Greece, Lehman, and the politics of Too Big To Fail

Mark Blyth

The collapse of Lehman Brothers in 2008 introduced three new concepts to the public: Moral Hazard, Systemic Risk, and Too Big To Fail. The first was well-known but misunderstood, the second wasn’t supposed to exist but did, and the third has helped morph the legacy of the 2008 banking crisis, the explosion of government debt across Europe, into a secondary banking crisis with a pernicious twist that is perhaps the real lesson of Lehman.

Before the 2008 crisis, 30 years of “markets-are-good” thinking produced an understanding of the economy where agents with rational expectations reacted to “the fundamentals” to produce efficient market outcomes. Armed with such ideas, regulatory authorities let banks regulate themselves. After all, it was their “skin in the game,” so who better than the self-interested banker to look after the interests of the bank?

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Spotlight G20: Speeding from Hopeful to Hopeless

Ilene Grabel, part of our 2011 Spotlight G20 Series

Remember the WTO– the institution that we loved to hate? We haven’t been hearing much from or about the institution since its 2003 meeting in Cancun Mexico. That meeting marked the emergence of open conflict between wealthy and developing nations on a number of issues (such as agricultural protection). The conflict left the institution frozen and irrelevant. It now stands on the sidelines as policymakers crisscross the globe signing bi- and multi-lateral agreements.

The G20 seems to be outpacing the WTO in the march toward irrelevance.  When it was organized in the early days of the financial meltdown, many progressives (including me) viewed the G20 as an embryo from which new and at least somewhat more inclusive discussions of global economic policy could emerge. In its early days the shock of the global crisis seemed to have engendered a genuine “Keynesian moment.” G20 leaders collectively declared the death of the Washington Consensus, indicted the financial sector for its misdeeds, acknowledged the economic firepower of the rapidly growing developing countries that became new lenders to the IMF, and took tentative steps toward amplification of the voice of developing countries at the IMF and World Bank.

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Spotlight G20: G20 Defers Decision on Financial Transaction Tax Despite Global Support

Kavaljit Singh, Guest blogger

The G20 finance ministers and central bankers have put off an immediate decision to weigh up a global financial transaction tax (FTT) proposal at the forthcoming G20 Summit (Cannes, 3-4 November 2011).

The two-day Ministerial Meeting (14-15 October) in Paris took place against the backdrop of huge protests in US and Europe, galvanized by the Occupy Wall Street movement. At the Paris meeting, G20 finance ministers discussed myriad policy and implementation issues concerning world economy and financial markets. As anticipated, eurozone sovereign debt crisis dominated the discussions and the communiqué pressed Europe to act decisively on resolving the crisis at the forthcoming EU summit next week.

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Whose country is it? Wall Street occupies the regulatory agencies

Steve Suppan, Guest Blogger

The occupation of Wall Street by protestors against financial “innovations,” such as mortgage derivatives, which have devastated the real economy and its people, is beginning its fourth week; the Wall Street occupation of U.S. regulatory agencies, which are supposed to ensure fair and transparent markets, is into its ninth decade.  A vote tomorrow by the Commodity Futures Trading Commission (CFTC) on a weakened rule to reduce bank and hedge fund control of agriculture and energy markets will likely confirm the continued occupation by Wall Street.

Market deregulation, lubricated by a $5 billion lobbying budget from 1998 to 2008, according to Wall Street Watch, is a major cause of the economic crisis from which we are trying to recover. As CFTC Chairman Gary Gensler noted in an October 3 speech, the unregulated market now is seven times the size of the regulated market.

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Occupy Wall Street: All the Power To Them, But Get the Targets Right

Kevin P. Gallagher and Mark Blyth

Last week we paid a visit to the Occupy Boston outpost of the Occupy Wall Street Movement.  The group has pretty much taken over Dewey Square in front of the Federal Reserve.  They had a couple hundred people there, but the numbers seem to be growing by the day. We liked what we felt, though not always what we saw and heard.

What we felt was a brewing angst among activists, working people, and students that something is fundamentally wrong with the way the economy is ‘delivering the goods’ and to whom in the US. They may not know what they are for, but they do know who they are for: who they call the “99 percent”—those of us in the US who are not millionaires, and whose jobs and livelihoods are increasingly threatened.

Also admirable is that they have set up a “Free School University” to educate themselves. And that is where we came in. We were asked to lecture on the “first day of classes.”

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The Dragon’s Shadow: China’s banking system

Jayati Ghosh

On October 10, the Chinese government announced that it will increase its stakes in the four largest commercial banks, which are already largely public-owned. The move is designed to “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.

But why was this move considered necessary at all? Recently, investors have been dumping Chinese bank shares, anticipating a slowing down not just of the economy as a whole, but in particular the property market, which had experienced a bubble of massive proportions. But the underlying concern about the health of Chinese banks reflects a deeper concern, about the extent of entanglement of these commercial banks with the growing “shadow banking sector”.

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The Continuing Heartbreak of Jobless ‘Recoveries’ and Jobless Growth

Arjun Jayadev

The Triple Crisis blog is pleased to welcome Arjun Jayadev as a regular contributor. Jayadev is Assistant Professor of Economics at the University of Massachusetts, Boston. His research focuses on international and macro economics, development, political economy and economics of distribution.

In The European Economy Between the Wars, a passage describes the experience of an unemployed English mechanic during the last depression. After seventeen weeks of being unemployed, the worker describes his desperation:

“It isn’t the hard work of tramping about so much, although that is bad enough. It’s the hopelessness of every step you take when you go in search of a job you know isn’t there”.

And in this recession, the despair of joblessness is equally palpable in the voices of those searching hopelessly for work. A long-term unemployed woman from Maryland reports:

“I have only had 2 interviews in the last 2 years out of hundreds of applications and postings of resumes. I have now gone 3 months without any income at all. I don’t know what to do now….It just seems to me that our Government and society is not recognizing us and really doesn’t care. What kind of people have we become?”

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Watch Your Health and Your Pocketbook: A Bi-partisan Scheme for Regulatory Deform

Gerald Epstein

Right wing politicians in the U.S. have gotten very good at channeling George Orwell: As the world economy teeters on the brink of another economic catastrophe whose precipitating cause was a twenty year project to de-regulate finance in the U.S. and abroad, they insist that the cause of our woes is “job killing” regulations. Never mind that, according to the World Bank, the U.S. ranks 5th in the world in terms of ease of doing business in relation to regulations, and that over the past 5 years, doing business in the U.S. overall has become easier, not harder. The same report shows that in the OECD the ease of doing business has stayed the same or improved since 2006. Yet in the OECD countries 50% more people were unemployed in 2010 than in 2007.

But repeat the “job killing regulation” mantra often enough – and have the echo chamber of the media spread it around relentlessly – and it begins to sink in. All of this serves to soften up the citizenry to accept the corporate goals of killing as many undesirable regulations and to prevent as many new ones. (Of course, they will continue to push for the regulations they like with gusto).

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Prepare now for a new global downturn

Martin Khor

The last two weeks have seen a clear downward shift in expectations on the global economy.  The dominant view now is that the world has slipped into stagnation that may well become a recession.

Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.

Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-9 Great Recession.

If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.  The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.

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Lucas in context, Keynes out of context

Matías Vernengo

Krugman decided to try his hand at history of macroeconomic thought in one of his last posts. That’s great, since history of thought is essential to understand how we got here. It’s also bad, since Krugman is still very much a mainstream author, and misses the point of Keynes’ contributions, and the limitations of neoclassical (or more properly, marginalist) approach. He suggests correctly that the New Classical (NC)/Real Business Cycle (RBC) project was a failure, but both the reasons for that and his interpretation of the Keynesian project are misguided.

The first proposition in Krugman’s reassessment of the recent history of macroeconomics, is that Keynesian models were ad hoc, and assumed wage and price rigidity. The whole of chapter 19 of the General Theory (GT) is about the effects of price and wage flexibility, and how it does not produce full employment. It was with Franco Modigliani’s PhD dissertation, done at the New School for Social Research under Jacob Marschak, that the sticky wage version of Keynesian theory that would dominate the neoclassical synthesis was concocted.
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