February 11 – Class Mediation

Hello Class,

The following are the questions for consideration that we will be discussing during our class mediation session on Wednesday. We look forward to a great discussion!

  1. Cassidy seems to hold a passive attitude towards the finance industry. For example, he argues “although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth”. Do you agree with him? Do you think certain financial activities are “socially useless”?
  2. Krippner argues that the increasing size and influence of financial institutions has been driven by political concerns. For example, in the seventh paragraph, she refers to “the U.S. government’s most visible interventions in the wake of the crisis in 2008” being directed to the auto industry as well as in the second to last paragraph referencing the “rescuing of Detroit” as a main pillar of Obama’s re-elction. But, could one make the argument that rather than being the driver of financialization, shifts in public policy are the result of financialization? What are some examples of how either phenomenon has taken place?
  3. Blyth dismisses the role of the state and individual morality as having significant impact on the global financial crisis and yet he writes “Note once again how none of this has anything to do with the state (beyond the fact that states chose not to regulate derivative markets – a cause only by omission). Thinking counterfactually (essentially asking “what might have occurred if…”), to what extent could this “omission” have altered the outcome of/or even avoided the crisis?
    1. The second assertion indicates the crisis took place in a moral vacuum in which different actors with the same motives would have the same results. How does he support this argument? Should this idea be widely accepted? For example, the imprudence of real estate buyers accumulating large amounts of debt could be considered a moral failing that contributed to the crisis.
  4. In Lanchester’s “How to Talk Money”, he cautions against economists’ tendency to rely too heavily on models. Blyth equates the Value at Risk (VaR) model with playing Russian Roulette. Both offer a bleak description of economic models. What positive utility do economic models have and what controls can be put in place to ensure they are not abused?
  5. Grabel suggests two alternative criteria termed the “principle of democratic credibility” and the “principle of fallibility”. To illustrate, on page 77, she argues that the principle of fallibility “begins with the presumption that the premises on which economic policies are founded are necessarily inherently imperfect”. Do you think these criteria are strong? What’s the weakness of them?

– Bethany and Xia

Greece’s options

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Mr Varoufakis has in essence four options or a combination of them. Each of them is opposed by at least one of the key actors in this drama.

The first is an extension of the existing programme. That would be procedurally the easiest of all, acceptable to everybody — except the Greek government. Mr Varoufakis already ruled this out because Syriza just won an election on a promise not to do precisely this.

Some people say he might be bluffing. He may still end up agreeing to reforms and suffer the humiliation of the hated troika descending on Athens once more. The single concession: a series of new, cuddly names. Watch out for euphemisms in which programmes become contracts, the troika turns into a consultant, and austerity becomes growth-friendly consolidation.

I suspect that Mr Varoufakis will not blink. And even if he did accept it, the Greek parliament might not.

Option two is more attractive for him. He could demand, not unreasonably, that the ECB release interest payments and profits from purchases of Greek government bonds during the crisis. These funds are currently on hold. Even if released, this would not be enough. Mr Varoufakis will also need to ask the European finance ministers to agree to lift the ceiling of treasury bills the Greek government can issue. It was imposed so that Athens would not issue too much debt during the bailout. If Greece does not accept a new programme, a lifting cannot be taken for granted.

The third option is simply to find the money elsewhere. There are not that many available sources. Moscow has signalled readiness in principle to help, clearly not out of humanitarian compassion. Russian money would come at a heavy political cost for Greece. Even for the Syriza government, this is not a preferred choice, at least for now.

The fourth option is to issue a parallel currency, redeemable only domestically, to fund government spending — essentially an IOU. This would be the most extreme option, but it would take care of the funding problem. It could easily be construed as a preliminary step to Grexit — a departure from the euro — or even as an act of Grexit. What is the meaning of a single currency when you have two of them?

Difficult as it may be to secure short-term funding, it is nothing compared to the big debt talks that lie ahead. I see no debt reduction, and only marginal scope for a fiscal relaxation of any kind. The biggest opposition will not come from Germany but from other periphery countries, such as Portugal, which did not revolt against the troika. A moment of truth is approaching in the eurozone crisis — but not quite this week.

Prepping Wednesday

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The readings for Wednesday are below. I replaced the Lavoie reading with Mark Blyth’s (attached) because the journal put it under password now.

