HIST 277

Schmitt

A Nazi political theorist who emphasized the importance of a strong executive authority, which "defines the exception" in an emergency situation. This invocation of emergency authority emerged in the Recession in the form of figures like ECB President Mario Draghi, who surpassed bounds of his legal authority, saying he would "do whatever it takes to preserve the euro."

SIV

Structured investment vehicle. A non-bank financial institution in which investment banks could keep off balance-sheet assets in order to effectively increase their leverage while not having to report higher leverage ratios to regulatory authorities.

TARP

A 2008 program that authorized $700BB of expenditure to stabilize the US financial system following the subprime mortgage crisis. Representative of the Paulson/Geithner "massive force" approach to stabilizing the financial system. Originally intended to be used to buy toxic assets from banks, but ultimately used for bank recapitalization.

Dusseldorf/IKB

A German bank at the bottom of the food chain of the trans-Atlantic financial system. As a result, many of the most toxic CDOs ended up there. Rescued by a corporate bailout from more solvent German banks.

Dodd-Frank/Volcker Rule

A broad reform of US financial regulation passed by Congress in 2010. The most contentious part of this legislation is the Volcker Rule, which was intended to ban proprietary trading (trading with a firm's own money, rather than that of depositors) but was ultimately watered down to exclude fixed income assets. The implementation of Dodd-Frank and, especially that of the Volcker Rule, has been extraordinarily messy, with regulators failing to define "bright lines" between compliance and violation and instead leaving firms to test these lines for themselves.

European Central Bank

A central bank with a purely neoliberal mandate to exclusively target low and stable inflation. While Trichet, in large part, stayed true to the spirit of the ECB's founding principles, his successor Mario Draghi broke from the ECB's neoliberal tradition, offering measures like the €1TT Long-Term Refinancing Operation to stabilize European markets. In July 2012, he settled the markets and ended the worst of the euro crisis by declaring, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Basel III

A global effort to make systemically important financial institutions more stable and resilient. Most notably, it increased capitalization requirements and attempted to tackle the moral hazard problem by putting more

Bretton Woods II

A nickname given to the current informal global monetary regime which points out that, just as with the Bretton Woods system of the mid-20th century, the world currency system is once again organized around the US dollar. This system emerged as Asian countries (led by China) recovering from the 1998 Asian Financial Crisis pegged their currencies against the dollar at very competitive rates as a means of avoiding the foreign reserve and currency crises suffered by debtor nations like Thailand. While critics of this system argue that China is not playing by the rules of the neoliberal game, such a system cannot be all bad, since a quite similar was in placed during the most successful period of American economic growth from 1944 to 1972.

Balance sheet recession

A recession in which economic recovery is made difficult by debt overhangs on the part of both banks and borrowers. This debt makes monetary policy ineffective in that borrowers take advantage of low interest rates to pay off debts rather than to increase consumption and banks use liquidity to consolidate their positions rather than to offer new loans. Although deleveraging may be individually rational, the result of everyone doing so simultaneously is disastrous.

Forward guidance

A strategy by which central bankers can get a head start with the effect of policy changes by announcing them ahead of time. The Federal Reserve has used this strategy to announce when interest rates will increase in the hopes that people would take advantage of low rates today that would not be available tomorrow. A strategic divide has emerged in the Fed leadership between Delphic guidance (where the Fed predicts its own future behavior) and Odyssean guidance (where the Fed commits itself to a course of policy action).

Leverage

A strategy in which one uses the yield curve to his advantage, borrowing short and lending long. This practice increases a bank's potential profits, but makes the bank subject to collapse if short-term interest rates rise or if depositors try to cash out all at once. Middle-class Americans tried to engage in leverage by taking out subprime mortgages and betting on the continued rise of housing prices.

Special Drawing Rights

A synthetic currency created by the IMF whose value is based on a weighted average of the dollar, yen, euro, and sterling pound. In 2009, China and other BRICS nations called for the expansion of SDR to be used as the world's reserve currency, which would effectively make the IMF the central bank of the world. This would benefit nations like China with large foreign reserves by allowing them to diversify their holdings from US dollars, but would also eliminate the possibility of emerging markets following the currency-manipulation path to growth that China has used.

