savings glut

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pages: 524 words: 143,993

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

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

In particular, they engineered surplus savings, as we saw in Chapter Three, to reduce their vulnerability to what they had learned to view (rightly) as destabilizing private-capital inflows, above all, debt-creating flows. As a matter of definition, observed savings must equal observed investment. So how does one identify a savings glut? Indeed, why should one call it a savings glut, rather than an ‘investment dearth’? The answer to the second question is that one cannot. It is a matter of interpretation of the evidence. Often, it is more sensible to talk of an investment dearth than a savings glut. The answer to the first question is that one cannot identify the savings glut or the investment dearth directly. It can be observed instead in some combination of the reward for savings – that is, the interest rate – and the level of economic activity – that is, the degree of excess capacity. In brief, if people desire to save (that is, not spend) more than people desire to invest, the economy will adjust in a combination of two ways: via interest rates or via output and incomes.

It notes, however, that those who agree on this advance two distinct views on what those macroeconomic roots were: savings glut and credit glut. These alternatives partly reflect different perspectives on how the economy works, differences that the crisis has brought out into the open. I will argue that the views are not as contradictory as many suppose. Indeed they share common roots in a series of profound and interconnected transformations of the world economy since around 1980. THE SHIFT INTO THE GLOBAL SAVINGS SURFEIT Ben Bernanke, when still a mere governor of the Federal Reserve, laid out the savings-glut hypothesis in a speech he gave in 2005. In this he stated that ‘Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving – a global savings glut – which helps to explain both the increase in the U.S. current-account deficit and the relatively low level of long-term real interest rates in the world today.’8 Michael Pettis of Peking University has written an excellent book that elaborates this hypothesis: ‘For almost any serious student of financial and economic history, what has happened in the past few years as the world adjusts to deep imbalances is neither unprecedented nor should even have been unexpected.

Also highly critical, in post-crisis writing, has been John Taylor of Stanford University, inventor of the eponymous ‘Taylor Rule’, which states that central banks should determine interest rates in response to divergences of actual inflation from target inflation and of actual GDP from full-capacity (or potential) GDP.45 Claudio Borio has argued more recently that the crisis is the consequence of excessive expansion in credit due to mistaken monetary policies.46 Justin Lin argues, on similar lines, that US monetary irresponsibility explains what has happened.47 The arguments can be put into two groups. The first contains arguments that no savings glut existed and that the global imbalances were solely the consequence of mistaken monetary policies in the high-income countries, above all the US. The second contains arguments that monetary policy was too loose, whether or not there was such a savings glut: Mr Bernanke may have had the right analysis, but the Fed’s was the wrong response, made worse by the failure to regulate the financial system. On the question of whether a savings glut existed (indeed still exists), the answer has to be that it did: it can be seen in post-1997 real interest rates and in huge and growing net exports of savings from a range of surplus countries.


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

(We may recall that Bernanke did not propagate the savings glut theory to explain a crisis, which at that point had not started yet.) But if one wanted to use these phenomena as the basis for a crisis theory, then attributing them only to a high propensity to save in foreign countries would not be sufficient to explain how they could have disrupted the economy. One would have to elaborate on how the coordinating faculties of market prices and, in particular, interest rates had been corrupted to a degree that allowed investment and saving to be temporarily out of synch. At this point one would have again arrived at a monetary cycle theory. If the savings glut theory describes the result of voluntary savings then it cannot explain the crisis. If one wants to build a crisis theory on what the savings glut theory describes, one would have no choice but to use the monetary crisis theory again, rendering the savings glut theory superfluous in the first place.

According to a popular view, phenomena such as low interest rates, excessive borrowing, and substantial rises in the prices of certain asset classes are not the result of monetary expansion but, ultimately, of excess savings. It seems worthwhile to briefly analyze this alternative narrative for two reasons: First, it will be shown that the extent of savings can never provide a satisfactory explanation for why an economic crisis occurs. Second, an analysis of the “savings glut theory” provides a good illustration of international aspects of the current monetary infrastructure. In particular, it can show how domestic inflationism can be substantially extended via a de facto international coordination of monetary policy. The Savings Glut Theory and the Myth of Underconsumption The notion that recessions occur because people save too much and consume too little has a very long history. It has intuitive appeal to the broader public, who perceive the recession in the form of a drop in the quantity of goods and services sold and the accumulation of excess inventories.

Naturally, we are at liberty to explain changes in these balances from either side of the accounts. This point is of no relevance to the topic discussed in this study. What is relevant to our purposes, however, is that the savings glut theory later, after the financial crisis had started, provided many commentators with a narrative of how the imbalances could have developed that played a role in destabilizing the economy and making a recession inevitable, such as persistent overly generous lending conditions in the United States, a low savings rate, and the concurrence of high levels of consumption with high levels of investment (mainly in residential real estate). According to this interpretation of the savings glut theory, these phenomena could have resulted from excess savings abroad rather than from domestic monetary arrangements and domestic monetary policy in the United States.


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

To the extent that the dollars were invested in equities, they pushed up stock prices and created a wealth effect that permitted more consumption to occur than would have been possible otherwise. In short, those dollars distorted the U.S. economy by funding bad investments and excessive consumption, thus increasing its vulnerability to the downturn that got underway in late 2007. Debunking the Global Savings Glut Theory It is necessary here to set aside a few pages to discredit Ben Bernanke’s global savings glut theory, which attributes the flood of foreign capital into the United States to the propensity of certain countries to “save” too much. Traditionally, trade imbalances were understood to be caused by differences in national levels of saving and investment. National savings comprise the savings of the household sector, the business sector, and the government sector.

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. See Balance of payments Fortune magazine Fractional reserve banking, money creation through Freddie Mac: conservatorship of credit creation and decline in liquidity reserves quantitative easing and U.S. debt guarantees and Friedman, Milton General equilibrium, theory of Germany Glass–Steagall Act Globalization Global savings glut theory, of Bernanke Goldman Sachs Gold reserve requirement, end of and creation of fiat money Government Accountability Office report Government sector: inflation and deflation’s effects on percentage of total credit market debt rational investment option for results of spending cuts in Government-sponsored entities (GSEs): credit supply and GSE-backed mortgage pools inflation and deflation’s effects on quantitative easing and U.S. debt guarantees and Great Depression economic conditions during Friedman’s conclusions about Greece Greenspan, Alan Gross domestic product (GDP): change in value added, by industry debt as percentage of driven by credit equation of exchange and during Great Depression ratio of credit growth to GSE-backed mortgage pools History of Economic Analysis (Schumpeter) Hoover, Herbert Household sector: debt and inflation and deflation’s effects on Human Action (von Mises) Hyperinflation Inflation and deflation credit and inflation derivative regulation and effects on asset classes Fisher’s theory of debt-deflation inflation in 2011 inflation likely in 2012 inflation likely without additional quantitative easing and fiscal stimulus New Great Depression scenarios and protectionism and wealth preservation during Innovation, in Mitchell’s theory of business cycles Interest rates, in U.S.: bond sales and cut by Federal Reserve to encourage credit expansion money supply and quantitative easing and trade balances and International Monetary Fund Ireland Jackson, Andrew Japan Johnson, Lyndon JP Morgan JPMorgan Chase Keynes, John Maynard Korea Labor market, changes in marginal cost of wages in.

Contents Preface Chapter 1: How Credit Slipped Its Leash Opening Pandora’s Box Constraints on the Fed and on Paper Money Creation Fractional Reserve Banking Run Amok Fractional Reserve Banking Commercial Banks The Broader Credit Market: Too Many Lenders, Not Enough Reserves Credit without Reserves The Flow of Funds The Rest of the World Notes Chapter 2: The Global Money Glut The Financial Account How It Works What Percentage of Total Foreign Exchange Reserves Are Dollars? What to Do with So Many Dollars? What about the Remaining $2.8 Trillion? Debunking the Global Savings Glut Theory Will China Dump Its Dollars? Notes Chapter 3: Creditopia Who Borrowed the Money? Impact on the Economy Net Worth Profits Tax Revenue Different, Not Just More Impact on Capital Conclusion Note Chapter 4: The Quantity Theory of Credit The Quantity Theory of Money The Rise and Fall of Monetarism The Quantity Theory of Credit Credit and Inflation Conclusion Notes Chapter 5: The Policy Response: Perpetuating the Boom The Credit Cycle How Have They Done so Far?


pages: 464 words: 139,088

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

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

Napoleon may (or may not) have described England as a nation of shopkeepers, but it would be more accurate to say that it is a nation that keeps on shopping. Keen though western consumers were on spending, their appetite was not strong enough to offset the even greater wish of emerging economies to save. The consequence was that in the world economy as a whole there was an excess of saving, or in the vivid phrase of Ben Bernanke, Chairman of the Federal Reserve from 2006 to 2014, a ‘savings glut’ in the new expanded global capital market.20 This glut of saving pushed down long-term interest rates around the world. We think of interest rates as being determined by the Federal Reserve, the Bank of England, the European Central Bank (ECB) and other national central banks. That is certainly true for short-term interest rates, those applying to loans for a period of a month or less. Over slightly longer horizons, market interest rates are largely influenced by expectations about the likely actions of central banks.

If over the course of that year the price of the things that you like to buy is expected to rise by 5 per cent, then the ‘real’ rate of interest you earn is the money rate less the anticipated rate of inflation (in this example the real rate is zero). In recent years, short-term real interest rates have actually been negative because official interest rates have been less than the rate of inflation. And the savings glut pushed down long-term real interest rates to unprecedentedly low levels.21 In the nineteenth century and most of the twentieth, real rates were positive and moved within a range of 3 to 5 per cent. My estimate is that the average ten-year world real interest rate fell steadily from 4 per cent or so around the fall of the Berlin Wall to 1.5 per cent when the crisis hit, and has since fallen further to around zero.22 As the Asian economies grew and grew, the volume of saving placed in the world capital market by their savers, including the Chinese government, rose and rose.

Such low interest rates, across all maturities, encouraged spending and led it along unsustainable paths in many, if not most, economies.24 With high levels of saving in Asia and rising debt in the West, saving and investment in a number of large countries, and in the world economy as a whole, got out of kilter and produced a major macroeconomic imbalance or disequilibrium. What started as an imbalance between countries became a disequilibrium within economies. When the world economy is functioning well, capital normally flows from mature to developing economies where profitable opportunities abound, as happened in the late nineteenth century when Europe invested in Latin America. A strange feature of the savings glut was that because emerging economies were saving more than they were investing at home, they were actually exporting capital to advanced economies where investment opportunities were more limited. In effect, advanced economies were borrowing large sums from the less developed world. The natural direction of capital flows was reversed – capital was being pushed ‘uphill’.25 Much of those capital flows passed through the western banking system, and this led to the second key development before the crisis – the rapid expansion of bank balance sheets, or in the phrase of Hyun Song Shin, Chief Economist at the Bank for International Settlements, a ‘banking glut’.26 A bank’s balance sheet is a list of all the bank’s assets and all its liabilities.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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

From 2001 through 2005, the ratio was $4.30 of debt to every dollar of nominal growth.10 Finance, rather than capital investment, generated growth. Bernanke’s World Ben Bernanke seemed to think that all was well. He was not concerned about the trade and finance imbalances. He was a leading missionary of a hot phrase: the “global savings glut.” He chided foreigners for saving too much. In Bernanke’s world, Americans were consuming as they should. His statement at the head of the chapter is from a “global savings glut” speech delivered in March 2005. In April, with time to revise his insight, he showed no better grasp of home economics: “[T]he recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. Higher home prices in turn have encouraged households to increase their consumption.

Greenspan is defining the terms 1 Clive James, Fame in the Twentieth Century (New York: Random House, 1993), pp. 248, 252, 121. 337 of the debate, there will never be an illuminating discussion of what went wrong to land the economy in the place it is today.”2 The Wall Street Journal kicked off the book tour with a similar editorial (“The Fed’s Alibi”): “Mr. Greenspan has emerged from the sixfigure speaking circuit with his memoir, ‘The Age of Turbulence.’” The Journal castigated Greenspan—and Bernanke—for “offering alibis for how we arrived at this pass.” It had little patience with a recent speech by the new chairman, in which Bernanke used the “global savings glut” as “his full-field explanation of just about everything. . . . The problem with this explanation is it omits the Fed’s role in producing this ‘savings glut.’ Billions of people around the world didn’t suddenly become more thrifty this decade. It was the Fed’s low interest rate policy—especially a 1% fed funds . . . that helped spur a global commodity price boom.”3 The Journal went on to condemn the dissembling by Bernanke and Greenspan: “Contrary to the dreams of Wall Street there is no free monetary lunch. . . .

By 2004, this had risen above $600 billion, and was close to $800 billion by 2006.2 Personal consumption drove the economy. Between 2001 and 2006, Asha Bangalore, economist at Northern Trust, estimated that 40 percent of new jobs were related to housing.3 This was not sustainable. The manufacturing economy kept shrinking. From the end of 2000 to 2004, manufacturing wages and salaries fell from $819 billion to 1 Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Deficit,” Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, March 10, 2005. 2 OECD.StatExtracts. Dataset: balance of payments, United States. Annual data. Actual numbers: $417 billion in 2000, $624 billion in 2004, and $788 billion in 2006. 3 William A. Fleckenstein with Frederick Sheehan, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve (New York: McGraw-Hill, 2008), pp. 193–194; information from Grant’s Interest Rate Observer, April 21, 2006. 307 $683 billion.4 Manufacturing profits fell from $144 billion in 2000 to $96 billion in 2003.5 The attenuation of manufacturing was a reason that Americans were falling behind.


pages: 142 words: 45,733

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

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

The crisis, after all, is that of a capitalist system, and no account of it, however searching, can be truly systematic if it neglects to consider property relations: that is, the preponderant ownership of capital by one class, and of little or nothing but its labor power by another. Paul Krugman, discussing Roubini’s book in the New York Review of Books, agreed with him that what Ben Bernanke called the “global savings glut” lay at the heart of the crisis, behind the proximate follies of deregulation, mortgage-securitization, excessive leverage and so on. Originating in the current account surpluses of net-exporting countries such as Germany, Japan, and China, this great tide of money flooded markets in the US and Western Europe, and floated property and asset values unsustainably. Why was so much capital so badly misallocated? In the London Review of Books (April 22, 2010), Joseph Stiglitz observed that the savings glut “could equally well be described as an ‘investment dearth,’ ” reflecting a scarcity of attractive investment opportunities. Stiglitz suggests that global warming mitigation or poverty reduction offers new “opportunities for investments with high social returns.”

Stiglitz suggests that global warming mitigation or poverty reduction offers new “opportunities for investments with high social returns.” The neo-Keynesians’ “savings glut” can readily be seen as a case of what a more radical tradition calls overaccumulated capital. But it is the broader and more systematic Marxist perspective that ultimately and properly contains Keynesianism within it, and a crude Marxist catechism may be in order. Where does an excess of savings come from? From unpaid labor—for example, that of Chinese or German workers. And why would such funds inflate asset bubbles rather than create useful investment? Because capital pursues not “high social returns,” but high private returns. And why should these have proved difficult to achieve, except by financial shell-games? Keynesians complain of an insufficiency of aggregate demand, restraining investment.

Both the new factories at home, turning out exports for the US, and the deliriously appreciating houses abroad rested on the premise of continuously rising American incomes. But among Americans, wage growth had ceased and household incomes could no longer be supplemented by the mass entry of women into the workforce, something already accomplished. The issuance and securitization of debt alone could substitute for present income. In the end, so much fictitious capital could not be redeemed. Whatever the destination of future Chinese savings gluts, they are unlikely to sponsor American consumption in the same way. In his final book, Adam Smith in Beijing (2007), the late Giovanni Arrighi expanded on Harvey’s concepts of the spatial fix and the switching crisis to survey half a millennium of capitalist development and to peer into a new, perhaps Chinese century. In Arrighi’s scheme of capitalist history, there have been four “systemic cycles of accumulation,” each lasting roughly a century and each organized on a larger scale than the one before, with a new polity at the center: a Genoese-Iberian cycle; a Dutch cycle; a British cycle; and an American one.


pages: 555 words: 80,635

Open: The Progressive Case for Free Trade, Immigration, and Global Capital by Kimberly Clausing

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, active measures, Affordable Care Act / Obamacare, agricultural Revolution, battle of ideas, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, corporate social responsibility, creative destruction, currency manipulation / currency intervention, David Ricardo: comparative advantage, Donald Trump, floating exchange rates, full employment, gig economy, global supply chain, global value chain, guest worker program, illegal immigration, immigration reform, income inequality, index fund, investor state dispute settlement, knowledge worker, labor-force participation, low skilled workers, Lyft, manufacturing employment, Mark Zuckerberg, meta analysis, meta-analysis, offshore financial centre, open economy, Paul Samuelson, profit motive, purchasing power parity, race to the bottom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transfer pricing, uber lyft, winner-take-all economy, working-age population, zero-sum game

Yet, the typical firm is not more profitable; the highly successful companies at the top of the distribution drive these trends. 14. See Germán Gutiérrez and Thomas Philippon, “Investment-Less Growth: An Empirical Investigation,” Working Paper 22897, NBER Working Papers, National Bureau of Economic Research, 2016. 15. On the savings glut, see: Ben S. Bernanke, “Why Are Interest Rates so Low, Part 3: The Global Savings Glut,” Brookings, April 1, 2015, https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/. On secular stagnation, see Lawrence H. Summers, “Secular Stagnation and Monetary Policy,” Federal Reserve Bank of St. Louis 98:2 (2016), 93–110. 16. See David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Cambridge, MA: Harvard University Press, 2014). 17.

Since 1980, corporate profits after tax have increased dramatically, from about 6 percent of GDP to over 9 percent of GDP.13 And the cash stockpiles of the world’s most successful companies are not necessarily fueling the sorts of investments that ultimately benefit workers by raising their productivity. In fact, greater market concentration has been associated in recent years with lower investment.14 Many prominent macroeconomists worry about an excess of savings relative to investment—among them, Ben Bernanke, who worries about a “savings glut,” and Larry Summers, who is pessimistic about “secular stagnation.”15 When companies earn outsized returns, this squeezes the returns for other factors of production throughout the economy. Workers in the most successful firms often do just fine, but as more and more of national income accrues to the most successful firms, workers in other companies experience greater competition and lower real wage increases.

