On July 26, as traders were once again deserting Spain’s government bonds, setting up the risk of a default and a deeper crisis of the euro, Mario Draghi, president of the European Central Bank surprised and delighted financial markets. Speaking off the cuff in London, he vowed to do “whatever it takes” to save the European economy.
The voters in France and Greece have rejected the parties of austerity. But it is not yet clear that the party of growth can deliver the recovery that the citizenry wants. On both sides of the Atlantic, the obstacles are more political than economic.
In Europe the conventional wisdom, enforced by Germany and the European Central Bank, still holds that the path to growth is budget restraint. Unfortunately, the more that budgets are tightened, the more economies shrink and the more revenues fall. No large economy has ever deflated its way to recovery.
The Federal Reserve, in a remarkable acknowledgement of how soft the economy is, has disclosed a vote of its open market committee to keep short term interest rates close to zero for at least three more years—until late 2014. This means that the Fed will keep pumping money into the economy by purchasing bonds at whatever level is required.
It’s Friday! Which means another round of bad news for the economy. In this case, the Commerce Department has revised its assessment of economic growth for the second quarter. At the time, economists had estimated 1.3 percent growth for the quarter – sluggish, but an improvement over the first quarter, when the economy grew by an anemic 0.4 percent. The revision shows 1 percent economic growth for the second quarter, a sharp drop and lower than the decline expected by economic analysts.
I have been to this conference before. The critics of standard economics make a devastating critique of the unreality of the conventional economic model. It operates outside of historic time, makes absurd assumptions about self-correcting markets, ignores self-reinforcing behaviors, and excludes shocks that cannot be modeled, as well as cases of plain corruption. The case is just irrefutable, more now than ever, since the financial collapse.
George Soros uses the term “reflexivity” to describe tendency of actual economies to defy the premise that the ideal economy will move towards equilibrium. He made his fortune by understanding these irrationalities better than others, and investing accordingly.
Via Kevin Drum, would you believe that, despite being paid huge amounts of money in bonuses -- money we were told was necessary to garner top talent -- some bankers are bad at their jobs? Believe it!
Some of the star financial advisers who were promised six- or seven-figure payments to jump ship have been huge disappointments, failing to generate profits for their new employer. Others quickly abandoned the brokerage firm that wooed them.
Yesterday, the always-fantastic anonymous lawyer behind the blog Economics of Contempt made a discomfiting observation: With only four members on the Federal Reserve's Board of Directors, the central bank couldn't use its emergency powers -- which require five directors -- in case, say, an international crisis like the recent Greek episode caused a run on an American money-market fund. That's a very scary prospect, especially given how critical the Fed's intervention had been during the 2008 crisis. Without Fed backstopping, a financial crisis could spin out of control.
One upcoming concern for the financial-reform conference is what to do about a resolution fund. Under the House bill, regulators would collect a $150 billion tax on big financial institutions so that regulators have funds available to liquidate a firm in the case of its failure. The Senate took its $50 billion liquidation fund out of the bill because Republicans preferred seeing taxpayers fund the resolution of a failing bank, rather than the banks themselves.
While I tend to agree with Ezra Klein’soverall argument about the need to move on financial regulation now, he misses some key points about how Chris Dodd’s bill deals with the Too Big To Fail problem.
Noam Scheiberconsiders the problem of Too Big To Fail, writing that skeptics of "breaking up the banks" who focus on the fact that size wasn't the major factor that lead to the crisis are merely gaining a "rhetorical advantage." Linking to James Kwak, who admits that the problem is not just size but other factors, Noam concludes:
Why don't we call it "too spooky to fail" and agree that we don't want to live with anything like it.
ViaKevin Drum, Steve Waldman has a smart post about the difference between asset and consumer price inflation, and how inequality contributes to asset bubbles. Essentially, the monetary policy constructed during the "Great Moderation" of the nineties and oughts created an untenable situation where the wealthy were able to invest, driving up asset prices into a bubble, and the middle class relied on credit to fund their purchases as wages stagnated. But ...
Whenever we talk about consumer credit markets -- Adam and I have twoarticles up today on the topic -- someone usually wonders whether or not serious consumer financial protection would have prevented the financial crisis.