Posts Tagged ‘finance’


Clearly (after reading James Kwak’s review), I’m going to have to include a discussion of Helaine Olen’s book, Pound Foolish, in my ongoing project on the Prosperity Gospel movement.

The underlying problem with financial advice—besides the fact that most of it is wrong, conflicted (in the conflict of interest sense), or covert marketing—is that, even in the best case, it rarely works. The underlying financial problem that most Americans have isn’t that they buy too many lattes or pick the wrong stocks. It’s that they don’t make enough money to begin with, at a time when many necessities like health care and education are getting more expensive. . .

But the big question is why this stuff is so popular. As Olen points out, we haven’t always had a personal finance advice industry, and it’s only recently that financial education has been embraced as the solution to all our problems. One reason, she suggests, is that we live in an age of stagnant real wages and rising inequality. Add that to a culture that fetishizes individualism and rejects government support programs, and you have a market that is ripe for self-proclaimed gurus or self-interested advertising campaigns that claim that you can get ahead by (insert your choice) drinking less coffee, or going into more real estate debt, or buying a variable annuity, or picking the right stocks. The governments (state and federal) that promote financial education are like Marie-Antoinette advising people to eat cake; if they could eat cake in the first place, they wouldn’t need financial education.

Many of the people Olen talked to were too embarrassed by their financial plight to let her use their names in the book. Somehow we ended up blaming ourselves for the fact that we don’t have a decent minimum wage, real national health insurance, subsidized child care that made it easier to hold a job, or long-term unemployment insurance (other than in special circumstances). If we saw individuals’ financial struggles as a political issue—or a class issue—things might be different.


I have to spend the rest of the day preparing Upton Sinclair’s The Jungle for class tomorrow (for the labor section of my course on Commodities: The Making of Market Society). But before I get to that. . .

The campaign against college players forming unions, as exemplified by Patrick T. Harker in his column today, continues to repeat the false impression that what the “student-athlete-employees” are demanding is to be paid for their efforts. (Even Joe Nocera, who has been very good on exposing the NCAA’s mistreatment of college athletes, makes the mistake.) No, what these employees are asking for is a voice in setting and enforcing the rules that govern their employment in NCAA-supervised athletic competitions—nontrivial things like how much time they are forced to spend in preparing for their sports, what majors and courses they can take, whether or not athletes who are injured will be given adequate medical care, and so on. No one—except the cavalcade of critics—is talking about making the athletes paid employees.

Sure, as Mark Thoma explains, rent-seeking behavior can explain at least some of the rise in inequality we’ve seen in recent decades. But why go through such tortured explanations, which require one or another deviation from perfect competition, when we can explain inequality in a much simpler manner, even when there’s perfect competition: surplus-seeking behavior. Because that’s what we need to focus on: the ability of a tiny minority in today’s economy to capture and keep the surplus being produced by the majority of workers. And how do they manage to get that surplus? Through high corporate profits that flow into CEO salaries, the growth of the financial sector, and capital gains, which in turn are taxed at low rates. And then, on top of those “normal” flows of surplus, we can consider various forms of market power that culminate in economic rents, which make the already-unequal distribution of income based on flows of the surplus even more unequal.

Speaking of inequality, how is it possible to write a paper on “Consumption Contagion: Does the Consumption of the Rich Drive the Consumption of the Less Rich?” in which Marianne Bertrand and Adair Morse [pdf] describe yet another departure from the Permanent Income Hypothesis, and never mention Thorstein Veblen and his Theory of the Leisure Class?

And, finally, under the heading of “let them eat flip-flops and cheap lingerie from Macy’s,” Thomas Edsall does a nice job summarizing the literature that explains why American workers might be wary about the claims that everyone gains from free trade and how the arguments of free-trade zealots like Jagdish Bhagwati ring so hollow these days.


Special mention

gF1gk.AuSt.79 Papal-Corrida


Neil Irwin, in commenting on the fact that the per-capita income in London is now 90 percent higher than the rest of Britain (which means it’s twenty percentage points higher than it was in the late-1990s), suggests a modified version of Dutch Disease:

Britain’s Dutch Disease isn’t driven by the export of oil or natural gas, but of something more ephemeral: A safe place for the global elite to park their money. When a Russian oligarch pays $80 million for a house in Knightsbridge, or shifts a billion dollars worth of his assets into British banks, the economic effect is similar to what would happen if he were buying exported oil.

And when Mark Carney and the Bank of England Monetary Policy Committee get together each month to set interest rate policy for the UK, they see a rosier economic picture by looking at the whole of Britain than they would if London were not part of the equation.