See Tax Cuts and Jobs Act Public opinion, 292–293 Purchasing power parity (PPP), 320n34 Race to bottom, 154–155 Reagan Administration, 265 Reemployment Trade Adjustment Assistance (RTAA), 228–229 Regulation, 164, 273–275 Reinventing Government, 273–274 Relocation assistance, 229–230 Remittances, 206 Reputation Institute, 277 Research and Development, 176, 235 Ricardo, David, 70 Rising-tide tax system, 247 Robinson, James, 64, 189–190 Rules of origin, 315n12 Sanders, Bernie, 25, 76 Savings glut, 151 Secular stagnation, 40, 151 Showdown at Gucci Gulch, 264–265 Silicon Valley, 181–182 Smith, Adam, 284, 316n1 Social Norms, 42–44, 276–278, 282 Social Security, 241–242 Stateless income, 159 Statue of Liberty, 212 Summers, Lawrence, 151, 307n29 Sunshine labor report, 278–283 Sunshine tax report. See tax transparency Tariffs: consequences of, 57–63, 297–298; costs to consumers, 93; as regressive tax, 93–95; as revenue source, 95; and trade deficits, 124–126 Tax avoidance.


pages: 561 words: 87,892

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

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

The inability of the G7 to reach any kind of credible agreement, notwithstanding the Plaza and Louvre accords in 1985 and 1987 respectively, led to upheavals in currency markets and, eventually, the 1987 stock-market crash.1 Japan and Germany remain important providers of capital, but from the mid-1990s onwards the really big suppliers have been China, the Middle East, Russia and an assortment of other emerging economies. Ben Bernanke, the Chairman of the Board of Governors of the Federal Reserve, famously referred to these imbalances as ‘The Global Savings Glut’.2 The argument boils down to a matter of supply and demand in the capital markets. If the rapidly expanding US current-account deficit reflected a rise in US demand for global capital, that increased demand should have raised the ‘price’ of capital. In other words, US interest rates should have gone up to attract the additional funds US borrowers wanted to suck in from abroad. This didn’t happen.

Knowing that American consumers were borrowing more because interest rates were lower does not mean they should have been borrowing more. After all, no one argues that the increase in drug usage that follows a fall in the street price of crack cocaine is a good thing, even though it’s a perfectly reasonable example of the market at work. The influence on the world’s capital markets of savings behaviour in emerging economies is, in fact, considerably more complicated than the simple global savings glut thesis suggests. And, because this influence has not been properly recognized, the Western world has been subject to increasing financial shocks. While many countries shifted from current-account deficit to surplus, one emerging Asian economy started with a large current-account surplus and saw the surplus get bigger and bigger over time. China wasn’t significantly affected by the Asian crisis.

The increased gravitational pull of the emerging nations is having a huge impact on relative prices across goods, labour and capital markets. The redistributional consequences of these price changes provide an increasingly strong incentive for governments to intervene in an attempt to bypass or distort the market. EXCESS SAVINGS AND COMMAND OVER ASSETS The increased economic clout of sovereign states partly reflects the global savings glut we first came across in Chapter 4. If the emerging economies carry on saving more than they’re spending and countries in the developed world – at least the US and the UK – carry on borrowing more than they’re earning, there are huge implications for ownership of almost every conceivable asset, from bonds to stocks and from companies to residential real estate. For every year the US runs a balance of payments current-account deficit – implying an inflow of capital – it increases its liabilities to the rest of the world.


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

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

In 2004, they amassed $400 billion of financial capital, and two years later they topped $600 billion. Most of those savings they exported to the United States by buying Treasuries, causing the price of money there-the interest rate-to stay low. This was one explanation for the much-talked-about global imbalances that involved Americans' borrowing and importing more and more while saving less and less. Fed chairman Ben Bernanke has referred to this as a "savings glut." It is a paradoxical but well-known phenomenon that poor people often save a larger proportion of their income than rich people, because the poor need a buffer for bad times and unforeseen expenses. As the income of the poor has risen, so have their savings, but investment opportunities are often limited in countries with many poor people, in part because the financial markets there are so underdeveloped that it would be impossible to gain a decent return.

Index ABN AMRO acquisition, 119 constant-proportion debt obligation, 59-60 accounting, 141 mark-to-market, 91-94 ACORN (Association of Community Organizations for Reform Now), 28, 34 adjustable-rate mortgages, 7, 71 AIG (American Insurance Group), 56, 82, 88-91, 136 retreats and other exclusive trips, 91 "Alt-A" loans, 42 "American Dream Commitment" of Fannie Mae, 33 Andrukonis, David, 40-41, 77 Apgar, William, 32, 35 Asian crisis of 1997, 16, 21 asset bubbles consumer prices and, 11-12 economic crises and, 21 Federal Reserve and, 13 laws of, 69 the "Three Is" and, 58 Atkins, Paul, 79, 145 Auerbach, Alan, 153 bailouts, 14, 91, 99-100, 141-42 arbitrariness of the dollar figure, 118 failed, 85-86 of Fannie Mae and Freddie Mac, 78-79 housing industry, 127 Troubled Assets Relief Program, 99, 100, 113, 115-16, 118-28 See also crisis management Baker, Richard, 39 Bank of America Countrywide and, 72 Merrill Lynch and, 82-83, 85-86 banks and banking industry bank mergers, 27, 28 bank runs, 49-50, 70-75 capital requirements, 49, 51-54, 133, 141 conduits, 52 overconcentration, 104 preventing banking crises, 50, 51 recapitalizing, 118-28 securitization of mortgages, 49-55 shadow banking sector, 52-53, 70-75, 133 structured investment vehicles, 52 Barclays, 82-83 Bartlett, Bruce, 20-21 Basel banking standards and rules, 49, 51-54,135,145-46 Bayers, Betsy, 72 Bear Stearns, 57, 85 hedge funds collapse, 72, 80-81, 113 oversubscribed securitized mortgages, 27 "Bear Stearns Precedent," 82 Bennett, Richard, 40 Berlusconi, Silvio, 119 Bernanke, Ben, 4, 78, 99, 100, 116-17, 121, 149 "Bernanke put," 13, 14-15 on Friedman and Schwartz, 123 "savings glut," 15-16 shorting and, 110 Bernholz, Peter, 143-44 Big Three automakers, 125 Black Monday (October 19, 1987), 2, 13, 14 The Black Swan, 43 Blankfein, Lloyd, 88-89 BNC Mortgage, 55 BNP Paribas, 74 borrowers, "subprime" behind in payments and defaulting, 71-72 definitions, 29-30, 41 early repayment penalties, 34 previously defaulting borrowers, 31 See also subprime mortgages Brown, Gordon, 98, 120, 149, 154 Buffett, Warren, 58, 74-75, 140 bugs in rating software, 59-60 Bush, George H.

See also Troubled Assets Relief Program history with Goldman Sachs, 113, 114 on institutional failure, 151-52 power and control and, 112-18 shorting and, 110 Pelosi, Nancy, 115-16 planned economy, 150 Greenspan and, 12-13 politicians and politics exploitation of crisis, 112-18 influence of, 132 Stockholm syndrome of politics, 145-52 Poole, William, 78 poor countries and people globalization and, 15-17 savings glut and, 15-16 power and control, exploitation of crises and, 112-13, 149 "preemptive Keynesianism," 14 prelude to crisis. See borrowers, "subprime'; financial innovations for risk pooling; housing policy; monetary policy prices of goods and services, central bank control, 11 Prince, Charles, 57-58, 76 privatizing gains and socializing losses, 50-51, 78-79, 135, 142 prosperity, 18, 21 public ownership of society's assets, 152-53 Putnam Investments, 84 pyramid schemes, 58 Qviberg, Mats, 111 Raines, Franklin D., 32, 38 Rajan, Raghuram, 52 Ranieri, Lewis, 47, 63 rating software, 58-60 real estate capital gains tax, 6 recessions, 14 reform proposals, 39-40 regime uncertainty, 107 regulations, 107-8, 131, 133-34, 138-45 Reich, Robert, 125-26 rent subsidy, 5-6 repackaging mortgages.


pages: 515 words: 142,354

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

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

(1) MAKING THE FINANCIAL SYSTEM SERVE SOCIETY Most of the discussion of financial sector reform (including that above, under Reform #2) has focused on preventing the financial sector from imposing harm on others—for instance, through the instability it has brought to the entire economy as a result of its excessive risk-taking.31 Little has focused on ensuring that the financial system actually performs the important functions that must be performed if the economy is to function well. It is precisely this failure that is behind the alleged savings glut: Ben Bernanke attempted to blame the weakness in the global economy before the crisis on excessive global savings, especially in China. But even as he spoke about the savings glut, many firms and countries had high-return investment projects that were not being financed. It is not that there is a surfeit of savings. It is that the financial markets have failed in their basic task of recycling the savings, making sure that the savings are used productively. This function is referred to as “intermediation”—intermediating between savings and investment.

This situation, where there has been a deficiency of aggregate demand, has persisted for a long time. Indeed, one of the reasons that the Fed encouraged the reckless lending that led to the housing crisis was to make up for what would otherwise have been a weak aggregate demand within the United States. Ben Bernanke, former chairman of the Federal Reserve, referred to the situation as a “savings glut.” See “The Global Saving Glut and the U.S. Current Account Deficit,” Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, March 10, 2005, available at http://www.federalreserve.gov/boardDocs/Speeches/2005/200503102/default.htm. Of course, there are many good investment opportunities, but the world’s financial system wasn’t then—and isn’t now—capable of intermediating effectively between the savers and these investments. 46 This number is higher than the US minimum wage but much lower than the $15 an hour that is being adopted in some American cities, and even lower than the $10.10 an hour required for enterprises doing business with the US government. 47 Thus, the eurozone’s surplus was substantially larger than China’s, which stood at $293.2 billion.

Such a super–Chapter 11 is particularly important in the crisis countries right now.36 (4) PROMOTING ENVIRONMENTAL INVESTMENTS A eurozone that works has to have not just high growth but sustainable growth, and sustainability entails not just economic sustainability but environmental sustainability. Once one recognizes the huge investments that are needed to retrofit the economy for climate change, one sees the foolishness of any claims that there is a “savings glut.” But, as we have seen, it will be hard to incentivize firms to make “green investments” if there is no price of carbon—that is, if those who pollute are not forced to pay the consequences of their pollution. That is why it is important for there to be a high, European-wide price of carbon.37 STRUCTURAL REFORM #7: A COMMITMENT TO SHARED PROSPERITY One of the central problems facing the advanced world today is the increase in inequality.


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The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"Robert Solow", banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

In January 2009, the Guardian newspaper drew up a list of 25 guilty parties, a mix of Central Bank governors, American and British political leaders, top Wall Street financiers and British bankers and credit agency bosses. Some analysts—notably the former Chairman of the Federal Reserve, Sir Alan Greenspan, and its current Chairman, Ben Bernanke—have pinned some of the blame for the 2008-2009 crisis on what Bernanke described in 2005 as Asia’s ‘savings glut’. This was the surplus accumulated in a number of successful Asian exporting countries —notably China—that was then recycled via financial institutions into the main importing and deficit nations. This money derived from the increase in the foreign exchange reserves accruing to countries with large export surpluses, from China to the Middle-Eastern oil producers. As most of these surpluses ended up being invested in American Treasury Bills, this helped to allow the United States to run a large trade deficit simultaneously with a cheap money policy.

By helping to perpetuate low interest rates, it is argued by some, the cash transfer contributed to the American debt bubble. Such flows have inevitably played a role in adding to global imbalances, but are of secondary importance, small beer compared with the rise of other sources of international credit and liquidity which grew to levels that were greatly in excess of that needed to run economies productively. As shown in figure 6.4, the Asian savings glut—$2200 billion in 2007—added up to around one per cent of the stock of global financial assets (of $220,000 billion). It was this much greater growth of global liquidity that created what became a severe economic shock to the system. As the economist, José Gabriel Palma of Cambridge University has concluded, ‘If this glut were in fact the “smoking gun” of the current crisis, never in the history of finance would anything have had such a multiplier effect.’233 Each of these were important ingredients of the global implosion.

The regulators failed to understand the dangerous implications of the new derivative-linked financial instruments—collateralised debt obligations, credit default swaps and special investment vehicles—that helped drive up world liquidity rates while greatly raising the level of risk in the system. Amongst those individually responsible, those on watch in the US and the UK were more culpable than those in other nations. Asia’s ‘savings glut’ (Figure 6.4) 234 Nevertheless, these issues only tell part of a much bigger story. Indeed, the common explanations offered for the financial crisis cannot be seen as primary causes, but symptoms of much more-deep seated trends. They deal more in epiphenomena than fundamentals. Reckless behaviour by an unregulated banking system provided the final spark, but the slow-burning fuse had been laid much earlier in the growing income and wealth inequalities that became the hallmark of market capitalism.


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

Country B’s deficits with country A are then said to be caused by country B’s spendthrift habits. Or country B might run a current account deficit because country A’s policies – for example, restricting consumption or maintaining an under-valued currency – prevent country B from exporting enough to it to cover its imports from country A. Country B’s deficits are then said to be caused by country A’s ‘saving glut’. Which is it? You can choose between China’s frugality and American extravagance. The ‘saving glut’ thesis was the orthodox pre-crash view. Think of the world as a single economy, in which all the saving is done in China and all the investment is done in the United States. If the Chinese want to save ex ante more than the Americans want to invest, * Because it did not have a fixed supply of gold, the US was able to issue as many Treasury bills as it wanted. 338 g l ob a l i m b a l a n c e s Keynesian theory tells us that saving S and investment I are equalized ex post not by an an appropriate interest rate adjustment, but by a fall in global income.

Understanding Banking: Some Essential Terms 316 iv. Loosening the Regulatory Noose 318 v. Financial Innovation 322 vi. Conclusion 327 Appendix 11.1: Why Didn’t the Credit Ratings Agencies Do Their Job? 12. Global Imbalances 329 331 i. Introduction 331 ii. A Pre-crash Bird’s-eye View 334 x C on t e n t s iii. Some Basic Theory 335 iv. Current Account Imbalances as a Cause of Meltdown? 336 v. Saving Glut versus Money Glut 338 vi. Banking Imbalances 342 vii. Conclusion 343 Pa r t Fou r A New Macroeconomics 13. Reinventing Political Economy 345 347 i. Introduction 347 ii. What Should Governments Do and Why? 349 iii. A New Macroeconomic Constitution 351 iv. The Inflation Problem 358 v. Making Banking Safe 361 vi. Inequality 368 vii. Hyper-globalization and its Discontents 371 viii.

That’s not a rip-off; that’s arithmetic.’ George P. Shultz and Martin Feldstein, Washington Post, 5 May 2017 I. I n t roduc t ion How far did global imbalances contribute to the crisis? By global imbalances we mean persistent surpluses and deficits in countries’ current accounts. A pseudo-Keynesian answer would be that the current account surpluses of China and the Middle East produced a global ‘savings glut’, which could only be liquidated by a decline in the world economy. But this does not explain the weakness of investment performance in the capital-importing countries. In Keynesian theory, ‘excess saving’ is the result of under-investment, not an independent factor. So it is the weakness in the inducement to invest which needs explaining. The other problem with the ‘global imbalances’ explanation of the collapse of 2007–8 is that it is not clear how it relates to the speculative boom and bust in the housing market.


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The Wealth of Humans: Work, Power, and Status in the Twenty-First Century by Ryan Avent

"Robert Solow", 3D printing, Airbnb, American energy revolution, assortative mating, autonomous vehicles, Bakken shale, barriers to entry, basic income, Bernie Sanders, BRICs, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collective bargaining, computer age, creative destruction, dark matter, David Ricardo: comparative advantage, deindustrialization, dematerialisation, Deng Xiaoping, deskilling, disruptive innovation, Dissolution of the Soviet Union, Donald Trump, Downton Abbey, Edward Glaeser, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, falling living standards, first square of the chessboard, first square of the chessboard / second half of the chessboard, Ford paid five dollars a day, Francis Fukuyama: the end of history, future of work, gig economy, global supply chain, global value chain, hydraulic fracturing, income inequality, indoor plumbing, industrial robot, intangible asset, interchangeable parts, Internet of things, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph-Marie Jacquard, knowledge economy, low skilled workers, lump of labour, Lyft, manufacturing employment, Marc Andreessen, mass immigration, means of production, new economy, performance metric, pets.com, post-work, price mechanism, quantitative easing, Ray Kurzweil, rent-seeking, reshoring, rising living standards, Robert Gordon, Ronald Coase, savings glut, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, single-payer health, software is eating the world, supply-chain management, supply-chain management software, TaskRabbit, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, Tyler Cowen: Great Stagnation, Uber and Lyft, Uber for X, uber lyft, very high income, working-age population

These purchases were designed both to slow the appreciation of their currencies against the dollar (a weaker currency boosts exports, other things being equal), and to accumulate a defensive stock of safe assets. This effectively squeezed the consumption of Chinese consumers in order to build up a pile of reserves that could be tapped during times of global financial trouble. The upshot of this reserve accumulation was growth in what Ben Bernanke,2 during his time at the Federal Reserve, called a global savings glut.3 Excess saving meant a shortfall in global consumption, in global demand. To prevent demand from tumbling, central banks needed to take what action they could to push markets to recycle those savings into new spending. Interest rates around the world sank to historically low levels as central banks struggled to cope. But a second factor frustrated their efforts. These savings accumulated at a time when opportunities for profitable investment were often limited.

Hansen, Alan Harvey, Full Recovery or Stagnation (New York, NY: W. W. Norton & Company, 1938).   2. Ben Shalom Bernanke (1953–) is an American economist who served two terms as chairman of the Federal Reserve, the central bank of the United States, from 2006 to 2014. During his tenure as chairman, Bernanke oversaw the Federal Reserve’s response to the late-2000s financial crisis.   3. Bernanke, Ben, in his speech ‘The Global Saving Glut and the US Current Account Deficit’, 10 March 2005.   4. Bank for International Settlements, Total Credit to Households as a Percentage of GDP (http://stats.bis.org/statx/srs/table/f3.1).   5. Federal Reserve Bank of New York, Household Debit and Credit Report.   6. Wolff, Edward, ‘Household Wealth Trends in the United States, 1962–2013: What Happened Over the Great Recession?’, NBER Working Paper 20733, December 2014. 10.

