National Bank of Belgium: Liquidity Doesn't Always Cause Asset Bubbles

http://www.nbb.be/doc/oc/repec/reswpp/wp117en.pdf

A 2007 empirical study by the National Bank of Belgium on the effects of excess liquidity finds that only under certain conditions does excess liquidity actually lead to an asset bubble. The idea that most high-cost booms are preceded by high money growth has been well elaborated by economic theory. However, this does not necessarily imply that all periods of excess liquidity signal an imminent asset price boom. In fact only 1/3 of all periods of excess liquidity analyzed by this empirical study lead to an asset bubble. It is a warning against naive monetary analysis.

The findings of this paper are that an asset price boom arises only under a combination of events. The conditions under which excess liquidity might lead to an asset price boom (a bubble), are when the period of excess liquidity is prolonged and is accompanied by strong real GDP growth, low inflation, and credit growth.

In looking at what this means for monetary policy, it means simply that central banks can afford to act without fearing the automatic rise of inflation or asset bubbles in reaction to any effort to improve sluggish economic growth. The threat of bubbles looms large when excess liquidity persists on the market for long periods, during episodes of strong economic growth. In looking at what it means for financial regulation, it means that asset price bubbles can also be prevented or possibly even dismantled by better regulating the credit markets.

Essentially, the results of this study confirm the conclusions outlined by the Quantity Theory of Money and by the Phillips Curve, albeit on a micro scale. That is, increases in liquidity might influence prices, but only after other avenues have been exhausted. Looking at the graph above, we can say that while at point B, we should feel confident in the usefulness of monetary action, without immediately worrying about price levels. We should not pretend that we are at point A when it simply isn't the case.  

Abstract

This paper analyses the relationship between the prevailing liquidity conditions (such as measures of money, credit and interest rates) and developments in asset prices from a monetary analysis perspective. After having identified periods of sustained excess liquidity, we analyse under which conditions they are more likely to be followed by an asset price boom. The results from a descriptive analysis of the developments in a number of macroeconomic and financial variables suggest that periods of sustained excess liquidity that are accompanied by strong economic activity, low interest rates, high real credit growth and low inflation have a higher likelihood of being followed by an asset price boom. This conclusion is also confirmed by a logit analysis.
http://www.nbb.be/doc/oc/repec/reswpp/wp117en.pdf
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The National Bank of Belgium is Belgium's central bank and lender of last resort. It is part of the European System of Central Banks 

Hollande Wins French Elections

http://www.bbc.co.uk/news/world-europe-17975660
http://socialjusticefirst.com/2012/05/05/french-elections-missing-the-big-picture/

On Sunday May 6th, 2012, French voters chose François Hollande as their president for the coming five years. Voters responded strongly to campaign promises made on transparency, proportional representation, and competence-related issues.

http://www.arretsurimages.net/vite.php?id=13741

French Economist Francois Cocquemas comments: 

Both the left-wing favorite, François Hollande, and the right-wing incumbent, Nicolas Sarkozy, promised higher taxes and controlled public spending. Both candidates aim to bring the public deficit back to equilibrium, disagreeing only on the time-frame. Both mostly refrained from costly, last-minute promises to rally the undecided. According to the pro-business think-tank Institut de l’entreprise, both programs are underfunded by a similar amount, €11bn to €12bn.

Their difference on economic matters seems largely limited to their plans for Europe: Mr Hollande wants to renegotiate the European Fiscal Stability Treaty, so it also promotes growth and not just government austerity, which is enough to make him “rather dangerous” in the eyes of the Economist. As the Financial Times’ Chief political commentator Philip Stephens rightly puts it, there’s no reason to fret:  

The influential Economist has declared on its front cover that Mr Hollande is “dangerous” – though, being British, it did add a qualifying “rather” to this disobliging epithet. The would-be president, the magazine observed, “genuinely believes in the need to create a fairer society”. Well, what could be more dangerous than that?

The influential Economist has declared on its front cover that Mr Hollande is “dangerous” – though, being British, it did add a qualifying “rather” to this disobliging epithet. The would-be president, the magazine observed, “genuinely believes in the need to create a fairer society”. Well, what could be more dangerous than that?

