consequence of the 2007 depression and whose dimensions and consequences are just now coming into focus.

Like winners in many wars throughout history, the United States had a secret weapon. That financial weapon was what went by the ungainly name “quantitative easing,” or QE, which essentially consists of increasing the money supply to inflate asset prices. As in 1971, the United States was acting unilaterally to weaken the dollar through inflation. QE was a policy bomb dropped on the global economy in 2009, and its successor, promptly dubbed QE2, was dropped in late 2010. The impact on the world monetary system was swift and effective. By using quantitative easing to generate inflation abroad, the United States was increasing the cost structure of almost every major exporting nation and fast-growing emerging economy in the world all at once. Quantitative easing in its simplest form is just printing money. To create money from thin air, the Federal Reserve buys Treasury debt securities from a select group of banks called primary dealers.

By buying intermediate-term debt, the Fed could provide lower interest rates for home buyers and corporate borrowers to hopefully stimulate more economic activity. At least, this was the conventional theory. In a globalized world, however, exchange rates act like a water-slide to move the effect of interest rates around quickly. Quantitative easing could be used by the Fed not just to ease financial conditions in the United States but also in China. It was the perfect currency war weapon and the Fed knew it. Quantitative easing worked because of the yuan-dollar peg maintained by the People’s Bank of China. As the Fed printed more money in its QE programs, much of that money found its way to China in the form of trade surpluses or hot money inflows looking for higher profits than were available in the United States. Once the dollars got to China, they were soaked up by the central bank in exchange for newly printed yuan.


pages: 475 words: 155,554

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

Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

British inflation has been by far the highest of the major European economies, and the Bank of England acknowledges that its quantitative easing policy has contributed. Europe had begun to notice Britain’s quantitative easing – but as an example to avoid, rather than to follow. Professor Werner’s view With no consensus among British economists about QE, who better to consult than the person who coined the term in the first place? Richard Werner, an expert on Japan, now of Southampton University, came up with the name in 1994. He has an unexpected perspective. He believes the whole QE exercise in Britain, as it was in Japan, is a ‘sham’, and isn’t really QE at all. ‘The Bank has dug a PR hole for itself with quantitative easing. I don’t know why they are using my expression,’ he tells me. His ‘expression’ arises from a translation of a specific Japanese term, ryoteki kanwa, which he devised a couple of decades ago to shine a light on the inadequacies of the sluggish policies of the Bank of Japan.

Behind the imposing façade that glowers over Threadneedle Street, the Bank was preparing an experiment in ‘financial repression’, an experiment that was to test the balance between credibility and calamity. It was called quantitative easing. Every schoolchild is familiar with ‘The Magic Penny’, the morning assembly song: It’s just like a magic penny, Hold it tight and you won’t have any. Lend it, spend it, and you’ll have so many, They’ll all roll over the floor. Only in Britain could there be a ubiquitous children’s song that invokes the concept of the velocity of circulation of money. After all, it was in Britain that David Hume and John Stuart Mill developed the quantity theory of money, the classical basis for modern monetarism. So it is entirely appropriate that Britain is currently conducting the world’s biggest experiment in the creation of magic money. Quantitative easing (QE), as it is officially known – or ‘printing money’ as it has been more colloquially described – has seen a flood of magic pennies wash through Britain.

In January of that year, he regaled me with the finer details of Dutch economist Willem Buiter’s blog, and with his own appreciation of the difference between quantitative easing and qualitative easing. The former referred to the sheer amount of buying the central bank could do, the latter concerned an attempt to lower interest rates in specific markets, such as mortgage debt and corporate credit. So this was a policy initiated and decided upon by the Bank, but with considerable input from the government. At the top of the Treasury the assumption was that the structure created would be used, as was the case in the USA, to buy a wide range of commercial, government and mortgage debt, but that operational decisions regarding such purchases would be left to the Bank. And so, on 5 March 2009, quantitative easing was launched in Britain, accompanied by a cut in the base rate from 1 per cent to an unprecedented 0.5 per cent.


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

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

This is broadly consistent with banking data for recipient currencies, such as the data shown in Figure 2.1. As previously mentioned, the dollar-funded carry trade at this new peak seemed to be in the magnitude of US$3 trillion in size. Despite the Bank of Japan’s adoption of quantitative easing policies and much talk in the financial markets about the yen carry trade, there was little evidence to suggest that the yen-funded carry trade had been resurrected back to its former heights. Instead, it seems likely that the European Central Bank’s conversion to the central bank trend of zero interest rates and quantitative easing promoted the development of a euro-funded carry trade during 2013 and 2014. Certainly, there was substantial growth in the net foreign assets of German, Dutch, and Spanish banks over this period, which provides strong circumstantial evidence of a growing euro-funded carry trade.

This was mispricing of risk in the sense of socialization of risk: the famous “Heads I win; tails the taxpayer loses,” from the perspective of the financial speculator. The experimental monetary policies of central banks, their willingness to expand their balance sheets to support financial markets, from the Fed’s quantitative easing policies to the European Central Bank’s “whatever it takes” approach, sent a strong signal to speculators that central banks were standing behind them. As discussed in Chapter 6, the central bank’s quantitative easing is itself a giant carry trade; the central bank buys higher-yielding debt instruments and finances these purchases by issuing its own low- or zero-yielding liabilities—the high-powered money, of which it is the monopoly supplier. If the central bank itself is implementing a giant carry trade, how can a financial speculator go wrong by following in the central bank’s footsteps?

See also specific currencies alternative, 211 asset bases for, 211 availability of, 4 in carry regime, 108–113 creation of, 109 INDEX defining, 109 Divisia, 111 statistical measures of, 109 US household holdings of, 117, 117f VIX and value of, 100, 122 volatility and value of, 98–101, 122 money market funds, government guarantee for, 113 money supply, 20, 21 business cycle and, 125–126 carry crashes and, 122–123 monopoly power, 176 natural, 186 moral hazard central banks and, 195, 200 globalization of, 195–200 monetary policy and, 208 mortgage bubble, 36 movie stars, 184–186 multiple equilibria, 183 natural monopolies, 186 negative yields, 70 net claims Australia, 40, 40f currency carry trade measurement and, 41 Turkey, 43, 43f net foreign assets, 14, 16, 29 network effects, 185 New Zealand, interest rate spreads and, 60–61 New Zealand dollar, capital flows into, 62 nonbank financial sector, 137 nonmonetary assets carry bubbles and, 169 carry regime and, 112, 114, 122 Norway, sovereign wealth fund, 75 OECD (Organisation for Economic Co-operation and Development), 115 oil carry trade, 128–133, 132f oil prices, 129f, 131 oil producers, debt levels of, 130 “The Optimal Design of Ponzi Schemes in Finite Economies” (Bhattacharya), 142 optionality buying, 146 227 selling, 152, 153 volatility and, 93–95 options delta hedging, 149–151 delta of, 149 gamma of, 149–150 pricing of, 149 unhedged, 150 volatility and, 146–148 volatility bets with, 89 volatility implied by, 57 Organisation for Economic Co-operation and Development (OECD), 115 output gap, 125 Panic of 1907, 218 personal net worth, 137, 138f photosynthesis, 189 pi Economics, 27–29 Piketty, Thomas, 219 poker, 182–183 Polish zloty, 34 Ponzi schemes, 140–143 Pope, Alexander, 179 popularity, 181–182, 184 populist political movements, 1 portfolio insurance, 155 portfolio volatility, 159 power, carry as, 191–192 pricing kernel, 99 private equity leveraged buyouts, as carry trades, 78–80 productivity, 115 profit share, 82, 137, 138f, 139 proprietary trading, compensation incentives and, 77 public intellectuals, 186 put options, 34, 89 selling fully collateralized, 156n4 QE. See quantitative easing QE3, 101, 103 quantitative easing (QE), 101, 105, 127, 136, 196, 209, 219 BOJ and, 31 real economic activity, measures of, 56 real estate booms, currency carry trades contributing to, 13 228 realized volatility, 90, 164, 167–168 anti-carry regime and, 172 implied volatility relationship to, 158 recessions, carry and consequences of, 6 recipient currencies, 10–11, 13, 65 crashes in, 23 volatility in, 215 regulatory capture, 176 rent-seeking carry as, 175–177 defining, 175 reporting horizons, 70–71 reserve balances, 109–110 resource allocation, carry regime and, 114–115 return, risk and, 99 risk carry trade profit explanations and, 48 of carry trades, 3, 5 of CDOs, 36–37 currency, 12 exchange rate, 12–13 market, 99 mispricing of, 21, 35–37, 132, 134–140, 142 return and, 99 ruin, 65, 72 selling optionality and, 153 socialization of, 136 spreading, 35 risk controls, 65 risk premium, 148, 152 portfolio volatility and, 159 roll yield, 91 rubisco, 189 ruin risk, 65, 72 sawtooth patterns, 96–97, 97f shadow banks, 137 Shin, Hyun Song, 22, 80–81 short squeezes on liquidity, 165 short-term reporting horizons, 70–71 social hierarchies, 187 social networks, 187 social realities, 184 socialization of risk, 136 South Africa, 55n6 sovereign bonds, 162 equity indexes correlation to, 161 Sovereign Wealth Fund Institute, 75 INDEX sovereign wealth funds, 75–76 growth of, 83 S&P 500, 53–55, 55n6, 56, 95 carry regime importance of, 86–87, 87f as carry trade, 160–162 equity risk trade correlation with, 99 gamma for, 154, 154f liquidity premiums for, 161 market corrections and, 79 mean reversion of, 154f, 155 quantitative easing and, 103 selling volatility on, 98 volatility of, as global volatility risk factor, 99 volatility selling in, 89–92 volatility trading on, 85, 86 S&P 500 front e-mini future, 159 stagflation, 217 stochastic discount factor, 99 stock buybacks, 82, 83f stock market crashes, of 1987, 155 stock markets carry and structures of, 7 emerging currency stability compared with, 55 performance of, 1 recessions and crashes in, 6 volatility bets in, 89 stocks, put options against, 34 stopped out, 94 structured finance, 135 subprime mortgages, 36 superstar effects, 186 Swiss franc, 29, 31, 33, 34 taxi licensing, 175 Thai baht, 25 Thailand, balance of payments current account deficit, 25 Theron, Charlize, 185 trading frequency, 74 tulip bulbs, 133 Turkey, 19, 20, 23, 39, 202 balance of payments, 45 carry bubble and bust, 42–46 consumer price index, 44 credit and claims data for, 43, 43f GDP growth, 45 interest rates, 12–13 INDEX Turkish lira, 11, 13, 20, 21, 23, 44, 55n6 carry crash of 2018 in, 45, 65 Twitter, 186 uncovered interest rate parity (UIP), 47, 48 United States capital flows into, 18 carry trade funding and, 17–20 current account deficit, 17 personal net worth in, 137, 138f savings rates, 18, 19 US Federal Reserve, 14, 26 balance sheet of, 101–102 carry crashes limited by, 127 carry regimes and, 107, 208 carry trades by, 103 creation of, 218 interest rates and, 14, 137, 208 liquidity swaps by, 104–105, 196–198 quantitative easing and, 101, 105 US household financial assets, 117–120, 117f–120f valuation metrics, 204 vanishing point, 116, 195, 209–210 variance, 94 VIX, 85, 95, 99 forward curve average, 92, 92f money value and, 100, 122 shorting, 96 spikes in, 98 VIX futures, 90–92 selling volatility using, 156, 158 shorting, 148, 157 VIX futures rolldown, 59, 96 VIX index, 53n5 volatility, 3 currency, 62 currency carry trade collapse signs from, 215 direct bets on, 89 equilibrium structure of premiums for, 156–160, 157f equity, 59 financial crises and spikes in, 52 in funding currencies, 215 global, 99, 101 implied, 57, 90 market making as premium for, 158–159 229 negatively priced liquidity and, 166 optionality and, 93–95 options and, 146–148 portfolio, 159 realized, 90 in recipient currencies, 215 selling, as short position, 156 selling, by receiving implied and paying realized, 148–150 selling, by receiving realized and paying realized, 151–156 short, 4 signs of carry regime ending and, 214–218 spikes in, 98 time horizons of, 152, 153f, 154, 154f value of money and, 98–101, 122 of volatility, 90 volatility carry, 86 volatility selling, 86, 96 central banks and, 101–105 in S&P 500, 89–92 volatility shock, 161 volatility-selling trades, 33–35, 57, 69 Volcker Rule, 77 Volmageddon, 98, 161 VXO index, 53, 53n5, 54, 55n6, 90n2 VXX, 92 wealth distribution, carry and, 2 wealth inequality, central bank stabilization actions and, 6 “What Explains the Persistence of Global Imbalances?”


pages: 566 words: 155,428

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

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

They are taught in central banking kindergarten never, ever to lose control of their balance sheet because that might cost them control of bank reserves and the money supply. That said, the Fed did lose control of its balance sheet somewhat when it instituted “QE3” in September 2012. This brings us to . . . VARIETIES OF QUANTITATIVE EASING The Fed’s favorite unconventional weapon has been quantitative easing (QE), a term that encompasses a variety of ways to use the central bank’s balance sheet to improve financial conditions. Since the Fed has deployed this weapon multiple times and in several different ways, we need to spend a little time on it. Since quantitative easing can take many forms, table 9.1 offers a simple two-by-two taxonomy. Quantitative easing operations might alter either the composition of the central bank’s balance sheet (the left-hand column) or the size (the right-hand column). The assets that the central bank purchases to do so can be either government securities (or Treasuries, the top row) or private-sector securities (the bottom row).* And, of course, many specific assets fall under the general term private-sector securities.

.* The QE0 in the lower left cell of table 9.1 refers to several early episodes of quantitative easing—so early, in fact, that no one called them QE at the time. Most prominently, we saw that the Fed began buying commercial paper (CP) in October 2008 in order to breathe life into the moribund CP market. QE0 was clearly aimed at spreads—specifically, at the spread of CP over T-bills. This emergency operation constituted QE because the Fed both changed its balance sheet and increased bank reserves by buying private-sector assets. QE1, the Fed’s massive purchases of Fannie Mae and Freddie Mac bonds and MBS between late November 2008 and March 2010, was a much bigger deal, quantitatively. That’s when the term “quantitative easing,” a Japanese coinage, started to be used in the United States. But what we now call QE1 also included purchases of $300 billion worth of Treasuries (upper right cell).

Like the CP program, the large-scale MBS purchases from 2008 to 2010 had a clear purpose: in this case, to reduce the spreads of MBS over Treasuries. And it worked. QE3 in late 2012 was essentially a repeat of the MBS part of QE1. QUANTITATIVE EASING A central bank normally eases monetary policy by reducing overnight interest rates—in the United States, that’s the federal funds rate. But what happens if the bank cuts its policy interest rate all the way to zero—or virtually to zero, as the Fed did in December 2008—and the economy still needs more stimulus? Does the central bank shutter its doors and take a long vacation? Or does it try something else? Starting with the Bank of Japan in the 1990s, a number of central banks, prominently including the Fed, have resorted to some form of quantitative easing. The name derives from the idea that a standard easing of monetary policy works on price—on the cost of borrowing money.


pages: 233 words: 71,775

The Joy of Tax by Richard Murphy

banking crisis, banks create money, carried interest, correlation does not imply causation, en.wikipedia.org, failed state, full employment, Gini coefficient, high net worth, land value tax, means of production, offshore financial centre, quantitative easing, race to the bottom, savings glut, seigniorage, The Spirit Level, The Wealth of Nations by Adam Smith, transfer pricing

And lastly, since the government owns a bank – the Bank of England – it too can create money for its own use. Precisely because this is so easy, and partly also because commercial bankers wanted to protect their own right to create money, it is actually illegal for the Bank of England and other equivalent EU central banks to lend directly to the governments that own them, but this has been got round by quantitative easing. In the quantitative easing process the government issues a debt (or gilt, as they are called) to a commercial bank which is then purchased by a Bank of England subsidiary company specially created for the purpose and to which the Bank of England has lent the money (made out of thin air) to pay for the debt. The net effect is that government debt ends up owned by the Bank of England, which is owned by the government, so that the debt is effectively cancelled because you can’t owe yourself a debt.

When fiscal policy is used to manage the economy a government injects its own money into the economy to make good the shortfalls arising from insufficient commercial bank money creation: shortfalls that are effectively preventing the economy from running at full capacity (an issue explored in more depth in Chapter 4). There are two ways it can do this. The first is by running a deficit, i.e. spending more into the economy than it reclaims by tax, which then leaves money over in the economy, giving it a boost. The second is by quantitative easing. Both these processes can, of course, be reversed: governments can run surpluses (as happened in the UK from 1998 to 2001), and bonds purchased via the quantitative easing process could be resold to the financial markets. That said, in the worldwide history of QE no bonds have been resold to date; and the running of surpluses is very rare. Deficit funding is the normal form of fiscal policy. The purpose of both policies, monetary and fiscal, is to make sure that the economy keeps going when the markets do not deliver the outcome that a government desires within the economy that it manages.

This will be addressed by the launch of a house-building programme to be funded by infrastructure quantitative easing. The debt that not-for-profit social landlords (including local authorities and housing associations) issue to fund their programmes will be made available for sale on financial markets in future, but with a guarantee that so long as the properties meet minimum requirements, including high environmental standards, a new Investment Bank to be established today will fund those loans using new money especially created for the purpose by the Bank of England. Every government has the power to create money for social purposes. We will use it when it provides a proper and better alternative than taxation provides. Let me turn then to other taxes. I have made clear our policies. We are not seeking to balance our budget, although the quantitative easing programme I have just announced will, by taking a burden off taxation, make it more likely that we will achieve that goal.


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

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

Conclusion 201 Appendix 7.1: IS/LM, the Keynesian Teaching Tool 203 Appendix 7.2: The Modelling of Expectations 205 Appendix 7.3: The Central Bank Reaction Function 212 Pa r t T h r e e Macroeconomics in the Crash and After, 2007– 8. The Disablement of Fiscal Policy 215 221 i. The Fiscal Crisis of the State 221 ii. The British Debate 225 ix C on t e n t s iii. Austerity: A Comparative Assessment 241 iv. Conclusion 244 Appendix 8.1: Monetary Financing of the Deficit 9. The New Monetarism 246 248 i. Pre-crash Monetary Orthodoxy 249 ii. Why Quantitative Easing? 253 iii. Quantitative Easing Programmes, 2008–16 256 iv. How was QE Meant to Work? 258 v. Assessment 263 vi. Conclusion 277 Appendix 9.1: A Note on Tim Congdon 10. Distribution as a Macroeconomic Problem 279 288 i. The Indifference of Mainstream Theory to Inequality 288 ii. The Microeconomics of Distribution 290 iii. Distribution and the Macroeconomy 293 iv. The Modern Under-consumptionist Story 298 v.

Jowett, A. and Hardie, M. (2014), Longer-term Trends – Public Sector Finance: Office for National Statistics. Available at: http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp171766_ 386187.pdf [Accessed 27 June 2017]. Joyce, M., Lasaosa, A., Stevens, I. and Tong, M. (2011a), The financial market impact of quantitative easing. International Journal of Central Banking, 7 (3), pp. 113–61. Joyce, M., Tong, M. and Woods, R. (2011b), The United Kingdom’s quantitative easing policy: design, operation and impact. Bank of England Quarterly Bulletin, Q3, pp. 200–212. Kaldor, N. (1966), Causes of the Slow Rate of Economic Growth of the United Kingdom. Cambridge: Cambridge University Press. Kaldor, N. (1970), The new monetarism. Lloyds Bank Review, July, pp. 1–18. Kaldor, N. (1971), The sea-change of the dollar.

., 179 Erie Canal, 90 Eshag, Eprime, 71 European Central Bank, 139, 188, 198, 217, 242–3, 253, 254, 361 institutional constraints on, 50, 234, 242, 249, 274–5 misreading of Eurozone crisis, 275 quantitative easing (QE) by, 273–4 on ‘stress testing’, 364 taxing of ‘excess’ reserves, 266 use of LTROs, 257 European Commission, 139, 3612, 365 European Exchange Rate Mechanism, 188 European Investment Bank, 354 European Union (EU, formerly EEC), 153, 318, 379, 383 Financial Stability Board (FSB), 363 ‘Four Freedoms’, 375 lack of state, 376 Single Resolution Board, 365 Eurozone current account imbalances, 333, 334, 335, 336–7, 341–2 Juncker investment programme, 274 proposed European Monetary Fund, 376, 382 structural flaw in, 341, 375–7 two original sins of, 274, 376–5 Eurozone debt crisis (2010–12), 50, 223, 377, 382 and double-dip recession, 241, 242–3, 274 ECB’s misreading of, 275 and financial crowding-out theory, 234 and Greece, 32, 224, 224–5, 226, 233, 235, 242–3, 243, 365 and ‘troika’, 32, 139, 243 469 i n de x exchange-rate policy, 127–8, 139 and Congdon’s ‘real balance effect’, 285 and domestic interest rates, 251 fixed rates under Bretton Woods, 16, 159, 161, 162, 168 floating rates from 1970s, 16–17, 184 and Friedman, 182 IMF ‘scarce currency’ clause, 380–81 Nixon’s dollar devaluation (1971), 153, 154, 165 and quantitative easing, 267, 267 sterling crisis (1951), 145 sterling devaluation (November 1967), 152 sterling-dollar peg (from 1949), 148, 150, 152 sterling/franc/deutschmark devaluations (1949), 152 ‘Triffin paradox’, 161, 165 ‘expansionary fiscal consolidation’, 192, 225, 231 Fabian socialism, 96 Fama, Eugene, 208, 311–12, 313 Fanny Mae, 217, 256, 309, 320 fascism, 13, 98, 131, 175 Federal Reserve, US and 2008 crash, 50, 217, 254, 256 AIG bail-out (2008), 325 Federal Open Market Committee (FOMC), 185–6 and Great Depression, 104–6 inflation targeting, 188 and monetarism, 185–6, 188 monetary policy in 1950s, 146 ‘Operation Twist’, 268 quantitative easing (QE) by, 256–7, 273–4 ‘Reserve Position Doctrine’ (1920s), 103–4 and under-consumption theory, 298 Ferguson, Niall, 73, 79, 80, 91 financial collapse (2007–8) acute phase, 218–20, 223 ‘Austrian’ explanation, 104, 303 banks as proximate cause, 343, 361, 365 Bear Stearns rescue, 217 British analogies with Greece, 235 British debate after, 225–8 causes of, 3–4, 343–4, 365, 366, 368 central bank responses, 3, 217, 219, 234–5, 253–4, 254, 256–8, 359 comparative recovery patterns, 241–4, 242, 273, 273–4 compared to 1929 crash, 218 Conservative narrative, 226–8, 229–31, 233, 234–5, 237–9 and crisis of conservative economics, 17 and embedded leverage, 318, 322, 325 five distinct stages of crisis, 216–19 ‘global imbalances’ explanation, 11, 331, 333, 336–43, 337 government responses, 3, 217–18, 219–20, 221–36, 237–47 Hayekian view of cause, 303 hysteresis after, 239–41, 240, 241, 370 inequality as deeper cause of, 299–306, 368 Lehman Brothers bankruptcy, 3, 50, 217, 365 leverage (debt to equity) ratios on eve of, 317–18 liquidity-solvency confusion, 317 outbreaks of populism following, 13, 371–3, 376, 383 post-crash deficit, 226–33, 229, 237–8 private debt as proximate cause, 3–4 470 i n de x stagnation of real earnings as deep cause, 4, 303, 367 standard account of origins of, 3–4 as test of two theories, 2–3, 76 theoretical and policy responses, 10, 129, 219–20, 223–36, 237–47 see also austerity policy and under-consumption theory, 303–6 US sub-prime mortgage market, 3, 216, 304–5, 309, 323, 328, 341 see also Great Recession (2008–9) Financial Services Authority, U K, 321–2, 330 financial system and causes of 2008 collapse, 3, 4–5, 253, 307–9, 361 and crisis of conservative economics, 17 deregulation, 307–9, 310–16, 318–22, 328, 332–3, 384 East Asian financial crisis (1997–8), 202, 339, 371, 382 ‘Efficient Market Hypothesis’ (EMH), 311–13, 321–2, 328, 388 ‘financialization’ of the economy, 5, 305, 307–9, 366–7 fraud and criminality, 3, 4, 5, 7, 328, 350, 365–6, 367 and free-market orthodoxy, 5, 308–16 loosening of moral restraints, 319 mark-to-market (M2M) framework, 314 offshore euro-dollar market, 308, 332 privatised gain and socialised loss, 319–20 released from national regulation (1980s/90s), 131, 318–22 structural power of finance, 6–7, 14, 309 systemic under-estimation of risk, 314–16, 316*, 320–22, 323, 329–30 Thatcher’s Big Bang (1980s), 319 tradable public debt instruments, 43, 80–81 Turner’s ‘financial intensity’ concept, 366 unrealism of assumptions, 310–16 value at risk (VaR) framework, 314–15, 315, 330 ‘Washington consensus’ deregulation, 198, 200 see also banks FinTech, 356 First World War, 86, 95, 106–7, 374, 375 ‘fiscal consolidation’, 10–11, 129, 225 Darling’s plan (2009), 225–6 ‘expansionary’, 192, 225, 231 and Osborne, 227–8, 229–30, 231, 233, 237–9, 243–4, 244, 245 fiscal policy and 2008 collapse, 10, 217–18, 219–20, 223–36, 265–6, 273–4, 286 ‘Barber boom’, 167, 168 during Blair-Brown years, 221–4, 223, 225–6, 227 British experience (1692–2012), 77 Congdon’s total rejection of, 280, 285–6 ‘crowding out’ argument, 83–4, 109–11, 226, 233–5 current and capital spending, 107–8, 114, 142, 155–6, 193, 221–3, 237–8, 355–7 directing flow of new spending, 286–7 fiscal multiplier, 110–11, 125–6, 133–6, 138, 230–31, 233, 235, 244–5 471 i n de x fiscal policy – (cont.) in inter-war Britain, 106–17 and Keynesian economics, 2–3, 109, 111, 114–17, 125–7, 129–31, 133–4, 137–8, 173, 278 Keynesian full employment phase (1945–60), 141–8 Krugman’s ‘confidence fairy’, 117 Lawson counterrevolution, 185, 192–3, 222, 358 legacy of monetarism, 190–93 May Committee (1931), 112 national income accounts, 138 New Classical view of, 200 in new macroeconomic constitution, 351–2, 355–7, 360–61 nineteenth-century theory of, 9, 29 post-Keynesian disablement of, 193, 221, 258, 304, 328 pre-crash orthodoxy, 221–2, 223–4, 230–31 Public Sector Borrowing Requirement (PSBR), 155–6 see also balanced budget theory; public investment; taxation Fisher, Irving, 9, 52, 61, 99, 280 ‘compensated dollar’ scheme, 66 equation of exchange, 62–4, 71–2, 258, 278–9, 283, 284, 287 QTM formulation, 62–7, 71–2 and quantitative easing, 258, 278–9 Santa Claus money, 62–4, 258, 278–9 Fitch (CR A), 329 France assignats in 1790s, 64–5 and gold standard, 50, 102, 104, 127 ‘indicative planning’ system, 150 ‘physiocrats’in, 81 protectionism in late nineteenthcentury, 59 state holding companies, 356 statism in, 140, 144 university campus revolts (1968), 164 Freddie Mac, 217, 256, 309, 320 free trade, xviii, 9, 58–9, 76, 79, 81–2 abandoned in Britain (1932), 113 general presumption in favour of, 377 and Hume’s ‘price-specie-flow’ mechanism, 37–8, 53, 54, 104, 332 and Irish potato famine, 15 List’s ‘infant industry’ argument, 88–9, 90, 378–7 and nationalist–globalist split, 371–3 and post-war liberalization, 16, 374 and presumption of peace, 379 repeal of Corn Laws (1846), 15, 85 Ricardo’s doctrine of comparative advantage, 88, 378, 379, 379 US conversion to (1940s), 90 Freiburg School, 140 Friedman, Milton adaptive expectations theory, 180–81, 183, 194, 206–11 and Cartesian distinction, 22 as Fisher’s heir, 278 The Great Contraction (with Schwartz; 1865), 105 idea of ‘helicopter money’, 63 and monetary base, 185, 280 and Mont Pelerin Society, 176–7 and ‘natural’ rate of unemployment, 163, 177, 181, 195, 206, 208 onslaught on Keynesianism, 170, 174, 177–83, 261 ‘permanent income hypothesis’ (1957), 178, 183 and Phillips Curve, 38, 180–81, 194, 206–8, 207 472 i n de x policy implications of work of, 182–3 political motives of, 177, 183–4 and quantity theory, 61, 70, 177–9, 182, 183, 194 ‘stable demand function for money’, 179 view of Great Depression, 104–6, 179, 183, 256, 276, 278 weaknesses in arguments of, 183 Frydman, Roman, 389 Fullarton, John, 49 Funding for Lending programme, 265–6 G20 Financial Stability Board, 363 summits (2009/10), 219–20, 223, 225 G7 finance ministers meeting (February 2010), 224–5 Galbraith, James, 303, 361 game theorists, 389 Gasperin, Simone, 357* Geddes, Sir Eric, 108 German Historical School, 88–9 Germany and 2008 crash, 217, 218, 243 current account surplus, 333, 334, 341, 342, 380, 381 employer–union bargains, 147, 167 and Eurozone crisis, 341, 365, 376, 377 and Great Depression, 97, 111, 129–30 growth Keynesianism (1960–70), 153–4 high growth rates in 1950/60s, 149, 156 Hitler’s reduction in unemployment, 111, 112, 129–30 hyperinflation of early 1920s, 275 as Keynesian in 1960s, 140 nineteenth-century expansion and unification, 89, 91 ‘ordo-liberalism’ in, 140 post-war modernization/catch-up, 156–7 protectionism in late nineteenthcentury, 59 return to gold standard (1924), 102 ‘Rhenish capitalism’ model, 154 Giffen, Robert, 51 Giles, Chris, 219, 302 Gini coefficient, 299, 300 Gladstone, William, 42–3, 86 Glass–Steagall Act (1933), 319, 361, 362 global imbalances basic theory of, 335–6 and capital account liberalization, 318–19 capital flight, 59, 334, 337, 341, 343 Eurozone see Eurozone: current account imbalances as explanation for 2007–8 crash, 11, 331, 333, 336–43, 337 and financial deregulation, 318–19, 332–3 and First World War, 95 increases in pre-crash years, 333, 333–4, 334, 335 problematic nature of, 333–4 reserve accumulation, 336, 337–41 ‘saving glut’ vs ‘money’ glut, 338–41, 342 structural causes still in place, 344 US dollar as main reserve currency, 338 global warming, 383 globalization, 17, 300, 334–5 absence of the state, 350, 373, 375–6 anti-globalist movements, 371–2, 373 first age of, 51, 55, 57, 59, 374, 375 473 i n de x globalization – (cont.) future of, 382–4 Geneva and Seattle protests (1998/99), 371 and inflation rate, 252–3 and lower wages in developed world, 252–3, 300, 379 nationalist-globalist split, 371–3 ‘neo-liberal’ agenda of IMF, 139, 181, 318–19 popular protest against, 351, 371–2 resurgence of after Cold War, 374 Rodrik’s ‘impossible trinity’, 375 gold, 23, 24, 25, 28, 35, 37 new gold production, 51, 52, 55, 62 gold standard, xviii, 1, 9, 27, 29, 338 and Britain, 9, 42, 43, 44, 45–50, 53, 57–9, 80, 101, 102, 113 collapse of US exchange standard (1971), 160, 165 commitment to convertibility, 55–6 and Cunliffe model, 54–5, 102 depressions in later nineteenthcentury, 51–2 dysfunctional after First World War, 95, 97 final suspension in Britain (1931), 113, 125 Fisher’s ‘compensated dollar’ scheme, 66 Hume’s ‘price-specie-flow’ mechanism, 37–8, 53, 54, 104, 285, 332 and international bond markets, 92 as international by 1880s, 50–52 Keynes on, 58, 101, 127 Kindleberger thesis, 58–9 move to ‘managed’ system, 71, 99–100 replaces silver standard (1690s), 42, 43 restored (1821), 48 return to in 1920s, 102, 104, 107 suspension during Napoleonic wars, 43, 45–7 suspension of convertibility (1919), 101–2 triumph of by mid-nineteenthcentury, 44, 50 working and design of, 52–9 as working in tandem with empire, 57, 58 Goldberg, Michael D., 389 Goldman Sachs, 315 Goodhart, Charles, 168, 187 Graeber, David, 28 Great Depression (1929–32), 9, 13, 96, 97–8, 110–13, 127 compared to 2008 crash, 218 Friedman-Schwartz view, 104–6, 179, 183, 256, 276, 278 impact on US policy-makers in 2008 period, 256, 275, 278 left-wing explanations of, 298 rise in inequality in lead-up to, 289 and second wave of collectivism, 15–16 Great Moderation (early 1990s–2007), 4, 53, 202, 278 economic problems during, 348 financial deregulation during, 318–22, 328 financial innovation during, 322–8 and independent central banks, 215 inflation during, 106, 215, 216, 252–3, 253, 348, 359, 360 international financial network, 309, 318–28 output growth during, 215, 253, 348 Great Recession (2008–9), xviii Congdon’s view of, 281–2, 287 co-ordinated global response, 219–20, 383 decline in productivity after, 305–6 474 i n de x initial signs of recovery (2009), 218–19, 225, 226 monetary interpretation of, 105, 106 ‘premature withdrawal’ of fiscal stimulus, 219–20, 223–36, 245, 352 reform agenda after, 361–8 rise in inequality in lead-up to, 289–90, 299–300 see also financial collapse (2007–8) Greece and Eurozone debt crisis, 32, 224, 224–5, 226, 233, 235, 242–3, 243, 337, 341, 365 in gold standard era, 59 Greenspan, Alan, 188, 313 Hamilton, Alexander, 88, 90, 92 Hammond, Philip, 236, 352 Hannover Re scandal, 329 Harrison, George, 105 Harrod, Roy, 123 Harvey, John, 333, 387 Hawtrey, Ralph, 109–10, 280 Hayek, Friedrich, 33, 46, 177, 195, 350, 367 founds Mont Pelerin Society, 176 ‘over-consumption’ theory, 296 The Road to Serfdom (1944), 16, 175–6 on Wall Street Crash, 104 Heath, Edward, 167–8 Heckscher, Eli, 37 Help to Buy programme, 265, 266 Henderson, Hubert, 109 Henderson, W.


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

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

See also OECD Deflation Watch, http://www.oecdobserver.org/news/fullstory.php/aid/4807/Deflation_watch.html (accessed 19 April 2016). 18 Federal Reserve, http://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm (accessed 19 April 2016); Bank of England, http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/qe_faqs.aspx (accessed 19 April 2016); Joyce and Spaltro, Quantitative Easing and Bank Lending; ECB, https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html (accessed 19 April 2016). 19 A. Blinder, ‘Quantitative easing: entrance and exit strategies’, Federal Reserve Bank of St. Louis Review, vol. 92, no. 6, November/December, 2010, pp. 465–79. 20 S. T. Fullwiler, ‘An endogenous money perspective on the post-crisis monetary policy debate’, Review of Keynesian Economics, vol. 1, no. 2, summer 2013, pp. 171–94. 21 Ibid. 22 B. S. Bernanke, ‘Japanese monetary policy: a case of self-induced paralysis?’

Rethinking Capitalism: An Introduction Capitalism and its discontents Rethinking economic policy Beyond market failure: towards a new approach Notes 2. The Failure of Austerity: Rethinking Fiscal Policy Introduction ‘Deficits saved the world’ The fiscal retreat and the monetary plunge A balanced budget or a balanced economy? Notes 3. Understanding Money and Macroeconomic Policy Introduction The orthodox view: exogenous money Endogenous money and modern money theory Money and monetary policy Quantitative easing Implications for the euro zone: the re-integration of money and fiscal policy Conclusion Notes 4. The Costs of Short-termism Introduction The literature on short-termism Empirical evidence of short-termism Policy implications Notes 5. Innovative Enterprise and the Theory of the Firm Introduction: what makes capitalism productive? The neoclassical theory of the unproductive firm The Marxian theory of the productive firm The theory of innovative enterprise The integration of theory and history Notes 6.

Source: National Institute of Economic and Social Research, NIESR Monthly Estimates of GDP, 7th October, 2014, London, 2014, p. 1, http://www.niesr.ac.uk/sites/default/files/publications/gdp1014.pdf (accessed 12 April 2016). Underpinning this weak growth pattern has been a dramatic collapse in private sector investment. Investment as a proportion of GDP had already been falling throughout the previous period of growth (see Figure 6). Since 2008 this has occurred despite the unprecedented persistence of near-zero real interest rates, bolstered in most of the major developed economies by successive rounds of ‘quantitative easing’, through which central banks have sought to increase the money supply and stimulate demand. Yet they have barely succeeded, as continuing low inflation rates have revealed. The decline in investment is also related to the marked ‘financialisation’ of the corporate sector. Over the past decade or so, an increasing percentage of corporate profits has been used for share buybacks and dividend payments rather than for reinvestment in productive capacity and innovation.


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

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

SIX Ben Bernanke’s Crony Credit SEVEN What the Supply-Siders and Hillary Clinton Sadly Have in Common EIGHT Why “Senator Warren Buffett” Would Be a Credit-Destroying Investor NINE The Credit Implications of the Fracking Boom TEN Conclusion: Sorry Keynesians and Supply-Siders, Government Is Always a Credit-Shrinking Tax PART TWO: BANKING ELEVEN NetJets Doesn’t Multiply Airplanes, and Banks Don’t Multiply Money and Credit TWELVE Good Businesses Never Run Out of Money, and Neither Do Well-Run Banks THIRTEEN Do We Even Need Banks? FOURTEEN The Housing Boom Was Not a Consequence of “Easy Credit” FIFTEEN Conclusion: Why Washington and Wall Street Are Better Off Living Apart PART THREE: THE FED SIXTEEN Baltimore and the Money Supply Myth SEVENTEEN Quantitative Easing Didn’t Stimulate the Economy, Nor Did It Create a Stock-Market Boom EIGHTEEN The Fed Has a Theory, and It Is 100 Percent Bogus NINETEEN Do We Really Need the Fed? TWENTY End the Fed? For Sure, But Don’t Expect Nirvana TWENTY-ONE Conclusion: The Robot Will Be the Biggest Job Creator in World History Notes Index FOREWORD Rob Arnott AS YOU READ this volume, prepare to be surprised.

But not only is Congress incapable of investing us to prosperity (remember, Congress never “fires” or ceases funding its Brady Hoke and Webvan equivalents), it can only spend what it has taxed or borrowed from the real economy first. The Fed is no different. It can’t create credit as much as it can re-allocate it toward parts of the economy that it deems worthy. The problem is the Fed, like Congress, can’t do this effectively because there’s no market to discipline its failures. This truth will become even clearer in chapter 17, on “quantitative easing.” Some will reply that the Fed can create money out of thin air. While that is true, the creation of money is in no way the creation of credit. The two are entirely different. While the Fed’s ability to control or direct the supply of dollars is vastly overstated, the Fed could drop trillions of dollars from the sky, and no new credit would be created. It would, at best, reduce the amount of credit—real resources—that the dollar can command.

No productive nation will ever lack money supply, simply because production itself is a magnet for money. Just as we don’t worry about where our shoes, socks, and T-shirts come from, it’s fair to say we needn’t worry about money either. So long as money has a legal, redeemable definition (and if it didn’t, markets would come up with a definition), let the markets provide the money supply much as they do so many other goods we desire. CHAPTER SEVENTEEN Quantitative Easing Didn’t Stimulate the Economy, Nor Did It Create a Stock-Market Boom You cannot step into the same river twice. —Heraclitus IN THE FALL OF 2014, the price of oil began to decline with great haste. While a barrel sold for more than $100 as recently as the summer of 2014, the price had fallen to $54 by December. As the Dallas Morning News reported about the oil-patch carnage, “Oil prices are at their lowest level in five years.


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

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

It focused exclusively on inflation—after all, that was its single mandate—and for a long time it continued to use as an indicator of its monetary stance (whether monetary policy was loose or tight) the rate of growth of the money supply, a holdover from the days when monetarism reigned king. QUANTITATIVE EASING When the Federal Reserve put interest rates down to zero—and still the economy did not recover—it felt it could and should do more. One idea was to purchase long-term bonds, driving down the long-term interest rates and providing more liquidity to the economy. This was called quantitative easing. The ECB was slow to introduce quantitative easing. It did so long after the United States, and even after Japan. Even as it undertook QE, the ECB may not have grasped why quantitative easing had such a limited effect in the United States—and why therefore the benefits would likely be still weaker in Europe. The problem in quantitative easing in the United States from 2009 to 2011 was that the money that was created wasn’t going where it was needed and where the Fed wanted it to go—to increase spending in the United States on goods and services.

Rewriting the Rules of the American Economy. 11 There is no general theory that argues the optimal response to the higher oil price should be that the demand for all nontraded goods should be lowered so that a particular index, the weighted average price, should be unchanged. 12 Indeed, as we have noted elsewhere, the ECB, worried about inflation, actually increased interest rates twice in 2011. 13 See chapter 4 for a discussion of competitive devaluation. 14 See Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, 1963). 15 The rate itself was determined mechanically—the rate of growth of the real economy. 16 Japan began its quantitative easing in earnest in 2011, buying hundreds of billions of dollars’ worth of bonds since then. The United States’ quantitative easing, which was even larger (though not relative to the size of its economy), began in 2008 and eventually entailed buying trillions of dollars’ worth of bonds. The Bank of England’s somewhat smaller program ran from 2009 to 2012. The theory behind QE is discussed at greater length at the end of this chapter. 17 This presumes that the local banks have the capacity to lend.

