---------- Forwarded message ---------- From: Dante-Gabryell Monson <[email protected]> Date: Wed, Dec 14, 2011 at 9:55 PM Subject: Fwd: [gang8] a BoP crisis To: [email protected] http://en.wikipedia.org/wiki/Currency_crisis http://en.wikipedia.org/wiki/Balance_of_payments excerpted from message below : *" BoP problems are at the core of the Eurozone implosion "* ---------- Forwarded message ---------- From: D.J.Bezemer <[email protected]> Date: Wed, Dec 14, 2011 at 12:14 PM Subject: [gang8] a BoP crisis To: Thomas Palley <[email protected]> Cc: [email protected] Hi Tom, Thanks for your reply and I look forward to your paper. The analogy with Virginia is not appropriate, since the nature of transfers differs between the US and EU. Deficit regions by definition need transfers. They come in three forms: fiscal (=gifts), investments (=in return for ownership) and loans (= in return for future payments flows). Within-country transfers are gifts via the fiscal mechanism that do not lead to loss of ownership or future liabilties, hence they are financially and structurally sustainable. They are feasible because of within-country solidarity, in turn based on sound governance. Europeans have no cross-country fiscal solidariy (for good reasons: no sound governance) and they refuse to set up an investment facility for the periphery. So that leaves loans as the only form of transfers. Deficit regions so accumulate liabilties and the thing is financially unsustainable. In sum, BoP problems are at the core of the Eurozone implosion. best wishes, Dirk On 13-12-11, *Thomas Palley *<[email protected]> wrote: Hi Dirk,**** ** ** Thanks for your comments.**** ** ** The intra-euro area trade imbalances are indeed a problem, but I think they are credited with too big a role in creating the crisis. When West Virginia runs a large trade deficit with California it does not cause a crisis, though it does signal the prospect of long term relative decline for West Virginia.**** ** ** I am currently working on a paper about the euro zone which examines these issues. I hope I can finish it in the next month and I look forward to sharing it with you.**** ** ** Best,**** ** ** Tom **** ** ** Thomas Palley**** Associate, Economic Growth Program**** New America Foundation**** Tel: (202)-667-5518**** e-mail: [email protected]**** www.thomaspalley.com**** ** ** *From:* D.J.Bezemer [mailto:[email protected]] *Sent:* Tuesday, December 13, 2011 2:46 PM *To:* [email protected] *Cc:* [email protected] *Subject:* surely it is ALSO (but not exclusively) a BoP crisis**** ** ** Dear Tom,**** ** ** Hi, it's Dirk.**** ** ** This is a good thread.**** ** ** I take that it that your problem is with chracterizing the crisi as ONLY a BoP crisis, not fundamentally the crisis of the ECB refusing to act as true government bank.**** ** ** For surely it is ALSO (but, repeat, not exclusively) a BoP crisis, even with stable exchange rates and low inflation - along the following lines (and I am curious what you and others think of this).**** ** ** The 2002-2008 story: Germany lends to Greece, which returns the money in payment for imports. Germany then invests that money in its stock exchange and in financial markets abroad, by accumulating claims against foreigners (among them Greek banks!). Note that the new money (lending by German banks) that keeps it all going does NOT push up the prices of goods, hence inflation can stay low. In Germany the additional money received back from the Greeks flows into financial investments, so there is no reason why they could not continue to create new money, lend it to Greece, receive it back for in payment imports, invest it in the financial markets, and go on to the next round of lending, all without inflation.**** **** (There is a refinement of this basic story, which does not change its basic message. It assumes that German exports can expand instantaneously in response to the debt-fuelled export demand without increasing prices on the home market. It cannot, of course. But given a drain of money to the financial markets, that drain could account for stable home market prices even with increased demand from abroad. Due to money flowing out of the economy into asset markets, the Germans would have a lower growth in money on the goods markets (due to financialization) as well as lower growth in availability of goods (due to demand from aborad), at stable prices. Wage moderation also helps, of course.)**** **** To finish the story, both countries lead the high life for a couple of years, Greece consuming and Germany growing on exports (their idea of the high life!) Meanwhile Greece accumulates debt and Germany accumulates foreign assets and stock market gains. At some point (say, 2009) Greek debts are so high that ‘the markets’ (including German investors) start worrying and the debt-financed spree ends, prices of foreign assets and stock markets tumble, leaving both disgruntled and ready to blow up the Euro.**** **** The evidence for this below-the-surface BoP crisis? Between 2002 (start of the Euro) and 2008 (last-pre crisis year):**** - -Germany’s current account turned positive, Greece's negative**** - -Germany's financial account turned negative, to the same amount. Germany had been having an inflow of loans and investments, but from 2001 onward it had a large outflow. Very striking.**** - -the German DAX index quadrupled, literally!**** - Greek consumption loans increased almost exactly proportionally (sic!) with their inflows of loans and investments. I checked.**** - all the while, cpi inflation was low between 1% and 2.5 %. Of cuorse asset price inflation was skyrocketing.**** **** So in summary: Germany created money for Greece to borrow, got it back in payment for imports, and invested it in financial assets at home and abroad, plus perhaps a bit extra to push back domestic inflation due to the increased demand (if wage moderation didn't already do that).**** **** Right?**** ** ** cheers, **** Dirk **** On 13-12-11, *Michael Hudson *<[email protected]> wrote:**** *From: *Thomas Palley <[email protected]> Hi Michael, (1) Yes, he is. Martin Wolf has an unerring eye for hitting the stomach rather than the heart; taking a progressive issue and de-fanging it; and occupying progressive space in a way that blocks progressive outcomes. A few weeks ago Wolf was characterizing the euro crisis as due to lack of a lender of last resort. This week he is characterizing it as a balance of payments crisis within the monetary union. (2) Your comments raise two separate issues. 2.a) I agree there is an inevitable link between fiscal policy and financial policy. I like very much the Gardiner – Bezemer characterization of euro’s design stripping away liquidity of government bonds. I have approached the issue from the perspective of speculation and multiple equilibrium (good v. bad) and the need for a government banker. 2.b) Re taxation, I agree governments are untaxing wealth and rentier incomes, but this is a separate issue from 2.a). I have copied the Gang of 8 on this message. If it does not get to them, please share it with them. Best, Tom Thomas Palley Associate, Economic Growth Program New America Foundation Tel: (202)-667-5518 e-mail: [email protected] www.thomaspalley.com *From:* Michael Hudson [mailto:[email protected]]<[email protected]]> *Sent:* Tuesday, December 13, 2011 11:46 AM *To:* Thomas Palley; GANG8 *Subject:* FW: [gang8] FW: Euro lacks a government banker etc. Dear Tom, Is Martin really THAT narrow? Obviously the problem is much more serious. First, a central bank should finance government deficits directly — not merely bail out commercial banks when they make money-losing loans. Second, fiscal policy is a natural complement to financial policy. The banks have sought to un-tax real estate rent, monopoly rent and other “unearned income” as their marketing plan, shifting the tax burden onto labor and industry. The problem is not simply that governments run a deficit. It is that they run a deficit by untaxing wealth and *rentier * income. Right? I think we’re on the same track. Michael ------ Forwarded Message *From: *Gunnar Tomasson <[email protected]> *Reply-To: *<[email protected]> *Date: *Tue, 13 Dec 2011 11:25:00 -0500 *To: *<[email protected]> *Subject: *[gang8] FW: Euro lacks a government banker etc. Dear Gang. Here is Tom Palley’s response. Gunnar *From:* Thomas Palley [mailto:[email protected]]<[email protected]]> *Sent:* Monday, December 12, 2011 10:44 AM *To:* 'Gunnar Tomasson' *Cc:* [email protected] *Subject:* RE: Euro lacks a government banker etc. Dear Gunnar, Thanks for your note. Yes, I see that we are thinking about similar issues, albeit from different starting points. I hope you and your group agree that characterizing the problem in terms of “lack of a lender of last resort”, as Martin Wolf and Paul De Grauwe have done, distorts the focus and blocks an understanding of the issue and the needed reform. Best, Tom Thomas Palley Associate, Economic Growth Program New America Foundation Tel: (202)-667-5518 e-mail: [email protected] www.thomaspalley.com <http://www.thomaspalley.com><http://www.thomaspalley.com/> *From:* Gunnar Tomasson [mailto:[email protected]]<[email protected]]> *Sent:* Monday, December 12, 2011 10:23 AM *To:* [email protected] *Cc:* [email protected] *Subject:* Euro lacks a government banker etc. Dear Mr. Palley. Your recent paper – FT Economists
<http://blogs.ft.com/economistsforum/#axzz1g31Gizzm><http://blogs.ft.com/economistsforum/#axzz1g31Gizzm>' Forum on December 9, 2011 titled "Euro lacks a government banker, not lender of last resort < http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-ban ker-not-a-lender-of-last-resort/#axzz1g31Gizzm> ". – was circulated to the Gang8 group of economists, including Michael Hudson and myself.
