Monthly Archives: February 2013

Six “Facts” On Our Debt: Corrections to Robert Solow’s Op-Ed

By L. Randall Wray

In yesterday’s NY Times, Nobel winner Robert Solow tackled the US debt debate, proclaiming that while it is a serious issue, many Americans are not aware of the facts.

Solow is a “neoclassical synthesis” Keynesian, the type of Keynesian economics that used to be taught in the textbooks. He was also on the wrong side of the “Cambridge controversy,” as the main developer of neoclassical growth theory. Still, he’s often on the “right side” when it comes to macro policy questions. And at least part of what he says about the US national debt is on the right track. But he gets enough confused that it is worthwhile to correct the errors.

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Real Dollars and Funny Money


I keep trying to unravel the confusion knotted beneath the surface of our public discourse about money.

For example, it seems evident that most people believe that U.S. Dollars are “created” by business entrepreneurs making profits. Until this happens, the understanding seems to be, the number of dollars available for everyone to try to get some share of is like a big lake of money we’re all drinking from, with the biggest drinker of all being the U.S. government.  What we seem to mean by “economic growth” is this lake growing bigger, and we’re constantly measuring it’s depth and volume in terms of something we call “Gross Domestic Product”. The process that makes the money-lake grow is an entrepreneur investing some of the existing dollars in some venture, and then making a profit on that investment thereby creating new dollars that didn’t exist before, which increases the overall size of the lake. Dollars created in this way are “real” dollars because they are created by private business entrepreneurs competing in a free market. The federal government (for some mysterious and perverse reason that we can’t entirely explain) has the authority to “print” dollars any time it sees the need, but dollars created in this fashion are “funny money”—they simply dilute the value of the “real” dollars and enable the federal government to spend money it doesn’t really have. To protect the “soundness” of our lake of money, we should therefore limit at all costs the federal government’s “printing” of dollars, and the most effective way to achieve this goal is to require the federal government to BORROW dollars from the bond market if, in fact, it has to spend more dollars than it collects in taxes. Having imposed this requirement, we must then carefully track the number of dollars the federal government borrows because if that number exceeds a certain percentage of our Gross Domestic Product, we can assume the government will never be able to repay the debt (because the taxes available from GDP are mathematically inadequate) at which point the federal government will be insolvent. When we reach the point that the federal government is borrowing too many dollars (and, therefore, approaching insolvency) we have to either raise taxes or reduce government spending. If we raise taxes—especially on the entrepreneurs and businessmen—that will reduce the incentive to invest and create jobs, and will slow the process by which new “real” money is created, causing economic growth to falter. The best course of action to reduce an overly large federal debt, therefore, is to reduce federal spending. On its surface, this seems a perfectly reasonable narrative, even though it is politically difficult to translate into action (as we are currently observing.)

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“Pervasive” Fraud by our “Most Reputable” Banks

By William K. Black

A recent study confirmed that control fraud was endemic among our most elite financial institutions.  Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market.  Tomasz Piskorski, Amit Seru & James Witkin (February 2013) (“PSW 2013”).

The key conclusion of the study is that control fraud was “pervasive” (PSW 2013: 31).

“[A]lthough there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions” (PSW 2013: 29).

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Job Killers

By Pat Hayes from KC’s JobsNow!

The Sequester Is Awful And Obama Didn’t Even Try To Stop It

NEP’s William Black appears on Daily Ticker with Henry Blodget. With two days to go before “sequestration” chops an indiscriminate $85 billion out of Federal government spending, the blame game has reached a fever pitch. Bill explains it is dumb economics and some of the short term impacts of the sequester.

You can view the episode at this link. (Sorry no embedding Yahoo videos)

[Yahoo was having technical difficulty – if video is not Henry and Bill, click image of House of Representatives to immediate right of Richard Branson beneath video.]

Why Italy’s Election Has Caused Global Markets to Crater

NEP’s William Black appears on Daily Ticker with Henry Blodget. The election in Italy moved markets around the world. Blodget gets an explanation from Bill why Italy has such an impact.

You can view the episode at this link. (Sorry no embedding Yahoo videos).

The Spinning Top Economy

By Matthew Berg

The central insight of the sectoral balances model of the economy is that not all sectors of the economy can net-save at the same time. That means that if all those of us in the private sector in aggregate want to (on net) take in more money than we spend, then some other sector will have to spend more money than it receives. In a simple three sector version, the three sectors are the domestic private sector, the government sector, and the foreign sector.

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Why Obama Refuses to Kill the Sequester

By William K. Black
(Cross posted at

We are in the midst of the blame game about the “Sequester.”  I wrote last year about the fact that President Obama had twice blocked Republican efforts to remove the Sequester.  President Obama went so far as to issue a veto threat to block the second effort.  I found contemporaneous reportage on the President’s efforts to preserve the Sequester – and the articles were not critical of those efforts.  I found no contemporaneous rebuttal by the administration of these reports.

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The Economic Crisis: Causes, Consequences, and What’s Next

As part of it’s Annual Colloquium Series, The Center for Social Theory and Comparative History at UCLA  is sponsoring “The Economic Crisis: Causes, Consequences, and What’s Next.” NEP’s Randall Wray is appearing along with Frank Partnoy and Robert Brenner on Monday, 25 February 2013 2:00-5:00 pm, in the History Conference Room, 6275 Bunche on the UCLA campus.

The speakers will consider the origins and results of the ongoing global economic crisis. They will give special attention to the rise of finance and the role of financial markets and institutions in its onset, spread, and ultimate consequences. How has the meltdown of Wall Street, its bailout by government, and its apparent recovery affected the macro-economy and the future of finance itself? Are the great banks and other leading financial institutions now more or less likely to experience new meltdowns in the foreseeable future? Will the real economy see a new surge of growth, continuing stagnation, or renewed crisis? These are only some of the issues that will be addressed at this colloquium.

For more information call Center for Social Theory and Comparative History (310) 206-5675 or email [email protected]



Krugman is Right about Simpson-Bowles: The Buzzards Circle the Fiscal Cliff

By L. Randall Wray
(Cross posted from

In a powerful piece, Paul Krugman blasts Alan Simpson as an ignoramus when it comes to federal government budgets. He rightly wonders why anyone takes this nutter seriously:

Simpson is, demonstrably, grossly ignorant on precisely the subjects on which he is treated as a guru, not understanding the finances of Social Security, the truth about life expectancy, and much more. He is also a reliably terrible forecaster, having predicted an imminent fiscal crisis — within two years — um, two years ago…. So what is it that makes Simpson the figure he is? Clearly, it’s an affinity thing: never mind his obvious lack of knowledge, his ludicrous track record, reporters trust and idolize Simpson because he’s their kind of guy.

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