Acemoglu, Daron ageing populations agency, concept of Airbnb Amazon American Medical Association (AMA) anarchism Andreessen, Marc Anglo-Saxon economies Apple the iPhone the iPod artisanal goods and services Atkinson, Anthony Atlanta, Georgia austerity policies automation in car plants fully autonomous trucks of ‘green jobs’ during industrial revolution installation work as resistant to low-pay as check on of menial/routine work self-driving cars and technological deskilling automobiles assembly-line techniques automated car plants and dematerialization early days of car industry fully autonomous trucks self-driving cars baseball Baumol, William Belgium Bernanke, Ben Bezos, Jeff black plague (late Middle Ages) Boston, Massachusetts Brazil BRIC era Bridgewater Associates Britain deindustrialization education in extensions of franchise in financial crisis (2008) Great Exhibition (London 1851) housing wealth in and industrial revolution Labour Party in liberalization in political fractionalization in real wages in social capital in surpassed by US as leading nation wage subsidies in Brontë, Charlotte Brynjolfsson, Erik bubbles, asset-price Buffalo Bill (William Cody) BuzzFeed Cairncross, Frances, The Death of Distance (1997) capital ‘deepening’ infrastructure investment investment in developing world career, concept of cars see automobiles Catalan nationalism Central African Republic central banks Chait, Jonathan Charlotte chemistry, industrial Chicago meat packers in nineteenth-century expansion of World’s Columbia Exposition (1893) China Deng Xiaoping’s reforms economic slow-down in era of rapid growth foreign-exchange reserves ‘green jobs’ in illiberal institutions in inequality in iPod assembly in technological transformation in wage levels in Chorus (content-management system) Christensen, Clayton Cisco cities artisanal goods and services building-supply restrictions growth of and housing costs and industrial revolution and information membership battles in rich/skilled and social capital clerical work climate change Clinton, Hillary Coase, Ronald Columbia University, School of Mines communications technology communism communities of affinity computing app-based companies capability thresholds cloud services cycles of experimentation desktop market disk-drive industry ‘enterprise software’ products exponential progress narrative as general purpose technology hardware and software infrastructure history of ‘Moore’s Law’ and productivity switches transistors vacuum tubes see also digital revolution; software construction industry regulations on Corbyn, Jeremy Corliss steam engine corporate power Cowen, Tyler craft producers Craigslist creative destruction the Crystal Palace, London Dalio, Ray Dallas, Texas debt deindustrialization demand, chronically weak dematerialization Detroit developing economies and capital investment and digital revolution era of rapid growth and industrialization pockets of wealth in and ‘reshoring’ phenomenon and sharp slowdown and social capital see also emerging economies digital revolution and agency and company cultures and developing economies and distance distribution of benefits of dotcom tech boom emergence of and global imbalances and highly skilled few and industrial institutions and information flows investment in social capital niche markets pace of change and paradox of potential productivity and output and secular stagnation start-ups and technological deskilling techno-optimism techno-pessimism as tectonic economic transformation and trading patterns web journalism see also automation; computing; globalization discrimination and exclusion ‘disruption’, phenomenon of distribution of wealth see inequality; redistribution; wealth and income distribution dotcom boom eBay economics, classical The Economist education in emerging economies during industrial revolution racial segregation in USA and scarcity see also university education electricity Ellison, Glenn Ellison, Sara Fisher emerging economies deindustrialization economic growth in education in foreign-exchange reserves growth in global supply chains highly skilled workers in see also developing economies employment and basic income policy cheap labour as boost to and dot.com boom in Europe and financial crisis (2008) ‘green jobs’ low-pay sector minimum wage impact niche markets in public sector ‘reshoring’ phenomenon as rising globally and social contexts and social membership as source of personal identity and structural change trilemma in USA see also labour; wages Engels, Friedrich environmental issues Etsy euro- zone Europe extreme populist politics liberalized economies political fractionalization in European Union Facebook face-recognition technology factors of production land see also capital; labour ‘Factory Asia’ factory work assembly-line techniques during industrial revolution family fascism Federal Reserve financial crisis (2008) financial markets cross-border capital flows in developing economies Finland firms and companies Coase’s work on core competencies culture of dark matter (intangible capital) and dematerialization and ‘disruption’ ‘firm-specific’ knowledge and information flows internal incentive structures pay of top executives shifting boundaries of social capital of and social wealth start-ups Ford, Martin, Rise of the Robots (2015) Ford Motor Company fracking France franchise, electoral Friedman, Milton Fukuyama, Francis Gates, Bill gender discrimination general purpose technologies enormous benefits from exponential progress and skilled labour supporting infrastructure and time lags see also digital revolution Germany ‘gig economy’ Glaeser, Ed global economy growth in supply chains imbalances lack of international cooperation savings glut and social consensus globalization hyperglobalization and secular stagnation and separatist movements Goldman Sachs Google Gordon, Robert Gothenburg, Sweden Great Depression Great Depression (1930s) Great Exhibition, London (1851) Great Recession Great Stagnation Greece ‘green jobs’ growth, economic battle over spoils of boom (1994-2005) and classical economists as consistent in rich countries decline of ‘labour share’ dotcom boom emerging economies gains not flowing to workers and industrial revolution Kaldor’s ‘stylized facts of’ and Keynes during liberal era pie metaphor in post-war period and quality of institutions and rich/elite cities rich-poor nation gap and skilled labour guilds Hansen, Alvin Hayes, Chris, The Twilight of the Elites healthcare and medicine hedge funds and private equity firms Holmes, Oliver Wendell Hong Kong housing in Bay-Area NIMBY campaigns against soaring prices pre-2008 crisis zoning and regulations Houston, Texas Huffington Post human capital Hungary IBM identity, personal immigration and ethno-nationalist separatism and labour markets in Nordic countries and social capital income distribution see inequality; redistribution; wealth and income distribution India Indonesia industrial revolution automation during and economic growth and growth of cities need for better-educated workers and productivity ‘second revolution’ and social change and wages and World’s Fairs inequality and education levels between firms and housing wealth during industrial revolution during liberal era between nations pay of top executives rise of in emerging economies and secular stagnation in Sweden wild contingency of wealth see also rich people; wealth and income distribution inflation in 1970s hyperinflation information technology see computing Intel interest rates International Space Station (ISS) iRobot ISIS Italy Jacksonville, Florida Jacquard, Joseph Marie Japan journalism Kaldor, Nicholas Keynes, John Maynard Kurzweil.


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Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, money market fund, mortgage debt, New Urbanism, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

European Commission, “VAT Rates Applied in the Member States of the European Union: Situation at 1st January 2018,” https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf; Zsolt Darvas, “EU Income Inequality Decline: Views from an Income Shares Perspective,” Bruegel, July 5, 2018, http://bruegel.org/2018/07/eu-income-inequality-decline-views-from-an-income-shares-perspective/. 66. Matthew C. Klein, “European Leaders Seem Determined to Remake the ‘Global Savings Glut’ on a Massive Scale,” FT Alphaville, November 8, 2017, https://ftalphaville.ft.com/2017/11/08/2195596/european-leaders-seem-to-determined-to-remake-the-global-savings-glut-on-a-massive-scale/. SIX The American Exception 1. Based on BEA, “International Transaction Accounts,” tables 1.1, 9.1, https://apps.bea.gov/iTable/index_ita.cfm; Tamim Bayoumi, Joseph Gagnon, and Christian Saborowski, “Official Financial Flows, Capital Mobility, and Global Imbalances,” Peterson Institute for International Economics Working Paper No. 14-8, October 23, 2014; and Brad W.

It is obvious that consumption cannot grow without investments to produce more of what people want. It is less obvious, but just as important, that those investments require rising consumption to be profitable. Building truck factories or apartment complexes or power plants is not “investing” in any meaningful sense if nobody ends up buying more trucks, living in the apartments, or needing the extra electricity. It is just waste.14 This explains how the world can be afflicted by a savings glut without having a high saving rate. The level of the saving rate by itself is meaningless. What matters is the amount of unconsumed output relative to the supply of worthwhile investment opportunities. Saving is excessive when real resources are diverted from the satisfaction of immediate human needs to develop wasteful investments. In many cases, of course, distinguishing “worthwhile” from “wasteful” is possible only in retrospect.

Shultz and Martin Feldstein, “Everything You Need to Know about Trade Economics, in 70 Words,” Washington Post, May 5, 2017; Jason Furman, “Worry about the Trade Deficit—a Bit,” Wall Street Journal, May 1, 2018; Joseph E. Stiglitz, “The US Is at Risk of Losing a Trade War with China,” Project Syndicate, July 30, 2018, https://www.project-syndicate.org/commentary/trump-loses-trade-war-with-china-by-joseph-e-stiglitz-2018-07. 6. Joseph W. Gruber and Steven B. Kamin, “The Corporate Saving Glut in the Aftermath of the Global Financial Crisis,” International Finance Discussion Papers 1150, June 2015; Matthew C. Klein, “Aging, Real Rates, and Labour Bargaining Power: The Case of Japan,” FT Alphaville, December 8, 2015, https://ftalphaville.ft.com/2015/12/08/2147125/aging-real-rates-and-labour-bargaining-power-the-case-of-japan/. 7. Based on BEA, “National Income and Product Accounts,” tables 1.1.5, 5.1, 5.2.6, https://www.bea.gov/iTable/index_nipa.cfm. 8.


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

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

Around 45 per cent of British investment went to the United States, Canada and the Antipodes, 20 per cent to Latin America, 16 per cent to Asia, 13 per cent to Africa and 6 per cent to the rest of Europe.21 If you add together all the British capital raised through public issues of securities between 1865 and 1914, you see that the majority went overseas; less than a third was invested in the United Kingdom itself.22 By 1913 an estimated $158 billion in securities were in existence worldwide, of which around $45 billion (28 per cent) were internationally held. Of all the securities quoted on the London Stock Exchange in 1913 nearly half (48 per cent) were foreign bonds.23 Gross foreign assets in 1913 were equivalent to around 150 per cent of UK GDP and the annual current account surplus rose as high as 9 per cent of GDP in 1913 - evidence of what might now be called a British savings glut. Significantly, a much higher proportion of pre-1914 capital export went to relatively poor countries than has been the case more recently. In 1913, 25 per cent of the world’s stock of foreign capital was invested in countries with per capita incomes of a fifth or less of US per capita GDP; in 1997 the proportion was just 5 per cent.24 It may be that British investors were attracted to foreign markets simply by the prospect of higher returns in capital-poor regions.25 It may be that they were encouraged by the spread of the gold standard, or by the increasing fiscal responsibility of foreign governments.

Chimerica, in other words, was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge fund population explosion. It was the underlying reason why private equity partnerships were able to borrow money left, right and centre to finance leveraged buyouts. And Chimerica - or the Asian ‘savings glut’, as Ben Bernanke called it110 - was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 per cent mortgage with no income, no job or assets. The subprime mortgage crisis of 2007 was not so difficult to predict, as we have already seen. What was much harder to predict was the way a tremor caused by a spate of mortgage defaults in America’s very own, home-grown emerging market would cause a financial earthquake right across the Western financial system.

Foster and H. Peyton Young, ‘Hedge Fund Wizards’, Economists’ Voice (February 2008), p. 2. 108 Niall Ferguson and Moritz Schularick, ‘ “Chimerica” and Global Asset Markets’, International Finance 10, 3 (2007), pp. 215-39. 109 Michael Dooley, David Folkerts-Landau and Peter Garber, ‘An Essay on the Revived Bretton-Woods System’, NBER Working Paper 9971 (September 2003). 110 Ben Bernanke, ‘The Global Saving Glut and the U.S. Current Account Deficit’, Homer Jones Lecture, St Louis, Missouri (15 April 2005). 111 ‘From Mao to the Mall’, The Economist, 16 February 2008. 112 For a critique of recent Federal Reserve policy, see Paul A. Volcker, ‘Remarks at a Luncheon of the Economic Club of New York’ (8 April 2008). In Volcker’s view, the Fed has taken ‘actions that extend to the very edge of its lawful and implied powers’. 113 See e.g.


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The Curse of Cash by Kenneth S Rogoff

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

The third reason the zero bound has been so problematic is that real interest rates have trended down dramatically, falling below zero at very short horizons, and roughly 1.5% at very long horizons, both well below more “normal” levels. The reasons real interest rates have fallen are many, but some of the main factors include high savings from fast-growing emerging markets and aging populations in advanced economies, factors that in 2005 Ben Bernanke famously pointed to in describing the “global savings glut.”2 Since 2008, intense post–financial crisis regulation and risk aversion have also pushed real interest rates down.3 Another important factor is slower growth. Some economists, such as Northwestern University’s Robert J. Gordon, argue that the root cause of post–financial crisis slow global growth is a sharp trend drop in the rate at which productivity is increasing, due above all to a declining rate of economically valuable inventions.

In The Usage, Costs and Benefits of Cash—Revisited. Proceedings of the International Cash Conference, September. Frankfurt: Deutsche Bundesbank. Berkes, Enrico, and Samuel H. Williamson. 2015. “Vintage Does Matter: The Impact and Interpretation in the Official Estimates of Post War GDP for the United Kingdom.” Northwestern University (February), Evanston, IL. Bernanke, Ben S. 2005. “The Global Savings Glut and the U.S. Current Account Deficit.” Paper presented at the Sandridge Lecture, Virginia Association of Economists, Richmond, March 10. Bernanke, Ben S., and Mark Gertler. 1999. “Monetary Policy and Asset Price Volatility.” In Federal Reserve Bank of Kansas City Symposium on New Challenges for Monetary Policy, Jackson Hole, WY, August 26–28. Federal Reserve Bank of Kansas City. ———. 2001.

See also Bitcoin; cryptocurrencies American Hustle (Russell), 71 Amromin, Gene, 238n22 Andolfatto, David, 213 Antràs, Pol, 236n12 Argentina, 44, 82 Ascaria, Guido, 248n5 Australia, 52, 132 Austria: cash, per capita holdings of, 33; cash used for different kinds of purchases, percentage of, 55–56; coinage debasement in, 20; currency held by consumers in, 51–52; deutsche mark currency demand, as a control for estimating, 45; stamp currency experiment in, 164–65 Automated Clearing House system, 103 Bagehot, Walter, 244n9 Bank Act of 1844 (Peel’s Act), 235n25 Bank of England: inflation target, choice of, 153; interest rate hike prior to 2008, impact of, 177–78; nominal policy interest rates, 2000–2015, 130; notes convertible to specie, early issue of, 26; quantitative easing by, 135–36 Bank of Japan: inflationary expectations, challenges faced in lifting, 124; inflation target, choice of, 153; January 2016 policy of, 250n5; museum of, understanding coinage debasement in, 20; negative interest rates, experience with, 1, 161; quantitative easing by, 135–36, 143; zero-bound problem of, lack of international coordination regarding, 206 Bartzsch, Nikolaus, 236n23 Baum, Frank (author of The Wonderful Wizard of Oz), 192 Belgium: cash used for different kinds of purchases, percentage of, 55; currency/GDP ratio, 1995, 46–47; restrictions on the use of cash, 64 Bennett, Paul, 237n4 Bernanke, Ben: financial stability, limits to concern regarding, 176; “global savings glut,” 122; “Helicoper Ben,” advice for Japan from, 155; inflation targeting adopted under, 232; macroprudential regulation, argument for, 177; Perry’s attack on, 191; small interest hikes, limited impact of, 177; “taper tantrum” set off by, 126, 141 Billi, Roberto, 229 biometric method for estimating foreign holdings of currency, 43–44 Bitcoin/bitcoins: “Bencoin” as governmental version of, 209–10, 213–14; blockchain technology pioneered by, 112; as a currency, possibility of, 211; as encrypted digital technology, 208; inflation and, 213; market price of, 212; as payment mechanism for criminal activities, 72; security of using, 67 Black, Fischer, 244n5 Blackburn, David, 253n6 Blanchard, Olivier Jean, 248n2, 252n7 blockchain technology, 112, 210, 213–14 border control, issue of, 75–76 Bordo, Michael D., 234n6 Brazil, 65, 183–84, 191, 205 Breaking Bad (TV series), 68, 240n27 Bretton Woods regime, 30 bribes, 70 Britain.


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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

By 2005: Federal Reserve Statistical Release, accession number Z.1.B.100.eB.100, http://federalreserve.gov/releases/z1/; Bureau of Economic Analysis, “Gross Domestic Product,” http://bea.gov/national/index.htm#gdp. In Spain, for example: Ricardo Gimeno and Carmen Martinez-Carrascal, “The Interaction between House Prices and Loans for House Purchase: The Spanish Case,” working paper, Banco de España, 2006, http://ideas.repec.org/p/bde/wpaper/0605.html. “global savings glut”: Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” remarks, Sandbridge Lecture, Virginia Association of Economists, Richmond, VA, March 10, 2005. In the United States alone: SIFMA database (U.S. corporate issuance data), http://www.sifma.org/research/statistics.aspx. There were, by 2007, $202 trillion in financial assets on earth: Charles Roxburgh, Susan Lund, and John Piotrowski, Mapping Global Capital Markets 2011, McKinsey Global Institute, August 2011, 2, http://www.mckinsey.com/.

For various other idiosyncratic reasons, some cultural, some legal, even people in many advanced countries were similarly eager for safe investments during the early 2000s. Germany, with its saving-oriented populace, had so much money filling its banks that they had to find other places to put their money. With the baby boomers in the world’s advanced economies in their peak earning years, pension funds were desperate for places to park cash, too. In 2005, Ben Bernanke, then a Federal Reserve governor, called all of this extra cash the “global savings glut.” Because there was so much of it, there were more people looking for safe, secure places to put money than there were safe, secure places to put it. Capitalism is a powerful force for creating that which is in demand—even something as intangible and elusive as a safe investment. To try to meet the demand for reliable places to park cash—and to make a great deal of money for itself along the way—the finance industry more or less conjured them out of thin air.