., 51–57 single currency and, 45–46 economic rents, 226, 280 economics, politics and, 308–18 economic security, 68 economies of scale, 12, 39, 55, 138 economists, poor forecasting by, 307 education, 20, 76, 344 investment in, 40, 69, 137, 186, 211, 217, 251, 255, 300 electricity, 217 electronic currency, 298–99, 389 electronics payment mechanism, 274–76, 283–84 emigration, 4, 68–69 see also migration employment: central banks and, 8, 94, 97 structural reforms and, 257–60 see also unemployment Employment Act (1946), 148 energy subsidies, 197 Enlightenment, 3, 318–19 environment, 41, 257, 260, 323 equality, 225–26 equilibrium, xviii–xix Erasmus program, 45 Estonia, 90, 331, 346 euro, xiv, 325 adjustments impeded by, 13–14 case for, 35–39 creation of, xii, 5–6, 7, 10, 333 creation of institutions required by, 10–11 divergence and, see divergence divorce of, 272–95, 307 economic integration and, 46–47, 268 as entailing fixed exchange rate, 8, 42–43, 46–47, 86–87, 92, 93, 94, 102, 105, 143, 193, 215–16, 240, 244, 249, 252, 254, 286, 297 as entailing single interest rate, 8, 85–88, 92, 93, 94, 105, 129, 152, 240, 244, 249 and European identification, 38–39 financial instability caused by, 131–32 growth promised by, 235 growth slowed by, 73 hopes for, 34 inequality increased by, xviii interest rates lowered by, 235 internal devaluation of, see internal devaluation literature on, 327–28 as means to end, xix peace and, 38 proponents of, 13 referenda on, 58, 339–40 reforms needed for, xii–xiii, 28–31 risk of, 49–50 weakness of, 224 see also flexible euro Eurobond, 356 euro crisis, xiii, 3, 4, 9 catastrophic consequences of, 11–12 euro-euphoria, 116–17 Europe, 151 free trade area in, 44–45 growth rates in, 63–64, 69, 73–74, 74, 75, 163 military conflicts in, 196 social models of, 21 European Central Bank (ECB), 7, 17, 80, 112–13, 117, 144, 145–73, 274, 313, 362, 368, 380 capture of, 158–59 confidence in, 200–201 corporate bonds bought by, 141 creation of, 8, 85 democratic deficit and, 26, 27 excessive expansion controlled by, 250 flexibility of, 269 funds to Greece cut off by, 59 German challenges to, 117, 164 governance and, 157–63 inequality created by, 154–55 inflation controlled by, 8, 25, 97, 106, 115, 145, 146–50, 151, 163, 165, 169–70, 172, 250, 256, 266 interest rates set by, 85–86, 152, 249, 302, 348 Ireland forced to socialize losses by, 134, 156, 165 new mandate needed by, 256 as political institution, 160–62 political nature of, 153–56 quantitative easing opposed by, 151 quantitative easing undertaken by, 164, 165–66, 170, 171 regulations by, 249, 250 unemployment and, 163 as unrepresentative, 163 European Commission, 17, 58, 161, 313, 332 European Court of Human Rights, 45 European Economic Community (EEC), 6 European Exchange Rate Mechanism (ERM), 30, 335 European Exchange Rate Mechanism II (ERM II), 336 European Free Trade Association, 44 European Free Trade Association Court, 44 European Investment Bank (EIB), 137, 247, 255, 301 European Regional Development Fund, 243 European Stability Mechanism, 23, 246, 357 European Union: budget of, 8, 45, 91 creation of, 4 debt and deficit limits in, 87–88 democratic deficit in, 26–27 economic growth in, 215 GDP of, xiii and lower rates of war, 196 migration in, 90 proposed exit of UK from, 4 stereotypes in, 12 subsidiarity in, 8, 41–42, 263 taxes in, 8, 261 Euro Summit Statement, 373 eurozone: austerity in, see austerity banking union in, see banking union counterfactual in, 235–36 double-dip recessions in, 234–35 Draghi’s speech and, 145 economic integration and, xiv–xx, 23, 39–50, 51–57 as flawed at birth, 7–9 framework for stability of, 244–52 German departure from, 32, 292–93 Greece’s possible exit from, 124 hours worked in, 71–72 lack of fiscal policy in, 152 and move to political integration, xvi, 34, 35, 51–57 Mundell’s work on dangers of, 87 policies of, 15–17 possible breakup of, 29–30 privatization avoided in, 194 saving, 323–26 stagnant GDP in, 12, 65–68, 66, 67 structure of, 8–9 surpluses in, 120–22 theory of, 95–97 unemployment in, 71, 135, 163, 177–78, 181, 331 working-age population of, 70 eurozone, proposed structural reforms for, 239–71 common financial system, see banking union excessive fiscal responsibility, 163 exchange-rate risks, 13, 47, 48, 49–50, 125, 235 exchange rates, 80, 85, 288, 300, 338, 382, 389 of China, 251, 254, 350–51 and competitive devaluation, 105–6 after departure of northern countries, 292–93 of euro, 8, 42–43, 46–47, 86–87, 92, 93, 94, 102, 105, 215–16, 240, 244, 249, 252, 254, 286, 297 flexible, 50, 248, 349 and full employment, 94 of Germany, 254–55, 351 gold and, 344–45 imports and, 86 interest rates and, 86 quantitative easing’s lowering of, 151 real, 105–6 and single currencies, 8, 42–43, 46–47, 86–87, 92, 93, 94, 97–98 stabilizing, 299–301 and trade deficits, 107, 118 expansionary contractions, 95–96, 208–9 exports, 86, 88, 97–99, 98 disappointing performance of, 103–5 external imbalances, 97–98, 101, 109 externalities, 42–43, 121, 153, 301–2 surpluses as, 253 extremism, xx, 4 Fannie Mae, 91 farmers, US, in deflation, xii Federal Deposit Insurance Corporation (FDIC), 91 Federal Reserve, US, 349 alleged independence of, 157 interest rates lowered by, 150 mandate of, 8, 147, 172 money pumped into economy by, 278 quantitative easing used by, 151, 170 reform of, 146 fiat currency, 148, 275 and taxes, 284 financial markets: lobbyists from, 132 reform of, 214, 228–29 short-sighted, 112–13 financial systems: necessity of, xix real economy of, 149 reform of, 257–58 regulations needed by, xix financial transaction system, 275–76 Finland, 16, 81, 122, 126, 292, 296, 331, 343 growth in, 296–97 growth rate of, 75, 76, 234–35 fire departments, 41 firms, 138, 186–87, 245, 248 fiscal balance: and cutting spending, 196–98 tax revenue and, 190–96 Fiscal Compact, 141, 357 fiscal consolidation, 310 fiscal deficits, see deficits, fiscal fiscal policy, 148, 245, 264 in center of macro-stabilization, 251 countercyclical, 244 in EU, 8 expansionary, 254–55 stabilization of, 250–52 fiscal prudence, 15 fiscal responsibility, 163 flexibility, 262–63, 269 flexible euro, 30–31, 272, 296–305, 307 cooperation needed for, 304–5 food prices, 169 forbearance, 130–31 forecasts, 307 foreclosure proposal, 180 foreign ownership, privatization and, 195 forestry, 81 France, 6, 14, 16, 114, 120, 141, 181–82, 331, 339–40, 343 banks of, 202, 203, 231, 373 corporate income tax in, 189–90 euro creation regretted in, 340 European Constitution referendum of, 58 extreme right in, xi growth in, 247 Freddie Mac, 91 Freefall (Stiglitz), 264, 335 free mobility of labor, xiv, 26, 40, 125, 134–36, 142–44, 242 Friedman, Milton, 151, 152–53, 167, 339 full employment, 94–97, 379 G-20, 121 gas: import of, 230 from Russia, 37, 81, 93 Gates Foundation, 276 GDP-indexed bonds, 267 German bonds, 114, 323 German Council of Economic Experts, 179, 365 Germany, xxi, 14, 30, 65, 108, 114, 141, 181–82, 207, 220, 286, 307, 331, 343, 346, 374 austerity pushed by, 186, 232 banks of, 202, 203, 231–32, 373 costs to taxpayers of, 184 as creditor, 140, 187, 267 debt collection by, 117 debt in, 105 and debt restructuring, 205, 311 in departure from eurozone, 32, 292–93 as dependent on Russian gas, 37 desire to leave eurozone, 314 ECB criticized by, 164 EU economic practices controlled by, 17 euro creation regretted in, 340 exchange rate of, 254–55, 351 failure of, 13, 78–79 flexible exchange of, 304 GDP of, xviii, 92 in Great Depression, 187 growing poverty in, 79 growth of, 78, 106, 247 hours worked per worker in, 72 inequality in, 79, 333 inflation in, 42, 338, 358 internal solidarity of, 334 lack of alternative to euro seen by, 11 migrants to, 320–21, 334–35, 393 minimum wage in, 42, 120, 254 neoliberalism in, 10 and place-based debt, 136 productivity in, 71 programs designed by, 53, 60, 61, 202, 336, 338 reparations paid by, 187 reunification of, 6 rules as important to, 57, 241–42, 262 share of global employment in, 224 shrinking working-age population of, 70, 78–79 and Stability and Growth Pact, 245 and structural reforms, 19–20 “there is no alternative” and, 306, 311–12 trade surplus of, 117, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 “transfer union” rejected by, 22 US loans to, 187 victims blamed by, 9, 15–17, 177–78, 309 wages constrained by, 41, 42–43 wages lowered in, 105, 333 global financial crisis, xi, xiii–xiv, 3, 12, 17, 24, 67, 73, 75, 114, 124, 146, 148, 274, 364, 387 and central bank independence, 157–58 and confidence, 280 and cost of failure of financial institutions, 131 lessons of, 249 monetary policy in, 151 and need for structural reform, 214 originating in US, 65, 68, 79–80, 112, 128, 296, 302 globalization, 51, 321–23 and diminishing share of employment in advanced countries, 224 economic vs. political, xvii failures of, xvii Globalization and Its Discontents (Stig-litz), 234, 335, 369 global savings glut, 257 global secular stagnation, 120 global warming, 229–30, 251, 282, 319 gold, 257, 275, 277, 345 Goldman Sachs, 158, 366 gold standard, 148, 291, 347, 358 in Great Depression, xii, 100 goods: free movement of, 40, 143, 260–61 nontraded, 102, 103, 169, 213, 217, 359 traded, 102, 103, 216 Gordon, Robert, 251 governance, 157–63, 258–59 government spending, trade deficits and, 107–8 gravity principle, 124, 127–28 Great Depression, 42, 67, 105, 148, 149, 168, 313 Friedman on causes of, 151 gold standard in, xii, 100 Great Malaise, 264 Greece, 14, 30, 41, 64, 81, 100, 117, 123, 142, 160, 177, 265–66, 278, 307, 331, 343, 366, 367–68, 374–75, 386 austerity opposed by, 59, 60–62, 69–70, 207–8, 392 balance of payments, 219 banks in, 200–201, 228–29, 231, 270, 276, 367, 368 blaming of, 16, 17 bread in, 218, 230 capital controls in, 390 consumption tax and, 193–94 counterfactual scenario of, 80 current account surplus of, 287–88 and debt restructuring, 205–7 debt-to-GDP ratio of, 231 debt write-offs in, 291 decline in labor costs in, 56, 103 ECB’s cutting of funds to, 59 economic growth in, 215, 247 emigration from, 68–69 fiscal deficits in, 16, 186, 215, 233, 285–86, 289 GDP of, xviii, 183, 309 hours worked per worker in, 72 inequality in, 72 inherited debt in, 134 lack of faith in democracy in, 312–13 living standards in, 216 loans in, 127 loans to, 310 migrants and, 320–21 milk in, 218, 223, 230 new currency in, 291, 300 oligarchs in, 16, 227 output per working-age person in, 70–71 past downturns in, 235–36 pensions in, 16, 78, 188, 197–98, 226 pharmacies in, 218–20 population decline in, 69, 89 possible exit from eurozone of, 124, 197, 273, 274, 275 poverty in, 226, 261, 376 primary surplus of, 187–88, 312 privatization in, 55, 195–96 productivity in, 71, 342 programs imposed on, xv, 21, 27, 60–62, 140, 155–56, 179–80, 181, 182–83, 184–85, 187–88, 190–93, 195–96, 197–98, 202–3, 205, 206, 214–16, 218–23, 225–28, 229, 230, 231, 233–34, 273, 278, 308, 309–11, 312, 315–16, 336, 338 renewable energy in, 193, 229 social capital destroyed in, 78 sovereign spread of, 200 spread in, 332 and structural reforms, 20, 70, 188, 191 tax revenue in, 16, 142, 192, 227, 367–368 tools lacking for recovery of, 246 tourism in, 192, 286 trade deficits in, 81, 194, 216–17, 222, 285–86 unemployment in, xi, 71, 236, 267, 332, 338, 342 urgency in, 214–15 victim-blaming of, 309–11 wages in, 216–17 youth unemployment in, xi, 332 Greek bonds, 116, 126 interest rates on, 4, 114, 181–82, 201–2, 323 restructuring of, 206–7 green investments, 260 Greenspan, Alan, 251, 359, 363 Grexit, see Greece, possible exit from eurozone of grocery stores, 219 gross domestic product (GDP), xvii decline in, 3 measurement of, 341 Growth and Stability Pact, 87 hedge funds, 282, 363 highways, 41 Hitler, Adolf, 338, 358 Hochtief, 367–68 Hoover, Herbert, 18, 95 human capital, 78, 137 human rights, 44–45, 319 Hungary, 46, 331, 338 hysteresis, 270 Iceland, 44, 111, 307, 354–55 banks in, 91 capital controls in, 390 ideology, 308–9, 315–18 imports, 86, 88, 97–99, 98, 107 incentives, 158–59 inclusive capitalism, 317 income, unemployment and, 77 income tax, 45 Independent Commission for the Reform of International Corporate Taxation, 376–377 Indonesia, 113, 230–31, 314, 350, 364, 378 industrial policies, 138–39, 301 and restructuring, 217, 221, 223–25 Industrial Revolution, 3, 224 industry, 89 inequality, 45, 72–73, 333 aggregate demand lowered by, 212 created by central banks, 154 ECB’s creation of, 154–55 economic performance affected by, xvii euro’s increasing of, xviii growth’s lowering of, 212 hurt by collective action, 338 increased by neoliberalism, xviii increase in, 64, 154–55 inequality in, 72, 212 as moral issue, xviii in Spain, 72, 212, 225–26 and tax harmonization, 260–61 and tax system, 191 inflation, 277, 290, 314, 388 in aftermath of tech bubble, 251 bonds and, 161 central banks and, 153, 166–67 consequences of fixation on, 149–50, 151 costs of, 270 and debt monetization, 42 ECB and, 8, 25, 97, 106, 115, 145, 146–50, 151, 163, 165, 169–70, 172, 255, 256, 266 and food prices, 169 in Germany, 42, 338, 358 interest rates and, 43–44 in late 1970s, 168 and natural rate hypothesis, 172–73 political decisions and, 146 inflation targeting, 157, 168–70, 364 information, 335 informational capital, 77 infrastructure, xvi–xvii, 47, 137, 186, 211, 255, 258, 265, 268, 300 inheritance tax, 368 inherited debt, 134 innovation, 138 innovation economy, 317–18 inputs, 217 instability, xix institutions, 93, 247 poorly designed, 163–64 insurance, 355–356 deposit, see deposit insurance mutual, 247 unemployment, 91, 186, 246, 247–48 integration, 322 interest rates, 43–44, 86, 282, 345, 354 in aftermath of tech bubble, 251 ECB’s determination of, 85–86, 152, 249, 302, 348 and employment, 94 euro’s lowering of, 235 Fed’s lowering of, 150 on German bonds, 114 on Greek bonds, 4, 114, 181–82 on Italian bonds, 114 in late 1970s, 168 long-term, 151, 200 negative, 316, 348–49 quantitative easing and, 151, 170 short-term, 249 single, eurozone’s entailing of, 8, 85–88, 92, 93, 94, 105, 129, 152, 240, 244, 249 on Spanish bonds, 114, 199 spread in, 332 stock prices increased by, 264 at zero lower bound, 106 intermediation, 258 internal devaluation, 98–109, 122, 126, 220, 255, 388 supply-side effects of, 99, 103–4 International Commission on the Measurement of Economic Performance and Social Progress, 79, 341 International Labor Organization, 56 International Monetary Fund (IMF), xv, xvii, 10, 17, 18, 55, 61, 65–66, 96, 111, 112–13, 115–16, 119, 154, 234, 289, 309, 316, 337, 349, 350, 370, 371, 381 and Argentine debt, 206 conditions of, 201 creation of, 105 danger of high taxation warnings of, 190 debt reduction pushed by, 95 and debt restructuring, 205, 311 and failure to restore credit, 201 global imbalances discussed by, 252 and Greek debts, 205, 206, 310–11 on Greek surplus, 188 and Indonesian crisis, 230–31, 364 on inequality’s lowering of growth, 212–13 Ireland’s socialization of losses opposed by, 156–57 mistakes admitted by, 262, 312 on New Mediocre, 264 Portuguese bailout of, 178–79 tax measures of, 185 investment, 76–77, 111, 189, 217, 251, 264, 278, 367 confidence and, 94 divergence in, 136–38 in education, 137, 186, 211, 217, 251, 255, 300 infrastructure in, xvi–xvii, 47, 137, 186, 211, 255, 258, 265, 268, 300 lowered by disintermediation, 258 public, 99 real estate, 199 in renewable energy, 229–30 return on, 186, 245 stimulation of, 94 in technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 investor state dispute settlement (ISDS), 393–94 invisible hand, xviii Iraq, refugees from, 320 Iraq War, 36, 37 Ireland, 14, 16, 44, 113, 114–15, 122, 178, 234, 296, 312, 331, 339–40, 343, 362 austerity opposed in, 207 debt of, 196 emigrants from, 68–69 GDP of, 18, 231 growth in, 64, 231, 247, 340 inherited debt in, 134 losses socialized in, 134, 156–57, 165 low debt in, 88 real estate bubble in, 108, 114–15, 126 surplus in, 17, 88 taxes in, 142–43, 376 trade deficits in, 119 unemployment in, 178 irrational exuberance, 14, 114, 116–17, 149, 334, 359 ISIS, 319 Italian bonds, 114, 165, 323 Italy, 6, 14, 16, 120, 125, 331, 343 austerity opposed in, 59 GDP per capita in, 352 growth in, 247 sovereign spread of, 200 Japan, 151, 333, 342 bubble in, 359 debt of, 202 growth in, 78 quantitative easing used by, 151, 359 shrinking working-age population of, 70 Java, unemployment on, 230 jobs gap, 120 Juncker, Jean-Claude, 228 Keynes, John Maynard, 118, 120, 172, 187, 351 convergence policy suggested by, 254 Keynesian economics, 64, 95, 108, 153, 253 King, Mervyn, 390 knowledge, 137, 138–39, 337–38 Kohl, Helmut, 6–7, 337 krona, 287 labor, marginal product of, 356 labor laws, 75 labor markets, 9, 74 friction in, 336 reforms of, 214, 221 labor movement, 26, 40, 125, 134–36, 320 austerity and, 140 capital flows and, 135 see also migration labor rights, 56 Lamers, Karl, 314 Lancaster, Kelvin, 27 land tax, 191 Latin America, 10, 55, 95, 112, 202 lost decade in, 168 Latvia, 331, 346 GDP of, 92 law of diminishing returns, 40 learning by doing, 77 Lehman Brothers, 182 lender of last resort, 85, 362, 368 lending, 280, 380 discriminatory, 283 predatory, 274, 310 lending rates, 278 leverage, 102 Lichtenstein, 44 Lipsey, Richard, 27 liquidity, 201, 264, 278, 354 ECB’s expansion of, 256 lira, 14 Lithuania, 331 living standards, 68–70 loans: contraction of, 126–27, 246 nonperforming, 241 for small and medium-size businesses, 246–47 lobbyists, from financial sector, 132 location, 76 London interbank lending rate (LIBOR), 131, 355 Long-Term Refinancing Operation, 360–361 Lucas, Robert, xi Luxembourg, 6, 94, 142–43, 331, 343 as tax avoidance center, 228, 261 luxury cars, 265 Maastricht Treaty, xiii, 6, 87, 115, 146, 244, 298, 339, 340 macro-prudential regulations, 249 Malta, 331, 340 manufacturing, 89, 223–24 market failures, 48–49, 86, 148, 149, 335 rigidities, 101 tax policy’s correction of, 193 market fundamentalism, see neoliberalism market irrationality, 110, 125–26, 149 markets, limitations of, 10 Meade, James, 27 Medicaid, 91 medical care, 196 Medicare, 90, 91 Mellon, Andrew, 95 Memorandum of Agreement, 233–34 Merkel, Angela, 186 Mexico, 202, 369 bailout of, 113 in NAFTA, xiv Middle East, 321 migrant crisis, 44 migration, 26, 40, 68–69, 90, 125, 320–21, 334–35, 342, 356, 393 unemployment and, 69, 90, 135, 140 see also labor movement military power, 36–37 milk, 218, 223, 230 minimum wage, 42, 120, 254, 255, 351 mining, 257 Mississippi, GDP of, 92 Mitsotakis, Constantine, 377–78 Mitsotakis, Kyriakos, 377–78 Mitterrand, François, 6–7 monetarism, 167–68, 169, 364 monetary policy, 24, 85–86, 148, 264, 325, 345, 364 as allegedly technocratic, 146, 161–62 conservative theory of, 151, 153 in early 1980s US, 168, 210 flexibility of, 244 in global financial crisis, 151 political nature of, 146, 153–54 recent developments in theory of, 166–73 see also interest rates monetary union, see single currencies money laundering, 354 monopolists, privatization and, 194 moral hazard, 202, 203 mortgage rates, 170 mortgages, 302 multinational chains, 219 multinational development banks, 137 multinationals, 127, 223, 376 multipliers, 211–12, 248 balanced-budget, 188–90, 265 Mundell, Robert, 87 mutual insurance, 247 mutualization of debt, 242–43, 263 national development banks, 137–38 natural monopolies, 55 natural rate hypothesis, 172 negative shocks, 248 neoliberalism, xvi, 24–26, 33, 34, 98–99, 109, 257, 265, 332–33, 335, 354 on bubbles, 381 and capital flows, 28 and central bank independence, 162–63 in Germany, 10 inequality increased by, xviii low inflation desired by, 147 recent scholarship against, 24 Netherlands, 6, 44, 292, 331, 339–40, 343 European Constitution referendum of, 58 New Democracy Party, Greek, 61, 185, 377–78 New Mediocre, 264 New World, 148 New Zealand, 364 Nokia, 81, 234, 297 nonaccelerating inflation rate of unemployment (NAIRU), 379–80 nonaccelerating wage rate of unemployment (NAWRU), 379–80 nongovernmental organizations (NGOs), 276 nonperforming loans, 241 nontraded goods sector, 102, 103, 169, 213, 217, 359 North American Free Trade Agreement (NAFTA), xiv North Atlantic Treaty Organization (NATO), 196 Norway, 12, 44, 307 referendum on joining EU, 58 nuclear deterrence, 38 Obama, Barack, 319 oil, import of, 230 oil firms, 36 oil prices, 89, 168, 259, 359 oligarchs: in Greece, 16, 227 in Russia, 280 optimal currency area, 345 output, 70–71, 111 after recessions, 76 Outright Monetary Transactions program, 361 overregulate, 132 Oxfam, 72 panic of 1907, 147 Papandreou, Andreas, 366 Papandreou, George, xiv, 60–61, 184, 185, 220, 221, 226–27, 309, 312, 366, 373 reform of banks suggested by, 229 paradox of thrift, 120 peace, 34 pensions, 9, 16, 78, 177, 188, 197–98, 226, 276, 370 People’s Party, Portugal, 392 periphery, 14, 32, 171, 200, 296, 301, 318 see also specific countries peseta, 14 pharmacies, 218–20 Phishing for Phools (Akerlof and Shiller), 132 physical capital, 77–78 Pinochet, Augusto, 152–53 place-based debt, 134, 242 Pleios, George, 377 Poland, 46, 333, 339 assistance to, 243 in Iraq War, 37 police, 41 political integration, xvi, 34, 35 economic integration vs., 51–57 politics, economics and, 308–18 pollution, 260 populism, xx Portugal, 14, 16, 64, 177, 178, 331, 343, 346 austerity opposed by, 59, 207–8, 315, 332, 392 GDP of, 92 IMF bailout of, 178–79 loans in, 127 poverty in, 261 sovereign spread of, 200 Portuguese bonds, 179 POSCO, 55 pound, 287, 335, 346 poverty, 72 in Greece, 226, 261 in Portugal, 261 in Spain, 261 predatory lending, 274, 310 present discount value, 343 Price of Inequality, The (Stiglitz), 154 prices, 19, 24 adjustment of, 48, 338, 361 price stability, 161 primary deficit, 188, 389 primary surpluses, 187–88 private austerity, 126–27, 241–42 private sector involvement, 113 privatization, 55, 194–96, 369 production costs, 39, 43, 50 production function, 343 productivity, 71, 332, 348 in manufacturing, 223–24 after recessions, 76–77 programs, 17–18 Germany’s design of, 53, 60, 61, 187–88, 205, 336, 338 imposed on Greece, xv, 21, 27, 60–62, 140, 155–56, 179–80, 181, 182–83, 184–85, 187–88, 190–93, 195–96, 197–98, 202–3, 205, 206, 214–16, 218–23, 225–28, 229, 230, 231, 233–34, 273, 278, 308, 309–11, 312, 315–16, 336, 338 of Troika, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 202, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 346, 366, 379, 392 progressive automatic stabilizers, 244 progressive taxes, 248 property rights, 24 property taxes, 192–93, 227 public entities, 195 public goods, 40, 337–38 quantitative easing (QE), 151, 164, 165–66, 170–72, 264, 359, 361, 386 railroads, 55 Reagan, Ronald, 168, 209 real estate bubble, 25, 108, 109, 111, 114–15, 126, 148, 172, 250, 301, 302 cause of, 198 real estate investment, 199 real exchange rate, 105–6, 215–16 recessions, recovery from, 94–95 recovery, 76 reform, 75 theories of, 27–28 regulations, 24, 149, 152, 162, 250, 354, 355–356, 378 and Bush administration, 250–51 common, 241 corporate opposition to, xvi difficulties in, 132–33 of finance, xix forbearance on, 130–31 importance of, 152–53 macro-prudential, 249 in race to bottom, 131–34 Reinhardt, Carmen, 210 renewable energy, 193, 229–30 Republican Party, US, 319 research and development (R&D), 77, 138, 217, 251, 317–18 Ricardo, David, 40, 41 risk, 104, 153, 285 excessive, 250 risk markets, 27 Rogoff, Kenneth, 210 Romania, 46, 331, 338 Royal Bank of Scotland, 355 rules, 57, 241–42, 262, 296 Russia, 36, 264, 296 containment of, 318 economic rents in, 280 gas from, 37, 81, 93, 378 safety nets, 99, 141, 223 Samaras, Antonis, 61, 309, 377 savings, 120 global, 257 savings and loan crisis, 360 Schäuble, Wolfgang, 57, 220, 314, 317 Schengen area, 44 schools, 41, 196 Schröeder, Gerhard, 254 self-regulation, 131, 159 service sector, 224 shadow banking system, 133 shareholder capitalism, 21 Shiller, Rob, 132, 359 shipping taxes, 227, 228 short-termism, 77, 258–59 Silicon Valley, 224 silver, 275, 277 single currencies: conflicts and, 38 as entailing fixed exchange rates, 8, 42–43, 46–47, 86–87, 92, 93, 94, 97–98 external imbalances and, 97–98 and financial crises, 110–18 integration and, 45–46, 50 interest rates and, 8, 86, 87–88, 92, 93, 94 Mundell’s work on, 87 requirements for, 5, 52–53, 88–89, 92–94, 97–98 and similarities among countries, 15 trade integration vs., 393 in US, 35, 36, 88, 89–92 see also euro single-market principle, 125–26, 231 skilled workers, 134–35 skills, 77 Slovakia, 331 Slovenia, 331 small and medium-sized enterprises (SMEs), 127, 138, 171, 229 small and medium-size lending facility, 246–47, 300, 301, 382 Small Business Administration, 246 small businesses, 153 Smith, Adam, xviii, 24, 39–40, 41 social cohesion, 22 Social Democratic Party, Portugal, 392 social program, 196 Social Security, 90, 91 social solidarity, xix societal capital, 77–78 solar energy, 193, 229 solidarity fund, 373 solidarity fund for stabilization, 244, 254, 264, 301 Soros, George, 390 South Dakota, 90, 346 South Korea, 55 bailout of, 113 sovereign risk, 14, 353 sovereign spreads, 200 sovereign wealth funds, 258 Soviet Union, 10 Spain, 14, 16, 114, 177, 178, 278, 331, 335, 343 austerity opposed by, 59, 207–8, 315 bank bailout of, 179, 199–200, 206 banks in, 23, 186, 199, 200, 242, 270, 354 debt of, 196 debt-to-GDP ratio of, 231 deficits of, 109 economic growth in, 215, 231, 247 gold supply in, 277 independence movement in, xi inequality in, 72, 212, 225–26 inherited debt in, 134 labor reforms proposed for, 155 loans in, 127 low debt in, 87 poverty in, 261 real estate bubble in, 25, 108, 109, 114–15, 126, 198, 301, 302 regional independence demanded in, 307 renewable energy in, 229 sovereign spread of, 200 spread in, 332 structural reform in, 70 surplus in, 17, 88 threat of breakup of, 270 trade deficits in, 81, 119 unemployment in, 63, 161, 231, 235, 332, 338 Spanish bonds, 114, 199, 200 spending, cutting, 196–98 spread, 332 stability, 147, 172, 261, 301, 364 automatic, 244 bubble and, 264 central banks and, 8 as collective action problem, 246 solidarity fund for, 54, 244, 264 Stability and Growth Pact, 245 standard models, 211–13 state development banks, 138 steel companies, 55 stock market, 151 stock market bubble, 200–201 stock market crash (1929), 18, 95 stock options, 259, 359 structural deficit, 245 Structural Funds, 243 structural impediments, 215 structural realignment, 252–56 structural reforms, 9, 18, 19–20, 26–27, 214–36, 239–71, 307 from austerity to growth, 263–65 banking union, 241–44 and climate change, 229–30 common framework for stability, 244–52 counterproductive, 222–23 debt restructuring and, 265–67 of finance, 228–29 full employment and growth, 256–57 in Greece, 20, 70, 188, 191, 214–36 growth and, 232–35 shared prosperity and, 260–61 and structural realignment, 252–56 of trade deficits, 216–17 trauma of, 224 as trivial, 214–15, 217–20, 233 subsidiarity, 8, 41–42, 263 subsidies: agricultural, 45, 197 energy, 197 sudden stops, 111 Suharto, 314 suicide, 82, 344 Supplemental Nutrition Assistance Program (SNAP), 91 supply-side effects: in Greece, 191, 215–16 of investments, 367 surpluses, fiscal, 17, 96, 312, 379 primary, 187–88 surpluses, trade, see trade surpluses “Swabian housewife,” 186, 245 Sweden, 12, 46, 307, 313, 331, 335, 339 euro referendum of, 58 refugees into, 320 Switzerland, 44, 307 Syria, 321, 342 Syriza party, 309, 311, 312–13, 315, 377 Taiwan, 55 tariffs, 40 tax avoiders, 74, 142–43, 227–28, 261 taxes, 142, 290, 315 in Canada, 191 on capital, 356 on carbon, 230, 260, 265, 368 consumption, 193–94 corporate, 189–90, 227, 251 cross-border, 319, 384 and distortions, 191 in EU, 8, 261 and fiat currency, 284 and free mobility of goods and capital, 260–61 in Greece, 16, 142, 192, 193–94, 227, 367–68 ideal system for, 191 IMF’s warning about high, 190 income, 45 increase in, 190–94 inequality and, 191 inheritance, 368 land, 191 on luxury cars, 265 progressive, 248 property, 192–93, 227 Reagan cuts to, 168, 210 shipping, 227, 228 as stimulative, 368 on trade surpluses, 254 value-added, 190, 192 tax evasion, in Greece, 190–91 tax laws, 75 tax revenue, 190–96 Taylor, John, 169 Taylor rule, 169 tech bubble, 250 technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 and new financial system, 274–76, 283–84 telecoms, 55 Telmex, 369 terrorism, 319 Thailand, 113 theory of the second best, 27–28, 48 “there is no alternative” (TINA), 306, 311–12 Tocqueville, Alexis de, xiii too-big-to-fail banks, 360 tourism, 192, 286 trade: and contractionary expansion, 209 US push for, 323 trade agreements, xiv–xvi, 357 trade balance, 81, 93, 100, 109 as allegedly self-correcting, 98–99, 101–3 and wage flexibility, 104–5 trade barriers, 40 trade deficits, 89, 139 aggregate demand weakened by, 111 chit solution to, 287–88, 290, 299–300, 387, 388–89 control of, 109–10, 122 with currency pegs, 110 and fixed exchange rates, 107–8, 118 and government spending, 107–8, 108 of Greece, 81, 194, 215–16, 222, 285–86 structural reform of, 216–17 traded goods, 102, 103, 216 trade integration, 393 trade surpluses, 88, 118–21, 139–40, 350–52 discouragement of, 282–84, 299–300 of Germany, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 tax on, 254, 351, 381–82 Transatlantic Trade and Investment Partnership, xv, 323 transfer price system, 376 Trans-Pacific Partnership, xv, 323 Treasury bills, US, 204 Trichet, Jean-Claude, 100–101, 155, 156, 164–65, 251 trickle-down economics, 362 Troika, 19, 20, 26, 55, 56, 58, 60, 69, 99, 101–3, 117, 119, 135, 140–42, 178, 179, 184, 195, 274, 294, 317, 362, 370–71, 373, 376, 377, 386 banks weakened by, 229 conditions of, 201 discretion of, 262 failure to learn, 312 Greek incomes lowered by, 80 Greek loan set up by, 202 inequality created by, 225–26 poor forecasting of, 307 predictions by, 249 primary surpluses and, 187–88 privatization avoided by, 194 programs of, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 197–98, 202, 204, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 348, 366, 379, 392 social contract torn up by, 78 structural reforms imposed by, 214–16, 217, 218–23, 225–38 tax demand of, 192 and tax evasion, 367 see also European Central Bank (ECB); European Commission; International Monetary Fund (IMF) trust, xix, 280 Tsipras, Alexis, 61–62, 221, 273, 314 Turkey, 321 UBS, 355 Ukraine, 36 unemployment, 3, 64, 68, 71–72, 110, 111, 122, 323, 336, 342 as allegedly self-correcting, 98–101 in Argentina, 267 austerity and, 209 central banks and, 8, 94, 97, 106, 147 ECB and, 163 in eurozone, 71, 135, 163, 177–78, 181, 331 and financing investments, 186 in Finland, 296 and future income, 77 in Greece, xi, 71, 236, 267, 331, 338, 342 increased by capital, 264 interest rates and, 43–44 and internal devaluation, 98–101, 104–6 migration and, 69, 90, 135, 140 natural rate of, 172–73 present-day, in Europe, 210 and rise of Hitler, 338, 358 and single currency, 88 in Spain, 63, 161, 231, 235, 332, 338 and structural reforms, 19 and trade deficits, 108 in US, 3 youth, 3, 64, 71 unemployment insurance, 91, 186, 246, 247–48 UNICEF, 72–73 unions, 101, 254, 335 United Kingdom, 14, 44, 46, 131, 307, 331, 332, 340 colonies of, 36 debt of, 202 inflation target set in, 157 in Iraq War, 37 light regulations in, 131 proposed exit from EU by, 4, 270 United Nations, 337, 350, 384–85 creation of, 38 and lower rates of war, 196 United States: banking system in, 91 budget of, 8, 45 and Canada’s 1990 expansion, 209 Canada’s free trade with, 45–46, 47 central bank governance in, 161 debt-to-GDP of, 202, 210–11 financial crisis originating in, 65, 68, 79–80, 128, 296, 302 financial system in, 228 founding of, 319 GDP of, xiii Germany’s borrowing from, 187 growing working-age population of, 70 growth in, 68 housing bubble in, 108 immigration into, 320 migration in, 90, 136, 346 monetary policy in financial crisis of, 151 in NAFTA, xiv 1980–1981 recessions in, 76 predatory lending in, 310 productivity in, 71 recovery of, xiii, 12 rising inequality in, xvii, 333 shareholder capitalism of, 21 Small Business Administration in, 246 structural reforms needed in, 20 surpluses in, 96, 187 trade agenda of, 323 unemployment in, 3, 178 united currency in, 35, 36, 88, 89–92 United States bonds, 350 unskilled workers, 134–35 value-added tax, 190, 192 values, 57–58 Varoufakis, Yanis, 61, 221, 309 velocity of circulation, 167 Venezuela, 371 Versaille, Treaty of, 187 victim blaming, 9, 15–17, 177–78, 309–11 volatility: and capital market integration, 28 in exchange rates, 48–49 Volcker, Paul, 157, 168 wage adjustments, 100–101, 103, 104–5, 155, 216–17, 220–22, 338, 361 wages, 19, 348 expansionary policies on, 284–85 Germany’s constraining of, 41, 42–43 lowered in Germany, 105, 333 wage stagnation, in Germany, 13 war, change in attitude to, 38, 196 Washington Consensus, xvi Washington Mutual, 91 wealth, divergence in, 139–40 Weil, Jonathan, 360 welfare, 196 West Germany, 6 Whitney, Meredith, 360 wind energy, 193, 229 Wolf, Martin, 385 worker protection, 56 workers’ bargaining rights, 19, 221, 255 World Bank, xv, xvii, 10, 61, 337, 357, 371 World Trade Organization, xiv youth: future of, xx–xxi unemployment of, 3, 64, 71 Zapatero, José Luis Rodríguez, xiv, 155, 362 zero lower bound, 106 ALSO BY JOSEPH E.


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial innovation, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, savings glut, short selling, sovereign wealth fund, special drawing rights, The Great Moderation, too big to fail

But in 2009, the economy badly needed more help, and in early March, the Fed launched an aggressive monetary stimulus experiment known as “quantitative easing,” buying mortgage securities and then Treasury bonds to try to bring down long-term interest rates and fight the Great Recession. The initial round, “QE1,” would expand to $1.75 trillion in Fed purchases and send a confidence-inducing message that the Fed would not stand by and let the economy stagnate. Ben and his colleagues would announce QE2 and QE3 in 2010 and 2012, eventually expanding the Fed’s balance sheet to more than $4.5 trillion, nearly five times its pre-crisis peak. A wide range of academic studies have found that quantitative easing lowered long-term Treasury and mortgage rates and helped support the economic recovery; it also encouraged other central banks to adopt similar programs to support global growth.

It lowered rates to the zero lower bound during the darkest days of the fall, and it kept them there to support the economic recovery for seven years. The Fed’s three rounds of quantitative easing also provided significant fuel for growth, helping the economy weather a series of negative events, including a sovereign debt crisis in Europe, without lapsing back into recession. And its purchases of mortgage-backed securities were crucial to the recovery of the housing market. Ben’s successors at the Federal Reserve, Janet Yellen and Jerome Powell, have begun a gradual process of unwinding the $4.5 trillion book of securities the Fed accumulated through quantitative easing, while slowly nudging interest rates above 2 percent as we write these words. However, it appears that even once monetary policy returns to a neutral stance, the prevailing interest rates will be lower than in the past.

Department of Housing and Urban Development Libor-OIS London Interbank Offered Rate–Overnight Indexed Swap rate MBS mortgage-backed securities MLEC Master Liquidity Enhancement Conduit MMF money market fund NBER National Bureau of Economic Research PDCF Primary Dealer Credit Facility PPIP Public-Private Investment Program QE Quantitative Easing SAAR seasonally adjusted annual rate SBA 7(a) Small Business Administration 7(a) Securities Purchase Program SCAP Supervisory Capital Assessment Program SDR special drawing right SPSPAs Senior Preferred Stock Purchase Agreements TAF Term Auction Facility TAGP Transaction Account Guarantee Program TALF Term Asset-Backed Securities Loan Facility TARP Troubled Assets Relief Program TLGP Temporary Liquidity Guarantee Program TSLF Term Securities Lending Facility CHARTING THE FINANCIAL CRISIS U.S.


pages: 397 words: 112,034

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

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

As the economy lost 2.1 million construction jobs during the recession, such an upturn could add several hundred thousand jobs. As a result of increasing consumption, robust business investment, and a delayed housing recovery, the odds are high that the economy’s growth rate will rebound to the 3.0–4.0 percent range by the first half of 2011. In such a scenario, quantitative easing will probably end in June 2011. The Fed’s policy will also force other countries to pursue expansionary monetary policies in order to prevent their own currencies from appreciating excessively. Japan has engaged in currency market intervention and announced its own quantitative easing program to stem the appreciation of the yen. Developing countries in both East Asia and Latin America are engaging in currency intervention that could nurture more domestic monetary growth. The European currency has suffered from investor concerns about the debt servicing problems of peripheral countries such as Greece, Ireland, and Portugal.

Since Japan’s economy remained weak over the ensuing dozen years and politicians more or less consistently demanded greater accommodation, the BOJ’s determination not to be pushed around translated into chronically and inappropriately tight monetary policy. Thus, the BOJ, which pioneered quantitative easing in the early 2000s, never employed those unconventional methods boldly enough to overcome the problem of declining prices. To the contrary, its spokesmen stated on several occasions that the agency had done all it possibly could and that deflation simply could not be defeated through monetary means—a notion eventually belied by the success of the United States, the United Kingdom, and other countries in using quantitative easing to combat intense disinflationary pressures in 2008 and 2009 (and again in late 2010 and 2011). It would be wrong to suggest that the BOJ did not loosen policy in reaction to the crisis.

The US corporate sector is also running a free cash flow surplus exceeding $755 billion. This number is unprecedented in the modern era, and explains why firms are boosting investment on productivity-enhancing technology. The great uncertainties in the US outlook center on public policy. As the unemployment rate remained at 9.6 percent during the fourth quarter of 2010, the Federal Reserve embarked upon a program of quantitative easing. The Fed pledged to purchase $600 billion of government securities in the eight months through June. Federal Reserve Chairman Ben Bernanke said that the policy would help to reduce long-term bond yields and bolster the equity market. Finance ministers in Brazil, China, and other developing countries said that the policy was designed to devalue the dollar. Several Republican economists warned that the policy could be inflationary.


pages: 363 words: 107,817

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

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

This net worth has come from the purchases of government bonds through issuing bank notes, and the purchase of government bonds through the creation of central bank reserves through the Quantitative Easing scheme. In effect, this £313 billion is seigniorage which has been earned from the creation of money, but which has only been recognised as a result of the fact that this reform does not require backing assets to be held against the state-issued currency (for the reasons discussed in Appendix III). We now need to complete our changes to the balance sheet of the Bank of England by converting the demand deposits of banks into state-issued currency held at the Bank of England. Box 8.A - Dealing with the bonds purchased through Quantitative Easing Quantitative Easing was a scheme set up in response to the financial crisis. One effect of QE was to boost the broad money supply, or at least negate the contraction in the money supply which arose when banks stopped lending but people continued paying down their debts.

More recently reserves have been injected through Quantitative Easing. How commercial banks acquire central bank reserves Ultimately, commercial banks need to acquire central bank reserves in order to settle net transactions with other banks. These net ‘settlement obligations’ arise when payments by customers of one bank to another are greater than the payments coming in the opposite direction. Banks may obtain reserves in one of three ways: a) From the central bank The central bank retains a monopoly on the production of central bank reserves. Therefore ultimately all central bank reserves initially come from the central bank. The central bank can inject these reserves into the system through a variety of channels, including through open market operations and quantitative easing. Here we will restrict ourselves to cases where the central bank lends reserves directly to commercial banks, which it may do in one of three ways: Long term lending: Before the financial crisis the Bank of England ran what was known as a ‘reserves averaging scheme’.

When the central bank lowers the interest rate in response to recessionary conditions it benefits borrowers at the expense of savers. Pension funds in particular may suffer: lower interest rates increase the net present value of future liabilities, increasing the need for higher current fund contributions. Financial crises may also lead to unorthodox monetary policy (such as Quantitative Easing). Because quantitative easing pushes up the price of bonds it also lowers their yield, again increasing required contributions to pension funds. Furthermore by decreasing the yield on bonds, QE increases the desirability of other assets, pushing up their prices. This can have long run effects. By purchasing assets the central bank may prevent prices from falling, and so ‘set a floor’ under their price, implicitly guaranteeing prices and legitimising prior investment decisions.


pages: 354 words: 92,470

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

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

These actions, however, only served to pass the buck to somebody else. No one would admit such a thing – no one, apparently, was in the business of pursuing 1930s-style ‘beggar-thy-neighbour’ currency devaluations – yet as one central bank after another fired up its printing presses, it became increasingly difficult to think of quantitative easing in any other way. Admittedly, central banks tried their hardest to explain the domestic channels through which quantitative easing was supposed to work – the central bank would purchase existing government debt from investors using newly printed money with the aim of lowering yields, encouraging investors to switch into riskier assets like equities, which would then rise in value, signalling to companies that they should raise funds via the capital markets in order to increase capital spending – but the evidence was mostly unconvincing.

While not all people’s coins are being clipped simultaneously, some people’s coins are being clipped repeatedly. The economic and political consequences have not been fully thought through. Among the ‘winners’ in a world of negative interest rates and quantitative easing are, most obviously, governments themselves. Lower borrowing costs enable governments more easily to meet their fiscal ambitions without having to make painful political decisions regarding spending programmes or tax rates. Other winners include those who have large holdings of financial wealth in the form of equities, government bonds or corporate debt. Quantitative easing is designed to increase the value of such assets, making the world’s financial plutocrats even more plutocratic. Then there are the providers of high-yield products who are likely to do well selling (or perhaps mis-selling) their products to a public too often unwilling or unable to recognize the risks involved.

True, the value of their financial assets initially fell a long way: in the initial stages of the global financial crisis, equities fell much further than housing. Yet the rich had two advantages. First, relative to their assets, they had a lot less debt and so, even as their assets fell in value, they were under no threat of finding themselves financially under the water. Second, they proved to be major beneficiaries of quantitative easing – the supposedly magical monetary medicine where, in effect, a central bank purchases financial assets in a bid to drive their price higher, in the hope that households and companies will spend more. The S&P 500 index peaked before the global financial crisis at 1,557. It then plummeted to a low of 683. A handful of years later – partly a response to sustained pump-priming from the Federal Reserve – the index had jumped to a new high of 2,270.


