A common story holds that the key cause of the financial turmoil in the U.S over the last two decades was the excessively low interest rates. This perspective lays the blame for the financial crisis at the feet of discretionary Federal Reserve policy, and is typically made based on the fact that short term rates such as the federal funds rate or Treasury bill rates had been lower between 2001 and 2011 than in any previous decade. In short, this view claims that rates were “too low for too long.”
Living as a Financial Enclave: Banks and Sovereigns in the EU’s Eastern Periphery
Before the PIIGS entered the collective consciousness of European elites, the East-Central European member states of the E.U. were supposed to be at the root of the European financial woes. Just as the beginnings of the Great Depression were tied to the financial imbroglio of a Viennese bank, it was Austria’s massive exposure to the financial sectors of countries like Hungary or Romania by 2008 that was expected to trigger collapse in the rest of Europe. Yet this did not happen. Why not and with what costs for the economies of the region?
The story of this averted meltdown in the East begins years before Lehman entered a tailspin. After the end of state socialism and especially as these states ran for E.U. membership, the I.M.F. and the E.U. abetted and at times coerced a wholesale transformation of their banking systems. The rules of the game were clear: privatization, deregulation, central bank independence, and trans-nationalization of the interbank market.
How not to manage capital flows: the IMF guide for developing countries
Daniela Gabor, guest blogger
In 2010, the development community sighed in collective relief as the IMF reconsidered its long-standing rejection of capital controls. Development agendas, it was hoped, would hence be pursued without the well-known disruptions caused by large and volatile capital inflows. And since foreign crises now come through capital rather than trade flows, developing countries could draw on the IMF’s expertise to avoid global financial volatility and contain sudden-stops.
China's Rebalancing
It is now generally agreed that China cannot go back to the export-led growth it had enjoyed in the run-up to the global financial crisis even with a return of the US and Europe to vigorous growth. It needs to expand the domestic market by reversing the secular decline in the share of private consumption in GDP, which has been hovering around wartime-like levels of some 35 per cent. It should do so not so much by reducing the household propensity to save as by increasing the share of household income in GDP which has been in a downward trend for almost two decades. This would require a judicious combination of wage, agricultural pricing and tax policies and significantly increased government transfers, particularly to poor rural households, financed with dividends from state-owned enterprises (Export Dependence and Sustainability of Growth in China).
China’s Rebalancing
It is now generally agreed that China cannot go back to the export-led growth it had enjoyed in the run-up to the global financial crisis even with a return of the US and Europe to vigorous growth. It needs to expand the domestic market by reversing the secular decline in the share of private consumption in GDP, which has been hovering around wartime-like levels of some 35 per cent. It should do so not so much by reducing the household propensity to save as by increasing the share of household income in GDP which has been in a downward trend for almost two decades. This would require a judicious combination of wage, agricultural pricing and tax policies and significantly increased government transfers, particularly to poor rural households, financed with dividends from state-owned enterprises (Export Dependence and Sustainability of Growth in China).
The Drought and the Coming Food Price Bubble
As drought ravages the Midwest and the world prepared for its third price spike in five years, Timothy A. Wise sat down with the Real News Network to talk about the implications of the crisis. Drawing on his co-authored report with Sophia Murphy, “Resolving the Food Crisis: Assessing Global Policy Reforms Since 2007,” Wise points out that the international community has failed to address any of the important drivers of the food crisis – climate change, biofuels expansion, financial speculation, the lack of publicly managed food reserves, and strong reinvestment in developing country food production.
The Triple Crisis blog invites your comments. Please share your thoughts below.
Will Hollande go to Germany?
The crisis of the Eurozone shows no sign of resolution and indications of intensification. W.B. Yeats’s image of ‘turning and turning in the widening gyre’, formulated in another period of clouds over the European continent, is as apposite as any other. Is there a way out for Europe from the foreseeable disaster of a disorderly collapse of the euro?
The current approach demands austerity from crisis-hit countries as a quid pro quo for support. It is failing for three reasons. The first is that austerity is having a counter-productive consequence, leading to economic contraction which makes debt-burdens all the more difficult to bear. The second is that austerity-oriented policies are perceived as unjustly punitive and distributively blind, leading to social and political resistance that makes them difficult to implement and sustain. The third is that austerity cannot succeed, by itself, at restoring the confidence of the ‘markets’.
Talking Populist, Walking Plutocrat: Paul Ryan on Dodd-Frank and the Volcker Rule
In a little noted speech to his constituents in May, Paul Ryan decried the “crony capitalism” that he said, prompted the big bank bail-outs of 2008 (though he himself voted for the TARP, and he himself gets massive campaign contributions from big financial firms).
More surprisingly, Ryan effectively endorsed the Volcker Rule, saying: “…if you’re a bank and you want to operate like some non-bank hedge fund, then don’t be a bank. Don’t let banks use their customer’s money to do anything other than traditional banking…”
The Last Days of Pushing on a String
A metaphor attributed to John Maynard Keynes maintains that using monetary policy to fight a severe recession is like “pushing on a piece of string.” When the problem is inflation, pushing up interest rates (pulling on a string) is a pretty effective policy tool — ask anyone who lived through the Volcker recession of the early 1980s. But when rates are pushed down to stimulate economic activity the ‘push’ becomes less and less effective the closer to zero rates get.
The power of this “pushing on a string” metaphor is especially apparent today. The Federal Reserve’s balance sheet shows that, since 2008, “deposits by depository institutions” (i.e. banks) have ballooned from about $30 billion to around $1.5 trillion. Why is all that money sitting at the Fed earning a meager 0.25% nominal interest when those same banks could make a lot more than that by lending it out?
LIBOR – Insider Trading on a Massive Scale
Stephany Griffith-Jones was recently interviewed on The Real News Network on how major banks fixed interest rates to make short term profits and look stronger than they were.
Triple Crisis welcomes your comments. Please share your thoughts below.