Financial repression

A view of QE and zero-interest monetary policy as the strangulation of savers and retirees. In some respects, however, low rates are the result of market logic rather than the result of technocratic policy run amok. The financial crisis blew up many AAA-rated bonds, which represented the favorite assets of safe-investment pensioners, meaning that the same savers must now compete for a smaller pool of safe bonds and will receive lower yields as a result.

Long-Term Refinancing Operation

A €1TT supply of liquidity provided by the ECB at 1% under Mario Draghi. Banks were to invest the funds they received in sovereign debt, which had the dual effect of easing borrowing costs for PIGS countries and recapitalizing the banks (since the bonds paid ~5% and they borrowed at only 1%, this resulted in both profits for and recapitalization of the banks). This program represents a clear departure from the traditionally neoliberal and low-inflation-focused tradition of the ECB.

European Stability Mechanism

A €500BB fund for emergency firefighting formed as a result of the Merkel-Sarkozy pact. The ESM represents a permanent fund that provides instant liquidity to EU member states suffering financial difficulty. It represents one of several small steps toward a European fiscal union enacted during the Euro crisis.

9/15/08

After the Fed's attempts at brokering a deal with Barclay's fell through, Lehman went into bankruptcy, triggering a financial panic. The media interpreted the Lehman failure as a decision by the Fed in favor of "Old Testament moralism." Geithner insists that the they simply ran out of options.

Robert Gordon

An Northwestern economist who authored the paper, "Is US Economic Growth Over?", in which he argues that unfavorable supply factors will lead the US to experience very slow economic growth (~0.2%) in the future. He proposes that the high rate of growth experienced since the 19th century is exceptional and that such rapid growth cannot be expected to persist for much longer. Even without assuming a slowdown in technological progress, Gordon asserts that five major headwinds will severely slow the level of economic growth felt by 99% of the US population.

Moral Hazard

An example of asymmetric information in which the party with more information has an incentive to behave recklessly/take risks at the expense of the party with less information. Many who opposed bailouts (especially members of the Germany political elite with respect to the bailout of PIIGs countries) felt that saving institutions that had behaved irresponsibly taught them the wrong lesson and ensured that they would repeat their bad behavior.

Corporatism

An ideology that tries to give shape to the inevitable public-private entanglements, integrating the political, economic, and social orders. One might view the post-Recession financial regulation as corporatist, as macroprudential regulation creates an in-group of macroeconomically significant banks at the exclusion of others. Corporatism is fundamentally opposed to neoliberalism, which seeks to create distinct spheres for gov't and economic actions.

2014 European Parliamentary elections

Both the far right and far left saw gains in this election, demonstrating voters' general discontent with the frustrating realities of the European project. This populist polarization has its origins in the austerity movements of 2010, which led to surges in the popularity of Greece's fascist Golden Dawn and, later, Spain's leftist Podemos. These sorts of populist uprisings (especially from the redistributionist left) represent the worst fears of neoliberals, who would prefer a system in which interactions between the government and private economy were defined by a "constitution of liberty" and not subject to the whims of the masses.

Jamie Dimon

CEO of JP Morgan Chase and a leading market exponent, claiming that financial crisis are events that happen naturally every 5-7 years. He led the banking industry's effort to convince lawmakers that this meant that the financial industry was not in need of fundamental reform in response to the 2008 crisis. Most notably, he called Basel III un-American as he felt that it ought to treat GSE bonds as equivalent to those of the ECB.

Christina Romer

Chair of the Council of Economic Advisers (2009-2010). Her 1992 paper "What Ended the Great Depression?", she argued that fiscal stimulus was not a significant factor in the US recovery from the Depression because its scale was small relative to the size of the crisis. She recommended a $1.8TT stimulus to fight the Recession, but was overruled by Larry Summers, who thought this figure was "non-planetary."