Two of our Gang8 colleagues, Geoffrey Gardiner and Dirk Bezemer, wrote a paper along similar lines one or two years ago – see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1687750 Regards, Gunnar Tomasson *From:* [email protected] [mailto:[email protected]]<[email protected]]> *On Behalf Of *Dirk Bezemer *Sent:* Monday, December 12, 2011 10:05 AM *To:* [email protected] *Subject:* [gang8] Gardiner and Bezemer on QE Dear Gunnar, Thanks for linking. The link is: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1687750 And here is a piece by Gavyn Davies (ex Goldman Sachs, ex BBC) on QE3: http://blogs.ft.com/gavyndavies/2011/12/11/central-banks-fire-the-second-barrel-of-qe/#<http://blogs.ft.com/gavyndavies/2011/12/11/central-banks-fire-the-second-barrel-of-qe/> <http://blogs.ft.com/gavyndavies/2011/12/11/central-banks-fire-the-second-barrel-of-qe/><http://blogs.ft.com/gavyndavies/2011/12/11/central-banks-fire-the-second-barrel-of-qe/> <http://blogs.ft.com/gavyndavies/2011/12/11/central-banks-fire-the-second-barrel-of-qe/><http://blogs.ft.com/gavyndavies/2011/12/11/central-banks-fire-the-second-barrel-of-qe/> Dirk On 12/12/2011 15:58, Gunnar Tomasson wrote:
Geoffrey.
Palley, who is based in Washington D.C., contacted me a year ago - he had read and liked something I had published.
Please send me a link to the piece by Dirk and you - I would like to forward it to him.
Gunnar
From: [email protected] <mailto:gang8%40yahoogroups.com><[email protected]> [ mailto:[email protected] <[email protected]> <mailto:gang8%40yahoogroups.com> <[email protected]> ] On Behalf Of G W Gardiner Sent: Monday, December 12, 2011 4:44 AM To: [email protected] <mailto:gang8%40yahoogroups.com><[email protected]> Subject: Re: [gang8] central banking (dys)functions of the ECB
Yes, Palley has got it right. Pity he does not point out that Bezemer and Gardiner targeted this problem over a year ago.
Geoff
From: D.J.Bezemer<mailto:[email protected] <mailto:d.j.bezemer%40rug.nl><[email protected]> <mailto:[email protected]%20%3cmailto:d.j.bezemer%40rug.nl><[email protected]%20%3Cmailto:[email protected]>
Sent: Sunday, December 11, 2011 9:03 AM
To: [email protected] <mailto:gang8%40yahoogroups.com><[email protected]>
Subject: [gang8] central banking (dys)functions of the ECB
dear gang,
Tom Palley wrote a good piece on ft.com about the lack of central banking functions of the ECB, copied below. Scrolling down I noted one Chris Cook responding! Advocating, unsurprisingly, public, government-issued credit aginast tax revenues rather than deficit-based credit.
Dirk
On 11-12-11, Thomas Palley<[email protected] <mailto:mail%40thomaspalley.com> <[email protected]> > wrote:
Dear friends and colleagues,
Please find below an op-ed published in the FT Economists <http://blogs.ft.com/economistsforum/#axzz1g31Gizzm><http://blogs.ft.com/economistsforum/#axzz1g31Gizzm>' Forum on December 9, 2011 titled "Euro lacks a government banker, not lender of last resort < http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-ban ker-not-a-lender-of-last-resort/#axzz1g31Gizzm> ".
Please feel free to share it with others.
