In December 2007, when most analysts were confident that the subprime mortgage crisis would be “contained” without major impact on the financial system, a working paper issued by the Levy Institute concluded, “The stage is set for a typical Minsky debt deflation in which position has to be sold to make position—that is, the underlying assets have to be sold in order to repay investors. . . . Retrenchment of consumer spending may become a reality, buttressed by the continued decline in the dollar. . . . That, along with rising petroleum prices, will further reduce real incomes and make meeting mortgage debt service that much more difficult. The system thus seems poised for a Minsky-Fisher style debt deflation that further interest rate reductions will be powerless to stop.”

Clearly, Levy Institute scholars expected an alternative evolution of events, one that would threaten the very foundations of the financial system and confirm Hyman Minsky’s thesis that financial crises are the endogenous result of system operations. Events proved them right, and as the crisis evolved and the need for regulatory change became obvious, they built on Minsky’s financial instability hypothesis to begin developing viable proposals for systemic reform.

This ebook traces the roots of the 2008 financial meltdown to the structural and regulatory changes leading from the 1933 Glass-Steagall Act to the Financial Services Modernization Act of 1999, and on through to the subprime-triggered crash. It evaluates the regulatory reactions to the global financial crisis—most notably, the 2010 Dodd-Frank Act—and, with the help of Minsky’s work, sketches a way forward in terms of stabilizing the financial system and providing for the capital development of the economy.

To download this document in EPUB format for use on an eReader, click here.

This monograph is part of the Institute’s research program on Financial Instability and the Reregulation of Financial Institutions and Markets, funded by the Ford Foundation. Its purpose is to investigate the causes and development of the recent financial crisis from the point of view of the late financial economist and Levy Distinguished Scholar Hyman Minsky, and to propose “a thorough, integrated approach to our economic problems.”

The monograph draws on Minsky’s work on financial regulation to assess the efficacy of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in response to the 2008 subprime crisis and subsequent deep recession. Some two years after its adoption, the implementation of Dodd-Frank is still far from complete. And despite the fact that a principal objective of this legislation was to remove the threat of taxpayer bailouts for banks deemed “too big to fail,” the financial system is now more concentrated than ever and the largest banks even larger. As economic recovery seems somewhat more assured and most financial institutions have regrouped sufficiently to repay the governmental support they received, the specific rules and regulations required to make Dodd-Frank operational are facing increasing resistance from both the financial services industry and from within the US judicial system.

This suggests that the Dodd-Frank legislation may be too extensive, too complicated, and too concerned with eliminating past abuses to ever be fully implemented, much less met with compliance. Indeed, it has been called a veritable paradise for regulatory arbitrage. The result has been a call for a more fundamental review of the extant financial legislation, with some suggesting a return to a regulatory framework closer to Glass-Steagall’s separation of institutions by function—a cornerstone of Minsky’s extensive work on regulation in the 1990s. For Minsky, the goal of any systemic reform was to ensure that the basic objectives of the financial system—to support the capital development of the economy and to provide a safe and secure payments system—were met. Whether the Dodd-Frank Act can fulfill this aspect of its brief remains an open question.

This monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.

In the current financial crisis, the United States has relied on two primary methods of extending the government safety net: a stimulus package approved and budgeted by Congress, and a massive and unprecedented response by the Federal Reserve in the fulfillment of its lender-of-last-resort function. This monograph examines the benefits and drawbacks of each method, focusing on questions of accountability, democratic governance and transparency, and mission consistency. The aim is to explore the possibility of reform that would place more responsibility for provision of a safety net on Congress, with a smaller role to be played by the Fed, not only enhancing accountability but also allowing the Fed to focus more closely on its proper mission.

Countries in crisis round the world face the daunting task of dealing with abrupt increases in unemployment and associated deepening poverty. Greece, in the face of her sovereign debt crisis, has been hit the hardest. Remediating employment policies, including workweek reductions and employment subsidies, abound but have failed to answer the call satisfactorily. Direct public-service job creation, instead, enables communities to mitigate risks and vulnerabilities that rise especially in turbulent times by actively transforming their own economic and social environment.

With underwriting from the Labour Institute of the Greek General Confederation of Workers, the Levy Economics Institute was instrumental in the design and implementation of a social works program of direct job creation throughout Greece. Two-year projects, funded from European Structural Funds, have begun.

This report traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. While its primary focus is identifying the needs in Greece, broader lessons for direct job creation are highlighted, and could be applied to countries entertaining targeted employment creation as a means to alleviate social strains during crisis periods.

Fiscal austerity is now a worldwide phenomenon, and the global growth slowdown is highly unfavorable for policymakers at the national level. According to our Macro Modeling Team's baseline forecast, fears of prolonged stagnation and a moribund employment market are well justified. Assuming no change in the value of the dollar or interest rates, and deficit levels consistent with the Congressional Budget Office’s most recent “no-change” scenario, growth will remain very weak through 2016 and unemployment will exceed 9 percent.

In an alternate scenario, the authors simulate the effect of new austerity measures that are commensurate with the implementation of large federal budget cuts. Here, growth falls to 0.06 percent in the second quarter of 2014 before leveling off at approximately 1 percent and unemployment rises to 10.7 percent by the end of 2016. In their fiscal stimulus scenario, real GDP growth increases very quickly, unemployment declines to 7.2 percent, and the US current account balance reaches 1.9 percent by the end of 2016—with a debt-to-GDP ratio that, at 97.4 percent, is only slightly higher than in the baseline scenario.

An export-led growth strategy may accomplish little more than drawing a small number of scarce customers away from other exporting nations, and the authors expect no net contribution to aggregate demand growth from the financial sector. A further fiscal stimulus is clearly in order, they say, but an ill-timed round of fiscal austerity could result in a perilous situation for Washington.

The extraordinary scope and magnitude of the financial crisis of 2007–09 required an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort (LOLR) function. In an attempt to stabilize financial markets during the worst financial crisis since the Great Crash of 1929, the Fed engaged in loans, guarantees, and outright purchases of financial assets that were not only unprecedented, but cumulatively amounted to over twice current US GDP as well. the purpose of this brief is to provide a descriptive account of the Fed's response to the recent crisis—to delineate the essential characteristics and logistical specifics of the veritable "alphabet soup" of LOLR machinery rolled out to save the world financial system. It represents the most comprehensive investigation of the raw data to date, one that draws on three discrete measures: the peak outstanding commitment at a given point in time; the total peak flow of commitments (loans plus asset purchases), which helps identify periods of maximum financial system distress; and, finally, the total amouunt of loans and asset purchases made between January 2007 and March 2012. This third number, which is a cumulative measure, reveals that the total Fed response exceeded $29 trillion. Providing this account from such varying angles is a necessary first step in any attempt to fully understand the actions of the central bank in this critical period—and a prerequisite for thinking about how to shape policy for future crises.

President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a “sovereign debt crisis” ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster.
 
The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.

Who Pays for the European Sovereign and Subprime Mortgage Losses?

In the context of the eurozone’s sovereign debt crisis and the US subprime mortgage crisis, Senior Scholar Jan Kregel looks at the question of how we ought to distribute losses between borrowers and lenders in cases of debt resolution. Kregel tackles a prominent approach to this question that is grounded in an analysis of individual action and behavioral characteristics, an approach that tends toward the conclusion that the borrower should be responsible for making creditors whole. The presumption behind this style of analysis is that the borrower—the purportedly deceitful subprime mortgagee or supposedly profligate Greek—is the cause of the loss, and therefore should bear the entire burden.

The root of Europe’s sovereign debt crisis can be found in the fact that investors are concerned that countries in the periphery might default, causing them to demand a higher yield on government bonds. What’s needed is a way of giving peripheral debt a high degree of safety while allowing peripheral countries to remain users of the euro.   A simple solution to this problem would be for peripheral countries to begin issuing a new type of government debt: the “tax-backed bond.” Tax-backed bonds would be similar to current government bonds except that they would contain a clause stating that if the country failed to make its payments when due—and only if this happens—the bonds would be acceptable to make tax payments within the country in question. This tax backing would set an absolute floor below which the value of the asset could not fall, assuring investors that the bond is always “money good,” leading to lower bond rates and thus ensuring that peripheral countries would not be driven to default.

