At Citizen Vox Micah Hauptman uses the recent Bloomberg revelations (regarding the details of the Federal Reserve’s extraordinary efforts to stabilize the financial system) to frame a discussion of Fed transparency and accountability:

The Fed has vigorously defended its secrecy, claiming that working behind closed doors is necessary to prevent panic in financial markets. According to the central bank, disclosing information about the Fed’s actions would create a stigma for the banks that took advantage of the measures, and cause investors and counterparties to shy away from doing business with them.

But these excuses just don’t hold water. When the Fed spends money, it creates a government liability, for which the public is ultimately on the hook. And when the public is on the hook, it must be done in the light of day.

Hauptman notes the recent formation by Senator Bernie Sanders of a panel of experts, featuring a number of Levy Institute scholars (including James Galbraith, Randall Wray, and Stephanie Kelton), that will make reform recommendations regarding these very issues.

In a recent interview Dimitri Papadimitriou talked about the EU leadership’s failure to prevent the euro crisis from entering its terminal phase and ran through the likely repercussions for the US financial system.  Papadimitriou cites $3 trillion in exposure for US finance, half of which is mutual fund investments in European banks and sovereign debt—and he notes that this doesn’t even include the fallout from any unraveling of credit default swaps.

Unless the European Central Bank steps up as lender of last resort (an announcement that it is willing to engage in unlimited purchases of sovereign debt should be sufficient), we will see the end of the euro project, says Papadimitriou.  He contrasts the Federal Reserve’s $29 trillion worth of pledges to save the banking system with the anemic actions of the ECB (less than half a trillion euros so far).  This is, says Papadimitriou, a truly historic moment we are witnessing, as the European project falls apart before our eyes.

Listen to the interview with Ian Masters here.

Here is another flattering mention of Wynne Godley‘s prescient writings on the euro, this time from John Cassidy’s blog at the New Yorker. (Cassidy sat in on the Keynes side of this week’s “Keynes vs. Hayek” debate.)

Many of Godley’s publications at the Levy Institute (“haven for heterodox thought,” as Cassidy calls it), including his early observations about the exponential growth in private debt that marked the Greenspan economy, can be found here.

Gennaro Zezza, together with Marc Lavoie, is also putting together a new book featuring Wynne Godley’s writings (The Stock-Flow Consistent Approach: Selected Writings of Wynne Godley).  It will be released in early 2012:

This book is the intellectual legacy of Wynne Godley, the famous British economist who was the head of the Department of Applied Economics at the University of Cambridge for nearly 20 years, after having been deputy director of the Economic section at the UK Treasury. These selected writings are useful not only as a summary of the evolution of Godley’s analysis, but also equip economists with new tools for the achievement of sustainable economic growth. Professor Godley’s work always originated from puzzles in the real world economy, rather than from curiosities in economic models, and his work has retained its practicality; the stock-flow models have proved to be effective in predicting recent recessions. These essays present Godley’s challenge to accepted wisdom in the field of macroeconomic modelling, which, in his opinion, did not reflect the economics that he had learned by working on practical matters for the Treasury in the 1960s. Godley developed post-Keynesian traditions and created models which fully integrate theory with the financial system and real demand and output.

There’s an interesting (and unsettling) section of Martin Mayer’s presentation at the Minsky Conference that I’ll quote at length in which he talks about the reception of Hyman Minsky’s work.  Add this to the growing “what’s wrong with the economics profession?” folder:

I have found my own explanation, rather a disturbing one, for Hy’s relative obscurity despite the importance and intrinsic interest of his work. Several people, some of whom consider themselves followers of Hy, have noted to me that there isn’t much published work, which is nonsense: there is a lot of published work. But relatively little of it is in the economic journals. It’s in the peer-review journals.

The most important person in Minsky’s career was Bernard Shull, who has also been at a lot of these meetings, and I talked to him the other day. . . . He was a young member of the research staff at the Philadelphia Fed when he read Hy’s original article on central banks and the money market in 1957. Shull moved onto the Board of Governors to conduct a study on how the discount window actually operated and how it should operate. It was through working on that study that Hy developed the financial instability hypothesis, which was published originally in detail as a Federal Reserve document. Hy’s important work for the Ford Foundation-sponsored Commission on Money and Credit was published as part of the report of the Commission on Money and Credit. His late and long and important article on finance and profits was published by the Joint Economic Committee of Congress. Other major papers appeared in Festschriften and textbooks.

In the world of the economics profession, these things don’t count. Efforts to explain problems to people who might be able to do something about them are hobbies for the professor. The real work, and what he is expected to turn out, is this goddamn gelatinous stuff with its borders of mathematics that gets published in the professional journals. It may be that Hy’s increasing salience will do something about that. There was only one Hy Minsky. Natura il fece, e poi ruppe la stampa. But other lone wolves may get more attention in the future because the economics world finally awakened to the importance of Hyman Minsky, and thus the importance of publications that are not right down the standard track. We hope so.

The 20th Annual Hyman P. Minsky Conference, organized by the Levy Institute with support from the Ford Foundation, featured a broad range of speakers, including Gary Gensler (CFTC Chairman—occasioning some interesting back-and-forth in Q&A regarding commodities speculation), Paul McCulley, Andrew Sheng, Phil Angelides, Charles Plosser, Gary Gorton, Charles Evans, Vitor Constancio (Vice President of the ECB), Sheila Blair (head of the FDIC), Martin Mayer (who is apparently writing a biography of Minsky), and more.  The proceedings, including Q&A sessions, can be found here; select audio can be accessed here.

