Financial crisis

Crashed: How a Decade of Financial Crises Changed the World

Published by Anonymous (not verified) on Sat, 03/11/2018 - 3:39am in

Book Review

Adam Tooze. Crashed: How a Decade of Financial Crises Changed the World. Viking. New York. 2018

The global economic crisis is now more than a decade old, and is far from definitively behind us. Indeed, many fear, with good reason, that the recent, uneven and lethargic global recovery may soon come to an end, and that the next crisis of global capitalism could be even worse than that of 2008.

The financial crisis and resulting crisis of the real global economy triggered by the collapse of Lehman Brothers and other major Wall Street banks has already prompted the release of a small library of books. ( The best, to my mind, is Martin Wolf’s, The Shifts and the Shocks.) But Adam Tooze provides us with the first truly comprehensive account. It is the work of a contemporary historian who draws on political and economic theory to frame a compelling and disturbing narrative, and is likely to become a standard and indispensable reference.

Over more than six hundred pages, Tooze looks at the origins and implications of the financial crisis around the world, proceeding both chronologically, geographically and thematically. In an extraordinary work of scholarship, he surveys the global political economy and financialized capitalism of the pre crisis period, the unfolding of the financial crisis in the United States and Europe, the spread of the crisis to developing countries and Eastern Europe, the extraordinary response of China, the euro zone crisis and the agonies of Greece and Southern Europe, and the political implications of the crisis.

He offers a coherent account of how the crisis set the stage for the rise of right-wing populism around the world, and speculates on how the global economy may evolve in a new age of explicit and escalating rivalry between the United States and China. What is at stake is the possible collapse of the “neo liberal” global economic and political order.

One relatively novel argument made in the book is that the global economy has to be seen, not so much as a set of discrete national economies trading with each other, as a vast “macro financial” web of corporate balance sheets and financial flows. In such a world, states can rapidly experience an exit of capital and economic collapse without necessarily running large trade or public finance deficits, while the hegemonic power, the United States, can readily finance such deficits by virtue of the unique status of the US dollar as the global reserve currency.

Tooze does not look in detail at the underlying contradictions of the pre crisis period, but he does note the key point that growth in an age of rising inequality and redistribution of income from labour to capital was dangerously reliant upon the growth of private debt, speculative bubbles, and the recycling of global trade surpluses to deficit countries, notably from China to the United States.

He broadly endorses the view that neo liberal capitalism has been associated with “secular stagnation” due to inadequate demand, offset only by the massive expansion of debt. As he notes, the fear was that crisis would result from a collapse of the US dollar, but instead it came from the collapse of global finance due to a massive accumulation of bad debts dispersed across the world. In response to the crisis there was, somewhat ironically, a flight to the US dollar as US government bonds were seen as the safest asset available.

Where Tooze departs a bit from the standard account is in his understanding and insistence that this was not just a crisis of the US banks, but a crisis of global and especially North Atlantic finance. Tight links between the Wall Street banks, the City of London, and the major European banks produced a global systemic financial crisis, not a crisis of so-called Anglo-Saxon capitalism as many European critics have argued. The euro crisis was also the consequence of low quality debt and speculative housing bubbles in some countries (the UK, Spain) rather than the excessive growth of public debt. Indeed the fiscal problem of countries hit by crisis in southern and eastern Europe were mainly the result of the crisis of the real economy which increased government deficits and debts, and the decision of many governments (most notably Ireland) to transfer bad bank assets to the public sector.

Building on the historical analysis of Leo Panitch and Sam Gindin in The Making of Global Capitalism, Tooze argues that the global economy has been economically and politically dominated by the United States, which remained in 2008, and remains even more so today, the only power capable of providing global economic leadership. “The crisis had the effect of recentering the world financial economy on the United States as the only state capable of meeting the challenge it posed.” He recounts how the US Treasury and the US Federal Reserve were absolutely key to resolution of the crisis of the banks in 2008, extending liquidity (very low interest US dollar credit lines) to global and not just US banks.

Similarly, massive US government purchases of distressed financial assets to bail out the financial system through the TARP and other programs were extended from the US banks to major European and even developing country banks. Key officials like Larry Summers and Tim Geithner won the day when they argued for “big bazooka, shock and awe” tactics to stabilize the financial system.

While there was a lot of bungling, experimentation and political resistance along the way, the US Treasury and the US Federal Reserve were indeed able to stabilize the US financial system fairly quickly by a combination of outright injections of new capital and arm twisting to force mergers. “Hair cuts” for those who had caused the crisis by investing in high risk, low quality assets and through reckless speculation and outright fraud were modest at best.

These bail-outs have been widely criticized, with good reason, for saving financial capital at the expense of working people who had to endure high unemployment and a huge wave of home foreclosures. But the US political system, even progressive Democrats included, would not even contemplate nationalizing the banks. In that context, a viable financial system and normal credit flows had to be restored by socializing bad debts.

The alternative to bail outs was to experience what happened in the eurozone, a failure to deal with insolvent banks through “extend and pretend” half measures which postponed an outright collapse of the banking system but without dealing with bad debt. “The eurozone, through willful policy choices, drove tens of millions of its citizens into the depths of a 1930s style recession. It was one of the worst self-inflicted disasters on record.” Tooze argues that the euro area also effectively sidelined itself from any pretensions to global economic leadership.

Fortuitously, US leadership also extended to fiscal policy in response to the collapse of the real economy. The stimulus program of the Obama administration could and should have been far bigger and lasted far longer, as was understood by those who had learned the lessons of the Great Depression in the 1930s, but again it was much more significant than similar programs in the UK and Europe endorsed by a new global forum, the G20 as an immediate fix.. Here there was a quick return to fiscal austerity and deep spending cuts long before growth and employment had recovered, with Germany and smaller Northern European countries demanding harsh and indeed sadistic fiscal measure as the precondition for any help to heavily indebted countries. In the most troubled countries, there was a death spiral as insolvent banks became every more shaky as the real economy collapsed and interest rates soared well above those of Germany.