Paul Volcker

Chairman of the Federal Reserve (1979-1987). Appointed by Reagan, he set the Fed on a course of strict monetarism, raising the federal funds rate as high as 20% in 1981. This policy shift ended the inflation suffered in the 1970s and represented a key element of Reagan's neoliberal revolution. Also, mastermind of Volcker Rule.

Ben Bernanke

Chairman of the Federal Reserve (2006-2014). Although he initially took a monetarist anti-inflationary position, following in Greenspan's footsteps, he later became a partner of Tim Geithner in a "massive force" approach to combating the financial crisis. Influenced by Friedman & Schwartz's A Monetary History of the United States, which made him determined not to allow deflation caused by a collapsing money supply as did his Depression-era predecessors.

Angela Merkel

Chancellor of Germany (2005-Present). Grew up in East Germany and later began her political career as the protégé of Chancellor Kohl (CDU). She was elected Chancellor on a neoliberal ticket and has promoted market reform and fiscal prudence both in Germany and in the Eurozone. During since the beginning of the crisis, she has warmed to the idea of the expansion of the European project, in 2012 declaring the need for "more Europe", partnering with Sarkozy to bailout Greece and create the European Stability Mechanism and partnering with Mario Draghi to expand ECB fiscal power.

CDS

Credit Default Swap. An arrangement that insures a financial institution against the default of a loan. The buyer pays the seller a regular premium and, in exchange, receives full payment of the value of the loan in the case of default. Invented by JPMorgan in 1994 to protect itself against a potential Exxon default and later used by traders like Greg Lippman of Deutsche to build short positions against US RMBSs.

Greg Lippman

Deutsche Bank trader. Built Deutsche Bank's $5BB short position against the residential mortgage-backed securities market. When the housing bubble burst, this position resulted in a $1.5BB profit.

Larry Summers

Director of the National Economic Council (2009-2010) and Treasury Secretary (1999-2001). Early in his career, he worked in academic economics and fought crises in emerging markets with the World Bank. He suggested that President-elect Obama not be shown a $1.8TT fiscal stimulus option, which he described (using his favorite word) as "non-planetary."

Keynesianism

Economic theory that promotes fiscal stimulus through deficit spending as a solution to recession. Dominant economic theory from 1940 until the neoliberal revolution of the 1970s. Keynesianism has experienced something of a revival since the onset of the crisis, with China enacting a particularly strong Keynesian fiscal response.

GSE

Government-sponsored entities Fannie Mae and Freddie Mac. Purchased mortgages of sufficiently-high quality, essentially providing government stimulus for private lending. In 2007-2008, their standards were lowered so that they could purchase subprime mortgages to stabilize the market. This led to their destabilization and they were placed into government conservatorship in 9/2008.

Rogoff & Reinhart

Harvard professors whose paper "Growth in a Time of Debt" served as the academic justification for the US austerity movement in 2010. They concluded that when a country has external debt of more than 90%, median GDP was negative. Their result was, in part, the result of an Excel error.

Ricardian Equivalence

Idea that households anticipate future changes in income (like taxation) and plan their spending accordingly. Austerity proponents argue that deficit spending (which will eventually be paid for by taxation) will lead to a decrease in household consumption.

Wisconsin Capitol Building

In February 2011, the Wisconsin Capitol Building was physically occupied by anti-austerity protesters opposed to Governor Scott Walker's cuts to welfare and limitation of union bargaining power. This represents the most significant populist political uprising from the left in the United States in the wake of the crisis and probably most closely mirrors the Tea Party movement on the right.

Deauville

In October 2010, Angela Merkel and Nicolas Sarkozy reached an agreement at Deauville that combined the fixed fiscal rules that Germany wanted to impose with the French proposal of non-compulsory enforcement. The announcement of this deal spooked the markets because it enshrined in law the possibility of an EU member state defaulting. They also discussed Private Sector Involvement, a mechanism allowing the market to exert disciplinary pressure on borrowers.

Outright Monetary Transactions

In September 2012, the ECB formalized its role as the lender of last resort by announcing OMTs, which allows the ECB, under certain conditions, to purchase the bonds of EU member states in secondary markets. This program represents a clear departure from the traditionally neoliberal and low-inflation-focused tradition of the ECB. Many (especially German neoliberals) have questioned the legality of this measure, since this does not obviously fall within the ECB's limited mandate.

Posner & Vermeulue

In The Executive Unbound, they defend the massive executive effort to quell the financial crisis, comparing it to the response to 9/11. The extensively cite Nazi legal theorist Carl Schmitt.

A Monetary History of the United States

Influential work by Milton Friedman, Anna Schwartz in which they argue that the Depression-era Fed allowed the crisis to unfold and failed to increase the money supply to prevent crippling deflation. This worked influenced modern central bankers like Ben Bernanke to be determined to not allow the same crisis to recur.

Bear Stearns

Investment bank saved from collapse through government by dealmaking. The NY Fed extended an emergency loan to Bear, and put its most toxic assets in Maiden Lane I, enabling it to be bought by JPMorgan.

Phillipe Selendy/Quinn Emanuel Urquhart & Sullivan

Law firm which, in the years after the crisis, developed a strategy of suing large financial institutions on behalf of federal agencies. For example, Selendy approached the FHFA with a plan to sue JP Morgan that led to a domino effect of agencies filing suit against big banks. Although Selendy is a liberal warrior of sorts, the political change that can result from these tactics is limited in that he views litigation opportunities as assets to be developed rather than problems of a broken system in need of fundamental reform.

Quantity Theory

Monetarist theory stating that the money supply is directly proportional to the price level. Friedman & Schwartz used this equation to show that the Depression-era Fed failed to expand the money supply and prevent deflation.

Bretton Woods

Monetary system in which 44 nations agreed to peg their currency against the dollar, which was backed by gold reserves. The system collapsed in 1971 when Nixon ended the convertibility of the dollar to gold. There are a number of parallels between this system and the current global currency system, in which China and other BRICS nations have pegged their currencies against the dollar at highly competitive rates.

Paul Krugman

Nobel Prize-winning economist. Krugman is a New Keynesian and argued for a large fiscal stimulus and deficit spending to combat the Great Recession. He also suggested that the US should confront China for its currency manipulation and suggested that such confrontation might boost the economy as the US entry into WWII did in 1941.

Capital controls

Policies that prevent investors from buying or selling a currency as a means of speculation/investment, which became increasingly unpopular globally as the developed Western economies reached a neoliberal consensus. However, in recent years, these policies have been adopted by many emerging economies as a response the Federal Reserve's Quantitative Easing. Incredibly, the IMF, traditionally a bastion of neoliberalism, has condoned these policies by countries like Brazil as a justifiable effort to maintain the competitive value of BRICS currencies (and implicitly to uphold the value of the dollar).

Michal Kalecki

Polish Marxist-Keynesian economist who argued that job creating-firms dislike the government fixing the economy because it challenges their dominance of the political economy. Paul Krugman adopted this view and suggested that this criticism applied to modern austerity hawks.

Nicolas Sarkozy

President of France (2007-2012). Partnered with Angela Merkel to enact stabilization mechanisms, including a bailout for Greece, ECB support for banks, and the Emergency Stabilization Mechanism, a $500BB fire-fighting fund. The Merkozy pact also included a strict fiscal compact, which applied a maximum deficit level of 0.5% of GDP and gave the ECJ oversight power of national fiscal affairs. This pact cost Sarkozy his political career, as his approval ratings in France plummeted.

Tim Geithner

President of NY Fed (2003-2009) and Treasury Secretary (2009-2013). In his approach to the financial crisis, he favored pragmatism over ideology and promoted a massive force response. He believed in that economic technocrats of the Fed should wield significant emergency powers and expressed impatience with the slowness of the democratic process. In the 1990s, he helped fight financial crises in emerging markets.