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The Scandal of Money by George Gilder

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

Perhaps the Fed would raise interest rates, giving banks incentives to lend. Or perhaps it would continue its zero-interest-rate policy, maintaining business and household incentives to borrow. Or through some combination of quantitative easing with suitable “twists,” might it do both at once? Experts from Larry Summers to Ben Bernanke cite the failure of previous remedies as the reason to continue them. If zero interest rates have not ignited a recovery yet, perhaps their continuation can prevent a new recession. Perhaps negative interest rates could be contrived, requiring holders of cash to buy stamps every month to attach to their dollars. If five years of quantitative easing—some $4.6 trillion worth of bond purchases—could not reverse the five-year decline in real median incomes, perhaps another year would yield a trickle-down effect. The middle class might finally benefit.

Most insidious was the eclipse of time, the flattening of interest rates in a global governmental raid on the future. Government debt seizes assets and moves them to the present. It is justifiable only if the spending on present goods promises a large yield for the future. Debt incurred for near-term stimulus merely depletes the future, bidding up the prices of current assets without improving their yields or creating new assets that can repay the debts. The result is swollen asset values, quantitatively “eased” but qualitatively empty—a bubble. When the prices fall back, the debts remain and weigh down the economy in much the way Piketty describes. But he comically errs in seeing the problem as actual saving and investment rather than government expropriation of the real creators of value. In the United States, the costs of the policy fell first on the pensions of the middle class. The Fed ultimately imposed near-zero interest rates, giving governments and their cronies free money, shrinking the horizons of future enterprise.

From 2012 to 2014, the precious metal lost 40 percent of its value against the dollar, which went on an awesome tear against nearly all the world’s currencies and commodities. Today it handles more than 60 percent of world trade, denominates more than half the market capitalization of world stocks, and partakes in 87 percent of global currency trades.2 To advocates of paper, the lesson seemed unanswerable. Even in a global monetary crisis, exacerbated by wildly loose monetary policy in Washington, with quantitative easing following stimulative buying, and with an explicit zero-interest-rate policy, the full faith and credit of the U.S. government behind the dollar roundly trumped the intrinsic value and scarcity of gold. Paul Krugman gloated mercilessly in his New York Times column. He seemed to have a point. He rubbed in his argument by regularly quoting Milton Friedman’s case for floating currencies.3 Friedman held that floating currencies could respond to real changes in the economy far faster and more easily than real factors could adjust to a fixed standard.


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The Theft of a Decade: How the Baby Boomers Stole the Millennials' Economic Future by Joseph C. Sternberg

Affordable Care Act / Obamacare, Airbnb, American Legislative Exchange Council, Asian financial crisis, banking crisis, Basel III, Bernie Sanders, blue-collar work, centre right, corporate raider, Detroit bankruptcy, Donald Trump, Edward Glaeser, employer provided health coverage, Erik Brynjolfsson, eurozone crisis, future of work, gig economy, Gordon Gekko, hiring and firing, Home mortgage interest deduction, housing crisis, job satisfaction, job-hopping, labor-force participation, low skilled workers, Lyft, Marc Andreessen, Mark Zuckerberg, minimum wage unemployment, mortgage debt, mortgage tax deduction, Nate Silver, new economy, obamacare, oil shock, payday loans, pension reform, quantitative easing, Richard Florida, Ronald Reagan, Saturday Night Live, Second Machine Age, sharing economy, Silicon Valley, sovereign wealth fund, TaskRabbit, total factor productivity, Tyler Cowen: Great Stagnation, uber lyft, unpaid internship, women in the workforce

See GDP (gross domestic product) Gurner, Tim avocado/coffee and, 1, 2, 3 homebuying and, 116 inheritance, 4 Hamilton, Alexander, 147, 147n, 148 Hammond, Darrell, 153 Harris, Kamala, 214 Hawley, Josh, 212 HCAI (Housing Credit Availability Index), 139, 139n health care electronic medical records, 235 See also Affordable Care Act/Obamacare; health insurance health insurance economic security and, 65 employer-based insurance/history, 65, 66 See also Affordable Care Act/Obamacare Hillbilly Elegy (Vance), 45 HOLC (Home Owner Loan Corporation), 119–120 Home Owner Loan Corporation (HOLC), 119–120 housing amortizing mortgage, 120, 120n balloon loans, 119 Boomer ownership, 109, 110, 111 Federal Reserve/mortgage lending and, 61–62 GI Bill and, 120 Great Depression/government response and, 119–121 history, 113–114, 114n, 118–119 Millennial home ownership/education debt and, 94–95 mortgages/taxes and, 120, 126, 127 multigenerational households, 112, 113 ownership value debate, 120n postwar boom and, 121 Housing Credit Availability Index (HCAI), 139, 139n housing/financial crisis bailouts, 130, 130n, 132n bank liquidity and, 129–130 Boomers and, 134, 135 description/consequences, 128–129 foreclosures and, 111, 132, 132n, 135 home equity increase and, 125–128, 126n home equity loss and, 10, 110–111 home ownership decline and, 121, 122 homeowners “lock-in” and, 136 housing debt/policies, 123–127, 125n insolvency crisis and, 129–130 interest rates and, 124–125, 125n, 127–128, 136 managing policies, 129–137 Millennials and, 131, 135–140, 141–143 mobility and, 135–136 mortgage-backed securities (MBS) market and, 124, 125n, 128, 129 mortgage security and, 122–124 press release/beginnings, 128 quantitative easing, 133, 135, 136, 137 quantitative easing dollar amount, 137 regulations following/Millennials and, 137–140 subprime/prime borrowers and, 126–127, 126n housing/Millennial issues economics and, 17, 110, 111, 112–113 expectations, 109–110 living with parents/statistics, 111–113, 114 locations/job locations and, 116, 117–118 multigenerational households, 112, 114n ownership/demographics, 115–116 renting/costs and, 113, 113n, 114, 114n, 141–142, 141n starter homes and, 116, 117 supplies and, 116–118 Howe, Neil, 6–7 HUD (Department of Housing and Urban Development), 123 Iceland and financial crisis, 180 immigration Millennials views, 218, 225–226 Trump, Donald and, 225–226 Immigration and Customs Enforcement (ICE), 211 India, 178, 201 Industrial Revolution, 113 information/computer technology rise, 56, 235 inheritances/Millennials beliefs/estimates, 103–104 Boomers life expectancy/health care finances and, 104–105 feudalism/history and, 106 Fidelity surveys, 105 Millennials retirement and, 107–108 timing and, 105–106 interest rates Bush and, 57 Federal Reserve and, 18, 19, 124 housing/financial crisis and, 124–125, 125n, 127–128, 136 Trump and, 19, 231–232 International Monetary Fund (IMF), 182–183 internships/Millennials numbers, 31 Obama and, 73 overview, 31, 72–73 pay and, 31, 72 work descriptions, 32 investment Boomers childhood and, 49 consumption relationship, 50 costs of labor vs. capital, 63–64, 65–66, 229 during Bush administration, 57 during Reagan administration, 53, 54 fixed investment, 49, 51, 53, 56, 57, 60, 127 growth (mid-twentieth century), 49 need to increase and, 15–17, 51 productivity and, 16, 49 technologies replacing labor and, 62–63 investment-and-productivity boom (1950s/1960s), 49–50 decline (1970s/1980s), 50 Ireland and financial crisis, 180 Italy Millennials and, 184, 201 temporary work, 184 Jackson, Alphonso, 123 Jackson, Andrew, 147 Japan consumption tax, 206 corporate scandals, 202, 202n debt, 205–206 demographic boom, 203n economic growth (1960s/1970s), 201–202 population trend, 207 working mothers and, 209 Japan Millennials delayed marriages/children and, 208–209 economy and, 203, 205, 206–207 inflation and, 207–208 interest rates and, 207–208, 208n job/training investments and, 204–205 lifetime employment deal and, 203–204 regular/nonregular work, 202–203, 202n taxes and, 205 Jeffersonians, 147n job hopping, 37–38 “jobless recovery,” 35, 69 jobs/job market and Millennials age of employee/job losses, 35–39 Boomers vs., 27, 46 company size and, 38–39 economists categories of jobs/job losses and, 33–34 experience requirements and, 37 financial crisis/recession losses distribution, 32–37 “fun/fulfilling” work and, 29 goals/dreams, 31 job losses by skill level, 34 job opportunity losses/time effects, 39–40 jobs replaced by robots, 34, 34n lower-skilled/low-paying employment replacements and, 36–37 mentors vs. bosses, 29–30 overqualification and, 42–43 pay/job losses and, 33–34 recovery from financial crisis and, 35, 59 statistics on white/blue collar jobs, 28 transformed jobs and, 27–29, 27n wants description, 29 See also specific components Johnson, Lyndon, 149 Kander, Jason, 212 Keynes, John Maynard/Keynesian economics, 50n, 58, 163n Kotlikoff, Laurence J., 171–172 labor capital vs. labor costs, 63–64, 65–66, 229 costs, 65–66 costs (by 1990s), 55 replacing labor and, 17, 34, 34n, 62–63 See also union power labor-force participation rate in 1970s, 47 in 1980s, 54 description, 30 Millennials/post-2008 decade, 30–31 labor productivity complementary technologies and, 49 definition, 48n labor hours and, 49 output per hour worked and, 48, 48n, 56, 57 labor share in 1950s/1960s, 47, 50 definition/description, 47 during Clinton presidency, 56 during Reagan presidency, 56 economic theories on, 62 trend past 50 years, 62 Lehman Brothers, 11, 129, 133 Libertarian candidates, 219 McAfee, Andrew, 41 McCain, John, 225 McCain, Meghan, 215 Maloney, Carolyn, 219 Manhattan Institute for Policy Research, 58 ManpowerGroup, 31 manufacturing economy (US) decline, 12, 14 description, 15–16 MBS (mortgage-backed securities) market, 124, 125n, 128, 129 Medicaid Affordable Care Act and, 167 financial problems, 156 role, 149 Medicare for all Americans, 211 financial problems/Millennials and, 153–161 inflation and, 169 insurance comparisons, 154 Millennial resources and, 142 role, 149 See also entitlements for elderly Medicare Part D, 157 Merkel, Angela political party/government and, 197, 200, 200n taxes and, 197 Merrill Lynch, 11, 128–129 Merrill Lynch survey/savings, 78 military spending deficit spending (government) and, 151 generational fairness and, 171 Millennials avocado/coffee debate, 1–3 childhood diseases and, 3–4 definition/description, 5–9, 237 diversity and, 216, 237–238 ethnicity, 9 as immigrants/children of immigrants and, 8–9, 112 material well-being and, 3–5 navigators and, 21–23 numbers, 8 parents/security and, 3–4 as “retirement plans” for parents, 145 second language and, 8 sex and, 217 social questions, 216–217 stereotypes and, 1–3, 29–30, 235 term origins, 6 views of, 1–3, 4–5, 26–27 wars and, 4 minimum wages debates/views on, 185 Europe, 183–184 in US, 183–184 Mondale, Walter, 20 mortgage-backed securities (MBS) market, 124, 125n, 128, 129 Mortgage Servicing Assets (MSAs), 138n Mulligan, Casey B., 165 Murphy, Patrick, 212 National Center for Education Statistics data analysis, 92–93 National Football League union refs lockout (2012), 49n National Home-ownership Strategy (1995), 123 navigator Millennials, 21–23 NEETs (youths “not in employment, education, or training”), 181 Netherlands minimum wage, 184 New Deal/regulations, 52–53, 148–149 Obama, Barack Boomers and, 64 education policy and, 93–94, 97–101 financial crisis/Great Recession and, 129, 131–132, 132n, 137, 162–164, 223–234 Millennials and, 64, 218–219, 224 policies and, 18, 19, 24, 64, 73, 93–94, 97–101 regulation and, 229 unpaid internships and, 73 See also Affordable Care Act/Obamacare Obamacare.

The fiscal-stimulus bill he and Democratic allies on Capitol Hill passed broke records for one-off spending legislation. The Affordable Care Act, also known as Obamacare, sought to remake a health care system that accounted for around one-sixth of annual economic output. He signed a sweeping overhaul of Wall Street regulations. Other policymakers took unprecedented steps—especially the Federal Reserve, which cut interest rates to levels they’d never been before and rolled out policies such as quantitative easing that most people have heard of but few fully understand. And then, eight years after the crisis, in 2016 Americans embarked on yet another big experiment—some might call it a huge gamble—with Donald J. Trump. We’ve never had a president like him, for better or for worse, and his administration alongside a Republican-controlled Congress for his first two years† refashioned America’s tax code and overhauled economic regulations to an extent most Americans don’t realize.

The federal funds rate would stay at essentially zero for nearly seven years between December 2008 and November 2015, a low never witnessed before for a duration never experienced before. And when that didn’t provide sufficient stimulus, Bernanke’s Fed also started buying financial assets to pour more cash into the economy and reduce borrowing costs even further. Bernanke injected money into the economy by expanding the Fed’s balance sheet with policies collectively known as “quantitative easing,” and by the time the Fed stopped buying bonds and other assets, it had expanded its balance sheet to roughly $4.5 trillion, from around $900 billion before the crisis. The stated goal of these asset purchases was to dramatically reduce long-term interest rates on corporate bonds and mortgages in order to stimulate more investment to lift America out of its slump. The Fed’s record is decidedly mixed on this score.


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

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

In the US, meanwhile, corporate debt is higher as a percentage of GDP than it has ever been. There seems to be a new corporate scandal every week, with overindebted, extractive, monopolistic companies controlling an increasing share of economic output whilst public services crumble. Interest rates around the world were until recently at record lows and most states are only now – a decade on from the crash – starting to wind up quantitative easing. The extra weight placed on monetary policy means that when the next crisis hits there will be little room for manoeuvre. Economists are at a loss to explain this ongoing malaise. Some have argued that we are living through an era of “secular stagnation” (where secular means long-term). Technological and demographic change mean that the Western world must accustom itself to much lower rates of growth than in the past.18 Others claim that this economic stagnation results from rising government debt, which is a drain on productive economic activity and is scaring off foreign investment.19 Still others argue that this is all down to “economic populism” — governments implementing ill-advised economic policies to please the masses rather than listening to the timeless, objective wisdom of professional economists.20 The lost decade since the financial crisis is living up to that old adage that when you get ten economists in a room, you’ll get eleven opinions.

Monetary policy changes pursued by the world’s four major central banks — the Federal Reserve (the Fed), the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ) — also helped. Interest rates were reduced to historic lows. But with households already heavily indebted, businesses uncertain of the future, and banks unwilling to lend, cutting interest rates wasn’t going to be enough. So, the world’s central banks tried something new: quantitative easing (QE). Since 2009, these four central banks have pumped more than $10trn of digitally-created money into the global financial system by purchasing government bonds, which has pushed up asset prices across the board.22 The Fed’s balance sheet peaked at around $4.5trn in 2015, or a quarter of US GDP — the value of the UK’s programme as a percentage of GDP peaked at a similar level.23 The BoJ’s apparently unending QE programme has seen its assets climb to over $5trn, larger than Japan’s entire economy.24 In many countries, it is hard to see how this expansion in central bank balance sheets will ever be reversed.25 For a time, it looked as though this coordinated action might bring a relatively swift end to the series of overlapping recessions then taking place in the economies of the global North.

Some have argued that this can be attributed to a slowdown in technological change.21 Others point to demographic change — falling birth rates and rising life expectancies associated with rising affluence in the global North have led to a fall in the working age population that is depressing long-term growth rates.22 But all those who support the secular stagnation hypothesis converge on one point: without extraordinary interventions from the state such as quantitative easing, many economies in the global North appear to have ground to a halt. Today’s economists have all converged on one burning question: What is going on? Just like the theory of the great moderation itself, the secular stagnation hypothesis takes for granted many of the assumptions of neoclassical economics. Take the argument about wage stagnation. Neoclassical economists argue that workers are paid a wage equal to their marginal productivity.


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

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

Central banks massively expanded their balance sheets by buying up or lending financial and corporate assets (securities) from capital markets, and crediting the accounts of the sellers. In this way the Federal Reserve has added $4.5 trillion to its balance sheet. The Bank of England’s balance sheet is bigger, relative to UK gross domestic product, than ever throughout its long history. But while quantitative easing (QE) may have stabilised the financial system, it inflated the value of assets like property – owned on the whole, by the more affluent. As such, QE contributed to rising inequality and to the political and social instability associated with it. So expanding QE further is probably not politically feasible. Even while monetary policy was loosened, economic recovery stalled or slowed because governments simultaneously tightened fiscal policy.

Andy Haldane, responsible for Financial Stability at the Bank of England, argued once that even if bankers were to compensate society for the losses endured, ‘it is clear that banks would not have deep enough pockets to foot this bill.’8 Despite massive bailouts by taxpayer-backed central banks, it is my contention that, even as I write in 2016, global banks are still effectively insolvent. Government guarantees, cheap finance and quantitative easing, coupled with the manipulation of balance sheets, are all that appear to stand between today’s ‘too big to fail’ banks and insolvency. The deregulated financial system – and liquidity Under our deregulated financial system, and despite the Great Financial Crisis of 2007–09, commercial bankers can create credit or liquidity (i.e. assets that can easily and readily be turned into cash) effectively without limit, and with few regulatory constraints.

The nationalised Bank of England, the US Federal Reserve as well as the free-standing European Central Bank – all ultimately backed by taxpayers – have, since August 2007, provided the world’s global banks and private financial markets with guarantees against losses, with historically low rates of interest on their borrowing, and with cheap and easy liquidity by way of monetary operations known as quantitative easing. (QE is the process whereby central banks purchase government debt or bonds from capital markets and place the bonds on their balance sheets. This cuts the number of bonds on the market, and because there is demand for ‘safe’ government bonds, the ‘price’ of these bonds rises, while simultaneously the ‘yield’ – comparable to the rate of interest – falls. This action helps bring down interest rates on government debt, but also on interest rates across the spectrum of lending.)


pages: 349 words: 98,868

Nervous States: Democracy and the Decline of Reason by William Davies

active measures, Affordable Care Act / Obamacare, Amazon Web Services, bank run, banking crisis, basic income, business cycle, Capital in the Twenty-First Century by Thomas Piketty, citizen journalism, Climategate, Climatic Research Unit, Colonization of Mars, continuation of politics by other means, creative destruction, credit crunch, decarbonisation, deindustrialization, discovery of penicillin, Dominic Cummings, Donald Trump, drone strike, Elon Musk, failed state, Filter Bubble, first-past-the-post, Frank Gehry, gig economy, housing crisis, income inequality, Isaac Newton, Jeff Bezos, Johannes Kepler, Joseph Schumpeter, knowledge economy, loss aversion, low skilled workers, Mahatma Gandhi, Mark Zuckerberg, mass immigration, meta analysis, meta-analysis, Mont Pelerin Society, mutually assured destruction, Northern Rock, obamacare, Occupy movement, pattern recognition, Peace of Westphalia, Peter Thiel, Philip Mirowski, planetary scale, post-industrial society, quantitative easing, RAND corporation, Ray Kurzweil, Richard Florida, road to serfdom, Robert Mercer, Ronald Reagan, sentiment analysis, Silicon Valley, Silicon Valley startup, smart cities, statistical model, Steve Jobs, the scientific method, Turing machine, Uber for X, universal basic income, University of East Anglia, Valery Gerasimov, We are the 99%, WikiLeaks, women in the workforce, zero-sum game

These events are typical of some of the confusions and controversies that now surround the political power of experts, which can incite suspicion and resentment. The appearance of quantitative easing coincided with that of the Tea Party movement in the United States, which fixated on the policy as the definitive example of establishment corruption, through which financial and government elites could rip off the public in secret. The sheer complexity of the policy didn’t help, and few of the economists involved in delivering it expressed much confidence in what the outcome was likely to be. After the policy was finished, the Bank of England’s own website admitted that “it is difficult to tell if [quantitative easing] has worked, and how well.” One of the few indisputable features of quantitative easing is that it benefits the wealthy, as it inflates the price of assets (including real estate), adding to the feeling that this was a conspiracy by elites against ordinary people.3 In what sense were economic technocrats really being objective or apolitical any longer?

The best hope for breaking the cycle of cynicism and distrust might be just one or two policies that are so simple, so deliverable that they reconnect the words of elected representatives with the experience of citizens. Had governments introduced a policy of “helicopter money” instead of quantitative easing in 2009, this would have seen the sum in every individual savings account increase by a set figure, using the same technical means as the one employed for quantitative easing. Who knows if this would have worked (who knows if quantitative easing worked?) but it would have had a populist quality with valuable symbolism. Societies have renewed their capacity to make wide-ranging promises in the past, both legal and otherwise. But they usually do so in response to prolonged warfare. The birth of modern government and scientific expertise occurred in the aftermath of civil and religious wars in the seventeenth century.

As one recurrent metaphor had it, the financial system had suffered the equivalent of a heart attack, and the recuperation was slow, as the mechanisms responsible for pumping money around—namely the banks—remained in a critical state.1 The recovery was overseen by central banks, staffed by unelected experts, whose task it was to prevent the system collapsing all over again. The technique that came to be deployed in Britain and the United States, then later in the eurozone, was “quantitative easing.” This saw central banks purchasing hundreds of billions of pounds’ worth of assets from pension funds. This strategy pushes money through the banking system (where pension funds keep their cash), which is intended to revive bank lending in the process. But the mystery at the heart of this practice is that central banks don’t actually have all that money in the first place: they create it by adding numbers to the bank accounts of the pension companies and adding the same amount as a liability on their own balance sheet.


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

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

Both the US and UK central banks adopted quantitative easing after the collapse of Lehman Brothers, and further deployed this policy in subsequent years. Quantitative easing implies the systematic over-expansion of reserves held by banks with the central bank, as was shown in Chapter 4. Unlike the BoJ, however, the Federal Reserve and the Bank of England did not adopt quantitative targets for the reserves of commercial banks. Quantitative easing has also included the announcement of intent by the central bank to drive down long-term interest rates.36 Whether as quantitative easing or as plain lending to commercial banks, liquidity provision by central banks also represents a public subsidy to banks since it replaces risky private with safe public credit. Quantitative easing stands for the abandonment of independent central banking as well as inflation targeting, the hallmarks of the period of Great Moderation discussed in Chapter 7.

Quantitative easing stands for the abandonment of independent central banking as well as inflation targeting, the hallmarks of the period of Great Moderation discussed in Chapter 7. For, quantitative easing reflects the overlapping of fiscal and monetary policy as the central bank acquires state bonds, thus financing state expenditure. The abandonment of the central banking shibboleths of the 1990s and 2000s has been quietly acknowledged by the mainstream literature as attention has shifted to the effectiveness of central bank policy.37 Effectiveness in this context appears to refer, first and foremost, to the impact of quantitative easing on interest rates. Bernanke, Reinhart, and Sack observed several years before the crisis that such ‘non-standard’ measures could be effective, a view that has gradually become prevalent.38 There has, however, been debate on the relative importance of the channels through which quantitative easing operates, including the rebalancing of the portfolios of financial institutions and the direct impact of holding reserves.

Bernanke, Reinhart, and Sack observed several years before the crisis that such ‘non-standard’ measures could be effective, a view that has gradually become prevalent.38 There has, however, been debate on the relative importance of the channels through which quantitative easing operates, including the rebalancing of the portfolios of financial institutions and the direct impact of holding reserves. Both the Federal Reserve and the Bank of England consider that quantitative easing has a significant effect on interest rates in the asset markets; the effect on long-term rates, however, might decline with successive expansion programmes.39 The effectiveness of quantitative easing in influencing asset markets is an empirical issue which remains unclear. Of greater theoretical interest is that liquidity provision by central banks in the course of the crisis has followed Walter Bagehot’s long-standing advice in Lombard Street – to lend freely and settle accounts later.40 It is equally notable, however, that key parts of Bagehot’s prescription have been ignored – to lend to commercial banks only on excellent collateral and at punitive interest rates.


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

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

joint-stock companies Jones, Homer Journal of Economic Perspectives Journal of Political Economy JPMorgan Juncker Plan Kahn, Richard Kant, Immanuel Keynes, John Maynard and the backlash against globalization and the Bloomsbury Group and Bretton Woods System and budget deficits counter-cyclical policies and crowding out on depression/recession The Economic Consequences of the Peace fiscal activism and Friedman The General Theory of Employment, Interest and Money and government spending on government’s role in economy and Hayek and investors Keynesian revolution legacy life and times of and Marshall and Niemeyer and paradox of thrift at Paris Peace Conference Prices and Production and public investment and Robbins Robinson and Keynes/Keynesian economics and Schumpeter and ‘socializing investment’ A Tract on Monetary Reform and the Treasury A Treatise on Money wealth Keynes, John Neville Khrushchev, Nikita Knight, Frank Kodak Korea North South Krugman, Paul Krupp Kuznets, Simon labour force growth labour productivity and work incentive laissez-faire landowners Lassalle, Ferdinand Latin America currency crisis (1981–82) see also specific countries League of Nations Lehman Brothers Lenin, Vladimir Leontief, Wassily Lewis, Arthur Lewis, Barbara (‘Bobby’) Life Extension Institute Linda for Congress BBC documentary London London School of Economics and Political Science London Stock Exchange Long Depression (1880s) Lopokova, Lydia Louis XIV LSE see London School of Economics and Political Science Lucas, Jr, Robert Ma, Jack (Ma Yun) Maastricht Treaty macroprudential policy see also central banks; financial stability Malaysia Malthus, Thomas Manchester Mandela, Nelson manufacturing additive (3D printing) automation in China and deindustrialization GDP contribution in UK German high-tech and industrialization see also industrialization Japan ‘manu-services’ ‘March of the Makers’ mass-manufactured goods and national statistics reshoring rolling back deindustrialization process and Smith trade patterns changed by advanced manufacturing US Mao Zedong Maoism ‘March of the Makers’ marginal utility analysis marginalism market forces/economy ‘Big Bang’ (1986) competition see competition and economic equilibrium see economic equilibrium emerging economies see emerging economies Hayek and the supremacy of market forces ‘invisible hand’ and laissez-faire and Marx 4 self-righting markets supply and demand see supply and demand Marshall, Alfred on approach to economics and the backlash against globalization and the Cambridge School and decentralization Economics of Industry and education’s role in reducing inequality and inequality and Keynes and laissez-faire legacy life and times of marginal utility analysis and Marx and poverty Principles of Economics and utility theory Marshall, Mary, née Paley Marx, Heinrich Marx, Henriette, née Pressburg Marx, Jenny, née von Westphalen Marx, Karl and agriculture and the backlash against globalization Capital and capitalism and China and class Communist Manifesto (with Engels) communist theories A Contribution to the Critique of Political Economy doctoral thesis The Eighteenth Brumaire of Louis Bonaparte and Engels journalism life and times of and Marshall and rate of profit and Ricardo and Russia on service sector workers surplus value theory and the Young Hegelians Marx, Laura Marx, Louise Marxism and the Austrian School and unemployment see also Marx, Karl Mason, Edward mathematical economics Mauritius May, Theresa Meade, James median income Menger, Carl mercantilist policies see also Corn Laws Merkel, Angela Mexico middle class China and economic growth and economic inequality and European revolutionaries income and industrialization and Keynes and Heinrich Marx as proportion of world population and Schumpeter social resentment US Mill, James Mill, John Stuart On Liberty Principles of Political Economy Minsky, Hyman Mises, Ludwig von Mitchell, Wesley mobile phones/smartphones monetarism see also Friedman, Milton monetary policy and Friedman tools see also quantitative easing (QE) see also central banks monopolies and Marx natural and Robinson and Schumpeter and Smith and Sraffa monopsony Mont Pelerin Society Morgenthau, Henry mortgage-backed securities (MBS) mortgage lending and the 2008 financial crisis sub-prime Myanmar Myrdal, Gunnar Napoleon I Napoleon III Napoleonic Wars national/official statistics China UK US national debt Austria and central banks China and creditors and debt forgiveness and deficits euro area and foreign exchange reserves and investment Japan major economies owed to foreigners and quantitative easing and Ricardian equivalent UK US Vietnam National Health Service (UK) National Infrastructure Commission (UK) Navigation Acts neoclassical economics convergence hypothesis ‘neoclassical synthesis’ New Neoclassical Synthesis see also Fisher, Irving; Marshall, Alfred; Solow, Robert Neoclassical Synthesis see also Samuelson, Paul New Classicists see also Lucas, Jr, Robert New Deal New Institutional Economics see also North, Douglass New Keynesians see also Stiglitz, Joseph New Neoclassical Synthesis New Rhineland News (Cologne) New Rhineland News: Review of Political Economy (London) new trade theory New York Herald New York Times New York Tribune Newcomb, Simon Newsweek Niemeyer, Sir Otto Nissan Nixon, Richard Nokia non-tariff barriers (NTBs) Nordhaus, William North, Douglass and the backlash against globalization and development challenges doctoral thesis The Economic Growth of the United States from 1790 to 1860 and institutions Institutions, Institutional Change and Economic Performance life and times of Nobel Prize path dependence theory and Smith North, Elizabeth, née Case North Korea Northern Rock Oak Ridge National Laboratory Obama, Barack Occupy movement oil industry Organisation for Economic Co-operation and Development (OECD) Osborne, George Overseas Development Institute (ODI) Oxford University Balliol College Paine, Thomas Paley, Mary Paris Peace Conference path dependence theory see also North, Douglass Peel Banking Act Philips, Lion Philips (electronics company) physical capital Physiocrats Pigou, Arthur Cecil Piketty, Thomas pin-making Pinochet, Augusto Ponzi finance populism Portugal poverty aid and development see economic development challenges eradication/reduction frictional and Marshall and Marx and median income people lifted from in South Africa productivity and agriculture ‘benign neglect’ of Britain’s productivity puzzle and computers and economic growth and education and factor reallocation and Germany and Hayek incentives and industry/industrial revolution and innovation and investment Japan and jobs labour see labour productivity and land low and Marshall moving into higher sectors of and pricing raising and Schumpeter and secular stagnation slow economic and productivity growth and the future and specialization and technology total factor productivity and trade and wages Prohibition protectionism agricultural see also Corn Laws Navigation Acts public-private partnerships public investment and Keynes public spending general government spending see government spending public investment see public investment squeeze see also austerity Puerto Rico quantitative easing (QE) Quantity Theory of Money see also Friedman, Milton; monetarism; Equation of Exchange Rand, Ayn RAND Corporation rate of profit rational expectations theory Reagan, Ronald recession/depression debt-deflation theory of depression Great Depression see Great Depression (1930s) Great Recession (2009) Greece ‘hangover theory’ of Hayek on and Keynes Long Depression (1880s) second recession (1937–38: recession within the Depression) in UK 1970s redistribution Regional Comprehensive Economic Partnership (RCEP) Reich, Robert reindustrialization Reisinger, Anna Josefina Remington Rand rent-seeking research and development (R&D) investment China Research in Motion (RIM) retail trade Rhineland News Ricardian equivalence Ricardo, David and the backlash against globalization and class comparative advantage theory and the Corn Laws Essay on the Influence of a Low Price of Corn on the Profits of Stock The High Price of Bullion international trade theory as a landlord life and times of as a loan contractor and Marx On the Principles of Political Economy and Taxation and Schumpeter and Smith wealth Ricardo, Priscilla Robbins, Lionel Robinson, Austin Robinson, James Robinson, Joan The Accumulation of Capital and the AEA and the backlash against globalization and communism Economic Philosophy The Economics of Imperfect Competition Essays in the Theory of Employment and imperfect competition Introduction to the Theory of Employment and Keynes and Keynesian economics life and times of and monopolies monopsony theory and Schumpeter and unemployment wage determination theory robotics Rodrik, Dani Rolls-Royce Roosevelt, Franklin D New Deal Russia 1905 Revolution and Lenin and Marx Samsung Samuelson, Paul and the backlash against globalization Economics factor-price equalization theorem Nobel Prize savings for capital investment and inflation and Keynes and the ‘paradox of thrift’ Say, Jean-Baptiste Schmoller, Gustav von Schumpeter, Anna, née Reisinger Schumpeter, Gladys, née Seaver Schumpeter, Joseph and the backlash against globalization as banker/investor Business Cycles and capitalism Capitalism, Socialism and Democracy ‘creative destruction’, innovation and ‘The Crisis of the Tax State’ and the Econometric Society economics and entrepreneurs on Fisher and Hayek History of Economic Analysis and Keynes legacy life and times of The Nature and Content of Theoretical Economics and perfect competition and Ricardo and Robinson Theory of Economic Development wealth Schumpeter, Romaine Elizabeth, née Boody Schumpeter Group of Seven Wise Men Schwartz, Anna Jacobson Schwarzenegger, Arnold Scottish Enlightenment Seaver, Gladys Ricarde see Schumpeter, Gladys secular stagnation self-interest services sector China and deindustrialization financial services see financial services global trade in services human capital investment invisibility of liberalization ‘manu-services’ and Marx move away from and national statistics output measurement productivity and innovation and Smith Trade in Services Agreement (TiSA) UK US shadow banking Shiller, Robert silver Singapore Skidelsky, Robert skill-biased technical change skills shortage small and medium-sized enterprises (SMEs) smartphones/mobile phones Smith, Adam and the backlash against globalization as Commissioner of Customs for Scotland economic freedom on ‘invisible hand’ of market forces and laissez-faire economics legacy life and times of and manufacturing and Marx and North and Physiocracy on rate of profit and rebalancing the economy and Ricardo and the services sector and state intervention The Theory of Moral Sentiments The Wealth of Nations social capital social networks social services socialism communist see communism vs welfare state capitalism Solow, Barbara (‘Bobby’), née Lewis Solow, Robert and the backlash against globalization with Council of Economic Advisers doctoral thesis economic growth model ‘How Economic Ideas Turn to Mush’ John Bates Clark Medal and Keynesian economics life and times of Nobel Prize Presidential Medal of Freedom and technological progress Sony Sorrell, Sir Martin South Africa South Korea Soviet Union and China Cold War collapse of see also Russia Spain specialization spontaneous order Sraffa, Piero stagflation Stanley Black & Decker state government regulation intervention in the economy laissez-faire STEM (science, technology, engineering and mathematics) workers sterling Stigler, George Stiglitz, Joseph stocks and Fisher and interest rates US railroad Strachey, Lytton Strahan, William Strong, Benjamin Sturzenegger, Federico Summers, Lawrence supply and demand see also market forces/economy: ‘invisible hand’ Sustainable Development Goals (SDGs) Taiwan Tanzania tariffs taxation and austerity devolved powers of flat for government deficit spending before Great Depression and inequality and investment Japan and Marshall negative income tax to pay off national debt Pigouvian tax progressive and Reagan redistribution through Schumpeter on Smith on Taylor, John Taylor, Overton H.

Their conclusion is that monetary policy was the culprit, specifically the Fed prematurely tightening the money supply, which they argued caused the crash and also led to a second economic downturn, known as a ‘recession within the Depression’, of 1937–38. So, what would Friedman say about the use of ‘unconventional’ monetary policy in the aftermath of the Great Recession with its parallels to the 1930s? Central banks have now deployed a dazzling array of policies, including quantitative easing (cash injections) and even negative interest rates (where commercial bank deposits at the central bank are being charged) to get more money into the economy. What would Friedman make of the activities of central banks which are largely operating in unknown territory? The next pair of authors put forward contrasting views about the fundamental drivers of how an economy grows and develops.

The US did devalue its currency and leave the gold standard but by 1933 the economy still wasn’t recovering. Fisher had believed that confidence would return the economy to prosperity immediately, but it did not. Nearly a century later, as Japan’s experience shows, it is clear that reflating an economy is not as easy as Fisher thought. Japan has undertaken a number of periods of aggressive monetary policies with the central bank injecting cash through quantitative easing (QE) programmes. It seems that the war against deflation cannot be won simply through robust action from the central bank. Combating deflation requires a change in consumer attitudes and firms’ behaviour, so it’s a more complex process than it appears. In a 2002 speech, Ben Bernanke argued that Japan should consider a ‘helicopter money drop’.18 It would inject money directly into the economy; in essence, a free gift of money to citizens.


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

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

There was a moment of great tension when, under joint pressure from the United States and others, Merkel resisted and said that, after the war, the Allies had given monetary policy autonomy to the Bundesbank and they had to live with it now. Quantitative Easing The differences between German and French attitudes again became very apparent in the fall of 2014 when inflation expectations dropped across Europe, including in Germany. The ECB was considering large-scale purchases of government debt from all member states of the euro area. It had strong support from the French side, while Germans mostly opposed quantitative easing. Further details of this program, which was announced in January 2015, are discussed in chapter 15. Policy Recommendations Solvency and liquidity are difficult to distinguish in practice. Should debt prove to be unsustainable, debt restructuring should be possible with as little disruption as possible.

The chasm between Germany and the ECB opened when the governing council decided to start purchasing government debt. This happened in May 2010, well before there was any project of quantitative easing in the euro area. The first ECB asset purchase program was the May 2010 Securities Markets Programme (SMP), which for the first time allowed National Central Banks (NCBs) to “conduct outright interventions in the euro-area public and private debt securities markets.”37 The ECB embarked on purchases of some government debt for reasons not directly related to monetary accommodation. The purposes of the first programs were different from quantitative easing. The stated objective was twofold: preserve financial stability and allow efficient implementation of monetary policy in all parts of the euro area. In May 2010, the central banks of the Eurosystem were allowed for the first time to purchase government bonds on secondary markets on a large scale.

At his first summit as president on June 27, 2012, as he set out his “vision of growth,” he was firmly blocked by Merkel, who had said a few days earlier that Eurobonds would never be created “in my lifetime.”25 As she told the German Parliament, “Apart from the fact that instruments like Eurobonds, Eurobills, debt redemption schemes and much more are not compatible with the constitution in Germany, I consider them wrong and counterproductive.”26 Several times during the following year, Hollande kept mentioning Eurobonds, knowing that he was confronting Merkel on an issue on which she could and would never yield. ESM and QE: Eurobond through the Backdoor In a sense, the bonds issued by the European Stability Mechanism (ESM) can be seen as Eurobonds of all euro-member states. Likewise, when the ECB started its quantitative easing (QE) measure in January 2015, several German observers complained prior to the ECB QE announcement that such an intervention would be an introduction of Eurobonds through the backdoor. The ECB did not want to undertake fiscal decisions and hence initially limited joint loss sharing to 20 percent. As described in detail in chapter 15, the lion’s share of possible losses has to be absorbed by the relevant national central bank.


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The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay by Guy Standing

3D printing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Bernie Sanders, Big bang: deregulation of the City of London, bilateral investment treaty, Bonfire of the Vanities, Boris Johnson, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, cashless society, central bank independence, centre right, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, credit crunch, crony capitalism, crowdsourcing, debt deflation, declining real wages, deindustrialization, disruptive innovation, Doha Development Round, Donald Trump, Double Irish / Dutch Sandwich, ending welfare as we know it, eurozone crisis, falling living standards, financial deregulation, financial innovation, Firefox, first-past-the-post, future of work, gig economy, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, income inequality, information retrieval, intangible asset, invention of the steam engine, investor state dispute settlement, James Watt: steam engine, job automation, John Maynard Keynes: technological unemployment, labour market flexibility, light touch regulation, Long Term Capital Management, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, means of production, mini-job, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, nudge unit, Occupy movement, offshore financial centre, oil shale / tar sands, open economy, openstreetmap, patent troll, payday loans, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, precariat, quantitative easing, remote working, rent control, rent-seeking, ride hailing / ride sharing, Right to Buy, Robert Gordon, Ronald Coase, Ronald Reagan, Sam Altman, savings glut, Second Machine Age, secular stagnation, sharing economy, Silicon Valley, Silicon Valley startup, Simon Kuznets, sovereign wealth fund, Stephen Hawking, Steve Ballmer, structural adjustment programs, TaskRabbit, The Chicago School, The Future of Employment, the payments system, The Rise and Fall of American Growth, Thomas Malthus, Thorstein Veblen, too big to fail, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, Y Combinator, zero-sum game, Zipcar

CONTENTS Title Page Glossary of Acronyms Preface Chapter 1: The Origins of Our Times Chapter 2: The Shaping of Rentier Capitalism Chapter 3: The Plague of Subsidies Chapter 4: The Scourge of Debt Chapter 5: Plunder of the Commons Chapter 6: Labour Brokers: The Precariat Bears the Strain Chapter 7: The Corruption of Democracy Chapter 8: Rent Asunder: The Precariat’s Revolt Index Copyright GLOSSARY OF ACRONYMS CETA Comprehensive Economic and Trade Agreement ECB European Central Bank EU European Union GDP Gross Domestic Product G20 Group of nineteen major economies and the European Union ILO International Labour Organization IMF International Monetary Fund ISDS Investor–State Dispute Settlement MGI McKinsey Global Institute MPS Mont Pelerin Society NHS National Health Service (UK) OECD Organisation for Economic Cooperation and Development (thirty-four mainly industrialised member countries) ONS Office for National Statistics (UK) PAC Parliamentary Accounts Committee (UK) PFI Private Finance Initiative (UK) QE Quantitative Easing TPP Trans-Pacific Partnership TTIP Transatlantic Trade and Investment Partnership TUC Trades Union Congress (UK) UK United Kingdom UN United Nations USA United States of America WIPO World Intellectual Property Organization WTO World Trade Organization PREFACE This book is about something worse than corruption by individuals or companies. It is about the uncharted corruption of a claimed ideal – ‘free markets’ – and how economies are being rigged to favour owners of assets – the rentiers – while depressing incomes from labour.

Mark Carney was prised from being head of Canada’s central bank at vast public expense. Whatever his qualities, this was unprecedented. Could one imagine a foreigner being appointed to run the US Federal Reserve or France’s national bank? A second feature has been the resort by governments and central banks since the crash to inject cash into the banking system, to bail out failing banks and to pump up the money supply to stimulate growth via ‘quantitative easing’. QE is discussed later in this chapter. Here it is enough to recall the self-serving statement used to justify the bailouts, that the banks were ‘too big to fail’. The cringing justification for giving them vast amounts of public money was that if they went bankrupt due to their recklessness the contagion effects would have sunk the whole economy. So their owners and managers were helped to restore their lavish earnings.

QE AND CHEAP MONEY ‘Bankers have been the biggest beneficiaries, with their twenty- or thirty-times leveraged balance sheets. Asset managers and hedge funds have benefited, too. Owners of property have made out like bandits. In fact, anyone with assets has grown much richer. All of us who work in financial markets owe a debt to QE.’ Paul Marshall, chairman of Marshall Wace, a London-based hedge fund The clunky term quantitative easing, QE, entered the popular lexicon in the wake of the 2008 financial crash. It involves creating money for banks and other financial intermediaries to lend to companies and consumers. The central bank does this by buying government bonds and other debt from the banking sector, giving it low-cost funds to finance investment. All the major central banks – the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan – have operated QE and related ‘cheap money’ policies.


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Platform Capitalism by Nick Srnicek

3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, collaborative economy, collective bargaining, deindustrialization, deskilling, disintermediation, future of work, gig economy, Infrastructure as a Service, Internet of things, Jean Tirole, Jeff Bezos, knowledge economy, knowledge worker, liquidity trap, low skilled workers, Lyft, Mark Zuckerberg, means of production, mittelstand, multi-sided market, natural language processing, Network effects, new economy, Oculus Rift, offshore financial centre, pattern recognition, platform as a service, quantitative easing, RFID, ride hailing / ride sharing, Robert Gordon, self-driving car, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, software as a service, TaskRabbit, the built environment, total factor productivity, two-sided market, Uber and Lyft, Uber for X, uber lyft, unconventional monetary instruments, unorthodox policies, Zipcar

But, stuck at the zero lower bound, policymakers have been forced to turn toward more unconventional monetary instruments.24 The most important of these has been ‘quantitative easing’: the creation of money by the central bank, which then uses that money to purchase various assets (e.g. government bonds, corporate bonds, mortgages) from the banks. The United States led the way in using quantitative easing in November 2008, while the United Kingdom followed suit in March 2009. The European Central Bank (ECB), due to its unique situation as a central bank of numerous countries, was slower to act, although it eventually began purchasing government bonds in January 2015. By the beginning of 2016, central banks across the world had purchased more than $12.3 trillion worth of assets.25 The primary argument for using quantitative easing is that it should lower the yields of other assets. If traditional monetary policy operates primarily by altering the short-term interest rate, quantitative easing seeks to affect the interest rates of longer term and alternative assets.