The euro zone as a whole failed to act until very late in the game, when the European Central Bank finally announced in July, 2012 that it was prepared to “do what it takes” to bring down interest rates on debt denominated in euros. This failure was partly due to institutional architecture (the narrow mandate of the ECB, tight rules on fiscal policy) and partly due to German insistence that recovery had to be based on austerity and wage discipline to restore global competitiveness, without heed to the immediate consequences. Greece was crucified as a salutary lesson to others. Today, the banking crisis is far from fully resolved, most notably in Italy, public debt has reached very high levels in some countries where the crisis has hit hardest, and output has grown little above pre crisis levels while unemployment remains very high.

Toooze further notes and details that China was an absolutely key player in resolving the crisis through massive fiscal stimulus, and continued willingness to retain and expand its enormous holdings of US dollars. “China’s response to the financial crisis it imported from the West was of world historic importance, dramatically accelerating the shift in the global balance of economic activity towards East Asia.” To give an idea of the scale, between 2008 and 2014, China built 10,000 kilometres of rail capable of running trains at 360 km per hour, in the process gaining a massive technological advantage. And health care coverage was extended from 30% to 90% of the population through expansion of subsidies and a massive construction program for health care facilities.

Tooze endorses and details the argument that the bail outs of finance, massive unemployment and fiscal austerity set the stage for a major discrediting of centre left neo liberal parties and the rise of right-wing populism in the US, the UK in the form of Brexit, and much of Europe. In the United States “in the name of economic nationalism and the American dream, the right wing claimed the cause of systemic change, while the Democratic Party establishment filled the middle ground the Republicans vacated. “ Trump explicitly challenges the global capitalist order in the form of America first economic nationalism and rejection of global institutions like the WTO.

More widely, “(s)ince 2007 the scale of the financial crisis has placed the relationship between democratic politics and the demands of capitalist governance under immense strain. Above all, this strain has manifested itself … in a crisis of the political parties that have mediated the two.” Moderate parties of the centre left which championed global capitalism and did little to alleviate the impacts of the global crisis on working people have paid a high political price, threatening the future of the global system as is it still exists. Social democracy in the eurozone has massively retreated as the populist right has rejected globalism and even the European Union itself in favour of economic nationalism and racial xenophobia.

Looking to the future, Tooze notes with many others that the recent global recovery has been built on the fragile base of continued growth in debt with very limited reform of global finance. Future crises are hard to predict, but are inevitable. He could, perhaps, have said more about what a stable and equitable growth model might look like. What he instead stresses, rightly, is the crisis of global political capacity to regulate the system. “With Trump as president and the Republicans dominating Congress, it is an open question whether the American political system will support even basic institutions of globalization let alone any adventurous crisis fighting at a national or global level”

The eurozone is seemingly incapable of resolving its own problems, as not just the UK but also Italy and the right in France look to the exits. Meanwhile, “China’s economic triumph is a triumph for the Communist Party. This is still the fundamental reason for doubting the possibility of truly deep co-operation with China in global economic governance. Unlike South Korea, Japan or Europe, China is not a subordinate part of of the American global network.”

We indeed live in profoundly dangerous times. Fortunately Adam Tooze has given us a narrative and analysis that illuminates where we have been, though he has no clear view of how progressive forces should and could re-shape the crisis prone and deeply inequitable global capitalist system created in the run-up to 2008.

Crashed: How a Decade of Financial Crises Changed the World

Published by Anonymous (not verified) on Sat, 03/11/2018 - 3:39am in

Book Review

Adam Tooze. Crashed: How a Decade of Financial Crises Changed the World. Viking. New York. 2018

The global economic crisis is now more than a decade old, and is far from definitively behind us. Indeed, many fear, with good reason, that the recent, uneven and lethargic global recovery may soon come to an end, and that the next crisis of global capitalism could be even worse than that of 2008.

The financial crisis and resulting crisis of the real global economy triggered by the collapse of Lehman Brothers and other major Wall Street banks has already prompted the release of a small library of books. ( The best, to my mind, is Martin Wolf’s, The Shifts and the Shocks.) But Adam Tooze provides us with the first truly comprehensive account. It is the work of a contemporary historian who draws on political and economic theory to frame a compelling and disturbing narrative, and is likely to become a standard and indispensable reference.

Over more than six hundred pages, Tooze looks at the origins and implications of the financial crisis around the world, proceeding both chronologically, geographically and thematically. In an extraordinary work of scholarship, he surveys the global political economy and financialized capitalism of the pre crisis period, the unfolding of the financial crisis in the United States and Europe, the spread of the crisis to developing countries and Eastern Europe, the extraordinary response of China, the euro zone crisis and the agonies of Greece and Southern Europe, and the political implications of the crisis.

He offers a coherent account of how the crisis set the stage for the rise of right-wing populism around the world, and speculates on how the global economy may evolve in a new age of explicit and escalating rivalry between the United States and China. What is at stake is the possible collapse of the “neo liberal” global economic and political order.

One relatively novel argument made in the book is that the global economy has to be seen, not so much as a set of discrete national economies trading with each other, as a vast “macro financial” web of corporate balance sheets and financial flows. In such a world, states can rapidly experience an exit of capital and economic collapse without necessarily running large trade or public finance deficits, while the hegemonic power, the United States, can readily finance such deficits by virtue of the unique status of the US dollar as the global reserve currency.

Tooze does not look in detail at the underlying contradictions of the pre crisis period, but he does note the key point that growth in an age of rising inequality and redistribution of income from labour to capital was dangerously reliant upon the growth of private debt, speculative bubbles, and the recycling of global trade surpluses to deficit countries, notably from China to the United States.

He broadly endorses the view that neo liberal capitalism has been associated with “secular stagnation” due to inadequate demand, offset only by the massive expansion of debt. As he notes, the fear was that crisis would result from a collapse of the US dollar, but instead it came from the collapse of global finance due to a massive accumulation of bad debts dispersed across the world. In response to the crisis there was, somewhat ironically, a flight to the US dollar as US government bonds were seen as the safest asset available.

Where Tooze departs a bit from the standard account is in his understanding and insistence that this was not just a crisis of the US banks, but a crisis of global and especially North Atlantic finance. Tight links between the Wall Street banks, the City of London, and the major European banks produced a global systemic financial crisis, not a crisis of so-called Anglo-Saxon capitalism as many European critics have argued. The euro crisis was also the consequence of low quality debt and speculative housing bubbles in some countries (the UK, Spain) rather than the excessive growth of public debt. Indeed the fiscal problem of countries hit by crisis in southern and eastern Europe were mainly the result of the crisis of the real economy which increased government deficits and debts, and the decision of many governments (most notably Ireland) to transfer bad bank assets to the public sector.