Mario Draghi

President of the ECB (2011-Present). Draghi has been more activist than his successors, departing from the ECB's strictly neoliberal traditions and mandate to stabilize European markets with efforts like the €1TT Long-Term Refinancing Operation. In July 2012, he settled the markets and ended the worst of the euro crisis by declaring, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

George Papandreou

Prime Minister of Greece (2009-2011), leader of PASOK, and descendant of Greece leftist revolutionaries. After coming to power in 2009, he revealed that his predecessors had kept hidden the enormity of Greece's debt, which sparked Greece's sovereign debt crisis. After proposing a referendum on the ECB/IMF bailout behind the backs of Merkel and Sarkozy, Papandreou was forced out of office, representing the end of his political career and that of his party.

Abe

Prime Minister of Japan (2012-Present). Has been an avid supporter of very strong fiscal stimulus as a means of reviving a Japanese economy which has been stagnant since about 1990. While Keynesians celebrate Abe's economic initiatives, many are wary of his unapologetically nationalist platform.

Gordon Brown

Prime Minister representing British Labour Party. His government nationalized several ailing banks, including Northern Rock. A strong advocate of recapitalization of bank, he tried to sell this effort to heads of state at the London G20 Summit.

LIBOR-OIS

Spread between indices of rates at which banks are lending to one another. Considered a gauge of the overall stress in the money market. The typical spread is about 10 basis points, but in October 2008, it reached 350.

Zombification

The idea that an economy can become dependent on government stimulus, lose its vitality, and be dragged down by weak firms as a result of government intervention in the economy. Proponents of this theory argue that the survival of firms that ought to have died off results in scrambling, which means that the actions of weak firms that would not naturally exist blocks the entry of new, stronger firms into the market. The lack of vitality in such economies is sometimes referred to as "sclerosis," meaning that markets become brittle, and inflexible.

Savings glut

The overflow of global savings led by both savers in China and other emerging markets and retirees/pensioners in the aging populations of Western economies. This large supply of savings has led to a drop in the "natural rate of interest." However, investors and policymakers have not yet grown accustomed to lower returns on investments as the new normal, and have therefore continued to seek high yields.

Tranche

The practice of dividing CDOs into multiple tiers. Investors in senior tiers were guaranteed to be paid first, while investors in lower tiers took on higher risk and received higher yields.

Pool

The practice of merging many loans in order in order to spread default risk. Assuming the individual default risks were independent, this meant that the top-tier tranches in the pool could be considered almost risk-free.

Multiplier

The proportion of total output change per change in government spending. In January 2013, the Olivier Blanchard, Chief Economist at the IMF, published a paper in which he asserted that the IMF has systematically underestimated government spending multipliers in the past and that these errors have led the IMF to recommend fiscal austerity that has had a worse-than-anticipated effect on economies and has actually increased debt/GDP ratios. This admission represents a departure from the austerity politics that has dominated Europe since the start of the sovereign debt crisis and which the IMF has encouraged globally since the 1970s.

Scientific developmentalism

The slogan of China's ambitious fiscal stimulus package, which provided nearly $600 billion of federal stimulus and trillions more in provincial stimulus, which was a rapid effort to combat the global financial crisis in China. Unlike in the United States, the stimulus came with a "grand narrative" and spurred excited conversation about a "Chinese model". Largest spending surge in human history.

Great Moderation

The view that inflation and the business cycle had been tamed in the period from 1984 until the financial crisis of 2007. This view ignored the crises suffered by developing markets in the 1990s and attributed the moderation to good luck, market reforms, and smart policy making. This narrative is true only in a narrow sense in that many emerging markets experienced financial crises during the 1990s.

Hank Paulson

Treasury Secretary (2006-2009) and former Goldman Sachs CEO. Proponent of massive force response to financial crisis: "If you have a bazooka, and people know you've got it, you might not have to use it." Sent Congress the original TARP proposal, a three-page document that would have granted $700BB to be used at his discretion without possibility of review.

Sudden Stop Crisis

the type of crisis suffered by Thailand, Mexico, and other emerging economies and that many feared the US would suffer as a result of enormous Chinese investment. A Sudden Stop occurs when an economy that is funded largely by foreign capital suffers waning investor confidence. As capital flees, interest rates rise, making refinancing expensive, and leading to soaring debt.