The Fed’s New “Operation Twist”: Twisted Logic

Gerald Epstein

The Federal Reserve announced on Wednesday (December 16) that it would raise policy interest rates by ¼ to ½ of 1 percent, ending the seven year policy of keeping Fed interest rates near zero, and would embark on a path of “gradual” interest rate increases in order to “normalize” interest rates. This announcement had been long expected by pundits, economists and the financial markets, and, more to the point, had long been pushed by Wall Street and their supporters. It was telling that the first question asked by a reporter in Fed Chair’s Janet Yellen’s press conference following the announcement was not a question at all. The reporter blurted out a sigh of relief: “Finally!” he exalted. The Financial Times’ Lex Column headline:  “U.S. Monetary Policy At Last.”

In fact, the financial media have been huge cheerleaders for a rate hike.  In the months leading up to this announcement, much of the business press had been pushing for an increase. In September, when the Fed did not raise rates, much of the financial press ran headlines like the this Wall Street Journal headline: “The FED Blinks.” The Journal was not alone with phrases like: “the open market committee sat on its hands.” Blinking and hands sitting: these suggest lack of courage, weakness and worse. Neil Irwin of the New York Times, personalized it to Janet Yellen with a headline on September 17: “Why Yellen Blinked on Interest Rates.”

Well, yesterday, Yellen did not blink and the financial press and many economists and pundits were clearly pleased. Yet, as the thoughtful members of the press and economists pointed out, economic conditions are not much better, and in some ways are worse, in December, than they had been in September. Dean Baker of the Center for Economic Policy Research (CEPR) wrote almost immediately after the decision multiple reasons why data do not support a decision to raise rates: He points out that while the official unemployment of 5% is not particularly high, “most other measures of the labor market are near recession levels.” The percentage of the workforce working part time but who really want full time jobs is near the highs reached after the 2001 recession. The percentage of workers willing to quit their jobs to look for a better job is also at near recession highs. “If we look at employment rates, the percentage of prime-age workers (ages 25-54) with jobs is still down by almost three full percentage points from the pre-recession peak.” Finally, wage stagnation is still significant, even despite some recent low gains.

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India’s Time to Lead at the WTO

Timothy A. Wise

As we approach the World Trade Organization (WTO) ministerial on December 15-18 in Nairobi, India is leading a group of developing countries insisting that the development goals promised in Doha in 2001 be achieved. On the other hand, the US, European Union (EU) and Japan have called for a “recalibration” of that agenda, one that leaves agriculture largely off the table.

India is right to lead the fight for reforms in developed countries’ agricultural policies. Cotton should be at the centre of those reforms. A recent study suggests that US subsidies under the 2014 Farm Bill will continue to suppress global cotton prices. Recognising this threat, Africa’s so-called Cotton 4 (or C-4) – Benin, Burkina Faso, Mali, and Chad – tabled a proposal in October calling on the US and other WTO members to make good on the longstanding commitment to address the cotton issue.

India should take the lead on cotton in Nairobi. The C-4 countries need a strong ally now that Brazil has abdicated that role, and India’s cotton farmers stand to lose a devastating US $800 million per year due to US price suppression.

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Capital Flows, Finance-Led Growth and Fragility in the Age of Global Liquidity and Quantitative Easing

The Case of Turkey

Özgür Orhangazi and Gökçer Özgür

Özgür Orhangazi is associate professor of economics at Kadir Has University in Istanbul. Gökçer Özgür is a faculty member in the Department of Economics, Hacettepe University in Ankara. This blog post summarizes a Political Economy Research Institute (PERI) working paper, available here.

As U.S. Federal Reserve Chair Janet Yellen laid the ground for the Fed’s expected interest rate rise, a major concern in the global economy has been how the “developing and emerging economies” will be affected by rising interest rates in the United States. The Financial Times  has recently noted that “[b]y some estimates, $7tn of QE dollars have flowed into emerging markets since the Fed began buying bonds in 2008. Now, a year after the Fed brought QE to an end, companies in emerging markets from Brazil to China are finding it increasingly hard to repay their debts.”

In fact, starting with the Fed’s tapering announcement in 2013, these economies have been on the edge. Turkey is among these economies. Economic growth in Turkey has been dependent on capital inflows since the financial account liberalization in 1989. Inflows of capital led to periods of growth followed by reversals in capital flows and three major financial crises–1994, 1998 and 2001. Following the 2001 crisis, the government brought budget deficits under control through primary budget surpluses and extensive privatizations, reformed the banking system in an effort to increase its resilience, moved to a more flexible exchange rate regime and began increasing its foreign exchange reserve accumulation. In a couple of years, Turkey began receiving large amounts of capital inflows and, after a brief interruption at the time of the global financial crisis, these inflows reached record levels. A long period of economic growth (only interrupted in 2009 by the global crisis), strong bank balance sheets, low levels of government debt, a flexible exchange rate system, and high foreign exchange reserves made the economy seem less vulnerable and more stable compared with the earlier era.

However, the post-2001 growth has been dependent on (mostly short-term) capital inflows and the emergence of an increasingly financialized economy, in which growth has come to depend more and more on the expansion of private sector debt and asset price appreciation. Strong capital inflows and external debt accumulation fueled the domestic credit expansion and asset price rise. Hence, a capital-inflows-dependent, finance-led growth model emerged in the 2000s. This model led to an accumulation of fragilities both in terms of the external accounts and within the domestic economy.

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Neoliberalism Resurgent: What to Expect in Argentina after Macri’s Victory

Matías Vernengo

The election of businessman Mauricio Macri to the presidency in Argentina signals a rightward turn in the country and, perhaps, in South America more generally. Macri, the candidate of the right-wing Compromiso para el cambio (Commitment to Change) party, defeated Buenos Aires province governor Daniel Scioli (the Peronist party candidate) in November’s runoff election, by less than 3% of the vote.

