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Actual Monetary Practice, aka Modern Monetary Theory

by ARGeezer Sun Oct 31st, 2010 at 05:58:00 PM EST

As noted below, Modern Monetary Theory, MMT, is neither "Modern" nor a "Theory". It is based on observation of how our monetary system works, as Stephanie Kelton notes. Prominent Mainstream Economists will, of course, acknowledge that the USA went off the Gold Standard totally in 1971. Yet they continue to frame economic policy and the public discussion of that policy as though we were still on the Gold Standard. Perhaps that is because pretending we are on the Gold Standard for purposes of framing and discussing economic policies gives all of the policy advantages of a Gold Standard without the practical awkwardness of an actual Gold Standard. This practice provides a compelling, if bogus, argument for ideologically favored policies, especially "Austerity". But insisting on presenting monetary policy options in terms of a monetary approach that is, in fact, not being used is about as helpful as following a false to fact map.

There are now available several good presentations focused on policy and based on "Modern Monetary Theory" from an April 28, 2010 Fiscal Sustainability Teach-In And Counter-Conference that was staged to run counter to the Peterson sponsored "fiscal responsibility" propaganda blitz last spring. Transcripts slides and videos are available for all presentations. Presentations are aimed at a more general, yet economically aware audience. Introductions and samples of each presentation follow:


"What Is Fiscal Sustainability?" By Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billy blog.

Sample:

And when you think about it, the whole discussion of fiscal sustainability in the mainstream media and in our governments, in our parliaments, are all applying the logic - and what's taught students in our universities out of textbooks - are all applying the logic that related moralists to a monetary system that ended in 1971. And people say to me, "Well, economists know that." And I say, "Yeah I know they know that." And so the agenda... They know the constraints that apply to governments now are not the same constraints that applied - and I'll talk about what they are - to governments under the Bretton Woods system of convertible currencies with the US effectively running a gold parity. They know that. And so then you dig further and realize that the whole rhetoric is ideological - that they run a conservative approach to government. They hate government intervention in the economy unless it's helping themselves, through handouts to the corporate sector, and so they've blurred the history and they just blithely go on teaching economics as if it's the gold standard economics.

....

So where should we start in trying to come up with a concept of fiscal sustainability? And I add that what I'm doing really is just introducing ideas which will be elaborated on in great detail by my colleagues here. So I'm not explaining everything in detail for that reason. But where I think that you should start, and I think we all agree on this up here, is ask yourself the question "Why do we bother to have a government in the first place?" ....

The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can't do it individually. That's why we'd want them. And we might call that the public purpose of government. And that might be a good place to start because fiscal policy is about governments, a government policy tool. So once we think about what we want governments to do for us, then that's a good place to work out, Well, what does that mean in terms of the way they conduct fiscal policy?"

So what are the dimensions of that? Well, the way I think about it, and my colleagues have different emphases here, I think about the state. The basic role of the state is to maximize the potential of all of us who live under its sovereignty. And I have this thing that the sustainable goal of the economy should be the zero waste of the people in the economy. That's what my view of economic behavior is, that nobody should be wasted as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.

And then from my point of view, that means, we - the state - should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.

"Are There Spending Constraints on Governments Sovereign in their Currency?" By Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Senior Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri - Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives

Sample:

(W)hat I'm going to say is based on what was described this morning as something called Modern Money Theory. This is not a term that we came up with. I think that others who began to follow our work branded us with this title and started referring to us as the Modern Money School and to our ideas as Modern Money Theory and in many ways I think it's kind of unfortunate, but this is the brand that we now, or the cross that we now bear, because it is something of a misnomer. What we're doing is actually not modern at all. The ideas are not theoretical, and they aren't particularly modern. What we're doing is simply describing, operationally, the way government finance works. It's not a theory; we do not make assumptions, although we are economists. What we've been describing to you today is not dependent upon any ceteris parabis condition or any set of assumptions about perfect competition or rational agents or anything else that you get exposed to when you study economics, but rather an attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation? That's really all we're up to, so don't be afraid.

....

How does the government actually spend? It spends by writing checks on its account at the Federal Reserve Bank. What we see, and what we hear all the time is that the government is spending a hundred, taxes are ninety and it sells bonds equal to ten. So, what we see is an attempt to coordinate the government's spending with taxes and bond sales and it creates the illusion that what's happening is that the government is taking money from us and using it to pay for the things that it purchases. But that's not really what's going on. As Warren likes to say, the government neither has nor does not have any money at any point in time. It is simply the scorekeeper. So what happens when the government spends?

Let's suppose that the U.S. Treasury issues a check for a hundred million dollars to Halliburton. What happens? The Fed marks down the Treasury's balance. It subtracts one hundred million from the Treasury's account at the Fed. Halliburton takes the check and deposits it wherever Halliburton happens to bank. I chose Bank of America. So Bank of America marks up Halliburton's balance by a hundred million dollars. The Fed marks up the size of Bank of America's reserve account (this is some reserve accounting, hang in there; it's a little dry). The Fed, in the clearing process, credits Bank of America with a hundred million dollars in its reserve account.

So what's happened at the end of the day? What are the effects of government spending? The monetary base increases. We call that `high powered money'. Those are the bank reserves. The monetary base increases by a hundred million. The money supply increases by a hundred million. The money supply is all the checking accounts and traveler's checks and a couple other things, but by and large, those are the deposits, ordinary everyday checking accounts. So the money supply increases. So what is the lesson from this? The lesson is that government spending creates new money, both high-powered money, bank reserves, and the more narrow definition of money, M1. They both increase as a consequence of government spending.

How about when the government collects taxes? What happens there? Say you write a check for five thousand dollars to the IRS on your personal checking account, and you bank at Wells Fargo. Wells Fargo marks down the balance in your account, minus five thousand. The check gets sent from the IRS to the Treasury's bank. The Treasury banks at the Fed. The Fed marks up the Treasury's balance by five thousand, and the Fed marks down Wells Fargo's balance by five thousand. What happens at the end of the day? The effects of paying taxes (See, when you pay taxes, there's nothing there. Everything just disappears.) The monetary base decreases. Bank reserves go down by five thousand, so the base goes down. The money supply also goes down because you drew on your checking account. So, the money supply goes down by five thousand, the narrow measure, M1, and the monetary base goes down as well. Paying taxes destroys money. It doesn't give the government anything. It doesn't get anything. It eliminates those liabilities. They are, for all intents and purposes, destroyed.

"The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy" By Warren Mosler, International Consulting Economist and blogger at The Center of the Universe (and 2010 candidate for the US Senate in Connecticut - Chris Dodd's former seat).

Sample:

Warren Mosler: The question is, "How do you turn litter into money?"

So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay. [00:00:19]

All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I'm going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers. [00:00:30]

Then I add one more thing: Look, there's only one way out of here and there's a man at the door with a nine millimeter machine gun. Okay? And you can't get out of here without five of my cards.

Now things have changed. I've now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that's the function of taxes. Stephanie talked about how taxes do it. But you can recreate that...

"Inflation and Hyper-inflation" By Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives

Sample:

So will the US turn into a modern day Weimar Germany?

....

Clearly, Weimar Germany came into existence after WWI, a very damaging war, hugely more damaging in many respects than WWII. The country's productive capacity was absolutely shattered, and more importantly virtually the entire world was really pissed off with Germany and as a result the war reparations claims that they imposed on the country were extremely punitive. And many people at the time, such as Keynes, for example, realized that this imposed a tremendously harsh economic consequences on Germany and that the imposition itself was going to be impossible to be repaid. As I say here in 1919 it was reported that the German budget deficit was equal to half GDP. Half GDP. And what are we talking about in the US today? We're talking about 8% of GDP I think it may have peaked at 10% and that's including TARP, so let's get a sense of perspective here.

....

By 1921 in Germany, war reparation payments equaled one third of got spending. One third. So I think that is an important consideration to look at and I think more importantly is that the payments were demanded in a foreign currency. They weren't being demanded in Deutsche Marks. They were being demanded in, the governments demanded huge gold reparations. Now by contrast as I said in the US you've got a fiscal deficit this year, I think it's projected at, I think the latest out of the CBO is about eight and a half per cent of GDP, assuming that GDP is what everyone thinks it will be.

....

So what finally broke down Weimar Germany, the straw that broke the camels back was by May 1921, the so-called London Ultimatum. The Germans were asked to make an annual installment in payments of 2 billion in gold or foreign currency, in addition to a claim on just over a quarter of the value of German exports.

So an extremely punitive measure, it was a condition virtually impossible to fulfill. The Germans attempted to fulfill it. They accumulated foreign exchange by paying with treasury bills and commercial debts denominated in marks, but the mark simply went into freefall. So they finally said, "You know, we can't pay up anymore." You are seeing a small parallel to, with that today in Greece, its not to the same degree but obviously its... the positions are reversed, it's the Germans imposing conditions on the Greeks, saying "You know you have to pay X" even though the Greeks don't have the money, so they're trying to get blood out of a stone. But we don't clearly have hyperinflation in Greece, but it is an interesting parallel.

So the response to that was that the French and Belgium troops occupied the Ruhr to secure reparation payments. The problem was that the Ruhr was one of the industrial powerhouse regions of Germany, and they employed about a quarter of their workforce in that area, and they exported a huge amount from that area. Effectively you take away their... the largest chunk of their manufacturing capacity is eliminated to begin with, then you occupy a chunk of the country which has a huge portion of what's left of manufacturing capacity, and then you say, "Now pay us the money." And you can see why a central bank printing money in that situation, or creating currency in that situation, is not going to be able to do so, won't be able to call forth goods and services. And you do create the conditions for inflation, and then hyperinflation. So again, it's a very different situation from what we have today in the US.

"Policy Proposals for Fiscal Sustainability" By L. Randall Wray, Professor of Economics, Research Director of CFEPS at the University of Missouri - Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College;
Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College and bloggers at New Economic Perspectives.

Sample:

So what they're saying is that strong economic growth is not a solution to this unemployment problem. It is going to exist -- even with strong economic growth. Okay. And why is that? It is because growth fuels productivity growth, which they said averaged 26% up to that business cycle peak over the past decade, on average around the world, but jobs had only grown by 16.6%. And meanwhile, of course, populations are also growing, and so the unemployment problem is becoming worse in spite of very strong productivity growth. In fact, it's not "in spite of," it's "because of."

It's because labor is becoming more productive that we don't need as many workers in order to have economic growth. And again, the economists in here will recognize this is David Ricardo's machine problem. So David Ricardo pointed this out back in the 1820's. He said this is going to be a continuous problem, that through labor-saving technological advance we are going to create a growing pool of unemployed labor that we can't put to use. So Ricardo was very pessimistic about the long-run outcomes. We were able to put this off for a very long time because we were able to find ways around this problem by opening up new markets, creating new sources of demand. But it has become a chronic, global problem that growth alone will not create enough jobs. Okay.

So what do we think should be the goals of a sovereign government? Now I think there are many. We have mentioned several times that we conceive of, in John Kenneth Galbraith's terminology, there is a public purpose, so there are things we want the government to provide for us. Okay. Maybe we want decent social security for the aged, but taking a step back from that, and just saying in the most general terms possible, what are the most important things that a sovereign government should do for us? Well, it ought to insure that we have full use of domestic resources, and it has the fiscal capacity to do this. Economic growth and promoting economic growth alone is not going to give us full capacity use.

So, we think that government ought to be focusing on full employment because it is much more important to have labor fully employed than it is to have, say, our agricultural resources fully employed -- although we ought to aim for that too. But let's make full employment a primary goal. And, as Warren keeps emphasizing, for political reasons, not really for economic reasons, we need to make price stability also a goal. The problem is that for a very long time orthodoxy has thought these two goals are completely in conflict. You cannot have both of these at the same time. You either can have full employment and then you're going to have inflation, or you can have price stability but you're going to have to have a lot of unemployment. Okay, so, what we're trying to do is to promote a program that can give you full employment with price stability, okay, and that this should be the goal of sovereign government. And our argument is that it has the capacity to do this.

Display:
Skelton:

Paying taxes destroys money. It doesn't give the government anything. It doesn't get anything. It eliminates those liabilities. They are, for all intents and purposes, destroyed.

Except that this isn't how governments budget - or at least, it's not how the UK government budgets. No matter what happens on the ledgers, taxes are counted as government income. In fact they're almost the only (acceptable) source of government income.

As a sovereign, the UK can create money if it chooses to - see e.g. QE. But if it does it will be 'punished' - how economic journalists love that word - by the markets (specifically by bond holders) if it tries to spend that money on something unacceptable. Which in practice means anything that lowers the rate of return owed to bond holders in the short term.

There's no need to chase around looking for economic logic to this. It's purely political. It's no different to the way that medieval and Renaissance money-lenders had kings and princes by the balls when the kings etc wanted to pay for wars and other adventures.

Typically the king would tax peasants and merchants, force them to be 'more productive' with taxes and tithes, and borrow cash from lenders to fill the spending gap, if there was one. (And usually, there was.)

The only difference is that democracies have some pull towards social spending, which kings mostly didn't.

But the basic rule - that payments go to lenders come first, and a significant contribution comes from peasant tithes in terms of hours worked and/or cash paid  - hasn't changed.

Economically, we've never gotten rid of feudal monarchy. There has never been any serious attempt to implement or even to imagine truly democratic economics, where permission-power and returns are both widely distributed rather than tightly concentrated.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 1st, 2010 at 11:03:43 AM EST
As always monetary policy and fiscal policy are, to a significant degree, perception games, and those most intimately involved, those who make their livings from the manipulation and exploitation of these policies, have a better understanding of the process than those more distant. Most of the insiders have a vested interest in maintaining the current perceptions that drive the financial markets and fiscal policy, as their market positions and familiar ways of doing business are based on those perceptions. They are less concerned that the way in which the operations of the markets are perceived by most of those who even pay attention than in being a couple of steps ahead of almost all of them. But they would be concerned with a rapid change in perception by the public, as that could change the value of their positions before they could exit those positions and enter new ones.