There were, by 2007, $202 trillion in financial assets on earth, 3.6 times the annual economic output of everyone on the planet; in 1990, the ratio was 2.6. That represents an extra $42 trillion in paper wealth over what would have existed had the ratio stayed constant. Global megabanks, hedge funds, insurance companies, and countless other financial firms were links in the chain that connected borrowers taking on ever larger amounts of debt with the global savings glut. And in Jackson Hole in 2005, almost no one seemed to understand just how weak that link was. But what did they understand? What did central bankers know about what was out of whack in the world economy? And when did they know it? On both sides of the Atlantic, central bankers had been fretting about the run-up in housing prices, even if they weren’t quite sure what to do about it. Without solid answers, they resorted to just trying to describe, with gentle euphemism, what was occurring in the property markets.


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Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

This meant that even as the United States was borrowing staggering sums from the rest of the world, its long-term bond and mortgage rates remained strangely low, fueling the housing boom. Alan Greenspan called this a conundrum. His fellow governor, Ben Bernanke, had a different explanation: it was the “global saving glut.” He noted that the low mortgage rates made possible by the influx of foreign savings had spurred home construction and home prices, though he didn’t spot the crisis that would result. The global saving glut is probably the least appreciated contributor to the financial crisis of 2008, and the least corrected. True, Americans curbed their appetite for borrowing, and China also embarked on an investment boom that soaked up some of its extra savings. But numerous other countries are more determined than ever to accumulate large piles of foreign assets as insurance against the chaos of global markets and to obviate the need for politically toxic bailouts.

Over Economic Criticism,” Dow Jones, October 31, 2013. 24 The head of the IMF repeatedly: Michel Camdessus, managing director of the IMF, recalls issuing the warning, in an interview with BusinessWeek in December 2007, cited in “The IMF Crisis,” Wall Street Journal, April 15, 1998. 25 Many of these conditions had: Independent Evaluation Office, “The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil” (Washington: International Monetary Fund, 2003): 48. 26 His fellow governor: Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” March 10, 2005, available at http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/. Chapter 6 1 Sandy “brought the stakes”: Michael R. Bloomberg, “A Vote for a President to Lead on Climate Change,” Bloomberg, November 1, 2012. 2 two-thirds of voters: Thomas Kaplan, “Most New Yorkers Think Climate Change Caused Hurricane, Poll Finds,” New York Times, December 4, 2012. 3 But climate change could not: New York City’s post-Sandy report notes that Sandy was no longer a hurricane when it hit.


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

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

So if long rates remained weirdly low, why might this be? Inflation expectations had certainly not fallen dramatically enough to provide an explanation. Nor were investors expecting a weak economy. Greenspan even doubted the leading theory among his colleagues.54 During an FOMC meeting two months earlier, Ben Bernanke had pointed to a “savings glut.” Long-term loans were cheap because capital was in plentiful supply, Bernanke had observed. Savings were flooding into the United States from China and other countries. The savings-glut theory was more plausible than Greenspan acknowledged, and later he would come around to it. China, like other emerging economies, was buying up long-term bonds issued by the U.S. government and other Western powers, helping to explain why long-term rates were low—including rates on long-term mortgages.

Later research confirmed that Chinese savings patterns did indeed influence U.S. long-term interest rates, but also that this effect could be swamped by changes in Fed policy.55 Moreover, to the extent that the U.S. housing bubble had analogs in Europe, a glut of foreign savings was not mainly to blame. In some smaller European economies, notably Spain, the housing bubble was the result of the new common currency, the euro, which had brought about a collapse in borrowing costs. Elsewhere the bubble reflected the policies of central banks that shared the Fed’s inflation-targeting mind-set: Britain was a good example. But the chief omission in the savings-glut theory was the Western financial system itself. In the United States especially, but also in Europe, the cause of the housing bubble was not simply a general surfeit of savings. It was that banks and various species of investment fund were scooping up those savings and pumping them into real estate. If financiers had chosen differently, there would not have been a bubble. In the years after the crisis, Greenspan suggested that there was nothing the Fed could have done to change financiers’ choices.

Contrary to Greenspan’s claims on NPR, moreover, there was no reason to suppose that monetary policy had to be either impotent or lethal: the Fed could have steered a middle course simply by abandoning forward guidance and “measured” gradualism.22 Anna Schwartz, the coauthor, with Milton Friedman, of the magisterial Monetary History, skewered Greenspan on this point. “There never would have been a sub-prime mortgage crisis if the Fed had been alert,” she charged. “Monetary policy was too accommodative. Rates of 1 percent were bound to encourage all kinds of risky behavior.” The contention that the mortgage bubble reflected a global savings glut did not impress Schwartz in the least. “The Fed failed to confront something that was evident. It can’t be blamed on global events,” she concluded.23 Even though Greenspan’s monetary policy was vulnerable to attack, the majority of his critics focused instead on his regulatory policy. Aside from a few mavericks such as Schwartz and Stanford’s John Taylor, not many people wanted to denounce Greenspan for setting interest rates too low—after all, he had delivered broadly on-target inflation and strong growth, the opposite of stagflation.


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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

So it is with unmanaged and unregulated credit creation; the result leads invariably to excessive credit creation, the inflation of assets, prices or wages, the build-up of unpayable debts, and then catastrophic failure of the financial system as debts are defaulted upon. The 2006–07 sub-prime mortgage crisis in the US – when impoverished debtors defaulted on large sums of debt charged at high rates of interest – is a textbook example of how a system based on ‘classical’ monetary theory works. Economists reckoned that an excess supply of money (‘the global savings glut’) had, thanks to market forces, lowered the ‘price’ (interest rate) of money. Because of their conviction that bankers as dealers in money were like other intermediaries, simply acting as agents between buyers and sellers, economists thought banking activities could safely be guided by the ‘invisible hand’ of the market. Private commercial bankers could hardly believe their luck. The Sorcerer – in the form of a financial regulator – had vacated a vast amount of monetary space and left them in charge of the magic of credit creation, not just in their own country, but globally; not just within the retail banking system, but outside the purview of regulators, in the ‘shadow’ banking system.

In The General Theory he finally understood that the critical point of departure of any such theory from the classical theory was the long-term rate of interest: the rate that underpinned all private activity, especially investment. Whatever the precise formulation, in the classical theory the rate of interest is a passive consequence of whatever real events are regarded as dictating outcomes. Today the most prominent of these events is defined as ‘a global savings glut’, changes in population growth, and failing productivity. In Keynes’s theory it is the rate of interest that dictates events and that, unchecked, is the ‘villain of the economic piece’. Unchecked, high rates of interest vindicate two millennia of condemnation of usury in both philosophical and religious doctrines. Ultimately, Keynes understood the rate of interest as a social construct, set according to the balance of conflicting economic interests.


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

As a nation, America was living beyond its means—and living off the savings of other countries. A tidal wave of foreign money was pouring into the United States, as global investors frustrated by low interest rates and scarce investment opportunities at home looked abroad for better and safer yields. Ben called this seemingly insatiable demand for assets that generated decent returns a “global savings glut,” and it created a lot of dry tinder. The greatest part of the credit boom took place in the U.S. mortgage market. Mortgage debt per U.S. household soared 63 percent from 2001 to 2007, much faster than household incomes. Some of this new debt was beneficial, helping people buy homes or take cash out of their homes for worthy purposes. But some of the new lending veered into dangerous, unexplored territory, where the underwriting standards, especially for higher-risk subprime mortgages to lower-income borrowers, eroded dramatically.

and arsenal for dealing with future crises, 118, 120 background, 13 and Bear Stearns rescue, 48, 50–51, 54 and Countrywide sale, 39 and early stages of financial crises, 33 and expansion of emergency authorities, 80–81 “Geithner put” condition, 101 and Lehman failure, 63, 65, 66, 67 and merger efforts, 77 and onset of financial crisis, 1, 30–31 and policy responses to crisis, 96, 97–101, 105, 106–7 and post-crisis reforms, 112, 116 and shortcomings of U.S. regulatory regime, 28 and spark of crisis, 16 and TARP, 93 and Term Securities Lending Facility, 44 and theoretical approaches to financial crises, 35 General Electric, 69 General Motors, 95, 97, 105, 208 Glass-Steagall Act, 115 global impact of financial crisis, 16, 129, 195–98 “global savings glut,” 16 GMAC, 22, 102, 180, 208 Goldman Sachs and Bear Stearns rescue, 51, 53 collateral Treasuries held by, 20–21 and expansion of crisis, 75, 77–78, 157 government investment in, 176 and Lehman failure, 64, 69 and merger efforts, 77 and Paulson’s background, 13 private capital raised during crisis, 175, 181 Goldstone, Larry, 44 Gorton, Gary, 31 Government Accountability Office (GAO), 115 government-sponsored enterprises (GSEs) and acceleration of crisis, 23 and Fannie Mae/Freddie Mac conservatorship, 56–57 and migration of risk outside regulatory system, 150 and onset of financial crisis, 155, 156 and recovery from crisis, 210 refinancing and loan modification programs, 194 and shortcomings of U.S. regulatory regime, 27–28 and taxpayer profit from rescue, 208 See also Fannie Mae; Freddie Mac Gramm-Leach-Bliley Act, 27 Great Depression Bernanke’s scholarship on, 13, 109 and federal intervention in financial system, 60 and Fed policies, 35 financial crisis compared to, 1, 5–6, 110, 200 and history of financial crises, 33 and model for stress tests, 101, 180 and small bank failures, 115 and U.S. regulatory regime, 29–30 “Great Moderation,” 146 guarantee programs, 164 “haircuts,” 74, 81–82, 87–88, 90, 93, 100, 127 hedge funds, 13, 31, 63, 71 herd mentality, 15–16, 117 Hiring Incentives to Restore Employment Act, 187 history of prior financial crises, 11–12 Home Affordable Modification Program (HAMP), 105–6, 163, 190, 192, 194 Home Affordable Refinance Program (HARP), 105–6, 163, 190, 193, 194 Hope Now, 190, 194 House Financial Services Committee, 54 household debt levels, 16 household wealth, 200, 216n Housing and Economic Recovery Act, 58–59, 185 housing market and causes of financial crisis, 4 and Fannie Mae/Freddie Mac conservatorship, 54–60 and fiscal stimulus efforts, 103 homeowner relief efforts, 80, 92, 97, 107 home ownership ideal, 29 home prices, 4, 108, 148, 154, 190, 200, 204, 216n and legacy of financial crisis, 123 and onset of financial crisis, 30 and policy responses to crisis, 105, 161, 189–94 and post-crisis reforms, 112 and resolution of financial crisis, 110 and spark of crisis, 18 See also mortgage market hyperinflation, 6, 109 income inequality, 12, 125, 143 IndyMac Bank, 54, 69, 71, 81, 190 inflation, 35–36, 147 insurance and acceleration of crisis, 22 and AIG rescue, 71, 72 and expansion of crisis, 76, 77 insured deposits, 22–23 and Lehman failure, 69 and models for future crisis management, 127 and TARP, 102 See also Federal Deposit Insurance Corporation (FDIC) interbank lending, 84–85 interest rates coordinated interest rate cuts, 197 and legacy of financial crisis, 123–24 long-term trends, 147 and policy responses to crisis, 97, 105–6, 163 and role of central banks, 34 and stimulus programs, 43 and vulnerability of financial system, 14 International Monetary Fund (IMF), 102, 198 investment banks, 4, 22, 47–48, 69, 77 It’s a Wonderful Life (film), 14 James, Bill, 76 JPMorgan Chase and Bear Stearns rescue, 49–50, 53–54 and expansion of crisis, 47 and expansion of emergency authorities, 81 government investment in, 176 and Lehman failure, 62 and onset of financial crisis, 155 and post-crisis reforms, 115 private capital raised during crisis, 175, 181 Keynesian stimulus, 44, 111–12, 123 Kindleberger, Charles, 11–12 King, Mervyn, 35, 89 labor force, 12, 141, 142 Lacker, Jeffrey, 36 Latin American debt crisis, 37 layoffs, 95, 108 Lazear, Edward, 70 Lehman Brothers and acceleration of crisis, 22 Archstone-Smith acquisition, 40 and arsenal for dealing with future crises, 121 and Bear Stearns rescue, 47–48, 51, 53 and causes of financial crisis, 4 and expansion of crisis, 75, 157 failure and rescue efforts, 61–62, 62–71 and Fannie Mae/Freddie Mac conservatorship, 60 management firings, 73 and policy responses to crisis, 168, 169, 176 and politics of crisis management, 9 and post-crisis reforms, 115 and spark of crisis, 18 lending practices, 17, 29, 40, 56 Lenin, Vladimir, 5 leverage and acceleration of crisis, 20–25 and Bear Stearns rescue, 47 and causes of financial crisis, 3 and current state of financial system, 6, 7 and Lehman failure, 63 and politics of crisis management, 126–27 and post-crisis reforms, 112, 117–18 and prevention of financial crises, 110–11 and recovery from crisis, 210 and roots of financial crisis, 12 and shortcomings of U.S. regulatory regime, 25–26, 28–29 and spark of crisis, 16, 19 “liar” loans, 17 Libor-OIS spread, 153, 155, 201 liquidity and Bear Stearns rescue, 48, 53 and Countrywide sale, 38–39 and current state of financial system, 6 and expansion of crisis, 75, 76, 158 Fed programs promoting, 42 and Lehman failure, 69 and onset of financial crisis, 32 and overleverage in financial system, 21 and policy responses to crisis, 161, 164, 166 and post-crisis reforms, 112–13 and recovery from crisis, 202 and regulation shortcomings, 26 and roots of financial crisis, 13 and TARP, 87, 90 and Term Securities Lending Facility, 44–45 and theoretical approaches to financial crises, 35, 36–37 loan loss rates, 145 loan modification programs, 105–7, 192, 193, 194 loan originators, 17–18 loan-servicing industry, 106 lobbying, 27 local budgets, 188 Lombard Street (Bagehot), 34 Long-Term Capital Management, 13, 40, 64 low-income borrowers, 17 Mack, John, 77 Maiden Lane, 50, 179, 208, 217n manias, 111, 112 margin requirements, 4, 22, 114, 126 maturity transformation, 14, 16, 23, 117 McCain, John, 80, 82 McCarthy, Callum, 67 McConnell, Meg, 118 media coverage of financial crisis, 65, 98 memory of financial crises, 3, 4, 125–26 mergers, 67, 77, 114 Merrill Lynch and Bear Stearns rescue, 51, 53 and causes of financial crisis, 4 and expansion of crisis, 75, 157 and foreign investment, 41 government investment in, 176 and instability of financial system, 84 and Lehman failure, 61, 64, 66–67 management firings, 73 and post-crisis reforms, 115 private capital raised during crisis, 175, 181 and TARP, 95, 96 and write-down of troubled assets, 40–41 Mexico, 37 middle-class insecurity, 125 Middle-Class Tax Relief and Job Creation Act, 187 Minsky, Hyman, 13 Mitsubishi, 78 monetary policy and legacy of financial crisis, 123–24 and onset of financial crisis, 43–44 and policy responses to crisis, 161, 163, 183–88 and prevention of financial crises, 111–12 and TARP, 89 money market funds and acceleration of crisis, 22 and expansion of crisis, 76–77 and migration of risk outside regulatory system, 150 and policy responses to crisis, 163, 171 and stress tests, 102 and TARP, 87 and taxpayer profit from rescue, 208 monoline insurers, 44 moral hazard and AIG rescue, 74 and Bear Stearns rescue, 51, 52 and current state of financial system, 8 and early stages of financial crises, 33 and Fannie Mae/Freddie Mac conservatorship, 56 and Federal Deposit Insurance Corporation (FDIC) Deposit Insurance Fund, 81–82 and shortcomings of U.S. regulatory regime, 28 and theoretical approaches to financial crises, 36, 37–38 Morgan Stanley and Bear Stearns rescue, 51, 53 credit default swaps, 75 and expansion of crisis, 77, 78, 157 and Fannie Mae/Freddie Mac conservatorship, 59 and foreign investment, 41 government investment in, 176 and Lehman failure, 64, 69 and onset of financial crisis, 156 private capital raised during crisis, 175, 181 mortgage-backed securities (MBS) and causes of financial crisis, 4 and legacy of financial crisis, 123 and policy responses to crisis, 106, 163, 190, 191 and roots of financial crisis, 12 and spark of crisis, 17 mortgage market and Bear Stearns rescue, 53 and causes of financial crisis, 3–4 and Fannie Mae/Freddie Mac conservatorship, 55–60 and instability of financial system, 85 loan modification programs, 105–7, 192, 193, 194 and long-term interest rates, 147 mortgage-related assets, 21 and policy responses to crisis, 103–7, 169, 189–94 and quantitative easing, 103–4 and recovery from crisis, 203 and shortcomings of U.S. regulatory regime, 27, 29 and spark of crisis, 16–20 See also housing market; mortgage-backed securities Mozilo, Angelo, 38–39 National Bureau of Economic Research, 43 nationalization of financial institutions, 54–60, 86, 91, 98, 100, 107, 182 negotiation of relief efforts, 65 Nevada housing market, 19 New York Fed, 26, 28, 64, 66, 118 New York Times, 70 “NINJA” loans, 17 no-documentation loans, 29 nonbanks and acceleration of crisis, 22–24 and AIG rescue, 72 and arsenal for dealing with future crises, 118–20 and bank holding companies, 216n and Bear Stearns rescue, 47, 48–50, 52, 53–54 and Countrywide sale, 39 and expansion of crisis, 76 and Lehman failure, 61, 63 and migration of risk outside regulatory system, 150 and policy responses to crisis, 162, 173 and post-crisis reforms, 113–14, 115 and shortcomings of U.S. regulatory regime, 26–27, 211 and Term Securities Lending Facility, 44–45 See also specific institutions Northern Rock, 155 Obama, Barack and arsenal for dealing with future crises, 120, 124 election, 93 and government response to crisis, 80, 82, 93, 103–7 and legacy of financial crisis, 124 and onset of financial crisis, 1 and policy responses to crisis, 163 and politics of crisis management, 9 and post-crisis reforms, 113 and TARP, 96–98, 100, 105, 107 Office of the Comptroller of the Currency (OCC), 23, 59 Office of Thrift Supervision (OTS), 23, 71, 116 optimism, 18, 117 “orderly liquidation authority,” 121 “originate-to-distribute” mortgage model, 17–18 overconfidence, 12–13, 125–26 overnight funding, 24 panics and Bear Stearns rescue, 49 causes of, 3 contagion effect of, 37, 111 inherent vulnerability to, 13–16 and Lehman failure, 70 and onset of financial crisis, 2, 31–32 and post-crisis reforms, 112 and prevention of financial crises, 111 and TARP, 87 and toxic mortgage assets, 41 Paulson, Henry M., Jr.