Best,
Tom Palley
Thomas Palley
Associate, Economic Growth Program
New America Foundation
Tel: (202)-667-5518
e-mail: [email protected] <mailto:mail%40thomaspalley.com><[email protected]>
www.thomaspalley.com <http://www.thomaspalley.com><http://www.thomaspalley.com/>
Euro lacks a government banker, not lender of last resort
Copyright Thomas I. Palley
In his novel, The Jungle, the American muckraking author Upton Sinclair wrote about the horrendous work and sanitary conditions in the Chicago meat packing industry of the early 20th century. It is sometimes said Sinclair aimed for the heart but hit the stomach. That is because he aimed for progressive social and economic change but instead prompted the founding of the Food and Drug Administration.
The same problem of aiming for the heart and hitting the stomach confounds current discussions of the euro zone's problems. What the euro lacks is a government banker, not a lender of last resort as is widely claimed.
The euro has a lender of last resort in the European Central Bank (ECB) which has dutifully performed that function. Lenders of last resort provide liquidity in financial panics, which is exactly what the ECB did in the financial crisis of 2008-09 and has continued doing via its Lombard lending facility. According to Bagehot's rule, lenders of last resort should lend without limit, to solvent firms, against good collateral - though Bagehot also recommended lending at high rates whereas today's practice is (sensibly) to lend at low rates.
The euro lacks a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. This explains why the U.S. and U.K. can borrow at low rates and remain solvent, whereas Spain, which has a roughly similar deficit and debt profile, is under speculative attack.
The lack of a government banker reflects the euro's neoliberal birthmark. Neoliberalism aims to diminish the role of the state and enhance the power of the market, and this goal is reflected in neoliberal monetary theory which guided the euro's design. The theory argues central banks should control inflation, but there should be complete separation between the central bank and government finances.
By adopting this theory, the euro's architects intentionally changed the monetary/fiscal balance. Whereas previous national monetary systems ensured "fiscal dominance" as central banks served governments, the euro instituted "central bank dominance" by stripping governments of access to central bank help managing public finances. This was done by creating a "detached" central bank that is prohibited from buying government debt. This is fundamentally different from an "independent" central bank which distances its decision making from government, but is allowed to purchase government debt. The Federal Reserve and the Bank of England are both independent but they are not detached. The ECB is detached by design.
The consequences are enormous. Prior national banking systems made governments masters of the bond market. The euro's architecture makes bond markets master of national governments, and that is the problem.
The solution is to create a European Public Finance Authority (EPFA)<http://www.boeckler.de/pdf/p_imk_wp_2_2011.pdf><http://www.boeckler.de/pdf/p_imk_wp_2_2011.pdf>that issues collectively guaranteed debt on behalf of euro zone governments which the ECB is allowed to buy. That would enable the ECB to manage governments' interest rate via open market operations, as does the Federal Reserve and Bank of England. Proceeds from EPFA debt issues would be distributed to countries on a per capita basis so that national governments would control all spending decisions. Country liability for EPFA debt would also be on a per capita basis, and EPFA decision-making would be governed by member countries with voting rights again granted on a per capita basis. That would render EPFA democratic.
The critical feature is EPFA's power to issue debt would be used immediately to finance the roll-over of existing debt at lower rates, and it would also be used on a permanent basis to finance current and future budget deficits. EPFA would therefore be a solution to both the current crisis and the euro's design flaw regarding absence of a government banker.
The great psychoanalyst Sigmund Freud claimed everything we say has psychic sense. That holds for economics too. Characterizing the problem as lack of a lender of last resort <http://www.ceps.be/book/only-more-active-ecb-can-solve-euro-crisis><http://www.ceps.be/book/only-more-active-ecb-can-solve-euro-crisis> obscures the euro's fundamental neoliberal design problem regarding lack of a government banker and subservience of fiscal policy. That is a structural flaw which creates financial fragility and permanent budgetary pressure that shrinks social democratic policy space. Failure to frame the problem accurately blocks identification of the proper resolution, so that policy reform - the intended solution - misses the mark and hits the stomach instead of the heart.
This article was posted in the FT Economists' Forum on December 9, 2011 at < http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-ban ker-not-a-lender-of-last-resort/>
http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-bank
er-not-a-lender-of-last-resort/#. De
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