If traditional monetary policy operates primarily by altering the short-term interest rate, quantitative easing seeks to affect the interest rates of longer term and alternative assets. The key idea here is a ‘portfolio balance channel’. Given that assets are not perfect substitutes for one another (they have different values, different risks, different returns), taking away or restricting supply of one asset should have an effect on demand for other assets. In particular, reducing the supply of government bonds should increase the demand for other financial assets. It should both lower the yield of bonds (e.g. corporate debt), thereby easing credit, and raise the asset prices of stocks (e.g. corporate equities) and subsequently create a wealth effect to spur spending. While the evidence is still preliminary, it does seem that quantitative easing has had an effect in this way: corporate yields have declined and stock markets have surged upwards.26 It may have had an effect on the non-financial sectors of the economy as well, by making much of the economic recovery dependent on $4.7 trillion of new corporate debt since 2007.27 Most important for our purpose is the fact that the generalised low interest rate environment built by central banks has reduced the rate of return on a wide range of financial assets.

Jones, John Philip. 1985. ‘Is Total Advertising Going Up or Down?’ International Journal of Advertising, 4 (1): 47–64. Jourdan, Adam, and John Ruwitch. 2016. ‘Uber Losing $1 Billion a Year to Compete in China’. Reuters. 18 February. http://www.reuters.com/article/uber-china-idUSKCN0VR1M9 (accessed 27 May 2016). Joyce, Michael, Matthew Tong, and Robert Woods. 2011. ‘The United Kingdom’s Quantitative Easing Policy: Design, Operation and Impact’. Quarterly Bulletin, Q3: 200–212. Kamdar, Adi. 2016. ‘Why Some Gig Economy Startups Are Reclassifying Workers as Employees’. On Labor: Workers, Unions, and Politics. 19 February. http://onlabor.org/2016/02/19/why-some-gig-economy-startups-are-reclassifying-workers-as-employees (accessed 27 May 2016). Kaminska, Izabella. 2016a. ‘Davos: Historians Dream of Fourth Industrial Revolutions’.


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The Left Case Against the EU by Costas Lapavitsas

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

That step signalled a significant relaxation of the rule that the central bank would not purchase the public debt of its member states.8 However, the policy was never tested in practice as the pressure on the Eurozone abated soon after the announcement of the policy of Outright Monetary Transactions was made by the ECB. The greatest increase in liquidity provision actually took place after 2015 in the form of quantitative easing that witnessed the ECB buying public bonds of all member states, though still in secondary markets. The balance sheet of the central bank expanded greatly and its liabilities rose to more than 3 trillion euros by 2016. Quantitative easing, quite apart from the vital support it gave to banks, also supported a gradual economic recovery across the EU, eventually allowing a return to mild growth by 2017. But the policies of the ECB created tensions with the Bundesbank since they have involved by-passing the rule that the central bank of the EMU would not purchase public debt, even if the purchases of the ECB were still not made in the primary markets.

The main factor leading to recession was the decline in investment, which collapsed completely in the periphery. For Greece in particular the collapse of investment led to a historic retrogression of the economy. Given the austerity measures and the downward pressure on wages and pensions, consumption also came under acute pressure. The only boost to aggregate demand in the Eurozone during this period was provided by the ECB, particularly after quantitative easing began in 2015.14 Even so, it took years before the effect of quantitative easing was actually observed in growth rates. Only in 2017 did the economy of the Eurozone as a whole begin to register significantly positive growth. Moreover, the fundamental imbalances of the Eurozone have not been addressed. Figure 1 shows that wage repression in Germany has not been substantially lifted, even though nominal wage growth has accelerated compared to the 2000s.

Perhaps Varoufakis hoped that the threat of potential disruption in the global markets would force the lenders into concessions. He also seemed to lay great store by a possible Greek threat unilaterally to write off some of the country’s (proportionately negligible) debt to the ECB. Apparently that unilateral action would have created insuperable legal complications in Germany, potentially forcing the ECB to abandon quantitative easing. There is no need to weigh these arguments any further, however, as events speak for themselves. At the first Eurogroup meeting attended by the new government, held on 11 February 2015, the lenders were implacable and demanded full compliance with the existing bail-out conditions. The SYRIZA side did not just lose the battle, it suffered a complete rout.39 In an agreement signed on 20 February, Varoufakis agreed fully to honour the country’s obligations with regard to debt and to desist from unilateral actions.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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

It could be a funding problem, in which the US Treasury was unable to raise money on reasonable terms. Or it could result from a plunge in the dollar, leading to inflationary fears. Indeed, quantitative easing could go horribly wrong, as it did in the Weimar Republic. Suddenly, all the newly created money (much of which is sitting idly in the banking system) could wash back into the global economy, driving up prices. Remember also that Western countries have used up a lot of their policy options. In the middle of 2011, interest rates were 1 per cent or below almost across the board. Further fiscal stimulus looked unlikely. And the potential impact of quantitative easing was far from clear. In a speech in October 2010, Mervyn King, the governor of the Bank of England, called for a ‘grand bargain’ between the major players in the world economy.8 ‘The risk is that unless agreement on a common path of adjustment is reached, conflicting policies will result in an undesirably low level of world output, with all countries worse off as a result,’ he said.

Gold is no one else’s liability; you can own it outright. Paper or electronic money is always a claim on someone else, whether a bank or a government. Modern money is debt and debt is money. It is no coincidence that debt levels have exploded in the last forty years, culminating in the credit crisis of 2007 and 2008 from which the world is still recovering. In response to that crisis, new money was created via a tactic called quantitative easing (QE) – central bankers created money to buy government bonds (and other assets). The creation of money to finance government deficits is something that would have horrified the sound-money men of Bryan’s era. But such tactics are hardly a surprise, now that governments and not just farmers have huge debts. The philosopher John Stuart Mill warned in The Principles of Political Economy, published in 1848, that ‘the issuers may have, and in the case of a government paper always have, a direct interest in lowering the value of the currency, because it is the medium in which their own debts are computed’.

So a bit like the porridge of Goldilocks, we want a money supply that is not too hot (commonplace), not too cold (scarce) but ‘just right’. Mankind has tried to find that balance in many different ways. Some politicians and voters have been tempted by money creation in the same way that the French regent was tempted by John Law. Modern economists mostly agree that monetary stimulus can be effective in reviving the economy. The twenty-first-century tactic of quantitative easing is a high-tech version of the same theory. Imagine, however, that you are a creditor or a merchant selling goods. Your debtor or customer offers to pay you back, not in pounds or dollars, but in Monopoly money. You might not regard this as payment at all. The fundamental worry of creditors is that governments can issue as much money as they like. Indeed, the concept is built into the rules of the Monopoly board game.


pages: 466 words: 127,728

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

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

Nominal growth equals real growth plus inflation. Since real growth is anemic, the central banks must cause inflation to have any hope of increasing nominal growth and reducing these debt-to-GDP ratios. When policy interest-rate cuts are no longer possible because the rates are effectively zero, quantitative easing, designed in part to import inflation through currency devaluation, is the central bankers’ preferred technique. The Bank of England (BOE) has engaged in four rounds of quantitative easing (QE), beginning in March 2009. Subsequent rounds were launched in October 2011, February 2012, and July 2012. Increased asset purchases have ceased for the time being, but the BOE’s near-zero-interest-rate policy has continued. The BOE is refreshingly candid about the fact that it is targeting nominal rather than real growth, although it hopes that real growth might be a by-product.

The European monetary standard prior to Charlemagne was a gold sou, derived from solidus, a Byzantine Roman coin introduced by Emperor Constantine I in A.D. 312. Gold had been supplied to the Roman Empire since ancient times from sources near the Upper Nile and Anatolia. However, Islam’s rise in the seventh century, and losses in Italy to the Byzantine Empire, cut off trade routes between East and West. This resulted in a gold shortage and tight monetary conditions in Charlemagne’s western empire. He engaged in an early form of quantitative easing by switching to a silver standard, since silver was far more plentiful than gold in the West. He also created a single currency, the livre carolinienne, equal to a pound of silver, as a measure of weight and money, and the coin of the realm was the denire, equal to one-twentieth of a sou. With the increased money supply and standardized coinage, along with other reforms, trade and commerce thrived in the Frankish Empire.

Both countries are out on a limb, with printing presses, insufficient gold, no monetary allies, and no Plan B. Japan and the U.K. are part of a global monetary experiment orchestrated by the U.S. Federal Reserve and articulated by former Fed chairman Ben Bernanke in two speeches, one given in Tokyo on October 14, 2012, and one given in London on March 25, 2013. In his 2012 Tokyo speech, Bernanke stated that the United States would continue its loose monetary policy through quantitative easing for the foreseeable future. Trading partners therefore had two choices. They could peg their currencies to the dollar, which would cause inflation—exactly what the GCC was experiencing. Or, according to Bernanke, those trading partners could allow their currencies to appreciate—the desired outcome under his cheap-dollar policy—in which case their exports would suffer. For trading partners that complained that this was a Hobson’s choice between inflation and reduced exports, Bernanke explained that if the Fed did not ease, the result would be even worse for them: a collapsing U.S. economy that would hurt world demand as well as world trade and sink developed and emerging markets into a global depression.


pages: 338 words: 104,684

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

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

In addition to buying US Treasuries, the Fed also purchased mortgage-backed securities (MBS) and bonds issued by government-sponsored mortgage enterprises Fannie Mae and Freddie Mac. 53. The Fed officially ended its quantitative easing program in 2014. At that point, the Fed held $2.8 trillion in US Treasuries on its balance sheet. That was 22 percent of the $12.75 trillion in federal debt held by the public. 54. For a very detailed look at this, see Scott T. Fullwiler, “Paying Interest on Reserve Balances: It’s More Significant than You Think,” Social Science Research Network, December 1, 2004, papers.ssrn.com/sol3/papers.cfm?abstract_id=1723589. 55. Although they were used to carry out quantitative easing, Fed chair Janet Yellen said she hoped the Fed would never have to do it again. She also said the Fed might need to consider buying a broader range of assets if it ever had to do quantitative easing again. 56. This would require authorization to run overdraft, platinum coin, or a new digital currency. 57.

It was a fairly mild recession, but the damage had been done.51 As we’ll see in the next chapter, the Clinton surpluses had weakened private sector balance sheets, magnifying the damage caused by the arrival of the Great Recession, which began in 2007. The Great Recession changed the way the Federal Reserve conducts monetary policy. In November 2008, the Fed launched the first of three rounds of a massive bond-buying program called quantitative easing.52 Among other things, the Fed hoped its program would help stimulate the US economy by lowering long-term interest rates. By the time it was over, the Fed had gobbled up some $4.5 trillion in bonds, including nearly $3 trillion in US Treasuries.53 In addition to using quantitative easing to push longer-term interest rates lower, the Fed also changed the way it managed its short-term interest rate. Instead of buying and selling Treasuries to add and subtract reserves, the Fed switched to a “more direct and more efficient method of interest rate support.”54 It simply started paying interest on reserve balances.

So I thought maybe this might help. So thank you for listening. Yeah, thanks. Bye. Out of the mouths of babes, as they say. Amy sees problems that need solving. Underfunded schools and a National Health Service that desperately needs more public investment. She also witnessed the Bank of England cranking up its digital printing press to manufacture £435 billion out of thin air, as part of its quantitative easing program following the financial crisis. To Amy, the solution seems obvious—forget about taxes and just run the printing press for the people! The hosts of the podcast were intrigued, and they reached out to me with the following question: The government can create money. So, what’s the point of taxes? Why does the government need to take my money in taxes?18 I told the folks at Planet Money that MMT recognizes at least four important reasons for taxation.19 We’ve already touched on the first.


pages: 262 words: 83,548

The End of Growth by Jeff Rubin

Ayatollah Khomeini, Bakken shale, banking crisis, Berlin Wall, British Empire, business cycle, call centre, carbon footprint, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, decarbonisation, deglobalization, energy security, eurozone crisis, Exxon Valdez, Fall of the Berlin Wall, fiat currency, flex fuel, full employment, ghettoisation, global supply chain, Hans Island, happiness index / gross national happiness, housing crisis, hydraulic fracturing, illegal immigration, income per capita, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Kickstarter, McMansion, Monroe Doctrine, moral hazard, new economy, Occupy movement, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, quantitative easing, race to the bottom, reserve currency, Ronald Reagan, South China Sea, sovereign wealth fund, The Chicago School, The Death and Life of Great American Cities, Thomas Malthus, Thorstein Veblen, too big to fail, uranium enrichment, urban planning, urban sprawl, women in the workforce, working poor, Yom Kippur War, zero-sum game

Unfortunately, the huge deficits we’ve run up since the last recession are very real bills that will need to be paid. Central banks are running printing presses almost nonstop to kick-start economic growth. In the United States, the Fed calls this tactic “quantitative easing”—a fancy way of saying the Fed is finding ways to pour as much new money into the system as it can. Typically, the Fed sticks to using its control over short-term interest rates to help strengthen the economy. But with those interest rates already at zero, Bernanke and Co. have needed to reach further into their bag of tricks. Under its program of quantitative easing, the Fed is buying longer-term government bonds in an attempt to inject new life into the economy. It works like this: By buying up US Treasury bonds, the Fed is trying to bring down long-term interest rates.

Federal Reserve chairman Alan Greenspan was spurred to hike interest rates by soaring oil prices, which were stirring inflation. Higher interest rates pricked the housing bubble, and the rest of the world was dragged down when the bubble burst. The Fed’s new chairman, Ben Bernanke, appears to be undeterred by the policy failures of his predecessor. His efforts to stimulate economic growth with rock-bottom interest rates and trillion-dollar quantitative easing programs will prove just as unsuccessful as Greenspan’s attempts to keep the economy afloat. Bernanke believes that holding interest rates near zero will encourage Americans to spend money, particularly on new homes. But what’s holding back the housing market isn’t the cost of taking out a mortgage, but a lack of jobs and economic growth. And that has little to do with the Fed’s monetary policy.

A lower rate of return on long-term government bonds, considered a relatively safe haven in times of financial uncertainty, makes other investments more attractive by comparison. Investors typically park huge sums of cash in long-term US bonds in an attempt to ride out a financial storm. By lowering the returns on those bonds, the Fed is trying to steer money into other parts of the financial system where it can do more good for the economy. As part of its quantitative easing program, the Fed also entered the market for mortgage-backed securities. Buying these securities allows the Fed to effectively lower mortgage rates, which reduces borrowing costs for potential homeowners, a move the Fed hopes will help to stimulate the housing market. By engineering a more modest return on government bonds, the Fed is also trying to curb the giant appetite for US dollars among global bond investors.


pages: 701 words: 199,010

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

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

They also announced the second phase of their quantitative easing technique. Instead of just buying mortgage securities, they agreed to begin buying up to $300 billion of longer-term Treasury securities over the next six months. They split up this buying among Treasury securities ranging from a 2-year maturity to a 10-year maturity. This program of buying long-dated securities to try and force their yields down has become known as QE1 (quantitative easing 1). Although it was innovative, it was not only not a new idea, but had already been put into practice by the Japanese between 2001 and 2004. During this period, the Japanese central bank bought long-term Japanese bonds. Some have argued that this policy was successful in stimulating Japan’s output for a period of two and a half years.4 The quantitative easing in the United States continued further when on November 3, 2010, the Fed announced that it would purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.5 This was called QE2 (quantitative easing 2).

This was another example of the Fed using unconventional measures to provide liquidity to the system, since banks were not funding the short-term borrowing needs of U.S. corporations. On November 25, 2008, the Federal Reserve created the Term Asset-Backed Securities Lending Facility (TALF), which allowed the Fed to lend up to $200 billion on a nonrecourse basis to holders of AAA-rated asset-backed securities. Quantitative Easing On November 25, 2008, the Fed announced perhaps its most unusual program of quantitative easing.3 Rather than simply manipulate the short-term Fed Funds rate, the Federal Reserve announced that it would purchase directly mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. This was the Fed’s second big innovation. With short-term interest rates already basically at zero and the economy still sputtering, the Fed decided to manipulate the long-term market for securities directly.

Some have argued that this policy was successful in stimulating Japan’s output for a period of two and a half years.4 The quantitative easing in the United States continued further when on November 3, 2010, the Fed announced that it would purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.5 This was called QE2 (quantitative easing 2). There have been both critics and supporters of the quantitative easing programs. Ultimately, it is hard to determine whether or not these policies helped stabilize the financial markets since there were so many other factors present. Also, it is impossible to do the counterfactual. That is, what would have happened had the Fed not engaged in these policies? Studies by researchers at the IMF believe that they did contribute to financial market stabilization.6 FIGURE N.3 shows the behavior of key interest rates after the QE1 and QE2 program announcements.


pages: 479 words: 113,510

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

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

Even during her swearing-in: FRB: Janet Yellen, “Remarks at the Ceremonial Swearing-In,” March 5, 2014, www.federalreserve.gov/newsevents/speech/yellen20140305a.htm. Yellen neglected to mention: Jon Hilsenrath, “Janet Yellen’s Human Message Gets Clouded,” Wall Street Journal, April 1, 2014. “I don’t think there is any doubt”: Phalguni Soni, “Why Richard Fisher Says Quantitative Easing Has Enabled the Rich,” MarketRealist.com, April 7, 2014, marketrealist.com/2014/04/richard-fisher-says-quantitative-easing-enabled-rich/. To justify her inaction: Adriene Hill, “Fed Stops Targeting 6.5% Unemployment,” MarketPlace.org, March 18, 2014, www.marketplace.org/2014/03/18/economy/fed-stops-targeting-65-unemployment. In March, I reported: From Investopedia: “The P/E 10 ratio uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle.

It took a few months, but the Fed’s mouth-to-mouth resuscitation brought gasping investment banks and hedge funds and giant corporations back to life. Wall Street rejoiced. But the Fed’s academic models never addressed one basic question: What happens to everyone else? In the decade following that fateful day, everyday Americans began to suffer the aftereffects of the Fed’s decision. By 2016, the interest rate still sat at the zero bound and the Fed’s balance sheet had ballooned to $4.5 trillion, thanks to the Fed’s “quantitative easing” (QE), the label given its continuing purchases of Treasuries and mortgage-backed securities. To what end? All around are signs of an economy frozen in motion thanks to the Fed’s bizarre manipulations of monetary policy, all intended to keep the economy afloat. The direct damage inflicted on our citizenry begins with our youngest minds and scales up to every living generation in our country’s midst.

Nor do they include the impromptu meetings like the one that Bernanke held at Jackson Hole in August 2007. As hedge funds tanked and credit markets trembled, Bernanke pulled a handful of top Fed officials into an empty conference room to talk about a possible Fed response. In the room: Geithner, Governors Kohn and Warsh, Dudley, and board secretary Brian Madigan. With these core supporters, Bernanke outlined his theories on the zero bound and quantitative easing. Geithner would later call the game plan the “Bernanke Doctrine.” (This meeting is absent from Bernanke’s memoir, perhaps because he knew it was less than kosher.) Though no action was taken at the time, substantive policy strategies were predetermined, to be fleshed out a year later at the Jackson Hole symposium in August 2008. No record was made of the meeting. Fisher and Rosenblum were not made aware of this secret discussion—an example of how Fed officials sometimes skirt transparency policies when it suits them.


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

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

There were two contrary responses in the form of letters to newspapers from my Keynesian friends Lord Richard Layard and Lord Robert Skidelsky, with many, many, more signatures for each. In the United States Paul Krugman was arguing strongly for a massive fiscal boost, while the New Classical economists of Chicago and Minnesota were skeptical of the need for, or the effectiveness of, any stimulus. Only among the central bankers of the United States and the United Kingdom was there agreement that the money supply had to be boosted by quantitative easing. Four years later and with hindsight, we can see that the crisis was severe – one of the deepest ever. We also know that the recovery is fragile, at best, in the UK and the US, and non-existent in the eurozone. With the possibility that the recovery may be destabilized by the slightest wrong turn, now is an opportune time to reflect on what went wrong. The problem was not so much with the economy but more importantly with economics and economists.

For its actual value is largely governed by the prevailing view as to what its value is expected to be.”2 The monetary authorities might try to pump more money into the system but people would prefer to leave the money idle, earning zero interest, than exchange it for bonds. There was a liquidity trap where the rate of interest reached a floor, and no further fall could be engineered by the monetary authorities. Recent policies of quantitative easing have seen Central Banks buying bonds and other assets on the open market to lower the rate of interest, both short term and long run. The short rate has reached a floor of below 0.5 percent and that is what a liquidity trap looks like. The novelty of terms such as consumption function and the marginal propensity to consume attracted the younger generation of economists. These terms looked more scientific and in tune with the then fashionable psychology.

The answer instead has been to allow Central Banks to buy bonds aggressively to pump money into the system. This policy originates from Milton Friedman and Anna Schwartz’s Monetary History of the United States.9 They blamed the severity of the Great Depression on the Fed’s policy of restricting the money supply. Ben Bernanke, the Fed Chairman who studied the Great Depression as his Ph.D. topic, took the lesson to heart. The policy of quantitative easing has been the norm for five years in the US and the UK. Japan has also joined the ranks. The European Central Bank is also contemplating adopting this strategy as the rate of inflation has fallen below 1 percent in the eurozone area. Keynes was skeptical about the efficacy of monetary policy to stimulate the economy out of depression. But the British recovery during the mid-1930s was based on monetary policy rather than fiscal policy.


pages: 537 words: 144,318

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

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

Now that the credit bubble has burst and banks and financials have imploded, what is next? We have huge deflationary forces that up until recently were self-reinforcing. These forces were only mitigated by record government interventions with liquidity provisions, interest rate cuts, quantitative easing, and fiscal stimulus. Now we have two enormous forces struggling against each other: one deflationary—the economy and the financial system—and one reflationary—stimulus of various types. We haven’t got a clue how these will play out, and it’s rather difficult balancing them. Quantitative easing, probably the correct course for central banks, is a difficult beast to control if market psychology turns quickly or if the real economy improves faster than expected. Because timely exit strategies will be tricky to implement, it is likely that they will come too early or too late.

However, this also makes alternatives more attractive. I am sure that one of these alternatives will indeed become very important fundamentally, but many will be bubbles. When you mention the end of fiat money, what do you mean? Regarding the end of fiat money, there is understandable concern about that concept. The global response to this crisis is massive reflation. Quantitative easing is now ubiquitous enough to be on CNN Headline News, whereas just two years ago, it was an arcane economics term. Quantitative easing is the budgetization of monetary policy—essentially printing money—and the examination of global central bank balance sheets confirms that it is global in scope and massive in scale. We all know that (1) money is ultimately a confidence trick, so policy credibility is very important; and (2) inflation unequivocally erodes savings and capital in the long term, which is one of the main reasons that price stability became such a focal point the past two decades and one of the standards for judging convergence.

The Experiment started with Greenspan, who preemptively and aggressively cut interest rates to head off the looming recession/depression in 2001-2003. It was a real-time experiment; it had never been done before. From 2003 to 2007, it appeared to have worked as easy money helped fuel another leg to the property and asset boom. I underestimated the potency of easy money when asset deflation emerges, perhaps because there was still another asset to inflate: property (see Figure 2.2). The hyper-experiment today, which includes the use of quantitative easing (QE) and bailouts, is a renewed attempt to prevent a cascade of defaults and preempt a deepening recession and possibly a prolonged depression. Figure 2.2 U.S. Home Prices and S&P 500 Index, 2000-2009 SOURCE: Bloomberg. It is very important, however, not to neglect the role of fiscal policy. The conventional argument is that Greenspan’s monetary policy was too easy, which created conditions for the equity bubble of the mid-to late 1990s and the housing bubble of 2002-2007.


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

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

Recall that the wealthiest 1 percent of Americans own about 40 percent of the nation’s wealth, and the picture becomes even more disturbing.64 prop trading In proprietary trading, banks bet their own money for their own benefit, as opposed to making such trading only on behalf of their clients. It is supposed to be banned by the forthcoming Volcker rule. quantitative easing (QE) An “unconventional” technique used by governments and central banks when interest rates are too low to go down any further, but the need for economic stimulus still exists. QE involves a government buying back its own bonds using money that doesn’t actually exist. It’s like borrowing money from somebody and then paying her back with a piece of paper on which you’ve written the word “Money”—and then, magically, it turns out that the piece of paper with “Money” on it is actually real money. Another way of describing quantitative easing would be if, when you look up your bank balance online, you had the further ability to add to it just by typing numbers on your keyboard.

But these digital ones and zeros measure the value of our labor and define a large part of our being, not just externally in terms of the work we do and where we live and what we own, but in terms of what we think, how we see our interests, with whom we identify, how we define our goals and ambitions, and often, perhaps too often, even what we think of ourselves in our deepest and innermost private being. And yet they’re just ones and zeros. And these ones and zeros are willed into being by governments, which can create more of them just by running a printing press; in fact, thanks to the miracle of quantitative easing, they don’t even need to do that, but instead can merely announce that there is now more electronic money. We’re inclined to think of money as a physical thing, an object, but that’s not really what it is. Modern money is mainly an act of faith—an act of credit, of belief. One of the lessons of the credit crunch was that this credit, this belief, can be vulnerable. A moment came when it wasn’t clear, even to people at the heart of the system—the high priesthood of money itself—that the ones and zeros were worth what they were supposed to be worth.

Although much of the coverage of the stock market focuses on how the price of shares goes up and down, history shows that about half the value of stocks has always come from the dividends they pay. dove A term often used in regard to inflation: an inflation dove is someone who thinks that the economy needs as much stimulus as it can get and that to raise interest rates would be a disaster. Inflation doves love quantitative easing and any other associated loose monetary policy. The opposite of a dove is a hawk. downgrade When a ratings agency lowers its rating on the debt issued by a company or country, that is a downgrade. Ratings agencies do that because they think the bond has grown in risk. A downgrade can have important consequences, because some types of investors, such a municipalities and public pension funds, are by law allowed to invest only in specific grades of debt: if a bond is downgraded, that can mean that some investors have no choice but to sell their bonds.


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The Global Minotaur by Yanis Varoufakis, Paul Mason

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

While QE can be branded ineffectual, for reasons outlined below, the assertion that the Fed’s QE will push America into another 1970s-like period of ever accelerating prices is ludicrous. Yet truth is not the currency in which the recalcitrant Right trades: terrifying impressions (that can be employed further to boost private appropriation of publically produced wealth) are! Quantitative easing as the most complex form of wishful thinking At the time of writing, the third round of quantitative easing, QE3, was in the air. It is worthwhile taking a look at what it means, because a great number of false accounts circulate whose profound error is particularly instructive regarding the nature of our Crisis. According to the Fed’s own announcement, every month (until further notice) America’s central bank will be buying $40 billion of paper titles backed by mortgages (so-called mortgage backed securities, or MBS).

Vandana Shiva, an Indian physicist and ecologist who directs the Research Foundation on Science, Technology and Ecology, offers a compelling explanation for the food crisis that had erupted in the developing nations just before the Crash of 2008. See Vandana Shiva (2005) Earth Democracy: Justice, sustainability, and peace, Cambridge, MA: South End Press. 5. Quantitative easing is usually referred to as a species of printing money. This is not strictly true. What the Fed is doing is purchasing from banks and other institutions all sorts of paper assets (US government bonds plus private companies’ bonds). It does this by creating overdraft facilities for these institutions, on which they can draw for the purposes of lending to others. But if these institutions do not lend to others (because they cannot find clients willing to borrow), the result is zilch. This is why I say that quantitative easing is an attempt to create money. The Fed’s tragedy is that it is trying to print money but finds it hard to succeed! 6. In Europe, politicians are even terrified of the bankers whose bacon they are still saving, daily, and to the tune of billions per month. 7.

In the United States, the Obama administration, following the Republicans’ victory in the November mid-term elections of 2010, is effectively bamboozled. With the government no longer able to pump-prime the economy with fiscal stimuli, the lonely task of tilting at the slow-burning Crisis has fallen on Ben Bernanke’s Fed. So the Fed, unhappily, is still desperately trying to increase the quantity of money circulating in the American economy by buying hundreds of billions of dollars’ worth of paper assets (quantitative easing is the name of the game).5 Bernanke knows that this is far from an ideal situation, but is left with no choice at a time of stalemate between the White House and Congress. In Europe, the Crisis has set in train centrifugal forces that are tearing the eurozone apart, setting the surplus economies, with Germany at the helm, against the stragglers, whose structural deficits cannot be cured, no matter how much belt-tightening goes on.


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

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

In the case of the US, Mr Haldane listed $3.8tn in money creation and $0.2tn in ‘collateral swaps’, both from the Federal Reserve. He also listed $2.1tn in ‘guarantees’, $3.7tn in ‘insurance’ and $0.7tn in ‘capital infusions’ (from the TARP), all of which came from the government. The total came to $10.5tn. 43. International Monetary Fund, Fiscal Monitor, April 2012, www.imf.org, Table 7. 44. Quantitative easing was first used by the Bank of Japan in 2001. See http://en.wikipedia.org/wiki/Quantitative_easing. 45. Bank for International Settlements, 83rd Annual Report 2013, Basel, 23 June 2013, http://www.bis.org/publ/arpdf/ar2013e.pdf, Figure VI.3, p. 69. 46. Fiscal data are from the IMF’s World Economic Outlook database, except where otherwise indicated. 47. Data on discretionary fiscal stimulus are taken from IMF, Fiscal Monitor, November 2010, www.imf.org, Box 1.1.

In essence, then, the developed countries’ most important central banks offered free or nearly free money to their banks from 2009 or, in some cases, from slightly earlier than that. It was little surprise that this official largesse to banks, not matched by comparable largesse from banks to their own borrowers – indeed accompanied by foreclosures on a grand scale in some countries – became a source of significant popular resentment. In addition, central banks adopted a wide range of ‘unconventional’ policies, including, notably, the policy known as ‘quantitative easing’ – expansion of the monetary base and central-bank purchases of longer-term assets.44 Such unconventional policies were aimed at financing banks, lowering yields on government bonds, increasing the money supply and easing credit supply. In domestic currency, the balance sheet of the ECB increased roughly threefold between 2007 and mid-2012, before shrinking modestly, while that of the Federal Reserve rose three and a half times and that of the Bank of England more than fourfold between 2007 and early 2013.45 To take the most important example, the US monetary base rose by $2.8tn between August 2008 and November 2013 – a sum equal to 17 per cent of annualized US gross domestic product in the third quarter of 2013.

After the crisis, much of the world found itself with close to zero nominal short rates. At that point, the debates revived. Both monetarists and most adherents of the contemporary orthodoxy argued that monetary policy could still work effectively, either by expanding the quantity of money or lowering the yield on other securities, particularly long-term bonds. One policy, it was thought, would achieve both those outcomes: quantitative easing, by which was meant the expansion of the monetary base. By using newly created central-bank money to buy bonds, the central bank could, it was believed, both expand the money supply and lower yields. Figure 37 shows what happened to US M2, the broadest measure of money the Federal Reserve publishes, after 1980.46 M2 consists of currency held by the public, plus deposit liabilities of financial institutions principally belonging to households.


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

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

RTPI Research Report no. 11, November. http://www.rtpi.org.uk/knowledge/research/projects/small-project-impact-research-spire-scheme/planning-as-market-maker/ Ryan-Collins, Josh. 2016. ‘Why You Can’t Afford a Home in the UK’. Medium. 16 February. https://medium.com/@neweconomics/why-you-can-t-afford-a-home-in-the-uk-44347750646a#.3xvhkhoi4. Ryan-Collins, Josh, Tony Greenham, R. A. Werner, and Giovanni Bernardo. 2013. Strategic Quantitative Easing. London: New Economics Foundation. http://www.neweconomics.org/publications/entry/strategic-quantitative-easing . Ryan-Collins, Josh, Tony Greenham, Richard Werner, and Andrew Jackson. 2012. Where Does Money Come From? A Guide to the UK Monetary and Banking System. 2nd ed. London: The New Economics Foundation. Ryan-Collins, Josh, Richard A. Werner, and Jennifer Castle. 2016. ‘A Half-Century Diversion of Monetary Policy? An Empirical Horse-Race to Identify the UK Variable Most Likely to Deliver the Desired Nominal GDP Growth Rate’.

ABBREVIATIONS ARLA Association of Residential Letting Agents BSA Building Societies Association BTL buy-to-let CAP Common Agricultural Policy CLT community land trust CMU Capital Markets Union CPI consumer price inflation CRE commercial real estate FPC Financial Policy Committee GDP gross domestic product HEW home equity withdrawal IHT inheritance tax IMF International Monetary Fund ISA Individual Savings Account LBTT land and buildings transaction tax LTI loan-to-income (ratio) LTV loan-to-value (ratio) LVT land value tax MBS mortgage-backed security MIRAS mortgage interest relief at source NIMBY not-in-my-back-yard OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries QE quantitative easing RMBS residential mortgage-backed security SDLT stamp duty land tax SMEs small and medium sized enterprises SPV special purpose vehicle GLOSSARY Bank capital – Bank capital can be considered as a bank’s ‘own funds’. For banks, capital mainly consists of common shares (also known as common equity) and retained earnings which can easily absorb losses and therefore protect them from insolvency.

Net wealth – The balance of a household’s assets subtracted from its liabilities. For example, if a household has savings of £50,000, owns a home worth £250,000 and has mortgage and credit card debts of £100,000, its net wealth will be £200,000. Property – In this book, property will be understood to refer to a spatially defined area of land and the structures on top of it that is legally owned by an individual or firm. Quantitative easing – An unconventional form of monetary policy where a central bank creates new money electronically to buy financial assets like government bonds from commercial banks and other financial institutions. Real estate – Property consisting of land or buildings. Residential mortgage-backed security (RMBS) – A type of asset-backed security that is secured by a collection of domestic mortgages. Section 106 – A section of the Town and Country Planning Act 1990 which allowed local planning authorities to enter into legally binding agreements with developers, with the latter having to provide certain public benefits as part of the development.


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

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

† When short-term interest rates hit zero, there was still some room for monetary policy through “unconventional measures,” such as quantitative easing. These, too, had only limited impact—not enough to restore Europe to full employment quickly. ‡ Ironically, one of the reasons that reunification was so costly was that Germany made a critical mistake in setting the exchange between East and West German marks at the wrong rate. Germany paid a high price for misguided exchange rate policies after 1990 and forced the crisis countries to do the same nearly 20 years later. § Of course, some may claim that the reason that the ECB did not give in to political pressure to monetize the debt of profligate governments was that strong strictures had been imposed on the ECB. But even in the United States, where in effect the national debt was monetized in quantitative easing, there was not inflation, largely because there was so much excess supply of goods and labor.

In its attempt to compensate for the absence of effective instruments with which to respond to asymmetric shocks (notably greater government spending) and with the short-term interest rate already at zero (even as most European countries had unacceptably high interest rates), the ECB got creative. First, it undertook aggressive quantitative easing, the name given to monetary stimulus that goes beyond lowering benchmark short-term rates to zero. It means buying not just short-term notes (the conventional approach of monetary policy), but also long-term bonds, and in some cases, bonds that were issued by the private sector. The bonds purchased via quantitative easing amounted to an average monthly pace of more than €60 billion from 2015 to 2017. The policy did lower long-term borrowing costs, especially for the countries that had been facing a debt crisis. Interest rates on Greek bonds fell to 4.4 percent and on Spanish bonds to 1.4 percent at the end of 2017.

■ This greater balance in focus should also be reflected in the ECB’s research agenda. Just as ECB research used to dwell on the reasons behind persistent inflation in certain sectors or geographies of the European economy, the central bank should now spend more time researching the causes of unduly low inflation and what can be done about it. The ECB undertook a valuable research exercise in 2015 and 2016, which showed that unorthodox monetary policy (such as quantitative easing) helped to expand aggregate demand in these periods of economic weakness.6 If central bankers can anxiously scan the horizon for wages that rise too fast and threaten to push prices higher, they can surely do so for persistently low inflation, deflation, and disinflation. ■ Make any inflation target symmetrical, or even biased toward preventing deflation, since periods of high unemployment are associated with deflationary pressures.


pages: 920 words: 233,102

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

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

The discussion is structured around whether or not an operation entails transactions in risky securities, with liquidity reinsurance facilities deferred to the next chapter since they come into their own during disasters and emergencies. APPLYING THE BALANCE-SHEET PRINCIPLES TO OPERATIONS IN DEFAULT-FREE GOVERNMENT INSTRUMENTS This section, on default-free operations, covers quantitative easing (QE), “helicopter money,” and operationalizing negative interest rates.12 The running theme is around where cooperation or coordination with the fiscal authority might be needed. Quantitative Easing and Government Debt Management The most basic operation is quantitative easing, which involves the central bank buying long-term government bonds with the dual purpose of injecting money into the economy and lowering long-bond yields. In terms of the state’s consolidated balance sheet, QE is equivalent to a combination of two operations: (1) the central bank buys Treasury bills via a “minimalist” open market operation; (2) it then enters into another transaction that swaps the bills for longer-term bonds.

3 Buchanan, “Constitutionalization of Money,” p. 255. 4 Smith, Rationale of Central Banking; Hayek, Denationalisation of Money; and Dowd, Private Money, which contains a short section entitled “Abolishing the Bank of England,” possibly explaining why Eddie George asked for a summary (Buchanan, “Constitutionalization”). 5 With thanks to Nellie Liang, Brookings Institution and former director for financial stability at the Fed Board, for comments on late drafts of this and the next chapter, which discusses whether a stability regime can meet the Design Precepts. 6 George, “Approach to Macroeconomic Management,” makes clear that the 1990s’ Bank of England leadership felt much more comfortable gaining operational independence after supply-side reforms in the 1980s had made the real economy more flexible, as that reduced the burden on demand management in accommodating shocks to the economy. 7 That story is broadly captured in Diamond and Dybvig, “Bank Runs.” 8 This is how Mervyn King persuaded the UK that quantitative easing was not inherently inflationary: we were addressing a problem of “not enough money” threatening deflation. By contrast, the Fed tends not to highlight the monetary part of quantitative easing (or of monetary policy more generally), which left it exposed to accusations that it risked runaway inflation by creating too much money. 9 Under the Hayek proposal, there would be competition between different standards chosen by the issuing banks themselves. For a (former) Bundesbanker’s view, see Issing, “Hayek, Currency Competition.” 10 Jackson’s veto hinged on monopoly rights and tax exemptions for a bank serving a public purpose but owned and largely controlled by private (including foreign) shareholders, which at the time was still the model for the Bank of England in London. 11 If the likelihood of deposit withdrawals and credit facility drawdowns are not highly correlated, the aggregate benefits increase (Kashyap, Rajan, and Stein, “Banks as Liquidity Providers”). 12 For recent advocacy of this, see Cochrane, “Towards a Run Free Financial System.”

A committee is needed because, with a single decision maker, it would be too easy for those making the appointment (the president or prime minister) to choose someone with their own preferences (an ally) rather than society’s preferences as framed in the objective. Thus, the committee should not be a rubber stamp for its chair. The members’ long terms should, for the same reason, be staggered. As a concrete example, when faced with the criticism that quantitative easing (QE) was a plot for central banks to finance governments cheaply by buying their bonds, and that independence had willingly but surreptitiously been surrendered, I found that the most persuasive argument, at least in the UK, was to point out that the Monetary Policy Committee contained four “external” members who were not part of the Bank of England’s senior executive. It was nearly always accepted that they would not have gone along with any such plot and would indeed have exposed it.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

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

By comparison with the 1970s, when it was the coincidence of inflation and unemployment that left economists clueless, now it is very cheap money coexisting with deflationary pressures, raising the spectre of ‘debt deflation’ and of a collapse of a pyramid of accumulated debt by far exceeding in size that of 2008. How much of a mystery the present phase of the long crisis of contemporary capitalism presents to its would-be management24 is nowhere more visible than in the practice of ‘quantitative easing’, adopted, under different names, by the leading central banks of the capitalist world. Since 2008, central banks have been buying up financial assets of diverse kinds, handing out new cash, produced out of thin air, to private financial firms. In return they receive titles to future income streams from debtors of all sorts, turning private debt into public assets, or better: into assets of public institutions with the privilege unilaterally to determine an economy’s money supply.

Right now, the balance sheets of the largest central banks have increased in the past seven years from around eight to more than twenty trillion dollars (see Figure 4.3, p. 127), not yet counting the gigantic asset buying programme started by the European Central Bank in 2014. In the process, central banks, in their dual roles as public authorities and guardians of the health of private financial firms, have become the most important, and indeed effectively the only, players in economic policy, with governments under strict austerity orders and excluded from monetary policymaking. Although quantitative easing has completely failed to counter the deflationary pressures in an economy like Japan – where it has been relied upon for a decade or more on a huge scale – it is steadfastly pursued for lack of alternatives, and nobody knows what would happen if cash-production by debt-purchasing was ended. Meanwhile in Europe, banks sell their no-longer-secure securities, including government papers, to the European Central Bank, either letting the cash they get in return sit with it on deposit, even if they have to pay negative interest on it, or they lend it to cash-strapped governments in countries where central banks are not allowed to finance governments directly, collecting interest from them at a rate above what they could earn in the private credit market.

Meanwhile in Europe, banks sell their no-longer-secure securities, including government papers, to the European Central Bank, either letting the cash they get in return sit with it on deposit, even if they have to pay negative interest on it, or they lend it to cash-strapped governments in countries where central banks are not allowed to finance governments directly, collecting interest from them at a rate above what they could earn in the private credit market. To this extent, quantitative easing at least serves to rescue, if nothing else, the financial sector.25 Decoupling Democracy As the crisis sequence took its course, the post-war shotgun marriage between capitalism and democracy came to an end.26 Again this was a slow, gradual development. There was no putsch:27 elections continue to take place, opposition leaders are not sent to prison, and opinions can still by and large be freely expressed in the media, both old and new.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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

To be fair, the Fed has moved to some extent on the first bullet point above: under the deeply confusing name of “quantitative easing,” it has bought both longer-term government debt and mortgage-backed securities. But there has been no hint of Rooseveltian resolve to do whatever is necessary: rather than being aggressive and experimental, the Fed has tiptoed up to quantitative easing, doing it now and then when the economy looks especially weak, but quickly ending its efforts whenever the news picks up a bit. Why has the Fed been so timid, given that its chairman’s own writings suggest that it should be doing much more? One answer may be that it has been intimidated by political pressure: Republicans in Congress went wild over quantitative easing, accusing Bernanke of “debasing the dollar”; Rick Perry, the governor of Texas, famously warned that something “ugly” might happen to Bernanke if he visited the Lone Star State.

Meanwhile, actual investors seemed not at all worried: interest rates on long-term U.S. bonds were low by historical standards as Bowles and Simpson spoke, and proceeded to fall to record lows over the course of 2011. Three other points are worth mentioning. First, in early 2011 alarmists had a favorite excuse for the apparent contradiction between their dire warnings of imminent catastrophe and the persistence of low interest rates: the Federal Reserve, they claimed, was keeping rates artificially low by buying debt under its program of “quantitative easing.” Rates would spike, they said, when that program ended in June. They didn’t. Second, the preachers of imminent debt crisis claimed vindication in August 2011, when Standard & Poor’s, the rating agency, downgraded the U.S. government, taking away its AAA status. There were many pronouncements to the effect that “the market has spoken.” But it wasn’t the market that had spoken; it was just a rating agency—an agency that, like its peers, had given AAA ratings to many financial instruments that eventually turned into toxic waste.

