Yeva Nersisyan

Does Excessive Sovereign Debt Really Hurt Growth? A Critique of 'This Time is Different', by Reinhart and Rogoff

The worst global downturn since the Great Depression has caused ballooning budget deficits in most nations, as tax revenues collapse and governments bail out financial institutions and attempt countercyclical fiscal policy. With notable exceptions, most economists accept the desirability of expansion of deficits over the short term but fear possible long-term effects. There are a number of theoretical arguments that lead to the conclusion that higher government debt ratios might depress growth. There are other arguments related to more immediate effects of debt on inflation and national solvency. Research conducted by Carmen Reinhart and Kenneth Rogoff is frequently cited to demonstrate the negative impacts of public debt on economic growth and financial stability. In this paper we critically examine their work. We distinguish between a nation that operates with its own floating exchange rate and nonconvertible (sovereign) currency, and a nation that does not. We argue that Reinhart and Rogoff’s results are not relevant to the case of the United States.

Rethinking liquidity creation: Banks, shadow banks and the elasticity of finance

ABSTRACT In this article, the authors use the concept of the hierarchy of money found in the works of Minsky (2008[1986]), Foley (1987), Wray (1990), and Bell (2001) to analyze the process of liquidity creation in modern capitalist economies where shadow banks play an active role. They abandon the narrow focus on banks as the creators of money as well as the idea that nonbank financial institutions are mere intermediaries between savers and borrowers. Instead, the authors demonstrate that, similar to banks, nonbank financial institutions and foreign banks (through their cross-border activities) create liquidity endogenously by leveraging over the liabilities of entities hierarchically above them. The authors further elucidate Kregel’s concept of “fictitious” liquidity in the context of the hierarchy of financial liabilities, distinguishing it from “true” liquidity. By bringing shadow banks and the euro-currency markets into to the pyramid of financial liabilities, they develop a more complete framework of liquidity creation in modern capitalist economies. Their “extended” pyramid is useful for analyzing not only the fragility that may arise from the interactions between firms, households and banks, but also that which may originate through the interactions between banks, shadow banks and foreign banks.

Transformation of the Financial System: Financialisation, Concentration and the Shift to Shadow Banking

There is little doubt that the current crisis is the worst since the Great Depression. US real GDP fell by 5.4 per cent in the first quarter of 2009 alone and investment shrank by 50 per cent. The economy shed as many as 571,000 jobs from August to September, 2009 and November’s official unemployment rate jumped to 10.2 per cent while the broader measure (U-6) rose to a post-depression record of 17.5 per cent (BLS). Yet despite all the dire statistics, most economists believe that the US economy is on the path to a recovery, albeit a jobless one. The conventional view points to the following as evidence: the Dow Jones Industrial Average crossed the 10,000 mark, the housing market is widely believed to have bottomed and credit is flowing again at least to some sectors.

Response to “A note on ‘Rethinking liquidity creation: Banks, shadow banks and the elasticity of finance’”

Abstract In an article published in vol. 40, issue 3 of the Journal of Post Keynesian Economics, we challenged the post Keynesian view that nonbank financial institutions (NBFIs) are intermediaries between savers and borrowers. We argued that the “intermediary” framework is not an appropriate description of what financial institutions do. Instead, we proposed to broaden the endogenous money theory by incorporating nonbank financial institutions into it using the hierarchy of money. Our article generated a response by Bouguelli in which they argue that the traditional post Keynesian framework, with its clear-cut distinction between banks and NBFIs is better suited for understanding the different roles of these institutions and their “symbiotic relationship.” In this rejoinder, we respond to the critique of Bouguelli and clarify our position. We demonstrate that banks and nonbanks are similar in how they issue liabilities to finance positions in assets and settle on a netted basis using the liabilities of another entity higher up in the hierarchy. Moreover, we argue that NBFIs’ reliance on banks is better captured by the framework of leveraging rather than that of intermediation.

The Repeal of the Glass-Steagall Act and the Federal Reserve's Extraordinary Intervention during the Global Financial Crisis

Before the global financial crisis, the assistance of a lender of last resort was traditionally thought to be limited to commercial banks. During the crisis, however, the Federal Reserve created a number of facilities to support brokers and dealers, money market mutual funds, the commercial paper market, the mortgage-backed securities market, the triparty repo market, et cetera. In this paper, we argue that the elimination of specialized banking through the eventual repeal of the Glass-Steagall Act (GSA) has played an important role in the leakage of the public subsidy intended for commercial banks to nonbank financial institutions. In a specialized financial system, which the GSA had helped create, the use of the lender-of-last-resort safety net could be more comfortably limited to commercial banks. However, the elimination of GSA restrictions on bank-permissible activities has contributed to the rise of a financial system where the lines between regulated and protected banks and the so-called shadow banking system have become blurred. The existence of the shadow banking universe, which is directly or indirectly guaranteed by banks, has made it practically impossible to confine the safety to the regulated banking system. In this context, reforming the lender-of-last-resort institution requires fundamental changes within the financial system itself.

Public Policy to Support Retirement: An Alternative to Financialization

Though the worst of the financial crisis of 2008 has, with hope, ebbed, it has forever changed the economy in the United States and throughout the rest of the world. Using the financial and economic crisis as a catalyst, this volume examines how to better regulate the financial system and what to expect in the future if no steps are made toward reform. This book lays the foundation for those steps by providing concrete ideas that will push policy in the direction of jobs growth and widespread prosperity.