Be that as it may, Mr Hollande’s campaign has been soft-spoken in therms of social and economic justice rhetoric. Mr Sarkozy, on his side, has argued about the impossibility to renegotiate a signed treaty – shortly before threatening to suspend the Schengen agreement if nothing was done to fix “leaky Europe”. Mr Hollande, on the other hand, claims that other leaders in Europe are looking forward to his election, and that lines are already moving after ECB president Mario Draghi called for a growth compact alongside the fiscal compact.

Draghi, of course, is thinking of structural reforms promoting flexibility and mobility in the labour market, where Mr Hollande’s growth plans mostly entail increased investment, financed by eurobonds.

In fact, BBC has reported that far from the being economically "rather dangerous", Hollande's policies will not make have the negative effect on growth that many in the media are trumpeting.
http://news.bbc.co.uk/today/hi/today/newsid_9719000/9719327.stm

What the Real Story is:

What is perhaps bigger news is the ideological shift across Europe as European voters reject austerity and pro-financial sector economic agendas in favor of parties backing pro-growth  economic policies. Almost simultaneously, there have been electoral shifts in Greece, France, and Germany, while the Dutch government fell over the austerity issue.

http://www.npr.org/blogs/thetwo-way/2012/05/07/152177839/seismic-shift-in-europe-after-french-and-greek-elections
http://www.bbc.co.uk/news/world-europe-18048942
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Francois Cocquemas holds a Master degree in finance from Sciences Po Paris and a joint Master degree in economics and public policy from Ecole Polytechnique, ENSAE and Sciences Po. He is currently doing  a PhD in finance at EDHEC Business School (École des Hautes Etudes Commerciales du Nord).

We Need to Address Student Loans & Student Debt

http://nacba.org/Portals/0/Documents/Student%20Loan%20Debt/020712%20NACBA%20student%20loan%20debt%20report.pdf

Today, we have reinvented debt-bondage via the university system. In the US, the OECD country where tuition rates are the highest relative to median income, the cost of decent tertiary education often exceeds $100,000 for a bachelor's degree and $150,000 for a master's. Given actual income and salary figures for Americans with a bachelor-level education, this constitutes an unsustainably high price level for education. 

Even in the best of economic times when jobs are plentiful, young people with considerable debt burdens end up delaying life-cycle events such as buying a car, purchasing a home, getting married and having children.  

The Effect on our Society

The amount of student borrowing crossed the $100 billion threshold for the first time in 2010 and total outstanding loans and exceeded $1 trillion for the first time in 2011.   Essentially, students and workers are borrowing extraordinary amounts to cover the rising cost of university education.  In fact, Americans now owe more on student loans than on credit cards. Furthermore, the National Association of Consumer Bankruptcy Attorneys reports that 25% of student loan recipients who graduated in 2005 have gone delinquent on the loans at some point, while 15% have defaulted. With rising debt comes increased risk, both to borrowers and to the economy in general. 

For the economy, higher private indebtedness levels mean less consumer confidence  (and indeed, less consumption), increased dependence on the economic cycle, and increased vulnerability to economic crises, unemployment, or anything else troublesome. It also means that people will be doing less investing in both themselves (such as by seeking more education), and in the market (which might have generated more employment).

On the personal side, high indebtedness amounts to serfdom. Ever-increasing tuition costs relative to other costs will not only lead to fewer Americans graduating from university, but also to increased mortgaging of the future for those who do. Just as the housing bubble created a mortgage debt-burden that absorbed the income of consumers and rendered them unable to afford to engage in the consumer spending that sustains a growing economy, student loans are beginning to have the same effect, which will be a drag on the economy for the foreseeable future. What’s worse, Bush-era bankruptcy law reforms make student debt completely undischargeable under bankruptcy proceedings.

Accumulating student debt in middle age is even more problematic because there is less time to earn back the money. It may also mean facing retirement years still deeply in debt.  Furthermore, parents who take out loans for children or co-sign loans will find those loans more difficult to pay as they stop working and their incomes decline.