Building on the historical analysis of Leo Panitch and Sam Gindin in The Making of Global Capitalism, Tooze argues that the global economy has been economically and politically dominated by the United States, which remained in 2008, and remains even more so today, the only power capable of providing global economic leadership. “The crisis had the effect of recentering the world financial economy on the United States as the only state capable of meeting the challenge it posed.” He recounts how the US Treasury and the US Federal Reserve were absolutely key to resolution of the crisis of the banks in 2008, extending liquidity (very low interest US dollar credit lines) to global and not just US banks.

Similarly, massive US government purchases of distressed financial assets to bail out the financial system through the TARP and other programs were extended from the US banks to major European and even developing country banks. Key officials like Larry Summers and Tim Geithner won the day when they argued for “big bazooka, shock and awe” tactics to stabilize the financial system.

While there was a lot of bungling, experimentation and political resistance along the way, the US Treasury and the US Federal Reserve were indeed able to stabilize the US financial system fairly quickly by a combination of outright injections of new capital and arm twisting to force mergers. “Hair cuts” for those who had caused the crisis by investing in high risk, low quality assets and through reckless speculation and outright fraud were modest at best.

These bail-outs have been widely criticized, with good reason, for saving financial capital at the expense of working people who had to endure high unemployment and a huge wave of home foreclosures. But the US political system, even progressive Democrats included, would not even contemplate nationalizing the banks. In that context, a viable financial system and normal credit flows had to be restored by socializing bad debts.

The alternative to bail outs was to experience what happened in the eurozone, a failure to deal with insolvent banks through “extend and pretend” half measures which postponed an outright collapse of the banking system but without dealing with bad debt. “The eurozone, through willful policy choices, drove tens of millions of its citizens into the depths of a 1930s style recession. It was one of the worst self-inflicted disasters on record.” Tooze argues that the euro area also effectively sidelined itself from any pretensions to global economic leadership.

Fortuitously, US leadership also extended to fiscal policy in response to the collapse of the real economy. The stimulus program of the Obama administration could and should have been far bigger and lasted far longer, as was understood by those who had learned the lessons of the Great Depression in the 1930s, but again it was much more significant than similar programs in the UK and Europe endorsed by a new global forum, the G20 as an immediate fix.. Here there was a quick return to fiscal austerity and deep spending cuts long before growth and employment had recovered, with Germany and smaller Northern European countries demanding harsh and indeed sadistic fiscal measure as the precondition for any help to heavily indebted countries. In the most troubled countries, there was a death spiral as insolvent banks became every more shaky as the real economy collapsed and interest rates soared well above those of Germany.

The euro zone as a whole failed to act until very late in the game, when the European Central Bank finally announced in July, 2012 that it was prepared to “do what it takes” to bring down interest rates on debt denominated in euros. This failure was partly due to institutional architecture (the narrow mandate of the ECB, tight rules on fiscal policy) and partly due to German insistence that recovery had to be based on austerity and wage discipline to restore global competitiveness, without heed to the immediate consequences. Greece was crucified as a salutary lesson to others. Today, the banking crisis is far from fully resolved, most notably in Italy, public debt has reached very high levels in some countries where the crisis has hit hardest, and output has grown little above pre crisis levels while unemployment remains very high.

Toooze further notes and details that China was an absolutely key player in resolving the crisis through massive fiscal stimulus, and continued willingness to retain and expand its enormous holdings of US dollars. “China’s response to the financial crisis it imported from the West was of world historic importance, dramatically accelerating the shift in the global balance of economic activity towards East Asia.” To give an idea of the scale, between 2008 and 2014, China built 10,000 kilometres of rail capable of running trains at 360 km per hour, in the process gaining a massive technological advantage. And health care coverage was extended from 30% to 90% of the population through expansion of subsidies and a massive construction program for health care facilities.

Tooze endorses and details the argument that the bail outs of finance, massive unemployment and fiscal austerity set the stage for a major discrediting of centre left neo liberal parties and the rise of right-wing populism in the US, the UK in the form of Brexit, and much of Europe. In the United States “in the name of economic nationalism and the American dream, the right wing claimed the cause of systemic change, while the Democratic Party establishment filled the middle ground the Republicans vacated. “ Trump explicitly challenges the global capitalist order in the form of America first economic nationalism and rejection of global institutions like the WTO.

More widely, “(s)ince 2007 the scale of the financial crisis has placed the relationship between democratic politics and the demands of capitalist governance under immense strain. Above all, this strain has manifested itself … in a crisis of the political parties that have mediated the two.” Moderate parties of the centre left which championed global capitalism and did little to alleviate the impacts of the global crisis on working people have paid a high political price, threatening the future of the global system as is it still exists. Social democracy in the eurozone has massively retreated as the populist right has rejected globalism and even the European Union itself in favour of economic nationalism and racial xenophobia.

Looking to the future, Tooze notes with many others that the recent global recovery has been built on the fragile base of continued growth in debt with very limited reform of global finance. Future crises are hard to predict, but are inevitable. He could, perhaps, have said more about what a stable and equitable growth model might look like. What he instead stresses, rightly, is the crisis of global political capacity to regulate the system. “With Trump as president and the Republicans dominating Congress, it is an open question whether the American political system will support even basic institutions of globalization let alone any adventurous crisis fighting at a national or global level”

The eurozone is seemingly incapable of resolving its own problems, as not just the UK but also Italy and the right in France look to the exits. Meanwhile, “China’s economic triumph is a triumph for the Communist Party. This is still the fundamental reason for doubting the possibility of truly deep co-operation with China in global economic governance. Unlike South Korea, Japan or Europe, China is not a subordinate part of of the American global network.”

We indeed live in profoundly dangerous times. Fortunately Adam Tooze has given us a narrative and analysis that illuminates where we have been, though he has no clear view of how progressive forces should and could re-shape the crisis prone and deeply inequitable global capitalist system created in the run-up to 2008.