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

The Chinese Communist party had no intention of letting their interest or exchange rates be controlled by the markets; they opted for capital controls and a managed currency, pegged to the dollar. The corollary of this policy was that they accumulated a massive current-account surplus which (being China) the government controlled. These foreign-exchange reserves were then held in Treasury bonds and bills, making it easier for the US to finance its trade deficit. In his book Fixing Global Finance, Financial Times columnist Martin Wolf argues convincingly that the ‘savings glut’ of China and others was more responsible for the imbalance than American profligacy. 3 His argument is that a low level of real interest rates indicated an excess of desired saving over investment. The Chinese (ironically for a communist state) did not provide much in the way of pensions, so their citizens saved to cover their old age; the Japanese had little desire to spend or invest because of their sluggish economy.

This required them to sell their own currencies and buy dollars, which they held in the form of foreign-exchange reserves. Those reserves were invested in developed-world government bonds (mostly US Treasury bills). The system had thus created a very wealthy group of investors who were effectively uninterested in the price of, and return from, their investments. The bond-market vigilantes had been swamped. There was a savings glut that forced up asset prices. The result was an odd system that seemed to suit both sides. The Chinese had a flourishing export market; the Americans were able to fund their consumption at low cost. There were occasional grumbles. American politicians feared that the Chinese were stealing US manufacturing jobs; the Chinese occasionally lectured the Americans on the need to safeguard the value of the Treasury bond market.

leverage leveraged buyout Lewis, Michael Liberal Democrat party (UK) Liberal Party (UK) life expectancy life-cycle theory Little Dorrit lire Live 8 concert Lloyd George, David Lombard Odier Lombard Street Research London School of Economics Long Term Capital Management longevity Louis XIV, King of France Louis XV, King of France Louvre accord Lucas, Robert Lucullus, Roman general Luxembourg Macaulay, Thomas McCarthy, Cormac Macdonald, James MacDonald, Ramsay McKinsey McNamara, Robert Madoff, Bernie Malthusian trap Mandelson, Peter Marais, Matthieu Marco Polo Mares, Arnaud Marks & Spencer Marshall, George Marshall Aid Marshalsea Prison Mauro, Paolo May, Sir George means/media of exchange Medicaid Medicare Mellon, Andrew mercantilism Merchant of Venice, The Meriwether, John Merkel, Angela Merton, Robert Mexico Mill, John Stuart Milne-Bailey, Walter Minsky, Hyman Mises, Ludwig von Mississippi Project Mitterrand, Francois Mobutu, Joseph Mongols monetarism monetary policy monetary targets money markets money supply Moody’s Moore’s Law moral hazard Morgan Stanley Morgenthau, Henry Morrison, Herbert mortgages mortgage-backed bonds Multilateral Debt Relief Initiative Napier, Russell Napoleon, emperor of France Napoleonic Wars Nasser, president of Egypt National Association of Home Builders National Association of Realtors National Association of Security Dealers Netherlands New Century New Hampshire New Jersey Newton, Sir Isaac New York Times New Zealand Nixon, Richard Norman, Montagu North Carolina Northern Ireland Northern Rock North Korea North Rhine Westphalia, Germany Norway Obama, Barack odious debt Odysseus OECD d’Orléans, duc Ottoman Empire output gap Overstone, Lord overvalued currency owner-equivalent rent Papandreou, George paper money paradox of thrift Paris club Passfield, Lord (Sidney Webb) Paulson, Hank pawnbroking pension age pension funds pensions Pepin the Short Perot, Ross Perry, Rick Persians Peter Pan Philip II, King of Spain Philip IV, King of France PIGS countries PIMCO Plaza accord Poland Ponzi, Charles Ponzi scheme population growth populism portfolio insurance Portugal pound Prasad, Eswar precious metals Price-earnings ratio primary surplus Prince, Chuck principal-agent problem printing money private equity property market protectionism Protestant work ethic public choice theory public-sector workers purchasing power parity pyramid schemes Quaintance, Lee quantitative easing (QE) Quincy, Josiah railway mania Rajan, Raghuram Rand, Ayn Reagan, Ronald real bills theory real interest rates Record, Neil Reformation, the Reichsbank Reichsmark Reid, Jim Reinhart, Carmen renminbi Rentenmark rentiers reparations Republican Party reserve currency retail price index retirement revaluation Revolutionary War Ridley, Matt Roberts, Russell Rogoff, Kenneth Romanovs Roosevelt, Franklin D. Rubin, Robert Rueff, Jacques Rumsfeld, Donald Russia Sack, Alexander St Augustine Saint-Simon, duc de Salamis (city) Santelli, Rick Sarkozy, Nicholas Saudi Arabia savings savings glut Sbrancia, Belen Schacht, Hjalmar Scholes, Myron shale gas Second Bank of the United States Second World War Securities and Exchange Commission seignorage Shakespeare, William share options Shiller, Robert short-selling silver Singapore Sloan, Alfred Smith, Adam Smith, Fred Smithers & Co Smithsonian agreement Snowden, Philip Socialist Party of Greece social security Société Générale solidus Solon of Athens Soros, George sound money South Africa South Korea South Sea bubble sovereign debt crisis Soviet Union Spain special drawing right speculation, speculators Stability and Growth pact stagnation Standard & Poor’s sterling Stewart, Jimmy Stiglitz, Joseph stock markets stop-go cycle store of value Strauss-Kahn, Dominque Strong, Benjamin sub-prime lending Suez canal crisis Suharto, President of Indonesia Sumerians supply-side reforms Supreme Court (US) Sutton, Willie Sweden Swiss franc Swiss National Bank Switzerland Sylla, Richard Taiwan Taleb, Nassim Nicholas taxpayers Taylor, John tea party (US) Temin, Peter Thackeray, William Makepeace Thailand Thatcher, Margaret third world debt crisis Tiernan, Tommy Times Square, New York tobacco as currency treasury bills treasury bonds Treaty of Versailles trente glorieuses Triana, Pablo Triffin, Robert Triffin dilemma ‘trilemma’ of currency policy Truck Act True Finn party Truman, Harry S tulip mania Turkey Turner, Adair Twain, Mark unit of account usury value-at-risk (VAR) Vanguard Vanity Fair Venice Vietnam War vigilantes, bond market Viniar, David Volcker, Paul Voltaire Wagner, Adolph Wall Street Wall Street Crash of 1929 Wal-Mart wampum Warburton, Peter Warren, George Washington consensus Weatherstone, Dennis Weimar inflation Weimar Republic Weinberg, Sidney West Germany whales’ teeth White, Harry Dexter William of Orange Wilson, Harold Wirtschaftswunder Wizard of Oz, The Wolf, Martin Women Empowering Women Woodward, Bob Woolley, Paul World Bank Wriston, Walter Xinhua agency Yale University yen yield on debt yield on shares Zambia zero interest rates Zimbabwe Zoellick, Robert Philip Coggan is the Buttonwood columnist of the Economist.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

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

The first is that it reflected the inflows into US Treasury and Agency assets coming from the build-up in reserves in emerging markets, including China—often referred to as the “global saving glut”.36 The second is that financial inflows from European banks lowered rates.37 The final explanation is that the rise in repos led to a reduction in yields as mortgage-backed assets became more liquid.38 Each explanation highlights a different potential driver, self-insurance by emerging markets, financial deregulation in Europe, and the widening of repo collateral in the United States. The evidence suggests that all three drivers mattered. Figure 39 provides a sense of the relative importance of these three explanations by comparing the amount of money that was pumped into US markets from each source. For the global saving glut, the chart shows the increase in reserve holdings as a proportion of US output.39 Holdings rose by some 8 percent of US output between 1999 and 2007 (unlike the other explanations, this flow accelerated after the crisis).

Fred Bergsten and Russell A. Green (eds), International Monetary Cooperation: Lessons from the Plaza Accord after Thirty Years, Peterson Institute for International Economics, Washington DC, 2016. Bernanke (2004): Ben S. Bernanke, “The Great Moderation”, speech given at the meetings of the Eastern Economic Association, Washington DC, February 20, 2004. Bernanke (2005): Ben S. Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit”, speech given at the Homer Jones Lecture, St. Louis, Missouri, on April 14, 2005. Bernanke (2015): Ben S. Bernanke, The Courage to Act, W. W. Norton Press, New York and London, 2015. Beyer and Smets (2015): Robert C. M. Beyer and Frank Smets, “Labour Market Adjustments in Europe and the US: How Different?”, European Central Bank Working Paper No. 1767, March 2015.


pages: 240 words: 60,660

Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life by Emanuel Derman

Albert Einstein, Asian financial crisis, Augustin-Louis Cauchy, Black-Scholes formula, British Empire, Brownian motion, capital asset pricing model, Cepheid variable, creative destruction, crony capitalism, diversified portfolio, Douglas Hofstadter, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Henri Poincaré, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Isaac Newton, Johannes Kepler, law of one price, Mikhail Gorbachev, Myron Scholes, quantitative trading / quantitative finance, random walk, Richard Feynman, riskless arbitrage, savings glut, Schrödinger's Cat, Sharpe ratio, stochastic volatility, the scientific method, washing machines reduced drudgery, yield curve

But I call it partial, or inadequate, if its effect cannot be understood through it alone. Theories are adequate knowledge. Models are inadequate. INADEQUATE KNOWLEDGE When we truly understand an occurrence, we have adequate knowledge of it; when we don’t, when we are unable to explain an occurrence in generality, we have inadequate knowledge. For example: The financial crisis of 2007-2008 was caused by the global savings glut. What caused that? The Asian currency crisis of 1997-1998: Asian countries came out of that wanting to run net surpluses rather than net deficits. But what caused that? . . . Each explanation, reasonable though it sounds, provokes a request for another. Each explanation is inadequate and local because it displaces the ultimate cause one degree further from the final effect. Extending the Scope of Adequate Knowledge As time passes we understand more things adequately.

In the long run, of course, paper money is very risky; governments collapse, countries disappear, empires fall, and things hold their value much better than paper does. James Grant, the editor of Grant’s Interest Rate Observer, has pointed out that an ounce of gold has always more or less been the price of a good men’s suit. 4. According to Krugman and Wells, the crisis of 2007–2008 was caused by the global savings glut (www.nybooks.com/articles/archives/2010/sep/30/ slump-goes-why/). That was caused by the Asian currency crisis of 1997– 1998, which stimulated Asian countries to avoid a repeat by running net surpluses rather than net deficits. But what caused the Asian currency crisis? And what caused whatever caused that? As I pointed out in chapter 3, this is a good example of what Spinoza would call an inadequate explanation. 5.


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

If, therefore, there are willing buyers for its debt (and this has been the uninterrupted case in the UK since 169417), running a deficit (or reclaiming less tax from the economy than you spend) is simply not a problem for a government. You would think that missing this fact would be a cardinal sin for any economist, let alone politician, and yet it is the norm. Of course this situation of being able to run deficits would change if a time came when a government could not sell its debt, but, given that there is a savings glut in the world at present and a shortage of secure assets in which to invest, the prospect of the government being unable to sell its debt seems very unlikely for a long time to come. So, it seems that the glaringly obvious has to be spelled out once again: there is no reason why any government should have to balance its books unless it really wants to do so as a matter of policy – which would only be wise if that economy was booming (as it was, for example, in the period 1997 to 2001), and the government wanted as a result to temporarily withdraw cash from the economy by underspending, and thus calm down over-activity to prevent an unsustainable boom.

That growth has to be shared with people whose main opportunity to participate in the benefits of growth is through work. So how does the tax system create work beyond those 55,000 or so people currently employed by HMRC? As already noted, right now it does not. Because national insurance charges employers tax for having employees it does the exact opposite of what is intended in this regard. Perversely, and at a time when there is a savings glut in the world2 and there is no need whatsoever to encourage yet more money to be put aside in the economy for no productive purpose (because the level of investment is in no way dependent upon the level of savings in an economy, as the discussion in Chapter 4 on the way money is created has shown), the net effect of this bias is to massively overtax labour, which needs to be put to work on decent wages when too many people in the UK are currently paid too little and too many people have low-productivity jobs.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"Robert Solow", Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Actually, I need to credit Rajan with a bit more ingenuity than he claims for himself in these interviews. His book Fault Lines has managed to amalgamate what had by then become the neoliberals’ favorite stories about the crisis into one neat and tidy package. In caricature, it combines: fingering the Asian economies for seeking to accumulate dollar reserves after the Asian crisis of 1997, and therefore creating a world “savings glut”; luxuriant financial innovation (a phenomenon that was “natural”), which lulled bankers and others into taking on “excessive risk”; and technological innovation, which lowered wages and worsened income distribution in the United States, which in turn lured the government to ineptly try to counter it by screwing around with the household mortgage market. The financial sector got frisky, investors bought it, and the government foolishly sought to lean against the wind.

And third, if all the blame can be lifted from the economics profession and foisted onto “engineers” and “managers,” then where does that leave the Fed and, in particular, the figure of Ben Bernanke? Was he not financial manager-in-chief during the late contretemps? The answer to this third, and most troublesome, question is that Bernanke never once in that lecture concedes that the Fed did anything wrong before or after the crisis, and indeed, in a subsequent lecture, attempted to load the blame on China and the “global savings glut” for the entire episode.62 Those “engineers” and “managers” must be slippery, devious fellows indeed, since they are forever undermining the noble economists, without ever once leaving a visible calling card or forwarding address. I have had some economists warn me that of course Bernanke had to say stuff like this: for the sake of political stability, he must hew to the party line in public.

Certainly it seems to have fooled at least one journalist who might otherwise been on the lookout for self-serving narratives concerning the crisis.106 Astoundingly, the Journal of Economic Literature, the primary reviews journal of the orthodox economics profession, turned to this particular scofflaw, in preference to literally hundreds of other economists who had written about the crisis, to provide a short syllabus for general economists to “get up to speed” on the crisis. Gorton’s choice of indispensable texts for crisis hermeneutics was so narrow of scope and devoid of curiosity as to be gobsmacking: Ben Bernanke’s testimony before the Federal Crisis Inquiry Commission blaming the whole thing on a spurious “global savings glut”; the Rogoff story that all crises throughout history look alike and involve government overindebtedness;107 the Shiller index on the housing bubble; his own work on repo; some deadly colorless reports from the IMF; and a couple of papers that suggest banks pulled back on their lending in 2008 because they were “constrained” when their own short-term lending dried up. Nothing untoward or illegal here.


pages: 232 words: 76,830

Dreams of Leaving and Remaining by James Meek

Affordable Care Act / Obamacare, agricultural Revolution, anti-communist, bank run, Boris Johnson, centre right, Corn Laws, corporate governance, Donald Trump, Elon Musk, Etonian, full employment, global supply chain, illegal immigration, Jeff Bezos, low skilled workers, Martin Wolf, mega-rich, Neil Kinnock, North Sea oil, Northern Rock, obamacare, offshore financial centre, race to the bottom, Ronald Reagan, savings glut, Skype, sovereign wealth fund, special economic zone, Stephen Hawking, working-age population

The combined effect was a global savings glut. It didn’t, of course, find expression in warehouses packed with dollar bills. All these hoarders sought to park their hoards in places where they would earn the most interest. Countries like Britain and the US found themselves importing the ‘products’ of resource giants like Saudi Arabia and Russia, and of export giants like China and Germany, twice over: first as the products themselves (oil, gas, cars, phones) and second as the profits made from selling them, in the form of hoarded savings, looking for a return. The trouble was that with so much hoarded money looking for a comfy place to sit and grow fat, governments were offering meagre rates of interest. The industries of the old industrial world – places where the savings glut might once have been invested – were themselves more interested in saving than in spending on making themselves bigger and better.


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

One explanation is that an excess of savings over investment has driven equilibrium real interest rates down. The argument is that changes in monetary policy and fiscal spending have not really been the most important drivers of interest rates. For instance, in his secular stagnation hypothesis, Summers (2015) suggests that chronically weak aggregate demand has, together with ultra-low policy rates, kept desired saving above investment and pushed the natural rate below market rates. The global saving glut (Bernanke 2005) and the shortage of safe assets (Caballero and Farhi 2017)10 have driven excess savings in emerging market economies, reflected in their current account surpluses, into advanced economies, depressing real rates there. But others point out that slower economic growth and lower inflation (partly reflecting the impact of demographics and partly also the impact of rapid technological disruption) are responsible.

Impact of a low interest rate environment – Global liquidity spillovers and the search-for-yield. Ruhr Economic Paper No. 429. Bentolila, S., and Saint-Paul, G. (2003). Explaining movements in the labor share. Contributions to Macroeconomics, 3(1). Benzoni, L., Chyruk, O., and Kelley, D. (2018). Why does the yield-curve slope predict recessions? Chicago Fed Letter No. 404. Bernanke, B. S. (2005). The global saving glut and the U.S. current account deficit. Board of Governors of the Federal Reserve System speech 77. Bernanke, B. (2010, Sept. 2). Causes of the recent financial and economic crisis. Testimony before the Financial Crisis Inquiry Commission, Washington, DC. Bernstein, P. L. (1997). What rate of return can you reasonably expect … or what can the long run tell us about the short run? Financial Analysts Journal, 53(2), 20–28.


pages: 1,066 words: 273,703

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

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

The Fed found itself boxed in between China’s determination to peg its currency and the refusal of Congress to curb America’s budget deficit. China’s unbalanced growth path created an excess of savings that needed to be invested abroad. AAA-rated US Treasurys were the reserve asset of choice. As a newly appointed member of the Federal Reserve Board, one of the first contributions to the policy debate by the Princeton economist Ben Bernanke was to coin the term “global savings glut” to describe this situation in which the Fed’s principal policy instrument lost its leverage on the economy.44 The availability of foreign funding negated Fed efforts to raise interest rates. At the same time it reduced the pressure on Congress to tighten fiscal policy. As capital surged in, this pushed down US interest rates, stoking the domestic economic upswing and sucking in imports, above all from China.