This, in fact, could be a benign way of explaining why policy is still framed and discussed as though we were on a gold standard in the USA almost 40 years after we abandoned such a policy -- market based conceptual inertia. But the political aspect is necessary to understand why that policy and conceptual inertia has continued so long. Rightly or wrongly, the majority of those involved in financial markets and policies must either believe the current framing is correct or that changing the framing to one consistent with current reality would be less profitable to them than staying with the old.

So, YES, the choice of policy is pure politics, no matter how effective is the attempt to obscure that fact.

To this point the views of the great majority of the population, to the extent that they have views on the subject, have not mattered. At first this was likely because so few realized the importance of the framing. By now there has been added to this the factor that a small number of actors with similar interests have effectively captured control of the political system via campaign contributions.

But the point may be approaching where a greater number of individuals may take a serious interest in these matters, as the ongoing GFC affects their pensions, the security of their home mortgages, the availability of jobs for themselves and their relatives, etc. At that point simple explanations of what has happened may be of use. Fortunately, that is not too difficult.

Current government money and spending plans are discussed and decided on the basis of an analogy to the requirements of a family budget. But a law abiding family cannot print its own money, while the government of the USA, Canada, the U.K. and other countries with their own currency can create their own money. We just did so to the tune of several trillion dollars in the USA to save the financial sector and the world hasn't ended yet. But neither has prosperity returned to any but those in the financial sector and those in export driven economies.

Why is this?

Could it be that the financial sector has been allowed to get too big? Could it be that that sector's size has been a major factor in the increasing concentration of wealth in the hands of a few, too many of whom now are in the financial sector? Could it be that we gave the money to the wrong people? There are economists who think so. Could it be that those who best understand the economy have been using that understanding to their own benefit and to the detriment of the rest of the society? Could it be that sending manufacturing jobs out of the country has benefited a wealthy few but harmed the rest of the society?

If the USA can afford to spend several trillion dollars directly on aid to the financial sector and to provide up to a total of $14 trillion in aid and guarantees to the financial sector - without reforming that sector or reviving the economy - could we not spend at least $2 trillion/year on needed renewable energy and transportation infrastructure that would put money in the pockets of those working on those projects? Should we not repeal tax policies that reward manufacturing consumer goods abroad and replace them with policies that reward domestic manufacturing?

Is it not time to seriously look at the beliefs and policies that got us where we are today?

I believe such questions will be increasingly well received, if only they are persistently asked in public. I think it is time for a new party that makes such questions, and the associated answers, the heart of its agenda.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 1st, 2010 at 01:17:41 PM EST
[ Parent ]
Skelton = S. Kelton. I spent some time searching for a quote from Skelton before I realized. :-)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 1st, 2010 at 03:10:22 PM EST
[ Parent ]
TBG:
There has never been any serious attempt to implement or even to imagine truly democratic economics, where permission-power and returns are both widely distributed rather than tightly concentrated.

Agreed! As Tom Hayden noted, the workplace is typically  the most undemocratic place in society. But any attempt to change that for the better is met with howls that this will bring the heavens down upon our heads and the economy will collapse. And, so long as the vast majority of the citizens of a "democracy" depend on employment by others for their sustenance, access to jobs can serve as the choke point whereby to control the society.

There are far too few effective counter-examples of companies that are run by their workers, though the Employee Stock Ownership Plans, or ESOPs are a starting point. Nor will such examples be highly touted in the mainstream press, though there is no end of references to "utopian" projects of worker empowerment that "failed". Yet there is evidence that, properly applied, such approaches can be highly effective and efficient.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 1st, 2010 at 03:33:31 PM EST
[ Parent ]
But any attempt to change that for the better is met with howls that this will bring the heavens down upon our heads and the economy will collapse.

Of course it will collapse. The entire system of privilege would fall apart.

This would in no way be a bad thing.

But that simply underlines the extent to which economic theory is there to legitimise privilege and to disenfranchise the unprivileged.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 1st, 2010 at 03:56:21 PM EST
[ Parent ]
Louis Orth Kelso - Wikipedia, the free encyclopedia
Louis Orth Kelso (December 4, 1913 - February 17, 1991) was a political economist in the classical tradition of Smith, Marx and Keynes. He was also a corporate and financial lawyer, author, lecturer and merchant banker who is chiefly remembered today as the inventor and pioneer of the Employee Stock Ownership Plan (ESOP), the prototype of the leveraged buy-out invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield.

Louis Kelso was one of the founders of a heterodox splinter of economics - Binary Economics - one of the principal tenets of which is the widespread ownership of Capital.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 1st, 2010 at 04:26:31 PM EST
[ Parent ]
Louis Orth Kelso. A good one, Chris! It shows that the existing system CAN work better for working people, even if it typically doesn't.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 1st, 2010 at 07:30:23 PM EST
[ Parent ]
Paying taxes destroys money.

I did not yet read the diary, so i don't know the context, but this sounds silly.

With taxes everyone gets public services.

by kjr63 on Tue Nov 2nd, 2010 at 07:22:36 AM EST
[ Parent ]
Under this interpretation the government creates money by spending it to pay for services, and destroys it by collecting taxes.

But for this interpretation to work, the Treasury and the Monetary Authority have to be in symbiosis. The conventional way to "create money by spending it" today would be for the Treasury to raise cash by selling newly issued bonds to the Central Bank in exchange for newly created money. Then the Treasury would collect taxes and use the proceeds to pay the bonds back. When money comes into the Central Bank again, it is effectively destroyed.

So in the US and UK this is sort of how things could work.

In the Eurozone: not so much, as the Treasury (the collective Treasuries of all EU public entities) is treated by the Central Bank (the European System of Central Banks) as more toxic than the private sector when it comes to buying its bonds.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 07:33:52 AM EST
[ Parent ]
I think what's interesting is that it's even possible to debate this.

Do taxes destroy money or not?

How is it possible to create consistent and useful economic models when the only honest answer to this is 'It depends who's asking, and why'?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 2nd, 2010 at 07:55:47 AM EST
[ Parent ]
ThatBritGuy:
Do taxes destroy money or not?
The short answer is that they don't as long as the Treasury is not the Monetary Authority, which is the case in all of the OECD.ThatBritGuy:
How is it possible to create consistent and useful macroeconomic models when the only honest answer to thismost questions is 'It depends who's asking, and why'?
One has to recognize that 1) Economics (at least macroeconomics) is political; 2) there cannot be a Grand Unified Theory of macroeconomics because the description of the (entirely conventional and man-made) institutional arrangements of the economy is an essential part of the analysis.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 08:00:28 AM EST
[ Parent ]
Given an adequate description of the institutional framework it should be possible to create consistent and useful economic models.

What those economic models will not be is universally applicable.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 08:03:59 AM EST
[ Parent ]
I was being somewhat rhetorical.

It's odd how models that aren't universally applicable suddenly seem to become universally applicable and detached from their institutional frameworks when governments are trying to make spending decisions.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 2nd, 2010 at 08:31:57 AM EST
[ Parent ]
Whose taxes and whose money?

Spending by a national government with a sovereign currency create money. Taxes levied in the sovereign currency by the national government with a sovereign currency destroy money.

The reason one has to ask is because money is not a thing, it is a type of institution, which is to say a system of rules of behavior combined with a set of shared understandings that explain the application and reinforce the legitimacy of the rules.

Different money systems that are designed differently work differently.

"Spending creates money, taxes destroy money" is how money works when the majority of money is created by banking organizations by leverage of sovereign currency, and the monetary system is designed so that checks by the national treasury in the sovereign currency do not bounce.

Obviously that does not apply to Spain, Italy, Germany, Greece, France, the Netherlands, and etc. and etc. in the Eurozone, because those nations have surrendered their sovereign currencies without (yet) establishing a Treasury whose checks have to be cleared by the European Central Bank.

That system is of course crippled, and indeed crippled by deliberate design. The neoliberal aim is to disable abilities of publicly elected governments that enable them engage in and, even worse, sometimes win economic balance of power contests with large commercial corporations.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Nov 4th, 2010 at 06:52:15 PM EST
[ Parent ]
Obviously that does not apply to Spain, Italy, Germany, Greece, France, the Netherlands, and etc. and etc. in the Eurozone, because those nations have surrendered their sovereign currencies without (yet) establishing a Treasury whose checks have to be cleared by the European Central Bank.

That system is of course crippled, and indeed crippled by deliberate design. The neoliberal aim is to disable abilities of publicly elected governments that enable them engage in and, even worse, sometimes win economic balance of power contests with large commercial corporations.

Did Theo Weigel and Jacques Delors know this is what they were doing when they designed the Euro rules in the early 1990's? Am I correct to pin the responsibility on them or who actually did this? Was it deliberate design or ignorantly following the conventional wisdom?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:55:46 PM EST
[ Parent ]
But for this interpretation to work, the Treasury and the Monetary Authority have to be in symbiosis.

I don't know about that. But if money goes into circulation as a payment for public services, how can it then be "destroyed?" It does excactly what money is supposed to do.

by kjr63 on Tue Nov 2nd, 2010 at 08:12:19 AM EST
[ Parent ]
It is destroyed when taken out of circulation, i.e., when taxed.

So in fact, under this interpretation, government deficits create money and government surpluses destroy it.

The problem is using a mental model where money is a physical coin (not even "gold standard", but medieval metal money!) to describe a fiat-money industrial political economy.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 08:21:20 AM EST
[ Parent ]
It is destroyed when taken out of circulation, i.e., when taxed.

But this does not take money out of circulation. These are payments from services and investments.

So in fact, under this interpretation, government deficits create money and government surpluses destroy it.

I can see that government surpluses would take money out of circulation. But is it destroyed?
And even in this scenario taxes don't destroy money, but surpluses.

by kjr63 on Tue Nov 2nd, 2010 at 08:52:36 AM EST
[ Parent ]
You agree that in this model government spending is not constrained by tax revenue?
As soon as that is the case there is no good reason to treat the part of government expenditure that just so happens to match tax revenue as funded by it.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Nov 2nd, 2010 at 09:52:42 AM EST
[ Parent ]
Instead of "treat" I should have written "think of".

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Nov 2nd, 2010 at 09:55:24 AM EST
[ Parent ]
generic:
in this model government spending is not constrained by tax revenue?
Note that the Eurozone has been designed so that such a model does not apply to it.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 10:03:02 AM EST
[ Parent ]
True, but institutions could be changed if there was any will to do so. Unfortunately our political class is more than happy to be able to hide behind self-imposed necessity.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Nov 2nd, 2010 at 10:08:26 AM EST
[ Parent ]
Well, there appears to be the will to change the treaties, just in the direction of digging deeper into the hole...

European Voice: Merkel secures major victory

EU leaders accepted that a temporary eurozone crisis facility set up in May had to be replaced with a permanent mechanism to avert the possibility of a recurrence of the problems faced by the eurozone earlier this year.

...

Merkel and Sarkozy had also insisted in their Deauville declaration that eurozone countries that persistently broke budget rules should lose their voting rights. But this was fiercely opposed by a large number of EU leaders during discussions on the conditions for the crisis mechanism on Thursday, the first day of the summit. José Manuel Barroso, the European Commission president, said the idea was "unacceptable".

...

The terms for the sanctions under new economic governance rules agreed at the summit made it harder to block penalties by requiring a weighted majority of member states to prevent sanctions.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 10:16:28 AM EST
[ Parent ]
They go to great lengths to make TINA a reality.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Nov 2nd, 2010 at 10:32:53 AM EST
[ Parent ]
Mig:
Note that the Eurozone has been designed so that such a model does not apply to it.

This is the point MMT proponents are trying to make. These constraints are not inherent in the monetary system. They are "voluntarily" entered into for political reasons.


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 12:16:37 PM EST
[ Parent ]
Do you know where one can find out about MMT academics working in Europe?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 01:06:34 PM EST
[ Parent ]
Bill Mitchell has written extensively about the problems facing the EMU and the Eurozone, but he is based in Australia. I strongly suspect that were you to send him an e-mail he would be happy to respond. Or you could ask the question on his blog, billy blog. Bruce is also likely to know something about this.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 01:40:22 PM EST
[ Parent ]
So in the US and UK this is sort of how things could work....In the Eurozone: not so much.

The Eurozone would have to be viewed as a single political entity for this to work. But the system that is described by "Modern Monetary Theory", or that exists in "Actual Monetary Practice" is one in which electronic credits create money and electronic debits destroy money. The essence of the monetary system is bookkeeping.

By long habit we intuitively view money as a thing. It is the coins we have in our pockets and the "paper money" we have in our wallets, bank accounts and investments. But now, in most countries, even coins are only tokens, even if some cost more than their face value to manufacture, as is the case with the US penny. Yet we know that actual bills and coins circulating as money are only a small fraction of the "money" in the economy. In the USA there is MZM, M1, M2, some still track M3, and there are categories extending through M6.

We accept that banks do not rush to their vaults to obtain bills and coins when they make a loan. They simply electronically credit the money to the account of the person making the loan while making a corresponding electronic entry on their books. Likewise, the Federal Reserve Bank does not print bank notes to provide member banks overnight reserves, even though these count as money. And the amount of "money" that is just electronic credits and debits vastly exceeds the total of coins and bills in circulation.