Writing Down Debt, Returning to Democratic Governance, and Setting Up Alternative Financial Systems—Now

The five-year-long crisis of Western finance capitalism is pushing advanced liberal societies to a breaking point. If governments continue to be proxies of finance capital and aspiring political leaders cheerleaders for their financial backers, a catastrophic economic scenario is not really as far-fetched as some might like to think. Governments, industries, and households are under debt bondage, with the result that revenues from every sector of the economy are being diverted toward interest payments and late fees for various loans taken out on largely exploitative, even fraudulent terms. Now, after years of building up a Ponzi financial regime, Western capitalism faces its ultimate test. Will it collapse, giving rise to long-term economic instability and authoritarian political regimes? Or will it find the strength and the wisdom to make a comeback?

The Nonprofit Model for Implementing a Job Guarantee

The conventional approach of fiscal policy is to create jobs by boosting private investment and growth. This approach is backward, says Research Associate Pavlina R. Tcherneva. Policy must begin by fixing the unemployment situation because growth is a byproduct of strong employment—not the other way around. Tcherneva proposes a bottom-up approach based on community programs that can be implemented at all phases of the business cycle; that is, a grass-roots job-guarantee program run by the nonprofit sector (with participation by the social entrepreneurial sector) but financed by the government. A job-guarantee program would lead to full employment over the long run and address an outstanding fault of modern market economies.

Hyman Minsky had particular views about how the regulatory system and financial architecture should be reformulated, and one of the many lessons we can learn from his work is that there is an intimate connection between how we think about the prospect of financial market instability and how we approach financial regulation. Regulation cannot be effective if it is simply based on “piecemeal” measures produced in response to the current “moment,” Minsky wrote. It needs to reformulate the structure of the financial system itself.

Since last month’s Greek bond swap, various European leaders have declared the eurozone crisis over or “almost over.” But Euroland’s current economic reality begs to differ. No matter how much cheap money the ECB provides or how high the EC “firewall” rises, the region’s economic malaise can’t be cured without massive government intervention—the implementation of strong, proactive economic policies that will put people back to work, increase state revenues, and improve the standard of living.

Nearly two years after becoming the first eurozone member-state to be bailed out by the European Union (EU) and International Monetary Fund (IMF), Greece is officially bankrupt. True, there was never any doubt about the outcome, but Greece’s restructuring of nearly 200 billion euros in private debt and the agreement for a new bailout package signify something much bigger—namely, the formal conversion of a sovereign nation into an EU/IMF zombie debtor, and a doomsday scenario that includes its forced exit from the eurozone.

Recently, some have wondered whether a fiscal stimulus plan could reduce the government’s budget deficit. Many also worry that fiscal austerity plans will only bring higher deficits. Issues of this kind involve endogenous changes in tax revenues that occur when output, real wages, and other variables are affected by changes in policy. Few would disagree that various paradoxes of austerity or stimulus might be relevant, but such issues can be clarified a great deal with the help of a complete heterodox model.

In light of recent world events, this paper seeks to improve our understanding of the dynamics of fiscal policy and financial crises within the context of two-dimensional (2D) and five-dimensional heterodox models. The nonlinear version of the 2D model incorporates curvilinear functions for investment and consumption out of unearned income. To bring in fiscal policy, I make use of a rule with either (1) dual targets of capacity utilization and public production, or (2) a balanced-budget target. Next, I add discrete jumps and policy-regime switches to the model in order to tell a story of a financial crisis followed by a move to fiscal austerity. Then, I return to the earlier model and add three more variables and equations: (1) I model the size of the private- and public-sector labor forces using a constant growth rate and account for their social reproduction by introducing an unemployment-insurance scheme; and (2) I make the markup endogenous, allowing its rate of change to depend, in a possibly nonlinear way, on capacity utilization, the real wage relative to a fixed norm, the employment rate, profitability, and the business sector’s desired capital-stock growth rate. In the conclusion, I comment on the implications of my results for various policy issues.