There’s a lot of good material to mine, but I’d like to highlight one particular session:  “Financial Journalism and Financial Reform: What’s Missing from the Headlines?” (the title explains itself), moderated by John Cassidy of the New Yorker and featuring Jeff Madrick, Joe Nocera, Steve Randy Waldman, and Francesco Guerrera (see “Session 2” for the audio).  There’s a great quotation from Steve Randy Waldman here:  “Goldman Sachs is just an off-balance sheet special purpose vehicle of the United States government.  Lloyd Blankfein is either a civil servant or a government contractor.  It’s just [that] his pay is out of line.”

The context is a discussion (starting at the 9:50 mark of Waldman’s presentation) that jumps off from this Minsky quotation: “financial reform needs to confront the public nature of much that is private.”  Waldman argues that while financial writers talk about the heads of the big six banks as though they were captains of private industry, their institutions ought to be treated as pseudo-government entities (just as Citibank ultimately had to stand behind its SIVs, which were supposed to be legally distinct, the US government ultimately has to stand behind the big banks in cases of insolvency).

At Pragmatic Capitalist, Cullen Roche writes about the “eerily prescient” predictions regarding the euro made by Modern Money Theorists and economists looking at sectoral balances.  Roche quotes from Randall Wray’s Understanding Modern Money (see in particular p. 91ff), a paper by Stephanie Kelton (Bell), and a Wynne Godley article written in 1997 (“Curried Emu — the meal that fails to nourish,” Observer, Aug. 31).  From Godley:

If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under ‘conditions of extreme emergency.’ … The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

See also Godley’s earlier piece (1992) in the London Review of Books, “Maastricht and All That“:

I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority. The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government. Yet there would simply have to be a system of institutions which fulfils all those functions at a Community level which are at present exercised by the central governments of individual member countries.

With regard to Godley’s prescience, take a look at this policy note from 2000 on the US economy (“Drowning in Debt“) that discusses the eye-popping rise in private indebtedness (“…it is certainly entirely different from anything that has ever happened before–at least in the United States”).  It’s really worth reading the whole thing (only five pages).

“If you’re going to have a model of capitalism, your model must be able to generate a Depression as one of its potential states. …if you can’t model that, you’re not modeling capitalism.”

Via the Institute for New Economic Thinking, Steve Keen explains how Minsky’s work played a foundational role in helping him to see the financial crisis coming:

Later in the video, Keen starts talking about the “holy hell!” moment he had in 2005 when looking at private debt-to-GDP ratios (Keen notes the central role private debt plays in Minsky’s theory).

This (from Randall Wray’s Minsky-inspired policy brief) is the sort of thing he would have been seeing:

Sources: Census Bureau; National Income and Product Accounts
(NIPA); Federal Reserve Flow of Funds Accounts (from 1945)

The Levy Institute’s Pavlina Tcherneva delivered a campus-wide lecture at Bard College yesterday that discussed the Federal Reserve’s policy actions during the crisis and the future of government stabilization policy.  The lecture also covered some of the themes in her working paper “Bernanke’s Paradox” (written roughly a year ago), which also appeared in the Journal of Post Keynesian Economics.

In the context of noting Bernanke’s increasingly urgent calls for more help from fiscal policy, it’s worth highlighting this portion of the working paper:

The second key implication of Bernanke’s non-orthodox approach to monetary policy is that, not only is fiscal policy effective (something rejected for decades by neoclassical advocates of the Ricardian Equivalence Hypothesis), but it is, in fact, more potent in recessions. This is because the mainstream has finally recognized that the Fed cannot alone and unilaterally rain money on the banking system … More importantly, from Bernanke’s new interpretation of monetary easing, we can extract one interesting new conclusion, namely that the Fed cannot exogenously expand the money supply without government spending. What this means is that, even if the Fed lent against a wide variety of assets, it may be able to prevent a sell-off or to put a floor on these asset prices, but it will not be able to boost aggregate demand. The only way to do this, according to Bernanke, is via a “gift” from government spending, namely through an injection of net financial assets (net wealth) from fiscal operations.

Read the working paper here.

[The following is the text of Senior Scholar Randall Wray’s presentation, delivered October 28, 2011, at the annual conference of the Research Network Macroeconomics and Macroeconomic Policies (IMK) in Berlin. This year’s conference was titled “From crisis to growth? The challenge of imbalances, debt, and limited resources.”]

It is commonplace to link Neoclassical economics to 18th or 19th century physics with its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic CDOs. Guided by invisible hands, supplies balance demands and all markets clear.

Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies, themselves. Certainly there is a price, somewhere, someplace, somehow, that will balance supply and demand—for the stuff we can drop on our feet to break a toe, and on to the mental and physical efforts of our brethren, and finally to notional derivatives that occupy neither time nor space. It all must balance, and if it does not, invisible but powerful forces will accomplish the inevitable.

The orthodox economist is sure that if we just get the government out of the way, the market will do the dirty work. Balance. The market will restore it and all will be right with the world. The heterodox economist? Well, she is less sure. The market might not work. It needs a bit of coaxing. Imbalances can persist. Market forces can be rather impotent. The visible hand of government can hasten the move to balance. continue reading…

Today in the New Yorker John Cassidy asks “where is the new Keynes”?  Where, in other words, are the new ideas that have emerged from this historic economic crisis?  While there is nothing, he insists, comparable to a new Keynesianism, there has been a rediscovery of some “important ideas.”  The first:

1. Finance matters. This lesson might seem obvious to the man in the street, but many economists somehow managed to forget it. Two who didn’t were Hyman Minsky and Wynne Godley, both of who were associated with the Levy Institute for Economics at Bard College. Minksy’s now-famous “Financial Instability Hypothesis” can be found here, and one of Godley’s warnings about excessive household debt can be found here. (It is from 1999!)