Merkel’s Eurausterity

Published by Anonymous (not verified) on Fri, 02/11/2018 - 11:15pm in

Outgoing German chancellor Angela Merkel’s record as a champion of Europe has a nasty stain:

Like many national leaders, Ms. Merkel, time and again, catered to domestic political interests at the expense of broader European concerns, dismissing calls that Germany’s prodigious savings be put on the line to rescue debt-saturated members of the bloc….  She adamantly opposed debt forgiveness to Greece, even as it teetered toward insolvency, and even as joblessness exceeded 27 percent — a special source of outrage given that German banks were primary lenders in Greece’s catastrophic explosion of borrowing.

“She was at the heart of the design of the flawed Greek program, which not only imposed austerity, but most importantly resisted restructuring the debt in order to save the German and French banks,” said Joseph E. Stiglitz, a Nobel laureate economist at Columbia University in New York. “The rhetoric that she used suggested that the crisis was caused by irresponsible behavior by Greece, rather than irresponsibility on the part of the lender.”

Read more here.

Hits to GDP

Published by Anonymous (not verified) on Wed, 24/10/2018 - 5:55am in

The hysterical (in the funny sense) report on socialism that the Council of Economic Advisers put out this morning contains this gem of simulation:

It may well be that American socialists are envisioning moving our policies to align with those of the Nordic countries in the 1970s, when their policies were more in line with economists’ traditional definition of socialism. We estimate that if the United States were to adopt these policies, its real GDP would decline by at least 19 percent in the long run, or about $11,000 per year for the average person.

Sounds dire—but even if true, and there’s no reason to believe it is—that would be smaller hit than the 2008 financial crisis was, no simulation about it. As the graph below shows, over the long term, actual GDP wandered around its trendline, rising above in booms (1990, 2000) and falling below in busts (1975, 1982). (The trendline assumes constant growth at the average over the period, 3.2% a year.) But the 2008 financial crisis and its sequelae have driven actual GDP well below its previous trend. Had real per capita GDP continued to grow at its 1970–2007 trend rate after the financial crisis, it would be $12,316 higher than it is now.

So a financial crisis is at least 12% worse than Nordic social democracy, without all the benefits.

GDP per cap actual & trend

10 years after – and nothing has changed.

Published by Anonymous (not verified) on Mon, 22/10/2018 - 8:50am in

The following is an interview with Yena Yoon – a financial journalist with Chosen Ilbo “the largest newspaper in South Korea” conducted on 12 February, 2018, but still relevant.

What is the most remarkable change in financial market after 2008 global crisis do you see? Why do you think so?

The most striking outcome from the global financial crisis of 2007-9 was that there was no structural change to the international financial architecture/system – the system that was at the heart of the global crisis. Instead policy-makers imposed on to the existing financial system – of financial deregulation and capital mobility – two policies: monetary easing and fiscal consolidation. This ‘economic model’ of monetary radicalism and fiscal conservatism has slowed global economic recovery in a way that is historically unprecedented. At the same time it has massively expanded Central Bank balance sheets to provide ‘life support’ to the ‘near-death’ finance sector. Because the finance sector (or the 1%) have been the main beneficiaries of central bank largesse, this has intensified inequality. Last year, at a time when the global economy (‘the semi-comatose patient’) was supposedly in recovery, boosted by growth in the EU, central banks still felt it necessary to inject at least $3 trillion of liquidity into the financial system. The global recovery continues on Central Bank ‘life support’; remains fragile, and is prone to volatility and shocks.

2. Could you pick 3~5 risk elements of our financial market these days? Why do you think so?

 The first risk faced by financial markets is synchronised central bank monetary tightening. Interest rate rises are a threat to a heavily indebted and still weak, global economy – and to the many corporates that have loaded up on debt over this last decade. This risk has risen with the Trump administration’s appointments of inflation ‘hawks’ to key posts at the Federal Reserve, and to the retirement of ECB President, Mario Draghi, in 2019

The second risk is related:  the fall in savings, and the build-up of consumer and corporate debts in both the US and China. Defaults on these debts could lead to financial sector failures, and in a highly integrated, synchronised globalised economy, one bank failure could send shock waves across borders.

The third risk is political: across the world, populations have risen up in anger at governments that allowed self-regulating ‘free’ markets to determine the allocation of resources across societies and across borders. Many are calling for a ‘strong man” (or woman) to protect them from uncontrolled market forces. Hence the election of, for example, Presidents Trump and Duterte (to name but two) who have promised to “build a wall” to protect society from the ‘free market’ – whether that be the trade in goods and services, or in drugs, or in the free movement of people and capital across borders. These nationalist, protectionist reactions will interfere with the workings of markets, and threaten volatility, instability and even war.

3. Do you agree with ‘10 years Crisis cycle’ hypothesis? Why do you think so, and when do you think the next crisis will come?

I do not agree that there is a cycle that is in a sense, inevitable. On the contrary: economic policy is man-made (sic) and can be unmade and transformed. The economic model of monetary easing and fiscal tightening was and is, disastrous. A more enlightened, geniuinely Keynesian model would have re-regulated the finance sector; managed capital mobility, credit creation and the rate of interest for loans across the spectrum of lending (short and long, safe, risky and real.) These monetary policies if combined with fiscal expansion at the time of the 2007-9 crisis, would have raised investment – both public and private. They would have led to the creation of jobs, raised incomes, lowered debts and minimised inequality.

Instead the economic model adopted after the crisis led to higher levels of debt globally; to falls in good, secure employment and income; and has intensified inequality.

History will not treat policy-makers of this era kindly.

End.

The BBC’s Cassandras of the Crash

Published by Anonymous (not verified) on Mon, 22/10/2018 - 8:18am in

 

On Wednesday, 19th September and again on 22nd September, the BBC broadcast an interview in which I participated. It was called Cassandras of the Crash. The programme is available on the BBC’s Radio 4 website, with the following introduction.