The sad irony is that back in 2000 Bernanke criticized the Bank of Japan for essentially having the same attitude, of being unwilling to “try anything that isn’t absolutely guaranteed to work.” Whatever the reasons for the Fed’s passivity, the point I want to make right now is that all the possible actions Professor Bernanke suggested for a time like this, but which Chairman Bernanke has not, in fact, tried, remain available. Joseph Gagnon, a former Fed official now at the Peterson Institute for International Economics, has laid out a specific plan for much more aggressive quantitative easing; the Fed should move ahead with that plan or something like it right away. It should also commit to modestly higher inflation, say, 4 percent over the next five years—or, alternatively, set a target for the dollar value of GDP that would imply a similar rate of inflation. And it should stand ready to do more if this proves insufficient. Would such aggressive Fed actions work? Not necessarily, but as Bernanke himself used to argue, the point is to try, and keep on trying if the first round proves inadequate.


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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

Government borrows money through the bond markets. The third is by actually creating money – printing it and creating it by other means such as quantitative easing. The fourth is by manipulating money – inflation. We have just seen how insidious this is. Let’s be idealistic for a moment and imagine that Bitcoin and other independent monies become the globally preferred means to make and receive payment. I do not see this as at all likely in the short term. But in the longer term, I do – and the implications are enormous. In a flash, the ability for a government to fund itself through the manipulation of money disappears. You can’t obfuscate bitcoin supply – inflation is transparent. You can’t ‘quantitatively ease’ bitcoins. Governments – without a very aggressive and potentially impractical bitcoin confiscation scheme – will struggle to use your bitcoins to bail themselves out.

It was a ‘global financial tsunami’; we were ‘on the brink’ and ‘staring into the abyss’.1 Capitulating stock markets, bankruptcies, bank runs – events came thick and fast and, at first, nobody seemed to know quite what to do. Then, under immense pressure from the world of finance, governments and central banks reacted dramatically. They created money and credit on a scale unprecedented in human history. Banks were bailed out, interest rates were slashed to levels never seen before and the process of creating money electronically known as quantitative easing was begun. The result? The financial system was saved. Central bankers were hailed as heroes. The idea spread that governments and central banks really can operate an economy. Even those who would normally oppose such interventions seemed to think the right thing had been done. A few dissenters argued that the few were being bailed out at the expense of the many, that enormous problems in the financial system were simply being deferred when they needed to be faced, and that these problems would only come back on a far greater scale.

In issuing the mortgage (for which they took the deeds of the house as collateral), the lending bank created money, which was then paid to me. The funds didn’t come from investors or from the deposits of others. The money did not previously exist. Thus modern electronic money – dollars, pounds and euros – is created through lending. Of course, governments create money through such processes as quantitative easing, but, even so, most money is lent into existence. This power to ‘create’ money through lending is what has made the worlds of banking and finance so large, powerful and rich. Modern money could thus be defined as ‘electronic debt-based fiat currency’. Research by UK think tank Positive Money shows that since 1989, money creation has been growing by 11.5% per annum. Compounded over time, the entire money stock doubles every six years and three months.


pages: 317 words: 71,776

Inequality and the 1% by Danny Dorling

Affordable Care Act / Obamacare, banking crisis, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Boris Johnson, Branko Milanovic, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, centre right, collective bargaining, conceptual framework, corporate governance, credit crunch, David Attenborough, David Graeber, delayed gratification, Dominic Cummings, double helix, Downton Abbey, en.wikipedia.org, Etonian, family office, financial deregulation, full employment, Gini coefficient, high net worth, housing crisis, income inequality, land value tax, longitudinal study, low skilled workers, lump of labour, mega-rich, Monkeys Reject Unequal Pay, Mont Pelerin Society, mortgage debt, negative equity, Neil Kinnock, Occupy movement, offshore financial centre, plutocrats, Plutocrats, precariat, quantitative easing, race to the bottom, Robert Shiller, Robert Shiller, TaskRabbit, The Spirit Level, The Wealth of Nations by Adam Smith, trickle-down economics, unpaid internship, very high income, We are the 99%, wealth creators, working poor

The richest fifth of all households hold the smallest share of their wealth in the form of their main residence – just 50 per cent for the richest fifth of Europeans – whereas almost 30 per cent of their wealth is held as other real estate, leaving 20 per cent in other forms such as stocks, shares and gold.108 As noted above, in the US the richest hold an even lower share of their vast wealth in the form of their main residence. The current ‘quantitative easing’ policies of central banks have had the effect of making the rich richer. The Financial Times, quoting the chief executive of the finance and insurance firm Legal and General, has described the policy as ‘designed by the rich for the rich’. Even the Financial Times has now insisted that enough is enough.109 Quantitative easing has been described as printing money to prevent prices falling when wages fall and the economy slumps. However, if it were that simple then the money should at least have been evenly distributed among the population. A progressive government would have given more to those who had least – especially since all of the money would then have been spent, rather than hoarded, and might have then boosted demand (see the illustration on the previous page).

The values of the most expensive of these items increased over the ten years to 2013 by over five times in real terms (at 17.5 per cent a year above inflation). This compares to a roughly three-fold increase in the price of gold. Quantitative easing has, in the short term, allowed the very rich to get much richer simply by owning assets that rise in value as the not-quite-so-rich stop buying bonds. More of the 1 per cent have then spent their money on luxury collectables.110 Imaginary money has created imaginary extra value in luxury goods. The Bank of England itself has noted that Britain’s richest 5 per cent own almost half of all the assets that have increased most in value due to quantitative easing.111 Beneath them, the not-quite-so-rich traditional savers have seen the real value of their savings decline. These factors have combined to push the 99 per cent closer together in the UK.

A progressive government would have given more to those who had least – especially since all of the money would then have been spent, rather than hoarded, and might have then boosted demand (see the illustration on the previous page). Priced out of London: wealth, prices, rent, housing and Occupy, 2013 What quantitative easing has actually entailed is the buying back of government bonds or other assets using government money created out of thin air. Financial institutions and individuals normally buy government bonds and wait to get their money back, plus interest, after a fixed period, but the bonds can be sold on. As a result of all the extra buying, the value of the bonds rises, but the returns do not rise, so they cease to be a good investment. The result is that bond-holders sell the bonds back to the government, and end up with more cash in hand.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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

A sell-off of Treasuries by other purchasers would have been predicted, amid a massive run on the dollar. That nothing like this occurred, and that the Treasury’s endorsement of quantitative easing initially elicited little critical comment, was a strong measure of the recognition on the part of global capital—and of the other capitalist states—of the central role of the American state in keeping the system going. The ultimate aim of quantitative easing was to try to get the banks to lend so as to stimulate the economy at a time when, despite continued high unemployment, the balance of Congressional forces was shifting against any further fiscal stimulus. Quantitative easing essentially involved an audacious printing of US dollars, and thus relied on the willingness of foreign investors and central banks to continue to hold dollars; it served as the strongest reminder to date of the special ongoing attractiveness of the dollar.

A lower dollar devalued their holdings of US assets, undermined the relative competitiveness of their economies, and—as excess dollars found their way abroad—aggravated inflationary pressures. But given these states’ structural positions within global capitalism, and their economic ambitions, they saw no option but to continue to hold and even increase their dollar holdings. Although there was no little handwringing at home and abroad about the potentially inflationary effects of quantitative easing, inflation was not a problem in the US, especially given the continuing weakness of American labor, and this was reinforced by high unemployment. As for Europe, although quantitative easing did provide additional liquidity for European banks, inflation was also not a serious problem there. This was because European governments had already been forced to move so far in the direction of austerity by the toll financial markets had exacted on the bond sales that many of them needed to cover fiscal deficits following the bailouts of their banks and decline in tax revenue.

For the lessons the Fed drew for this exercise based on its earlier “stress tests,” see Beverley Hirtle, Til Schuermann, and Kevin Stiroh, “Macroprudential Supervision of Financial Institutions: Lessons from the SCAP,” Federal Reserve of New York Staff Reports, no. 409, November 2009. 88 The aim of quantitative easing was less to control medium- and long-term market rates, although this was how the program was sold to the public, than to stabilize market valuations of securities and sustain interbank markets. Thus, while QE1 in November 2008 involved the purchase of both Treasury bonds and GSE securities ($300 billion and $200 billion respectively), the essence of the project was the socialization of bank losses and risk. The QE2 purchase of Treasury bond securities ($600 billion) two years later had the similar effect of increasing private banks’ reserve holdings, but with bank balance sheets now significantly improved, the Fed was now able to manipulate the interest it paid on the reserves that the banks held with it. See Alan S. Blinder, “Quantitative Easing: Entrance and Exit Strategies,” Federal Reserve Bank of St.


pages: 632 words: 159,454

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

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

It was clear that currencies had played an important role in the development of the crisis and in the ability of governments to withstand the squalls of the financial storm. The ease with which credit could be issued with paper money has already been observed. More paradoxically, the paper money which had been responsible in large part for the explosive increase in credit was now seen to provide the solution. It was in this period that the phrase ‘quantitative easing’ first entered into everyday speech, at least in the newspapers. If anything symbolized the power of the government to conjure money out of thin air it was quantitative easing. Quantitative easing (QE) was said to be ‘an ugly name for a simple idea’. Central banks ‘buy long-term government bonds with newly printed money’.56 The theory was that this purchase of government debt, by which the central bank was effectively printing money and lending it to its own government, would keep bond prices high.

In his own words, very simply put, ‘A greater Quantity [of money] employs more People than a lesser Quantity.’13 Another central component of Law’s thinking was that more economic activity would lead to an export surplus. This latter conclusion has not been endorsed by modern economists, but Law’s suggestion that the level of output, or ‘trade’ in his terminology, was related to the quantity of money is an idea which has been persistently espoused by later economists. Indeed, the modern advocates of ‘quantitative easing’, whereby a central bank prints more money to sustain economic activity, are the intellectual descendants of John Law. Unlike most gamblers, and even most monetary theorists, Law, by a series of improbable circumstances, managed to put his theories into practice on a national stage. He spent much of his late thirties and early forties travelling around the ‘principal cities of Italy’, where he continued ‘his speculations, playing at all sorts of games, betting, and engaging in the public funds and banks’.

Tim Geithner was Obama’s Treasury Secretary, and coincidentally an alumnus of the same small elite New England university attended by Hank Paulson, Dartmouth College. A slick and committed public servant, he had earned plaudits from Britain’s Alistair Darling, who found him ‘unpretentious and easy going’, with a ‘quiet style’ which ‘belied a steely determination’.59 He and most of the other leading figures in both the United States and the West generally were committed to printing and spending large sums of money to avert recession. Such policies as quantitative easing and the running of enormous budget deficits could be applied only in a world which had been totally removed from the constraints imposed by a gold standard. Central bankers like Bernanke remained committed to providing liquidity and supporting bond prices by means of printing more money. Some drastic spending cuts did occur in some countries in Europe such as Greece, Ireland and Portugal.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

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

For the second time since the start of the crisis, the ECB cut its policy rate by 50 basis points. Coming after a “stunning” 150-​basis-​point cut by the Bank of England (BOE) earlier that day, the ECB’s limited move disappointed financial markets. December 16, 2008: Fed reduces interest rates to near zero, begins forward guidance, and announces quantitative easing. The Fed lowered its interest rate to the 0.0–​0.25 percent range, publicly committed itself to keeping interest rates low for “some time” (forward guidance), and initiated quantitative easing (QE), which is the purchase by the central bank of long-​ term bonds and other securities to bring down long-​term interest rates. March 5, 2009: BOE reduces interest rates and launches QE. With the BOE reducing its interest rate to 0.5 percent, British rates had fallen by 450 basis points since the coordinated rate cut of October 2008.

Economic Papers 493, European Commission, Brussels, April. Obstfeld, Maurice, and Giovanni Peri. 1998. “Asymmetric Shocks: Regional Non-​ Adjustment and Fiscal Policy.” Economic Policy, April: 206–​259. Occorsio, Eugenio. 2016. “La Ue dica sì al piano italiano” [Let the EU Say Yes to the Italian Plan”]. La Repubblica, April 20. Odendahl, Christian. 2014. “Quantitative Easing Alone Will Not Do the Trick.” Centre for European Reform, April 28. http://​www.cer.org.uk/​ insights/​quantitative-​easing-​alone-​will-​not-​do-​trick#sthash.YWU9YtaD. dpuf. O’Donnell, John, and Angeliki Koutantou. 2015. “Draghi Ties ECB’s Greek Funding to Bailout Compliance.” Reuters News, March 5. OECD. 2008. “Ageing OECD Societies” Paris. https://​www.oecd.org/​berlin/​ 41250023.pdf. OECD. 2016a. “OECD Economic Surveys: Greece 2016.” Paris, March.

acknowledgments xv L IST O F ABBR EV IATIONS ABCP AfD AIB AIG ARRA BBC BDI BIS BNP BOE BOJ BRRD CAP CDU CSU D-​mark EBA EC ECB ECJ ECSC ECU EDC EEC Asset-​backed commercial paper Alternative für Deutschland Allied Irish Bank American International Group American Recovery and Reinvestment Act British Broadcasting Corporation Bundesverband der Deutschen Industrie (Federation of German Industries) Bank for International Settlements BNP Paribas Bank of England Bank of Japan Bank Recovery and Resolution Directive Common Agricultural Policy Christian Democratic Union Christian Social Union Deutschmark European Banking Authority European Community (see also EEC) European Central Bank European Court of Justice European Coal and Steel Community European Currency Unit European Defense Community European Economic Community EFSF EFSM ELA EMS EMU EONIA ERM ESM ESRI EU EURIBOR FDIC FDP FOMC GDP GFSR IKB IMF KfW LIBOR LREM LTCM LTROs MEP MPS NATO NPL OECD OIS OMTs PASOK PISA QE R&D S&P SEA SGP SMP SPD xviii   l i s t European Financial Stability Facility European Financial Stability Mechanism Emergency Liquidity Arrangement European Monetary System European Monetary Union Euro Overnight Index Average Exchange Rate Mechanism European Stability Mechanism Economic and Social Research Institute European Union European Interbank Offered Rate Federal Deposit Insurance Corporation Free Democratic Party Federal Open Market Committee Gross Domestic Product Global Financial Stability Report IKB Deutsche Industriebank AG International Monetary Fund Kreditanstalt für Wiederaufbau London Interbank Offered Rate La République En Marche Long-​Term Capital Management Longer-​Term Refinancing Operations Member of the European Parliament Monte dei Paschi di Siena North Atlantic Treaty Organization Non-​Performing Loan Organisation for Economic Co-operation and Development Overnight Index Swap Outright Monetary Transactions Panhellenic Socialist Movement Programme for International Student Assessment Quantitative easing Research and development Standard and Poor’s Single European Act Stability and Growth Pact Securities Markets Programme Social Democratic Party of abbreviations SRB SRM SSM TAF TARP UKIP VIX WAMU WEO Single Resolution Board Single Resolution Mechanism Single Supervisory Mechanism Term Auction Facility Troubled Asset Relief Program UK Independence Party Measure of expected volatility in the US stock market Washington Mutual “World Economic Outlook” list of abbreviations xix Introduction Europe Ends Up Someplace Else T he euro—​the single currency shared by nineteen European nations—​ is unique in human history.


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With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

Alfred Russel Wallace, banks create money, basic income, Buckminster Fuller, collective bargaining, computerized trading, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, en.wikipedia.org, Fractional reserve banking, full employment, hydraulic fracturing, income inequality, Jaron Lanier, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Network effects, oil shale / tar sands, Paul Samuelson, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, Upton Sinclair, Vilfredo Pareto, wealth creators, winner-take-all economy

Here are the four most-touted pro-middle-class policies and the reasons why they won’t halt the current decline: Stimulus. Though they quarrel over details, most economists agree that when recession strikes, government should rekindle the economy by adding money to it. Democrats prefer to do this through direct spending, Republicans through tax cuts. The Federal Reserve often plays along by lowering interest rates or printing money through a process called “quantitative easing.” Such fiscal and monetary pump-priming often perks up the economy for a while, but it doesn’t fix the causes of middle-class decline. As we’re seeing nowadays, it’s easy for GDP and corporate profits to grow without more income flowing to the middle class. Job creation. Listen to any politician and you’ll hear bold promises to spur job creation. The underlying premise is that more private sector jobs will save the middle class and that given enough incentives, profit-seeking entrepreneurs will create them.

The International Monetary Fund has argued that other measures might work better.7 With regard to new money creation: from 2001 to 2008 (before the financial crisis), the average yearly increase in what the Federal Reserve calls M2 was $244 billion.8 I use this figure (which is adjusted to 2013 dollars) to calculate the low end of the range in figure 7.1. For the high end I use the average annual change in M2 from 2001 to 2013, which includes several years of “quantitative easing.” That figure, translated into 2013 dollars, is $323 billion. The middle figure is halfway between. Intellectual-Property Protection Intellectual property (IP) rights owned by private corporations include patents, copyrights, and trademarks granted and enforced by the federal government. Such property rights are enormously valuable. A recent study by the Department of Commerce found that IP-intensive industries account for about a third of US GDP.9 This is the reason why our government goes to such great lengths to protect IP, not only within the United States but worldwide.

See Jobs; Unemployment Energy and Commerce Committee, 109 England, textile machinery in, 18 Environmental Defense Fund, 99 Environmental movement, 134–135 Epstein, Joshua, 31–33 Equity leverage, 47–48 European carbon trading system, 99, 104–105 European Union (EU) universal guaranteed income ideas in, 129–130 value added taxes (VATs) and, 140–141 Euthanasia of the rentier, 56 Everyone-gets-a-share capitalism, 3–4, 42, 126 Externalities, 63–64, 98–99 Extracted rent, 43, 45–57 recycled rent compared, 60 Extreme inequality, 33–34 ExxonMobil, 102 F Facebook, 48 Fair market value, 52 Fallacy of composition, 24–25 Family Assistance Plan, 80–81 Federal Reserve on new money creation, 144 quantitative easing, 22 shared market economy and, 83 FedEx, 26 Fee and dividend program, 115 Financial derivatives, global value of, 57 Financial infrastructure. See also Banks; Stocks and bonds as co-owned wealth, 61 rent from, 142–145 Financial leverage, 47–48 Financial Times (Kay), 53 Financial transaction taxes, 143 Fisher, Irving, 91 Ford, Henry, 8, 19 Ford Motor Company, 18 Foreign Affairs, 130–131 Foreign exchange transitions, value of, 57 Foreign manufacturing, 16 Fossil fuels, 115–116 401(k) plans, 123 Foxconn, 25 Fractional reserve banking, 54, 90 Friedman, Milton, 80–81, 85–87, 91, 119 Fuller, Buckminster, 66 Future scenarios, 135–136 G Galbraith, John Kenneth, 34, 80 Gates, Bill, 48–49, 84 General Motors, jobs at, 23 George, Henry, 4, 51, 66 Germany, 19, 37–38 GI Bill, 16 Glass-Steagall Act of 1933, 54–55 Globalization, 17 Global Warming Solutions, 117 God Bless You, Mr.


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

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

Their conclusion is that monetary policy was the culprit, specifically the Fed prematurely tightening the money supply, which they argued caused the crash and also led to a second economic downturn, known as a ‘recession within the Depression’, of 1937–38. So, what would Friedman say about the use of ‘unconventional’ monetary policy in the aftermath of the Great Recession with its parallels to the 1930s? Central banks have now deployed a dazzling array of policies, including quantitative easing (cash injections) and even negative interest rates (where commercial bank deposits at the central bank are being charged) to get more money into the economy. What would Friedman make of the activities of central banks which are largely operating in unknown territory? The next pair of authors put forward contrasting views about the fundamental drivers of how an economy grows and develops.

The US did devalue its currency and leave the gold standard but by 1933 the economy still wasn’t recovering. Fisher had believed that confidence would return the economy to prosperity immediately, but it did not. Nearly a century later, as Japan’s experience shows, it is clear that reflating an economy is not as easy as Fisher thought. Japan has undertaken a number of periods of aggressive monetary policies with the central bank injecting cash through quantitative easing (QE) programmes. It seems that the war against deflation cannot be won simply through robust action from the central bank. Combating deflation requires a change in consumer attitudes and firms’ behaviour, so it’s a more complex process than it appears. In a 2002 speech, Ben Bernanke argued that Japan should consider a ‘helicopter money drop’.18 It would inject money directly into the economy; in essence, a free gift of money to citizens.

It is possible for the central bank to set a negative interest rate, charging commercial banks for depositing money with it in the hope that they will lend the money instead. This is the type of unconventional monetary policy that has been adopted by the European Central Bank, the Bank of Japan and others. Even if interest rates are close to zero, there should still be a policy response. Simply running the printing press is always an option. Money could be injected into the economy through asset purchases such as quantitative easing, or even more aggressively via the equivalent of a ‘helicopter drop’. This could work through fiscal policy, say through a tax cut or an increase in government spending funded not by borrowing but through the central bank printing money. Fisher thought that it should always be possible to reflate the economy back to where it ought to be. To him, central banks have not exhausted their armoury should they need to fight against deflation.


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

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

See Freddie Mac Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 47 Federal Reserve AIG bailout and, 178 China’s yuan panic of 2015 and, 606–7 CHOICE Act and, 589–90 Comprehensive Capital Analysis and Review, 310–11 Dodd-Frank Act and, 304, 305 dual mandate of, 366 interest rate hikes, 2015-2018, 590, 608 Lehman collapse and, 176–77 as liquidity providers of last resort to global banking system, 9–10, 11–12, 202–3, 206–21 low interest rate policy, investment climate created by, 472–75 quantitative easing (See quantitative easing (QE)) short-term interest rate policy of, 2000–2006, 37–38, 55–56, 69–70 stress tests, 298–301 Volcker shock, 11, 37, 43–44, 46, 50, 68 Fekter, Maria, 404 Ferguson, Niall, 35, 346–47, 368 FIAT, 123 financial crisis of 2007–2009, 1–4, 143–69, 609–10, 613, 614 ABCP market, implosion of, 146–47 AIG and, 150–52, 178–79 automobile industry and, 157–59, 449–50 Bear Stearns collapse and, 147–48 bursting of housing bubble and initial mortgage lender failures, 143–45 China and, 7, 242–54 credit default swaps and, 150–51 dollar-funding shortage for European banks and, 8, 154–55, 203–6 in East and Southeast Asia, 257–61 in Eastern Europe, 220–38 election of 2016, impact on, 566–67, 574–75 European banks funding crisis and, 8, 154–55, 203–6 European banks US mortgage market exposure, 73–75 Federal Reserve as liquidity provider to global banking system, 9–10, 11–12, 202–3 G20 and, 261–75 global nature of, 5–6, 159–60 household wealth lost in, 156–57 Keynesian macroeconomics as inadequate to understanding, 8–9 Lehman Brothers collapse and, 149, 176–77 lending, collapse in, 155–56 liquidity crisis (See liquidity crisis) money market mutual funds (MMF) and, 152–53 Northern Rock collapse and, 145–46 Rajan’s warning of financial risks and, 67–68 regulatory changes and, 69 repo market, run on, 146–50 syndicated loans, drop in, 153–54 Wall Street versus Main Street in, 164–65 financial reform, 301–17 Basel III accord, 311–14 Dodd-Frank Act of 2010, 302–9 entanglement of regulators, law firms and banks, 309–11 Larosière committee recommendations, 314–15 Financial Services Authority (FSA), 81, 541 Financial Services Modernization Act of 1999, 68, 82 Financial Stability Board, 269–70, 311 Financial Stability Forum (FSF), 89 Financial Stability Oversight Council, 303, 309 Financial Times, 481, 525, 526, 587 Fink, Larry, 481 Finland, 105, 421 fiscal compact.

Among technical experts it is commonly agreed that the swap lines with which the Fed pumped dollars into the world economy were perhaps the decisive innovation of the crisis.30 But in public discourse these actions have remained far below the radar. They have been displaced from discussion by controversies surrounding the bailouts of individual banks and subsequent waves of central bank intervention that went by the name of quantitative easing. Even in the memoirs of Ben Bernanke, for instance, the transatlantic liquidity measures of 2008 receive little more than a passing mention by comparison with the fraught politics of the AIG takeover or mortgage credit relief.31 The technical and administrative complexities of the Fed’s actions no doubt contribute to their obscurity. But the politics go beyond that. The bank bailouts of 2008 provoked long-running and bitter recrimination and for good reason.

The busiest week of purchases was the third week of April 2009, and holdings (net of sales) peaked in June 2010 at $1.129 trillion. Crucially, what the Fed was doing was not just pumping liquidity into the system. It was also absorbing onto its balance sheet the maturity mismatch, which had done such damage in markets like ABCP. The Fed took the long-term asset in exchange for immediate liquidity. Quantitative easing, or QE, is generally thought of as the quintessential “American” policy, the symbol of the Fed’s adventurousness. It would earn Bernanke regular scolding by conservative policy makers in Europe. But after what we have already said, it will come as no surprise that 52 percent of the mortgage-backed securities sold to the Fed under QE were sold by foreign banks, with Europeans far in the lead.


Basic Income And The Left by henningmeyer

basic income, Bernie Sanders, centre right, eurozone crisis, income inequality, John Maynard Keynes: technological unemployment, labour market flexibility, land value tax, means of production, mini-job, moral hazard, precariat, quantitative easing, Silicon Valley, the market place, Tobin tax, universal basic income

Of course it is, in the sense in BASIC INCOME PILOTS: A BETTER OPTION THAN QUANTITATIVE EASING which the European Union itself was utopian until BY GUY STANDING (9 FEBRUARY 2015) not so long ago, and also in the sense in which the social security system was utopian before Bismarck put together its first building blocks. But Bismarck did not create his pension system out of the kind‐ ness of his heart. He did so because people started mobilizing in favour of radical reforms across the whole of the Reich he was trying to unify. What are we waiting for? With much fanfare, Mario Draghi announced on 22 January 2015 that the European Central Bank (ECB) would be pumping €60bn a month into the financial markets until September 2016, in what is euphemistically called ‘quantitative easing’ (QE). This amounts to 10% of Eurozone GDP and 10% of its gross public debt.

BASIC INCOME AND THE LEFT A EUROPEAN DEBATE PHILIPPE VAN PARIJS CONTENTS Authors 1. Basic Income And the Left: A European Debate 2. How To Combat Inequalities Produced By Global Capitalism 3. Basic Income And Social Democracy 4. Why Basic Income Can Never Be A Progressive Solution - A Response To Van Parijs 5. The Euro-Dividend 6. Basic Income Pilots: A Better Option Than Quantitative Easing 7. Why The Universal Basic Income Is Not The Best Public Intervention To Reduce Poverty Or Income Inequality 8. The Worldwide March To Basic Income: Thank You Switzerland! 9. Universal Basic Income: A Disarmingly Simple Idea – And Fad 10. Unconditional Basic Income Is A Dead End 11. Basic Income Is A Tonic Catalyser: A Response To Anke Hassel 12. Basic Income And Institutional Transformation 13. No Need For Basic Income: Five Policies To Deal With The Threat Of Technological Unemployment 14.


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How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, disruptive innovation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

Banks use this reserve to operate and meet the withdrawal needs of their customers, while the Federal Reserve uses this reserve to achieve its own policy goals of either expanding or contracting the money supply. Increasing the reserve requirement (forcing banks to hold on to more money) contracts the money available to lend and decreasing the reserve requirement increases it. Finally, the Federal Reserve has recently engaged in a controversial strategy called quantitative easing (QE) to get a slow economy moving when the above measures have failed to increase lending. Quantitative easing entails the Fed’s purchase of a large quantity of securities in the open market to pump even more money into the banks—hence “quantitative easing.” Under QE, the Fed purchases U.S. Treasury notes and mortgage-backed securities using newly created electronic cash, which increases bank reserves. In theory, this provides banks with more money to lend so they will lower interest rates and make more loans. In 2008, the Federal Reserve bought over $1.25 trillion in mortgage-backed securities from banks on the theory that the banks would use this money to lend.

This occurs both directly, through influencing the loan rates charged by banks, but also indirectly through the overall effect of monetary policy on economic activity in the economy.” McLeay, Radia, and Thomas, “Money Creation,” 16. 14. See Peter Conti-Brown, The Structures of the Federal Reserve Independence (Princeton, NJ: Princeton University Press, 2015). 15. See Kimberly Amadeo, “What is Quantitative Easing: How the Federal Reserve Created Massive Amounts of Money,” About News, October 14, 2014, accessed March 13, 2015, useconomy.about.com/od/glossary/g/Quantitative-Easing.htm; “What is Quantitative Easing?,” Economist, January 14, 2014, accessed March 13, 2015, www.economist.com/blogs/economist-explains/2014/01/economist-explains-7. 16. “No one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.” Bob Ivry, Bradley Keoun, and Phil Kuntz, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” Bloomberg, November 27, 2011, accessed March 13, 2015, www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html.

Because the central bank controls the supply of currency, the cost of credit circulating through the economy at any given moment is largely a policy decision made by the government’s central bank. Our central bank in the United States, the Federal Reserve, uses four levers to shape the economy and control monetary supply: (1) the federal fund rate, (2) the discount rate, (3) reserve requirements, and (4) “quantitative easing.” The central bank uses all of these measures, which are only possible with the help of the banking system, to influence the economy.14 The federal fund rate is the rate at which banks lend to each other, which influences the interest rate for all lending. Given the state of the economy and the Fed’s policy goals, it sets a target interest rate that it believes will be optimal. To reach this rate, the Federal Open Market Committee (FOMC) buys or sells government securities from or to banks depending on whether it wants to increase or decrease the economy’s money supply.


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

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

Austrian-School and post-Keynesian economists have contributed a basic insight to the discussion: Once a credit bubble has inflated, the eventual correction (which entails destruction of credit and assets) is of greater magnitude than government’s ability to spend. The cycle must sooner or later play itself out. There may be a few more arrows in the quiver of economic policy makers: central bankers could try to drive down the value of domestic currencies to stimulate exports; the Fed could also engage in more quantitative easing. But these measures will sooner or later merely undermine currencies (we will return to this point in Chapter 6). Further, the way the Fed at first employed quantitative easing in 2009 was minimally productive. In effect, QE1 (as it has been called) amounted to adding about a trillion dollars to banks’ balance sheets, with the assumption that banks would then use this money as a basis for making loans.29 The “multiplier effect” (in which banks make loans in amounts many times the size of deposits) should theoretically have resulted in the creation of roughly $9 trillion within the economy.

However, some argue that limits to government debt (due to snowballing interest payments) need not be a hard constraint — especially for a large nation, like the US, that controls its own currency.16 The United States government is constitutionally empowered to create money, including creating money to pay the interest on its debts. Or, the government could in effect loan the money to itself via its central bank, which would then rebate interest payments back to the Treasury (this is in fact what the Treasury and Fed are doing with Quantitative Easing 2, discussed below).17 The most obvious complication that might arise is this: If at some point general confidence that external US government debt (i.e., money owed to private borrowers or other nations) will be repaid with debt of equal “value” were deeply and widely shaken, potential buyers of that debt might decide to keep their money under the metaphorical mattress (using it to buy factories or oilfields instead), even if doing so posed its own set of problems.

Documents released by the Fed on December 1, 2010 showed that more than $9 trillion in total had been supplied to Wall Street firms, commercial banks, foreign banks, and corporations, with Citigroup, Morgan Stanley, and Merrill Lynch borrowing sums that cumulatively totaled over $6 trillion. The collateral for these loans was undisclosed but widely thought to be stocks, CDSs, CDOs, and other securities of dubious value.27 In one of its most significant and controversial programs, known as “quantitative easing,” the Fed twice expanded its balance sheet substantially, first by buying mortgage-backed securities from banks, then by purchasing outstanding Federal government debt (bonds and Treasury certificates) to support the Treasury debt market and help keep interest rates down on consumer loans. The Fed essentially created money on the spot for this purpose (though no money was literally “printed”).


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

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

Radical though they sound, neither is in fact different in essence from the policies that have so far failed to generate a return to pre-crisis paths of output. Financing more government spending by printing money is equivalent, in economic terms, to a combination of (a) additional government spending financed by issuing more government debt and (b) the creation of money by the central bank to buy government debt (the process known as quantitative easing). Equally, helicopter drops of money are equivalent to a combination of debt-financed tax cuts and quantitative easing – the only difference being that the size of spending or tax cuts is decided by government and the amount of money created is decided by the central bank. Since both elements of the combination have been tried on a large scale and have run into diminishing returns, it is hard to see how even more of both, producing a short-run boost to demand that will soon peter out, will resolve the paradox of policy.

The impact of the crisis was to make debtors and creditors – households, companies and governments – uncomfortably aware that their previous spending paths had been based on unrealistic assessments of future long-term incomes. So they reduced spending. And central banks then had to cut interest rates yet again to bring more spending forward from the future to the present, and to create more money by purchasing large quantities of assets from the private sector – the practice known as unconventional monetary policy or quantitative easing (QE). There is in fact nothing unconventional about such a practice – as I will explain in Chapter 5, so-called QE was long regarded as a standard tool of monetary policy – but the scale on which it has been implemented is unprecedented. Even so, it has become more and more difficult to persuade households and businesses to bring spending forward once again from an ever bleaker future. After a point, monetary policy confronts diminishing returns.

It is ironic, therefore, that economists who believe that money matters (for example, Milton Friedman) argue that ‘the demand for money is highly stable’, whereas Keynesian economists argue that money does not matter because its demand is unstable.27 Both groups are wrong – money really matters when there are large and unpredictable jumps in the demand for it. The method used to create money was to buy government bonds from the private sector in return for money.28 Those bond purchases were described by many commentators as ‘unconventional’ monetary policies and became known as ‘quantitative easing’, or QE. They were regarded as newfangled and untried. If history is what happened before you were born, then many of the commentators must be extremely young. For open market operations to exchange money for government securities have long been a traditional tool of central banks, and were used regularly in the UK during the 1980s, when they were given the descriptions ‘overfunding’ and ‘underfunding’.29 What was new in the crisis was the sheer scale of the bond purchases – £375 billion by the Bank of England, almost 20 per cent of GDP, and $2.7 trillion by the Federal Reserve, around 15 per cent of GDP.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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

Since the collapse of Lehman Brothers in September 2008, the world’s major central banks have been plowing vast quantities of money into the banking system. The U.S. Federal Reserve has made commitments totaling some $29 trillion, lending $7 trillion to banks during the course of one single fraught week. The Bank of England has spent around £325 billion on quantitative easing alone—a figure that could yet rise to £600 billion—while the U.K. government has committed a total of £1.162 trillion to bank rescues. The European Central Bank has made low-interest loans directly to banks worth at least €1.1 trillion. These measures are not addressing the crisis alone. In April 2013, the Bank of Japan embarked on a quantitative easing program worth some $1.3 trillion, designed to end more than a decade of deflation. The social costs of the crisis, too, have been devastating. These are the costs both of the crisis itself and importantly of the policies used by governments and central banks to alleviate its effects on those very institutions that caused it.

More recently, however, the bankers did not oppose the significant levels of money creation ($13 trillion of debt to rescue bad loans and other obligations) that went into the bailout and the quantitative easing (QE) program. QE began in March 2009, when the U.S. Federal Reserve bought $1,750 billion of government bonds and mortgage-related and agency securities, and the Bank of England purchased £200 billion ($308 billion) of (mostly) government debt. Despite this, and several subsequent episodes of QE, deflation, not inflation, still appears to be the prevailing concern. Technically, quantitative easing consists of temporary bond purchases, but there is a view, increasingly predominant, that these purchases will turn out to be forever.57 This would be helicopter money,58 or what is otherwise known as direct (or overt) monetary financing.59 Monetary theory is at the heart of this idea.

Gold was worth less than $30 an ounce until the 1930s and less than $40 until 1970. Gold’s price broke the $1,000 an ounce barrier in 2009, reaching a little more than $1,700 by early 2012. To sympathizers of Menger, this rise provides all the evidence necessary for the declining purchasing power of money once it is untethered from gold. Central banks would never have been able to pursue policies like quantitative easing, for example, if the supply of money was fixed to the supply of a reliable commodity, such as gold. Moreover, money would be worth considerably more as a result. To others, who sympathize with Keynes’s famous description of gold as a “barbarous relic,” linking the supply of money to a commodity with a finite supply spells disaster because it stifles the supply of investment that the economy needs.


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

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

It was hard to imagine there would be a normal pickup. Around this time, most of the world’s central banks and governments were slowing their aggressive rates of stimulus. The Fed ended the first round of quantitative easing in March after purchasing $1.25 trillion in mortgage-backed securities. The pace of fiscal stimulus from programs like the America Recovery and Reinvestment Act were set to peak later in the year. Abroad, there were pockets of tightening as countries like China increased interest rates. Importantly, at this point it wasn’t clear to investors that merely slowing or ending quantitative easing was equivalent to tightening—and not that different from raising interest rates. Some thought it was enough to simply pump a lot of money into the economy to stimulate it—and the Fed had certainly done that, printing over $2 trillion.

–New York Times August 24, 2010 Wall Street Hit Again, This Time by Housing Data -New York Times September 1, 2010 Wall Street Surges After Good Reports -New York Times September 7, 2010 Renewed European Worry Hurts Shares -New York Times September 21, 2010 Fed Stands Pat and Says It Is Still Ready to Buy Debt -New York Times September 21, 2010 Another Step Toward More Quantitative Easing “We suspect the Fed will end up having to push much harder than anyone currently expects, as it is likely that the currently planned quantitative easing will not be nearly as effective per dollar as the last stage of QE was. This is because the economic impact of the Fed printing and spending money (QE) depends on who gets the money and what they do with it.” –BDO September 24, 2010 Signs of Stability Help Extend September’s Rally -New York Times October 1, 2010 In Comments, Fed Officials Signal New Economic Push -New York Times October 14, 2010 ECB Policy “We see overall growth rates decelerating, debt problems on the periphery that at a minimum remain an intense weight on growth and a fiscal policy of austerity that is clearly a drag.

When central banks reduce interest rates, they stimulate the economy by a) producing a positive wealth effect (because the lower interest rate raises the present value of most investments); b) making it easier to buy items on credit (because the monthly payments decline), raising demand—especially for interest-rate-sensitive items like durable goods and housing; and c) reducing debt-service burdens (which improves cash flows and spending). MP1 is typically the first approach to a debt crisis, but when short-term interest rates hit around 0 percent, it no longer works effectively, so central banks must go to the second type. Monetary Policy 2 “Quantitative easing” (QE) as it is now called (i.e., “printing money” and buying financial assets, typically debt assets), is Monetary Policy 2. It works by affecting the behavior of investors/savers as opposed to borrowers/spenders, because it is driven by purchases of financial assets, typically debt assets that impact investors/savers the most. When the central bank buys a bond, it gives savers/investors cash, which they typically use to buy another financial asset that they think is more attractive.


pages: 128 words: 35,958

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

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

The Fed can get around this limitation with unconventional monetary policy, which is why it has been buying up large amounts of long-term bonds in its policy of “quantitative easing,” hoping to directly lower long-term interest rates. This is a second-best solution. The effects of buying up large amounts of government bonds and mortgage-backed securities are not well understood or predictable. The process of unwinding this policy as the Fed sells off these assets is also not entirely predictable or without risk. Given the costs of a sustained period of unemployment, the Fed’s policy is certainly worth the risk, but it would be better if conventional monetary policy could be more effective. (Conventional monetary policy would also raise fewer political objections of the sort that have limited the use of quantitative easing). The obvious way to give monetary policy more power would be to have a higher initial inflation rate.

And it would have prevented the world from recognizing that the economics profession was wrong, since its estimate of the structural rate of unemployment would otherwise never have been tested.[14] As the unemployment rate falls in the years ahead we will face similar controversies. Indeed, prominent voices in the profession claim that the unemployment rates we are now seeing are consistent with the structural rate of unemployment in the economy.[15] From this perspective, efforts by the Fed to boost the economy with low interest rates and quantitative easing, or by Congress to use spending and tax cuts to increase demand, are foolhardy, since they will primarily have the effect of raising the inflation rate while having little impact on output and employment. Their argument is that the downturn represents a fundamental shift in the economy. In their view, the bursting of the housing bubble left a huge pool of workers with capabilities in construction and manufacturing; when the economy recovers we are not likely to see as much employment in these sectors as before, and so millions of former construction and manufacturing workers will be structurally unemployed.[16] While this is a minority view in the profession, as evidenced in part by the fact that the Fed’s Open Market Committee has overwhelmingly supported expansionary policy, more moderate voices have argued that the NAIRU is considerably higher than it was before the downturn.


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, liquidity trap, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

Here is a typical pro-inflation argument by Dean Baker of the Center for Economic and Policy Research: If it is politically impossible to increase the deficit, then monetary policy provides a second potential tool for boosting demand. The Federal Reserve Board can go beyond its quantitative easing program to a policy of explicitly targeting a moderate rate of inflation (e.g., 3–4 percent) thereby making the real rate of interest negative. This would also have the benefit of reducing the huge burden of mortgage debt facing tens of millions of homeowners as a result of the collapse of the housing bubble.22 The problem is, in a deflationary environment when banks aren’t lending, how can the Fed create inflation? This is the biggest problem with the inflation solution in a situation of overleveraging and overcapacity. Quantitative easing exchanges a highly liquid asset (base money, reserves) for less liquid assets (e.g., various financial derivatives), but that won’t cause price or wage inflation if the new money doesn’t reach people who will spend it.23 Even if the Fed monetized all debt, public and private, the essential problem would remain.

We can still envision a new airport, but we can no longer build it. The magic talisman by which the pronouncement “An airport shall be built here” crystallizes into material reality has lost its power. Human hands, minds, and machinery retain all their capacities, yet we can no longer do what we once could do. The only thing that has changed is our perceptions. We can therefore see the bailouts, quantitative easing, and the other financial measures to save the economy as further exercises in perception management, but on a deeper, less conscious level. Because what is money, anyway? Money is merely a social agreement, a story that assigns meaning and roles. The classical definition of money—a medium of exchange, a store of value, a unit of account—describes what money does, but not what it is. Physically, it is now next to nothing.

If a bank’s margin reserves are insufficient to meet requirements, it simply borrows the necessary cash from the Fed or the money markets. If there is a system-wide insufficiency of reserves, then the Fed expands the monetary base through open-market operations. That is why M0 growth typically lags behind M1 and M2 by many months—the opposite of what one would expect from the multiplier effect if we lived in a fractional reserve system (see Keen, “The Roving Cavaliers of Credit”). That is also why recent “quantitative easing” by the Fed and other central banks has done little to increase the money supply. 5. This in fact happened many times; during the Great Depression it happened in nearly every country. Holders of currency demanded gold from banks and ultimately central banks, which eventually said no. In the United States in the 1930s it actually became illegal under Roosevelt’s Executive Order 6102 to hold more than a small amount of gold.


pages: 401 words: 112,784

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

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

Analysis of official data by the Centre for Research on Socio-Cultural Change at Manchester University for the Guardian; Aditya Chakrabortty, ‘London's economic boom leaves rest of Britain behind’, Guardian, 23 October 2013, at: www.theguardian.com/business/2013/oct/23/london-south-east-economic-boom 23. Claire Jones and Chris Giles, ‘King warns over surge in asset prices’, Financial Times, 13 February 2013, at: www.ft.com/cms/s/0/756c4840–75ff–11e2–9891–00144feabdc0.html#axzz2jt3EgRGf For a fuller explanation and analysis of quantitative easing, see M. Joyce, M. Tong and R. Woods, ‘The United Kingdom's quantitative easing policy: Design, operation and impact’, Bank of England Quarterly Bulletin, 51:3 (2011), pp. 200–12. 24. For a comparison of Chamberlain's and Osborne's rhetoric, see Duncan Weldon, 'UK recession: Have we heard it all before?’, Guardian, 25 July 2013, at: www.guardian.co.uk/commentisfree/2012/jul/25/uk-recession-george-osborne-neville-chamberlain 25.

But a few years on, and to the extent that variable recoveries allow it, both Britain and the US are heading back towards business as usual. The basic model has not been reformed. In the UK, new analysis of official data shows that the proportion of bank lending going to productive businesses is actually lower than it was before the bust.22 Meanwhile, orthodox voices such as Sir Mervyn King, former Bank of England governor, openly worry that a recovery pumped by so-called quantitative easing – the policy of printing money to pour into financial assets – could even inflate a fresh bubble.23 If that is right, another bust could become conceivable sooner than anyone would like to imagine. But even if the recovery is sustained, it is built on the same old foundations. Both British and American societies will live with the consequences, as the effects of the Great Recession – which might soon be forgotten in more prosperous neighbourhoods – dog poor communities into the indefinite future.