Sustainable Full Employment

In most economies, the potential of saving energy via insulation and more efficient uses of electricity is important. In order to reach the Kyoto Protocol objectives, it is urgent to develop policies that reduce the production of carbon dioxide in all sectors of the economy. This paper proposes an analysis of a green-jobs employer-of-last-resort (ELR) program based on a stock-flow consistent (SFC) model with three productive sectors (consumption, capital goods, and energy) and two household sectors (wage earners and capitalists). By increasing the energy efficiency of dwellings and public buildings, the green-jobs ELR sector implies a shift in consumption patterns from energy consumption toward consumption of goods. This could spur the private sector and thus increase employment. Lastly, the jobs guarantee program removes all involuntary unemployment and decreases poverty while lowering carbon dioxide emissions. The environmental policy proposed in this paper is macroeconomic and offers a structural change of the economy instead of the usual micro solutions.

This paper investigates the causes behind the euro debt crisis, particularly Germany’s role in it. It is argued that the crisis is not primarily a “sovereign debt crisis” but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany’s part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all —perpetual export surpluses, a no transfer / no bailout monetary union, and a “clean,” independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro’s survival. The crisis in Euroland poses a global “too big to fail” threat, and presents a moral hazard of perhaps unprecedented scale to the global community.

The Summary updates current Levy Institute research, with synopses of new publications, accounts of professional presentations by the research staff, and an overview of Levy Institute events. In this issue, papers survey the prospects of a new global financial crisis, propose a new institutional architecture and other solutions to the global debt crisis, quantify the Federal Reserve measures to stabilize the US economy, compare inequality and living standards in Canada and the United States, outline labor-demand policies that connect fiscal policy with full employment, and suggest a return to classical economic policies, including debt write-downs.

INSTITUTE RESEARCH

Program: The State of the US and World Economies

• DIMITRI B. PAPADIMITRIOU and L. RANDALL WRAY, Fiddling in Euroland as the Global Meltdown Nears
• C. J. POLYCRHONIOU, Neo-Hooverian Policies Threaten to Turn Europe into an Economic Wasteland
• ESTEBAN PÉREZ-CALDENTEY and MATÍAS VERNENGO, The Euro Imbalances and Financial Deregulation: A Post-Keynesian Interpretation of the European Debt Crisis
• L. RANDALL WRAY, The Euro Crisis and the Job Guarantee: A Proposal for Ireland
• ROBERT DUBOIS, The European Central Bank and Why Things Are the Way They Are: A Historic Monetary Policy Pivot Point and Moment of (Relative) Clarity

Program: Monetary Policy and Financial Structure

• JAMES FELKERSON, A Detailed Look at the Fed’s Crisis Response by Funding Facility and Recipient
• JAMES FELKERSON, $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient
• L. RANDALL WRAY, Is There Room for Bulls, Bears, and States in the Circuit?
• L. RANDALL WRAY, Imbalances? What Imbalances? A Dissenting View
• BERNARD SHULL, Too Big to Fail: Motives, Countermeasures, and the Dodd-Frank Response

Program: The Distribution of Income and Wealth

Levy Institute Measure of Economic Well-Being

• EDWARD N. WOLFF, AJIT ZACHARIAS, THOMAS MASTERSON, SELÇUK EREN, ANDREW SHARPE, and ELSPETH HAZELL, A Comparison of Inequality and Living Standards in Canada and the United States Using an Expanded Measure of Economic Well-Being

Program: Employment Policy and Labor Markets

• PAVLINA R. TCHERNEVA, Full Employment through Social Entrepreneurship: The Nonprofit Model for Implementing a Job Guarantee
• PAVLINA R. TCHERNEVA, What Do Poor Women Want? Employment or Cash Transfers? Lessons from Argentina
• PAVLINA R. TCHERNEVA, Inflationary and Distributional Effects of Alternative Fiscal Policies: An Augmented Minskyan-Kaleckian Model