“Ten years ago, in autumn 2008, the world watched as the biggest financial meltdown in history unfolded. The crash plunged the world into recession, lost millions of families their homes and its shadow still hangs over our politics today. And when the Queen went to the London School of Economics, she asked the question everyone wanted the answer to: why did no one see it coming? In this programme Aditya Chakrabortty, senior economics commentator at the Guardian newspaper, chairs a discussion between four economists who can claim they did: Raghuram Rajan, former governor of the Reserve Bank of India; Steve Keen, professor of economics at Kingston University in London; Ann Pettifor, director of PRIME, Policy Research in Macroeconomics and council member of the Progressive Economy Forum; and Peter Schiff, American stockbroker and investor. They warned financial crisis was imminent, they wrote books and papers, they even told the powerful to their faces – and they got nowhere. They showed intellectual bravery of a kind that isn’t often celebrated, and it cost some of them dearly. Call them four “Cassandras” – cursed, as Greek myth has it, to utter prophesies that were true but never believed. Had they been heeded we may have averted what the then chief US central banker, Ben Bernanke, calls “the worst financial crisis in global history, including the Great Depression”. How did they see it when no one else did? Why didn’t others listen? And what happens next? Producer: Eve Streeter A Greenpoint Production for Radio 4”

Book Review: Portfolio Society: On the Capitalist Modes of Prediction by Ivan Ascher

Published by Anonymous (not verified) on Tue, 16/10/2018 - 9:46pm in

In Portfolio Society: On the Capitalist Modes of PredictionIvan Ascher explores how the abstraction and securitisation of risk in financial markets have had a profound influence on economic and social relations, with a particular focus on the aftermath of the global financial crisis. The book underscores the extent to which much of the ‘value’ generated by the contemporary economy results from financial engineering or extractive practices, writes Jenny McArthur

Portfolio Society: On the Capitalist Modes of Prediction. Ivan Ascher. MIT Press. 2016.

Find this book: amazon-logo

In Portfolio Society: On the Capitalist Modes of Prediction, Ivan Ascher argues that financial markets have reshaped the contemporary economy, extending Karl Marx’s theory of labour to consider how the abstraction and securitisation of risk in financial markets have profound influence on economic and social relations. The text adds to a growing body of critical literature from various disciplines – including Mariana Mazzucato’s The Value of Everything, Nick Silver’s Finance, Society and Sustainability and Daniel Cohen’s The Infinite Desire for Growth – that scrutinises the 2008 global financial crisis and the contradictions it revealed in the nature of our economies and financial systems.

The book is a concise 192 pages, structured across five chapters that explore the development of financial markets, primarily in the UK and the USA, through the lens of Marx’s Capital. It examines the current financial system (Chapter One) and the development of financial securities that speculate on risk and uncertainty (Chapter Two). Looking inside the black box of prediction in financial markets (Chapter Three), the text shows how the transformation of finance in the US is accompanied by fundamental changes in the conceptualisation and measurement of risk. Through the rolling back of comprehensive social insurance schemes for health insurance and pension funds and the creation of credit scores, financialised risks become embedded within social relations, recasting the individual in society as ‘homo probabilis’: possessing a quantifiable risk profile that can be abstracted, pooled and exchanged in financial markets (Chapter Four). The final chapter returns to the aftermath of the 2008 crisis and reflects on what may lie ahead.

Image Credit: (Pixabay CCO)

While it draws heavily from Marx’s Capital, Portfolio Society is not strictly a Marxist analysis – rather, it extends theories from Capital to argue that risk has now outranked labour power as the central source of value in contemporary capitalism. Examining the current financial system and its crises, it explores the supporting narratives and implicit power relations that shape specific modes of prediction and protection in the economy: characterised by Ascher as a ‘portfolio society’. Taking the 2008 crisis as a point of departure, the text tracks the emergence of the portfolio society through a long-term process of financialisation, starting in the 1970s. A key question is when, and how, speculation became a generalised feature of society. The central critique is that this not only affects financial markets and the tendency towards collapse, but how we can envisage the future:

What Marx did not say, but what can be presumed, is that a world where people decide together on what is to be produced is also a world where people decide together on what possibilities are to be pursued, what dangers are to be avoided, what risks are worth taking (59).

Portfolio Society draws from a wide variety of sources to elaborate this argument. The story of former Goldman Sachs trader Fabrice Tourre – one of the few people to be prosecuted following the 2008 financial crisis – draws a common thread throughout the text. Extracts from Tourre’s email exchanges with his girlfriend are telling, showing contradictions revealed through everyday conversation, as even the highly-trained quants responsible for structuring financial products openly admit their ignorance:

Seul surviving potentiel, the fabulous Fab […] standing the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of those monstruosities [sic]!! (19).

Ascher also traces the historical development of portfolio theory by economists Harry Markowitz, William Sharpe, Fischer Black and Myron Scholes. This historical analysis shows the building blocks of the financial economic theory that underpins financial models, portfolio selection and investment decisions. It shows how the interplay between the generation of new ideas in economics and wider political shifts shaped the financial system we have today. Markowitz’s theory pointed out that investors weren’t solely concerned with the expected return on an investment, but also the uncertainty or variance of this return. Therefore, selection of financial assets for a portfolio jointly considered the value and variance of returns. Markowitz’s student Sharpe extended this, positing the existence of a dominant factor that could explain overall shifts in asset values, providing a benchmark to assess the relative volatility of any single investment. Scholes and Black advanced this further to create a model for the price fluctuations of financial instruments, which enabled the pricing of options (bets on the future prices of assets). A fundamentally speculative logic underpinned these new ideas in economics: it was not just about the actual return on investment but ensuring variance in the volatility of asset prices to balance overall portfolio risk. This enabled individual investors to seemingly eliminate risk – however, Ascher points out that this sort of financial engineering only creates a façade of low-risk investment. In reality, risk is not eliminated –  it is rendered systemic to the financial system.

Ascher makes liberal use of metaphor to evoke his ideas, conjuring images of horror stories, zombies, vampires, Robinson Crusoe, casinos and horse races. This provides powerful insight where Ascher compares financial markets to horse races, to critique the resulting class divisions:

It is not a division that separates “borrowers” from “creditors” [… it] separates those who are free to run a race and those who are free to bet on its outcome […] those whose lives keep placing them at risk and having thus to seek protection (say in the form of a loan or an insurance policy) and those whose position of relative security, by contrast, gives them the opportunity to take risks – say, by lending to others or betting on their probability of default (124)

However, other metaphors conceal important features of the portfolio society that we need to understand better to develop alternatives. Characterising financialisation as a zombie evades the critical question of what impels it forward, and how that may be changing ten years on from the last crisis.