HOW THE STUDENT LOAN BUBBLE WILL AFFECT OUR NATION

DEFAULT: THE STUDENT LOAN DOCUMENTARY

 

How we Should Treat the Issue?

We need to invest properly in the productivity and competitiveness of our nation. Investing in human capital secures dividends for our nation, our economy, and our society. Like most OECD countries, the US has an economy that depends on the knowledge-base of its human capital-driven service industry in order to be competitive on an international level. OECD and US research indicate that this trend will only get deeper in the future. The more we drag our feet on this issue, the further behind the US will get compared to countries like Japan, Korea, and Germany.

In order to address the situation, a two-pronged approach is best. On one hand, tuition costs should be mostly paid by taxpayers. The argument for this can be justified by the simple fact that most of the benefits of higher education actually accrue to society at large, rather than the student. This comes in the form of increased employment levels and international competitiveness, as well as lower incarceration rates and improved health. On the other hand, currently outstanding student debt should be drawn down as efficiently and quickly as possible. This should take place by means of statutory pro-debtor statutory changes, as well as interest rate caps, and stricter application of anti-predatory-lending principles.

NACBA Study

A 2012 study by the US National Association of Consumer Bankruptcy Attorneys found that aside from the proportions of the student debt problem and its productivity-draining effects on our economy, the stability of US student-loan debt may become the next trouble spot on the financial markets. The study recommends statutory reforms including re-instating the dischargablilty of student debt, and improved oversight of private student lenders.

http://nacba.org/Portals/0/Documents/Student%20Loan%20Debt/020712%20NACBA%20student%20loan%20debt%20report.pdf

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About the Author:

Max Berre is a financial sector regulatory economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Contributions of the Stockholm School

Role in Public Debate: The Scandinavian Welfare State

http://econjwatch.org/file_download/119/2006-9-carlsonjonung-char-issue.pdf 

In Sweden, the public debate has been shaped by economists and by the economics profession to an unusual degree. In fact, a study launched by Carlson and Jonung claims that in Sweden, economists have more influence and higher standing than any other type of social scientist. Furthermore, they claim that this fact is what underlies the construction of the modern Swedish state. This claim is embodied in the contributions of five of the Stockholm School's most accomplished economists, who have had an influence on academic and policy circles alike. These are Wicksell, Cassel, Heckscher, Ohlin, and Myrdal. The Stockholm school is so-named because its ideological home university is the Stockholm School of Economics.

What Policies Does the Stockholm School Stand For?
In short, the Stockholm School is the practical embodiment of Social-Democratic theory. Historically seeing themselves as the antithesis of the Austrian school (a view that they do not hold alone), Stockholm school economists, they independently reached the same conclusions as JM Keynes on macroeconomic theory during the interwar period. Because the main scientists in the Stockholm school did not die immediately after the war,  Stockholmers went on to publish further policy works.

The Work of Stockholm professors served as a major source of inspiration for the construction of the modern Swedish welfare state, relying heavily on government intervention and social engineering to create a "people's home" (Swedish: "Folkhemmet"). 

This paper discusses the contributions of the five main professors of the Stockholm school.

Abstract  

In Swedish public debate, economists have been more influential than any other category of social scientists. We examine the views of five great Swedish economists on the role of the university economist in the public arena. What did they say about scholarly objectivity and value judgements, about political commitment and educating the people? The five economists are Knut Wicksell, Gustav Cassel, Eli Heckscher, Bertil Ohlin and Gunnar Myrdal. Representing two generations and a broad political spectrum, they were immensely productive. They founded Sweden’s tradition of media-tuned university economists strongly involved in the current social issues. More recently, however, academic economists in Sweden have shifted away from that ideal. The future of the old heritage hangs in doubt.
http://econjwatch.org/file_download/119/2006-9-carlsonjonung-char-issue.pdf 
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About the Authors:
-Benny Carlson is professor of economic history at Lund University.
-Lars Jonung is a guest professor at  Lund University School of Economics and Management, a member of the Fiscal Policy Council of Sweden, and economist at DG ECFIN at the European Commission in Brussels.