McCauley and Hyun Song Shin, “Breaking Free of the Triple Coincidence in International Finance,” Economic Policy 31, no. 87 (2016): 409–451, graph 6. The rise of China dominated contemporary perceptions of early twenty-first-century globalization. And the axis of imbalance that attracted most attention was that between China and the United States. Worries about geopolitics, Larry Summers’s balance of financial terror, Ben Bernanke’s savings glut, all pointed the finger in that direction. But if we map not annual flows but cross-border banking claims, this gives further proof of how one-sided the Sino-American view of the buildup to the crisis was. The central axis of world finance was not Asian-American but Euro-American. Indeed, of the six most significant pairwise linkages in the network of cross-border bank claims, five involved Europe.

King, Fed Power: How Finance Wins (Oxford: Oxford University Press, 2016). 42. Minutes of the Federal Open Market Committee (FOMC) meeting, June 29–30, 2004, https://www.federalreserve.gov/fomc/minutes/20040630.htm. 43. The so-called Mundell-Fleming model of open economy macroeconomics originated already in the 1960s, see J. M. Boughton, “On the Origins of the Fleming-Mundell Model” (IMF Staff Papers 50, 2003), 1–9. 44. B. Bernanke, “The Global Saving Glut and the US Current Account Deficit,” No. 77, Board of Governors of the Federal Reserve System (US), 2005. 45. B. Bernanke, “On Milton Friedman’s Ninetieth Birthday” (conference to honor Milton Friedman, November 8, 2002). 46. M. Friedman and A. J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, 2008), 407–414. 47. Ben S. Bernanke, “Constrained Discretion and Monetary Policy,” remarks before the Money Marketeers of New York (New York: New York University, 2003). 48.


pages: 263 words: 80,594

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

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

., Ludvigson, S.C. and Van Nieuwerburgh, S. (2012), “International Capital Flows and House Prices: Theory and Evidence”, in Housing and the Financial Crisis, Chicago: University of Chicago Press. https://static1.squarespace.com/static/54397369e4b0446f66937a73/t/56590b88e4b0702d37f626e1/1448676232727/nbh.pdf; Ferrero, A. (2012) “House Price Booms, Current Account Deficits, and Low Interest Rates”, Staff Report Number 541, Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr541.pdf; Felix, D. (2005) “Why International Capital Mobility Should Be Curbed and How It Could Be Done”, in Epstein (2005); Geet, P. (2015) “Housing Demand, Savings Gluts and Current Account Dynamics”, Globalization and Monetary Policy Institute Working Paper 221 https://www.dallasfed.org/~/media/documents/institute/wpapers/2015/0221.pdf; Guschanski, A. and Stockhammer, E. (2017) “Are Current Accounts Driven by Competitiveness or Asset Prices? A Synthetic Model and an Empirical Test”, Greenwich Papers in Political Economy number GPERC55 http://gala.gre.ac.uk/17946/1/CA%20imb%20draft%201_00%20gppe%20%282%29. pdf; Laibson, D. and Mollerstrom, J. (2010) “Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis”, The Economic Journal, vol. 120 https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0297.2010.02363. 8 This account draws on: Tooze (2018); Aalbers (2008); Acharya, V. and Richardson, M. (2009) “Causes of the Financial Crisis”, Critical Review, vol. 21; Lysandrou (2011); Dymski, G. (2009) “Why the Subprime Crisis Is Different: A Minskyian Approach”, Cambridge Journal of Economics vol. 34; Segoviano, M., Jones, B., Lindner, P. and Blankenheim, J. (2013) “Securitization: Lessons Learned and the Road Ahead”, IMF Working Paper 13/255. https://www.imf.org/external/pubs/ft/wp/2013/wp13255.pdf; Ashcraft, A. and Schuermann, T. (2008) “Understanding the Securitisation of Subprime Mortgage Credit”, Federal Reserve Bank of New York Staff Reports No 318; Lewis, M. (2011) The Big Short: Inside the Doomsday Machine, London: Penguin; National Audit Office (2016) “Introduction to Asset-Backed Securities”, Briefing Paper November 2016. https://www.nao.org.uk/wp-content/uploads/2016/07/Introduction-to-asset-backed-securities.pdf; Bank of England (2008) Financial Stability Report No. 23, April 2008 https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2008/may-2008; Bank of England (2007) Financial Stability Report No. 22, October 2007. 9 This account draws on: Tooze (2018); Fligstein, N. and Goldstein, A. (2012) “A Long Strang Trip The State and Mortgage Securitisation, 1968-2010”, in Preda, A. and Knorr-Cetina, K.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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

The temptation is overwhelming to bestow it on somebody.’204 The remorseless rise in public indebtedness was further exacerbated by rising life expectancy and falling birth rates, which made health-care and pension commitments more costly. In the US and several other countries, incomes remained stagnant for the best part of three decades. An illusion of rising living standards was nonetheless maintained, either because households borrowed more against their overvalued homes in a very free credit environment fuelled by a global savings glut, which was the case in the US and the UK, or because governments created unproductive make-work jobs, as in Italy, Spain and Greece. As Raghuram Rajan sees it: The advanced countries have a choice. They can act as if all is well, except that their consumers are in a funk, and that ‘animal spirits’ must be revived through stimulus. Or they can treat the crisis as a wake-up call to fix what debt has papered over in the last few decades.

He argues that money may ultimately tip the balance of forces in China and Japan towards those who can prevent war and put these countries’ conflicting territorial claims back on the shelf. 112 Robert J. Shiller, Finance and the Good Society, Princeton University Press, 2012. 113 Quoted in ‘China’s Holdings of US Securities: Implications for the US economy’, a report by Wayne M. Morrison and Marc Labonte of the Congressional Research Service, 19 August 2013. 114 The Bill From the China Shop: How Asia’s Savings Glut Threatens the World Economy, co-authored with Diana Choyleva, Profile Books, 2006. 115 The Great Convergence: Asia, the West, and the Logic of One World, Public Affairs, 2013. 116 Quoted in Don’t Blame The Shorts by Robert Sloan, McGraw-Hill, 2010. 117 Karl Marx, Fourth Estate, 1999. 118 Kynaston, ibid. 119 Macmillan, 1999. 120 In reality, the lender of shares sells them to the short seller and buys them back in due course, so the standard terminology used by market practitioners on stock lending and short selling is at odds with the contractual legal position. 121 Ibid. 122 Alexander Hamilton, Penguin Group, 2005. 123 Financial Times, 16 May 2009. 124 Content.ksg.harvard.edu/…/jeff_frankels…/commodity-prices-again; 125 See Robert Sloan, ibid., for an excellent, more detailed account. 126 This is just one in a splendid Dickensian line of portentously named companies that includes such gems as the Anglo-Bengalee Disinterested Loan & Life Insurance Company in Martin Chuzzlewit.


pages: 370 words: 102,823

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

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

A first justification for the claim that inequality is necessary for growth focuses on the role of savings and investment in promoting growth, and is based on the observation that those at the top save, while those at the bottom typically spend all of their earnings. Countries with a high share of wages will thus not be able to accumulate capital as rapidly as those with a low share of wages. The only way to generate savings required for long-term growth is thus to ensure sufficient income for the rich. This argument is particularly inapposite today, where the problem is, to use Bernanke’s term, a global savings glut.42 But even in those circumstances where growth would be increased by an increase in national savings, there are better ways of inducing savings than increasing inequality. The government can tax the income of the rich, and use the funds to finance either private or public investment; such policies reduce inequalities in consumption and disposable income, and lead to increased national savings (appropriately measured).

Horowitz, and Bennett Harrison, eds, Patterns of Racial Discrimination, Lexington, MA, D. C. Heath and Company Lexington Books, 1974, pp. 5–26. 42 I have argued elsewhere (‘Monetary policy in a multipolar world’, in J. E. Stiglitz and R. S. Gurkaynak, eds, Taming Capital Flows: Capital Account Management in an Era of Globalization, IEA Conference Volume No. 154, New York, Palgrave Macmillan, 2015) that the problem is not really a savings glut: there are huge needs for investment on the global level. Unfortunately, the global financial system is unable to intermediate—to ensure that the available savings is used to finance the real global investment needs. The consequence is the ‘paradox of thrift’: savings leads to inadequate aggregate demand. 43 A. Berg and J. Ostry, Inequality and Unsustainable Growth: Two Sides of the Same Coin?


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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

But now over half of China’s output is attributable to services, including financial services. It and Southeast Asian countries such as Malaysia and Singapore have become rentier economies, with the means to invest in rich countries and buy up companies and other assets. They have accumulated large cash hoards by keeping labour costs low, which constrains consumption at home. Concentrated in the hands of a few plutocrats and a growing elite, this ‘savings glut’ has created a stock of funds to invest in assets all over the world, much of it in property. China has become a special rentier economy. State-owned enterprises spearheaded its export-led industrialisation, helped by subsidies and low wages. The resultant trade surpluses, alongside capital inflows, enabled China to accumulate vast foreign currency reserves. These peaked at nearly $4 trillion in 2014 – almost twenty times what they were in 2001 – and, though they have fallen since, they remain by far the world’s largest.

According to Matt King of Citigroup, emerging economies accounted for three-quarters of global ‘private money creation’ between 2010 and 2015. Flows of $8 trillion into those economies generated $5 trillion of credit annually.14 Much of that went into fuelling property bubbles at home and abroad. Ben Bernanke, former chair of the US Federal Reserve, and economists at the International Monetary Fund (IMF) are among those arguing that the combination of loose monetary policy, financial innovation and the savings glut in emerging market economies is responsible for housing price bubbles in Britain, the USA and elsewhere.15 This has contributed to the growth of wealth inequality and a revival of landlordism. This time, however, many of the landlords are on the other side of the world. THE SILICON REVOLUTION – APOLOGY TO NED LUDD ‘Within the very near future – much less than twenty-five years – we shall have the technical capacity of substituting machines for any and all human functions in organisations.’


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

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

The great financial crisis of 2008 that brought down Wall Street and humbled the United States along with other major industrial nations has already ushered in an era of newfound zeal for reform. It has raised serious questions about the sustainability of global capitalism, at least in the form that we have experienced in the last quarter century. What might have prevented the financial crisis? Did the problem lie with unscrupulous mortgage lenders? Spendthrift borrowers? Faulty practices by credit rating agencies? Too much leverage on the part of financial institutions? The global savings glut? Too loose monetary policy by the Federal Reserve? Government guarantees for Fannie Mae and Freddie Mac? The U.S. Treasury’s rescue of Bear Stearns and AIG? The U.S. Treasury’s refusal to bail out Lehman Brothers? Greed? Moral hazard? Too little regulation? Too much regulation? The debate on these questions remains fierce and will no doubt continue for a long time. In the bigger scheme of things, these questions interrogate mere details.

Whole countries such as Iceland turned into hedge funds, leveraging themselves to the hilt in international financial markets in order to exploit small differentials in margins. Calls for increased regulation of finance were rebuffed by pointing out that banks would simply get up and move to less regulated jurisdictions.23 The immediate causes of the financial crisis of 2008 are easy to identify in hindsight: mortgage lenders (and borrowers) who assumed housing prices would keep rising, a housing bubble stoked by a global saving glut and the reluctance of Alan Greenspan’s Federal Reserve to deflate it, financial institutions addicted to excessive leverage, credit rating agencies that fell asleep on the job, and of course policy makers who failed to get their act together in time as the first signs of the crisis began to appear. Without these regulatory failings, the glut in global finance would not have proved dangerous; after all, low interest rates are a good thing insofar as they enable higher investment.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Ben Bernanke, one of the seven governors who oversaw the Federal Reserve, of which Greenspan was chair, presented a benign explanation that seemed to absolve Americans of either worry or blame. While the world chided America for borrowing so much, Bernanke suggested that the fault lay equally with the lenders. As he elaborated in a much-quoted 2005 address, the decline in U.S. saving might in some part be “a reaction to events external to the United States. . . . My own preferred explanation focuses on what I see as the emergence of a global saving glut in the past eight to ten years.”7 In short, America was borrowing because others were lending. The “others” were China and other countries, many from the Third World—once profligate but lately transformed into paragons of thrift. Bernanke argued that their dollars had to flow somewhere, and the United States was merely an attractive destination. The curious financing of rich nations by poor ones reversed a long tradition.

This time, as two professors, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, put it, “a large chunk of money had been recycled to a developing economy that exists within the United States’ own borders [emphasis added].”8 Surplus credit was flowing not to weak borrowers overseas, but to a Subprime Nation inside the United States. Generally, it is the job of the Fed to mitigate potentially destabilizing financial currents. And Bernanke was well aware that the global savings glut was making its presence felt in the bubbly market for real estate—in particular, he noted, “as low mortgage rates have supported record levels of home construction and strong gains in housing prices.” In other words, foreigners were lending cash that, via a network of financial intermediaries, was fueling home buyers and inflating prices potentially beyond the level warranted by supply and demand.


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House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

asset-backed security, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Hyman Minsky, Irwin Jacobs, John Meriwether, Long Term Capital Management, margin call, merger arbitrage, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, savings glut, shareholder value, sovereign wealth fund, too big to fail, traveling salesman, Y2K, yield curve

“I will suggest to you big adjustments will inevitably come, and they will come long before the Social Security surpluses disappear or even before we cut the federal budget in half. And as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change…. I think we are skating on increasingly thin ice.” A month later, Fed Governor Bernanke proclaimed there was a “global savings glut,” especially in China and other developing countries where consumption was low, helping to fuel a high global demand for the debt of the United States, keeping interest rates low. “In retrospect, we didn't have a global savings glut,” explained Stephen Roach, the chairman of Morgan Stanley Asia, “we had an American consumption glut. In both of these cases, Bernanke was complicit in massive policy blunders on the part of the Fed.” Eight months later, in October 2005, Meredith Whitney, the well-regarded financial services research analyst, published a report where she claimed that “10% of the population is at risk of recession” and that “constrained liquidity on both the borrower as well as lender level will be the catalyst to spark this credit and economic downturn … It is important to keep in mind that historically, rising rates have not sparked recessions, credit or otherwise.

He certainly lived very well: Details about Cioffi's lifestyle from Northjersey.com, June 18, 2008. Chapter 24: Cayne CAPs Spector 288. On the call: New York Post, August 6, 2004. 292. “Consistently performing makes”: Andrew Bary “How Sweet It Is,” Barron's, August 2, 2004. Chapter 25: Cioffi's Bubble 293. “pockets of severe stress”: Alan Greenspan speech at Americas Community Bankers Annual Convention, Washington, D.C., October 19, 2004. 293. “global savings glut”: Ben Bernanke speech at the Virginia Association of Economics, Richmond, Virginia, March 10, 2005. 293. “In retrospect”: John Cassidy, NY December 1, 2008. 294. “increase home ownership”: Dennis Sewell, Spectator, October 1, 2008. 296. “an explicit target”: Russell Roberts, “How Government Stoked the Mania,” WSJ, October 3, 2008. 300. “I have been waiting”: NYT, October 19, 2008. Chapter 26: “The Entire Subprime Market Is Toast” 302.


pages: 497 words: 150,205

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

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

Three in five Spaniards think so, as do two in three Britons, three in four Italians and more than three in four French and Greeks. 36 Pew Research Center, Global Attitudes Survey, Spring 2013, Q31. 54 per cent of Germans think their country’s economy has been strengthened by European integration. 37 Ibid, Q83. 38 Adam Posen, "The UK is very European – in its mistakes", Financial Times, 22 February 2013 http://www.ft.com/cms/s/0/cdcfe152-7b79-11e2-8eb3-00144feabdc0.html 39 RBS figures are from http://www.bbc.co.uk/news/uk-england-26364715. Credit to businesses in the eurozone contracted by 3 per cent in the year to December 2013 and by 2.9 per cent in the year to January 2014. http://www.ecb.europa.eu/press/pdf/md/md1401.pdf 40 See, for example, Hyun Song Shin, “Global savings glut or global banking glut?”, Vox.eu, 20 December 2011 http://www.voxeu.org/article/global-savings-glut-or-global-banking-glut 41 High-Level Expert Group on Reforming the Structure of the EU Banking Sector, chaired by Erkki Liikanen, 2 October 2012 http://ec.europa.eu/internal_market/bank/docs/highlevel_expert_group/report_en.pdf Table A1.2: total number and assets of monetary financial institutions by country (March 2012) 42 OECD, Debt of financial corporations, as a percentage of GDP, DBTS12GDP 43 OECD, Household debt as a share of gross disposable income, DBTS14_S15GDI In the UK it rose from 112.39 per cent in 2000 to 174.15 per cent in 2007, that is by a factor of 1.55; in the Netherlands it rose from 163.72 per cent in 2000 to 242.37 per cent, that is by a factor of 1.48. 44 See Nationwide House Price Index, http://www.nationwide.co.uk/hpi/historical.htm and http://www.cotizalia.com/cache/2008/07/03/46_europa_preocupa_mucho_ajuste_inmobiliario_espana.html 45 Philippe Legrain, Aftershock: Reshaping the World Economy After the Crisis, Little, Brown: 2010 46 Nouriel Roubini with Stephen Mihm, Crisis Economics: A Crash Course in the Future of Finance, Allen Lane: 2010 47 Charles Kindleberger, Manias, Panics and Crashes, Wiley: 1978 48 Philippe Legrain, Open World: the Truth about Globalisation, Abacus: 2002 49 Financial markets were deemed efficient in the sense that prices set by the market were “right” since they were determined by rational investors acting on all available information and mistakes were rapidly corrected by other profit-seeking investors. 50 As Bill White has observed, in the 1980s the fight against high inflation was justified on the grounds that it was ‘necessary’ for macroeconomic stability.


pages: 554 words: 158,687

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

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

At the BIS, however, William White argued that central bank should ‘lean against the wind’ by raising interest rates when bubbles threatened, even if price stability and growth targets were not compromised (‘Procyclicality in the Financial System’, BIS Working Paper No. 193, 2006; ‘Is Price Stability Enough?’, BIS Working Paper No. 205, 2006). In contrast, Ben Bernanke, who became the head of the US Federal Reserve, argued that credit and asset bubbles should be allowed to follow their course, the authorities intervening aggressively only after the bubble would have burst (‘The Global Saving Glut and the U.S. Current Account Deficit’, 10 March 2005; ‘The Subprime Mortgage Market’, 17 May 2007). The response of economists following the burst of the bubble was similarly weak, typically offering bland technical advice, such as improving information flows and extending regulation across financial institutions; for instance, see Randall Dodd, ‘Subprime: Tentacles of a Crisis’, Finance and Development, December 2007.