Overall, Portfolio Society makes an important contribution to theorising the contemporary economy, although it would benefit from greater attention to the detail of financialisation processes and how they are mediated through political and economic systems. The book does not capture enough of the variation in financialisation processes and contestation between economic actors to avoid reducing the entire thesis to deterministic relations between risk and financialisation. Focusing on economic systems beyond advanced economies, namely those of the US and UK, could also support a more robust empirical basis for the analysis. It does, however, show the durability of Marx’s distinction between use value and exchange value to problematise the contemporary economy and reveal how much of the apparent ‘value’ generated is indeed fictional, resulting from financial engineering or extractive processes.

Jenny McArthur is a lecturer at UCL Department of Science, Technology, Engineering and Public Policy. Jenny has a background in civil engineering and economics and her research focuses on urban infrastructure governance, policy and finance. Twitter @jen_m_mcarthur. Read more by Jenny McArthur.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. 


‘The world turned upside down’: How the global economy was hit by the crisis

Published by Anonymous (not verified) on Thu, 20/09/2018 - 6:00pm in

David Young

For the global economy, it was the best of times, and then it was the worst of times.  Buoyed by very strong growth in emerging markets, the global economy boomed in the mid-2000s.  On average, annualised world GDP growth exceeded 5% for the four years leading up to 2007 – a pace of growth that hadn’t been sustained since the early 1970s.  But it wasn’t to last.  In this post, I illustrate how the failure of Lehman Brothers in September 2008 coincided with the deepest, most synchronised global downturn since World War II.  And I describe how after having seen the fallout of the Lehman collapse, macroeconomic forecasters were nevertheless surprised by the magnitude of the ensuing global recession.

How severe was the Global Financial Crisis?

The Global Financial Crisis (GFC) caused the worst peacetime contraction in world economic activity since the Great Depression.  Using Maddison Historical Statistics, we can estimate annual world GDP growth rates over the entire 20th century (and even earlier), as shown in Chart 1.

Chart 1: World GDP

Sources: Maddison Historical Statistics, Thomson Reuters DataStream, IMF WEO and author calculations.  Maddison data used to calculate growth rates from 1901 until 1982.

The Great Depression and both World Wars caused steeper falls in global GDP – but the GFC was by far the deepest global downturn that has occurred in the post-war period.  Indeed, so far, 2009 has been the only year since World War II in which world activity contracted relative to the previous year.  Of course, there have been other downturns – the most severe occurred in the mid-1970s, the early 1980s, and the early 1990s.  But annual global growth never fell below 1% in any year of the post-war period – until the GFC.

A similar picture emerges when looking at other indicators of global activity, such as world trade. Chart 2 shows a long time series of annual rates of growth in world trade volumes, taken from Federico and Tena-Junguito (2016).  Again, though less severe than during World War I and the Great Depression (the data don’t cover the World War II period), the fall in global trade volumes during the GFC was by far the deepest contraction that has occurred in the post-war period.  Trade volumes fell by around 12% in 2009 – almost 5 percentage points more than during the next-worst contraction in 1975.

Chart 2: Global trade volumes

Sources: Federico and Tena-Junguito (2016) and author calculations.

Moreover, the GFC wasn’t just the deepest downturn of the post-war period – it was also the most synchronised.  This can be illustrated using four-quarter GDP growth rates from the OECD database.   Starting in 1961, these data cover 25 major economies, rising to 44 economies by the time of the GFC.  As shown in Chart 3, GDP contracted in 40% to 60% of countries during the global downturns in the 1970s, 1980s and 1990s – whereas the share of countries experiencing negative four-quarter GDP growth spiked up sharply to almost 90% in 2009.  And the share of countries experiencing slowing GDP growth reached an unprecedented 100% in 2008.

Chart 3: Share of economies in recession or experiencing a slowdown

Sources: OECD database and author calculations.  Economies are classed as experiencing slowing GDP growth in a given quarter if four-quarter GDP growth was lower than in the previous quarter.

“How did things get so bad, so fast?”

World activity deteriorated extraordinarily quickly.  Global growth was exceptionally strong in the years running up to the GFC, supported by buoyant growth in emerging market economies (EMEs), especially in China.  Annual average global growth reached its pinnacle of around 5½% in 2007 – but as shown in Chart 4, the pinnacle immediately preceded a precipice.

Chart 4: Annualised quarterly GDP growth in advanced economies, emerging market economies, and the world

Sources: OECD database, Thomson Reuters DataStream, IMF WEO and author calculations.

Lehman Brothers filed for bankruptcy on 15 September 2008.  By this point, in the face of tightening financial conditions, advanced economies (AEs) had already entered recession – annualised quarterly AE GDP growth was around -2½% in 2008Q3.  But there was much worse to come: AE GDP growth plummeted to -8½% in 2009Q1 before recovering.  Annualised world GDP growth dropped from above 6% in 2007Q4 to -5¼% in 2009Q1 – an 11 percentage point turnaround in just over a year.  And it was a truly global recession, with aggregate EME GDP also contracting in 2008Q4 and 2009Q1.

It was always going to be challenging to accurately forecast the deepest peacetime contraction in global activity for 80 years, especially given how rapidly the outlook deteriorated.  Indeed, it could easily be argued that the GFC – or at least the magnitude of its repercussions – was inherently unpredictable.  Nevertheless, it is interesting to examine the evolution of macroeconomic forecasts in the run up to and in the months following the failure of Lehman Brothers, when the GFC entered its most acute phase.

All major macroeconomic forecasters substantially overpredicted  world GDP growth during the GFC.  This can be seen in Chart 5, which plots one year ahead forecast errors for world GDP growth from the IMF and Consensus Economics, and for total OECD GDP growth from the OECD.  In all cases, GDP growth in 2009 was four to five percentage points lower than projected.  And it’s worth emphasising that these forecasters were far from alone in producing – with hindsight – overly optimistic projections during the GFC.

Chart 5: One year ahead GDP growth forecast errors

Sources: OECD database, Consensus Economics, Thomson Reuters DataStream, IMF April WEOs since 1998, and author calculations.  The IMF and Consensus errors are annual world GDP growth outturns minus IMF forecasts from April the previous year, or minus Consensus Economics forecasts from Q2 the previous year.  The OECD errors are total OECD annual GDP growth outturns minus OECD forecasts from June the previous year.

The evolution of IMF forecasts in the months before and after the failure of Lehman Brothers illustrates the dramatic deterioration of the global outlook.  Chart 6 shows successive IMF forecasts of annual average world GDP growth for the year 2009.  It can be seen that in the April 2008 World Economic Outlook (WEO), the IMF was projecting that annual world GDP growth in 2009 would be 3.8% – well above the outturn of around -½%.  Of course, 3.8% growth would have been a material slowdown relative to 2007; the WEO’s opening line was “The global expansion is losing speed in the face of a major financial crisis.”  With hindsight, it’s also interesting to read that “the IMF staff now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 – equivalent to a global recession.”  For world GDP growth in 2008, at least, 3% turned out to be right on the money.  But 2009 would prompt the IMF to reconsider its definition of a global recession.

Chart 6: Successive IMF forecasts for annual GDP growth in 2009

Sources: IMF WEOs from April 2008 until October 2009, Thomson Reuters DataStream and author calculations.

By October 2008, 3% was the IMF’s central projection for world growth in 2009.  Around the publication of the October 2008 WEO, Olivier Blanchard (then the IMF’s chief economist) said “it is not useful to use the word ‘recession’ when the world is growing at 3%.”  In the end, of course, 2009 proved to be a recession in every sense of the word.  The October WEO also included a fan chart around the IMF world GDP growth projections – this showed that the IMF thought world GDP growth in 2009 would be between 1% and 4%, with 90% probability.

The failure of Lehman Brothers prompted a rapid deterioration in the economic outlook, leading the IMF to publish updated forecasts just one month after the October WEO (the October WEO was published after Lehman Brothers filed for bankruptcy, but before the ramifications could be incorporated in the IMF’s projections)World growth in 2009 was revised down again, to 2.2%.  This was the first IMF forecast in which AE GDP was projected to contract in 2009.

The April 2009 WEO was the first IMF forecast in which global GDP was projected to contract in 2009, and the full magnitude of the crisis was recognised.  The first subsection of the WEO is simply entitled, “How Did Things Get So Bad, So Fast?”  At this point, the IMF had revised down its growth forecasts by 5 percentage points after just one year – an unprecedented revision.

Conclusion

To sum up, the Global Financial Crisis was the deepest, most synchronised global downturn since World War II, and it happened incredibly quickly.  After Lehman Brothers failed, macroeconomic forecasters underestimated the economy-wide impacts of an extraordinary financial shock that resulted in the failure of financial institutions, the evaporation of market liquidity, dramatic falls in assets prices, and a collapse in consumer and business confidence.  It served as a sobering reminder that financial crises have sizeable effects on the real economy.

David Young works in the Bank’s Global Analysis Division

If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees

‘Running for the exit’: How cross-border bank lending fell

Published by Anonymous (not verified) on Wed, 19/09/2018 - 6:00pm in

Neeltje van Horen

Cross-border bank lending fell dramatically in the aftermath of Lehman Brothers’ failure as funding constraints forced banks to reduce their foreign exposures. While this decline was partly driven by lower demand for international bank credit, it was substantially aggravated by a retrenchment of international banks from cross-border lending. But banks did not cut their cross-border lending in a uniform manner. Instead, they reallocated their foreign portfolios towards countries that were geographically close, in which they had more experience, in which they had close connections with domestic banks or in which they operated a subsidiary. The crisis thus showed that deeper financial integration is associated with more stable cross-border credit when large global banks are hit by a funding shock.

How do banks contract their cross-border lending?

Syndicates – groups of financial institutions that jointly provide large loans – are a key source of cross-border finance for firms in both developed and emerging countries. In 2007, international syndicated loans made up over 40% of all cross-border debt funding of US borrowers and more than two-thirds of cross-border flows to emerging markets. But in the year following the collapse of Lehman Brothers syndicated cross-border lending to private borrowers shrank by 58% according to data from Dealogic Loan Analytics.

As Figure 1 illustrates, the magnitude of this reduction differed substantially across countries. While 46 out of 59 recipient countries experienced a reduction in lending, the decrease varied from a drop of 1 percent to a complete lending stop. Furthermore, 13 recipient countries actually experienced and increase in cross-border flows they received after the collapse of Lehman Brothers. While this partly reflects differences in the adjustment of economic activity and credit demand, I show in a paper co-authored with Ralph De Haas (published in the Review of Financial Studies) that it also reflects variation in how banks reduced their credit-supply across countries.

If banks face a funding or other shock which leads them to cut cross-border lending and focus on domestic credit, they have to decide how to allocate the contraction across different foreign markets. Broadly speaking, international operating banks can follow one of three strategies.

First, they could simply cut cross-border lending uniformly across the board. A second strategy is to cut their credit supply on the basis of broad recipient country characteristics that are common across all lenders, such as political or macroeconomic risk. Whilst this second strategy implies that banks withdraw more from some countries relative to others, both strategies imply that all banks adjust their portfolio by the same magnitude in each recipient country, i.e. there is a generalized run for the exit.

But they could adopt a third strategy, where they cut lending on the basis of characteristics that are specific to bank-country pairs. Banks compare the ‘franchise’ value of future cross-border lending to determine where to retrench more and where to reduce credit less.  Unlike the first two strategies, under this approach two foreign lenders might react differently to a given borrower, and there may not be a generalised run for the exit.

Economic theory suggests several reasons why different banks might react differently to a given lender. One reason is that banks find it easier to overcome information asymmetries when they are geographically closer to borrowers. This channel becomes especially important when default risk increases during a crisis. Another reason is that if a bank has established lending relationships in a country it may also possess local market power, which it can exploit during a crisis. Related, banks with significant experience in a country can lend at lower costs as they know the local business sector well, know more domestic banks they can co-lend with, and are familiar with the legal, institutional, and accounting environment. If banks withdraw less from countries that are relatively ‘close’ to them in a geographic sense or in terms of lending relationships, they will adjust their portfolios differently for each recipient country.

Empirical evidence from syndicated loan data

A useful way to study how lending contracted is by looking at adjustments in syndicated lending. For each syndicated loan all lenders and the borrower are known. So we can observe how much each bank lends to each country in the year after the collapse in Lehman Brothers and compare it to its lending to that country in the year before. As multiple banks lend to the same country we can control for changes in credit demand and how much the country was affected by the financial crisis. We can thus analyse how a particular bank – given a certain funding shock – changes its lending to a particular country compared to another bank.