Macri is the wealthy scion an Italian immigrant family that made its money on the basis of government contracts. He went on to work for the family business and later, defying his father’s wishes, became president of the most popular professional soccer club in the country, Boca Juniors. In 2007, he won election as mayor of the capital city, Buenos Aires—the springboard for his eventual election to the presidency.

This is a momentous change in Argentina’s history, since it is the first time that a right-wing party has won the presidency by electoral means. In the past, conservatives had only gained power through military coups or by disguising neoliberal policies under more progressive electoral promises and the mantle of a left-of-center party—as in Carlos Menem’s Peronist government in the 1990s.

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Would Political Integration Emerge for the Euro Area in Terms of a Banking Union?

Philip Arestis and Malcolm Sawyer

A recent report of the European Commission (2015), the Five Presidents’ report on “Completing Europe’s Economic and Monetary Union” by the year 2025, updates relevant plans that were proposed by an earlier European Council Report (2012), the Four Presidents’ report. The stated aim is to gradually achieve a “genuine economic and monetary union,” which would gradually evolve towards “Economic, Financial and Fiscal Union.” What is meant by a genuine union, and would that involve at least de facto, if not de jure, political integration?

The 2012 report proposed closer integration in four main areas: banking union, closer integration of budgetary policies, better coordination of economic policies other than fiscal policy, and a strengthening of democratic legitimating and accountability. Little has been achieved to date, with the exception of some moves towards the banking union objective. But even within the banking union driver not much emerged. The only changes in the latter respect were the agreement on a new structure for prudential supervision of banks under the ECB pinnacle of national central banks and a common approach to resolving failing banks (the single resolution mechanism).

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Banking on Climate Finance for Latin America

Kevin Gallagher

Latin American and Caribbean (LAC) countries arrived in Paris with ambitious national commitments to combat climate change.  Mexico promises to reduce peak emissions even before China’s landmark commitment; Chile has said it will introduce a carbon tax; Brazil has put forth a strategic plan on reducing emissions and deforestation; and Caribbean nations have come with a dire message, reminding the world that their livelihoods are at stake if the world sticks with more business-as-usual, as the Caribbean continues to be subject to ever increasing sea-level rise, flooding, and extreme weather events.

But these promises and plans won’t come cheap. LAC governments will need to make significant financial investments to meet their climate change commitments.  According to the Inter-American Development Bank, the region faces a $100 billion annual gap in financing for climate change mitigation and adaptation.

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What We’re Writing, What We’re Reading

What We’re Writing

Juan Antonio Montecino and Gerald Epstein, The Political Economy of QE and the Fed: Who Gained, Who Lost and Why Did it End? (See also Triple Crisis co-editor Alejandro Reuss’s interview with Gerald Epstein on the distributional impact of Quantitative Easing, here.)

Martin Khor, In the Aftermath of the Attacks

Sunita Narain, Alternative Paris

Matias Vernengo, What to Expect in Argentina (video, in Spanish) (See also Matias Vernengo’s blog posts on Argentina and the recent elections, here and here.)

What We’re Reading

Eileen Appelbaum and Rosemary Batt, Private Equity at Work: When Wall Street Manages Main Street (New book. Read the entire introduction here.)

Robert Pollin, Four Reasons Why We Can and Must Fight Terrorism and Poverty Through Climate Action

Jomo Kwame Sundaram and Vikas Rawal, Emulating the U.S. Opposed by the U.S.

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Right Wing Turn in Latin America?

Matías Vernengo

Regular Triple Crisis contributor Matias Vernengo reflects on the recent presidential election results from Argentina. See his Triple Crisis blog post about the main issues in the election, written just before the run-off round, here.

Just a brief follow up on my recent post on Argentina. By a relative small margin the right wing candidate, Mauricio Macri, won the election. As noted in the previous post the most dangerous result would be an attack on the human rights policies followed by the current government, that have led to jail more than 400 human rights violators (noted that several were acquitted by lack of proofs as it should happen in a civilized society; so this was not witch hunt).

La Nación, the main conservative daily, that benefited economically from the last dictatorship and supported it, had an editorial demanding an end to ‘revenge.’ They called the left of center militants the true terrorists of the 1970s, even though the vast majority had committed no violent crime (and even those that did commit crimes should have been prosecuted according to the law, not tortured, and summarily executed). Macri has suggested that he will not stop the judiciary system from prosecuting human rights violators. But he made it clear that this will not be part of government policy.

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German Financialization and the Eurozone Crisis

Nina Eichacker

Nina Eichacker is a lecturer in economics at Bentley University. This blog post summarizes her recent Political Economy Research Institute (PERI) working paper “German Financialization, the Global Financial Crisis, and the Eurozone Crisis.” Her previous blog post, on financial liberalization and Iceland’s financial crisis, is available here.

Many studies of the Eurozone crisis focus on peripheral European states’ current account deficits, or German neo-mercantilist policies that promoted export surpluses. However, German financialization and input on the eurozone’s financial architecture promoted deficits, increased systemic risk, and facilitated the onset of Europe’s subsequent crises.

Increasing German financial sector competition encouraged German banks’ increasing securitization and participation in global capital markets. Regional liberalization created new marketplaces for German finance and increased crisis risk as current accounts diverged between Europe’s core and periphery. After the global financial crisis of 2008, German losses on international securitized assets prompted retrenchment of lending, paving the way for the eurozone’s sovereign debt crisis. Rethinking how financial liberalization facilitated German and European financial crises may prevent the eurozone from repeating these performances in the future.

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