Financialization and Securitization session at 12th International Conference

1. Asset shortages and the Great
Recession: A Kaldorian Perspective
Nicholas Snowden
Lancaster University Management School,
LANCASTER,
LA1 4YX,
United Kingdom
n.snowden@lancaster.ac.uk

2. Introduction
• Monetary and financial variables were relatively
neglected by the ‘modern consensus’
macroeconomics before 2008
• Heavy focus on financial sector developments has
arisen since with Minsky’s views widely endorsed
• But was financial instability ultimately connected
with ‘real’ sector (structural) developments?
• This was a theme in the 1930s (re the Wall Street
Crash) and there has been some recent revival:

3. Sector shifts and investment
• For example, the ‘technological disemployment’ thesis
of the 1930s’ has some echoes in Gatti et.al. (2012)
• They draw an analogy between the employment shift
from agriculture to manufacturing in the 1920s and
the modern shift from manufacturing to services
• Workers in agriculture/manufacturing are trapped
between sluggish demand and rising productivity
• Fiscal expansion, or an adequate rate of investment
spending could, in principle, aid the transition
• But, if inadequate, might debt-fuelled consumption
spending have (temporarily) had a similar role?

4. A ‘necessary’ bubble?
• This is the theme of the present study – initially
prompted by recent writing on asset shortages
and ‘necessary’ bubbles
• Kaldor (1966) proposed a (non-speculative)
capital gains mechanism to adjust saving
(consumption) to investment at full employment
• A minor extension to this model highlights the
probable connection between the sub-prime
boom and earlier trends in US corporate
investment (and saving) behaviour

5. Purchasing power transfers
• In OLG terms, a bubble asset transfers consumer
purchasing power from the high-saving ‘young’ to
the low-saving ‘old’
• In Kaldor’s model, higher share prices boost
shareholder consumption while releasing equities
for workers’ retirement portfolios
• The modification here introduces a given (asset
shortage-linked) US current account deficit
퐹 = 푀 − 푋 with the associated credit allocated
to corporate needs and, residually, to housing

6. ‘Neo-Pasinetti’ profits?
• Kaldor’s model derives expressions for the long-run
profit rate (ρ) and for the equity valuation
ratio (v) with a given issue ratio
• In the shorter term, the issue ratio could be
derived from a given profit rate (reflecting a
predetermined mark-up at full employment):
• Simple rearrangement of Kaldor’s expression for
푔퐾−푠퐶휌퐾
휌 would then imply: 푖 =
푔퐾
• With this determination of 푖 the modified
valuation ratio is:

7. Full-employment asset values
• 푣 =
1
푐퐵
퐹
푔퐾
1 −
푐퐻
θ
+
푠푊푊
푔퐾
−
푔퐾−푠퐶휌퐾
푔퐾
1 − 푐퐵 − 푐퐻
휋
θ
• As national accounting would imply, if 퐹 ↑, or if 푖 ↓,
v↑, (cet.par) to generate extra shareholder consumption
• But the influence of 퐹 ↑ on v is lessened if associated
housing gains raise consumption through ‘equity
withdrawal’ (푐퐻)
• In particular, if investment spending slackens (푔퐾↓) and
if the profit rate rises (휌↑) then 푣↑ (cet.par)
• But, the implied fall in issues diverts credit to the housing
sector (reflected in 푐퐻
휋
휃
) limiting the necessary rise in 푣
• How did these variables behave before 2008?:

8. 0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
Corporate 'financing gap' and asset price changes:
1950-2013
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Real house price deviation from CPI (Ln) 'Q' diff from mean
Finance gap to capex (RH axis) Finance gap to capex HP trend

9. Corporate funding and asset values
• The dashed series (and H-P trend) show the
financing gap as a % of GCF (≈issue ratio)
• This ratio was high in the 1970s while ‘Q’
deviations suggest weak equity valuations (≈v)
• The gap recedes through the 1980s with +ve
equity gains (‘Q’ deviations) after 1991
• After the exceptional NASDAQ boom the
financing gap falls dramatically and housing
equity withdrawal greatly increases

10. Other influences?
• The NASDAQ boom coincided with substantial
external financing needs – contrary to the model
• This takes expectations to be constant with
capital gains reflecting only the value of installed
capital relative to its purchase cost
• If extended it would also suggest that a lower
budget deficit would raise share prices, and the
budget deficit declined remarkably in the 1990s
• But, was the weakness of ‘Q’ in the first greyed
period only due to OPEC and recession? →

11. 1.2
1
0.8
0.6
0.4
0.2
0
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05
Capital formation and profitability: 1950-2013
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
GCF to corp VA Gross pt profit to VA
Real interest rate GCF to gross pt profit (RH axis)
GCF to profit HP trend

12. Over-to-under-investment?
• GCF tended to rise re corporate value added (and
profits) during the 1970s up to the Volcker
squeeze
• GCF and gross profits both then fell but GCF more
so. Earlier in the NASDAQ period, profits amply
matched growing GCF
• After 2001 the contrast between rising profits
and falling GCF against CVA is striking -
• Despite falling real interest rates - this is the
housing equity withdrawal period
• But why did the corporate GCF changes occur? →

13. 0.3
0.25
0.2
0.15
0.1
0.05
0
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
Distributions and the financing gap: 1950-2013
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Financing gap to capex Financing gap HP trend
Equity issue to capex Dividends paid to gross pt profit (RH axis)

14. Changing distribution policies
• Weak equity prices in the first greyed period
were linked to low payout ratios and new
equity fund-raising
• Beginning in the mid-1980s, the recovery in ‘q’
was linked to the emergence of negative
equity issues (share repurchases) and, later, to
greatly increased payout ratios
• The timing of share repurchases suggests an
interpretation:

15. Management and shareholders
• The first key buy-back period (1983-92) was
linked to the emergence hostile takeovers and
leveraged buyouts - prompted by low profits and
empire-building in the 1970s (Murphy, 2012)
• Share repurchases during 1992-2001 (shaded)
were linked to reorientation of managerial
incentives through stock option schemes (ibid)
• Generally, a tighter screening of new capital
projects from the 1980s was reasserted after
NASDAQ and dominated the cyclical recovery of
2001-07

16. Investment dearth – housing boom
• In investment/saving (aggregate demand) terms, the
corporate sector became increasingly a ‘sink’, rather than a
‘spout’ after 2001
• Combined with hefty capital inflows, and as Kaldor’s
framework suggests, monetary policy needed to stimulate
consumption
• Contrary to recent trends, and pending a revival in private
investment appetites, substantial public capital formation
would help to prevent further financial disruption
• Moreover, debt financing for these purposes would also help
to address the international asset shortage problem