Just as with taxes and spending, macroeconomic choices over interest rates and so on will create winners and losers, and the balance of political power between them will bear upon the direction of policy.5 But monetary policy in the Great Recession has been nothing like as controversial as during the Depression: this time reflationists have carried the day with relative ease in Britain and America, if not continental Europe. Although it is worth noting in passing that ‘quantitative easing’ has disproportionately boosted the value of assets held by the rich,6 even this unprecedented aspect of the monetary stance has not proven especially divisive. It thus makes sense for us to concentrate on the fiscal side, and most especially social expenditure and redistribution. In tracing public opinion on these things, we will concern ourselves not with particular policies or plans (which inevitably evolve over time, and on which many voters will typically have no view), but rather with support for the broad underlying principles of providing for the poor and pooling risk – principles as pertinent today as they were in the hard times of the 1930s.


pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

"Robert Solow", 3D printing, Asian financial crisis, bank run, basic income, battle of ideas, Berlin Wall, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, dematerialisation, disruptive innovation, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, land reform, land value tax, Landlord’s Game, loss aversion, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, mobile money, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, Richard Thaler, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, Steve Ballmer, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

Benes, J. and Kumhof, M. (2012) The Chicago Plan Revisited. IMF Working Paper 12/202. https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf 50. Keynes, J. M. (1936) General Theory of Employment, Interest and Money, Chapter 24. 51. Ryan-Collins, J. et al. (2013) Strategic Quantitative Easing: Stimulating Investment to Rebalance the Economy. London: New Economics Foundation. 52. Blyth, M., Lonergan, E. and Wren-Lewis, S., ‘Now the Bank of England needs to deliver QE for the people’. Guardian, 21 May 2015. 53. Murphy, R. and Hines, C. (2010) ‘Green quantitative easing: paying for the economy we need’, Norfolk: Finance for the Future, available at: http://www.financeforthefuture.com/GreenQuEasing.pdf 54. Greenham, T. (2012) ‘Money is a social relationship’, TEDx Leiden, 29 November 2012, available at: https://www.youtube.com/watch?

The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce.50 States could also transform the distributive impact of monetary policy measures used during recessions. In mild recessions, central banks normally seek to boost the money supply by cutting interest rates in order to stimulate commercial bank lending and hence money creation. In deep recessions, however, once interest rates have already been cut very low, central banks attempt to further boost the money supply by buying back government bonds from commercial banks – a practice known as quantitative easing, or QE – in the hope that the banks will then seek to invest the extra money in expanding productive businesses. But as post-financial-crash experience demonstrated, commercial banks used that extra money to rebuild their own balance sheets instead, buying speculative financial assets like commodities and shares. As a result, the price of commodities such as grain and metals rose, along with the price of fixed assets like land and housing, but new investments in productive businesses didn’t.51 What if, instead, central banks tackled such deep recessions by issuing new money directly to every household as windfall cash to be used specifically for paying down debts – an idea that has come to be known as ‘People’s QE’.52 Rather than inflating the price of bonds, which tends to benefit wealthy asset owners, this approach – which resembles a one-off tax rebate for all – would benefit indebted households.

., Grant, A. and Margolis, J. (2012) ‘The bedside manner of homo economicus: how and why priming an economic schema reduces compassion’, Organizational Behavior and Human Decision Processes 119: 1, pp. 27–37. Montgomery, S. (2015), The Soul of an Octopus. London: Simon & Schuster. Morgan, M. (2012) The World in the Model. Cambridge: Cambridge University Press. Murphy, D. J. (2014) ‘The implications of the declining energy return on investment of oil production’, Philosophical Transactions of the Royal Society A 372. Murphy, R. and Hines, C. (2010) ‘Green quantitative easing: paying for the economy we need’, Norfolk: Finance for the Future. Murphy, S., Burch, D. and Clapp, J. (2012) Cereal Secrets: the world’s largest grain traders and global agriculture, Oxfam Research Reports, Oxford: Oxfam International. OECD (2014) Policy Challenges for the Next 50 Years, OECD Economic policy paper no. 9. Paris: OECD. Ormerod, P. (2012) ‘Networks and the need for a new approach to policymaking’, in Dolphin, T. and Nash, D.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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

There are some inflationary pressures not even the most vigorous action by the Federal Reserve can just wipe out‌—‌China’s rapid growth and consequent demand for raw materials, for example. You can’t expect Ben Bernanke, chairman of the Fed, to be able to do anything about that. On the other hand, the Fed’s response to the rapidly declining value of the dollar has been to assist that decline in every way possible. I pointed out in chapter 1 that the Fed has allowed its balance sheet to inflate by some $2,000 billion, largely as a result of quantitative easing (to use the technical term) or printing money (to use the descriptive one). This ‘easing’ has taken place at a time when the Fed has already forced down short-term interest rates as low as they can possibly go, lower than they’ve been for generations.9 It has come at a time when long-term interest rates are as low as they’ve been since Japanese bombs were falling on Pearl Harbor.10 In addition, it’s come at a time when the threat of deflation (an admittedly serious possibility) has long, long retreated.

I was more certain of some of the potential costs. One cost is the risk of being perceived as embarking on the slippery slope of debt monetization [i.e. printing money to support government borrowing]. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises. I realized that two other central banks were engaging in quantitative easing—the Bank of Japan and, most notably, our friends at the Bank of England. But the Bank of England is offsetting an announced fiscal policy tightening that out-Thatchers Thatcher. This is not the case here. Here we suffer from fiscal incontinence and regulatory misfeasance. If this were to change, I might advocate for accommodation. But that is not yet happening. And I worry that by providing monetary accommodation, we are reducing the odds that fiscal discipline will be brought to bear.11 Fisher puts his finger on precisely the right issue.

Cotton prices are also exceptionally volatile.29 The same has been true of cocoa futures.30 By good fortune, none of these flash crashes have yet caused much damage, but poorly maintained levees didn’t do much harm to New Orleans until 2005. The mortgage market looked to be working fine, until it came close to destroying the international financial system. In 2010 we were fortunate that the flash crash happened when the markets were still being buoyed up by ultra-low interest rates, by quantitative easing, by massive fiscal stimulus, and by a broad sense of returning security in the financial markets. Those props (disastrous as they’re proving in the longer run) were enough to stop the meltdown. But just suppose the next crash happens when another major financial institution is on the brink. When nerves are shredded. When panic is only half a rumor away. Under these circumstances, a flash crash could easily precipitate failure on a Lehman-like scale.


pages: 310 words: 90,817

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

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

Naturally, the dependence of the price structure and of large parts of the economy on a steady flow of money at low interest rates had become so considerable that the next attempt to return to and sustain “normal” rates and a slower pace of money growth initiated another downturn and now even kicked off a severe financial crisis. This was the so-called subprime crisis that commenced in the summer of 2007. Not surprisingly, the U.S. Federal Reserve did go again one step further, now adopting practically zero policy rates and conducting aggressive debt monetization, labeled “quantitative easing,” a policy in which it was followed by the Bank of England. But again, Japan had preceded everybody by a few years, having conducted zero-rate policies and quantitative easing from 2001 to 2006. When Japan had done so, the policy had again been unprecedented and appeared extreme to financial market commentators. The policy establishment began to follow Japanese developments with increasing trepidation, frustration, and even anger. After all, the Japanese used the twentieth century’s newfound policy equipment of money printing and deficit spending, the all-purpose policy tools that allegedly promised an end to any recession.

Nevertheless, statistics may give us an indication: Industrial production in the United States is about 12 times larger today than it was at the beginning of the Great Depression.2 However, the amount of currency in circulation (notes and coins) is more than 200 times larger today (end of 2010).3 The stock of money in the statistical definition of M1 is about 65 times larger and in the M2 definition about 150 times larger.4 By the end of 2010, the Federal Reserve was on its second round of quantitative easing, which meant that the monetary base and bank reserves were more than 330 times larger than in October 1929.5 Total net debt as a percent of GDP—which stood at about 150 percent when Nixon took the dollar off gold—reached a record high of 370 percent in the third quarter of 2009. At the time of the 1929 stock market crash, this ratio stood at less than 200 percent and was thus half of what it is today.6 It is part of the inherent logic of the present system that policy makers must do everything to avoid a rise in interest rates, as such a rise would reveal the true availability of savings, which naturally is much more limited than what artificially lowered interest rates have consistently projected.

The ECB felt compelled to buy Greek, Portuguese, and Irish government bonds in particular as investors sold these securities heavily out of fear of sovereign insolvency. The reason for the central bank’s intervention was to avoid a spreading of the sovereign debt crisis to other and bigger members of the monetary union, none of which are fiscally sound. In the United States, where the government is running record budget deficits, the central bank has, with its second round of so-called quantitative easing, become the biggest marginal buyer of U.S. government bonds and will soon be the largest holder. The central bankers make every effort to portray these market interventions as only temporary. They are supposed to appear as creative stimulus measures or as short-term maneuvers that guarantee stability and liquidity. In fact, our analysis has shown that these policies are the inevitable next steps in the deterioration of the paper money system and that we should expect them to be continued and indeed expanded.


pages: 389 words: 87,758

No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs, James Manyika

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, access to a mobile phone, additive manufacturing, Airbnb, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, autonomous vehicles, Bakken shale, barriers to entry, business cycle, business intelligence, Carmen Reinhart, central bank independence, cloud computing, corporate governance, creative destruction, crowdsourcing, demographic dividend, deskilling, disintermediation, disruptive innovation, distributed generation, Erik Brynjolfsson, financial innovation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Gini coefficient, global supply chain, global village, hydraulic fracturing, illegal immigration, income inequality, index fund, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, job automation, Just-in-time delivery, Kenneth Rogoff, Kickstarter, knowledge worker, labor-force participation, low skilled workers, Lyft, M-Pesa, mass immigration, megacity, mobile money, Mohammed Bouazizi, Network effects, new economy, New Urbanism, oil shale / tar sands, oil shock, old age dependency ratio, openstreetmap, peer-to-peer lending, pension reform, private sector deleveraging, purchasing power parity, quantitative easing, recommendation engine, Report Card for America’s Infrastructure, RFID, ride hailing / ride sharing, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, Snapchat, sovereign wealth fund, spinning jenny, stem cell, Steve Jobs, supply-chain management, TaskRabbit, The Great Moderation, trade route, transaction costs, Travis Kalanick, uber lyft, urban sprawl, Watson beat the top human players on Jeopardy!, working-age population, Zipcar

Guonan Ma and Wang Yi, China’s high saving rate: myth and reality, Bank for International Settlements working papers number 312, June 2010, www.bis.org/publ/work312.htm. 31. “Gross savings (% of GDP).” 32. Dobbs et al., Farewell to cheap capital? 33. Ibid. 34. Ibid. 35. Richard Dobbs and Susan Lund, “Quantitative easing, not as we know it,” The Economist, November 14, 2013, www.economist.com/blogs/freeexchange/2013/11/unconventional-monetary-policy. 36. EIU World Database; McKinsey Global Institute analysis. 37. Historical tables, Budget of the US government, Fiscal year 2015, Office of Management and Budget, www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/hist.pdf. 38. Dobbs and Lund, “Quantitative easing.” 39. Ibid. 40. Ibid. 41. Fiscal Monitor, International Monetary Fund, April 2014, www.imf.org/external/pubs/ft/fm/2014/01/pdf/fm1401.pdf. 42. Hiroko Tabuchi, “In Japan, a tenuous vow to cut,” New York Times, September 1, 2011, www.nytimes.com/2011/09/02/business/global/japan-seeks-answers-to-debt-load-without-angering-voters.html?

Between fiscal year 2008 and fiscal year 2012, for example, the US government’s net interest bill fell from $253 billion to $220 billion, a decline of 13 percent, even as the total gross federal debt outstanding grew 67 percent.37 Historically, expansive monetary policy has been a temporary measure deployed to boost consumer expenditure and corporate investments at times of slow growth. Most analysts agree that the central banks’ efforts at quantitative easing over the past five years have boosted global aggregate GDP by 1 to 3 percent.38 However, precisely how the central banks achieved this remains a point of debate. The impact of ultralow rates on consumer expenditure and corporate investment isn’t clear. In the United States, for example, the personal savings rate in 2013 was 5 percentage points higher than the precrisis level, while the rate of business investment remains at its lowest levels since the end of World War II.39 Did lower rates stimulate GDP growth?

After two decades of low growth and continued debt monetization, Japan’s annual fiscal deficit peaked in 2011 at just under 10 percent of GDP; the country’s gross public debt is above 240 percent of GDP.41 This level of debt has been sustainable because most Japanese debt is owned domestically.42 However, Japan’s demographic outlook means that the country is unlikely to be able to repay the debt traditionally, and it might need to monetize its government debt over the coming years. That is to say, the central bank will create new money in order to purchase the debt issued by the government. Japan may not be alone. As governments struggle to find a way to deleverage in the face of increasing age-related spending and fragile growth rates, unconventional monetary policies such as quantitative easing and even permanent debt monetization may become less of a taboo among central banks and policy makers. In this new macroeconomic territory, a traditional view of supply and demand fundamentals may no longer be a sufficient indicator for the future cost of capital. As illustrated by the European Central Bank’s move in the spring of 2014 to lower its benchmark deposit interest rate below zero, ultralow interest rates may remain the norm over the coming years.43 As economists Carmen Reinhart and Kenneth Rogoff argued in a 2013 IMF paper, policy makers need to guard against overplaying the risks related to unconventional monetary support and limiting central banks’ room for policy maneuvering.44 HOW TO ADAPT As demand-supply dynamics change, business leaders need to be prepared to navigate both worlds.


Not Working by Blanchflower, David G.

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

Folks with defined contribution plans have no reason to retire; there is no compulsory retirement age for faculty, who are on defined contribution plans where I work. I have no intention of retiring any time soon. I still like my students! To do this would require further monetary and fiscal stimuli. It would mean that central banks such as the Fed would have to stop raising rates and possibly turn them negative, although it is yet to be established that that is even feasible. This could well mean more quantitative easing. The idea that the ECB should stop doing quantitative easing when the unemployment rates in the Eurozone are high and underemployment remains high makes no sense. Japan is the precedent. Central bankers have focused like a laser beam on nonexistent inflation, which was a story of the 1970s when unions were stronger. We know that even if inflation gets to 5 percent or so it isn’t hard to stop it from going higher by raising rates.

It may well be that the patterns that existed between 1945 and 2007 tell us little or nothing about what has happened in the years since. There has never been a situation in anyone’s memory when central banks, including the European Central Bank, the Bank of Japan, and those in Sweden and Switzerland, continue to have negative interest rates. At the time of writing both the European Central Bank (ECB) and the Bank of Japan are still buying assets as part of an ongoing quantitative easing program.8 This is unprecedented in our lifetime. It may be that we will have to look at what happened in the 1930s in the years after the Great Crash. Some of my economist friends continue to call this “the crisis that keeps on giving.” It is likely to keep on giving for many years to come. It is my job and that of my colleagues to figure out how to make the labor market work. The most watched economic data release in the United States, and probably the world, given the importance of the U.S. economy, is the Employment Situation Report, which is published monthly by the Bureau of Labor Statistics (BLS) on a Friday.

Most countries other than the UK and the Netherlands have seen falling self-employment rates.20 Real net national disposable income in the UK is down: from £23,503 in 2007 to £22,786 in 2014.21 It is interesting also that the real disposable income of retired households continued to rise while that of the non-retired did not. Between 2007–8 at the start of the recession and 2015–16, real disposable income of retired households rose 13 percent. In contrast, that of non-retired households fell by 1.1 percent.22 Retired households have benefited from government policies on uprating state pensions and from rises in equity values and house prices, as well as all the fruits of quantitative easing. If we do the same calculation by quintile, the lowest quintile saw its real incomes rise by 13.2 percent; the second by 6.6 percent; the third by 3.9 percent; and the fourth by 4 percent; the top quintile real incomes fell 3.3 percent. This is of interest given that the poor, the retired, and older folks disproportionately voted for Brexit. Productivity and Employment Employment growth has picked up as productivity has slowed.23 Employment growth rates in the UK, according to the ONS, were as follows (where we calculate the average annual growth rates of employment). 1970s 1980s 1990s 0.4% 0.6% 0.2% 2000–2007 2008–10 2011–17 1.0% −0.1% 1.3% The Great Recession saw a fall in employment from 2008 through 2012.


Battling Eight Giants: Basic Income Now by Guy Standing

basic income, Bernie Sanders, centre right, collective bargaining, decarbonisation, diversified portfolio, Donald Trump, Elon Musk, full employment, future of work, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), job automation, labour market flexibility, Lao Tzu, longitudinal study, low skilled workers, Martin Wolf, Mont Pelerin Society, moral hazard, North Sea oil, offshore financial centre, open economy, pension reform, precariat, quantitative easing, rent control, Ronald Reagan, selection bias, universal basic income, Y Combinator

Additional finance could be raised by tackling the widespread tax avoidance by wealthy individuals and corporations, which has been allowed and even facilitated to a much greater extent in the UK than in other countries.14 Why Basic Income Beats the Alternatives 59 There are other ways of showing how a basic income could be afforded. Some commentators propose funding basic income through monetary policy, a form of ‘quantitative easing for people’ instead of the Bank of England’s ‘quantitative easing’ policy of releasing money to the financial markets. This could be a means of redressing a structural failing of the British economy, the increasing lag of aggregate wage income behind GDP growth, which is resulting in rising debt as households try to maintain living standards by borrowing to pay for goods and services.15 Stewart Lansley and Howard Reed, in a report for Compass, have proposed a three-step approach for phasing in a full basic income.

See also individual entries definition 1, 4–8 reasons for need 8–9 security 98, 113, 114 system 1, 20, 23, 26, 32, 37, 52, 70, 84, 90–1, 122 n.7 Basic Income Earth Network (BIEN) 94 behavioural conditionality 70, 73, 77, 114 behaviour-testing 4, 39, 70, 84 benefits 5, 7, 27 conditional schemes 41 social assistance 23 BET365 11 Beveridge, William 8–9, 38 Beveridge model 21 Big Bang liberalization 18 BJP 92 black economy 40, 60 B-Mincome 99–100 Booker, Cory 101 brain development 98–9 132 Branson, Richard 54 Brexit 53 Britain 6, 8–10, 12–18, 20, 23–4, 26–7, 30–1, 33–4, 37–8, 40–2, 55, 57, 59, 90, 101, 104, 112 British Columbia 95 British Constitution 1 Buck, Karen 57 bureaucracy 40, 49, 100, 102 Bureau of Economic Analysis 16 Business Property Relief 58 California 69, 96–7 Canada 35 capacity-to-work tests 6, 104 cap-and-trade approach 34 Capita 50 capital dividend 59 capital fund 89–90 capital grants 59, 75, 76, 92 carbon dividends 37 carbon emissions 33–4 carbon tax 34–5, 37 care deficit 53 care work 36, 53, 67, 74, 84 cash payments 111 cash transfers 99 ‘casino dividend’ schemes 88 charities 48 The Charter of the Forest (1217) 1 Chicago 99 Child Benefit 57, 58, 72, 123 n.4 childcare 99, 110–11 child development 88 Child Tax Credits 81 chronic psychological stress 26 Citizens Advice 46–8 Citizen’s Basic Income Trust 7, 122 n.7, 123 n.4 citizenship rights 1, 29 civil society organizations 79 Index climate change 34 Clinton, Hillary 126 n.4 Clinton, Bill 105 Coalition government 41, 50 cognitive performance 33 collateral damage 53 common dividends 7, 20, 21, 59–60, 69, 73, 75, 83, 84, 85 Commons Fund 8, 35, 57, 59, 89 community cohesion 3 resilience 23 work 84 ‘community payback’ schemes 102 Compass 59 compensation 2, 7, 16, 104 ‘concealed debt’ 24–5 conditional cash transfer schemes 90 Conservative government 9, 85 Conservatives 23 consumer credit 24 consumption 23 contractual obligations 46 Coote, Anna 113 cost of living 25, 49, 52, 83 council house sales 76 council tax 25 Crocker, Geoff 122 n.15 cross-party plans 80 crowd-funded schemes 100 deadweight effects 102 ‘deaths of despair’ 27 Deaton, Angus 10 debt 23–6, 67, 85 debt collection practices 24–5 decarbonization 34 dementia 33 democratic values 69 Democrats 37 demographic changes 15 Index 133 Department for Work and Pensions (DWP) 11–12, 42–8, 50–2, 73, 81, 92, 129 n.6 depression 28, 94 direct taxes 56, 58 disability benefits 6, 49–52, 83 Disability Living Allowance (DLA) 49–51 Disabled People Against Cuts 52 Dividend Allowance 58 ‘dividend capitalism’ 8 domestic violence 29, 87 Dragonfly 92 due process 46, 49 ecological crisis 33, 37, 39, 114 ecological developments 21 ecological disaster 35 ecological taxes and levies 37 economy benefits 20, 60 crisis 106 damage 34 growth 20, 36, 106 industrialized 20 insecurity 21, 35, 39, 89 security 75, 80, 84, 88 system 15, 27, 38 tax-paying 60 uncertainty 8, 22–3, 31 ‘eco-socialism’ 8 ecosystems 33 Edinburgh 80 education 88, 108 Elliott, Larry 122 n.15 employment 16, 22, 39, 60–1, 81, 89, 93–4, 102, 106, 107, 110, 114 Employment Support Allowance (ESA) 27, 41, 49–51 England 28, 63, 110–11 Enlightenment 85 Entrepreneurs’ Relief 18 equality 31, 85 Europe 37 European Foundation for the Improvement of Living and Working Conditions (Eurofound) 120 n.1 European Heart Journal 33 European Union 6, 17, 41 euthanasia 113 extinction 33–7 ‘Extinction Rebellion’ 33 Fabian Society 57–8 Facebook 97 family allowances 56 family benefits 56 family insecurity 23 federal welfare programs 106 Fife 24, 80 financial crash (2007–8) 23, 26, 34 financialization 116 n.22 financial markets 18 Financial Services Authority 123 n.15 Financial Times 19, 123 n.15 financial wealth 18 Finland 28, 61, 93–5 food banks 10, 29–30, 43, 109 food donations 29 food insecurity 108–9 fossil fuels 33–4 France 12, 17, 18, 32, 38, 57 free bus services 112 freedom 8, 30, 84, 85, 101, 114 ‘free food’ 108–9, 129 n.6 ‘free’ labour market 106 free trade 13 Friends Provident Foundation 75 fuel tax 35 fund and dividend model 89 funding 29, 59, 62, 69, 71–2, 112 134 G20 (Group of 20 large economies) 15 Gaffney, Declan 57 Gallup 105 GDP 14, 17–18, 23–4, 34, 36, 59, 89, 108 General Election 91–2, 94 ‘genuine progress indicator’ 36 Germany 17–18, 38, 100 Gillibrand, Kirsten 101 Gini coefficient 9, 12 GiveDirectly 91 Glasgow City 80 globalization 14 Global Wage Report 2016/17 14 global warming 33, 37 Good Society 75, 106 The Great British Benefits Handout (TV series) 92 Great Depression 9 Great Recession 23 greenhouse gas emissions 34, 36 gross cost 110 The Guardian 101, 103, 122–3 n.15 Hansard Society 37 Harris, Kamala 101 Harrop, Andrew 57 Hartz IV 100 HartzPlus 100 health 67, 87, 100 human 33 insurance premiums 35 services 60 healthcare costs 28 hegemony 14 help-to-buy loan scheme 76 Her Majesty’s Revenue and Customs (HMRC) 64, 73, 81 Hirschmann, Albert 56 household debt 24 Index household earnings 16 household survey 12 House of Commons 110–11 housing allowance 95 Housing Benefit 24, 41, 53, 71 housing policy 53 hub-and-spoke model 112 Hughes, Chris 97 humanity 33 human relations 3 ‘immoral’ hazard 109 ‘impact’ effects 78 incentive 62 income 81 assistance 88 average 83 components 11 distribution system 4, 13–14, 38, 67, 84, 107, 114 gap 9 growth 16 insecurity 27 men vs. women 15–16 national 14, 36 pensioners’ 16 rental 13–15, 20 social 14, 16–17 support payments 110 tax 1, 7, 57, 89, 111 transfer 85 volatility 22 India 68, 80, 90–2 Indian Congress Party 91 inequality 2, 4, 9–13, 21, 29, 31, 33, 35, 37, 38, 39, 54, 80, 85, 114 growth 17 income 9–10, 15–17, 19 living standard 20 wealth 18–19, 76 informal care 111 Index 135 inheritance tax 58 in-kind services 111 insecurity 21–3, 29, 38, 39, 47, 67, 85, 106 Institute for Fiscal Studies (IFS) 10 Institute for Public Policy Research 125 n.17 Institute for Public Policy Research (IPPR) 75, 111 Institute of New Economic Thinking 123 n.15 Institute of Public Policy Research 59 insurance schemes 8 intellectual property 14–15 Intergovernmental Panel on Climate Change (IPCC) 34 International Labour Organization (ILO) 14, 122 n.4 International Monetary Fund (IMF) 31, 34 international tax evasion 18 interpersonal income inequality 83 inter-regional income inequalities 83 intra-family relationships 3 involuntary debt 26 in-work benefits 22 Ireland 35 Italy 18 labour 31, 107 inefficiency 106 law 101 markets 8, 14, 32, 39, 40, 60, 62–3, 96, 100, 106 regulations 13 supply 67, 95 Labour governments 85 labourism 106 Lansley, Stewart 59 Latin America 90 Left Alliance 94 Lenin, Vladimir Ilyich 113 Liberal government 35 life-changing errors 51 life-threatening illness 33 Liverpool 80 living standards 20, 23, 33, 36, 53, 59, 92 Local Housing Allowances 24 London Homelessness Project 92–3 low-income communities 33 low-income families 21 low-income households 17 low-income individuals 86 Low Pay Commission 63 low-wage jobs 60, 107 Luddite reaction 32 lump-sum payments 35, 59, 76 Jackson, Mississippi 99 JobCentrePlus 47 job guarantee policy 101–7 job-matching programs 106 Jobseeker’s Allowance (JSA) 41, 46 Joseph Rowntree Foundation 21 McDonnell, John 129 n.13 McKinsey Global Institute 31 Macron, Emmanuel 35 Magna Carta 1 ‘Making Ends Meet’ 97 ‘mandatory reconsideration’ stage 51 Manitoba 87–8 Manitoba Basic Annual Income Experiment (Mincome) 87 market economy 105, 114 master-servant model 101 Kaletsky, Anatole 123 n.15 Kenya 90–2 Khanna, Ro 103 Kibasi, Tom 113 136 Index Maximus 50 means-testing 4, 39, 42, 48, 58, 61–2, 70, 84, 88, 90, 109–10, 114 benefits 5, 7, 27, 40, 46, 56, 71–3, 81, 129 n.6 social assistance 23, 41, 95, 122 n.7 system 6 medical services 28 Mein Grundeinkommen (‘My Basic Income’) 100 mental health 26, 28, 94 disorders 88 trusts 28 mental illness 33, 68 migrants 7, 113 ‘minimum income floor’ 45 Ministry of Justice 51 modern insecurity 22 modern life 31 monetary policy 59 Mont Pelerin Society 13 moral commitment 75 moral hazard 109 mortality 27, 76 multinational investment funds 34 Musk, Elon 31, 54 Namibia 90–2 National Audit Office (NAO) 24, 43–4, 46, 76 National Health Service (NHS) 8, 24, 27–8, 44, 68, 80, 108, 111 National Insurance 18, 22, 124 n.4 nationalism 37 National Living Wage 63 National Minimum Wage 63–4 national solidarity 3 Native American community 88 negative income tax (NIT) 23, 87, 95, 100 neo-fascism 37–8 neoliberalism 13, 84 Netherlands 96 New Economics Foundation (NEF) 57, 113, 122 n.15 non-resident citizens 113 non-wage benefits 16 non-wage work 74 North America 67 North Ayrshire 80 North Carolina 88 North Sea oil 89–90 Nyman, Rickard 23 Oakland 96–7 Office for National Statistics (ONS) 14–15, 17, 36 Ontario, Canada 95–6 open economy 84 open ‘free’ markets 13, 15 opportunity dividend 59 Organization for Economic Co-operation and Development (OECD) 18, 23, 27, 31 Ormerod, Paul 23 Osborne, George 19 Paine, Thomas 2, 75 Painian Principle 2 panopticon state 55 Paris Agreement (2015) 34 participation income 74–5 paternalism 42, 55 pauperization 63 Pawar, Alderman Ameya 99 pay contributions 21 pension contributions 18, 58 Pension Credit 41 Pericles Condition 75 permanent capital fund 71 personal care services 110–11 Index 137 personal income tax 35 Personal Independence Payment (PIP) 49–51 personal insecurity 23 Personal Savings Allowance 58 personal tax allowances 17, 58, 59 perverse incentives 50 physical health 26, 94 piloting in Britain 67–81 applying 80–1 rules in designing 70–80 policy development 3, 69 political decision 78 political discourse 92 political instability 35 political system 38 populism 37–8, 75 populist parties 37 populist politics 39 Populus survey 55 post-war system 8 poverty 2, 4, 10–12, 22, 27, 29, 36, 38, 40, 60–1, 89, 100, 108–9, 114, 125 n.17, 129 n.6 precarity 29–30, 38, 39, 60–1, 85, 103, 129 n.6 Primary Earnings Threshold 124 n.4 private debt 23–4, 39 private inheritance 2 private insurance 85 private property rights 13 private wealth 18 privatization 13, 17, 112 property prices 76 prostitution 43 Public Accounts Committee (PAC) 51 public costs 28 public debt 23 public inheritance 61 public libraries 47 public policy 97 public sector managers 103 public services 4, 17, 62, 108, 112, 114 public spending 89 public wealth 18 ‘quantitative easing’ policy 59 quasi-basic income 89, 98 quasi-universal basic services 30 quasi-universal dividends 35 quasi-universal system 61, 70, 90 Randomised Control Trial (RCT) 124–5 n.14 rape 44 Ratcliffe, Jim 12 Reagan, Ronald 13 Reed, Howard 59 refugees 7 regressive universalism 57 regular cash payment 7 rent arrears 24 controls 53 rentier capitalism 13–21, 107, 116 n.22 republican freedom 2–3, 30, 84 Republicans 37 Resolution Foundation 10, 15, 19, 25, 76 ‘revenue neutral’ constraint 7 right-wing populism 37–8 robot advance 31–3 Royal College of Physicians 33 Royal Society of Arts 55, 59, 124 n.12 RSA Scotland 125 n.17 Rudd, Amber 9 Russia 113 138 Sanders, Bernie 101 scepticism 31 schooling 67, 89 Scotland 69, 80, 111 Second World War 19, 21 security 8, 38, 55, 68, 84 economic 3, 4, 49, 56 income 73–4 social 8, 22, 49 Self-Employed Women’s Association (SEWA) 68 self-employment 45 Shadow Chancellor of the Exchequer 3, 115 n.3 Smith, Iain Duncan 42 ‘snake oil’ 113 social assistance 3, 28 social benefit 20 social care 102, 104, 110–11 social crisis 106 social dividend scheme 92 Social Fund 29 social inheritance 2 social insecurity 21 social insurance 22, 85 social integration 44 social justice 2, 8, 20, 69, 84, 101, 114 social policy 8, 23, 26, 30, 42, 53, 84–5, 96 social protection system 32 social relation 100 social security 10, 70–1, 95 social solidarity 3, 8, 39, 61, 84–5, 91 social spending 17 social status 104 social strife 35 social value 29 ‘something-for-nothing’ economy 19–20, 61 Index Speenhamland system 63 State of the Global Workplace surveys 105 statutory minimum wages 106 stigma 47, 55 stigmatization 41, 109 Stockton 97–9 Stockton Economic Empowerment Demonstration (SEED) 97 stress 26–9, 39, 51, 67, 68, 85, 93 student loans 24 substitution effects 102–3 suicides 26–7 Summers, Larry 105–6 Sweden 113 Swiss bank Credit Suisse 12 Switzerland 35 tax advantages 49 and benefit systems 17, 18, 69, 110 credits 3, 17, 24, 63, 105, 106 policies 16 rates 72 reliefs 17–18, 57–8, 61 tax-free inheritance 19 technological change 105 technological revolution 14, 31, 114 ‘teething problems’ 42 Thatcher, Margaret 13 Thatcher government 9, 18 The Times 92 Torry, Malcolm 122 n.7 Trades Union Congress 24 tribal casino schemes 76 ‘triple-lock’ policy 16 Trump, Donald 37 Trussell Trust 29, 43 Tubbs, Michael 97–8 Index 139 Turner, Adair 123 n.15 two-child limit 44 UK.


pages: 492 words: 118,882

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

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

At the same time, the lack of demand for credit causes creditors to also reduce their expenditures. The cumulative effect of these two changes results in choking investments, higher unemployment levels, and a reduced demand for goods and services. In the past, to overcome these effects and boost spending, monetary policies aimed at reducing interest rates and employed the use of nontraditional instruments, such as quantitative easing (QE), in order to boost the supply of credit. While the effects of QE and other recently employed tools will be discussed in a later part of this book, the key point to consider is that the use of such measures is limited, since borrowers who are already overleveraged do not wish to get into more debt. Hence, the demand side of credit availability becomes the more pressing issue (Koo, 2014), for even if credit is supplied at a low price, the debt overhang effect reduces the demand for credit.

The enactment of the Volker rule, which restricts US banks from making certain kinds of speculative investments that do not benefit their customers, is a return to the older form of banking regulations when deposits were not used to trade on the bank’s own accounts. While the net effect of these rulings, along with stricter regulations following the LIBOR23 scandal, do apply new restrictions on the ability of commercial banks to participate in speculative activities, they have been coupled with extraordinary measures such as quantitative easing (QE) and quantitative and qualitative easing24 (QQE). This is not to say that the regulators and central bankers were wrong in doing what they did. Following the events of the crisis of 2008, pumping money into the economy at ultra-low rates was better than not taking any action. But it replays the dance with debt all over again, as thanks to the current modus operandi, governments have to borrow and pay interest to central banks for the newly minted money they push into the economy.

LIBOR is used to settle contracts on money market derivatives and is also used as a benchmark to set payments on about $800 trillion worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. Source: The Economist: http://www.economist.com/node/21558281 24 Qualitative easing means targeting certain assets to try to drive up their prices and drive down their yields, whereas quantitative easing is unspecific and intends to drive down interest rates across the whole spectrum of assets. Source: Bloomberg: http://www.bloomberg.com/news/ articles/2014-10-31/what-the-heck-is-japans-qqe2 23 23 Chapter 1 ■ Debt-based Economy: The Intricate Dance of Money and Debt banking. While a number of measures have been taken to address some of these issues, these measures have been reactive rather than proactive.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, Plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

The final facet of Abenomics is its monetary policy, which reinforces stimulus with monetary stimulus. We should have learned that monetary stimulus—even strong and unprecedented actions like quantitative easing—has, at most, limited effects. Attention is focused on reversing deflation, which I believe is mainly a concern because it is a symptom of underutilization. While weakening the yen’s exchange rate will make Japanese goods more competitive and thus stimulate the economy’s growth, this is the reality of the international interdependence of monetary policy. It is equally true that the Federal Reserve’s policy of “quantitative easing” weakens the dollar. We can look forward to a day when global coordination improves in this area. AS THE PIECES of evidence fall into place, the pressing issue turns out to be not whether Abenomics is a good plan, but how the United States could achieve a similarly integrated plan, and what the consequences would be if it fails.

As always, it is the poor who suffer the most from such crises, as they lose their jobs and face protracted unemployment. In this case, the effects on ordinary Americans were particularly grave, given that more than 14 million homes were foreclosed from 2007 to 2013, and given the magnitude of the cutbacks in government spending, including for education. Aggressive monetary policy (so-called quantitative easing) focused more on restoring prices in the stock market than on restoring lending to small and medium-size enterprises, and as a result was much more effective in restoring wealth to the rich than in benefiting average Americans or in creating jobs for them. That’s why in the first three years of the so-called recovery, some 95 percent of the increases in income went to the top 1 percent, and why six years after the start of the crisis, median wealth was down 40 percent relative to precrisis levels.

But this means that “wealth” and “capital” (as conventionally understood) are distinct concepts. Indeed, it is even possible that wealth could be increasing, even as “capital” was decreasing. In Piketty’s home country of France, the value of land in the Riviera was increasing. But that didn’t mean that there was more land. The land in the Riviera is the same today as it was fifty years ago. Only the price of land was increasing. Loose money (for instance, associated with quantitative easing, where the U.S. Fed tripled its balance sheet by buying large amounts of medium- and long-term debt, increasing it by some two trillion dollars over a short time) had led to a flood of credit. Textbook economics suggested that this should increase the quantity of lending and reduce the cost of lending, and both would have helped the American economy. But in a world of globalization, money created by the Fed doesn’t have to stay in the United States; it can go anywhere in the world it wants; and it naturally went to economies that were booming—and that wasn’t here at home.


pages: 305 words: 98,072

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

This is extremely bad news for most people but relatively good news for the small minority who do understand. The value (purchasing power) of one pound or one dollar has fallen by around 90 per cent since 1971. Worse, this negative trend in the value of money is accelerating thanks to the actions of politicians and central banks all over the world as they continue to invent large amounts of new money out of thin air. In the UK and US this is called quantitative easing (QE). BUT WHAT IS INFLATION? “But inflation is still really quite low – 2 per cent or something, isn’t it?” I hear you ask. Yes but what is “inflation” as reported by governments? Here is a little story that may help explain why official government inflation numbers are of very little use to us. Understanding this is incredibly important for your financial future. In the 1980s the British government changed the definition of “unemployment” on numerous occasions.

At the time of writing the first edition of this book, this is exactly what was happening across Europe. Interest rates in Greece, Italy, Spain and even France had been significantly pushed up by a bond market that refused to pay as much for these countries’ debt as before. The only way for a country to fight against this reality is by inventing money to buy their own bonds. This is essentially what “quantitative easing” (QE) is. As we have seen, throughout history this policy has always caused significant inflation. And higher inflation means lower real returns on assets. In those countries that decided to combat this by printing money (particularly the UK and the US), property markets are caught between the “rock” of rising interest rates and the “hard place” of rising inflation. We must also consider the supply of money (as well as its price).

So far, governments on both sides of the Atlantic have taken the money-printing option, and it is extremely likely this will continue for the simple reason that they can get away with it, because so few people understand what is going on (remember the John Maynard Keynes quote about only “one man in a million” understanding inflation). And for obvious reasons a politician who stands up and says, “Sorry, you can’t have a pension, we just can’t afford it any more,” has a much shorter life span than one who says, “We are taking positive steps to solve the financial crisis with a £100 billion package of quantitative easing (QE).” Both statements have essentially the same result but only a small minority of people understand this. No matter what your political inclinations, no matter how you view the role of government, the simple fact is that we can’t afford to pay for society’s pension and healthcare requirements the way we have for the last few decades. There are just too many retired and retiring people compared to productive workers.


pages: 391 words: 97,018

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

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

In 2009 and 2010, through fees and interest, TALF generated $721 million in profits for the Fed, which didn’t pay out a dime in guarantees.4 These efforts were short-term emergency interventions to unclog the nation’s—and the world’s—financial plumbing. Other interventions were made to keep interest rates low and to jolt the economy back into life. After the financial panic passed, the Federal Reserve continued to add new assets to its balance sheet, creating new money to buy $1 trillion in mortgage-backed securities in 2009, in the first round of what came to be known as “quantitative easing” (QE). In late 2010 and early 2011, in a second round of quantitative easing, the Fed bought $600 billion in Treasury securities. But the overall balance sheet didn’t expand by anywhere near $1.6 trillion as a result of QE1 and QE2, thanks to the slow-motion erosion of crisis-era facilities and loans. Each week, as people made payments on mortgages and refinanced and sold homes, the mortgage-backed securities portfolio shrank.

Having spent a week getting acquainted with the depopulating, self-doubting country, I gulped hard. But Nishimura’s takeaway was an optimistic one. In the 1990s Japanese policymakers deliberated and delayed before embarking on a regime of interest rate cuts, stimulus measures, an expansion of bank deposit insurance, a partial nationalization of failed institutions, bank capital injections, a zero-interest-rate policy, quantitative easing, and still more stimulus. The United States, he said, had essentially undertaken the same response, with one significant difference: speed. It took the United States just eighteen months to conduct the aggressive fiscal and monetary actions that Japan waited twelve years to carry out. Whereas Japan’s first major stimulus came seven quarters after its commercial real estate bubble peaked, the U.S. policymaking apparatus responded to the downturn much more quickly.

In 2010 and 2011 the consumer was more like a weightlifter who has strengthened his legs and core and has learned how to use them. As a result the vicious debt circle of 2008 and 2009 was increasingly replaced by a virtuous circle in 2010 and 2011. Higher demand—led by global growth, rising government expenditures, and a recovering private sector—spurred job creation starting in February 2010. And this process gained steam even as the effects of policy and public spending withered. The Federal Reserve’s quantitative easing helped keep interest rates low in 2010 and 2011, but petered out in the second half of 2011. The stimulus and government assistance, so vital to averting a Great Depression in 2008 and 2009, began to wane in 2010. Meanwhile states and cities were acting as brakes on growth by cutting spending and employment. In what’s been dubbed “the conservative recovery,” the private sector persistently added jobs even as the public sector just as persistently cut them.


pages: 267 words: 74,296

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

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

The mood of foreboding grew darker still on May 6th 2010, the day of a strange “flash-crash” on Wall Street, in which the Dow Jones Industrial Average collapsed by about 1,000 points before recovering within minutes, perhaps because of a technical glitch. The ECB’s governing council, in Lisbon that day for its monthly meeting, faced a momentous decision: should it start buying sovereign bonds to stop the panic? The Federal Reserve and the Bank of England had been doing so under their policy of quantitative easing to bring down long-term borrowing costs. But the ECB had not gone so far, wary of the prohibition against anything resembling “monetary financing”, that is, printing money to finance public debt. After the official meeting, Trichet told journalists that the subject of bond-buying had not been discussed. Later on over an informal dinner, however, the council had reached a tentative agreement to start selectively buying the bonds of vulnerable countries.4 The next day, as leaders gathered in Brussels for a euro-zone-only summit, ostensibly to endorse the bail-out of Greece, many participants seemed unaware that they would be called upon to do something much bigger: set up a safety net for the whole euro zone.

The ECB had its own twin fears, both of them German. They were called “Bundesbank” and “Karlsruhe”. The inflation-busting tradition of the Bundesbank meant that the ECB would rather flirt with deflation than let prices rise too high in Germany, or upset German savers by more aggressive lowering of interest rates. It never dared engage in the aggressive loosening of monetary policy, known as “quantitative easing” (involving the purchase of government bonds and other assets), long pursued by the US Federal Reserve and the Bank of England. Excessively low inflation, overly tight monetary policy and a high exchange rate made it even harder for the periphery to adjust relative to Germany. The Bundesbank openly opposed any resort to bond-buying to hold down borrowing costs. And the ECB soon ran up against the even greater intransigence of the German constitutional court, which ruled that Draghi’s policy of outright monetary transactions (OMT), the one true firewall that had arrested the financial blaze, was illegal (though it offered a stay of execution by passing the case on to the European Court of Justice).

And given that its supervisory role already raises questions about its political independence, not least because bank failures have an impact on national treasuries, the ECB should get out of the entanglement of the troika. For now, the ECB must have the courage to loosen monetary policy more aggressively, despite German complaints that savings are being undermined, to avert the threat of deflation. A dose of American-style quantitative easing may be in order. Once again, though, it would be easier if the ECB had Eurobonds to buy instead of having to pick and choose which country’s debt to buy and which to exclude. Narrow the democratic deficit The integration of the euro zone, the intrusion of European bodies into national economic policymaking and the growing popular disenchantment with the European project require the democratic deficit to be addressed more urgently than ever.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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

What we did with money in the run-up to 2008 was to massively expand its volume: the global money supply rose from $25 trillion to $70 trillion in the seven years before the crash – incomparably faster than growth in the real economy. When money expands at this rate, it is a sign that we think the future is going to be spectacularly richer than the present. The crisis was simply a feedback signal from the future: we were wrong. All the global elite could do once the crisis exploded was put more chips on the roulette table. Finding them, to the tune of $12 trillion in quantitative easing, was no problem since they themselves were the cashiers at the casino. But they had to spread their bets more evenly for a while, and become less reckless.12 That, effectively, is what the policy of the world has been since 2008. You print so much money that the cost of borrowing it for banks becomes zero, or even negative. When real interest rates turn negative, savers – who can only keep their money safe by buying government bonds – are effectively forced to forgo any income from their savings.