Just last week, the bank signaled that interest rate increases may come sooner than it had thought, which pushed up the pound on global currency markets. Surely if Carney & Co. were setting monetary policy only for the UK excluding Britain, they would not be so eager to raise rates.

The result of all this is that businesses across the countryside of Britain have a more challenging competitive environment than they would otherwise, leaving them less able to compete with German or French or American competitors.

Of course, the United States has its own version. It’s called New York City.


Students and friends have been asking me about the current debates concerning monetary policy. I’m certainly no expert on the topic, which means doing a bit of additional reading. And here’s what I’ve come up with.

Walter Bagehot is the name to drop in these discussions (to judge by Ben Bernanke’s talk at the Fourteenth Jacques Polak Annual Research Conference and Brad DeLong frequent references, such as here). So, I went back and read the entirety of Lombard Street: A Description of the Money Market and, in all honesty, I didn’t come away with anything more than what I first learned in Charles Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises [pdf]. To wit, when financial crises occur, there needs to be a lender of last resort, which means some kind of central bank that lends freely, without any kind of ex ante limit, no playing of favorites, and at some penalty to borrowers.

And that’s exactly what happened in the United States after the crash of 2008. Except that it did play favorites, favoring financial institutions (in the United States and around the world) that did gain access to additional capital, whenever and wherever they needed it—but not offering any kind of bailout to homeowners, who were the victims of predatory lending in the first place.

Not surprisingly, a large part of the discussion has been about the consequences of that monetary policy—of, first, price easing (forcing interest rates down to the zero lower bound), and then, quantitative easing (large-scale purchases of long-term government bonds and other securities). Mark Thoma provides the traditional interpretation of how that Fed policy works (or at least is supposed to work). Andrew Huszar, who actually managed the Fed’s quantitative-easing program during 2009-10, questions the wisdom of that program, which in his view has helped Wall Street but little else.

Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.

Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

The McKinsey Global Institute has conducted the first large-scale analysis of the distributional consequences of Fed policy after the crisis. Their conclusion? The entities that have gained from lower interest-rates are central governments (because borrowing costs have been much lower), non-financial corporations (as a result of lower debt-service costs), and banks (at least in the United States, since they’ve been able to take advantage of the spread between borrowing costs and lending rates as well as the fees generated by securitizing the loans they’ve made).


The last piece of the financial puzzle is the one we (or at least I) have tended to understand the least: the shadow banking system. In 2010 (revised in 2012), the New York Fed [pdf] prepared a useful report in which they documented the institutional features of shadow banks, discussed their economic roles, and analyzed their relation to the traditional banking system. It includes a reminder of how important that part of the financial architecture of contemporary capitalism shadow banking has been and continues to be: by June 2007, on the eve of the crash, shadow bank liabilities had grown to nearly $22 trillion, in comparison to traditional banking liabilities of $14 trillion. And while the shadow banking system has contracted substantially since then, there are indications it’s on the rise again.


Which, ironically, takes us back to Bagehot.

While on the surface of it the modern banking system looks quite different from the one that prevailed in mid-nineteenth century England, Perry Mehrling et al. [pdf] beg to differ:

At its core, modern shadow banking is nothing but a bill funding market, not so different from Bagehot’s. The crucial difference between his world and ours is the fact that Bagehot’s world was organized as a network of promises to pay in the event that someone else doesn’t pay, whereas our own world is organized as a network of promises to buy in the event that someone else doesn’t buy. Put  another way, Bagehot’s world was centrally about funding liquidity, whereas our world is centrally about market liquidity.

In consequence, Bagehot’s “lender of last resort” has had to become a “dealer of last resort,” which involves (as we have seen) a commitment to purchase some set of well-defined prime securities and, with it, the willingness to accept as collateral a significantly larger set of securities in order to put a floor on their price in times of crisis.

What we’re left with then is a Fed that is quite capable of stemming a financial panic, once it begins to happen, but is no more capable than in Bagehot’s time of actually preventing the recurring manias, panics, and crashes that characterize a capitalist economy.

Chart of the day

Posted: 2 November 2013 in Uncategorized
Tags: , , , ,


As expected, a year after the crash, 2009 was a bad year for the 400 richest Americans.

However, as James Stewart explains, that supposedly bad year was actually pretty damn good, especially in comparison to everyone else:

That’s the year that market averages hit their post-financial-crisis lows, and prices of nearly all assets plunged. Since the superrich depend disproportionately on assets, rather than earned income, they suffer more during hard times for financial markets since more of their assets are at risk, or so the theory goes.