Berger, Allen, Leora Klapper, and Gregory Udell, ‘The Ability of Banks to Lend to Informationally Opaque Small Businesses’, Journal of Banking and Finance 25, 2001, pp. 2127–67. Berger, Allen, Nathan Miller, Mitchell Petersen, Raghuram Rajan, and Jeremy Stein, ‘Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks’, Journal of Financial Economics 76, 2005, pp. 237–69. Berle, Adolph, and Gardiner Means, The Modern Corporation and Private Property, New York: Macmillan, 1932. Bernanke, Ben, ‘The Global Saving Glut and the U.S. Current Account Deficit’, remarks at the Sandridge Lecture, Virginia Association of Economists, Richmond, VA, 10 March 2005, available at federalreserve.gov. Bernanke, Ben, ‘The Great Moderation’, remarks at the meeting of the Eastern Economic Association, Washington, DC, 20 February 2004, at federalreserve.gov. Bernanke, Ben, ‘Some Reflections on the Crisis and the Policy Response’, speech delivered at the Russell Sage Foundation and the Century Foundation conference on ‘Rethinking Finance’, New York, 13 April 2012, available at federalreserve.gov.


pages: 524 words: 155,947

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

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

And borrowing money to buy a property that was rapidly rising in price seemed like a no-brainer. Another factor behind the bubble was the very low level of bond yields. This seems to have been driven by the reaction of Asian countries to the late 1990s crisis. They ran trade surpluses, accumulated foreign exchange reserves, and then invested them in US government bonds. In the view of Ben Bernanke, who became Fed chairman in 2006, this led to a “savings glut” that kept yields low.44 All seemed to be going well for the world economy in 2006. The liberal market economy – a combination of the welfare state, free markets and a buoyant financial sector – had been adopted across the developed world and was accepted by centre-left politicians like Bill Clinton and Tony Blair as well as by conservatives. Tony Blair retired as British prime minister in June 2007.

Longer term, it soured British politics by making many on the right hostile to the EU in general. 41. Robert Shiller, Irrational Exuberance, third edition 42. Judith Yates, “Housing in Australia in the 2000s: on the agenda too late?”, https://www.rba.gov.au/publications/confs/2011/yates.html 43. Tobias Buck, “Spain: boom to bust and back again”, Financial Times, April 6th 2017 44. Ben S. Bernanke, “The global saving glut and the US current account deficit”, the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, March 10th 2005 Chapter 15 – Government: an ever-present force 1. Some of the reporting for this chapter also featured in my article for The Economist, “A welcome upgrade to apprenticeships”, July 12th 2018 2. John Yates, “At the cutting edge of a new era”, Yorkshire Post, February 15th 2001 3.


pages: 305 words: 69,216

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

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

How will suppliers respond? If—a critical assumption — all prices, including the price of labor (wages), are completely flexible, suppliers, including suppliers of labor—workers —will reduce their prices in an effort to retain as many buyers as possible. With consumers saving more because they are buying less, and at lower prices, interest rates —earnings on savings—will fall because there will be a savings glut. The lower interest rates will induce borrowing; and with more borrowing and lower prices, spending will soon find its way back to where it was before the shock. One reason this will happen is that not all consumers are workers, and those who are not, and whose incomes therefore are unimpaired, will buy more goods and services as prices fall. The flaw in this classical economic theory of the self-correcting business cycle is that not all prices are flexible; wages especially are not.


pages: 741 words: 179,454

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

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

But it didn’t look that way from my point of view.”45 He had warned about subprime lending and low-down-payment mortgages in 1999 and 2001. He was powerless, as legislators would have prevented him from taking action. It was an odd admission of helplessness from the second most important man on the planet. Greenspan’s analysis of the crisis was conventional; central banks were innocent voyeurs to events. He recited Ben Bernanke’s global saving glut thesis—an excess of global saving created the problems. He steadfastly denied that loose money or deregulation of the financial system were key elements of the crisis. Keynes argued that “the difficulty lies not so much in developing new ideas as in escaping from old ones.”46 But as John Kenneth Galbraith realized, “faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof.”47 Patrick Artus, economic adviser to the French government and author of Les incendiaires: Les banques centrales dépassées par la globalisation (The Arsonists: Central Banks Overtaken by Globalisation), called Greenspan a “very bad Fed chairman” who created four major crises—savings and loans, LTCM, new-technology shares and subprime mortgages.

See also John Maynard Keynes genocide, 38 George, Lloyd, 48, 340 Gere, Richard, 326 Germany, 312 gold, 359 inflation in, 22 get-rich investment and trading-secrets books, 98 Gherkin, 79 Gibson Greetings, 135 Gipp, George, 97 Girl with the Dragon Tattoo, The, 360 Girls Gone Wild, 344 Gladwell, Malcolm, 329 Glass, Carter, 66 Glass-Steagall Act of 1933, 66, 201 Glassman, James, 97, 99 Gleacher, Eric, 148 Glengarry Glen Ross, 185 global credit process, 88 Global Crossing, 154 global financial crisis, 310, 346-347 aftermath, 361-366 European debt crisis, 357-359 Greece, 354-356 solutions, 352-354 global saving glut thesis, 303 globalization, 38, 41 GNH (gross national happiness), 364 Go-Between, The, 185 Godfather, The, 147 gold, 21, 25-27, 58 China’s investment in, 87 circulation of, 32 effect of speculators on price, 28 Germany, 359 reserves, 30 Sons of Gwalia (SoG), 216 standard, 29-31 golden ring, 314 golden years, 46. See also retirement Goldfinger, 26 Goldilocks Economy, 296, 348 Goldman Sachs, 76, 81, 122, 191, 195, 289 David Viniar, 126 indictment of, 325 Jim O’Neill, 90 Milken’s mobsters, 146 Ron Beller, 321 SEC suit against, 196 Trading Corporation, 198, 338 Goldman, David, 287 Goldsmith, Sir James, 137 Gono, Gideon, 22, 345 Goodspeed, Bennett W., 96 Gorbachev, Mikhail, 101 Gorton, Gary, 232 governance, 290 Government Accountability Office (GAO), 353 government-sponsored entities (GSEs), 180 Göttingen (Germany), 101 Graduate Business School (GBS), 116 Graduate, The, 262, 308 Grais, David, 284 Gramm, Phil, 67 Grand Central Station (New York), 80 Grant’s Interest Rate Observer, 71 Grant, Duncan, 25 Grant, Emily, 71 Grant, James, 71, 178 Grantham, Jeremy, 265 Grapes of Wrath, The, 360, 365 Gravity; Our Enemy Number One, 347 gravity, financial, 347 Great Crash (1929), 332 Great Crash, The, 157 Great Depression, 29, 42, 102-103, 307 mortgage defaults, 179 great expectation machine, 54 Great Gatsby, The, 343 Great Moderation, 296 Great Moderation, 267, 277, 348 Great Slump of 1930, The, 306 Great Society, 30 Great Wave of Kanagawa, The, 324 Greece, 223, 225 global financial crisis, 354-356 greenbacks, 21, 28 Greenberg, Hank, 170 Greenberg, Maurice R., 230 Greenberger, Michael, 300 Greenburg, Ace, 326 greenmail, 137 Greenspan put, 280 Greenspan, Alan, 32, 44, 57, 129, 180, 215, 296 2002 interest rate cut, 154 adjusted rate mortgages (ARMs), 183 advocacy of derivatives, 213 Asian crisis, 280 as a celebrity central banker, 297 defense of record, 303-304 derivatives, 235, 238 dissenters, 300-302 FCIC testimony, 304-305 Great Moderation, 277 regulation, 279 U.S.


pages: 268 words: 75,490

The Knowledge Economy by Roberto Mangabeira Unger

additive manufacturing, balance sheet recession, business cycle, collective bargaining, commoditize, deindustrialization, disruptive innovation, first-past-the-post, full employment, global value chain, information asymmetry, knowledge economy, market fundamentalism, means of production, Paul Samuelson, savings glut, secular stagnation, side project, total factor productivity, transaction costs, union organizing, wealth creators

From 1947 to 1972, labor productivity, which roughly tracks total factor productivity, rose in the United States by an average of 2.8 percent a year; from 1972 to 1994 by 1.5 percent a year; from 1994 to 2005 by 2.8 percent a year; and from 2005 to the present by 1.4 percent a year. After a period of slow growth, productivity spiked in 1994–2005 and then fell back again. The slowdown in the growth of productivity since 1972, interrupted only by the turn-of-the-century spike, has been attributed to many of the factors emphasized by Hansen in the 1930s: the decline of population growth, the inadequacy of aggregate demand, and a “savings glut”—an excess of savings over consumption. One factor, however, largely absent from the older discussion of secular stagnation, has now taken center stage: the supposedly more limited transformative effect of contemporary technologies, especially in communication and information, when compared to the technological innovations of a hundred years ago. Consistently with this line of argument, we can explain the temporary rise in productivity growth in 1994–2005 as the result of a one-time phenomenon: the adoption of computers and other digital technologies by a wide range of mega-, large-, and medium-sized firms whose operations otherwise bear few traces of the now most advanced practice of production.


pages: 270 words: 73,485

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

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

They maintained high consumption levels even though they were building up debt. At the same time governments carried on borrowing even in prosperous times. Apart from the two last years of the Clinton Administration, the US Budget has been in deficit from the time Reagan became President. During the presidency of George W. Bush (2001–9), the US ran a trade deficit in addition to the budget deficit. The defense was that given the savings glut, America was doing a noble job by being the consumer of the last resort. But it also became a debtor of the first rank. The long boom of 1945–70 was based on a demographic surge and the growth of manufacturing which held up workers’ income. Governments had stable tax revenue and savings in pension contribution from people working their way for a few more decades before they were to retire. There was investment in many innovations which had been made during the war and soon after.


pages: 278 words: 82,069

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

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

The great irony of the Greenspan era is that conservative ideology turned out to be not conservative at all. It was instead recklessly experimental, testing out its new theories in the human laboratory and ignoring any negative results. Who can still believe in “efficient markets”? Not the folks who lost $6 trillion in the stock market. Who can seriously argue that capital investors need still more “supply side” favors from government, when even Bush’s economic adviser complains of a “global savings glut”? Who still wants to liberate the fraud-happy bankers and financiers from the dead hand of government regulation? My point is, the market ideology is in deep trouble—intellec-tually, if not politically. If you go behind the mystique and examine Greenspan’s performance, there is abundant evidence that demonstrates in real terms the right’s economic fallacies, never mind its moral failings. It is premature to talk of an ideological crackup—the right still holds power—but it is not too soon to develop the case for counter-reformation.


pages: 287 words: 95,152

The Dawn of Eurasia: On the Trail of the New World Order by Bruno Macaes

active measures, Berlin Wall, British Empire, computer vision, Deng Xiaoping, different worldview, digital map, Donald Trump, energy security, European colonialism, eurozone crisis, failed state, Francis Fukuyama: the end of history, global value chain, illegal immigration, intermodal, iterative process, land reform, liberal world order, Malacca Straits, mass immigration, megacity, open borders, Parag Khanna, savings glut, scientific worldview, Silicon Valley, South China Sea, speech recognition, trade liberalization, trade route, Transnistria, young professional, zero-sum game, éminence grise

Europeans have become increasingly convinced that the outside world is the source of all their problems and therefore that a strategy capable of isolating EU politics from these external disturbances is the only way to ensure long-term stability. Take the financial crisis, which many still see as an exclusively American phenomenon. In fact, the impact of the Chinese trade surplus and the corresponding savings glut was probably more important – the expansion of production in China created huge trade and current account deficits, so that economic growth in the United States had to be maintained through a credit bubble. Financial integration across the Atlantic is so deep that Europe would inevitably suffer when that credit bubble burst. Might the worst of the crisis have been prevented if the European Union had put in place some form of controls on global financial flows?


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"Robert Solow", 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, plutocrats, Plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, 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 market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

These savings, which must be invested, further exacerbate the capital glut, and where used to artificially lower exchange rates, they reallocate demand between countries. Economic activity globally was affected by slower growth in populations and workforces, as well as declining improvements in productivity. Lawrence Summers argued that the problem was not the result of the GFC itself, having emerged slowly over the previous twenty years. Critics claimed there was no direct evidence of secular stagnation. Some disputed the existence of a savings glut. Others thought that government intervention had distorted the economy. Many pointed out that Alvin Hansen's thesis proved incorrect. World War II, the postwar baby boom, rising consumption, investment, and technological innovation had revived economic growth. Channeling Keynes, Summers argued that greater public investment, rather than monetary policy, was the key to recovery. The ability of over-indebted governments to finance proposed investments was unclear.


pages: 1,088 words: 228,743

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

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Demand effects—examples • Demographic developments may have a significant impact on asset prices but the results are controversial. The high proportion of prime-age savers (40 to 60-year-olds) in the population may have contributed to the 1990s “baby-boomer rally” in the stock market. Similar considerations have led to fears of falling prices for risky assets when baby-boomers retire. • The savings glut story was one key explanation of the “conundrum” of low bond yields in the 2000s. Some controversial estimates suggest that foreign investor (mainly Asian central banks) demand for U.S. Treasuries reduced Treasury yields by more than 100 bp and other bond yields (close substitutes) by somewhat less. • New assets may be structurally cheap until they find their natural home. Investor demand for inflation-linked bonds was quite limited following their introduction in 1997.

In many countries there are clear examples of regulatory or legislative changes that quickly influence the pricing of long-term bonds. For example, in the U.K., the combination of the minimum funding requirement (legislation that encouraged pension funds to shift from equities to bonds) and fiscal surpluses made long-term gilts extremely expensive at the end of the 1990s. Foreign flows:• In the early 2000s, Asian central banks channeled their surpluses mainly into U.S. Treasuries. The “savings glut” view maintained that such demand was the main reason for historically low real bond yields. Some estimates of the impact of foreign flows on U.S. Treasury yields exceeded 100 bp, but the consensus view was 30 bp to 50 bp. Near-substitutes to Treasuries also benefited from this demand, but to a lesser extent. Cyclical factors Yield curve shape is closely related to (interrelated) business cycles, credit cycles, and monetary policy cycles.


pages: 350 words: 109,220

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

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

“We tried in 2004 to move long-term rates higher in order to get mortgage interest rates up and take some of the fizz out of the housing market, but we failed,” Greenspan said just as the Great Panic was beginning. He publicly labeled this “the conundrum,” the fact that the Fed was — albeit slowly — raising short-term interest rates, and long-term rates were not following. Bernanke provided intellectual cover on this front by talking about “a global savings glut,” a torrent of savings from China and the rest of Asia that flooded global markets and especially the United States and was overwhelming the Fed’s ability to tighten credit. Greenspan concurred. The arrival of billions of Chinese, Indian, and Eastern European workers into the global economy created such an antiinflationary force that long-term interest rates simply wouldn’t rise no matter what the Fed did, he asserted.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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

This is a theme we shall see reappearing in the work of Joseph Schumpeter. 49. Ibid., 581. 50. Ibid. 51. Ibid., 588, 588–589. 52. Ibid., 589. 53. Ibid., 590. 54. Carmen Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009). 55. Murphy, “Genesis,” 176–185. 56. Ibid., 43–71. 57. Ben S. Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” remarks by Governor Ben S. Bernanke at the Homer Jones Lecture, St. Louis, Missouri, April 14, 2005; Wolf, Fixing Global Finance, (Baltimore, MD: Johns Hopkins University Press, 2008). 58. See Philip Plickert, “Ungleichgewichte,” Frankfurter Allgemeine Zeitung, August 13, 2012, http://www.faz.net/aktuell/wirtschaft/aussenhandel-ungleichgewichte-11854842.html. 59.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

There are things we do not know we don’t know.’ The idea of ‘unknown unknowns’ nicely sums up Keynes’ concept of uncertainty. Active fiscal policy for full employment: the Keynesian solution In an uncertain world, investors may suddenly become pessimistic about the future and reduce their investments. In such a situation, there will be more savings than are needed – there will be, in technical terms, a ‘savings glut’. The Classical economists thought this glut would be sooner or later eliminated, as the lower demand for savings would drive the interest rate (that is, the price of borrowing, if you like) down, making investments more attractive. Keynes argued that this does not happen. As investment falls, overall spending falls, which then reduces income, as one person’s spending is another’s income. A reduction in income in turn reduces savings, as savings are essentially what are left after consumption (which tends not to change much in response to a fall in income, being determined by our survival necessities and habit).


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

accounting loophole / creative accounting, asset-backed security, banking crisis, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, forensic accounting, Frederick Winslow Taylor, G4S, intangible asset, Internet of things, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

THE ROLE OF THE BIG FOUR IN THE 2008 FINANCIAL CRISIS Not long after most of the world’s largest banks had been bailed out with trillions of dollars of taxpayers’ money, one old lady in London wondered out loud: why had nobody seen the September 2008 financial crash coming? A few months later, this senior citizen received an answer, possibly because she was the Queen of the United Kingdom, from some of the most eminent brains in the land. The British Academy gathered thirty intellectuals, central bankers and assorted great-and-good and identified some now widely accepted causes: an expansion of credit in response to a largely Chinese savings glut; financial engineering magnifying and hiding risks within the ensuing credit bubble; lax financial regulation; skewed and excessive incentives for bankers, and political indulgence of their methods. Overall, they said, there was a ‘psychology of denial’ and it was ‘difficult to recall a greater example of wishful thinking combined with hubris’. This ‘fuelled the increase in house prices both here and in the USA’ and meant more loans to people without the means to repay them.


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

For an interesting assessment of the applicability of underconsumption theory to post-2008 capitalism, see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences, New York: Monthly Review Press 2009. 33Presumably also because he would have had to declare the substantial income he received from Wall Street firms after his resignation from the Obama administration at the end of 2010. See ‘The Fed, Lawrence Summers, and Money’, New York Times, 11 August 2013. 34The same idea had been put forward in 2005 when Ben Bernanke, soon to follow Alan Greenspan at the Fed, invoked a ‘savings glut’ to account for the failure of the Fed’s ‘flooding the markets with liquidity’ to stimulate investment. Today Summers casually subscribes to the view of Left stagnation theorists that the ‘boom’ of the 1990s and early 2000s was a chimera: ‘Too easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilization wasn’t under any great pressure, unemployment wasn’t under any remarkably low level.