It was Treasury Secretary Larry Summers who, in 1999, through the repeal of Glass-Steagall, opened the banking system to the attentions of those adept at exotic, opaque and offshore forms of finance. Fiat money, then, contributed to the crisis by creating wave after wave of false signals from the future: the Fed will always save us, shares are not risky and banks can make high profits out of low-risk business. Nothing demonstrates the continuity between pre- and post-crisis policy better than quantitative easing (QE). In 2009, having wavered before the enormity of the task, Bernanke – together with his UK counterpart Mervyn King, governor of the Bank of England – started the presses rolling. In November 2008 China had already begun printing money in the more direct form of ‘soft’ bank loans from the state-owned banks to businesses (i.e. loans that nobody expected to be repaid). Now the Fed would print $4 trillion over the next four years – buying up the stressed debts of state-backed mortgage lenders, then government bonds, then mortgage debt, to the tune of $80 billion a month.

Interest rates35 Kondratieff measured his waves using interest rates, and for the post-1945 period there is no clearer metric than this one: the average interest rates banks charge to companies and individuals in the USA. Interest rates rose gradually during the long boom, spiked in the early 1980s – when high interest rates were used to wipe out swathes of the old industries – and have gradually declined, flatlining at the end of the graph because of quantitative easing. Kondratieff’s colleagues, who’d seen this exact pattern in all the previous cycles, would have concluded: ‘Comrade, that’s a long wave.’ 3. Commodity prices: nickel However, Kondratieff also tracked the prices of basic commodities, such as coal and iron. This graph tracks the price of a modern equivalent, nickel – a key component of stainless steel – over fifty-seven years. I think it would have knocked Kondratieff off his chair.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

A young scholar in a highly selective finance program is rightly concerned with fellowships, publication, and faculty appointment. Approaching a sexagenarian thesis adviser with an abstract that refutes what the adviser has held dear for decades is not an astute career move. Most deem it better to bang out the thousandth variation of a dynamic stochastic general equilibrium model using autoregressive conditional heteroscedasticity to explain the impact of quantitative easing on swap spreads. That’s the way to get ahead. Then there is simple inertia, like staying in a warm bed on a cold morning. Academics have their comfort zones too. New knowledge is like a dive in the surf in winter—bracing, exhilarating, but not everyone’s cup of tea. The preference for certainty over uncertainty, the allure of elegant mathematics, the close-minded academic mentality, and inertia are good explanations for why flawed paradigms persist.

Silver was almost the only commodity accepted by China in exchange for Chinese manufactures until the nineteenth century. China put its own chop on the Spanish coins to make them a circulating currency in China. If gold was the first world money, silver was the first world currency. Silver’s popularity as a monetary standard was based on supply and demand. Gold was always scarce; silver more readily available. Charlemagne invented quantitative easing in the ninth century by substituting silver for gold coinage to increase the money supply in his empire. Spain did the same in the sixteenth century. Silver has most of gold’s attractions. Silver is of uniform grade, malleable, relatively scarce, and pleasing to the eye. After the United States made gold possession a crime in 1933, silver coins circulated freely. The United States minted 90 percent solid silver coins until 1964.

This leaves one option: the International Monetary Fund’s Special Drawing Right. … An incremental expansion of the SDR’s role in the new global financial architecture, aimed at making the monetary-policy transmission mechanism more effective, can be achieved without major disagreement. This is because, conceptually, an increase in SDRs is equivalent to an increase in the global central bank balance sheet (quantitative easing). … Consider a scenario in which member central banks increase their SDR allocation in the IMF by, say, $1 trillion. A five-times leverage would enable the IMF to increase either lending to member countries or investments in infrastructure via multilateral development banks by at least $5 trillion. Moreover, multilateral development banks could leverage their equity by borrowing in capital markets. … The IMF and the major central banks should take advantage of this newfound knowledge, and provide equity and liquidity against long-term lending for infrastructure investments. … The linkages among climate change, SDRs, the IMF, World Bank, and the need for global coordination could not be more explicit.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"Robert Solow", bank run, banking crisis, banks create money, Basel III, basic income, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, David Graeber, decarbonisation, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, Mahatma Gandhi, mass immigration, means of production, meta analysis, meta-analysis, moral hazard, mortgage debt, Naomi Klein, new economy, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, profit motive, purchasing power parity, quantitative easing, Richard Thaler, road to serfdom, Robert Gordon, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

On the reworking of the Reinhart and Rogoff results, see Herndon et al. (2014). Herndon was a graduate student at Princeton when he discovered the errors in the Reinhart and Rogoff paper. See www.bbc.co.uk/news/magazine-22223190 (accessed 18 March 2016). See also Jayadev and Konczal (2010). 49 Quantitative easing is a way of injecting more liquidity into the economy and stimulating investment. The term refers mostly to the purchase by the Central Bank of government and corporate debt from financial institutions. See for instance BoE (2010). Suggestions for ‘green quantitative easing’ or ‘people’s quantitative easing’ work slightly differently. See GND (2013), Positive Money (2013). On the scale of the US commitments, see Felkerson (2011). 50 Stuckler and Basu (2014). 51 For an overview (and collection of essays) on secular stagnation, see Teulings and Baldwin (2014); see also BIS (2015), Summers (2014).

‘Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.’ The impacts were as unsavoury as they were predictable. Economies that had been on the verge of recovery were pushed back into recession. With interest rates at zero, and deficit spending outlawed, central banks were forced to turn towards more unconventional monetary policy. They committed even more money – this time in the form of ‘quantitative easing’ – to try and increase nominal demand and restimulate investment. The sheer scale of these commitments was extraordinary. By 2012, the US alone had committed a staggering $30 trillion – almost twice its annual GDP – to the recovery effort.49 But as health economists David Stuckler and Sanjay Basu argue, the ‘greatest tragedy of austerity is not that it has hurt our economies. The greatest tragedy of austerity is the unnecessary human suffering that austerity has caused.’

INDEX Locators in italic refer to figures absolute decoupling 84–6; historical perspectives 89–96, 90, 92, 94, 95; mathematical relationship with relative decoupling 96–101, 111 abundance see opulence accounting errors, decoupling 84, 91 acquisition, instinctive 68 see also symbolic role of goods adaptation: diminishing marginal utility 51, 68; environmental 169; evolutionary 226 advertising, power of 140, 203–4 Africa 73, 75–7; life-expectancy 74; philosophy 227; pursuit of western lifestyles 70; growth 99; relative income effect 58, 75; schooling 78 The Age of Turbulence (Greenspan) 35 ageing populations 44, 81 agriculture 12, 148, 152, 220 Aids/HIV 77 algebra of inequality see inequality; mathematical models alienation: future visions 212, 218–19; geographical community 122–3; role of the state 205; selfishness vs. altruism 137; signals sent by society 131 alternatives: economic 101–2, 139–40, 157–8; hedonism 125–6 see also future visions; post-growth macroeconomics; reform altruism 133–8, 196, 207 amenities see public services/amenities Amish community, North America 128 An Inquiry into the Nature and Causes of the Wealth of Nations (Smith) 123, 132 angelised growth see green growth animal welfare 220 anonymity/loneliness see alienation anthropological perspectives, consumption 70, 115 anti-consumerism 131 see also intrinsic values anxiety: fear of death 69, 104, 115, 212–15; novelty 116–17, 124, 211 Argentina 58, 78, 78, 80 Aristotle 48, 61 The Art of Happiness (Dalai Lama) 49 arts, Baumol’s cost disease 171–2 assets, stranded 167–8 see also ownership austerity policies xxxiii–xxxv, 189; and financial crisis 24, 42–3; mathematical models 181 Australia 58, 78, 128, 206 authoritarianism 199 autonomy see freedom/autonomy Ayres, Robert 143 backfire effects 111 balance: private interests/common good 208; tradition/innovation 226 Bank for International Settlements 46 bank runs 157 banking system 29–30, 39, 153–7, 208; bonuses 37–8 see also financial crisis; financial system basic entitlements: enterprise as service 142; income 67, 72–9, 74, 75, 76, 78; limits to growth 63–4 see also education; food; health Basu, Sanjay 43 Baumol, William 112, 147, 222, 223; cost disease 170, 171, 172, 173 BBC survey, geographical community 122–3 Becker, Ernest 69 Belk, Russ 70, 114 belonging 212, 219 see also alienation; community; intrinsic values Bentham, Jeremy 55 bereavement, material possessions 114, 214–15 Berger, Peter 70, 214 Berry, Wendell 8 Better Growth, Better Climate (New Climate Economy report) 18 big business/corporations 106–7 biodiversity loss 17, 47, 62, 101 biological perspectives see evolutionary theory; human nature/psyche biophysical boundaries see limits (ecological) Black Monday 46 The Body Economic (Stuckler and Basu) 43 bond markets 30, 157 bonuses, banking 37–8 Bookchin, Murray 122 boom-and-bust cycles 157, 181 Booth, Douglas 117 borrowing behaviour 34, 118–21, 119 see also credit; debt Boulding, Elise 118 Boulding, Kenneth 1, 5, 7 boundaries, biophysical see limits (ecological) bounded capabilities for flourishing 61–5 see also limits (flourishing within) Bowen, William 147 Bowling Alone (Putnam) 122 Brazil 58, 88 breakdown of community see alienation; social stability bubbles, economic 29, 33, 36 Buddhist monasteries, Thailand 128 buen vivir concept, Ecuador xxxi, 6 built-in obsolescence 113, 204, 220 Bush, George 121 business-as-usual model 22, 211; carbon dioxide emissions 101; crisis of commitment 195; financial crisis 32–8; growth 79–83, 99; human nature 131, 136–7; need for reform 55, 57, 59, 101–2, 162, 207–8, 227; throwaway society 113; wellbeing 124 see also financial systems Canada 75, 206, 207 capabilities for flourishing 61–5; circular flow of the economy 113; future visions 218, 219; and income 77; progress measures 50–5, 54; role of material abundance 67–72; and prosperity 49; relative income effect 55–61, 58, 71, 72; role of shame 123–4; role of the state 200 see also limits (flourishing within); wellbeing capital 105, 107–10 see also investment Capital in the 21st Century (Piketty) 33, 176, 177 Capital Institute, USA 155 capitalism 68–9, 80; structures 107–13, 175; types 105–7, 222, 223 car industry, financial crisis 40 carbon dioxide emissions see greenhouse gas emissions caring professions, valuing 130, 147, 207 see also social care Cat on a Hot Tin Roof (Williams) 213 causal path analysis, subjective wellbeing 59 Central Bank 154 central human capabilities 64 see also capabilities for flourishing The Challenge of Affluence (Offer) 194 change see alternatives; future visions; novelty/innovation; post-growth macroeconomics; reform Chicago school of economics 36, 156 children: advertising to 204; labour 62, 154; mortality 74–5, 75, 206 Chile xxxiii, xxxvii, 58, 74, 74, 75, 76 China: decoupling 88; GDP per capita 75; greenhouse gas emissions 91; growth 99; life expectancy 74; philosophy 7; post-financial crisis 45–6; pursuit of western lifestyles 70; relative income effect 58; resource use 94; savings 27; schooling 76 choice, moving beyond consumerism 216–18 see also freedom/autonomy Christian doctrine see religious perspectives chromium, commodity price 13 Cinderella economy 219–21, 224 circular economy 144, 220 circular flow of the economy 107, 113 see also engine of growth citizen’s income 207 see also universal basic income civil unrest see social stability Clean City Law, São Paulo 204 climate change xxxv, 22, 47; critical boundaries 17–20; decoupling 85, 86, 87, 98; fatalism 186; investment needs 152; role of the state 192, 198, 201–2 see also greenhouse gas emissions Climate Change Act (2008), UK 198 clothing see basic entitlements Club of Rome, Limits to Growth report xxxii, xxxiii, 8, 11–16, Cobb, John 54 collectivism 191 commercial bond markets 30, 157 commitment devices/crisis of 192–5, 197 commodity prices: decoupling 88; financial crisis 26; fluctuation/volatility 14, 21; resource constraints 13–14 common good: future visions 218, 219; vs. freedom and autonomy 193–4; vs. private interests 208; role of the state 209 common pool resources 190–2, 198, 199 see also public services/amenities communism 187, 191 community: future visions of 219–20; geographical 122–3; investment 155–6, 204 see also alienation; intrinsic values comparison, social 115, 116, 117 see also relative income effect competition 27, 112; positional 55–61, 58, 71, 72 see also struggle for existence complexity, economic systems 14, 32, 108, 153, 203 compulsive shopping 116 see also consumerism Conference of the Parties to the UN Framework Convention on Climate Change (CoP21) 19 conflicted state 197, 201, 209 connectedness, global 91, 227 conspicuous consumption 115 see also language of goods consumer goods see language of goods; material goods consumer sovereignty 196, 198 consumerism 4, 21, 22, 103–4, 113–16; capitalism 105–13, 196; choice 196; engine of growth 104, 108, 120, 161; existential fear of death 69, 212–15; financial crisis 24, 28, 39, 103; moving beyond 216–18; novelty and anxiety 116–17; post-growth economy 166–7; role of the state 192–3, 196, 199, 202–5; status 211; tragedy of 140 see also demand; materialism contemplative dimensions, simplicity 127 contraction and convergence model 206–7 coordinated market economies 27, 106 Copenhagen Accord (2009) 19 copper, commodity prices 13 corporations/big business 106–7 corruption 9, 131, 186, 187, 189 The Cost Disease: Why Computers get Cheaper and Health Care Doesn’t (Baumol) 171, 172 Costa Rica 74, 74, 76 countercyclical spending 181–2, 182, 188 crafts/craft economies 147, 149, 170, 171 creative destruction 104, 112, 113, 116–17 creativity 8, 79; and consumerism 113, 116; future visions 142, 144, 147, 158, 171, 200, 220 see also novelty/innovation credit, private: deflationary forces 44; deregulation 36; financial crisis 26, 27, 27–31, 34, 36, 41; financial system weaknesses 32–3, 37; growth imperative hypothesis 178–80; mortgage loans 28–9; reforms in financial system 157; spending vs. saving behaviour of ordinary people 118–19; and stimulation of growth 36 see also debt (public) credit unions 155–6 crises: of commitment 192–5; financial see financial crisis critical boundaries, biophysical see limits (ecological) Csikszentmihalyi, Mihalyi 127 Cuba: child mortality 75; life expectancy 74, 77, 78, 78; response to economic hardship 79–80; revolution 56; schooling 76 Cushman, Philip 116 Dalai Lama 49, 52 Daly, Herman xxxii, 54, 55, 160, 163, 165 Darwin, Charles 132–3 Das Kapital (Marx) 225 Davidson, Richard 49 Davos World Economic Forum 46 Dawkins, Richard 134–5 de Mandeville, Bernard 131–2, 157 death, denial of 69, 104, 115, 212–15 debt, public-sector 81; deflationary forces 44; economic stability 81; financial crisis 24, 26–32, 27, 37, 41, 42, 81; financial systems 28–32, 153–7; money creation 178–9; post-growth economy 178–9, 223 Debt: The First Five Thousand Years (Graeber) 28 decoupling xix, xx, xxxvii, 21, 84–7; dilemma of growth 211; efficiency measures 84, 86, 87, 88, 95, 104; green growth 163, 163–5; historical perspectives 87–96, 89, 90, 92, 94, 95; need for new economic model 101–2; relationship between relative and absolute 96–101 deep emission and resource cuts 99, 102 deficit spending 41, 43 deflationary forces, post-financial crisis 43–7, 45 degrowth movement 161–3, 177 demand 104, 113–16, 166–7; post-financial crisis 44–5; post-growth economy 162, 164, 166–9, 171–2, 174–5 dematerialisation 102, 143 democratisation, and wellbeing 59 deposit guarantees 35 deregulation 27, 34, 36, 196 desire, role in consumer behaviour 68, 69, 70, 114 destructive materialism 104, 112, 113, 116–17 Deutsche Bank 41 devaluation of currency 30, 45 Dichter, Ernest 114 digital economy 44, 219–20 dilemma of growth xxxi, 66–7, 104, 210; basic entitlements 72–9, 74, 75, 76, 78; decoupling 85, 87, 164; degrowth movement 160–3; economic stability 79–83, 174–6; material abundance 67–72; moving beyond 165, 166, 183–4; role of the state 198 diminishing marginal utility: alternative hedonism 125, 126; wellbeing 51–2, 57, 60, 73, 75–6, 79 disposable incomes 27, 67, 118 distributed ownership 223 Dittmar, Helga 126 domestic debt see credit dopamine 68 Dordogne, mindfulness community 128 double movement of society 198 Douglas, Mary 70 Douthwaite, Richard 178 downshifting 128 driving analogy, managing change 16–17 durability, consumer goods 113, 204, 220 dynamic systems, managing change 16–17 Eastern Europe 76, 122 Easterlin, Richard 56, 57, 59; paradox 56, 58 eco-villages, Findhorn community 128 ecological investment 101, 166–70, 220 see also investment ecological limits see limits (ecological) ecological (ecosystem) services 152, 169, 223 The Ecology of Money (Douthwaite) 178 economic growth see growth economic models see alternatives; business-as-usual model; financial systems; future visions; mathematical models; post-growth macroeconomics economic output see efficiency; productivity ‘Economic possibilities for our grandchildren’ (Keynes) 145 economic stability 22, 154, 157, 161; financial system weaknesses 34, 35, 36, 180; growth 21, 24, 67, 79–83, 174–6, 210; post-growth economy 161–3, 165, 174–6, 208, 219; role of the state 181–3, 195, 198, 199 economic structures: post-growth economy 227; financial system reforms 224; role of the state 205; selfishness 137 see also business-as-usual model; financial systems ecosystem functioning 62–3 see also limits (ecological) ecosystem services 152, 169, 223 Ecuador xxxi, 6 education: Baumol’s cost disease 171, 172; and income 67, 76, 76; investment in 150–1; role of the state 193 see also basic entitlements efficiency measures 84, 86–8, 95, 104, 109–11, 142–3; energy 41, 109–11; growth 111, 211; investment 109, 151; of scale 104 see also labour productivity; relative decoupling Ehrlich, Paul 13, 96 elasticity of substitution, labour and capital 177–8 electricity grid 41, 151, 156 see also energy Elgin, Duane 127 Ellen MacArthur Foundation 144 emissions see greenhouse gas emissions employee ownership 223 employment intensity vs. carbon dioxide emissions 148 see also labour productivity empty self 116, 117 see also consumerism ends above means 159 energy return on investment (EROI) 12, 169 energy services/systems 142: efficiency 41, 109–11; inputs/intensity 87–8, 151; investment 41, 109–10, 151–2; renewable xxxv, 41, 168–9 engine of growth 145; consumerism 104, 108, 161; services 143, 170–4 see also circular flow of the economy enough is enough see limits enterprise as service 140, 141–4, 158 see also novelty/innovation entitlements see basic entitlements entrepreneur as visionary 112 entrepreneurial state 220 Environmental Assessment Agency, Netherlands 62 environmental quality 12 see also pollution environmentalism 9 EROI (energy return on investment) 12, 169 Essay on the Principle of Population (Malthus) 9–11, 132–3 evolutionary map, human heart 136, 136 evolutionary theory 132–3; common good 193; post-growth economy 226; psychology 133–5; selfishness and altruism 196 exchange values 55, 61 see also gross domestic product existential fear of death 69, 104, 115, 212–15 exponential expansion 1, 11, 20–1, 210 see also growth external debt 32, 42 extinctions/biodiversity loss 17, 47, 62, 101 Eyres, Harry 215 Fable of the Bees (de Mandeville) 131–2 factor inputs 109–10 see also capital; labour; resource use fast food 128 fatalism 186 FCCC (Framework Convention on Climate Change) 92 fear of death, existential 69, 104, 115, 212–15 feedback loops 16–17 financial crisis (2008) 6, 23–5, 32, 77, 103; causes and culpability 25–8; financial system weaknesses 32–7, 108; Keynesianism 37–43, 188; nationalisation of financial sector 188; need for financial reforms 175; role of debt 24, 26–32, 27, 81, 179; role of state 191; slowing of growth 43–7, 45; spending vs. saving behaviour of ordinary people 118–21, 119; types/definitions of capitalism 106; youth unemployment 144–5 financial systems: common pool resources 192; debt-based/role of debt 28–32, 153–7; post-growth economy 179, 208; systemic weaknesses 32–7; and wellbeing 47 see also banking system; business-as-usual model; financial crisis; reform Findhorn community 128 finite limits of planet see limits (ecological) Fisher, Irving 156, 157 fishing rights 22 flourishing see capabilities for flourishing; limits; wellbeing flow states 127 Flynt, Larry 40 food 67 see also basic entitlements Ford, Henry 154 forestry/forests 22, 192 Forrester, Jay 11 fossil fuels 11, 20 see also oil Foucault, Michel 197 fracking 14, 15 Framework Convention on Climate Change (FCCC) 92 France: GDP per capita 58, 75, 76; inequality 206; life-expectancy 74; mindfulness community 128; working hours 145 free market 106: financial crisis 35, 36, 37, 38, 39; ideological controversy/conflict 186–7, 188 freedom/autonomy: vs. common good 193–4; consumer 22, 68–9; language of goods 212; personal choices for improvement 216–18; wellbeing 49, 59, 62 see also individualism Friedman, Benjamin 176 Friedman, Milton 36, 156, 157 frugality 118–20, 127–9, 215–16 fun (more fun with less stuff) 129, 217 future visions 2, 158, 217–21; community banking 155–6; dilemma of growth 211; enterprise as service 140, 141–4, 147–8, 158; entrepreneur as visionary 112; financial crisis as opportunity 25; and growth 165–6; investment 22, 101–2, 140, 149–53, 158, 169, 208; money as social good 140, 153–7, 158; processes of change 185; role of the state 198, 199, 203; timescales for change 16–17; work as participation 140, 144–9, 148, 158 see also alternatives; post-growth macroeconomics; reform Gandhi, Mahatma 127 GDP see gross domestic product gene, selfish 134–5 Genuine Progress Indicator (GPI) 54, 54 geographical community 122–3 Germany xxxi; Federal Ministry of Finance 224–5; inequality 206; relative income effect 58; trade balance 31; work as participation 146 Glass Steagal Act 35 Global Commodity Price Index (1992–2015) 13 global corporations 106–7 global economy 98: culture 70; decoupling 86–8, 91, 93–5, 95, 97, 98, 100; exponential expansion 20–1; inequality 4, 5–6; interconnectedness 91, 227; post-financial crisis slowing of growth 45 Global Research report (HSBC) 41 global warming see climate change Godley, Wynne 179 Goldman Sachs 37 good life 3, 6; moral dimension 63, 104; wellbeing 48, 50 goods see language of goods; material goods; symbolic role of goods Gordon, Robert 44 governance 22, 185–6; commons 190–2; crisis of commitment 192–5, 197; economic stability 34, 35; establishing limits 200–8, 206; growth 195–9; ideological controversy/conflict 186–9; moving towards change 197–200, 220–1; post-growth economy 181–3, 182; power of corporations 106; for prosperity 209; signals 130 government as household metaphor 30, 42 governmentality 197, 198 GPI (Genuine Progress Indicator) 54, 54 Graeber, David 28 Gramm-Leach-Bliley Act 35 Great Depression 39–40 Greece: austerity xxxiii–xxxiv, xxxvii, 43; energy inputs 88; financial crisis 28, 30, 31, 77; life expectancy 74; schooling 76; relative income effect 58; youth unemployment 144 Green Economy initiative 41 green: growth xxxvii, 18, 85, 153, 166, 170; investment 41 Green New Deal, UNEP 40–1, 152, 188 greenhouse gas emissions 18, 85, 86, 91, 92; absolute decoupling 89–92, 90, 92, 98–101, 100; dilemma of growth 210–11; vs. employment intensity 148; future visions 142, 151, 201–2, 220; Kyoto Protocol 18, 90; reduction targets 19–20; relative decoupling 87, 88, 89, 93, 98–101, 100 see also climate change Greenspan, Alan 35 gross domestic product (GDP) per capita 3–5, 15, 54; climate change 18; decoupling 85, 93, 94; financial crisis 27, 28, 32; green growth 163–5; life expectancy 74, 75, 78; as measure of prosperity 3–4, 5, 53–5, 54, 60–1; post-financial crisis 43, 44; post-growth economy 207; schooling 76; wellbeing 55–61, 58 see also income growth xxxvii; capitalism 105; credit 36, 178–80; decoupling 85, 96–101; economic stability 21, 24, 67, 80, 210; financial crisis 37, 38; future visions 209, 223, 224; inequality 177; labour productivity 111; moving beyond 165, 166; novelty 112; ownership 105; post-financial crisis slowing 43–7, 45; prosperity as 3–7, 23, 66; role of the state 195–9; sustainable investment 166–70; wellbeing 59–60; as zero sum game 57 see also dilemma of growth; engine of growth; green growth; limits to growth; post-growth macroeconomy growth imperative hypothesis 37, 174, 175, 177–80, 183 habit formation, acquisition as 68 Hall, Peter 106, 188 Hamilton, William 134 Hansen, James 17 happiness see wellbeing/happiness Happiness (Layard) 55 Hardin, Garrett 190–1 Harvey, David 189, 192 Hayek, Friedrich 187, 189, 191 health: Baumol’s cost disease 171, 172; inequality 72–3, 205–6, 206; investment 150–1; and material abundance 67, 68; personal choices for improvement 217; response to economic hardship 80; role of the state 193 see also basic entitlements Heath, Edward 66, 82 hedonism 120, 137, 196; alternatives 125–6 Hirsch, Fred xxxii–xxxiii historical perspectives: absolute decoupling 86, 89–96, 90, 92, 94, 95; relative decoupling 86, 87–9, 89 Holdren, John 96 holistic solutions, post-growth economy 175 household finances: house purchases 28–9; spending vs. saving behaviour 118–20, 119 see also credit household metaphor, government as 30, 42 HSBC Global Research report 41 human capabilities see capabilities for flourishing human happiness see wellbeing/happiness human nature/psyche 3, 132–5, 138; acquisition 68; alternative hedonism 125; evolutionary map of human heart 136, 136; intrinsic values 131; meaning/purpose 49–50; novelty/innovation 116; selfishness vs. altruism 133–8; short-termism/living for today 194; spending vs. saving behaviour 34, 118–21, 119; symbolic role of goods 69 see also intrinsic values human rights see basic entitlements humanitarian perspectives: financial crisis 24; growth 79; inequality 5, 52, 53 see also intrinsic values hyperbolic discounting 194 hyperindividualism 226 see also individualism hyper-materialisation 140, 157 I Ching (Chinese Book of Changes) 7 Iceland: financial crisis 28; life expectancy 74, 75; relative income effect 56; response to economic hardship 79–80; schooling 76; sovereign money system 157 identity construction 52, 69, 115, 116, 212, 219 IEA (International Energy Agency) 14, 152 IMF (International Monetary Fund) 45, 156–7 immaterial goods 139–40 see also intrinsic values; meaning/purpose immortality, symbolic role of goods 69, 104, 115, 212–14 inclusive growth see inequality; smart growth income 3, 4, 5, 66, 124; basic entitlements 72–9, 74, 75, 76, 78; child mortality 74–5, 75; decoupling 96; economic stability 82; education 76; life expectancy 72, 73, 74, 77–9, 78; poor nations 67; relative income effect 55–61, 58, 71, 72; tax revenues 81 see also gross domestic product INDCs (intended nationally determined commitments) 19 India: decoupling 99; growth 99; life expectancy 74, 75; philosophy 127; pursuit of western lifestyles 70; savings 27; schooling 76 indicators of environmental quality 96 see also biodiversity; greenhouse gas emissions; pollution; resource use individualism 136, 226; progressive state 194–7, 199, 200, 203, 207 see also freedom/autonomy industrial development 12 see also technological advances inequality 22, 67; basic entitlements 72; child mortality 75, 75; credible alternatives 219, 224; deflationary forces 44; fatalism 186; financial crisis 24; global 4, 5–6, 99, 100; financial system weaknesses 32–3; post-growth economy 174, 176–8; role of the state 198, 205–7, 206; selfishness vs. altruism 137; symbolic role of goods 71; wellbeing 47, 104 see also poverty infant mortality rates 72, 75 inflation 26, 30, 110, 157, 167 infrastructure, civic 150–1 Inglehart, Ronald 58, 59 innovation see novelty/innovation; technological advances inputs 80–1 see also capital; labour productivity; resource use Inside Job documentary film 26 instant gratification 50, 61 instinctive acquisition 68 Institute for Fiscal Studies 81 Institute for Local Self-Reliance 204 institutional structures 130 see also economic structures; governance intended nationally determined commitments (INDCs) 19 intensity factor, technological 96, 97 see also technological advances intentional communities 127–9 interconnectedness, global 91, 227 interest payments/rates 39, 43, 110; financial crisis 29, 30, 33, 39; post-growth economy 178–80 see also credit; debt Intergovernmental Panel on Climate Change (IPCC) 18, 19, 201–2 International Energy Agency (IEA) 14, 152 International Monetary Fund (IMF) 45, 156–7 intrinsic values 126–31, 135–6, 212; role of the state 199, 200 see also belonging; community; meaning/purpose; simplicity/frugality investment 107–10, 108; ecological/sustainable 101, 152, 153, 166–70, 220; and innovation 112; loans 29; future visions 22, 101–2, 140, 149–53, 158, 169, 208, 220; and savings 108; social 155, 156, 189, 193, 208, 220–3 invisible hand metaphor 132, 133, 187 IPAT equation, relative and absolute decoupling 96 IPCC (Intergovernmental Panel on Climate Change) 18, 19, 201–2 Ireland 28; inequality 206; life expectancy 74, 75; schooling 76; wellbeing 58 iron cage of consumerism see consumerism iron ore 94 James, Oliver 205 James, William 68 Japan: equality 206; financial crisis 27, 45; life expectancy 74, 76, 79; relative income effect 56, 58; resource use 93; response to economic hardship 79–80 Jefferson, Thomas 185 Jobs, Steve 210 Johnson, Boris 120–1 Kahneman, Daniel 60 Kasser, Tim 126 keeping up with the Joneses 115, 116, 117 see also relative income effect Kennedy, Robert 48, 53 Keynes, John Maynard/Keynesianism 23, 34, 120, 174, 181–3, 187–8; financial crisis 37–43; financial system reforms 157; part-time working 145; steady state economy 159, 162 King, Alexander 11 Krugman, Paul 39, 85, 86, 102 Kyoto Protocol (1992) 18, 90 labour: child 62, 154; costs 110; division of 158; elasticity of substitution 177, 178; intensity 109, 148, 208; mobility 123; production inputs 80, 109; structures of capitalism 107 labour productivity 80–1, 109–11; Baumol’s cost disease 170–2; and economic growth 111; future visions 220, 224; investment as commitment 150; need for investment 109; post-growth economy 175, 208; services as engine of growth 170; sustainable investment 166, 170; trade off with resource use 110; work-sharing 145, 146, 147, 148, 148, 149 Lahr, Christin 224–5 laissez-faire capitalism 187, 195, 196 see also free market Lakoff, George 30 language of goods 212; material footprint of 139–40; signalling of social status 71; and wellbeing 124 see also consumerism; material goods; symbolic role of goods Layard, Richard 55 leadership, political 199 see also governance Lebow, Victor 120 Lehman Brothers, bankruptcy 23, 25, 26, 118 leisure economy 204 liberal market economies 106, 107; financial crisis 27, 35–6 life expectancy: and income 72, 73, 74, 77–9, 78; inequality 206; response to economic hardship 80 see also basic entitlements life-satisfaction 73; inequality 205; relative income effect 55–61, 58 see also wellbeing/happiness limits, ecological 3, 4, 7, 11, 12, 20–2; climate change 17–20; decoupling 86; financial crisis 23–4; growth 21, 165, 210; post-growth economy 201–2, 226–7; role of the state 198, 200–2, 206–7; and social boundaries 141; wellbeing 62–63, 185 limits, flourishing within 61–5, 185; alternative hedonism 125–6; intrinsic values 127–31; moving towards 215, 218, 219, 221; paradox of materialism 121–23; prosperity 67–72, 113, 212; role of the state 201–2, 205; selfishness 131–8; shame 123–4; spending vs. saving behaviour 118–21, 119 see also sustainable prosperity limits to growth: confronting 7–8; exceeding 20–2; wellbeing 62–3 Limits to Growth report (Club of Rome) xxxii, xxxiii, 8, 11–16 ‘The Living Standard’ essay (Sen) 50, 123–4 living standards 82 see also prosperity Lloyd, William Forster 190 loans 154; community investment 155–6; financial system weaknesses 34 see also credit; debt London School of Economics 25 loneliness 123, 137 see also alienation long-term: investments 222; social good 219 long-term wellbeing vs. short-term pleasures 194, 197 longevity see life expectancy love 212 see also intrinsic values low-carbon transition 19, 220 LowGrow model for the Canadian economy 175 MacArthur Foundation 144 McCracken, Grant 115 Malthus, Thomas Robert 9–11, 132–3, 190 market economies: coordinated 27, 106; liberal 27, 35–6, 106, 107 market liberalism 106, 107; financial crisis 27, 35–6; wellbeing 47 marketing 140, 203–4 Marmot review, health inequality in the UK 72 Marx, Karl/Marxism 9, 189, 192, 225 Massachusetts Institute of Technology (MIT) 11, 12, 15 material abundance see opulence material goods 68–9; identity 52; language of 139–40; and wellbeing 47, 48, 49, 51, 65, 126 see also symbolic role of goods material inputs see resource use materialism: and fear of death 69, 104, 115, 212–15; and intrinsic values 127–31; paradox of 121–3; price of 126; and religion 115; values 126, 135–6 see also consumerism mathematical models/simulations 132; austerity policies 181; countercyclical spending 181–2, 182; decoupling 84, 91, 96–101; inequality 176–8; post-growth economy 164; stock-flow consistent 179–80 Mawdsley, Emma 70 Mazzucato, Mariana 193, 220 MDG (Millennium Development Goals) 74–5 Meadows, Dennis and Donella 11, 12, 15, 16 meaning/purpose 2, 8, 22; beyond material goods 212–16; consumerism 69, 203, 215; intrinsic values 127–31; moving towards 218–20; wellbeing 49, 52, 60, 121–2; work 144, 146 see also intrinsic values means and ends 159 mental health: inequality 206; meaning/purpose 213 metaphors: government as household 30, 42; invisible hand 132, 133, 187 Middle East, energy inputs 88 Miliband, Ed 199 Mill, John Stuart 125, 159, 160, 174 Millennium Development Goals (MDG) 74–5 mindfulness 128 Minsky, Hyman 34, 35, 40, 182, 208 MIT (Massachusetts Institute of Technology) 11, 12, 15 mixed economies 106 mobility of labour, loneliness index 123 Monbiot, George 84, 85, 86, 91 money: creation 154, 157, 178–9; and prosperity 5; as social good 140, 153–7, 158 see also financial systems monopoly power, corporations 106–7 The Moral Consequences of Economic Growth (Friedman) 82, 176 moral dimensions, good life 63 see also intrinsic values moral hazards, separation of risk from reward 35 ‘more fun with less stuff’ 129, 217 mortality fears 69, 104, 115, 212–15 mortality rates, and income 74, 74–6, 75 mortgage loans 28–9, 35 multinational corporations 106–7 national debt see debt, public-sector nationalisation 191; financial crisis 38, 188 natural selection 132–3 see also struggle for existence nature, rights of 6–7 negative emissions 98–9 negative feedback loops 16–17 Netherlands 58, 62, 206, 207 neuroscientific perspectives: flourishing 68, 69; human behaviour 134 New Climate Economy report Better Growth, Better Climate 18 New Deal, USA 39 New Economics Foundation 175 nickel, commodity prices 13 9/11 terrorist attacks (2001) 121 Nordhaus, William 171, 172–3 North America 128, 155 see also Canada; United States Norway: advertising 204; inequality 206; investment as commitment 151–2; life expectancy 74; relative income effect 58; schooling 76 novelty/innovation 104, 108, 113; and anxiety 116–17, 124, 211; crisis of commitment 195; dilemma of growth 211; human psyche 135–6, 136, 137; investment 150, 166, 168; post-growth economy 226; role of the state 196, 197, 199; as service 140, 141–4, 158; symbolic role of goods 114–16, 213 see also technological advances Nudge: Improving Decisions about Health, Wealth, and Happiness (Thaler and Sunstein) 194–5 Nussbaum, Martha 64 nutrient loading, critical boundaries 17 nutrition 67 see also basic entitlements obesity 72, 78, 206 obsolescence, built in 113, 204, 220 oceans: acidification 17; common pool resources 192 Offer, Avner 57, 61, 71, 194, 195 oil prices 14, 21; decoupling 88; financial crisis 26; resource constraints 15 oligarchic capitalism 106, 107 opulence 50–1, 52, 67–72 original sin 9, 131 Ostrom, Elinor and Vincent 190, 191 output see efficiency; gross domestic product; productivity ownership: and expansion 105; private vs. public 9, 105, 191, 219, 223; new models 223–4; types/definitions of capitalism 105–7 Oxfam 141 paradoxes: materialism 121–3; thrift 120 Paris Agreement 19, 101, 201 participation in society 61, 114, 122, 129, 137; future visions 200, 205, 218, 219, 225; work as 140–9, 148, 157, 158 see also social inclusion part-time working 145, 146, 149, 175 Peccei, Aurelio 11 Perez, Carlota 112 performing arts, Baumol’s cost disease 171–2 personal choice 216–18 see also freedom/autonomy personal property 189, 191 Pickett, Kate 71, 205–6 Piketty, Thomas 33, 176, 177 planetary boundaries see limits (ecological) planning for change 17 pleasure 60–1 see also wellbeing/happiness Plum Village mindfulness community 128 Polanyi, Karl 198 policy see governance political leadership 199 see also governance Political Economy Research Institute, University of Massachusetts 41 pollution 12, 21, 53, 95–6, 143 polycentric governance 191, 192 Poor Laws 10 poor nations see poverty population increase 3, 12, 63, 96, 97, 190; Malthus on 9–11, 132–3 porn industry 40 Portugal 28, 58, 88, 206 positional competition 55–61, 58, 71, 72 see also social comparison positive feedback loops 16–17 post-growth capitalism 224 post-growth macroeconomics 159–60, 183–4, 221; credit 178–80; degrowth movement 161–3; economic stability 174–6; green growth 163–5; inequality 176–8; role of state 181–3, 182, 200–8, 206; services 170–4; sustainable investment 166–70 see also alternatives; future visions; reform poverty 4, 5–6, 216; basic entitlements 72; flourishing within limits 212; life expectancy 74, 74; need for new economic model 101; symbolic role of goods 70; wellbeing 48, 59–60, 61, 67 see also inequality; relative income effect power politics 200 predator–prey analogy 103–4, 117 private credit see credit private vs. public: common good 208; ownership 9, 105, 191, 219, 223; salaries 130 privatisation 191, 219 product lifetimes, obsolescence 113, 204, 220 production: inputs 80–1; ownership 191, 219, 223 productivity: investment 109, 167, 168, 169; post-growth economy 224; services as engine of growth 171, 172, 173; targets 147; trap 175 see also efficiency measures; labour productivity; resource productivity profits: definitions of capitalism 105; dilemma of growth 211; efficiency measures 87; investment 109; motive 104; post-growth economy 224; and wages 175–8 progress 2, 50–5, 54 see also novelty/innovation; technological advances progressive sector, Baumol’s cost disease 171 progressive state 185, 220–2; contested 186–9; countering consumerism 202–5; equality measures 205–7, 206; governance of the commons 190–2; governance as commitment device 192–5; governmentality of growth 195–7; limit-setting 201–2; moving towards 197–200; post-growth macroeconomics 207–8, 224; prosperity 209 prosocial behaviour 198 see also social contract prosperity 1–3, 22, 121; capabilities for flourishing 61–5; and growth 3–7, 23, 66, 80, 160; and income 3–4, 5, 66–7; limits of 67–72, 113, 212; materialistic vision 137; progress measures 50–5, 54; relative income effect 55–61, 58, 71, 72; social perspectives 2, 22, 48–9; state roles 209 see also capabilities for flourishing; post-growth macroeconomics; sustainable prosperity; wellbeing prudence, financial 120, 195, 221; financial crisis 33, 34, 35 public sector spending: austerity policies 189; countercyclical spending strategy 181–2, 182; welfare economy 169 public services/amenities: common pool resources 190–2, 198, 199; future visions 204, 218–20; investment 155–6, 204; ownership 223 see also private vs. public; service-based economies public transport 41, 129, 193, 217 purpose see meaning/purpose Putnam, Robert 122 psyche, human see human nature/psyche quality, environmental 12 see also pollution quality of life: enterprise as service 142; inequality 206; sustainable 128 quality to throughput ratios 113 quantitative easing 43 Queen Elizabeth II 25, 32, 34, 37 quiet revolution 127–31 Raworth, Kate 141 Reagan, Ronald 8 rebound phenomenon 111 recession 23–4, 28, 81, 161–3 see also financial crisis recreation/leisure industries 143 recycling 129 redistribution of wealth 52 see also inequality reforms 182–3, 222; economic structures 224; and financial crisis 103; financial systems 156–8, 180 see also alternatives; future visions; post-growth economy relative decoupling 84–5, 86; historical perspectives 87–9, 89; relationship with absolute decoupling 96–101, 111 relative income effect 55–61, 58, 71, 72 see also social comparison religious perspectives 9–10, 214–15; materialism as alternative to religion 115; original sin 9, 131; wellbeing 48, 49 see also existential fear of death renewable energy xxxv, 41, 168–169 repair/renovation 172, 220 resource constraints 3, 7, 8, 11–15, 47 resource productivity 110, 151, 168, 169, 220 resource use: conflicts 22; credible alternatives 101, 220; decoupling 84–9, 92–5, 94, 95; and economic output 142–4; investment 151, 153, 168, 169; trade off with labour costs 110 retail therapy 115 see also consumerism; shopping revenues, state 222–3 see also taxation revolution 186 see also social stability rights: environment/nature 6–7; human see basic entitlements risk, financial 24, 25, 33, 35 The Road to Serfdom (Hayek) 187 Robinson, Edward 132 Robinson, Joan 159 Rockström, Johan 17, 165 romantic movement 9–10 Roosevelt, Franklin D. 35, 39 Rousseau, Jean Jacques 9, 131 Russia 74, 76, 77–80, 78, 122 sacred canopy 214, 215 salaries: private vs. public sector 130, 171; and profits 175–8 Sandel, Michael 150, 164, 218 São Paulo, Clean City Law 204 Sardar, Zia 49, 50 Sarkozy, Nicolas xxxi, 53 savage state, romantic movement 9–10 savings 26–7, 28, 107–9, 108; investment 149; ratios 34, 118–20, 119 scale, efficiencies of 104 Scandinavia 27, 122, 204 scarcity, managing change 16–17 Schumpeter, Joseph 112 Schwartz, Shalom 135–6, 136 schooling see education The Science of Desire (Dichter) 114 secular stagnation 43–7, 45, 173 securitisation, mortgage loans 35 security: moving towards 219; and wellbeing 48, 61 self-development 204 self-expression see identity construction self-transcending behaviours see transcendence The Selfish Gene (Dawkins) 134–5 selfishness 133–8, 196 Sen, Amartya 50, 52, 61–2, 123–4 service concept/servicization 140–4, 147–8, 148, 158 service-based economies 219; engine of growth 170–4; substitution between labour and capital 178; sustainable investment 169–70 see also public services SFC (stock-flow consistent) economic models 179–80 shame 123–4 shared endeavours, post-growth economy 227 Sheldon, Solomon 214 shelter see basic entitlements shopping 115, 116, 130 see also consumerism short-termism/living for today 194, 197, 200 signals: sent out by society 130, 193, 198, 203, 207; social status 71 see also language of goods Simon, Julian 13 simplicity/simple life 118–20, 127–9, 215–16 simulations see mathematical models/simulations slow: capital 170; movement 128 smart growth 85, 163–5 see also green growth Smith, Adam 51, 106–7, 123, 132, 187 social assets 220 social boundaries (minimum standards) 141 see also basic entitlements social care 150–1 see also caring professions social comparison 115, 116, 117 see also relative income effect social contract 194, 198, 199, 200 social inclusion 48, 69–71, 114, 212 see also participation in society social investment 155, 156, 189, 193, 208, 220–3 social justice 198 see also inequality social logic of consumerism 114–16, 204 social stability 24, 26, 80, 145, 186, 196, 205 see also alienation social status see status social structures 80, 129, 130, 137, 196, 200, 203 social tolerance, and wellbeing 59, 60 social unrest see social stability social wage 40 social welfare: financial reforms 182–3; public sector spending 169 socialism 223 Sociobiology (Wilson) 134 soil integrity 220 Solon, quotation 47, 49, 71 Soper, Kate 125–6 Soros, George 36 Soskice, David 106 Soviet Union, former 74, 76, 77–80, 78, 122 Spain 28, 58, 144, 206 SPEAR organization, responsible investment 155 species loss/extinctions 17, 47, 62, 101 speculation 93, 99, 149, 150, 154, 158, 170; economic stability 180; financial crisis 26, 33, 35; short-term profiteering 150; spending: behaviour of ordinary people 34, 119, 120–1; countercyclical 181–2, 182, 188; economic stability 81; as way out of recession 41, 44, 119, 120–1; and work cycle 125 The Spirit Level (Wilkinson and Pickett) 71, 205–6 spiritual perspectives 117, 127, 128, 214 stability see economic stability; social stability stagflation 26 stagnant sector, Baumol’s cost disease 171 stagnation: economic stability 81–2; labour productivity 145; post-financial crisis 43–7, 45 see also recession state capitalism, types/definitions of capitalism 106 state revenues, from social investment 222–3 see also taxation state roles see governance status 207, 209, 211; and possessions 69, 71, 114, 115, 117 see also language of goods; symbolic role of goods Steady State Economics (Daly) xxxii steady state economies 82, 159, 160, 174, 180 see also post-growth macroeconomics Stern, Nicholas 17–18 stewardship: role of the state 200; sustainable investment 168 Stiglitz, Joseph 53 stock-flow consistent (SFC) economic models 179–80 Stockholm Resilience Centre 17, 201 stranded assets 167–8 see also ownership structures of capitalism see economic structures struggle for existence 8–11, 125, 132–3 Stuckler, David 43 stuff see language of goods; material goods; symbolic role of goods subjective wellbeing (SWB) 49, 58, 58–9, 71, 122, 129 see also wellbeing/happiness subprime lending 26 substitution, between labour and capital 177–178 suffering, struggle for existence 10 suicide 43, 52, 77 Sukdhev, Pavan 41 sulphur dioxide pollution 95–6 Summers, Larry 36 Sunstein, Cass 194 sustainability xxv–xxvi, 102, 104, 126; financial systems 154–5; innovation 226; investment 101, 152, 153, 166–70, 220; resource constraints 12; role of the state 198, 203, 207 see also sustainable prosperity Sustainable Development Strategy, UK 198 sustainable growth see green growth sustainable prosperity 210–12; creating credible alternatives 219–21; finding meaning beyond material commodities 212–16; implications for capitalism 222–5; personal choices for improvement 216–18; and utopianism 225–7 see also limits (flourishing within) SWB see subjective wellbeing; wellbeing/happiness Switzerland 11, 46, 157; citizen’s income 207; income relative to wellbeing 58; inequality 206; life expectancy 74, 75 symbolic role of goods 69, 70–1; existential fear of death 212–16; governance 203; innovation/novelty 114–16; material footprints 139–40; paradox of materialism 121–2 see also language of goods; material goods system dynamics model 11–12, 15 tar sands/oil shales 15 taxation: capital 177; income 81; inequality 206; post-growth economy 222 technological advances 12–13, 15; decoupling 85, 86, 87, 96–8, 100–3, 164–5; dilemma of growth 211; economic stability 80; population increase 10–11; role of state 193, 220 see also novelty/innovation Teilhard de Chardin, Pierre 8 terror management, and consumption 69, 104, 115, 212–15 terrorist attacks (9/11) 121 Thailand, Buddhist monasteries 128 Thaler, Richard 194 theatre, Baumol’s cost disease 171–2 theology see religious perspectives theory of evolution 132–3 thermodynamics, laws of 112, 164 Thich Nhat Hanh 128 thrift 118–20, 127–9, 215–16 throwaway society 113, 172, 204 timescales for change 16–17 tin, commodity prices 13 Today programme interview xxix, xxviii Totnes, transition movement 128–9 Towards a Green Economy report (UNEP) 152–3 Townsend, Peter 48, 61 trade balance 31 trading standards 204 tradition 135–6, 136, 226 ‘Tragedy of the commons’ (Hardin) 190–1 transcendence 214 see also altruism; meaning/purpose; spiritual perspectives transition movement, Totnes 128–9 Triodos Bank 156, 165 Trumpf (machine-tool makers) Germany 146 trust, loss of see alienation tungsten, commodity prices 13 Turkey 58, 88 Turner, Adair 157 21st Conference of the Parties to the UN Framework Convention on Climate Change (2015) 19 UBS (Swiss bank) 46 Ubuntu, African philosophy 227 unemployment 77; consumer goods 215; degrowth movement 162; financial crisis 24, 40, 41, 43; Great Depression 39–40; and growth 38; labour productivity 80–1; post-growth economy 174, 175, 183, 208, 219; work as participation 144–6 United Kingdom: Green New Deal group 152; greenhouse gas emissions 92; labour productivity 173; resource inputs 93; Sustainable Development Strategy 198 United Nations: Development Programme 6; Environment Programme 18, 152–3; Green Economy initiative 41 United States: credit unions 155–6; debt 27, 31–32; decoupling 88; greenhouse gas emissions 90–1; subprime lending 26; Works Progress Administration 39 universal basic income 221 see also citizen’s income University of Massachusetts, Political Economy Research Institute 41 utilitarianism/utility, wellbeing 50, 52–3, 55, 60 utopianism 8, 38, 125, 179; post-growth economy 225–7 values, materialistic 126, 135–6 see also intrinsic values Veblen, Thorstein 115 Victor, Peter xxxviii, 146, 175, 177, 180 vision of progress see future visions; post-growth economy volatility, commodity prices 14, 21 wages: and profits 175–8; private vs. public sector 130, 171 walking, personal choices for improvement 217 water use 22 Wealth of Nations, An Inquiry into the Nature and Causes (Smith) 123, 132 wealth redistribution 52 see also inequality Weber, Axel 46 welfare policies: financial reforms 182–3; public sector spending 169 welfare of livestock 220 wellbeing/happiness 47–50, 53, 121–2, 124; collective 209; consumer goods 4, 21, 22, 126; growth 6, 165, 211; intrinsic values 126, 129; investment 150; novelty/innovation 117; opulence 50–2, 67–72; personal choices for improvement 217; planetary boundaries 141; relative income effect 55–61, 58, 71, 72; simplicity 129; utilitarianism 50, 52–3, 55, 60 see also capabilities for flourishing western lifestyles 70, 210 White, William 46 Whybrow, Peter 68 Wilhelm, Richard 7 Wilkinson, Richard 71, 205–6 Williams, Tennessee 213 Wilson, Edward 134 wisdom traditions 48, 49, 63, 128, 213–14 work: as participation 140–9, 148, 157, 158; and spend cycle 125; sharing 145, 146, 149, 175 Works Progress Administration, USA 39 World Bank 160 World Values Survey 58 youth unemployment, financial crisis 144–5 zero sum game, growth as 57, 71