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Can Economics be Taught Better?

http://www.nytimes.com/roomfordebate/2012/04/01/how-to-teach-economics-after-the-financial-crisis (NYT)

What NY Times and LA Times are Reporting

At the beginning of April 2012, a stirring debate within academia reached the pages of two of the US' premiere newspapers. 

LA Times

On April 11th, the LA times ran a piece highlighting student discontent at Harvard with the economics discipline. Last November, 70 students organized a walkout on Harvard economist Greg Mankiw's economics lecture. The students later posted an open letter saying "Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University [sic], and our greater society." They went on to complain that instead of presenting a broad introduction to economics, Mankiw's teaching was narrowly focused, on orthodox models was ultimately complicit in perpetuating systemic global inequality. Professional economics in the field and in academia went on to sympathize with the students' message.

NY Times

The April 1st op-ed piece looks at things from the point of view of the researchers, professors, and professional academics. Authored by a collection of seven economics a the forefront of the contemporary academic economic debate including Nassim Taleb and Robert Skidelsky, a number of well-thought suggestions on reform of the economics curriculum were made. 

• We need to move beyond dependence on mathematical models. This goes for both probabilistic models and finance and abstract calculus-based model in the economics discipline at large. A more cross-disciplinary approach is needed.
• Economic History deserves our serious attention. 
• The difference between risk and uncertainty needs to be taught and understood. In particular, we should spend time on the meaning and implications of uncertainty.
• We should not give assurances that we have completely figured out the markets or the economy. Economics is not a hard science. We cannot run experiments. 
• Focus more on market imperfections. A lot of people believe that the market is infallible. That's not what either history or Adam Smith teaches. 
• Realize that price signals are not infallible either.

http://www.latimes.com/news/opinion/commentary/la-oe-weiner-youth-revolt-economics-20120411,0,6994951.story?track=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MostEmailed+%28L.A.+Times+-+Most+E-mailed+Stories%29 (LA Times)

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http://www.nytimes.com/roomfordebate/2012/04/01/how-to-teach-economics-after-the-financial-crisis (NY Times)

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About the Author:
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Recovered Factories Movement in Argentina - The Take

Argentine Unions use Bankruptcy Law to Take Over Bankrupt Factories

http://www.youtube.com/watch?v=LEzXln5kbuw&feature=relmfu (with English subs)

This film, directed by Avi Lewis in the aftermath of the 2002 Argentine crisis, documents the struggle of the movement of Empresas Recuperadas (Recovered Firms) in factories and industries of Buenos Aires and its suburbs. A recovered firm run by its ex-employees after they have been taken over by following bankruptcy or abandonment management by management.

The Legal Aspect

Legally, the movement legitimizes their actions by means of default law as well as bankruptcy law. Essentially, bankruptcy is a situation of permanent insolvency. Economically, the bankruptcy is defined by debts which exceed the income and assets. Under the legal concept of bankruptcy is established that the bankrupt is disqualified from managing their property, while under the cessation of payments, the situation could be resolved in the absence of agreement with creditors, after the liquidation of corporate assets.

Economic Effects

Once rehabilitated, the company generally is organized as a cooperative. Under this type of firm, members are both employee who contributes labor, and entrepreneur who contributes to the commercial decision-making process. Instead of layoffs and economic downturn in the region generated by business closures, generate sustainable employment and production and eventually perhaps, economic stability.

Full Movie, without subtitles

Sindicatos Argentinos se Apoderan de los Medios de Producción en Fabricas Bancarrotas Usando Ley de Quiebra

Este obra, dirigido por Avi Lewis poco después de la crisis Argentina del 2002 documenta la lucha del movimiento de empresas recuperadas en las fabricas e industrias de Buenos Aires y sus suburbios. Una emperesa recuperada es una empresa gerenciada por sus ex-empleados después de haber sido tomada por ellos en situación de quiebra o abandono gerencial.  