J.K. Galbraith famously noted that "The process by which banks create money is so simple the mind is repelled." This is true for our local banks, the TBTFs and the Federal Reserve Banks and it still is funny. But the joke is on us. That joke is that, though the USA has been on a fiat money regime since 1971 we still act and think as though it is still on the gold standard, arguably to our great disadvantage. Perhaps this is THE classic illustration of Hamlet's dictum: "Nothing is but that thinking makes it so."

The US Federal Reserve typically buys a Treasury Bond when it creates money. It then auctions those bonds to "primary dealers" who are banks. But it does not have to do so. During the Civil War the Treasury printed "Greenback Dollars" which were accepted as legal tender. The banks did not like this and agitated for a return to The Gold Standard. They got their wish and the economy promptly crashed.

But the Federal Reserve using newly created money to buy a Treasury bond is only part of the story - the part that helps the literal minded majority sleep better at night - and the part that insures that the big banks make money on the process of money creation. The key fact is that the Federal Reserve FIRST creates the money, THEN purchases the bond. The bond could be dispensed with.

The truth is that when the US Treasury credits my banking account for the monthly amount of my and my wife's Social Security payment, it makes no immediate difference whether they have first printed a bond that they sold to the Federal Reserve or if they just made the credit. And in the long term, while inflation might be a problem, payments to Social Security and Medicare are only part of the causes. Other, more significant causes are money spent in Iraq, Afghanistan and elsewhere, money given to TBTFs and debt assumed from TBTFs by government agencies on behalf of the US citizens.

I have only been seriously trying to get my mind around these factors since spring of '08 and think I have only been partially successful. But the ideas contained in what has been labeled Modern Monetary Theory seems to me to offer the best possible resolution to our problems. With close to 20% actual unemployment, government spending to employ the unemployed to do socially necessary functions, such as teaching, fire protection and police protection, is not going to produce wage driven inflation. And government spending to provide renewable energy could significantly mitigate the price increases that WILL come from increasing fossil fuel prices.

I think it is unfortunate that economists like to use "canonical" statements such as "inflation is always and everywhere a monetary phenomenon." Perhaps this is partly responsible, out of long habit in the discipline, for those supporting MMT to make similar statements. It would be more illuminating to show how the economy behaves in specific existing situations. This would be like solving differential equations at a boundary, where one or more terms drops out. We are now at the Zero Bound on interest rates. That would be a good place to start. Also we are very far from full employment and should be so lucky as to have the problem of wage push inflation, so we can safely ignore all of the crude formulations of economics that involve controlling inflation with unemployment.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 12:13:11 PM EST
[ Parent ]
But for this interpretation to work, the Treasury and the Monetary Authority have to be in symbiosis.

No it doesn't.

All it requires is that the government is able to enforce legal tender laws and willing to accept a (dirty) floating exchange rate. The rest is a kabuki.

If the government is able to enforce legal tender laws, it can always issue Greenbacks. That is, it can always simply credit your bank account with legal tender, and let the central bank worry about the bonds and interest rates. In a determined stand-off between the central bank and the treasury, the central bank loses. Because the central bank isn't the entity that pays the police's salaries, so the central bank isn't the entity that decides what counts as legal tender.

The conventional way to "create money by spending it" today would be for the Treasury to raise cash by selling newly issued bonds to the Central Bank in exchange for newly created money.

That is conventional. It is not, however, necessary. The treasury can simply credit your account with legal tender. That's what treasuries can do. Issuing bonds (through open market operations) or offering an overnight rate for excess bank reserves to maintain a non-zero risk-free overnight rate is then the central bank's problem.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 11:00:35 AM EST
[ Parent ]
JakeS:
The treasury can simply credit your account with legal tender.
Is that true under the Euro, too?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 11:05:10 AM EST
[ Parent ]
What's Strasbourg gonna do about it? Fine you?

The EU has no army, and your treasury owns the local police. The worst they can do is expel you from the Union, and there is no lawful mechanism for the forcible expulsion of an EU member, nor even (yet) for the revocation of its voting privileges.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 11:21:58 AM EST
[ Parent ]
So what you're saying is it's okay for Treasuries to counterfeit money because <stalin>how many divisions does Trichet have</stalin>?

How illiberal of you :)

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 11:23:45 AM EST
[ Parent ]
So what you're saying is it's okay for Treasuries to counterfeit money because <stalin>how many divisions does Trichet have</stalin>?

It's not counterfeiting when the Treasury does it. That's what legal tender laws do for you ;-P

I never said it was OK for treasuries to print €. That would obviously be counterfeiting, since the Bundesbank, I mean the ECB, no I mean the Bundesbank holds monopoly rights to issuing €. But I don't recall seeing anywhere in the treaties that the € had to be the only legal tender in member states...

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 02:49:13 PM EST
[ Parent ]
So, in what currency would the treasury of an EMU country credit the accounts of its citizens?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 03:18:23 PM EST
[ Parent ]
Historical local currencies have always been scrip.

The Treasury would have to pass legislation (or a regulation or decree) mandating banks operating within its jurisdiction to register a new currency unit into their systems and to allow people to keep accounts denominated in it.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 03:33:53 PM EST
[ Parent ]
How exactly do the Scottish banknotes fit in this scheme? They are not issued by a national bank, and they are officially not legal tender, not even in Scotland (actually, no banknotes, not even U.K. ones are legal tender in Scotland, only coins...). However, they are regulated, and only certain banks are allowed to issue them.
by gk (g k quattro due due sette "at" gmail.com) on Thu Nov 4th, 2010 at 03:47:36 PM EST
[ Parent ]
From Wikiepdia
Scottish and Northern Irish banknotes are unusual, firstly because they are issued by retail banks, not central banks, and secondly, as they are not legal tender anywhere in the UK - not even in Scotland or Northern Ireland - they are in fact promissory notes. Indeed, no banknotes (even Bank of England notes) are now legal tender in Scotland or Northern Ireland.
The following answers JakeS' observation about the Euro rules not preventing local currencies from circulating
In 2000, the European Central Bank indicated that, should the United Kingdom join the euro, Scottish banks (and, by extension, Northern Ireland banks) would have to cease banknote issue.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 04:01:58 PM EST
[ Parent ]
And if they don't stop, what happens? The EU fines the U.K.? Will Scotland care? Does the U.K. have the authority to stop Scotland issuing them?
by gk (g k quattro due due sette "at" gmail.com) on Thu Nov 4th, 2010 at 04:07:04 PM EST
[ Parent ]
I want to dig up that 2000 ECB statement.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 04:14:17 PM EST
[ Parent ]
Scotland (actually, three Scottish retail banks) are allowed to issue the notes by act of parliament. Of course the UK has on paper the legal authority to revoke the issuing rights. Then again, that might be a political hot potato: Scotland's banknotes 'under threat in Treasury shake-up' (4 February 2008)
Clydesdale Bank, one of three banks allowed to print Scottish banknotes, has admitted it would have to consider whether to continue issuing notes north of the Border if the Treasury proposals get the go-ahead.

Alex Salmond, the First Minister, has also voiced fears over the move, claiming the changes posed the "biggest threat" to Scottish notes in more than 160 years. Under current laws, Clydesdale Bank, Royal Bank of Scotland and Bank of Scotland have to lodge funds with the Bank of England to cover the value of their notes, but only for three days of the week - the other four days they can be invested elsewhere, gaining millions of pounds in interest.

However, the new proposals, announced last week by Alistair Darling, the Chancellor, would require funds to be lodged with the Bank of England for the entire week.

From Wikipedia:
The issuing of retail-bank banknotes in Scotland is subject to the Bank Charter Act 1844, Bank Notes (Scotland) Act 1845, the Currency and Bank Notes Act 1928, and the Coinage Act 1971. Pursuant to some of these statutes, the Commissioners for Revenue and Customs publishes an account of "the Amount of Notes authorised by Law to be issued by the several Banks of Issue in Scotland, and the Average Amount of Notes in Circulation, and of Bank of England Notes and Coin held" in the London Gazette. See for example Gazette Issue 58254 published 21 February 2007 at page 2544.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 04:22:32 PM EST
[ Parent ]
No, it just tells us what the Bundesbank ECB Bundesbank wants the rules to be.

The fact that they have to "indicate" it rather than, say, "point it out" tells me that they probably pulled it out of the same orifice where they found their 2 % inflation target.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 05:06:59 PM EST
[ Parent ]
Indicate is latin for point out with the index finger.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:23:15 PM EST
[ Parent ]
So, in what currency would the treasury of an EMU country credit the accounts of its citizens?

Assuming that the run a double standard - that is, run two parallel monetary systems, both of which are legal tender - then nothing other than copyright law prevents, say, the Greek treasury from issuing G€ (for Greek Euro) as a separate, floating currency which is legal tender in Greece.

If and when the €-zone comes to its senses, the Geuro can be quietly retired.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 04:11:49 PM EST
[ Parent ]
I don't recall seeing anywhere in the treaties that the € had to be the only legal tender in member states...

That is true, but I wasn't really paying attention to such minutiae... Then we would have a rare case of a Local currency not satisfying the usual definition

In economics, a local currency, in its common usage, is a currency not backed by a national government (and not necessarily legal tender), and intended to trade only in a small area. As a tool of fiscal localism, local moneys can raise awareness of the state of the local economy, especially among those who may be unfamiliar or uncomfortable with traditional bartering. These currencies are also referred to as community currency, and are a form of alternative currency or complementary currency. They encompass a wide range of forms, both physically and financially, and often are associated with a particular economic discourse.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 03:29:59 PM EST
[ Parent ]
Wikipedia: Historical Local Currencies
The Wörgl experiment that was conducted from July 1932 to November 1933 is a classic example of the potential efficacy of local currencies. Wörgl, a small town in Austria with 4000 inhabitants, introduced a local scrip during the Great Depression. By 1932 unemployment in Wörgl had risen to 30%. The local government had amassed debts of 1.3 million Austrian schillings (AS) against cash reserves of 40,000 AS. Local construction and civic maintenance had come to a standstill. On the initiative of the town's mayor, Michael Unterguggenberger, the local government printed 32,000 in labor certificates which carried a negative 1% monthly interest rate and could be converted into schillings at 98% of face value. An equivalent amount in schillings was deposited in the local bank as cover for the certificates in case of mass redemption and earned interest for the government. The certificates circulated so rapidly that only 12,000 were ever actually put into circulation. According to reports by the mayor and economists of the day who studied the experiment, the scrip was readily accepted by local merchants and the local population. It utilized the scrip to carry out 100,000 AS in public works projects involving construction and repair of roads, bridges, tanks, drainage systems, factories, and buildings. The scrip was also accepted as legal tender for payment of local taxes. In the one year that the currency was in circulation, it circulated 13 times faster than the official shilling[citation needed] and served as a catalyst to the local economy. The heavy arrears in local tax collection declined dramatically. Local government revenue rose from 2,400 AS in 1931 to 20,400 in 1932. Unemployment was eliminated, while it remained very high throughout the rest of the country. No increase in prices was observed. Based on the dramatic success of the Wörgl experiment, several other communities introduced similar scrips.

In spite of the tangible benefits of the program, it met with stiff opposition from the regional socialist party and from the Austrian central bank, which opposed the local currency as an infringement on its powers over the currency. As a result the program was suspended, unemployment rose, and the local economy soon degenerated to the level of other communities in the country.

Take that, inflation hawks!

I think European Central bankers should be asked about this in public.

Here's an idea: if and when there are confirmation hearings of the new ECB president, some European Parlamentarian should ask the candidate their opinion about the Wörgl experiment.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 03:37:11 PM EST
[ Parent ]
if and when there are confirmation hearings of the new ECB president, some European Parlamentarian should ask the candidate their opinion about the Wörgl experiment.

Agreed! But after having given the candidate a memo on the subject the previous day.


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 05:24:08 PM EST
[ Parent ]
No, no.

The parlamentarian first asks the Central Banker whether he knows about the Wörgel experiment.

When the Banker says he doesn't, the parlamentarian proceeds to reading an account of it.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:22:10 PM EST
[ Parent ]
Almost certainly both could be done. Give him the memo, then when he professes ignorance, both read it and point out that it was given to him the previous day.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 11:06:56 PM EST
[ Parent ]
Now, do we have a sympathetic Austrian MEP (I'm thinking Green Left is the only viable group, SocDems marginally viable depending on how fringe the MEP is) on the Monetary Affairs Committee?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 5th, 2010 at 05:59:33 AM EST
[ Parent ]
It is interesting that Willem Buiter knew about Gesellian theory and even advocated it, but didn't mention the Wörgel experiment in his article Negative interest rates: when are they coming to a central bank near you?
Economics as a science and economic reality have never had problems with negative real (inflation-adjusted) interest rates.  So what is the problem with nominal rates?  In a word, it's currency.

Financial instruments can be categorised as bearer instruments (bearer securities) or registered instruments (registered securities). Bearer instruments are instruments for which the issuer does not know the identity of the owner.  So, unless you can prove the opposite (after a mugging say), the holder or bearer is the owner - possession is most of the law.  Currency is an example of a bearer instrument.  It is a negotiable bearer bond - it is transferable to another party by delivery.  And it does not have to be endorsed by the party transferring it.  Many bonds are bearer securities as well, but through a variety of arrangements (including clipping coupons in the old days) it has been possible to get over the problem of paying interest on these non-currency bearer instruments.

...

Currency is the only problem.  Paying positive interest on currency is difficult because you don't know the identity of the owner.  The same note could be presented repeatedly to earn the interest due for a single period.  To get around this problem, the instrument itself must be clearly identified as current or non-current on interest.  Once interest has been paid, it is marked, traditionally by stamping it or by clipping a coupon off it.

With negative interest, the problem is not the owner turning up too often to claim his interest.  It is getting him to turn up at all.  Since the authorities don't know I am the owner of the currency I own, why should I volunteer to pay the government money for the privilege?

...

Solutions

There are three practical ways to implement negative nominal interest rates.

...

(2) Tax currency and `stamp' it to show it is `current on interest due'. This is Silvio Gesell's proposal, supported by Irving Fisher and re-introduced into the policy debate by Marvin Goodfriend and by myself and Nikolaos Panigirtzoglou.[2] When the interest rate on currency is positive, the currency must be marked (by stamping or clipping coupons) to make sure the (anonymous) bearer does not present it repeatedly for the payment of interest.  When the interest rate is negative, the (anonymous) bearer must (a) be induced to come forward to receive his negative interest (i.e. pay interest to the central bank) and (b) must be able to demonstrate that the negative interest has been received.  To ensure (b), the currency must again be stamped or marked (electronically tagged).  To get the bearer to come forward to pay the negative interest we can either rely on honesty and a sense of patriotic duty, or we can impose sanctions for non-compliance.  I am afraid penalties for non-compliance (fines, a day in the stocks) would be required to make negative interest on currency work.  This would require random checks etc.  It would be administratively costly and unpleasantly intrusive.  This may well endear the notion to our governments.

The Wörgel experiment required people to purchase a 1%-face-value stamp each month and affix it to the bearer notes in order for them to remain current. The administrative cost and intrusiveness were negligible. Once a year the notes needed to be recycled, and twelve stamps needed to be on them for that purpose. Notes could be redeemed for legal tender at a 2% discount.

The anonymous bearer is induced to stamp his notes not through government intrusion but by other people not accepting the notes in payment if they don't bear the proper number of stamps. The Invisible Hand of the Market at work!

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:52:21 PM EST
[ Parent ]
There's no reason why people couldn't use the € as a benchmark unit of account even if they don't use € bank accounts or € notes in actual settlement, preefrring to accept 'money's worth' instead.

The Swiss WIR - and any proprietary barter system which incorporates credit - essentially does just that through the centralised issue of 'look-alike' currencies.

Similarly the 'FactoRepo' system under development - where sellers may discount VAT invoices directly with the Central Bank - will minimise the use of genuine (?!) Fed dollars in dollarised Ecuador.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 03:44:27 PM EST
[ Parent ]
Who was the first "classical" economist to say that?! I would not be surprised if this idea never came up Before Reagan, or even before this century.

When no one can spend but the government (and only theoretically, the rich cats), Treasury's account must be taken seriously as a source of active money. That account (or the national debt) is not just a meaningless number.

What is behind the scare that (gasp!) money is destroyed? Does that mean that wealth is destroyed?

The monetary base decreases. Bank reserves go down by five thousand, so the base goes down. The money supply also goes down because you drew on your checking account. So, the money supply goes down by five thousand, the narrow measure, M1, and the monetary base goes down as well. Paying taxes destroys money. It doesn't give the government anything. It doesn't get anything. It eliminates those liabilities. They are, for all intents and purposes, destroyed.

As you see, there is a lot of circular repetition, so it is hard to follow the logic :-] If the Treasury deposit is not included in M1 by definition, why the financial heads still discussing (PDF) how inversely the 2 things are related?!

If the world is just as rich (in money) as it is rich in liabilities, then yeah - taxing is terrible. A state might pay off its debt with the income - and that would destroy our collective liabilities (and bondholder's entitlements). That must be terrible indeed...

by das monde on Tue Nov 2nd, 2010 at 09:06:11 AM EST
[ Parent ]
das monde:
The monetary base decreases. Bank reserves go down by five thousand, so the base goes down. The money supply also goes down because you drew on your checking account. So, the money supply goes down
This is just a lot of simple-minded quantity theory of money, which is hogwash.

It is hogwash because it contains a fudge factor, the "velocity of money", which is defined as "whatever number which, when multiplied into the money supply, yields the nominal GDP". When people use the money supply as a proxy for anything useful (or as a source of problems) they are assuming the "velocity of money" stays constant. Too bad the velocity of money is unmeasurable and, when people have tried to estimate it, the estimates tend not to be very stable.

It's just putting a veneer of precision on a purely political argument (in this case, against taxation).

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 09:23:15 AM EST
[ Parent ]
Velocity of circulation was Fisher's solution to the early problems with the Quantity Theory of Money, which it does, however difficult actual independent determination of velocity might be. And it does have a nice intuitive sensibility. In times of financial panic, money is scarce. It is reasonable to assume that much of this is due to those who have money putting that money in the safest possible place. But money that is destroyed cannot circulate at any velocity. However, the way our system works, in some sense destruction of money is just the inverse of the creation of money, only the computers that keep track don't cost more or less to maintain because of the creation or destruction.

The true hogwash is that money is a physical thing. Only a small portion of money ever exists in a physical form and it is not the expansion or contraction of that physical form of money that creates problems. The problems arise from abuses of the electronic credit-debit system of money, largely in the form of fraudulent underwriting of loans and it is there that solutions must be found. But the beneficiaries of the frauds would vastly prefer to see millions suffer and starve than to pay the price themselves.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 02:01:24 PM EST
[ Parent ]
In financial panics, money isn't scarce - it's elsewhere. Money may be scarce in fiscal terms, but for a select few it's far from scarce. The difference between panics and bubbles is largely the difference between that select few hoarding their cash in tangibles or trying to multiply it through investment.

The more we have these discussions, the more obvious it becomes that the current system isn't just a poor joke in terms of rigour, it's a political cataclysm.

Far from defending financial probity, the banks, trad-economists and bond holders are a ferociously regressive influence which make it impossible for a diverse, stable and sane economy to emerge.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 2nd, 2010 at 07:06:58 PM EST
[ Parent ]
It has BECOME a political disaster for all but those who control the banking system and the government. IMO it doesn't really matter how hard the system crashes -- it is sufficiently unstable that it will crash in a few years or less. What matters is that the linkage between banks and government control is broken. Accomplish that and lots of good options are possible. Fail to accomplish that and we are truly doomed. I believe it is that stark.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 08:17:17 PM EST
[ Parent ]
When there was a gold standard there was a point to depending on the lenders. But today, with fiat money, what is the fucking point?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 2nd, 2010 at 07:28:39 AM EST
[ Parent ]
It's so that lenders can set policy.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 2nd, 2010 at 07:57:02 AM EST
[ Parent ]
We HAVE to rely on the lenders to employ proper underwriting of loans. If we don't enforce that requirement then there ceases to be any point to the entire monetary system at some time as most of it comes to be based on fraud by the continuous application of Gresham's Law. "Austerity" is just a technique to try to make good a small portion of the fraudulent gains at the expense of the vast majority who have been honest.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 02:06:02 PM EST
[ Parent ]

There has never been any serious attempt to implement or even to imagine truly democratic economics ...

Not even "imagine" ? ! It must be another of those major issues only TBG has even imagined :-)  Or maybe not:

 ... in chapters 2 and 3 we described procedures for making production and consumption participatory and equitable. We explained the importance of democratic councils, balanced work complexes, and participatory workplace and consumption decision making

...
In chapter 4 we described participatory allocation including iterative bargaining, rules for converging, procedures for updating plans, facilitation boards, and how the "communicative tools" of prices, measures of work, and qualitative information would be utilized. In chapter 5 we demonstrated that a formal model of our participatory economy converges to an efficient plan under far less stringent and more realistic assumptions than traditional alternatives.

...
We believe we have made a prima facie case for further examining a participatory vision. For those who would like to live in a better world, the implications seem clear. Quoting Noam Chomsky, "The task for a modem industrial society is to achieve what is now technically realizable, namely, a society which is really based on free voluntary participation of people who produce and create, live their lives freely within institutions they control and with limited hierarchical structures, possibly none at all."

http://books.zcommunications.org/books/conclusion.htm



Maybe it's because I'm a Londoner - that I moved to Nice.
by Ted Welch (tedwelch-at-mac-dot-com) on Tue Nov 2nd, 2010 at 03:53:02 PM EST
[ Parent ]
... the budget is constructed under a range of convenient fictions that are quite real for most everyone else, because the UK is a sovereign economy with its own sovereign currency, and therefore cannot be forced to default in payments owed in its own currency.

Greece, Germany, France, Spain, etc. ... y'all are not actually back in Gold Standard days. You are also also Modern Monetary Production Economies, you are just not sovereign monetary economies, but rather have surrendered your monetary sovereignty to a confederation of states.

So inside the Eurozone, those are not fictions either, except at the level of the Eurozone. However, conveniently, you've neglected to construct a fiscal authority at the Eurozone level, so that you have deprived yourselves by deliberate decision of a substantial portion of the capacities that under neoliberal fictions we are all supposed to pretend that we do not have.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Nov 3rd, 2010 at 03:53:15 PM EST
[ Parent ]
So the EU is actually a neoliberal wet dream as its radical left claimed but not for the reasons they claimed. We also have an answer to Jerome's 'how is the EU neoliberal?' though, to be fair, this was in the treaties since the 1990s and the Lisbon Treaty itself didn't make matters worse in this respect. The Washington Consensus is now the Brussels Consensus and the joke truly is on us... And the Social Democrats are none the wiser about the disaster they contributed to visiting on Europe...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 04:08:59 PM EST
[ Parent ]
I vaguely remember the Swedish left claiming that "the EU was built on a foundation of bourgeois economy". This was at the time of the referendum on entry into the union.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Thu Nov 4th, 2010 at 05:20:44 AM EST
[ Parent ]
I never found such rhetoric convincing and it's so vague as to be meaningless.

"We are relinquishing our fiscal sovereignty to a confederation without giving that confederation fiscal instruments and making the treaties increasingly hard to reform so the lack of a fiscal policy will be frozen in place" would have been better. But it doesn't rally the faithful so effectively as the word "bourgeois".

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:09:48 AM EST
[ Parent ]
BruceMcF:
the capacities that under neoliberal fictions we are all supposed to pretend that we do not have

Worth underlining.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Nov 3rd, 2010 at 04:22:25 PM EST
[ Parent ]
And which we have written out of the institutional arrangements, thereby making the neoliberal fictions a reality.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 06:38:28 PM EST
[ Parent ]
You have a typo in the header, ARG....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Nov 1st, 2010 at 01:25:57 PM EST
Thanks, I corrected it and updated. For some reason typos and misspellings don't get flagged in the title line. A neurological deficit in the last five years or so has resulted in slowing my left hand while typing, among other problems. This I often find letters from left fingers that should precede letters from right fingers fail to do so. Add to that my brain seeing what I intended rather than what is... :-(

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 1st, 2010 at 03:08:43 PM EST
[ Parent ]
The state of macroeconomics is such a fraking disaster because it relegates to the fringes theories that contain half-truths. The idea of MMT that countries which control the unit of fiat money can never default is completely right.. but I think most economists would have that idea in mind.. although via a different framework (for them inflating out or printing money is tax.. so of course, you can always tax).

The sad state of affairs comes from the lack of recognition that macroeconomics is an historic-narrative science... it is about establishing the narrative which fits best historical data. You can not make thousands of experiments or have thousands and thousands of data... but in physics we had astronomy once upon time with the same experimental restrictions as macroeconomics.. and let me tell you.. we did a heckofajob. Now with the big bang theory and other sui-generis not-even-wrong theories we are also losing ourselves.

A Migeru says, political and economic institutions are key (for crist sakes, NO, NO the JOB MARKET CAN NOT CLEAR!!!!).. they could be modelled, fit to historic data,... check new countries and situations.. and fit a sensible narrative... And frankly, MMT are wrong when they say that fiat coin receives value through taxes... NO, it receives value via magical thinking. Plus, they are right that banks do create money.. a lot of times they lend first.. and look for reserves later... but it is not true that the central government and bank can not create money.. they do affect the rate of creation of money with open-market operation, quantitive easing... or monetizing debt.

The point is that a narrative and a model could be developed for debt creation , destruction and the circulation of money goods and services in a Minsky moment... it could be.. but as DeLong says :"the sect of the Minskian had not enough followers to be able to distill their narratives ideas in a simple concise model, as the Friedman and Keynes sect did"... and as always Keynnes and Friedman were smarter in their economic analysis that all of their sect members combined... none of them would be saying the stupid things we hear now.

It is a sad state of affairs.. for Europe and the US. China and Brazil can not be happier...if this situation of crazy macroeconomics (let's not pursue inflation under any circumstance) goes on like this and we have the lost decade that all serious people warn (not the very serious people, they are crazy, wrong and all they want is cocaine and prostitutes) , Brazil and China will split the world in two areas, and each one will rule one area. Who will get Europe, Brazil or China?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Nov 2nd, 2010 at 03:43:13 PM EST
kcurie:
A Migeru says, political and economic institutions are key (for crist sakes, NO, NO the JOB MARKET CAN NOT CLEAR!!!!).. they could be modelled, fit to historic data,... check new countries and situations.. and fit a sensible narrative...

Sounds like history to me. But unlike astronomy, history appears to have a lot of chaotic points. A mutation in a bacteria here, a change of weather there, and an accident over there and then foreign soldiers are pillaging the buildings of your political institutions. Plus any working model needs to include the effects of the model on the actions of people.

kcurie:

And frankly, MMT are wrong when they say that fiat coin receives value through taxes... NO, it receives value via magical thinking.

I do not see these as opposing statements. The magical thinking is a shared belief and taxation is a ritual with powerful punishments for non-participants. The ritual upholds the belief and the belief validates the ritual.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Nov 3rd, 2010 at 11:37:10 AM EST
[ Parent ]
I take point two as mine from now on.

Point one... I think history has less data points that macro...so let's say that they can try to filter irrelevant noise better.. and get with the relevant dynamics and noise.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 4th, 2010 at 02:21:17 PM EST
[ Parent ]
This is sometimes known as folkviews in actual Institutional Economics, the stories that participants tell each other and that participants rely upon regarding what the rules of sensible behavior are and which rules apply in which context.

The thing about magical thinking is, anything could be held to be valuable because everyone else considers it to be valuable because everyone else considers it to be valuable and etc. and etc. ... but so long as a country has a functioning system of civil law that enforces breach of contract in terms of monetary damages, and its fiat currency functions as a store of value, that fiat currency tends to be that thing which accumulates the four functions of money in one institution: medium of exchange, store of value, standard of deferred payment, and unit of account. The taxes directly enforce both the medium of exchange, by creating a necessity for money among those who are taxes, and a unit of account, by creating a need to keep track of tax obligations in the unit in which taxes are owed. Legal enforcement of civil contracts in monetary terms enforces the standard of a deferred payment.

The medium of exchange is obviously the most liquid possible asset, if it functions well enough as a store of value, and so if that condition is met, we see all four functions of money coalesce around the same institution. And then given that in a monetary production economy, sufficient money to command resources to produce is a path to power, money acquires the magical status of all other totems associated with power.

However, when the store of value function breaks down, that is when we tend to observe mixed hard currency / soft currency systems.

The "magical thinking" reinforces and reproduces the habitual acceptance of money as if it were intrinsically valuable, when of course in a modern monetary production economy, money is extrinsically valuable ~ valuable for what can be done with it under the rules of the game.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Nov 3rd, 2010 at 04:07:38 PM EST
[ Parent ]
That paragraph should be in any introduction to macro... unfortunately the ones out there do not get even close to it.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 4th, 2010 at 02:25:42 PM EST
[ Parent ]
I haven't read their writings enough to know whether they're really adding anything new or not the whole money question, but it seems from the excerpts you're providing that they're getting bogged down a bit in the minutia of accounting definitions, and not really addressing what makes money be money.

Chris Cook offers a competing idea of money which tries to tie it more to real commodities, such as energy, which has the theoretically satisfying property of limiting the kinds of commitments that people can make to each other to the actual physical properties of real resources that people actually have ready to hand.

But the reason money is so useful as we know it today is that no such limitation is required.  A dollar or euro has its value not because it is associated with any real commodities whatsoever but merely because taxes have to be paid with those currencies in two very large and stable polities -- the US and the EU. Likewise for any other currency.  

Money is valuable because a dominant, powerful organization guarantees its value by accepting tax payments in a given currency. If lots of people need to pay taxes to that organization, and people expect that such an authority will retain the power to coerce taxes from lots of people, then money retains its usefulness and value as a medium of exchange and a storage of wealth.  The same would exist, and has, for smaller polities and for private banking relationships.  Private banks in the past printed their own currency and could do so again if it were economically beneficial to do so. Tiny countries print their own currencies.

The basis of any new monetary theory of money can be summarized by the following statement: Money is not a real commodity. It is rather a social organizing tool which allows for individuals to efficiently obtain the cooperation of others for personal benefit. The value of money is therefore a function of the power of the organization which guarantees its usefulness as an organizing tool, and the absence of alternative means available to individuals for obtaining the cooperation of others for the personal ends.

How might this affect monetary policy today? For one thing, it would help explain how inflation doesn't occur if the money is not being exchanged for things, such as the situation in most of the industrialized world today, even if lots of money has been put into circulation.  And this would help the argument that employment can be reduced today if governments both print more money and spend it in ways that organize people back to work. (In other words, not by providing tax cuts to people who will merely hoard it, such as any rational wealthy person who gets a windfall sum of cash would do today.)

by santiago on Tue Nov 2nd, 2010 at 09:57:34 PM EST
There are a couple of discussions of the role of taxes in establishing the acceptability of fiat money in the cited excerpts. The MMT people want to establish that base. But the bulk of their work seems to derive from close observation of how our monetary system actually works and then they compare that to how it is commonly described. These presentations are didactic for an assumed audience with some background in "mainstream economics" but is not a full on presentation of an alternative system. The purpose was to show that there ARE alternatives to the austerity rhetoric coming from the Peterson Institute, et al.

And this would help the argument that employment can be reduced today if governments both print more money and spend it in ways that organize people back to work. (In other words, not by providing tax cuts to people who will merely hoard it, such as any rational wealthy person who gets a windfall sum of cash would do today.)

Actually, the last presentation cited, by Randall Wray and Pavlina Tcherneva does just that. One of the proposals is that the government should be an employer of last resort within certain limitations, but also that the public policy should be to promote full employment. Interestingly, such a policy was enacted as official policy just after WW II and has never been repealed, but it obviously has been ignored.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 2nd, 2010 at 10:52:32 PM EST
[ Parent ]
Yes, I think Moesler has the best explanation in your piece, but there doesn't seem to be any real theory going on yet, just alternative explanations. What is money, and can it be used for implementing policy outcomes? is the central question that any new monetary theory has to address. Moesler, the "International Consulting Economist," whatever that is, seems to have the right idea about what provides money with value in modern society. But I wonder if he or anyone at his institute in KC has actually formalized their observations into an actual theory about how the social world works in a way that can be really said to be an alternative to the present Fisher-Keynes-Friedman way policymakers think about money and its role.
by santiago on Tue Nov 2nd, 2010 at 11:58:46 PM EST
[ Parent ]
In many ways they are updates to Keynes. It would be very nice to have a new spectrum: AMP-Keynes-Fisher-Friedman. (AMP = Actual Monetary Practice update of Keynes + Minsky) I can dream. For starters, having a description of the monetary system that is congruent with reality should be a help in devising and explaining policies that work for the good of the whole society rather than just the benefit of the financial sector.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 12:39:32 AM EST
[ Parent ]
Don't forget Veblen, the granddaddy of Actual Economic Practice as acknowledged by Fisher (though the latter "discovered" it independently 30 years later)

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 03:52:15 AM EST
[ Parent ]
And I also must include Minsky disciple Steve Keen of the debt including, multi-sector, time-based, economic modeling approach utilizing sets of differential equations.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 08:27:19 AM EST
[ Parent ]
If you model the banking sector not as a single representative bank but as a collection of banks trading claims among themselves and expanding each other's balance sheets you get very interesting hints of phenomena that simply aren't explainable with a model in which there is a single bank. See for instance Monetary Circuit Theory form Wikipedia:
The key distinction with mainstream economic theories of money creation is that circuitism hold that money is created endogenously by the banking sector, rather than exogenously by central bank lending: that is, the economy creates money itself (endogenously), rather than money being provided by some outside force (exogenously). Circuitism also models banks and other firms separately, rather than combining them into a representative agent as in mainstream neoclassical models.

These theoretical difference leads to a number of different consequences and policy prescriptions; circuitism rejects, inter alia, the money multiplier, arguing that money is created by banks lending, which only then pulls in reserves from the central bank, rather than by re-lending money pushed in by the central bank. It also emphatically rejects the neutrality of money, believing instead that the money supply and its growth or decline are critical to the functioning of the economy.

Of course, not all money is created by the banking system, but the majority of it is. In US terms, anything outside M1 is created "endogenously by the financial sector" whereas M1 contains a mixture of Central Bank money and Bank money.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 04:00:18 AM EST
[ Parent ]
But the circuitous theory is also an example of what I would call too much focus on accounting definitions and too little on understanding of what is really going on when banks make loans or governments print money, spend it,  and then collect it back in taxes again. What I see going on is people using money to extract cooperation, and commitments of cooperation, from others, i.e., as means of exercising power. The correct unit of analysis isn't the money. Rather, it's the power relationships between people that money is being used to create. Why can banks create money? Because agents make commitments to do things for banks in exchange for the credible access to resources that banks can provide to provide to the people that agents want to organize toward some end. People use banks to gain others' cooperation, i.e., to exercise power. From where do banks' credibility come? From their competent judgments about how to manage other people's credibility, but also mostly from the fact that a very powerful organization called the government provides them with such credibility directly through regulation and oversight, meaning that the power they lend to people for a price is acquired mostly from their own relationship as implementers of government power. Ergo, money, where it is created in government regulated banks, is still endogenously created -- not by the central bank, but by the government itself, an expression of the power, or lack thereof, of an entire polity.
by santiago on Wed Nov 3rd, 2010 at 05:10:04 AM EST
[ Parent ]
santiago:
But the circuitous theory is also an example of what I would call too much focus on accounting definitions and too little on understanding of what is really going on when banks make loans or governments print money, spend it,  and then collect it back in taxes again.
But it does provide a framework within which boom-bust credit cycles are understandable, and not "external shocks".

One of the biggest problems with Neoclassical economics is that, in Minsky´s words, it is a theory "of capitalism without capitalists, capital assets, and financial markets".

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 05:15:32 AM EST
[ Parent ]
santiago:
What I see going on is people using money to extract cooperation, and commitments of cooperation, from others, i.e., as means of exercising power. The correct unit of analysis isn't the money. Rather, it's the power relationships between people that money is being used to create. Why can banks create money? Because agents make commitments to do things for banks in exchange for the credible access to resources that banks can provide to provide to the people that agents want to organize toward some end.
I would turn this on its head. The ability to create money gives banks huge power over other economic agents. And why can banks create money? It's not only banks that can create money for (again paraphrasing Minsky) "anyone can create [credit] money, the problem is to have it accepted". Generally speaking, it's a matter or creditworthiness whether you can create money. But once this gets institutionalised, and for the past 100 years, banks can create money because they have a state guarantee fo solvency. Deposit-taking institutions are a state-created legal category which have, by virtue of their implicit state guarantee, an effective monopoly on the creation of credit money.

Central banks can still create "base money", and governments could, if they wished, create money by issuing certificates redeemable in payment of taxes, but they don't, by and large, particularly if they try to remain economically orthodox.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 05:56:31 AM EST
[ Parent ]
Migeru:
anyone can create [credit] money, the problem is to have it accepted
And if you can't have your credit money accepted you pay someone who can (i.e., a bank) a commission to underwrite it.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 09:03:47 AM EST
[ Parent ]
I'm not sure that this explanation turns anything on its head, though, instead of just restating it. If banks' power over other economic actors is institutionally derived, it means that banks are mere agents of government and that government is still the principle basis for money.  

While true that anyone can create money, and often do in everyday situations such as taking future delivery on a promise to pay, something must be fundamental about government's ability to provide a more acceptable, and therefore trade-able, money than other agents. That more fundamental something, I'm arguing, is power, the capacity to persuade or co-opt the cooperation of others towards a common end. Government is just better at this than other agents, particularly in an exchange based society like modern, urban ones, because government has significant other means of coercing cooperation other than exchange-based persuasion. Money is just a tool with which to engage in exchange-based persuasion, so money whose value is guaranteed by an agent with credible alternatives to exchange in order to obtain social cooperation is going to be more universally acceptable than money based on less credible guarantees.

by santiago on Wed Nov 3rd, 2010 at 12:41:01 PM EST
[ Parent ]
No, it means governments are agents of the banks.

The job of government is to provide and manage sources of labour (through education and health care) and resources (through military and financial interventions) that profit the managers and shareholders of the banks and the lead corporations.

If cheaper sources of labour become available, it's the job of governments to make it possible for banks to use them.

If they don't become available, it's the job of government to impression manage local politics to give the illusion of participatory democracy, while guaranteeing that policy is decided in board rooms, not at street level.

Government is effectively PR, policy marketing, and enforcement, with a bit of HR.

Money exists to implement rationing for individuals, and policy coercion for smaller corporates. Policy is set and acceptable performance is rewarded by steering money to certain individuals, enterprises, and activities, and denying it to others.

None of this requires a theory of economics with internal consistency. It simply requires some interesting academic-ish story-telling, and a monopoly on the money supply.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 3rd, 2010 at 01:02:52 PM EST
[ Parent ]
That what's you're asserting, but that's not what following the power actually shows, though.  If you believe that banks derive their power over other economic actors from the government, then banks must be agents of the government and not the other way around.  If you want it to to be the other way around as you say, then you can't accept that banks power over other economic actors is institutionally derived from the government as migeru argued.  You have to instead argue that government's power over others is derived institutionally from the banks, but that's not the argument I see being made here.
by santiago on Wed Nov 3rd, 2010 at 04:14:23 PM EST
[ Parent ]
It doesn't have to be either/or. Banks and corporations have a synergy with national sovereignty. They're two faces of the same (ahem) coin. They can - quite literally - play two sides of the same confidence trick.

This shouldn't be news, given the role of distributed quasi-states like the East India Company in British history.

Do democratic populations set policy? Of course they don't. And currently, they're not benefiting in any obvious way from policy trends.

The financial sector and the CEO class clearly are, however.

And if you want an argument from power, people in the US who used to own their own homes outright until a bank stole it from them - with no serious resistance from the US government - might have something to say about that.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 3rd, 2010 at 04:38:57 PM EST
[ Parent ]
I think you'll find that it a lot more ambiguous than that. You might be right, but that's actually a separate, yet unestablished argument, so it's somewhat dishonest to yourself to bring it in as an a priori assumption.  

Are corporations and banks powerful interests with undue influence on policy? Probably yes. But are they really as powerful as the identity relationship between them and government as you claim?  That's not so clear at all?  What about the military? Senior citizens? Farmers? other interests with which bankers have to compete for attention in even a non-democratic polity, let alone a democratic one?  You need a good theory here too before you can bring it to an analysis of monetary policy.

by santiago on Wed Nov 3rd, 2010 at 05:35:42 PM EST
[ Parent ]
Are corporations and banks powerful interests with undue influence on policy? Probably yes. But are they really as powerful as the identity relationship between them and government as you claim?

There hasn't been a US secretary of the Treasury who had not previously been employed by Goldman Sachs since I was seven years old.

The US may be an extreme case, though.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 05:44:33 PM EST
[ Parent ]
There is a degree of circularity, but that is because our political systems are designed with "checks and balances" in mind so that power may flow in cycles. A appoints B who then appoints A's successor. Or C makes the rules allowing D to dictate terms to C in the future.

So, the reason I claim that the banks have a state-guarantee and a state-granted monopoly is because of deposit insurance and because banking supervisors have the power to set guidelines on the kinds of business banks are allowed to engage it, and revoke banking licences and intervene banks which don't follow the guidelines. So banks are agents of the state and also banks can be reined in by the state.

The reason I claim that the banks have the governments by the balls is that governments cannot create money, especially in the Eurozone, and so state fiscal policy is subordinate to the bond markets. The bond markets are dominated by investment banks acting for themselves or as intermediaries of speculators. And the states can do precious little to rein in banks from outside their jurisdiction. This is because of legal structures erected by the states themselves (a case of C making rules allowing D to dictate terms to C).

Power doesn't flow hierarchically in a tree, but there are loops. However, some of the power relations are more direct than others. The threat to make a bond rollover very expensive to the point of causing sovereign insolvency can be executed more swiftly than the threat of legal change.

So it would appear it is the Central Bankers that have the power. They control monetary policy, and so fiscal policy (by virtue of the states having relinquished fiscal policy to the markets and the Central Bankers acting as regulators for the market makers).

The Monetary Authorities/Financial Regulators are not monolythic nor do they have universal jurisdictions, but collectively they sit at the top of the system and could call the shots if they felt so inclined. In practice, they are all market worshippers so the financial markets call the shots.

Of course, the state appoints the monetary authorities and the regulators, as well as making and amending the rules, so the state still has power to put itself back in charge of fiscal policy. Except that this requiresstrong majorities and, in the case of the EU's fiscal and monetary rules, the insanity has been frozen into virtually unamendable treaties so here we are.

The only way out is collusion. For instance, if the ECB wanted to enable fiscal expansion it couldn't do it by buying sovereign debt directly from the treasuries of EU member states. But the Central Bankers could conceivably have a quiet talk with the private banks instructing them to buy the next issue of public debt only to turn around and sell it to the Central Banks a day later.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:35:52 AM EST
[ Parent ]
Not entirely unlike Iran's power structure.

(diagram)

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:52:56 AM EST
[ Parent ]
Mig:
Power doesn't flow hierarchically in a tree, but there are loops.

And in the USA chief amongst those loops is the campaign contribution loop, the post government employment loop and the academic advancement loop.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 11:40:41 AM EST
[ Parent ]
I cannot fathom how an economist such as yourself can look at last Spring's European Sovereign Debt Crisis and come to the conclusion
that banks are mere agents of government and that government is still the principleprincipal [sorry, pet spelling peeve] basis for money


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 01:11:30 PM EST
[ Parent ]
I'm not looking at the sovereign debt crisis and saying that.  I'm just following the argument you've given that derives banks' power over other economic actors from institutional bases, i.e., rules derived from outside of banks, i.e., the government's guarantee of solvency.  

If banks appear to have had too much power over the government vis a vis the debt crisis then that's an argument that government is the agent and banks are the principal (thanks) which requires a separate set of evidence and argument than the one being made here. We can't have it both ways.  Either government is the tool of banks or vice versa, not both.  

The European sovereign debt crisis therefore appears to still be consistent with banks' power being derived from government, therefore, and government just responding to successful claims made by that particular set of constituents instead of by others, not that the EU actually derives its power from the European banking sector.

by santiago on Wed Nov 3rd, 2010 at 04:26:09 PM EST
[ Parent ]
As above, that's a falsely excluded middle.

Finance and government are two arms of the same phenomenon. Finance sets policy, government implements it, within shrinking token limits that define what's democratically acceptable before the rioting and the lynching starts.

Banks support policy by creating cash for government spending - such as the occasional invasion - and government repays the favour by using 'the deficit' as an excuse to cheapen labour costs, lower taxation and increase profits.

If a small government gets out of line, it can be 'punished' with financial torture and dramatic tutting that - coincidentally - can only be alleviated by cheaper labour costs, lower taxation, and increased profits.

And so on.

As games go, it's not even particularly sophisticated or difficult to understand. But because it's buried under buckets of pinstriped theoretical diarrhoea it appears far more complex than it really is.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 3rd, 2010 at 04:48:55 PM EST
[ Parent ]
As I said above, you're trying to establish a new, cynical theory of governance that says that banks and government are the same thing to the exclusion of others.  That might be good rhetoric, but it's not analysis, so it can't be brought into a more systematic analysis of monetary policy like the Minsky-Keen people are attempting.
by santiago on Wed Nov 3rd, 2010 at 05:40:26 PM EST
[ Parent ]
Nice try with the rhetoric, but you're simply trying to pretend that facts don't exist because they don't suit your rather vague argument.

The test of a theory is its predictive power and it closeness to lived reality.

Do the Minsky-Keen people have a theory of government action? With my 'cynical' analysis it's not difficult to predict what a centre-right/hard-right government is going to do to its population.

Economic theories are useless unless policy goals are made explicit. What's the goal of monetary theory? Global prosperity, or monopolised profit?

You'd think if the goal were really global prosperity, as stated, then impoverishing the US and UK populations might be seen as a bad thing to do.

And yet - this isn't what's been happening for the last thirty years. The trend towards impoverishment is clear, unarguable, and accelerating.

A different set of differential equations isn't going to change that. It won't change that because the people who set policy are perfectly happy with their nonsense pseudo-theories, and are more interested in a theory's persuasive power as economic propaganda than in its correlation with reality.

Johann Hari has done some nice work on the sophistication of the models used in corporate management.

David Craig gives a typical explanation of what the consultants Actually Do. After getting a degree specialising in romantic poetry, he was astonished to be hired by a prestigious management consultancy, given three weeks training, and then dropped into major corporations to tell them how to run their oil rigs, menswear stores, and factories, for tens of thousands of pounds a pop. In his brave memoir Rip Off! he explains: "We were proud of the way we used to make things up as we went along... It's like robbing a bank but legal. We could take somebody straight off the street, teach them a few simple tricks in a couple of hours and easily charge them out to our clients for more than £7,000 per week." It consisted, he says, of "lies, lies and even more lies."

He worked to a simple model, which is common in the industry. He had to watch how a workforce behaved for a week - and then tell the company's bosses, every time, that they had 30 percent too many staff and only his consultancy could figure out who should be culled. If he calculated they actually had the right amount of staff, he was told by his bosses not to be so ridiculous and do his sums again: where was the money for them in a properly-staffed company? The company had to be POPed - People Off Payroll.

So that's corporate economic modelling in practice.

Apart from some marginal awareness of the political impact of the numbers, I see no evidence - absolutely none - that national policy is decided in a more thoughtful and less mercenary way.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 3rd, 2010 at 06:06:37 PM EST
[ Parent ]
but you're simply trying to pretend that facts don't exist because they don't suit your rather vague argument.

Not at all.  You're trying to pretend that facts actually exist because you seem to have observed something you think to be true.  

Your theory of governance might work the way you say, but it is more likely that the associations you think you observe are spurious ones and not causal. You'd have consider all of the alternative theories first to accept yours as really factual.

Economic theories are useless unless policy goals are made explicit. What's the goal of monetary theory? Global prosperity, or monopolised profit?

Actually monetary theory has a very explicit policy goal, which is usually part of the legal mandate of central banking functions in most countries: maximize employment, growth, and price stability. It's a straightforward optimization problem that turns out to be much more difficult to implement than legislators ever realize.

But you'll have to suspend your cynical mindset first to actually find anything of value in thinking about such things.

 

by santiago on Wed Nov 3rd, 2010 at 10:06:38 PM EST
[ Parent ]
Actually monetary theory has a very explicit policy goal, which is usually part of the legal mandate of central banking functions in most countries: maximize employment, growth, and price stability.

Indeed! This has been law in the USA since just after WW II. Those mandates are observed with all of the scrupulous attention of which we used to complain that the constitutional protections of personal liberty in the Soviet State were observed by the Soviet State.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 10:15:36 PM EST
[ Parent ]
Well, Greenspan actually had a pretty good run of it for 15 years. Very high employment, healthy growth, and low inflation until 2008. The fact that this eventually ended up in a housing and asset bubble doesn't support the argument that policymakers weren't actually trying to follow the mandate.  They were, but it is just hard to do.
by santiago on Wed Nov 3rd, 2010 at 10:30:51 PM EST
[ Parent ]
Employment figures weren't great during the Bush years, and of course Greenspan knowingly inflated the debt bubble, both to disguise shrinking real earnings and to skirt around a possible post-9/11 crash.

The shrinking real earnings are the real cause of the current mess. But there's no real interest in increasing real earnings, either in the US or elsewhere, so the mess will continue.

The reality is that Greenspan and the Fed never had any interest in improving the common good. Their deliberate attempts to shrink real earning power and create a fantasy world of impossible debt obligations are proof of that.

Spending on the real economy was always possible - as per Iraq, but at home - but instead government money inexplicably went elsewhere.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 12:10:35 AM EST
[ Parent ]
On the contrary, employment figures were very good during the Bush years (GWB anyway) until the recession hit.  Unemployment was somewhat higher than it was during the boom years of the 1990's but still quite low by absolute standards.
by santiago on Thu Nov 4th, 2010 at 04:50:56 PM EST
[ Parent ]
Uh, no.

"Low unemployment by absolute standards" means something in the vicinity of 2-3 %, not 4-6 %.

And that's excluding all the statistical legerdemain that most governments have been practising with unemployment figures over the last couple of decades. The Danish trick is to put the unemployed on workfare rather than unemployment benefits - being technically in an "educational initiative," they don't count as unemployed. The British trick is to put the unemployed on indefinite sick leave, so they're "temporarily out of the labour force" instead of being unemployed. The American trick is to underemploy people; a person who works five hours a week is "employed" under the headline definition of unemployment, but is hardly likely to earn anything resembling a proper income that way.

It would, I suspect, be quite instructive to compile a little book of all the ways the neoliberal consensus has been breaking the unemployment thermometer in place of curing the fever.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 06:03:18 PM EST
[ Parent ]
No, w don't know to be the case.  And in lots of parts of the US -- including many of the most productive parts -- did have unemployment in the 2-3% range during these periods, so at the national, monetary policy level, which can't discriminate between regions, you can't really do anything else to get it lower if fiscal authorities don't do their part.  
by santiago on Thu Nov 4th, 2010 at 09:03:07 PM EST
[ Parent ]
Well, Greenspan actually had a pretty good run of it for 15 years. Very high employment, healthy growth, and low inflation until 2008.

Uh, no.

  • Employment was well below full even during Clinton's best years. Of course, that's using the Eisenhower definition of "full employment," not the fraudulent NAIRU-based definition.

  • Inflation wasn't low either - it just took place in assets instead of in consumer goods. Deliberately not measuring something is not a valid excuse for not seeing it happen.

  • And I would argue that growth wasn't particularly healthy either, since it was mostly taking place in the FIRE sector(s) rather than the industrial and extractive sectors.

Now, much of this can't really be laid at Greenspan's feet, at least not exclusively. But quite enough of it can to make Greenspan's tenure a case of Epic Fail.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 05:52:46 PM EST
[ Parent ]
Epic fail is a much differently thing than willful neglect of duty, which is the charge being leveled at Greenspan.  With unemployment as low as it was, and with growth as strong as it was, and inflation as measured by the standards of the time -- CPI -- as low as it was, it is just ridiculous to actually argue that Greenspan was in any way willfully neglecting his job. He screwed up. He didn't shirk.
by santiago on Thu Nov 4th, 2010 at 09:06:48 PM EST
[ Parent ]
He was negligent. If he had not been negligent, he would have known that the standard metrics of the time were bullshit. This was not hard to call, and there were plenty of warnings from inside the federal government as well as outside it. To take just the most prominent, you had Case and Shiller warning that the real estate market was way out of line; you had Krugman warning that the stock market was way out of line; you had Sheila Bair warning that it was highly unwise to deregulate derivatives, which should have told him that he should keep an extra sharp eye on derivatives (and no, it is not a valid excuse that a financial instrument is "too complicated" for the central bank. The central bank is a financial regulator - if a financial regulator sees an instrument it does not understand, its job is to ban trading in that instrument until it is satisfied that it does, in fact, understand said instrument. In particular it is the financial regulator's job to understand what happens if said financial instrument blows up).

An important part of Greenspan's job as a central banker was to make sure that he was measuring the right things. The fact that he mindlessly relied on the conventional proxies despite explicit warnings from within and outside the federal government that they were seriously misleading is itself an indictment of his negligence in the line of duty.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 09:37:58 PM EST
[ Parent ]
You're asking too much of a policymaker in a democracy. You're asking someone to ignore all of the established wisdom that has worked so well up to that point, when everyone is doing well and nothing seems to be broken, and say, "Guess what. I'm wrong. I'm going to throw out the models we're using a try a radical new approach that will require making lots of people a bit poorer, but trust me, you'll be glad I did if you could really see what would happen if I didn't, even though none of that irrational exuberance stuff I warned you about 10 years ago has ever happened yet."

Kind of like Obama telling people that his stimulus really worked because if he hadn't done it things would have been much worse.  It just not a realistic assessment of Greenspan's options and judgment at the time.

by santiago on Thu Nov 4th, 2010 at 10:18:57 PM EST
[ Parent ]
What's radically new about a central bank killing financial bubbles? That's what central banks are there for. That's the only reason to have central banks in the first place. If the central bank can't or won't kill bubbles, then fold the damn thing into the Treasury and be done with it, already.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 10:31:05 PM EST
[ Parent ]
Actually, no it's not. It was talked about alot at the time, from when Greenspan first called the stock market boom in the mid-1990's "irrational exuberance" in his now famous speech at the American Enterprise Institute.  But it was argued by most other policymakers at that time that 1) it was not the Fed's job to burst bubbles, and 2) how do you know for sure if it really is a bubble?  

Even now, there's no consensus anywhere that it's a central bank's job to burst asset bubbles of any kind, although fortunately that consensus appears to be growing.

by santiago on Thu Nov 4th, 2010 at 10:41:58 PM EST
[ Parent ]
Ad 1) Popping bubbles is the only thing monetary policy does better than fiscal policy. If you don't want to pop bubbles, then what's the point of having a central bank in the first place?

Ad 2) Simple: You poke it. If it blows up, it was a bubble.

In this particular case, you knock out the shadow banking system and the securitisation train(wreck). Those had to go anyway, since they were blatantly vehicles for regulatory arbitrage cheating the solidity requirements. (The central bank is permitted to object to blatant and organised counterfeiting of the currency, even in the neo-liberal fantasy world, right?) This is functionally equivalent to raising margin requirements, since the whole point of securitising and establishing a shadow banking system is to cheat the margin requirements.

If asset prices collapse when you raise margin requirements a little bit, then there was a bubble. If killing the shadow banking system causes margin requirements to rise by more than a little bit, then you have a corrupt banking sector, and it's time for housecleaning. If raising margin requirements a little bit does not cause asset prices to collapse, then you go back to business as usual, and nobody has been harmed (except the banks who had to foot a small increase in funding cost for a limited time - if they can't take that on the chin, then there was a bubble in the banking sector - and anyway it is relatively easy for the central bank to make banks whole; all it has to do is offer an overnight rediscount at a lower rate than its overnight reserves rate).

None of this is rocket science - all of this has been well known at least since the Panic of 1921.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 03:38:24 AM EST
[ Parent ]
It might work, but that doesn't mean central banks have any authority to do it. And how often has it ever been done, given that it is as easy and clear as you claim?
by santiago on Fri Nov 5th, 2010 at 03:58:20 AM EST
[ Parent ]
It was done in 1921. Not soon enough to avert a serious crisis, but soon enough that the real great depression didn't show up until ten years later. It was done in Spain and Sweden in the '90s. It was done

And of course the central bank has the necessary authority. The central bank controls the discount window, which is a perfectly fine way to reward banks that behave like you want them to behave and punish banks that don't. Simply drive the open market rate sky-high and offer to fund legitimate activities through the discount window... but only to banks that both behave properly and don't re-lend to poorly behaving banks.

For that matter, Greenspan could have simply not been a cheerleader. The fact that he was a cheerleader throughout his tenure (he actively lobbied for tax cuts at the end of Clinton's term; he actively lobbied against regulating credit default swaps; he actively lobbied in favour of adjustable-rate time-bomb mortgages; he actively lobbied in favour of pension privatisation; the list goes on) goes a long way towards incriminating him in and of itself.

Even granting the spurious assumption that these policies were not self-evidently moronic to anybody with a functioning brain and a bare minimum of familiarity with the way the financial system works, that sort of lobbying is clearly just as much or as little outside his remit as central banker as punishing banks for not exercising due diligence. You can't have it both ways: Either he was grossly out of bounds by cheerleading on the financial crazies, or he was well within his rights to curb stomp them, but decided not to.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 04:52:00 AM EST
[ Parent ]
The central bank has the tools, but not necessarily the authority. That power can be, and has been contested.  The existence of bubbles is still contested, as well, let alone that the central bank should try to do anything about them.  The examples you provided aren't examples of particularly successful outcomes, so they add to the ambiguity of policy not clarity. (I think Australia in 2002 is held up as the successful example of doing what you say.)

Whatever the case, there was just no political consensus for doing something like that at a central bank, and although it might seem like Fed chairmen are very powerful individuals, really they are just bureaucratic implementers of policy in a contested democratic arena and they can't do anything outside of an established political consensus or they'll quickly be shown the door, like anyone else.

by santiago on Fri Nov 5th, 2010 at 11:58:42 AM EST
[ Parent ]
The existence of bubbles is still contested,

The theory of evolution is contested in some quarters. The germ theory of disease is contested in some quarters. The theory of relativity is contested in some quarters. Hell, even heliocentric cosmology is contested in some quarters.

Only in economics are the crackpots who deny well-established phenomena put in charge of academia and allowed to "contest" empirical evidence they don't like.

The examples you provided aren't examples of particularly successful outcomes,

Say what? The Spanish and Swedish interventions in their financial markets were not successful? In which alternative universe?

Whatever the case, there was just no political consensus for doing something

That does not excuse Greenspan being a cheerleader. If he had been honestly doing his level best to bring sane policies to Washington and been obstructed by incompetent and negligent neoliberals every step of the way, then I could have cut him some slack. But he was one of the obstructionist neoliberal cheerleaders himself.

If being a neoliberal means that you are excused from being negligent and incompetent, then neoliberalism is a prima facie disqualifier for any public office more important than dog catcher.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 03:59:05 PM EST
[ Parent ]
The theory of evolution is not contested by any leading biologists, however. The concept of bubbles is nowhere near as clear at that. Bubbles are simply not well established phenomenon.  There isn't even a language for it, just a weak analogy to a airborne globes of soap and air.

Again, it's another example of something that seems to be a certain, but when you really try to pin it down explicitly, the thinking and evidence just isn't there yet to do it. There's no causality demonstrated yet in the whole bubble concept, so it just another gut judgment, among many others. And when gut judgments are involved, it's asking alot for a policymaker to go outside of the available consensus in a democracy.

The problem of bubbles is likely solvable, but it's not a "trivial" problem to do so, even if it seems apparently evident.  It's the kind of problem noted by the famous AI scientist, Judea Pearl, who first solved this puzzle which also seems straightforward but turns out to be difficult to show:

If the statement that if Oswald didn't shoot Kennedy, someone else must have is so apparently true, why isn't the statement if Oswald didn't shoot Kennedy someone else would have also true?

Most of social science has to do with similar statements in the subjunctive conditional tense, as are a substantial amount of questions in natural science too.

by santiago on Fri Nov 5th, 2010 at 05:09:04 PM EST
[ Parent ]
The theory of evolution is not contested by any leading biologists, however.

Only in economics...

Only in economics can you waltz into a reactor control room, disable all the interlocks, override all the warning klaxons, remove all the control rods and then proclaim startled surprise when the reactor goes supercritical.

I never really could picture the scene in the Chernobyl control room until now. But now I see it clearly:

Alan Greenspan walks in, and starts disabling the interlocks. An engineer walks up to him and asks:

Engineer: Are you quite sure you know what you're doing?

Greenspan: Of course. I'm operating the reactor.

E: Uh, yeah, I know that. But you really aren't supposed to disable those safety features.

G: Don't worry. I'm applying best practise as developed by the University of Chicago nuclear engineering division.

E: Didn't those guys have five meltdowns over the last twenty years?

G: Pish-tosh. You know how hard it is to see a meltdown coming. You only really know that you were building up to one after the fact. Can't blame a chap for an honest mistake.

E: Meaning no disrespect, sir, but we actually have a pretty good idea about how to prevent meltdowns. See, you make sure that you have enough control rods in the reactor core at all times, and...

G [interrupting]: Control rods? What silly nonsense! The reaction becomes much more efficient if you remove the control rods. Why, the only function served by control rods is to impair nuclear reactions.

E: Uh, yeah, that's sort of the whole point.

G: Shut up! I'm applying best practise as developed by the University of Chicago nuclear engineering division. Do you want to keep your job?

E: Sir, yes sir.

G: Good.

[Greenspan goes back to tinkering with the reactor. Five minutes pass.]

Reactor: KA-BOOOOM!

Greenspan [looking into the rapidly expanding fireball that's about to swallow him and the rest of the reactor crew]: Oooops. Well, can't blame a man for failing if he was giving his best effort.

The one obvious difference is that nuclear engineers only get to make one such colossal fuckup in their career.

Bubbles are simply not well established phenomenon.  There isn't even a language for it,

There is a perfectly fine language for it, developed by Keynes and Minsky. The fact that Greenspan's ideology made him discount that language does not mean that it does not exist.

There's no causality demonstrated yet in the whole bubble concept, so it just another gut judgment, among many others.

Bullshit.

That was the case in the late 19th and early 20th centuries. We have a hundred years' worth of data on the phenomenon by now. The fact that Greenspan subscribes to a garbage model of the political economy does not excuse his incompetence any more than the fact that a paediatrician is a germ theory denier would excuse failing to vaccinate the children in his care.

If the statement that if Oswald didn't shoot Kennedy, someone else must have is so apparently true, why isn't the statement if Oswald didn't shoot Kennedy someone else would have also true?

That is trivial. The second statement discusses what might have been if whomever shot Kennedy that day had not shot him. Whereas the first statement confines itself to describing the history that actually did occur, where Kennedy was shot.

None of which has any bearing on whether it was Greenspan's job to kill the shadow banking system, kill the unregulated derivatives, kill the TBTF banks and thereby kill the bubble.

I always felt that this entire line of conversation was a surreal deja vu, and I've finally pinned down precisely where I've seen it before. It starts three minutes in:

And continues here:

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 05:58:45 PM EST
[ Parent ]
There is a perfectly fine language for it, developed by Keynes and Minsky. The fact that Greenspan's ideology made him discount that language does not mean that it does not exist.

Don't forget Irving Fisher's Debt-Deflation Theory of Great Depressions. In point #19 Fisher postulates that the one factor that accounts for great crashes is an excessive build-up of debt. This 20 page paper was published in Econometrica in 1933 and was immediately ignored.

While it is not true that there was no theory of bubbles in economic theory it is true that there is no theory of bubbles in mainstream US economics. They have actively excluded and marginalized the works of Fisher, Keynes and Minsky that deal with the subject. They don't even include debt as a factor in their considerations. This was the grounds on which Bernanke, in the 1990s, dismissed Fisher's work as irrelevant.

The "mainstream", via their gatekeepers, exclude from their theories time and debt, require that their econometric model, the General Dynamic Stochastic Equilibrium Model analyze the entire economy as though all decisions are made by a single rational actor and are unable, from what they accept into their theories, to account for profit and they refuse to acknowledge alternative approaches that do incorporate time and debt and that do include multiple sectors into their econometric models and which can derive wages and profits directly as a function of time from the models.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 5th, 2010 at 08:52:46 PM EST
[ Parent ]
While it is not true that there was no theory of bubbles in economic theory it is true that there is no theory of bubbles in mainstream US economics.

I'm well aware of that fact.

This does not justify Greenspan's ideological excesses, any more than the fact that there was no mainstream opposition to it at the time justifies the Tuskegee experiment. "But the rules of the time said I was allowed to" didn't cut it as a defence at Nürnberg, and it doesn't cut it as a defence today.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 09:24:01 PM EST
[ Parent ]
Do you think I am disagreeing with you?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 5th, 2010 at 10:05:53 PM EST
[ Parent ]
No, but I still think it's important to point it out.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 12:01:58 AM EST
[ Parent ]
You're missing the point.  The Oswald-Kennedy puzzle (on which you don't have the right answer, incidentally -- outside of mere intuition, which isn't science, you haven't demonstrated why what did occur in the past (observation) is necessarily more compelling than what might occur if the past were different) is important because it is an example of a counter-factual conditional problem -- things that might be true based on what we can observe, but because we can't actually observe the phenomenon directly, and must instead substitute conception for observation, it could just as well not be true. If Oswald didn't kill Kennedy, someone else could have, but we'll never be able to know for certain because Oswald ruined any possibility of testing any other hypothesis, not because it false.

Same with a bubble.  If asset values of a certain class are increasing, it certainly could be a harbinger of disaster, but if we intervene to try to change the event, we'll never know. Another example: in the lead up to the invasion of Iraq, the pro-war argument frequently was that if Allied forces had intervened more aggressively against Hitler before he invaded Poland and Czechoslovakia, WWII would have been thwarted, ergo, we should stop Sadaam now before he becomes another Hitler. That's a bubble argument, and it assumes that the conditional -- WWII would have been avoided if the Allies attacked Germany instead of the other way around -- is true, when it is only one possibility among others.  

The historical record of intervening in bubbles, based on the attempts you cited and the poor outcomes that occurred nonetheless, are good reasons to be wary of concluding that intervention to "pop" asset bubbles actually does any better than doing nothing, particularly if you consider the possibility of false positives when identifying bubbles.

by santiago on Sat Nov 6th, 2010 at 03:21:39 AM EST
[ Parent ]
Same with a bubble.  If asset values of a certain class are increasing, it certainly could be a harbinger of disaster, but if we intervene to try to change the event, we'll never know.

This is missing the point.

The point is that the action you take to pop bubbles is perfectly harmless if there is, in fact, no bubble. It's like having an alien invasion by a species that's vulnerable to nerf darts. You then shoot Kennedy with a nerf dart. If he keels over from the nerf dart, then he was an alien impostor. If he isn't an alien impostor; well no harm, no foul.

The first and most important thing is to properly police your financial system. And already at this very preliminary stage, we start seeing Greenspan's record of unsuitability for any regulatory function that deals with the financial industry:

  • In 1999, he was lobbying Congress to repeal Glass-Steagall. This, alone and in itself, is prima facie evidence that he was unfit for any regulatory duty involving the financial system. He had no obligation, political or institutional, to lobby against responsible regulation of the financial system, he did not need to pander to anybody at the time by doing so, and he had the perfect excuse for not supporting the bill that it would be inappropriate for him to use his position at the Fed to lobby Congress.