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

The greater the volatility, the more likely it is that economies will be face severe downturns requiring central bank interest rate cuts (Rogoff, 2016), and therefore the more likely that we will need to indulge in negative interest rates. Third, an increasing tendency to save in emerging economies coupled with ageing populations in developed economies have had a net effect of reduced investment, and hence further perpetuate low interest rates. This was what Ben Bernanke alluded to when he hypothesised about a “global savings glut.” It is for these reasons that central bankers have been indulging in negative interest rates and debating upon their use. Owing to the rarity of the long-term use of this policy instrument, it remains to be seen whether negative interest rates will be an effective solution to the problems of low inflation 136 Chapter 3 ■ Innovating Capitalism and near-zero interest rates. Negative interest rates are still an experimental policy, and they may be effective in theory, but no one can be sure what issues could arise if rates become significantly negative.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

"Robert Solow", Airbnb, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

Companies are today principally funded by debt and not equity, and for a long time tax systems have made the former more advantageous to issue than the latter. Companies can still tap into sources of long-term debt funding but their capital structure has progressively moved toward shorter-term debt. And with that development, the capital performance demands reflects the greater role of liquid forms of debt and owners with shorter stockholding periods. There is a paradox in modern capital markets, and regulation partly explains it. Despite the “savings glut,” or a growing surplus of capital chasing investments, companies have gradually seen their funding for long-term investments squeezed, and that is not just because investors demand better short-term returns. One of the interesting patterns of financial development in recent decades is that while leverage and balance sheets in the financial system have increased, and substantially so, long-term investment and innovation exposure in the corporate sector have declined.


pages: 424 words: 121,425

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

In fact, most respected analysts who have studied the mortgage crisis have concluded that Wall Street demand created the troubling subprime loans in the first place.80 The subprime mortgage market was a private market creation, and the GSEs neither created nor contributed to its supply or demand. The data is clear on this: “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.”81 The Turner Report, the most comprehensive review of the financial crisis, as well as most other serious analyses of the causes of the crisis, start the economic story with the problem of a “savings glut.” Put simply, the U.S. markets became flooded by foreign money seeking a high return on investment. While these funds would usually have bought up U.S. Treasury bonds, the large demand for them lowered Treasury yields and the pool of money flowed toward Wall Street, seeking a better return. The next safest asset class after U.S. treasuries was asset-backed securities, or home mortgages. Wall Street banks, trying to meet investor demand, sold and resold as many of these securities as they could through bundling and creating new “structured products,” but the demand was practically insatiable.


pages: 433 words: 125,031

Brazillionaires: The Godfathers of Modern Brazil by Alex Cuadros

affirmative action, Asian financial crisis, big-box store, BRICs, cognitive dissonance, creative destruction, crony capitalism, Deng Xiaoping, Donald Trump, Elon Musk, facts on the ground, family office, high net worth, index fund, invisible hand, Jeff Bezos, Mark Zuckerberg, NetJets, offshore financial centre, profit motive, rent-seeking, risk/return, Rubik’s Cube, savings glut, short selling, Silicon Valley, sovereign wealth fund, stem cell, The Wealth of Nations by Adam Smith, too big to fail, transatlantic slave trade, We are the 99%, William Langewiesche

An argument in favor of corporate buybacks is that shareholders will spend the money more wisely than corporations with excess profits. But actual productive investment has declined in recent years. Instead, these payouts may be financing increased luxury consumption and campaign finance by the rich: Justin Fox, “How Rich Investors Use All That Buyback Cash,” Bloomberg View, November 11, 2015. Also, much of the money is apparently being hoarded—a phenomenon economists refer to as the global savings glut. 212CBMM. Details in Cristiane Lucchesi and Alex Cuadros, “Brazil’s Richest Family Forging $13 Billion Niobium Dream,” Bloomberg, March 13, 2013. 212more made money from money, through investments. In Erin Carlyle, “How Self-Made Forbes 400 Billionaires Earned Their Money,” Forbes, September 18, 2013. 212U.S. government agencies developed GPS. These points have been highlighted by the economist Mariana Mazzucato. 212Bill Gates himself.


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

What are the implications of the crisis and the recovery outside the U.S.? That is one of the things I got very wrong. Look at how well many countries outside the U.S. are doing; it is the decoupling theory. I thought a crisis in debtor countries would drag down surplus countries as well. Not for long, it seems. China is the most obvious example; their fiscal stimulus was huge and so far pretty effective. With perfect hindsight, it makes sense; in a global savings glut environment, when interest rates stay low, you want faster domestic demand in the high savings/creditor countries. That leans against contracting demand growth in the debtor economies. As the U.S. consumer spends less out of income, the Chinese consumer spends more. That helps absorb excess capacity in China and helps limit the global downturn. Increased savings in the U.S.—leading to a narrowing of the U.S. current account deficit—is matched by increased spending and a narrower surplus abroad.


pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, business cycle, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, full employment, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, Kickstarter, Kitchen Debate, land reform, land tenure, liberal capitalism, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, mass immigration, means of production, megacity, Mikhail Gorbachev, new economy, Pearl River Delta, Pierre-Simon Laplace, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, undersea cable, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, World Values Survey

Between 1840 and 1940, up to 58 million Europeans migrated to the Americas, 51 million Russians to Siberia, Central Asia and Manchuria, and 52 million Indians and Chinese to South-east Asia, Australasia or the Indian Ocean rim.51 Up to 2.5 million migrants from South and East Asia also travelled to the Americas. One in seven of the US population was foreign-born in 1910, a record that has yet to be surpassed.52 Capital, too, flowed around the globe. Britain was the world’s banker, exporting prodigious amounts of capital to the rest of the world; perhaps contemporaries should have praised the English ‘savings glut’ rather than grumbled about imperialism. In the peaks of the overseas investment booms – 1872, 1887 and 1913 – the British current-account surplus exceeded 7 per cent of GDP.53 British firms stood ready to export not just cotton, but the machinery to manufacture cotton and the capital necessary to buy it. Yet perhaps the most remarkable expression of this first globalization was sartorial. With extraordinary speed, a mode of dressing that was distinctly Western swept the rest of the world, consigning traditional garb to the dressing-up basket of history.


pages: 585 words: 151,239

Capitalism in America: A History by Adrian Wooldridge, Alan Greenspan

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, agricultural Revolution, air freight, Airbnb, airline deregulation, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bonfire of the Vanities, Bretton Woods, British Empire, business climate, business cycle, business process, California gold rush, Charles Lindbergh, cloud computing, collateralized debt obligation, collective bargaining, Corn Laws, corporate governance, corporate raider, creative destruction, credit crunch, debt deflation, Deng Xiaoping, disruptive innovation, Donald Trump, edge city, Elon Musk, equal pay for equal work, Everybody Ought to Be Rich, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, fixed income, full employment, George Gilder, germ theory of disease, global supply chain, hiring and firing, income per capita, indoor plumbing, informal economy, interchangeable parts, invention of the telegraph, invention of the telephone, Isaac Newton, Jeff Bezos, jimmy wales, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, labor-force participation, Louis Pasteur, low skilled workers, manufacturing employment, market bubble, Mason jar, mass immigration, means of production, Menlo Park, Mexican peso crisis / tequila crisis, minimum wage unemployment, mortgage debt, Myron Scholes, Network effects, new economy, New Urbanism, Northern Rock, oil rush, oil shale / tar sands, oil shock, Peter Thiel, plutocrats, Plutocrats, popular capitalism, post-industrial society, postindustrial economy, price stability, Productivity paradox, purchasing power parity, Ralph Nader, Ralph Waldo Emerson, RAND corporation, refrigerator car, reserve currency, rising living standards, road to serfdom, Robert Gordon, Ronald Reagan, Sand Hill Road, savings glut, secular stagnation, Silicon Valley, Silicon Valley startup, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, stem cell, Steve Jobs, Steve Wozniak, strikebreaker, supply-chain management, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, total factor productivity, trade route, transcontinental railway, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Unsafe at Any Speed, Upton Sinclair, urban sprawl, Vannevar Bush, War on Poverty, washing machines reduced drudgery, Washington Consensus, white flight, wikimedia commons, William Shockley: the traitorous eight, women in the workforce, Works Progress Administration, Yom Kippur War, young professional

The policy of keeping interest rates low began as much as six years before the financial crisis, driven by worries that America might be headed for Japanese-style deflation. (This was admittedly unlikely, but if it happened, would have inflicted extensive damage to the economy.) They also fail to take into account the fact that the Federal Reserve’s ability to influence interest rates through the federal funds rate (which is the only interest rate that the Fed controls) has been limited by the global savings glut. The “easy money” critics are right to argue that a low federal funds rate (at only 1 percent between mid-2003 and mid-2004) lowered interest rates for ARMs. But originations of ARMs peaked two years before the peak in home prices. Market demand obviously did not need ARM financing to elevate home prices during the last two years of the expanding bubble. THE GREAT STAGNATION One reason the 2008 financial crisis did not develop into a Great Depression, as happened in the 1930s, was the superior quality of the official response.


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

What would a Chinese National Health Service look like? Part of the spike in Chinese savings rates can be dated back to a pension reform that severely limited retirement payouts to state workers. Financial markets will need to develop to help the Chinese masses save and smooth their incomes over time. In China, however, the experts refute the notion that high savings really are the problem. The flipside of the ‘savings glut’ in China that America complains about is the ‘investment famine’ in the rest of the world that China is only too keen to point out. Even the management consultants McKinsey & Co. – those high priests of Western globalisation – calculate that there is a $20 trillion investment shortfall in infrastructure around the world, as Western countries have drastically slashed their investment budgets.


pages: 566 words: 163,322

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

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

In the nineteen nations of the Eurozone, the average current account deficit reached 1.6 percent of GDP in 2008, but that deficit gave way to a surplus of 2.4 percent by 2014. After having collapsed by 2007, the link between domestic saving and domestic investment has also returned to where it was in 1980. Once again, to the extent countries are investing at all, most are funding that investment largely from their own savings.‡ The concern in the post-crisis era is an emerging “savings glut,” created by the lack of investment opportunities. A number of forces are contributing to this glut, but two of the most important are slower growth in the emerging world and the related slump in commodity prices. In the 2000s investment increased as a share of global GDP, but all that increase came in the emerging world, where the slowdown in economic growth in the 2010s has been particularly sharp.


pages: 603 words: 182,781

Aerotropolis by John D. Kasarda, Greg Lindsay

3D printing, air freight, airline deregulation, airport security, Akira Okazaki, Asian financial crisis, back-to-the-land, barriers to entry, Berlin Wall, big-box store, blood diamonds, borderless world, Boris Johnson, British Empire, business cycle, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, Charles Lindbergh, Clayton Christensen, cleantech, cognitive dissonance, commoditize, conceptual framework, credit crunch, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, deskilling, digital map, disruptive innovation, edge city, Edward Glaeser, failed state, food miles, Ford paid five dollars a day, Frank Gehry, fudge factor, full employment, future of work, Geoffrey West, Santa Fe Institute, George Gilder, global supply chain, global village, gravity well, Haber-Bosch Process, Hernando de Soto, hive mind, if you build it, they will come, illegal immigration, inflight wifi, intangible asset, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), intermodal, invention of the telephone, inventory management, invisible hand, Jane Jacobs, Jeff Bezos, Joan Didion, Kangaroo Route, Kickstarter, knowledge worker, kremlinology, low cost airline, Marchetti’s constant, Marshall McLuhan, Masdar, mass immigration, McMansion, megacity, Menlo Park, microcredit, Network effects, New Economic Geography, new economy, New Urbanism, oil shale / tar sands, oil shock, peak oil, Pearl River Delta, Peter Calthorpe, Peter Thiel, pets.com, pink-collar, pre–internet, RFID, Richard Florida, Ronald Coase, Ronald Reagan, Rubik’s Cube, savings glut, Seaside, Florida, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, spinning jenny, starchitect, stem cell, Steve Jobs, supply-chain management, sustainable-tourism, telepresence, the built environment, The Chicago School, The Death and Life of Great American Cities, The Nature of the Firm, thinkpad, Thomas L Friedman, Thomas Malthus, Tony Hsieh, trade route, transcontinental railway, transit-oriented development, traveling salesman, trickle-down economics, upwardly mobile, urban planning, urban renewal, urban sprawl, walkable city, white flight, white picket fence, Yogi Berra, zero-sum game

According to the Chinese National Bureau of Statistics, China’s GDP more than tripled and its exports quadrupled during the long boom between 9/11 and the crash; the real figures are likely much higher. Could they have caused the crisis? The Great Recession’s roots have proved impossible to trace, but at the macro level there’s consensus that “global economic imbalances” were to blame. China’s factory workers had produced too much and consumed too little—what future Federal Reserve chairman Ben Bernanke had blithely referred to in 2005 as a “global savings glut”—while Americans had done the opposite. The historian Niall Ferguson dubbed their codependency “Chimerica” to underscore how dangerously they’d become entwined, with China’s savings financing America’s debt in order to keep its factories humming. In the aftermath, Ferguson led a chorus of critics calling for the dismantling of Chimerica. A “rebalancing” was necessary; Chinese consumers needed to pick up the slack, buying more of their own goods instead of sending them abroad.


pages: 593 words: 189,857

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

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

We didn’t think it made sense to create more uncertainty about the path of monetary policy just to keep investors guessing and induce more volatility. That concern grew when our gradual increases in the short-term federal funds rate failed to boost long-term interest rates, a situation Greenspan dubbed “the conundrum.” Bernanke, then a member of the Fed board of governors, called this the consequence of a “global savings glut,” explaining that a flood of money from newly opened markets with lots of savings, such as China, was holding down borrowing costs, offsetting our efforts to shrink our own money supply. That seemed right to me. The Fed wasn’t fueling the credit boom with loose policy anymore—we raised rates to 5.25 percent by 2006, well above the underlying inflation rate—but there was still an awful lot of money sloshing around.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

"Robert Solow", airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, global pandemic, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

Louis Cardinals, 87 Salk, Jonas, 206 sample sizes, 44, 338–39 San Andreas Fault, 158–59 Sandberg, Ryne, 102 Sanders, John, 94–98, 101, 103, 105 S&P 500, 24–25, 197, 324, 339, 347, 365–66, 462, 499–500, 503 CFOs as overestimating ability to forecast, 359 5–year average return on, 351 1–year return on, 350 P/E ratio of, 349, 350, 351 10–year average return on, 351 20–year return on, 350 San Francisco, Calif., 149, 160, 219n, 221–23, 222, 225, 476 San Simeon, Calif., 160 Santorum, Rick, 217, 333 SARS, 229 satellite temperature record, 394 Saturn, 242–43 savings glut, 31 scenario uncertainty, 392–93 Schelling, Thomas, 419, 420, 510 Schlumberger, William, 262 Schmalkaldic War, 4 Schmidt, Gavin, 390–91, 392, 399, 405, 409 Schneier, Bruce, 439, 443 Schoolhouse Blizzard, 122–23 Schwarzenegger, Arnold, 160, 290 science, 10 as deliberative process, 284 Industrial Revolution and, 6 progress of, 1, 4, 7, 112, 243, 406, 410–11, 447 Science, 395 scientific determinism, 112, 113, 241, 242, 249, 448 scientific method, 9, 230, 256–57, 257 Scottish Civil War, 4 scouts, 76, 77 biases of, 91–93, 102 budget for, 99 PECOTA vs., 88–90, 90, 91, 102, 105, 106–7 statheads vs., 86, 88, 128 search trees, 284, 285 sea-rise levels, 385 Seattle, Wash., 150 Securities and Exchange Commission, 24, 353 security theater, 439 self-awareness, 328 self-canceling predictions, 219–20, 228 self-confidence, 97 see also overconfidence self-fulfilling predictions, 216–19, 353 semiconductor companies, 186 semistrong efficient-market hypothesis, 341 Senate, U.S., 62–63, 63, 69 Energy Committee of, 370 see also Congress, U.S.; House of Representatives, U.S.


pages: 351 words: 102,379

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

affirmative action, Andy Kessler, Asian financial crisis, Berlin Wall, break the buck, BRICs, business cycle, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Emanuel Derman, Fall of the Berlin Wall, fear of failure, fixed income, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise

Wall Street firms had debt to capital ratios of 32 to 1. When it worked, this strategy worked spectacularly well, validating the industry’s complex models and generating record earnings. When it failed, however, the result was catastrophic. The Wall Street juggernaut that emerged from the collapse of the dot-com bubble and the post-9/11 downturn was in large part the product of cheap money. The savings glut in Asia, combined with unusually low U.S. interest rates under former Federal Reserve chairman Alan Greenspan (which had been intended to stimulate growth following the 2001 recession), began to flood the world with money. The crowning example of liquidity run amok was the subprime mortgage market. At the height of the housing bubble, banks were eager to make home loans to nearly anyone capable of signing on the dotted line.


pages: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

"Robert Solow", 8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, carried interest, collateralized debt obligation, collective bargaining, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, full employment, future of work, gender pay gap, George Akerlof, Gini coefficient, glass ceiling, helicopter parent, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, Paul Samuelson, payday loans, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Steve Jobs, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, Winter of Discontent, women in the workforce, working poor, young professional, zero-sum game

See Benedict Carey, “Life in the Red,” New York Times, January 14, 2013, accessed November 19, 2018, www.nytimes.com/2013/01/15/science/in-debt-and-digging-deeper-to-find-relief.html; and Sendhil Mullainathan and Eldar Shafir, Scarcity: Why Having Too Little Means So Much (London: Allen Lane, 2013). ideologically opposed to outright redistribution: See Rajan, Fault Lines. This phenomenon also had an international and macroeconomic dimension. On the global savings glut, see Martin Wolf, The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis (London: Allen Lane, 2014). an almost actuarial logic: These observations attribute debt and financialization to deep structural—and in this sense necessary—features of social and economic arrangements. But contingency of course also played a role. For example, it mattered to the inflation of the housing bubble that it is not practicable to make money off falling house prices by selling short individual houses.