Conference on “debt, deficits, and unstable markets” at the Deutsche bank headquarter in Berlin’s unter der linden, Germany

Conference on “debt, deficits, and unstable markets” at the Deutsche bank headquarter in Berlin’s unter der linden, Germany.

By Mitja Stefancic, PhD student

On November 26 and 27, 2012, the Hyman P. Minsky Conference “Debt, Deficits, and Unstable Markets” took place in Berlin. The conference was organized by the Levy Economics Institute with the support from the Ford Foundation, the German Marshall Fund of the United States, and Deutsche Bank AG. Speakers included Philip D. Murphy, the US ambassador to Germany; Klaus Günter Deutsch (Deutsche Bank AG); Peter Praet, chief economist and executive board member of the ECB; and a number of young scholars, experienced economists, financial analysts, and experts in financial regulation.

The conference, named after late American Professor and economist Hyman Philip Minsky (1919-1996), focused on the causes of financial instability and its implications for the global economy. Speakers and participants addressed crucial issues confronting financial policymakers, including the challenge to global growth resulting from the Eurozone debt crisis; the impact of the credit crunch on both economic and financial markets; the implications of government deficits and debt crises for the US, European, and Asian countries; reforms to improve the design of financial markets and the regulation of financial players; the supervision of non-bank payment systems currently operating outside formal financial systems; and policies to encourage good governance in banks and in other financial intermediaries.

In his speech titled “Completing and Repairing EMU”, Vice-President of the ECB Vitor Constâncio argued that conventional macroeconomic models were ill-equipped to address the key roles of financial markets. The crisis has put into question standard models as good and useful representations of how the economy works. By focusing on Europe,  Constâncio noted that, in retrospect, the euro area was not adequately prepared to deal with the building-up of systemic risk due to, for instance, the lack of institutions to support a highly financially integrated monetary union. Essential improvements should in the future include a well-integrated banking union, as well as a fiscal union to introduce more discipline and help with shock absorption.

Focusing on the challenges by the US economy, Richard Fisher (Federal Reserve Bank of Dallas) argued that, at the moment, the main challenge for the US economy is unemployment rather than inflation. Fisher said that inflation is under control despite advocating carefulness in decision-making and policy-making as shifts in inflation expectations can come “quickly and suddenly”. Instead, major problems that cannot be postponed include unemployment and underemployment. The aim of policymakers should be the creation of robust employment through sensible fiscal measures so to regenerate prosperity.  Fisher also suggested that “the best money is money earned”, and that “the best way to cure poverty is to give people a job and put them at work”. I believe these ideas are both insightful and promising.

A topic that clearly emerged from some of the presentations and stimulating debates at the conference is the need to supervise the developments in emerging payment systems as well as monitor related sources of instability. By defining financial instability as “an interruption of crucial financial institutions” that may threaten the real economy, Dennis Lockhart (Federal Reserve Bank of Atlanta) spoke about new sources of financial instability. As he observed, potential sources of instability not only originate from the credit system, but also from the pension system. A new, unprecedented source of instability is represented by cyber-attacks aimed at large banks, which can cause disruption and financial loss. Despite such issues not being as critical as fiscal crises or bank runs, the introduction of resilience measures such as multiple back-up sites and redundant computer systems would be appropriate in order to secure financial stability and normal functioning of markets.

Jan Kregel (Levy Institute and Tallin Technical University) focused on non-bank payment systems, some of which are currently located outside the formal financial systems (such as, for instance, the p2p lending system). In sum, “innovation is leading to non-regulated payments systems”. As a result of that, better regulation needs to be developed in order to prevent an increase in financial instability. As suggested by Kregel, innovations may both “evolve into liquidity creators that may challenge regulated financial institutions and even non-regulated shadow banks” and, at the same time, “create an additional source of instability”.

Policy guidelines that emerged from the conference stress the fact that global capitalism needs a sound structure for regulation. Increased awareness of how profit-seeking activities and incentives drive economic agents is urgent. In order to prevent unsustainable debt and financial speculation, secure market stability, and stimulate wealth and well-being, a stable financial system is key. Countries across the globe face different challenges. In the US as well as in many European countries, an increase in employment rates and in the rate of job creation are top priorities for policymakers. Also, new economic policies and financial reforms should prevent further stagnation in the Euro area, and secure the survival of the euro. Expected outcomes include: a coordinated fiscal policies; substantial improvements in wage and incomes policies (so to create nominal stabilization); active regional policies enabling a catching-up process of the less developed regions within the Euro area.

Image gallery:

Publish your comment: