... to achieve substantial currency depreciation throug

1
IDEAs Conference on Re-regulating global finance
in the light of the global crisis Tsinghua
University, Beijing, China 9-12 April
2009 Re-regulating finance Using Minsky to
Learn from the crisis
Jan Kregel Director, Monetary Policy and
Financial Structure Program, Levy Economics
Institute of Bard College, Professor of
Development Finance, Tallinn University of
Technology Distinguished Research Professor,
Center for Full Employment and Price Stability,
University of Missouri, Kansas City
2
Outline

• Diagnosis as Important than Cure
• Current Policy Based on US and Japanese
• Fisher and Reflation in the New Deal
• Return Prices and Incomes to Normalcy
• Krugman Bernanke on Japan Liquidity Trap
• Do ZIRP Quickly
• Alternative Diagnosis What Went Wrong?
• Market as Provider of Bank Liquidity
• How the System Works
• Minsky Fragility of Balance Sheet Approach
• What Can We Do To Regulate Stability
• Macro Provision of Liquidity
• Monetary Policy Provision of Incomes
• Balance Sheet Intervention

3
Fisher and Reflation in the New Deal

• Monetary Expansion Will Bring Reflation (Chicago
  too!)
• To Reverse Debt Deflation Return Prices to
  NORMAL
• !932 Glass-Steagall Act Allows Open Market
  Operations
• Drives Interest Rates on Treasuries towards ZERO
• Decimates Bank Profits Policy Reversed to Save
  Banks
• Fed FAILED to Create Money and Caused Depression
  (Friedman and Schwartz Bernanke)
• New Deal
• Dollar Depreciation
• Price Fixing NIRO, AAA etc
• Fiscal Policy Not Keynesian until 1937 Collapse
• Social Safety Net via CCC, WPA etc

4
Zirp And Quantitative Easing

• Money, unlike other forms of government debt,
  pays zero interest and has infinite maturity. The
  monetary authorities can issue as much money as
  they like. Hence, if the price level were truly
  independent of money issuance, then the monetary
  authorities could use the money they create to
  acquire indefinite quantities of goods and
  assets. This is manifestly impossible in
  equilibrium. Therefore money issuance must
  ultimately raise the price level, even if nominal
  interest rates are bounded at zero. This is an
  elementary argument, but, as we will see, it is
  quite corrosive of claims of monetary impotence
  (Bernanke 2000).

5
Exchange Rate Policy

• the BOJ should attempt to achieve substantial
  currency depreciation through large open-market
  sales of yen. Through its effects on import-price
  inflation . . . , on the demand for Japanese
  goods, and on expectations, a significant yen
  depreciation would go a long way toward
  jump-starting the reflationary process in Japan
  (Bernanke 2000, p. 160).
• Mr Yen tried in July 1999 but resulted only in
  yen appreciation, because the United States was
  unwilling to allow the value of the dollar to
  rise.

6
Minsky Alternative Diagnosis

• Banking is not money lending to lend, a money
  lender must have money..... A bank loan is
  equivalent to a banks buying a note that it has
  accepted. When a banker vouches for
  creditworthiness or authorizes the drawing of
  checks, he need not have uncommitted funds on
  hand. He would be a poor banker if he had idle
  funds on hand for any substantial time. Banks
  make financing commitments because they can
  operate in financial markets to acquire funds as
  needed to so operate they hold assets that are
  negotiable in markets and hold credit lines at
  other banks. The normal functioning of our
  enterprise system depends upon a large array of
  commitments to finance, which do not show up as
  actual funds lent or borrowed, and money markets
  that provide connections among financial
  institutions that allow these commitments to be
  undertaken in good faith and to be honored
  whenever the need arises.

7
Business Models Deposit Banks

• Deposit Banks
• Provide Payments and Safekeeping Services
  Deposits
• Provide Finance to Business Speculators Loans
• Lend by creating Deposits, and then Funding Loans
  by attracting Deposits or Borrowing from other
  banks
• This means that banks create purchasing power ex
  nihilo that they lend to firms who use it to
  command resources
• They then have to support the money creation by
  acquiring reserves or raising bank capital
• Bank profit charge more loan of money they dont
  have than they pay for money they have to borrow
• Profits Net Interest Margin Lending rate gt
  borrow rate
• BUT activities and prices are regulated
• Banks Originate, Fund and Hold Assets

8
Business Models Investment Banks

• Act as Brokers for account of others
• Specialists on NYSE require call lending,
  Charge fee for service
• Act as Dealers for their own account
• Require short-term financing from Deposit Banks,
  Charge a bid-ask spread
• Provide Capital Funding for Business, Charge a
  percentage of the funds raised
• Engage in Proprietary trading. -- Requires
  proprietary capital financing
• Provide advisory services. Charge fees
• They Originate Assets and Distribute them in
  Capital Market to general public
• Require Short Term Funding

9
Business Models Real Sector

• All Business Models are Speculative
• Physical Production
• Buy inputs today to produce output for sale
  tomorrow
• Wholesale and Retail Trade and Commerce
• Buy outputs today for resale tomorrow
• All Require Finance to purchase today something
  expected to be sold at a profit at some future
  date
• Profits Sales Proceeds gt Input Finance Costs

10
Speculative Business Models

• All depend on selling assets to finance activity
• Real Sector Production
• Buy before you sell
• Crisis Excess production and inventory
• Decline in product prices relative to costs
• Financial Sector
• Sell Loans before you fund
• Crisis Excess sales that cant be financed
• Decline in value of assets relative to borrowing
  costs

11
How Can We Regulate Stability?

• Cannot be Done!!
• Provision of Liquidity --
• Fed to Support Financial Asset Prices BEFORE
• Lending to ALL Financial Institutions (Minsky
  1960)
• FED did it too late, and too Aleatory
• Fed Cannot Be Lender of Last Resort AND Control
  Economic Activity
• Balance Sheet Restructuring
• German Approach Equilibrium Bonds
• For Banks as in 1949 Currency Conversion, East
  German Mark Integration
• For Households
• For Value of Shortfall or Simply to Repay Mortgage

12
Structure of SYSTEM is Important

• Glass Banking Act Determined Structure
• GBL MFA Determined Structure
• Far NO Discussion of New Structure
• Return to Normalcy
• Save the Banks,
• Concentration Too Big To Fail/Regulate?
• Regulation By Function or By Institution?
• Bank Holding or Universal Bank
• Different Regulation for Each
• US Never Introduced Special Regulation for
  Holding Company Model

13
Understand How System Works?

• Government Does Not Have to Borrow To Spend
• Banks Do Not Have to Fund/Reserve to Lend
• Reserves Are Endogenous
• Capital Is Endogenous
• Both Are Pro-Cyclical
• Balance Sheets Are Important
• Consumption Function
• Liquidity Preference