Ten years after the outbreak of the global financial crisis, banks in the euro area have not recovered. The Euro Stoxx Financials is 65% below the pre-crisis peak, whereas the S&P Financials has come close to the pre-crisis level. The different fate of financial institutions is due to different monetary and regulatory crisis therapies of the European Central Bank (ECB) and the Fed. Continue reading
We published lots of new posts in 2018. Some have received more attention than others. Below you find the 5 most popular new posts of 2018:
- My appreciation of Mario Rizzo on his 70th birthday (See: A Tribute to Mario Rizzo)
- Ten Years After Lehman: Bubbles Galore & Zombies
- Hayek’s Work Helps Explain the Link Between Monetary Policy and Political Instability
- Friedrich von Wieser, or: Against “Sidelining” Austrian Economists
- Distributional Effects of Monetary Policy: An Opportunity for Austrian Economics
The ECB’s zero and negative interest rate policy continues despite the economic upswing. An interest rate hike is not expected before autumn 2019. The extensive purchases of government and corporate bonds will have reached €2,600 billion by the end of the year. The ECB’s financial market supervision as part of the Single Supervisory Mechanism (SSM), which was created in 2014 in response to the crisis, is proliferating. Most recently, ECB vice president Luis de Guindos has expressed the intention to monitor the investment fund sector.
For a long time, Austrian macro had a unique selling point in what might be called the ‘money matters’ view: referring to the notion that changes in the money supply by their very nature can never be said to be neutral. Yeager (1997) and Horwitz (2000) describe the Austrian stance as a “fluttering veil”. On the one hand, it incorporates the belief that prosperity cannot be generated through an expansion of the money supply in the long-run (long-run neutrality of money). On the other hand, changes in the money supply have real effects (short-run non-neutrality).
This proposition can be traced back to the works of classical economists such as Hume (1970), Mill (1909), Cairnes (1873), and Cantillon (1755).[i] In his essay on economic theory, Cantillon (1755) points out that an expansion of the money supply necessarily entails distributional effects as first receivers of the newly created money benefit compared to those ones further down the line.
by Edward Chancellor*
Interest rates in China may never have turned negative, as they did in neighbouring Japan. Yet China’s economy has also become distorted by the decade of easy money since the 2008 financial crisis. As in the West, low interest rates in China are responsible for inflating asset prices, misallocating capital, aggravating inequality and undermining financial stability.
by Edward Chancellor*
The Greek philosopher Aristotle attacked the charging of interest on grounds that lenders demanded more money in return than they supplied. This ancient prejudice against interest lingers in the French economist Thomas Piketty’s claim that inequality increases when the return on capital, a quantum which includes the rate of interest, is higher than that of economic growth. Yet the overwhelming evidence from the easy money that followed Lehman Brothers’ demise shows that inequality really takes off when interest rates are maintained at artificially low levels.
by Edward Chancellor*
In 1776, the English man of letters Horace Walpole observed a “rage of building everywhere”. At the time, the yield on English government bonds, known as Consols, had fallen sharply and mortgages could be had at 3.5 percent. In the “Wealth of Nations”, published that year, Adam Smith observed that the recent decline in interest had pushed up land prices: “When interest was at ten percent, land was commonly sold for ten or twelve years’ purchase. As the interest rate sunk to six, five and four percent, the purchase of land rose to twenty, five-and-twenty, and thirty years’ purchase.” [i.e. the yield on land fell from 10 percent to 3.3 percent].
by Edward Chancellor*
Back in November 2002, Ben Bernanke, then a governor of the Federal Reserve, attended Milton Friedman’s 90th birthday party. In his writings, the legendary monetarist had pinned the Great Depression on policy failures of the American central bank. Bernanke was a keen disciple and apologised to Friedman on behalf of his employer, vowing that the Fed wouldn’t make the same mistake again. Less than six years later, Bernanke found himself at the helm of the Fed on that fateful day, Sept. 15, 2008, when Lehman Brothers collapsed. Another Great Depression beckoned. But now the Fed chairman was ready to make good on his promise. Continue reading
by Stefan Kolev
Four cities are usually considered the birthplaces of neoliberalism: Vienna, London, Chicago, and Freiburg. In his new book, “Globalists. The End of Empire and the Birth of Neoliberalism” (Harvard University Press, Cambridge, MA, 2018, 393 pages), historian Quinn Slobodian points out that an important place is missing in this series: Geneva. The Genevan melting pot of neoliberal ideas in the immediate vicinity of major international institutions was formative in the various attempts to establish an order for the global economy over the past nine decades.
by Arash Molavi Vasséi
In a previous post, Andreas refers to George Selgin’s recent discussion of the place of fractional reserve banking in the Austrian Business Cycle Theory (ABCT). There, Selgin takes a swipe at the monetary pillar of the ABCT. According to the Austrian model, fractional reserve banking is inclined to create money out of “thin air” and, therewith, admits investment spending in excess of “voluntary saving”. This imbalance, allegedly induced by a decline in reserve ratios, is reflected in a Wicksellian interest rate gap, which is supposed to impact prices and the allocation in a systematic way (the real pillar of the ABCT). Selgin argues that fractional reserve banking does not account for the Austrian business cycle, and Andreas expresses sympathy for this view.
by Andreas Hoffmann
George Selgin has a much-discussed post over at Alt-M. I agree with most of it. However, I am puzzled by the following statement:
Austrian accounts of the money-creation process often exaggerate the ability of fractional reserve banks to create money “out of thin air,” even while sticking to a fixed reserve ratio, by looking at only one part of the bank money creation process.