Program: Economic Policy for the 21st Century

Explorations in Theory and Empirical Analysis

• MICHAEL HUDSON, Trade and Payments Theory in a Financialized Economy
• SANJAYA DESILVA and MOHAMMED MEHRAB BIN BAKHTIAR, Women, Schooling, and Marriage in Rural Philippines
• MICHAEL HUDSON, The Road to Debt Deflation, Debt Peonage, and Neofeudalism

INSTITUTE NEWS

Upcoming Events:

• 21st Annual Hyman P. Minsky Conference, April 11–12, 2012
• The Hyman P. Minsky Summer Seminar, June 16–24, 2012

PUBLICATIONS AND PRESENTATIONS

• Publications and Presentations by Levy Institute Scholars
• Recent Levy Institute Publications

Financial Reform and the Real Economy

A conference organized by the Levy Economics Institute of Bard College with support from the .

This year’s Minsky conference marks the Levy Institute’s 25 anniversary, and the third year of the Ford–Levy joint initiative on reforming global financial governance. This initiative aims to examine financial instability and reregulation within the theoretical framework of Minsky’s work on financial crises. Minsky was convinced that a program of financial reform must be based on a critique of the existing system that identifies not only what went wrong, but also why it happened. Speakers addressed the ongoing effects of the global financial crisis on the real economy, and examined proposed as well as recently enacted policy responses. Should ending too-big-to-fail be the cornerstone of reform? Do the markets’ pursuit of self-interest generate real societal benefits? Is financial sector growth actually good for the real economy? Will the recently passed US financial reform bill make the entire financial system, not only the banks, safer?

Papers highlighted in the January issue include a new Strategic Analysis that justifies fears of prolonged stagnation and flat employment, proposals to resolve problems in the eurozone, recommendations for avoiding another global financial crisis, the Levy Institute Measure of Time and Income Poverty, gender inequalities in work time, and the economic impact of legalizing undocumented immigrants in the United States.

NEW STRATEGIC ANALYSIS

• Is the Recovery Sustainable?

NEW PUBLIC POLICY BRIEFS

• Waiting for the Next Crash: The Minskyan Lessons We Failed to Learn Debtors’ Crisis or Creditors’ Crisis? Who Pays for the European Sovereign and Subprime Mortgage Losses?

NEW POLICY NOTES

• Resolving the Eurozone Crisis—without Debt Buyouts, National Guarantees, Mutual Insurance, or Fiscal Transfers
• Toward a Workable Solution for the Eurozone

NEW WORKING PAPERS

• Lessons We Should Have Learned from the Global Financial Crisis but Didn’t
• Infinite-variance, Alpha-stable Shocks in Monetary SVAR: Final Working-Paper Version
• Permanent and Selective Capital Account Management Regimes as an Alternative to Self-Insurance Strategies in Emerging-market Economies
• Central Banking in an Era of Quantitative Easing
• Quantitative Easing, Functional Finance, and the “Neutral” Interest Rate
• Estimating the Impact of the Recent Economic Crisis on Work Time in Turkey
• Access to Markets and Farm Efficiency: A Study of Rice Farms in the Bicol Region, Philippines
• An Unblinking Glance at a National Catastrophe and the Potential Dissolution of the Eurozone: Greece’s Debt Crisis in Context
• Effects of Legal and Unauthorized Immigration on the US Social Security System
• The Measurement of Time and Income Poverty
• Unpaid and Paid Care: The Effects of Child Care and Elder Care on the Standard of Living
• Quality of Match for Statistical Matches Used in the Development of the Levy Institute Measure of Time and Income Poverty (LIMTIP) for Argentina, Chile, and Mexico
• Euroland in Crisis as the Global Meltdown Picks Up Speed
• Reducing Economic Imbalances in the Euro Area
• Orthodox versus Heterodox (Minskyan) Perspectives of Financial Crises: Explosion in the 1990s versus Implosion in the 2000s
• Time Use of Mothers and Fathers in Hard Times and Better Times: The US Business Cycle of 2003–10
• Distribution and Growth: A Dynamic Kaleckian Approach