What is financialization? http://harvardpress.typepad.com/hup_publicity/2012/09/what-we-talk-about-when-we-talk-about-financialization.html

John Cassidy, “What good is Wall Street” New Yorker, November 29, 2010

Ilene Grabel, “Creating ‘Credible’ Economic Policy in Developing and Transitional Economies,Review of Radical Political Economics 29:3 (Summer 1997), pp. 70-78.

Mark Blyth, Austerity, chapter 1

Read them in this order.

For moderators: There is no presentation. Your job is to read everything very carefully and send me the day before class the five your will be asking, to make sure all is well. The questions have to elicit rich answers or very different-even polarizing-views. Here is a template:

Most people think that the crisis has been caused by the combination of people living beyond their means, loose monetary policy, government profligacy and Asian savings. Does he agree with this view and, if not, what are the most important five pieces of evidence he marshals in support of his argument? Do you agree with his positions?

Blyth securitization and crisis chapter

Mainstream economics revisited

The Economist:

The economics curriculum is evolving, but too slowly for some

“I DON’T care who writes a nation’s laws, or crafts its advanced treatises, if I can write its economics textbooks.” So said Paul Samuelson, an American economist who more than achieved his aim by producing a bestseller. But debate swirls around the teaching of the dismal science—nowhere more so than in Britain.

When the financial crisis hit in 2007-08, many economics students found themselves ill-equipped to think about what had gone wrong in the economy or how to fix it. Although researchers in top universities had studied financial panics, their work had not filtered down to the lecture theatre. Undergraduate courses focused on drier stuff, imparting a core of basic material that had not changed much for decades.

As a result, aspiring economists struggled to analyse burning issues such as credit crunches, bank bail-outs and quantitative easing. Employers complained that recruits were technically able but could not relate theory to the real world. Graduates’ knowledge of economic history—crucial during the crisis, given its parallels with the Depression of the 1930s—was especially lacking.

Students became dissatisfied, too. Groups such as Rethinking Economics, a London-based network of student reformers, emerged to challenge the conventional wisdom of the classroom. At Manchester University, a student revolt led to plummeting satisfaction scores, driving the economics course down the league table.

Teachers have now responded. University College London has introduced a new curriculum, the result of a project led by Professor Wendy Carlin. The old textbooks had things the wrong way round, Ms Carlin says. They taught concepts like supply and demand in an abstract way and then illustrated them with simple examples, such as the market for apples and oranges. By contrast, the new material challenges students to consider real-world topics from the outset. The section on labour supply begins with the history of real wage growth. The new course also acknowledges the limitations of basic models: the trade-off between efficiency and fairness is mentioned early, for instance. Students consider only the first in most introductory courses elsewhere.

Though Ms Carlin and her colleagues are overhauling teaching methods, the content of the course remains fairly mainstream. That irks those who think the financial crisis has posed a more fundamental challenge to the subject. Rethinking Economics wants curricula to cover heterodox schools of thought. For example, mainstream economic models rely heavily on the concept of equilibrium—a state in which nobody has an incentive to change their behaviour. Critics say this is never reached in the real world, so is a flawed starting point. They want more philosophical discussion about how best to approach economics, and point to Leeds, Greenwich and Kingston universities as models of how to do this.

Two rather different questions have been posed. One asks whether courses do a good job of equipping students with the most important insights from mainstream academic research. The other asks whether young economists should learn more than just today’s favoured approach. It would be odd if curricula departed radically from the academic consensus. But perhaps mainstream theory must catch up with its students.

New version of the class for the 2013-2014 academic year

New course title: Power, Ideas and Money: The Politics of Global Finance



How has the evolving nature of international finance constrained and/or enlarged the possibilities of economic prosperity? Under what conditions does the financial sector contribute to inclusive growth? Given the power of the bond market, what roles can states still play in economic development? How do states finance wars and how do insurgents fund insurgencies? Is the ongoing crisis exceptional and what should one expect to find in its debris? Do Islamic finance or the BRICs challenge the financial status quo? Is microfinance a good answer to the crisis of international development? Is austerity the inevitable outcome of financial crises? How can we fix the problems of contemporary finance?

This course attempts to address these questions by exploring the patterns of stability and change in the world economy from the perspective of the role of the financial sector. While some of the readings cover historical developments, the main focus remains on developments from the past two decades and the post-Lehman crisis.

The readings used in the class are intended for a general audience, rather than a readership endowed with a specialist training in economics.

Syllabus here:

IR759 Power and Money-aug 4


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