Plenty of people did get hit in 2009, including people at the very top. But all things are relative. The fortunate 400 people with the highest adjusted gross incomes still made, on average, $202 million each in 2009, according to Internal Revenue Service data. And this doesn’t even count income that doesn’t show up as adjusted gross income, such as tax-exempt interest.

Yet the top 400 paid an average federal income tax rate of less than 20 percent, far lower than the top rate of 35 percent then in effect.


Do Eugene Fama and Robert Shiller, two of this year’s laureates for the Nobel economics prize, make odd bedfellows?

On one level, certainly. Fama has no idea what a financial bubble might be, while Shiller sees bubbles all around us. Yanis Varourfakis agrees:

The moment I heard that Fama and Shiller (together with Hansen) were awarded the latest pseudo-Nobel in Economics, my initial thought was: What next? A Darwin Prize to some Arch Creationist? The Award for Top Seamanship to the Titanic’s captain?

But then I quickly changed my mind. Awarding this ‘Nobel’ to both Fama and Shiller was a brilliant hedge. One that can only be bested by awarding the Physics Nobel to Galileo and to the Inquisitor who condemned him.

But it also makes perfect sense to award the prize to both Fama and Shiller—not as a hedging of bets or a splitting of the difference but because, at another level, they’re in perfect agreement: both of them want to see more markets. This is one Tyler Cowen gets right:

Robert Shiller is best known for warning about the internet stock market bubble and later the housing bubble. What is most impressive to me, however, is that most people who think that markets can be inefficient are anti-market. Shiller’s solution to market problems, however, is more markets! The housing market, for example, has traditionally had two problems. Since each house is unique there has been no market index of housing prices so that people couldn’t easily see bubbles and if they could see them on the ground there was no easy way to short the market (to try to profit from the bubble in a way that would moderate the bubble). Moreover, because there haven’t been good housing indexes a very large amount of each average person’s wealth has been tied up with an asset that can fluctuate substantially in price. Most house buyers, in other words, are putting all their eggs in one basket and crossing their fingers that the basket doesn’t go bust. In recent years, that has been a very unfortunate bet.

Shiller’s solution to the problems in the housing market has been to make the market better—he created with Case and Weiss–the Case-Shiller Index. For the first time, it’s possible to see in real time housing prices and compare with averages over time and it possible to buy options and futures on the index which will help for forecasting. Moreover, it’s possible that in the future insurance products can be built based on local versions of the index–thus you could insure yourself against big declines in the price of housing in your neighborhood.

Shiller’s housing index is also a window into how macro markets could also be used to create livelihood insurance, a type of private unemployment insurance. Moral hazard and adverse selection make it difficult to protect any single individual from unemployment but indexes in the unemployment rate of dentists or construction workers could be used to provide some insurance for workers in these fields when conditions in their entire industry are poor.

So, this year’s decision is perfectly consistent with a long line (stretching back to 1968) of market-friendly prizes from the Nobel economics committee.

Plus, as one former student wrote to me this morning, “quite overwhelmed by that unprecedented gender-balance of the (not-really) nobel prize.” It is still the case that not one female economist (and thus with the exception of political scientist Elinor Ostrom, in 2009) has ever been awarded the Nobel Memorial Prize in Economic Sciences.

Fama and Shiller, together, may or may not be odd but they are certainly bedfellows.

Obama Summers

Barack Obama will name former Treasury Secretary Lawrence Summers as chairman of the Federal Reserve Board, Japan’s Nikkei newspaper reported today.

This is the same Summers who, back in 1997 (when he was the deputy Treasury secretary under Robert Rubin, whom he would succeed as Treasury secretary in 1999), was playing the End Game of financial deregulation with Timothy Geitner and the “Financial Leaders Group.”

And the Summers who, as undersecretary of the Treasury, helped Andrei Shleifer [pdf] obtain grants to “reform” the Russian economy and make investments for personal gain, and who was forced to resign from Harvard’s presidency because of financial conflict of interest questions concerning his relationship with Shleifer.

The Summers who, while president of Harvard, forced Cornel West to leave but hired Harvard’s ignorant gay-bashing bloviating right-wing infotainment historian Niall Ferguson.

And, finally, the same Summers whose consulting position with Citigroup and many other financial institutions would create, if not actual conflicts of financial interest, at least the appearance of such conflicts if he were appointed as head of the Federal Reserve.

Only in America—coming up on the fifth anniversary of Lehman Brothers’ spectacular failure, in the wake of the most severe financial crash since the First Great Depression—would such a nomination be even a possibility.