INSTITUTE NEWS

• Upcoming Event: 21st Annual Hyman P. Minsky Conference, April 11–12, 2012
• Upcoming Event: The Hyman P. Minsky Summer Seminar, June 16–24, 2012
• Levy Institute Launches Greek Website
• 1967 Census of the West Bank and Gaza Strip Now Available Online
• New Research Associate and Policy Fellow
• New Research Associate

PUBLICATIONS AND PRESENTATIONS

• Publications and Presentations by Levy Institute Scholars

Throughout its 25-year history, the Levy Economics Institute has maintained its commitment to independent thinking and the belief that economics can and should make a profound contribution to improving the human condition. The purpose of all our activities and research is to serve the wider policymaking community in the United States and throughout the world.

Our 25th Anniversary Report details the Institute’s contributions—through its conferences, seminars, and publications—to the debate surrounding such fundamental public policy issues as the sustainability of long-term economic growth, unemployment, income and wealth inequality, systemic risks in the financial sector, and the deteriorating international trade environment. It also outlines our latest initiatives, including partnerships with other leading public policy institutions, pilot programs abroad, and the newly digitized Minsky Archive.

Wynne Godley and Marc Lavoie

The work of Wynne Godley and Marc Lavoie offers a novel approach, based on a consistent accounting methodology relating stocks and flows, and making use of Post-Keynesian behavioural assumptions that tie the analysis to a monetary economics perspective. The authors’ objective is to provide an analytical framework that could provide an alternative to the standard approach, by taking into account comprehensively the interrelations between real and financial variables.

By Dimitri B. Papadimitriou

Los Angeles Times, January 5, 2012. Copyright © 2012 Los Angeles Times

International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis.

Is high unemployment as certain as death and taxes? Of course not. But if we depend on the private sector to bring rates down, joblessness could join those two certainties.

International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis. Nonetheless, unfounded optimism about the power of privately fueled growth underlies the latest round of interventions in Europe. The assumption that the business sector has the ability to absorb enough labor to end the unemployment crisis remains almost unquestioned.

And it is a crisis, despite the recent employment upsurge in much of the world. In Portugal, Ireland, Greece and Spain, high unemployment has continued, with anemic confidence indicators and planned-purchases data in Greece, for example, showing clear evidence that businesses and consumers are bracing for a protracted recession. In economies that are improving, outrageously high unemployment rates among important groups, particularly youths, signal the start of both a threat and a tragedy. Grave labor issues are scattered around the globe.

It's unreasonable to expect private enterprises to solve these problems. Full employment isn't an objective of businesses. Companies usually strive to keep staffing at a minimum—we've all heard the virtues of "lean and mean." There simply isn't any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work.

In contrast, direct public-service job creation programs by governments have a history of long-term positive results. Throughout the last century, the United States, Sweden, India, South Africa, Argentina, Ethiopia, South Korea, Peru, Bangladesh, Ghana, Cambodia and Chile, among others, have intermittently adopted policies that made them "employers of last resort"—a term coined by economist Hyman Minsky in the 1960s—when private sector demand wasn't sufficient.

South Korea, for example, during the meltdown of 1997-'98, implemented a Master Plan for Tackling Unemployment that accounted for 10% of government expenditure. It employed workers on public projects that included cultivating forests, building small public facilities, repairing public utilities, environmental cleanup work, staffing community and welfare centers, and information/technology-related projects targeted at the young and computer-literate. The overall economy expanded and thrived in the aftermath.

In 2005, France outlined a program in which the government paid laid-off workers their former salaries. It showed that this model could ultimately cost the nation a lower percentage of GDP than unemployment compensation or other traditional remedies.

