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.
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).
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?
The Republicans’ Medicaid Cruelty
“The essential American soul,” claimed D.H. Lawrence, “is hard, isolate, stoic, and a killer.” While the rejection by five state governments of the Affordable Care Act’s Medicaid expansion may not precisely illustrate Lawrence’s heated observation, it does suggest a contemporary vein of cruelty in America that is deeply disturbing.
A new study published in The New England Journal of Medicine shows that providing greater medical insurance coverage for the poor has saved lives. Moreover, the ACA’s expansion of Medicaid requires little state money, since the federal government will pick up more than 90 percent of the costs over time, and 100 percent of the costs for the first few years. Yet Texas, Florida, Louisiana, South Carolina, and Mississippi—which together account for more than a sixth of the overall US population—have already rejected the plan, and as many as twenty other states, including New Jersey, Missouri, Iowa, Nebraska, and Nevada, have indicated they may follow suit.
When battered people took on the pesticide industry
Today, I want to tell you a true story of extraordinary courage. The past week, I was in Kasaragod, a district in Kerala, splendid in beauty and with abundant natural resources, but destroyed by the toxic chemical, endosulfan. The pesticide was aerially sprayed over cashew plantations, for some 20 years, in complete disregard of the fact that there is no demarcation between plantations and human habitation in this area. It is also a high rainfall region and so, the sprayed pesticide leached into the ground and flowed downstream. The poison contaminated water, food and ultimately harmed human beings.
This story is known. But the personal battles that make up the story of this poisoned land and its diseased people are not known. More importantly, it is not asked where this story ends?
Credit to Small Enterprises: The silent crisis
A new BIS working paper by Cecchetti and Kharroubi makes a point that is becoming more widely known, especially after the continuing financial crises experienced globally since 2008. This is that the level of financial development is good only up to a point, after which it becomes a drag on growth. In fact, the authors argue that when the focus is on advanced economies, a fast-growing financial sector is actually detrimental to aggregate productivity growth. This is explained by the authors on the grounds that, because the financial sector competes with the rest of the economy for scarce resources, financial booms are not, in general, growth-enhancing.
The recent experience of the United States and now particularly Europe, certainly confirms this – and even established doyens of the world of private finance are now more willing to concede this. But one critical aspect of the failure of financial intermediation is still inadequately recognised and discussed: the inability of the currently constituted private financial system to deliver funds to small and medium enterprises (SMEs), which still account for the bulk of employment not just in developing countries but also in advanced economies.