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, asset allocation, bitcoin, Bretton Woods, buy and hold, buy low sell high, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial innovation, fixed income, hindsight bias, index fund, invention of the wheel, Isaac Newton, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, mega-rich, merger arbitrage, Myron Scholes, Paul Samuelson, quantitative easing, Renaissance Technologies, Richard Thaler, Robert Shiller, Robert Shiller, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, transcontinental railway, value at risk, Vanguard fund, Y Combinator

Paulson, like most people who experience gigantic success, quickly went searching for his next big trade. “It's like Wimbledon. When you win one year, you don't quit; you want to win again.”15 The other issue is that it's virtually impossible to have fantastic success and keep your ego in check. We're all overconfident to begin with, and huge gains make our feet levitate off the ground. In the aftermath of the financial crisis and the Federal Reserve's quantitative easing program, Paulson turned to a new asset. He firmly believed the future would bring inflation, so he looked for something that would not be negatively impacted – in fact, he wanted to buy something that could become even more valuable in an inflationary environment. The answer was gold. So in the summer 2010, Paulson plowed $5 billion into gold‐related investments, becoming the largest owner of gold in the world.

Hutton, founding, 17 Einhorn, David, 27 Ellis, Charlie, 38, 99 Emotions, control, 93 Endowment effect, 75 fund, Keynes control, 123 Energizer Holdings, value, 91 Enron, 113–114 eToys, valuation, 58 Exchange‐traded funds (ETFs), 157 Graham recognition, 7 leverage, 131, 159 proliferation, 57 Exchange‐traded notes (ETNs), proliferation, 57 Explorer Fund, decline, 50 Exxon Mobil, shareholder wealth, 109 Facebook acquisition, 150 Fairchild Camera, trading level, 70 FAZ, 159 Federal Reserve interest rate increase, 61 quantitative easing program, 134–135 Federal Reserve Bank of New York takeover, 42 Federal Reserve Board, 39 Federal Trade Commission (FTC), Herbalife charges, 93–94 Ferriss, Tim, 150 Fidelity Capital Fund, 68 Fidelity Capital, initiation, 71 Fidelity Funds, 68 Fight or flight system, 27 Financial commitments, 163 Financial crisis, aftermath, 134–135 First Index Investment Trust initiation, 51–52 performance, 52 Float, 79 Fooled by Randomness (Taleb), 42 Foreign stocks, 60–61 Frankel, Bethenny, 163 Freud, Sigmund, 9 Fundamentals, 100 Futures contracts, usage, 131 Galbraith, John Kenneth, 67, 121 Gates, Bill, 57 General Electric shareholder wealth, 109 stock market valuation, examination, 6 General Theory of Employment, Interest and Money, (Keynes), 121, 124 Generation Z, 151 George, David Lloyd, 122 Gerber, comparison, 91 Global monetary system, 122 Go‐go, term (usage), 49 Go‐Go years, 48–50, 59 Go‐Go Years, The, (Brooks), 68 Gold purchase, 105 value, loss, 135 Goodwyn, Jerry, 68 Google, compounding, 139–140 GoPro, 150 Gotham Partners, 88 closure, 89 Government Employees Insurance Company (GEICO), 78 Buffett interest, 78–79 Gracian, Baltasar, 131 Graham, Benjamin, 1, 3, 78, 157 Dean of Wall Street, 3 teachings, 11 Graham Corporation, arbitrage techniques, 7 Graham‐Newman Corporation, 9 Grant, Ulysses S., 29–30 Great Crash, The, (Galbraith), 67 Great Depression, 48, 52, 68, 126, 147 Dow value, losses, 142 Great Financial Recession, 142–143 Griffin, Dale, 81 Griffin, Tren, 81 Grove, Andy, 57 Gutfreund, John, 39 Haghani, Victor J., 39 Harris, Hutton & Company, 17 Harris, John B., 111 Hartford Accident Insurance Company (Twain investment), 28 Hartford Courant (Hawley ownership), 29 Hawking, Stephen, 37 Hawkins, Gregory, 39 Hawley, Joseph Roswell, 29 Heath, Thomas, 114 “Hedge Fund Miseries” (Steinhardt), 59 Heinze, Augustus/Otto, 19 Hemingway, Ernest, 28 Herbalife Ackman crusade, 3, 90–92 FTC charges, 93–94 sales, 91 stock, increase, 92 Heuristics, dangers, 16 H.H.

., founding, 132 Paulson, John, 3, 129, 131–132 merger/arbitrage, 133 Pearson, Mike, 113 Buffett, contrast, 114 Pellegrini, Paolo, 132–133 Penn Dixie Cement, shares (purchase), 58 Pershing Square Capital Management, 89 Pittsburgh National Bank, 101 Plasmon (Twain investment), 28 Polaroid, trading level, 70 Poppe, David, 114 Portfolio turnover, 69 Portugal, Ireland, Italy, Greece, Spain (PIIGS), 158 Post‐go‐go years meltdown, 147 Post III, William, 131 Price, Teddy, 19–20 Princeton University, 47–48 Private/public investing, history, 149 Profit sharing, 68 Prospect Theory (Kahneman/Tversky), 126 Pyramid schemes, 93 Qualcomm, gains, 57 Quantitative easing program, 134–135 Quantum Fund, 100, 103 Ramirez, Alberto/Rosa, 132 Rational thinking, suspension, 27 Recession, odds (calculation), 38 Renaissance Technologies, 135 Return on equity, term (usage), 4 Reverse crash, 100 Risk, arrival, 32 Risk management, 23 Roaring Twenties, bull market cycle, 7 Robertson, Julian, 58 Roche, Cullen, 99 Rockefeller, John, 30 Rogers, Henry (“Hell Hound”), 30–32 Rooney, Frank, 80, 81 Rosenfeld, Eric, 39, 41 Ruane, Bill, 4, 109, 112 Ruane & Cunniff, 112 Ruane, Cunniff & Goldfarb, 110–111 Russell 3000, 135 Russia, Quantum Fund loss, 103–104 Sacca, Chris, 145, 149–150 Salomon Brothers, 39 Buffett investment, 79 Samuelson, Paul (remarks), 51 San Francisco Call, 31 Schloss, Walter, 4 Schmidt, Eric, 150 Scholes, Myron, 39 Nobel Prize in Economics, 40–41 Schroeder, Alice, 80 Schwager, Jack, 159 Sears, Ackman targeting, 90 Sears Holdings, 109 Securities and Exchange Act, 7 Securities and Exchange Commission (SEC) 13D registration, 90 creation, 22 Security Analysis (Graham), 3–5 See's Candy Berkshire Hathaway purchase, 78 purchase, 142 Self‐esteem, satisfaction (impact), 75–76 Sequoia Fund, 107 operation, 110–111 Shiller, Robert, 75–76, 87 Short squeeze, 93 Silvan, Jon, 94 Simmons, Bill, 151 Simons, Jim, 135 Slack, Sacca investment, 149 Smith, Adam, 68, 121 Snapchat, 151 Snap, going public, 151 Snowball, The, (Schroeder), 80 Social activities, engagement, 87–88 Soros Fund Management, losses, 105 Soros, George, 58, 60, 100, 103 interaction, 102 reform, 121 South Sea Company shares, 37 Speculation, 15 avoidance, 28 SPY, 62 Stagecoach Corporate Stock Fund, 52 Stamp revenues, trading, 141–142 Standard Oil, 30 Standard & Poor's 500 (S&P500) ETF, 62 gains, 112, 114 performance, comparison, 119 shorting, 163 Valeant performance, comparison, 113 Steinhardt, Fine, Berkowitz & Company, opening, 58 Steinhardt, Michael, 55, 58 performance record, 59–60 Steinhardt Overseas Fund, 60 Stoker, Bram, 30 Stock market, choices, 114–115 Stocks crashing/reverse crashing, 100 return, 99 stock‐picking ability, 88 Stock trader, training, 18 Strategic Aggressive Investing Fund, 102 Sunk cost, 110 Sun Valley Conference, 57 “Superinvestors of Graham‐and‐Doddsville, The,” 111–112 Taleb, Nassim, 42 Target, Ackman targeting, 90 TDP&L, 50 Tech bubble, inflation, 57 Technivest, 50 Thaler, Richard H., 75, 126 Thinking, Fast and Slow, (Kahneman), 15 Thorndike, Dorain, Paine & Lewis, Inc., 48 Time horizons, 120 Time Warner, AOL merger, 49 Tim Ferriss Show, The, (podcast), 150 Tim Hortons, spinoff, 89 Tract on Monetary Reform, A, (Keynes), 125–126 Trader (Jones), 119 Trustees Equity Fund, decline, 50 Tsai, Jerry, 65, 68 stocks, trading, 69 ten good games, 71 Tsai Management Research, sale, 70 Tversky, Amos, 81 Twain, Mark (Samuel Clemens), 25, 27, 75 bankruptcy filings, 32 money, losses, 27–32 public opinion, hypersensitivity, 31 Twilio, Sacca investment, 149 Twitter, Sacca investment, 149–150 Uber, Sacca investment, 149 Undervalued issues, selection, 10 Union Pacific, shares (sale), 18 United Copper, cornering, 19 United States housing bubble, 132 University Computing, trading level, 70 US bonds international bonds, spreads, 41 value, decline, 61 U.S. housing bubble, impact, 132 U.S.


The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, barriers to entry, business cycle, business process, buy and hold, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Robert Shiller, shareholder value, Steve Jobs, The Great Moderation, value at risk

We then statistically relate for each year, over the past 60 years, the market values (the product of stock price and the number of shares outstanding) of all US public companies with the required data to their recent respective earnings and book value (see the Appendix for a more formal discussion of this analysis). Market values (capitalization) of companies reflect, of course, multiple sources of information, such as interest rates, industry conditions (e.g., depressed real estate in the financial crisis), and monetary policy (the Fed’s “quantitative easing”), in addition to The Widening Chasm between Financial Information and Stock Prices 33 companies’ earnings and book values. Accordingly, our statistical methodology (a regression analysis) enables us to answer the following question: Of all the information items reflected in companies’ market values (stock prices), how much is attributed to corporate earnings and book values? This is the message of Figure 3.1: roughly 80 to 90 percent in the 1950s and 1960s versus 50 percent today.

Pretty good for a back-of-the-envelope forecast, even compared with the 17 54 MATTER OF FACT financial analysts following Exxon—all experts on Exxon and the oil and gas industry—which had in January 2012 a mean (consensus) full-year earnings estimate of $46.27 billion, overshooting actual earnings by 3.1 percent. Surprise—you are in the same league as the experts. One can devise, of course, more sophisticated models to predict earnings than the above: last-year’s earnings plus average growth. Taking into account expected events—like the termination of the Fed’s “quantitative easing,” leading to higher interest rates, or an impending corporate acquisition—will likely improve the accuracy of the forecast. But our aim in this chapter is not to devise the best earnings prediction model, but rather, to focus on the ability or usefulness of reported earnings to predict those in the future. Our test is designed for this specific purpose.7 Back to our task of assessing reported earnings’ usefulness over time.

Even a far larger disaster, British Petroleum’s (BP) 2010 oil spill in the Gulf of Mexico, costing the company tens of billions of dollars, didn’t dethrone BP from its membership in the group of major international oil companies. The current (2016) oil glut and price drops may prove more consequential to oil companies. 7. As an aside, any prediction model that incorporates other predictions (like the expected rising interest rates post quantitative easing) is subject to additional inaccuracies from the errors of those predictions. So our prediction, based solely on adjusted reported earnings, may perform quite well compared with “more sophisticated” ones. See, for example, Joseph Gerakos and Robert Gramacy, Regression-Based Earnings Forecasts, working paper (Chicago: University of Chicago, 2013). 8. An alternative, often used by researchers, is to compute the “root mean-squared error,” which is computed by squaring the errors, averaging them, and taking the square root of the average, which also abstracts from the error sign. 9.


pages: 279 words: 90,888

The Lost Decade: 2010–2020, and What Lies Ahead for Britain by Polly Toynbee, David Walker

banking crisis, battle of ideas, Boris Johnson, call centre, car-free, centre right, collective bargaining, congestion charging, corporate governance, crony capitalism, David Attenborough, Dominic Cummings, Donald Trump, Downton Abbey, energy transition, Etonian, first-past-the-post, G4S, gender pay gap, gig economy, Gini coefficient, global village, high net worth, housing crisis, income inequality, industrial robot, Intergovernmental Panel on Climate Change (IPCC), James Dyson, manufacturing employment, mass immigration, moral panic, mortgage debt, North Sea oil, offshore financial centre, payday loans, pension reform, quantitative easing, Right to Buy, Saturday Night Live, selection bias, smart meter, Uber for X, urban renewal, working-age population

(The state also bailed out their retail customers, then got blamed by them for being too big. It was an augury of a period when the public willed and wanted incompatible things, then lashed out when they couldn’t get them. Johnson’s cake-ism caught the spirit of the times.) The authorities lowered interest rates, making money cheaper, which pumped up the price of shares and houses. Inequality trailed in the wake of quantitative easing. But no one counted the winners and losers. In hindsight, a banker-punishing crash – had it been short and sharp – might have made Brexit less likely. Letting rip would have hurt property dealers and the wealthy, and might, just might, have provided a kind of national catharsis. Professor Nicholas Crafts of the University of Warwick argued that the UK economy was up to 16 per cent of GDP smaller than it would have been if bankers had not gambled and been bailed out.

The impotence of the Financial Conduct Authority was laid bare when Neil Woodford, a year after paying himself and his business partner £36.5 million, refused to waive the gargantuan daily fee paid by the investors whom he was barring from withdrawing their money after his funds plummeted. It may sound extraordinary to suggest the Old Lady of Threadneedle Street was cognitively impaired, but the evidence comes in the shape of ‘quantitative easing’. Neither its governors nor the Treasury fully understood what they were doing and certainly did not anticipate that it would plump up the feathers of the rich and turbo-charge house prices. Perhaps Osborne did grasp how the latter spread good feeling (and a tolerance of austerity and a willingness to vote Tory) across the land. For all his would-be orthodoxy, Osborne readily clung on to a policy started under Labour that, in defiance of immutable rules, gave the green light to printing money, billions of it.

His wealth-management firm looks after the investments of 100,000 clients, mostly British expats, advising them on the tax-efficient zones in which to park their money. His firm has 1,500 employees in fifty countries, from Switzerland to Botswana, China and Luxembourg to South Africa. His base is in Dubai, which is where he was when we spoke to him, but he lived, he said, mainly on planes. ‘It’s been very good for the markets: low interest rates, low inflation and, yes, quantitative easing as well.’ QE had dramatic redistributive effects, as we saw, and inflated the value of assets. ‘Clients’ accounts have done very well.’ Green had few worries about protectionism or nationalisation or clamping down on tax havens: ‘You can’t fight globalism. It won’t stop.’ Brexit was an error, but Johnson at the helm meant less tax: ‘People need encouragement. Entrepreneurs need to be motivated.’


pages: 478 words: 126,416

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

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

No one thanks the person who exposes the bezzle. Traditional monetary policy involved setting interest rates and supplying or reducing liquidity in the banking system through ‘open market operations’ – trading in the government’s own debt. The more recent policy, known as ‘quantitative easing’, involves the central bank buying assets from the financial sector – not just banks, and not necessarily only government securities. Though this policy enjoyed little success in stimulating the Japanese economy when it was first tried there in the 1990s, quantitative easing has been extensively adopted since 2009 by the Federal Reserve Board and the Bank of England. The balance sheet of the Federal Reserve System totalled just under $900 billion in 2007: by 2014 this figure had risen fivefold to almost $4.5 trillion.7 The Bank of England’s balance sheet has been multiplied by ten, from £39 billion to £399 billion.8 While British government debt of around £1.4 trillion is the highest it has ever been, the Bank of England itself is by far the largest holder of this debt.

But such information asymmetry is a benefit rather than a problem: if the British government knows it is not going to default on debt when the bond market believes otherwise, a state that can issue as much short-term debt (money) as it likes can use the misapprehension to refinance its debt on favourable terms, buying back its own long-term debt for subsequent reissue. The policy has been followed during quantitative easing, but at the wrong time, for the wrong reasons and with the wrong consequences. Far from being abnormally high in anticipation of a possible default, long-term interest rates in developed economies are at historically unprecedented lows. The governments of Britain, France, Germany and the USA can today borrow for decades ahead at low or even negative real interest rates. But instead of issuing such debt, Britain and the USA have been buying it back in exceptional quantities in order to sustain asset prices and help recapitalise the banking system.

Gerald 242 Countrywide Financial 150, 152, 293 Craig, James 26 credit cards companies 27, 210 debt 54 origin of 185–6 profitability 113 credit default swaps 41, 60, 61, 64, 73, 100, 101, 119, 120, 121, 139, 152, 153, 223 credit expansion 54, 98 Crédit Lyonnais 33 credit ratings 21, 101, 248 credit risk 42, 75, 177, 192 Crédit Suisse First Boston 167, 292 credit-scoring 84, 87, 290, 291 Crosby, James 125 crowd-funding 81 D Dad’s Army (television series) 12 Dahinden, Vincent 124 Daschle, Tom 230 debit cards 186 debt reduction 241 debt securities 101, 107 debt-to-value ratio 149 democracy 4, 52, 308 deposit channel 25–6, 147–8, 173–94 activities of 188–94, 189, 192 directed by retail banks 291 household wealth 173–80, 175, 179 the payment system 181–8 ring-fencing 194, 287 simplification needed 213 deposit insurance 25, 121 deposit protection schemes 135 Derbyshire Building Society 90 deregulation 13, 28, 31, 149–50, 151, 246–7, 292 derivative contracts 191, 192, 323n11 derivatives market 2, 19, 35, 38, 110 portfolios 98 regulation 57, 234 securities 2, 15, 17, 41, 71, 131 Detroit, Michigan 254 Deutsche Bank 33, 104, 136–8, 166, 169, 191–2, 192, 193, 200, 219, 222, 266, 282, 286, 303, 323n11 Diamond, Bob 34, 35, 261, 267, 295, 300 Dickens, Charles: Martin Chuzzlewit 201 Dimon, Jamie 14–15, 35, 231 Dirks, Ray 228 Disney, Walt 70, 71 diversification 21, 27, 28, 29, 32, 33, 45, 95–9, 153 ‘alternative assets’ 98 building societies 151 buying all available stocks 99 coin-tossing game 96 correlation 96, 97–8 Exchange Traded Funds 99 hedge funds 98–9 passive funds 99 diversification divorce 74 DLJ 313n15 Dodd-Frank regulatory regime 236–7, 271 Doerr, John 167 dollar devaluation (1971) 14, 36 Donoghue, Mrs 283 dot.com boom 40 Draghi, Mario 42, 139 Dreamworks 21 Drexel Burnham Lambert 46 drug use 22 ‘Dutch book’ 68, 116 E eBay 187 economic policy 240–69 the British dilemma 262–9 consumer protection 259–62 financial markets and economic policy 248–52 Maestro 240–48 pensions and inter-generational equity 252–9 Economist, The 115 ‘Edge, the’ 114–18, 288 Edinburgh Britain’s second financial centre 11, 263 investment trusts in 26 Edison, Thomas 196 education 253, 259 efficient market hypothesis (EMH) 69–70, 99 Einstein, Albert 129 El Paso oil business 117–18, 232 electricity 245–6, 278 eligible counterparty 282–3 Elizabeth II, Queen 161 Emanuel, Rahm 301 embezzlement 127 emerging markets 39, 42 Emerson, Ralph Waldo: The Conduct of Life 181 emperor’s guard’s new clothes, the 309–10 empire, decline of 13 Enron 123, 124, 126, 127, 158, 176–7, 197, 246, 317n5 Equitas 107 Equity Funding 228 equity markets 23, 85, 168–9, 249, 288 Ericsson 108 Espirito Santo 271 Eurodollar market 13, 20, 120, 121 European Central Bank 42, 98, 138, 139, 183, 243, 244 European Commission 184, 289 European Monetary System 184 European Parliament 184, 328n6 European Union (EU) 194, 220, 226, 228, 273, 287 Eurostat 250 Eurozone 158, 183, 243, 250 creation of 129 crisis 41–2, 139, 301 indebtedness in 184 exchange rates fixed 18 flexible 18 forward 73 Exchange Traded Funds (ETFs) 99 synthetic 99 exchange-traded funds 280 Exchequer Partnerships 158, 159 extended family 78 Exxon Mobil 96, 101, 120, 134, 161, 163, 164, 189, 196 F Facebook 81, 162–3, 166, 167, 185, 196 ‘fair value’ 125–6, 191 fallacy of composition 89 Fama, Eugene 69 family support 79 Fannie Mae 75, 91, 135, 152, 230, 317–18n5 Farkas, Lee 152, 293 FBI 131 febezzle (‘functionally equivalent bezzle’) 127, 128, 132, 136, 176, 177, 190 Federal Deposit Insurance Corporation (FDIC) 25, 135, 247 Federal Reserve Bank of Kansas City symposium (Jackson Hole, Wyoming, 2005) 56–7, 58, 73, 79, 102, 181, 236, 256, 280 Federal Reserve Bank of New York 57, 183, 232, 242, 243 Federal Reserve Board 5, 41, 56, 57, 58, 134, 183, 231, 240, 243, 245, 247 Federal Reserve System 13, 40, 90, 98, 150, 183, 245 Federated Department Stores 204 fee structures 204 Ferguson, Charles 236 Feynman, Richard P. 276, 327n3 Fidelity 109, 199, 200, 213 finance sector a bias to action 203–8 control of risk 6, 7 economic significance 6 excess in the industry 6 export contribution 265 greedy individualism 24 growth of 1–2, 33 heavy criticism of 233 as just another business 5 labour force 263 lack of sanction application 7 lobbying 230, 302, 306 major role in politics 4 management of household financial affairs 6 matching of borrowers and lenders 6, 7 past and current attitudes in 23–4 payments system 6, 7, 25, 281 profitability 132–40, 134 qualitative assessment 265 recurrent crises 35, 307 regarded as having unique status 4–5 remuneration 54, 112 role of 143 search 144 sense of personal entitlement 24, 300 share in GDP 264–5 skills 15 stewardship 144 structural reform 7 taxation 266–7 work incentives 7 workers in finance 6–7, 125 finance theory 5 Finance Watch 328n6 financial advisers 197, 199, 291 Financial Conduct Authority 230, 237, 261 Financial Products Group 293 financial sector, regulation of see regulation Financial Services Authority 243, 247, 303 Financial Services Compensation Scheme 260 Financial Times 68, 115 financialisation 4–7, 36, 45, 72, 163, 165, 172, 259 and complexity 276, 278 conflation of roles of agent and trader 198 and the conglomeration 133 direct impact of 176 effect on corporate behaviour 78 and emergence of large asset management companies 200 emphasis on monetary policy 241 in Germany 169 and hedge funds 289 and housing 149 national and international 39 and risk 55 and secondary markets 170 and social security 255 Summers supports 57 transition from agency to trading 84 two main componenents of 16 Fink, Larry 200 First Boston 200 First Data Corporation 186 First World War 221 fiscal arbitrage 122, 123, 223 FISIM (financial services indirectly measured) 264 Fitch rating agency 313n6 Fitzgerald, Scott: The Great Gatsby 17, 297 FitzPatrick, Sean 156, 293–4 Five Star Movement 306 fixed commissions 29 fixed interest, currency and commodities (FICC) 22, 107, 110, 111, 118, 125, 160, 191, 194, 288 fixed-interest securities 190, 193 Flaubert, Gustave: Sentimental Education 80 Florida land boom (1920s) 201 Forbes magazine 204, 231 Ford, Henry 45, 70, 71 foreign exchange transactions speculators in 18–19 value of 2 Fortune magazine 23 ‘four horsemen’ 167, 168 Fox, Justin 70 fractional reserve banking 88 France corporatism 303–4 defeat of Sarkozy 248, 249 downgraded bonds 248, 249, 250 housing 149, 174 ‘trente glorieuses’ 36 Frankfurt financial centre 26 Freddie Mac 75, 135 free market 18, 59, 238, 247, 302 Frick, Henry Clay 44 Friedman, Milton 60, 63 Free to Choose 56 front running 28 FrontNational 306 Frost, Robert: ‘Provide, Provide’ 252 FT Alphaville 16 Fuld, Dick 24, 32, 72–3, 75, 231, 293 full employment 241 fund managers 66, 86, 108, 115, 206, 209, 212 future of finance 297–308 futures 19 G G8 and G20 economic summits 220 Galbraith, J.K. 127, 201 Galton, Francis xi gambling 130–31, 289 close regulation of 71, 72 Lloyd’s coffee house 71–2 lottery 65, 66, 68, 72 Gates, Bill 174, 268 Gaussian copula 22 GEC 48, 51 GEICO 107 Geithner, Timothy 57–8, 73, 75–6, 92, 104, 183, 230, 232, 239, 276, 306, 307 Geithner doctrine 271 Gemeinschaft 17, 61, 255 General Electric 46, 196 General Motors 45, 49 general share price indexes 98 Generali 27 Generally Accepted Accounting Principles (GAAP) 193 Gensler, Gary 288 Germany corporatism 303, 304 ‘economic miracle’ 36 housing 149, 174 indebtedness to 183–4 Landesbanken 169 Mittelstand 52, 168, 169, 170, 171, 172 role of Bundesbank 243 social market economy 219 state pensions 253 Gesellschaft 17, 61, 255 Gingrich, Newt 230 Glass-Steagall Act (1933) 25, 28, 33 Glaxo 96 global financial crisis (2007–9) and bank assets 91 bankers’ cognitive dissonance 102 begins in the USA 41 causes of 194, 220, 271 collapse of asset-backed securities market 21 collapse of sub-prime mortgages 109 costs of 285 and derivative contracts 192 and diversification 32 emergency measures 285–6 Gaussian copula 22 and liquidity 188, 278, 286 misallocation of housing finance 148 most culpable figures 293 unprecedented public intervention 41 the worst financial crisis since the Great Depression 15 globalisation 13 of capital flows 176, 180 of financial markets 17 and income inequality 53–4 pressure on regulatory structures 14 ‘gnomes of Zurich’ 18 gold standard 13, 18, 36, 181, 241 Golden Dawn 306 Goldman Sachs 1, 14, 31, 55, 57, 59, 63, 104–5, 114, 115, 117, 118, 120, 135, 143, 158, 160, 164, 232, 233, 250, 258, 266, 282, 283, 284, 288, 294, 300, 306 Code of Business and Ethics 118 Goldsmith, Oliver: The Deserted Village 49 goodwill 31, 258–9 Goodwin, Fred 14, 34, 149, 156, 169, 231, 293 Google 80, 83, 162, 167, 196 Gould, Jay 44 government assets and liabilities 000 government bonds 17, 42, 86, 155, 178, 208, 222, 290 government debt 128, 178, 190, 203, 245, 250, 251 government spending 253 Graham, Ben 176 Grasso, Dick 49 Great Depression 12, 15, 25, 36, 57, 218, 221, 225, 258, 308 ‘Great Moderation, the’ 40, 57, 104 Greece accounting manipulation 158, 250 adoption of a common currency 41 government debt 42, 128 refinancing of Greek credit 42 Greenspan, Alan 57, 63, 104, 119, 181, 245, 276 and Ayn Rand 79, 240 and ‘Black Monday’ 242 chairman of the Federal Reserve Board 56, 58, 181, 240–41, 242 and Fed priorities 247–8 and the Markowitz model 68–9 and mortgage defaults 97 and risk 73 testimony to Congress 67–8, 240 ‘Greenspan doctrine’ 56, 60, 67, 68, 71, 87, 101, 249 ‘Greenspan put, the’ 242, 249 Grillo, Bepep 306 Grimaldis of Monaco 123 gross domestic product (GDP) 251, 256, 264–5, 265, 266 gross national income (GNI) 265–6 gross value added (GVA) 265 group insurance 76–7 Grubman, Jack 293 H Haldane, Andrew 139, 264 Halifax Building Society 31, 32, 140, 164, 258–9 becomes a public company 124 competition for the ‘talent’ 193–4 ‘the Edge’ established in wholesale financial markets 114 and fixed-interest securities 190, 193 Group Treasury 106, 107, 111, 129 origins 106 rescued by the British government 124 response to changing times (1990s) 129 takes over the Bank of Scotland 124, 125 the world’s largest mortgage lender 106 worthless windfall shares 127–8 Hamamatsu Photonics 168 Hambrecht & Quist 167 Hambros Bank 158 Hanson 45, 46–7 ‘hard’ commodities 17 Harding, David 111–12, 124 Hartlepool nuclear power station, northeast England 158 Harvard University 5, 14–15 Harvey-Jones, Sir John 51 Hawkins, Sir Henry 61, 64, 116 Hayek, Friedrich 225 HBoS 32, 91, 124, 125, 135 healthcare 77, 78, 79, 253, 257–8 hedge fund managers 23, 99, 109, 282 Hedge Fund Research 323n9 hedge funds 27, 98–9, 110, 191, 194, 284, 289, 323n9 hedge fund centre, Mayfair, London 263 Helyar, John 46, 164 Henderson, David 58 ‘hidden champions’ 168 high-frequency trading 2, 111, 280, 305 Hill, Lord 322n14 Hope, Bob 160 Hornby, Andy 14 horse-racing 72, 116 House of Commons library 115 House of Lords 283 House of Morgan 25, 35 Household International 34–5 housing 148–54, 290 causes of crisis in housing finance 153 collapse of thrifts 150 equity release 54 house prices (US) 41, 43, 174, 259 houses as physical assets 146–7 low-cost 79 mortgage defaults 97 owner-occupied housing stock 53, 149, 151 specialist lenders 150 HSBC 1, 24, 34–5, 286, 328n22 Hubler, ‘Howie’ 130 Hurricane Katrina (2005) 79, 256 I Ibsen, Henrik: An Enemy of the People 285 Iceland: bank and compensation scheme collapse 260 ICI 45, 46–8, 51, 78 Iksil, Bruno 35, 130 ‘I’ll be gone, you’ll be gone’ culture 125, 128, 129, 131, 133, 152, 156, 204, 273 imperialism 13, 218 income distribution 52–4, 53 Independent Commission on Banking 139, 287 India, economic growth in 53 inflation 36, 54, 178, 241–2, 258 information asymmetry 60, 74, 76, 251, 317n2 information technology 18, 19–20, 31, 168, 185 infrastructure, property and 154–60 initial public offering (IPO) 113 Inside Job (film) 236 insurance companies 16, 27, 29, 120, 197, 199, 208, 213, 264 Intel 29, 167 interest rates and inflation 241, 242 long-term 251 intergenerational accounting 258 intermediation 80–105 bad intermediaries 81–2 competition 271 direct/indirect 82, 83 and diversification 96 facilitating 7 and the internet 81 leverage 100–105 managed 83, 201, 212–13 the role of the middleman 80–99 total costs of 207 transparent 83, 84, 201–2, 203 International Financial Reporting Standards (IFRS) 193 International Labour Organization (ILO) 263 International Monetary Fund (IMF) 13–14, 38, 39, 56, 58, 139, 220, 302 international reply coupons 131 International Swaps and Derivatives Association (ISDA) 61, 119, 193 internet 182, 183, 185 connectedness 81, 83 and intermediation 81 Interstate Commerce Commission 233, 237 investment banking FICC trading 107 global expansion of American banks 33 investment trusts 26, 27 relationships 16 within commercial banks 22 investment banks boutique 205 ‘dark pools’ 29 economists in 248–9 legal partnerships 30 modern objectives 197 and rating agencies 249 and search 197 investment channel 26, 148, 174, 175, 195–213 a bias to action 203–8 fails to meet the needs of businesses and households 213 investable assets 202–3, 203 the role of the asset manager 208–13 simplification needed 213 and sovereign wealth funds 253 stewardship 195–203, 203 investment companies 26, 27, 96, 177, 197, 199, 200, 201, 202 investment funds closed-end (managed) 212 open-ended (transparent) 212 Investor B 108 investors allocation of risk 57, 60, 73 and credit ratings 21 foreign 39 institutional 23, 28, 46 large 98 and leverage 101 long-term 94 losses of 43 private 28 property 99 retail 66 small 30, 99 sophisticated 23 Ireland bank workers’ strike (1970) 182 collapse of banking system (2008) 42, 138, 182 Isaacson, Walter 71 Ishmael, Stacy-Marie 16 Israel defence forces 171 high-technology start-up sector 117 It’s a Wonderful Life (film) 12–13 ITT 45 J Japan credit expansion 98 economic growth 36, 39 imagined competitive threat from 221 and quantitative easing 245 speculative bubble (late 1980s) 38–9, 280 jobbers 25, 28, 29–30 Jobs, Steve 70, 71, 162, 196 Johnson, Simon 302 Jordan Marsh department store 46, 90 J.P. Morgan 14, 25, 35, 113, 120, 123–4, 130, 134, 191, 192, 193, 197, 200, 286, 294–5 J.P. Morgan Chase 231 junk bonds 46, 292 jurisdictional arbitrage 122–3, 223 ‘just culture’ 238 K Kahn, Alfred 238 Kahneman, Daniel 66 Kaupthing bank 294 Kay, John Obliquity 48 The Long and the Short of it 208 The Truth about Markets 240 Keating, Charles 292 Kerviel, Jérôme 50, 130 ‘ketchup economics’ 5, 15, 57, 69, 80 Keynes, John Maynard 67, 87, 110, 226, 307 The General Theory of Employment, Interest and Money 65, 297 Keynesianism 241 Kinder Morgan 117–18, 232 Knight, Frank 67 ‘known unknowns’ 67 Kohn, Don 56–7, 58, 73, 101 Kuznets, Simon 263 L Lagos, Nigeria: scammers in cyber cafés 118 Landesbanken 33, 169 large companies 160–64 Latin American states, default of (1980s) 37 Lazard family 217 Lazard Frères 205 Lazards 134 Leeds United FC 21 Leeson, Nick 130 Legal & General 200 Legg Mason 109 Lehman Brothers 24, 32, 34, 43, 75, 91, 121, 122, 135, 231, 277, 280–81, 293 ‘lender of the last resort’ 90, 244, 275 leverage 100–105, 282 central to modern financial crises 104 debt element of risk 101 defined 100 and derivative contracts 191 equity element of risk 101 forms of 101 and a high return on equity 137–8 ‘out of the money option’ 102, 103 and property transactions 155, 156 refinancing established companies 166 and shareholder value 211 tailgating strategy 102, 103, 104 the ‘winner’s curse’ 103, 104 Levin, Sen.


Global Financial Crisis by Noah Berlatsky

accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, mass immigration, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

Issue Bonds and Print Money First, EU (rather than exclusively national) bonds can be created. These will effectively give Europe a fiscal capacity that is, for all intents and purposes, equivalent to that of the U.S. Treasury. Second, given the deflation problem, the European Central Bank can now follow the Bank of England and the Swiss National Bank by entering the next tier of quantitative easing, expanding its balance sheet and starting to buy those crisp new EU bonds in the primary market. (Quantitative easing, which is simply a generic way of referring to all the recent attempts to boost money supply when interest rates fall close to zero, becomes in this particular case a euphemism for “printing money,” with the unusual characteristic that this time, inflation is exactly what we are looking for. And if we don’t get it, well, as Paul Krugman wrote in a 97 The Global Financial Crisis Eastern Europe Is Going Backward The view in the East is that the onset of the world economic crisis has suddenly reversed globalization.

Europe, Hugh claims, has been in denial about the extent of the crisis and must act swiftly if the European Union is to survive. As you read, consider the following questions: 1. According to Edward Hugh, what might Spanish unemployment rise to in 2010? 2. Which two Eastern European nations face the current worst-case economic scenarios in Europe, according to Hugh? 3. According to Hugh, in the current economic situation, for what is “quantitative easing” a euphemism? A s [Russian novelist] Leo Tolstoy might put it, all of Europe’s economies are feeling pretty unhappy right now, but each is unhappy in its own unique way. Nowhere have the Edward Hugh, “The Center Cannot Hold,” Foreign Policy, March 1, 2009. Copyright © 2008 Foreign Policy. All rights reserved. Reproduced by permission. 92 Effects of the Global Financial Crisis on Wealthier Nations effects of the crisis been felt more acutely than in the “peripheral” countries on Europe’s southern, northwestern and eastern edges.


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