Of course, these ideas came long after America's Depression-era initiatives had already proved that government could successfully fulfill the role of employer without competing with the private sector. Programs such as the Public Works Administration and the Civilian Conservation Corps were followed by a "golden" era in American capitalism, and now, decades later, those policies are still providing rewards. The vogue to dismiss the 1940s recovery as entirely the result of World War II reflects political positioning, not economic data.

At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate—in this case, a wage—is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.

And, as in any good public policy, another key is rigorous, scientific monitoring and evaluation. South Africa, in response to a projected unemployment rate of 33% by 2014, has launched a $2.5-billion initiative to create 1 million "cumulative work opportunities" over five years. Analysis by Rania Antonopoulos of the Levy Institute found that care-provisioning jobs—such as home-based workers who care for the ill, the elderly or young children—had a significantly stronger impact as an employment multiplier than infrastructure-oriented or "green" opportunities. Not all jobs are created equal.

The benefits of direct job creation aren't just transitory. It's well documented that persistent unemployment results in a permanent loss of output and labor productivity. During a crisis, jobs combat these potential future effects. When the good times are rolling, they support those excluded from the prosperity while stimulating demand through feedback loops that increase the economy's vibrancy.

This is the moment to expand the range of policy responses to unemployment.

There's no evidence that work creation policies either hurt private business or break national treasuries. Incurring national debt to restore an economy through direct job creation isn't frivolous. It is logical, practical, effective and humane.

By Chris Isidore

CNNMoney, May 14, 2012. © 2012 Cable News Network. A Time Warner Company. All Rights Reserved.

Investors are getting increasingly worried about whether Greece will remain in the eurozone. And they should.

There are a series of upcoming events that could spell the end of a deal, put in place nearly three months ago, to restructure Greee’s debt under strict terms dictated by the European Union, International Monetary Fund and European Central Bank, known as the troika.

“The threat from Greece remains real, and Greece exiting the euro area would likely have contagion effects that cannot easily be addressed in the current set-up,” said Bank of America Merrill Lynch analysts in a note Monday. “The next weeks are crucial.”

Greece has been struggling under a mountain of debt, as it tries to push through unpopular austerity measures and get its economy on solid footing. Without a cohesive government, that battle just got tougher.

Here’s what next in the Greek political drama, and what it could mean for the rest of Europe and the global economy.

Where do things stand after last week’s national elections? There is still no party that has been able to form a new government. The two parties from the previous ruling coalition that supported austerity and the debt deal, New Democracy and Pasok, only have 149 seats between them and 151 are needed.

So far, none of the other parties are willing to join them, given Greek voters’ anger over the harsh austerity measures.

If Greek President Karolos Papoulias is not able to bring together a new ruling coalition by Thursday, he is expected to call for another round of voting, likely in mid-June.

What is likely to happen if new elections are held in June? Recent polls and various experts seem to agree that the Coalition of the Radical Left, also known as Syriza, would be the top vote getter in the next round. Syriza has gained solid support since finishing second in last week’s round of voting.

If it can form a majority coalition with other anti-austerity parties, that would leave Greece with a government opposed to the earlier deals made with the EU, IMF and ECB, which has to approve funds for Greece that would allow the government to pay its bills and make its bond payments.

Whether the June election result would lead to a disorderly default and a Greek exit from the euro is far less clear.

“Even Syriza is not really interested in getting out of the euro. Their primary focus is to renegotiate the bailout package,” said Dimitri Papadimitriou, economics professor and expert on Greece from Bard College.

But without financial support from the so-called troika, it will be tough for Greece to meet its financial obligations.

Can Greece stop paying its bills and still stay in the eurozone? That is the biggest unknown, and probably the biggest worry for markets.

Elisabeth Afseth, fixed income analyst for Investec Bank in London, said if Greece stops paying its bills, that will mean the end of the funding it so desperately needs. If that happens, it won’t have much choice but to start issuing its own currency to pay its ongoing bills.

How Greece can stay in the eurozone

But Papadimitriou said that other European leaders are also loath to have Greece exit the euro, due to the shock it might cause for the continent’s already-fragile financial system. Therefore, he said, it is possible, albeit unlikely, that there could be yet another new deal even if Greece stops paying what it owes.