Aspectos Legales

Legalmente, el movimiento legitimiza sus acciones por medios de ley de cesación de pagos tanto como ley bancarrota. Esencialmente, la bancarrota es una situación de insolvencia permanente. Economicamente, la quiebra se defina por deudas cuales exceden los ingresos y los activos. Bajo el concepto legal de bancarrota se establece que el fallido queda inhabilitado de administrar sus bienes, mientras que bajo de la cesación de pagos, la situación se podría resolver, en ausencia de acuerdo con los acreedores, tras la liquidación de activos de la sociedad. 

Efectos Económicos

Una vez rehabilitada, la empresa generalmente se organiza como empresa cooperativa. Bajo de este tipo de empresa, el miembro es a la vez empleado  que contribuye con su mano de obra, y empresarial, que contribuye al proceso de decisión comercial. En lugar de despidos masivos y caída económica en las región generado por cierres empresariales, se genera producción y empleo sostenible y eventualmente quizás, estabilidad económica. 

http://www.youtube.com/watch?v=LEzXln5kbuw&feature=relmfu
(Español, subtitulado en inglés)

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

European Left Proposes Way out of Crisis

Social-Dems Unveil Pro-Growth "2020 Strategy"

http://www.feps-europe.eu/uploads/documents/1103_ECLM_WaysOutOfCrisis.pdf

Because sovereign indebtedness is about a country's Debt-to-GDP ratio, there are two ways a country can reduce indebtedness. One way in to reduce the its debt. This is the way favored by the European right with respect to the current debt crisis, who have even called for "severe and unflinching cuts" as expressed by ECB director  Draghi, and undertaken by David Cameron.

Nevertheless, this way is seen by Social Democrats as a strategy to be avoided because of implication for living standards, growth and employment.While tight fiscal policy may have a short-term effect, true long-term recovery requires structural change. Tight fiscal policy does not address unemployment and if the fiscal tightening creates lack of confidence in the economy for consumers and investors, it will endanger the recovery.

The other way is to overcome indebtedness by simply outgrowing it. This of course calls for an agressive, multifaceted economic strategy.

The 2020 Strategy
FEPS, a Brussels-based think-tank with affiliation to both the PES and the S&D group has unrolled a long-term growth strategy designed around four key points. These are:

1. Improve European Education and Productivity: The underlying idea is the improved education is the basis of increased productivity. In fact this is a point which is borne out by microeconomic theory.
2. Green Growth: This is the type of infrastructural growth which will increase the GDP int he short-term. Also, its better to get green infrastructure built sooner rather than later. 
3. Reduction of Social Inequality: This point focuses primarily on reducing the male-female earnings gap in Europe. This issue will be via active labor market policy and via active social policy. 
4. The Financial Transactions Tax: This will help to stabilize the financial markets while also serving as a source of revenue, thus stabilizing the sovereign debt issue. 

2020 Strategy EU-27 GDP Growth Projection

Implementation of the 2020 strategy is projected to have positive implications for growth and unemployment figures in the EU-27. This should come as no surprise -the strategy calls for the creation of infrastructure, increases of ALMPs, and making sure that women get better pay- The question of whether it can be sustained will hinge on how well the strategy is implemented and whether it will yield growth dividends.

 2020 Strategy EU-27 Unemployment Projection 

Abstract

The EU recommends that 24 out of the 27 EU countries tighten fiscal policy. Some countries have tightened fiscal policies already in 2010 and some countries have decided on more ambitious consolidation plans than recommended by the Commission. Macroeconomic model calculations show that it will have large consequences for both GDP growth and the development on the labour market if all 24 countries tighten fiscal policy at the same time. If only the 5-8 countries with the largest budget deficit tighten fiscal policy the negative effects on the European economy will not be as harsh.

A second path is to introduce reforms. Tightening fiscal policy might improve the budgets in the short run, but in the medium and long run, an economic upturn in Europe requires structural changes in the form of reforms that change the underlining structures. Model calculations show that a strategy based on investments in green growth, increasing productivity and the education level, fighting social inequality and introducing a FTT-tax can create almost 6.5 mil-lion jobs over the next 20 years.
http://www.feps-europe.eu/uploads/documents/1103_ECLM_WaysOutOfCrisis.pdf


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