Using a dataset of syndicated cross-border lending by 117 international banks to 59 recipient countries we find that during the financial crisis international banks did not cut cross-border lending in an indiscriminate manner. In other words, there was no overall run for the exit. Rather, and in line with economic theory, banks followed the third strategy.

We find that bank-borrower closeness was strongly related to the resilience of cross-border credit. Banks continued to lend more to countries that were geographically close, where they were integrated in a network of domestic co-lenders, and where they had built up more lending experience. Banks that operated a local subsidiary were more stable providers of cross-border credit too, in particular in countries with weaker institutions.

What did the crisis reveal about the resilience of cross border lending?

The global financial crisis provided a stark natural experiment in how international credit contractions play out. It demonstrated that cross-border lending can be very unstable in times of stress which can have important negative consequences for firm performance and the real economy. However, alongside the aggregate contraction, the crisis also demonstrated that not all cross-border lending is equally unstable. This yields several important insights:

First, when international banks that provide cross-border bank lending are more entrenched in the recipient country they are less likely to cut lending. This entrenchment naturally results from cultivating long-term lending relationships with domestic banks and firms.

Second, a local presence in terms of a subsidiary or branch also tends to increase lending stability, especially in countries with weaker institutional environments. Not only do foreign-bank subsidiaries provide a relatively stable credit source themselves in these countries, their presence also tends to stabilize cross-border lending flows provided by the parent banks.

Third, a country’s vulnerability to capital outflows depends on the geographical proximity and experience of its creditors. For countries and firms that depend on international banks that are remote and have less local experience, the risk of a significant homebound retrenchment when foreign creditors are faced by a funding shock will be higher.

The crisis thus showed that shocks to the core of the global financial system can easily transmit to other parts of the world via a sharp reduction in cross-border lending. But when two countries are more deeply integrated financially, cross border lending flows between them are likely to be more resilient.

Neeltje van Horen works in the Bank’s Research Hub Division

If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

Teaching macroeconomics as though Lehmans didn’t happen

Published by Anonymous (not verified) on Mon, 17/09/2018 - 11:42pm in

September 15th marked the tenth anniversary of the fall of Lehman Brothers, destabilizing Western economies at levels not seen since the 1930s. It also marked the second week of fall classes, with many economics graduate students cranking through equations that define the discipline’s conventional macroeconomic models. With such names as New Classical, Real Business Cycle and New Keynesian, these models can all be traced to the rational expectations revolution of the 1970s, which sought to explain stagflation when the conventional Keynesian framework could not. The rational expectations approach attempted to provide more precise behavioral microfoundations than the Keynesian model by positing that economic actors can form expectations of future economic values, say inflation, such that on average, their predictions of future values tend to be correct. This assumes the actors share the same understanding of the structure of the economy and past economic data. This research program would come to dominate macroeconomic scholarship and strongly influence policy makers, culminating in the creation of the dynamic stochastic general equilibrium (DSGE) model, a popular forecasting and policy analysis tool used in central banks and finance departments.

This approach to macroeconomic modeling came under scrutiny following the 2008 crisis, with Nobel laureate Paul Krugman asserting that most of the macroeconomics over the past 30 years was “spectacularly useless at best, and positively harmful at worst”. While this did spark some soul-searching within the discipline, the debate has been inconclusive. Several policy-making bodies are taking seriously the limitations of 1970s macroeconomics. In its recent Medium-term Research Plan, the Bank of Canada recognises that the crisis has challenged its reliance on New Keynesian DSGE models, encouraging the exploration of alternative modeling paradigms, such as agent-based and stock-flow consistent models.

On Canadian campuses, however, where the next generation of macroeconomists are being trained, there is no clear signal that similar changes are being made in the curriculum of grad-level macroeconomics. A recent panel discussion among academic economists featured the admission that the 2008 crisis was the most embarrassing empirical failure of the profession since the Great Inflation of the 1970. Yet, in the same breath, that professor said he wouldn’t change a thing in his teaching. Indeed, a glance at the macroeconomics syllabuses of several top Canadian grad schools find little evidence of a shift away from teaching the rational expectations-grounded macro models that have come under criticism.

Professors tend to teach what they are taught. With the sunk cost of prepping for PhD macroeconomic comprehensive exams, they have little incentive to develop a new course involving subject matter in which they are not trained. Further reinforcing the status quo is the tendency to teach what you research. Working in a climate of publish or perish, macroeconomic profs have good reason to not deviate from the dominant research agenda, which remains wedded to 1970s macro. In the absence of strong leadership for change or a mandate from either the dean or the premier to sit down with one another and re-design the curriculum, teaching macro in the post-crisis era will continue to be business as usual.

Yet this is not in the public interest. Given the acute financial stress experienced ten years ago, we have a stake in knowing that the policy makers of tomorrow are well prepared to confront episodes of economic downturn and instability. Learning to use a larger modeling toolbox is part of such preparation.

So, what are Canada’s economics students to do in the meantime as they are grind through the math describing a DSGE model? As befitting any college course where critical thinking is one of the learning outcomes, here are some questions students may ask about the models they are taught:

1. Who is in the model? The basic models tend to have a single agent representing all consumers who are assumed to be sufficiently alike as autonomous rational optimizers sharing common knowledge. Can the model accommodate multiple actors who may differ by age, preference, belief, resources and class?

2. Is there room for “black swans”? The 2008 crisis was precipitated by the collapse of the U.S. subprime mortgage market, an event deemed of low risk but of high impact. How does the model address this and other examples of fundamental uncertainty?

3. What kind of markets are modelled? Models with perfect competition behave very differently from more realistic models with imperfect competition, information asymmetries, price rigidities and institutional constraints.

4. Is there a financial sector? Perhaps the strongest criticism of the 1970s macro models was the reduction of complex financial plumbing to a single interest rate variable. Can these models feature lenders and borrowers? Are there banks? How does money fit in?

5. Does the model have to move to equilibrium? Following an economic shock, standard models tend to instantaneously jump to a new equilibrium path. However, observations of macroeconomic variables as they unfold over time suggest that such adjustment may be a much slower, sequential process. Understanding this path of adjustment may be of greater importance than the equilibrium destination.

6. How are these models empirically tested? A model’s usefulness should be judged by how it explains actual economic history.

With these and other critical questions about the core macro teaching models, tomorrow’s dismal scientists should be better prepared to confront challenging economics times.

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