“I would expect the European finance ministers’ meeting to have intense discussions this week,” he said. “The best case for keeping Greece within the euro would be for the rest of Europe to be proactive in trying to come up with a renegotiated deal suitable for all parties. But I’m not optimistic.”

What’s the best case scenario for Greece leaving the euro? In the best case, the ECB steps in and contains the so-called contagion effect.

While the central bank’s drumbeat has been to not be the lender of last resort, it has also made it clear that it would do everything in its power to keep the crisis from spreading.

Greek euro exit won’t mean tragedy

A dozen European countries are already in recession thanks to Germany’s surprise growht, the entire EU and eurozone managed to stave off recession in the first quarter.

Even in this best case scenario, one in which measures to prop up the non-Greek sovereign debt work, the austerity measures needed to pay for them would send the remaining countries of the eurozone and EU into an even deeper, more prolonged downturn.

Yields could soar on government debt for Portugal and Ireland, let alone much larger economies like Spain and Italy, vastly increasing the costs for the remaining European governments that are paying for various bailouts.

That would also weigh on the already slowing growth in both the United States and Asia.

How bad could things get? Things could be worse than that—far worse.

“I don’t think anyone at the present time can quantify the contagion effect of a disorderly exit of Greece from the eurozone,” said Papadimitriou. “No one can predict the markets. They have a mind of their own.

In a worst-case scenario, the Greek exit prompts other countries to leave the euro, as voters there follow Greek voters’ lead and rebel against austerity measures.

“As it stands now, there’s no precedence for leaving,” said Afseth. “If Greece leaves, all of sudden there is precedent.”

If larger countries follow Greece out of eurozone, it could cause a meltdown in the European banking sector, which holds billions of euros of sovereign debt of the other troubled economies, as well as private sector loans to consumers.

In turn, businesses in those countries would be unable to pay given their suddenly devalued currency.

While U.S. authorities have said U.S. banks have relatively limited exposure to European sovereign debt, the major banks here do have exposure to the European banking system, so a meltdown in European markets would be felt in the United States and around the globe.

Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou

With Greece teetering and increasing doubts about the solvency of Spanish banks, Masters and Papadimitriou discuss the growing likelihood of a cascading crisis in the eurozone and its potential impact on US elections in November. Full audio of the interview is available here.

By Daniel Wagner

Bloomberg Businessweek, May 6, 2012. Copyright 2012 Bloomberg L.P. All Rights Reserved.

Financial markets will likely stumble this week after elections in Greece and France cast a pall of uncertainty over Europe's efforts to solve its debt crisis.

Greek voters on Sunday voted mostly for two parties that want to change the nation's international bailout terms or even overturn the rescue deal, according to early projections of the election results. Greece won't have a government until parties with divergent worldviews can form a governing coalition.

Greek voters are reacting against spending cuts imposed on the recession-weary nation by the international lenders whose bailouts are keeping it afloat.

French President Nicolas Sarkozy lost in a runoff election to Socialist candidate Francois Hollande. Hollande has criticized France's austerity program and wants to encourage growth by boosting government spending.

Sunday's votes raise serious doubts about whether voters will swallow the current plan of international bailouts coupled with severe cost-cutting, economists said.

Many experts believe the austerity program is necessary to keep bond investors from panicking about the possibility that more European nations will default or require bailouts.

But a growing number say the cuts have been too much, too fast. They say the region's economy can't return to growth unless governments stop tightening the fiscal noose and start spending again to create demand.

Much depends on the reaction of investors in debt issued by European nations, said Dimitri Papadimitriou, president of the Levy Economics Institute at Bard College. If they fear that the crisis response is losing momentum, they will likely demand higher interest rates -- not just from Greece, but from other nations seen as carrying too much debt.

The result would be rising borrowing costs for Greece as well as countries that haven't received bailouts, like Italy and Spain. Rising borrowing costs sent global stock markets diving last year. Uncertainty about the path forward in Europe may mean a return to extreme market volatility after several months of relative calm.