In neoclassical economics, everything comes down to flexible markets. And in neoclassical macroeconomics, everything comes down to the labor market, which should follow the rules of any other market, like the market for oranges.* Hence, the neoclassical lamentation that wages are downwardly rigid.**

As neoclassical economists understand it, if only nominal wages would decline in the face of significant unemployment, an equilibrium between the quantity supplied of and the quantity demanded of labor would be achieved and unemployment itself would cease to exist (because the number of people looking for work would exactly equal the number of jobs being offered by employers). In such a neoclassical world, there aren’t any financial bubbles and crashes, no problems of aggregate demand, no decisions by employers not to hire additional workers even with hoards of cash on hand. It’s all about the inflexibility of the labor market.***

The latest report from the Federal Reserve Bank of San Francisco tells exactly this story. For reasons the authors can’t seem to fathom, employers were hesitant to reduce wages and workers reluctant to accept wage cuts in the midst of growing unemployment. (What an idea! Employers don’t want to risk losing the workers they have while the only alternative for workers who have managed to keep their jobs is to do what they can to resist wage cuts.) Not only did that wage rigidity cause high levels of unemployment; in their view, it created “a significant buildup of pent-up wage cuts” that “will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels.”

What they obtain, then, is their second-best option: although nominal wages didn’t in the end fall, the slow growth in nominal wages along with creeping inflation has meant that real wages for different groups of workers have either stagnated or declined. Their hope, then, is that “slower wage growth also means businesses are able to hire more workers, which stimulates the demand for labor and pushes the unemployment rate down further.”

That’s how the neoclassical model is supposed to work: squeezing workers in order to induce employers to hire more labor and thus to reduce unemployment—just like the market for oranges. The presumption, of course, is that private employers will in fact create more jobs and hire more workers and not use their increased profits for some other purpose, such as hoarding cash, buying back stock, rewarding CEOs, investing in new labor-saving technologies, or participating in the financial casino.

Alternatively, we might consider keeping the market for oranges and abolishing the market for labor entirely.


*The analogy to the market for oranges comes from Rajiv Sethi:

What I cannot understand is why people of considerable intelligence persist in conducting a partial equilibrium Walrasian analysis of the labor market, as if we were dealing with the market for oranges. Please stop it.

**And, truth be told, it’s not just neoclassical economists. I once had a dean and a department chair who actually wanted to decrease the salaries of some faculty members who, in their view, were not productive enough. They, too, lamented that faculty salaries were downwardly rigid. They opted, instead, to increase salaries at less than the rate of inflation, which of course resulted in a decrease in real salaries. That achieved the punishment they wanted, only more slowly than they desired.

***Keynesian economists, of course, have a different view. Their argument is that wage flexibility would actually make matters worse, because a fall in nominal wages would lead to deflation and a resulting downward spiral of prices and aggregate demand (based on declining consumption and investment).


Paul Krugman [ht: br] has discovered that, under current conditions, finance may be unproductive.


This, it seems, is the first time Krugman has recognized that the finance may in fact be a socially useless sector of economic activity—enriching a few and laying waste to the rest of the economy.

Actually, all economic theories make some sort of distinction between productive and unproductive labor. The Physiocrats, for example, argued that the agricultural sector was productive and all other sectors (such as manufacturing) were unproductive. Adam Smith, a critic of the Physiocrats, made a different distinction: between the productive labor of manufacturing and the unproductive labor of domestic servants. Karl Marx, famously, picked up Smith’s argument and turned it in a different direction: focusing on labor that was productive of surplus-value (e.g., the work performed by the producers of capitalist commodities) and labor that was unproductive because it did not produce surplus-value (e.g., the labor of those who supervised the labor of the productive workers as well as the labor performed in sectors like trade and finance, all of which was paid out of distributions of surplus-value produced elsewhere). Even neoclassical economists make a productive/unproductive distinction: in their case, between the productive labor of the private sector (including, of course, finance) and the unproductive labor of government workers.

Krugman really should have cited Marx in order to make the point that finance is an unproductive sector of the economy: it doesn’t produce surplus-value but, instead, “shares in the booty” of the surplus-value created during the course of producing capitalist commodities (whether goods or services). Instead, for reasons only he knows (neoclassical or Ivy League comradery, perhaps?) he relies on Paul Samuelson to identify finance as unproductive economic activity.

All of the various groups of economists (including Krugman) are, in one way or another relying on a distinction between socially useful and socially useless areas of economic activity and, therefore, on some sense of what society is and can be. Thus, for example, while neoclassical economists want to see a society based almost entirely on private property and free markets, Marxists want to focus on the contradictions created by the capitalist appropriation and distribution of surplus-value—and then to make the transition to a society in which those who actually perform surplus labor are the ones who collectively appropriate it.

In such a noncapitalist context, finance might actually become a socially useful activity.