Actually, it isn’t, for the simple reason that, more often than not, a deposit made at one bank involves a corresponding withdrawal of funds from another bank, as when the deposited sum takes the form of a check.
by Liya Palagashvili
About two weeks ago, City Council in New York City voted to ban ride-hailing services (Uber, Lyft, Via, Juno) from adding new drivers for a year—with the exception of wheelchair accessible vehicles. The main justification for this cap is that ride-hailing services have been leading to reductions in vehicular speeds and causing road congestion in Manhattan’s busiest areas.
by Andreas Hoffmann
These days many commentators suggest that in Turkey a recession is on the way. But nominal GDP has continued to grow along trend.
Patricia Commun / Stefan Kolev (eds.): Wilhelm Röpke (1899-1966). A Liberal Political Economist and Conservative Social Philosopher, Springer, Cham 2018, 272 pages, 123 Euro.
by Erwin Dekker
Neo-liberalism is often associated with an excessive focus on the market at the expense of both the state and society. This new book, which is the outcome of a conference held to commemorate the fiftieth anniversary of Röpke’s death, demonstrates that precisely this imbalance was one of the main worries of many ordoliberals, and in particular of Wilhelm Röpke.
Both in Europe and in the US, interest rates have fallen to still very low levels and central banks have used unconventional measures to stimulate the economy. Nevertheless, officially measured inflation rates have remained low. While central bankers are proud of the high degree of price stability, many citizens feel their purchasing power diminishing. How does this fit together?
by Andreas Hoffmann
David Glasner has posted his paper on “Hayek and equilibrium concepts” on SSRN. An earlier version of this fascinating paper was presented at the History of Economics Society in Toronto in 2017 and the NYU Colloquium.
A teaser (taken from the abstract):
The now dominant Lucas rational-expectations approach misconceives intertemporal equilibrium and ignores the fundamental Hayekian insights about the meaning of intertemporal equilibrium.
by Jerry O’Driscoll
Fed Chairman Jerome Powell testified to the Senate Committee on Banking, Housing, and Urban Affairs. It was the semi-annual testimony mandated by the Humphrey–Hawkins Act. Powell’s testimony was anodyne. He repeated and reiterated the Fed’s planned policy moves with respect to interest rates, and added suitable caveats on economic growth, inflation, and tariffs. Trade policy is a new factor for Fed policymakers. Continue reading
by Robert P. Murphy
Like many others, I have been enjoying the birthday wishes offered to Mario. (Happy birthday Mario!) But these notes of congratulation have also included reminiscences of the Austrian Colloquium. As a PhD student on the Austrian fellowship at NYU from 1998-2003, I have some of my own reflections to share. (Disclaimer: I am fairly confident in these memories, but these events happened almost 20 years ago so proceed with caution.)
by Jeffrey Tucker
For one day last week, this blog ran a wonderful succession of articles that provide deep insight into the life and work of an influential intellectual. His name is Mario Rizzo, economist and author at New York University. I’m also proud to call him a teacher, however briefly, and friend through the years.
by Malte Dold
Two of my favorite articles by Mario Rizzo are “Abstract Morality for an Abstract Order: Liberalism’s Difficult Problem” (Supreme Court Economic Review, 2015) and “Behavioral Economics and Deficient Willpower: Searching for Akrasia” (The Georgetown Journal of Law & Public Policy, 2016). Both of these recent articles wonderfully illustrate the depth, breadth, and originality of Mario’s thinking. On one hand, they reflect his deep knowledge of the history of economic and philosophical thought. On the other hand, they deal with contemporary challenges in economic, legal, and psychological theory. Many of my co-congratulators correctly emphasized how well-read Mario is in economics and philosophy. Personally, I love and admire his ventures into psychology.
by Glen Whitman
When I arrived at NYU in Fall of 1994, I knew Mario only as a distant scholarly figure, someone whose work I had read along with Hayek and Mises. He seemed as unapproachable as those intellectual giants – which is really something, given that both Hayek and Mises were already dead. Fortunately, the Mario I met in person was neither dead nor unapproachable. He invited me into the Austrian Economics Colloquium, as it was then called, where I met many other living-and-breathing Austrian thinkers and fellow travelers. In the years that followed, Mario became my teacher, then my dissertation advisor, and finally – I’m proud to say – my coauthor, with five published articles and counting. Not to mention the long-awaited book on behavioral paternalism that we will submit to the publisher later this month. (Mario would probably tell me to stop wasting time on a silly blog post and get back to editing.)
by Sandy Ikeda
Back in the early 1980s I took Industrial Organization (two semesters) with Mario in which I got a decent grounding (and not a bad grade) in Chicago-style I.O. and antitrust, which unlike Chicago-style pizza is not too messy or excessively deep. This has served me well in analyzing some economic problems and policies, such as why people tend to be more productive in coffeehouses than at home. I also took a semester of Economic Analysis of Law with him – something, something, transactions costs, something…. In each of those courses, Mario’s approach was to present a well-prepared lecture followed by questions and discussion, using somewhat of a Socratic style. If not always eloquent, they were engaging and insightful.
by Nick Cowen
I met Mario Rizzo in person for the first time just two years ago when I joined the Classical Liberal Institute. I have since had the pleasure of teaching alongside him on his course on Classical Liberalism at the NYU School of Law. For much longer, I have benefitted from his influence from his public writing and through the academic networks that he has helped establish.
by Peter Lewin
On the occasion of his 70th birthday I would like to pay tribute to Mario Rizzo. I beat him to this milestone by a few months and welcome him to the septuagenarian Austrian economist club.