And the ECBuBa isn't subject to any meaningful oversight from any court of law. Central bank "independence," remember? Will you at least concede that this is a stupid doctrine that needs to be killed dead and exorcised with garlic and holy water?

Sure, if Trichet commits embezzlement or rapes his secretary, he might be prosecuted (or maybe not - bankers have done worse and walked away in recent times). That does not mean that the courts can in any meaningful way provide oversight and policy direction to the ECBuBa (nor should they - that should be Parliament's job, through the Commission).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

Finally, the physical economy of Europe (in particular the periphery) has the problem that thirty years of neoliberal brain rot (twenty in the case of Eastern Europe, but with much weaker countervailing pressures) have rendered large swathes of Europe into a wasteland, industrially speaking.

Bingo.

Skepticism is the first step on the road to truth. -- Denis Diderot

Of course they do it anyway, but that's because they're busy usurping Treasury functions.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of  excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter reaches the zero lower bound, they simply represent a form of liquid asset for banks.

This paragraph says two things. The first thing it says is that everything Bofinger thinks he knows about banks, banking and money is wrong.

The second, and for the purposes of our discussion, more important, is that the amount of base money in the system is irrelevant to the amount of bank lending, because the central bank always has the option to remunerate excess reserves at the policy rate, or extend rediscount facilities to banks that fail to meet liquidity requirements.

In other words, bank lending is equity constrained, not liquidity constrained. And since the central bank can not provide new equity (unless it is prepared to take equity risk onto its books, something you generally do not want your central bank to do, for a whole host of excellent reasons), the central bank can not affect the volume of lending, except by tightening and relaxing solvency requirements (something you definitely do not want to do).

Absent cash-for-trash programmes by central banks, private sector equity can come from precisely three places, as a matter of simple accounting identity: Private sector physical investment in excess of physical deterioration of the capital plant. A net foreign surplus. And government deficit spending.

Now, unless you wish to postulate that every country can run a foreign surplus (in which case you may want to look into repealing the rules of addition and subtraction), this means that sustainable private sector equity increases are equal to net expansion of capital plant plus sovereign deficit. Give or take maybe half a percent of the GDP of the countries you trade with, as a maximum sustainable trade imbalance.

Running a balanced budget, a responsible central bank rediscount policy, and balanced foreign accounts means that, asymptotically, the private sector's net financial position is zero. That is, the private sector will be unable to save up any high powered money in excess of whatever debt other parts of the private sector may owe the sovereign at any given time.

Why, precisely, is that a good thing?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

The MMT'ers are right when they talk about the financial side of things. But I find that they sometimes get so caught up in debunking financial BS that they pay too little attention to the needs of the physical economy.

In particular, a few of them argue that the US' foreign balance is of no particular concern since its import costs are all denominated in US$. I disagree with that position, because the US' foreign balance position means that if other people start demanding hard currency for their stuff, they risk cutting off the flow of goods and services on which the American society depends to be in a state of not-revolution. Since I rather like my society to be in a state of not-revolution, and since I assume that this disposition is shared by most well-fed, reasonably affluent people, knowing that my society's continued being in a state of not-revolution depended on the largess of foreign powers with possibly divergent geopolitical interests...

... would not improve the quality of my sleep.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.