  • In the late 1990s, Greenspan and Rubin fought a running battle with the Commodities Future Trading Commission to prevent the latter from regulating credit default swaps. All the above considerations about Greenspan's hands being wholly unforced apply here as well, making this another cardinal sin committed of his own free will.

  • He encouraged people to take out option adjustable-rate mortgages at a time of historically low interest rates. There is no economic theory, left, right or centre, where this advice makes sense, unless you are deliberately trying to inflate housing prices.

And that's just the three best known examples of Greenspan not wanting to do his job (and making it harder for his successors to do his job for him to boost). It's not like they're the only ones.

Having a properly regulated financial system is not sufficient, obviously, to prevent asset price inflation. But having a properly regulated financial system means that you can control the financial system's aggregate leverage with reasonable precision. So, when suspecting a bubble, you temporarily raise the solidity requirements on the banking system by a little bit. If prices collapse, you had a bubble. If prices do not collapse, well no harm, no foul. And if you really are blind as a bat and can't see a bubble coming even when, like the housing bubble, it is equipped with floodlights, fog horn and a radar beacon, you just hike capital adequacy ratios at irregular intervals to test the waters. Obviously, this is less efficient than being able to actually understand what's going on (as hiking capitalisation ratios imposes a negligible but nonzero cost on the financial system), but that's the price you pay for putting blind morons in charge of managing your financial regulation.

Another example: in the lead up to the invasion of Iraq, the pro-war argument frequently was that if Allied forces had intervened more aggressively against Hitler before he invaded Poland and Czechoslovakia, WWII would have been thwarted, ergo, we should stop Sadaam now before he becomes another Hitler. That's a bubble argument, and it assumes that the conditional -- WWII would have been avoided if the Allies attacked Germany instead of the other way around -- is true, when it is only one possibility among others.

Yes, it is possible to construct bubble arguments that are transparently moronic. If it were impossible to construct invalid bubble arguments, it wouldn't be much of a theory, would it now? It is also possible to construct arguments for space exploration that are transparently moronic, such as suggesting that we should go to the moon in order to mine the blue cheese that it is made of.

Your argument actually provides an excellent illustration of why popping the housing bubble was so obviously the right choice, and attacking Iraq was so obviously the wrong choice. Consider:

  • The historical evidence supported the conclusion that a housing bubble was credible. It was well known at the time that median real estate prices were grossly out of line with median income. Every single time, for as long as we have recorded real estate prices and incomes, that behaviour has terminated in a crash. There are no exceptions what so ever. By contrast, history provides no indication that two-bit tin-pot crooks like Hussein tend to become genocidal demagogues. There are plenty of two-bit tin-pot crooks like Hussein in the world (most of them supported by the very same neocon chickenhawks who wanted to go after Hussein, incidentally), and most of them are not genocidal maniacs.

  • The housing bubble, if indeed it existed, posed a credible threat to the world economy in general, and the American economy in particular. If the price/income ratio reverted to its historical norm, in the same manner as in previous inflationary episodes, it would blow a bigger hole in aggregate demand than the great crash of 1929 did. By contrast, Hussein wasn't even a credible threat to many of his own subjects - he was under intense surveillance, he had no significant military capabilities, his industrial plant pretty much didn't exists and he didn't even have sovereignty over his own airspace.

  • If and when the housing bubble had started doing damage, it would have been too late to intervene. This is in the nature of bubbles. Contrast this with Iraq, which had neither the military nor the industrial capacity to seriously resist a punitive expedition. Meaning that if and when Hussein jumped the shark, he'd be gone in two weeks flat, if the US decided to intervene. And while modern technology is incredibly efficient, including in aiding the death and dismemberment of one's fellow man, even Hitler - who had the full support of the premier industrial power of his age - did require more than two weeks to do any material harm.

  • The cost of intervening against a bubble that does not, in fact, exist is negligible. The cost of toppling an innocent government by military invasion is calculated in human lives, using six or seven figures.

Every term of the cost-benefit analysis was clearly in favour of intervening against a potential housing bubble - it was clearly visible; if it were real, it posed a credible threat; the cost of not acting if it were real would have been very great; and the cost of acting if it were not real would be negligible.

Similarly, the cost-benefit analysis of the Iraq war was just as clearly in the other direction: There was no credible indications that the threat was real. Even if it were real, it was not very great. The cost of delaying action, if the threat were real, would not have been very great. And the cost of taking action if the threat were not real was very great.

This chain of reasoning should not be very hard to understand.

The historical record of intervening in bubbles, based on the attempts you cited and the poor outcomes that occurred nonetheless, are good reasons to be wary of concluding that intervention to "pop" asset bubbles actually does any better than doing nothing,

Uh, no.

The historical examples of not popping asset bubbles include the Long Depression, the Great Depression and the South Sea Bubble. That's like saying that the consequences of installing safety interlocks on nuclear reactors are ambiguous, because a security lockdown occasionally causes a blackout.

particularly if you consider the possibility of false positives when identifying bubbles.

sigh The actions you take to pop bubbles are perfectly harmless if there is no bubble. Well, no, not perfectly harmless, because they impose a negligible but nonzero cost on the financial system. But that's hardly onerous, and Greenspan had several percentage points of federal funds rate to compensate for that before hitting the zero lower bound on nominal interest rates.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 09:18:59 AM EST
[ Parent ]
Okay, I see where we're passing each other now.  You believe this to be true when it is just another example of the counterfactual problem, like the Oswald-Kennedy one:

The point is that the action you take to pop bubbles is perfectly harmless if there is, in fact, no bubble.

But it isn't. Popping a non-bubble may, in fact, be as harmful to both the allocation of resources (equity) and growth prospects for an economy (efficiency) as not not popping a true bubble. We have no reason, based on the data, to believe otherwise. The only way you can make the argument you do, that popping bubbles is perfectly harmless, is if you assume that you actually know when some phenomenon is a bubble with perfect certainty, which you can't.  Volatility, up as well as down, is a normal part of any market and may be random and thus not a bubble.  The science with which to determine what is random and what is caused by correctable monetary policy is what isn't there yet, despite the good work by Minsky, Schiller and others that is happening right now.

And since it is usually harder to convince people to fix something that isn't apparently broken, it usually isn't feasible either.

by santiago on Sat Nov 6th, 2010 at 02:12:05 PM EST
[ Parent ]
But it isn't. Popping a non-bubble may, in fact, be as harmful to both the allocation of resources (equity) and growth prospects for an economy (efficiency) as not not popping a true bubble. We have no reason, based on the data, to believe otherwise.

Uh, yes we have. We spent the years from 1945 through 1980 testing what happens when you castrate the financial sector. We have plenty of data on how much damage bubbles do when they are popped in different stages of life. It requires only the most trivial interpolation to conclude that even if (and this is a big if) popping the bubble in a controlled fashion on your own time table created a result every bit as bad as having it pop of its own accord, then popping it deliberately remains the superior option, because bubbles only get worse the longer you let them live. I really don't see how anybody with even the most cursory knowledge of the economic history of the first world over the last century or two can claim otherwise.

Volatility, up as well as down, is a normal part of any market and may be random and thus not a bubble.  The science with which to determine what is random and what is caused by correctable monetary policy is what isn't there yet

Poke it. If it blows up, it was a bubble. If it doesn't blow up, poking it doesn't hurt anybody who can't be made whole by easing terms at the discount window.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 02:50:51 PM EST
[ Parent ]
We don't have a lot of data on what happens when you pop non-bubbles, however. And that's that main problem because we have no reason to believe that popping non bubbles is any less harmful than not popping true bubbles.

Poke it. If it blows up, it was a bubble. If it doesn't blow up, poking it doesn't hurt anybody who can't be made whole by easing terms at the discount window.

No, this is just the drowning the witch argument. Poking a non- bubble, if "poking" however it is done is actually effective at poking real bubbles, will also depress economic growth and re-allocate resources in possibly perverse ways when a condition is not really a bubble.  We have no information which indicated otherwise.  Intervention in markets always introduces inefficiency, and may introduce inequity. Intervention, of which "poking" is a kind, is therefore justified when we know that the market is already grossly inefficient or grossly inequitable. But that's what's hard to know because of the counter-factual conditional problem.

Arguably, and this was the argument of Krugman and others on the left, the market was demonstrably inequitable and this justified some sort of intervention.  Problem is, popping a bubble wasn't the sort of intervention that could be certain to correct inequity if it turned out that the housing market was, in fact, not a bubble.  If it hadn't been a bubble and the Fed had attempted to "pop" it, the result would have had greater consequences on the poor than on the rich as reduced home ownership availability for the poor would have been affected first. See the problem?

by santiago on Sat Nov 6th, 2010 at 03:24:50 PM EST
[ Parent ]
We don't have a lot of data on what happens when you pop non-bubbles, however. And that's that main problem because we have no reason to believe that popping non bubbles is any less harmful than not popping true bubbles.

Yes we do. The dynamics of a bubble - that asset prices rise in expectation of capital gains rather than dividends in a credit-fuelled feedback loop - make it vulnerable to much smaller perturbations than a market where prices are determined without explicit feedback loops in price.

If the price of an asset class is chiefly determined by something other than the price movements in the recent past, then a small suppression of the price of that asset class will be self-contained and largely reversible (as long as you reverse policy before the new pricing regime has had time to work its way through the rest of the economy). If, on the other hand, you are in a bubble environment where the price changes in any given period depends on price changes in the immediately preceding period, then suppressing prices cause a non-linear cascade, which is not self-contained and is not reversible. So a small, short-lived intervention can reliably pop bubbles but leave benign price increases mostly alone.

When you have strong non-linearities, small perturbations can have large effects. When you have no non-linearities, small perturbations have small effects. You can suppress bubbles but not non-bubbles precisely by exploiting the fact that bubbles involve non-linear response to price changes, whereas non-bubbles, by definition, involve only linear responses to price changes.

Poking a non- bubble, if "poking" however it is done is actually effective at poking real bubbles, will also depress economic growth and re-allocate resources in possibly perverse ways when a condition is not really a bubble.

Not necessarily. The magnitude and duration of the effect required to suppress a bubble is very, very small compared to the magnitude and duration of the effect required to affect the price of a non-bubble asset in a way that causes any measurable hysteresis.

Moreover, if you design your intervention so it levies the cost chiefly on the banking system, you can compensate them through ordinary central bank operations afterwards if there turned out to be no bubble. Any bank that can't handle a small, temporary perturbation of this sort isn't doing its job properly (Like all infrastructure, banks are not supposed to be efficient, they're supposed to be reliable, which is not the same thing).

Intervention in markets always introduces inefficiency,

In which fictional alternative universe? One very prominent intervention in the market - the 95 % income tax - introduces efficiency, by making asset stripping prohibitively expensive.

If it hadn't been a bubble and the Fed had attempted to "pop" it, the result would have had greater consequences on the poor than on the rich as reduced home ownership availability for the poor would have been affected first. See the problem?

No.

In the first place, I don't see why homeownership should, in and of itself, be an objective. Ensuring that everybody has a home is a policy objective. Ensuring that everybody owns a home is a policy tool. There are plenty of other tools available, including, but not limited to, publicly owned rental units.

In the second place, you can control the price movements of a non-bubble real estate market pretty well: In the most extreme non-bubble case of price sensitivity, prices are roughly inversely proportional to mortgage interest rates (in a bubble they are more sensitive than this, in most non-bubble cases they are less sensitive than this). So you can take an action that will not in any (non-bubble) case drop prices by more than, say, 5-10 % for a couple of months, and then unwind it. This does not cause anybody to go bankrupt (all mortgages are 20 % down, 20 year fixed rate, right? If not, your financial regulator isn't doing its job).

It does cause the people who net sell (i.e. people who move in together, the heirs of people who die, people who sell to rent and people who buy down after their kids leave home) during that period to lose, and the people who net buy (divorcees, first time buyers, people who have kids and need to buy up and people who buy to let) during the period to gain. But a) people who net sell real estate are typically better off than people who net buy, and b) you only undertake this kind of poke action when the prices have been rising lately - so you are really just putting a temporary break on a price rise (that the net sellers had no right to plan for - planning for price rises is speculation, and that should not be encouraged), not taking away from the net sellers in absolute terms.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 04:43:14 PM EST
[ Parent ]
You've made a lot of new claims here, and I agree with almost none of them, but this thread is getting too long at this point to go on, so we might have to hold this for another day.

In general though, you have an overly optimistic assessment of the ability of economists to actually measure what causes price movements and their ability to intervene, using blunt monetary instruments of interest rates, without causing lots of collateral damage on real people who have nothing to gain by your attempts to avert bubbles.

And if you don't believe that markets work, then you can't really invoke market logic to argue that a bubble exists, which is what you're doing here.

by santiago on Sun Nov 7th, 2010 at 11:17:30 PM EST
[ Parent ]
Markets totally work.

They just work very, very stupidly and badly.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Nov 7th, 2010 at 11:30:08 PM EST
[ Parent ]
For decades it was expected that the Fed would intervene with higher interest rates if WAGES began to increase. When The Fed intervened and the economy slowed it was called a Recession. Many times, when resource prices such as oil increased, this rippled through the economy and caused wages to also increase. But The Fed employed the same kind of intervention, even when the recession had to reduce oil demand sufficient to cause a fall in oil prices before the inflation could abate. But still, intervention was considered to be justified.

When asset prices begin to soar and are left to sort themselves out we have a bubble that pops, as in 1929 and 2008 and the result is a Depression. Deflation resulted from returning stock prices to reality following 1929. Returning housing prices to levels first time buyers could afford and which are within shouting distance of rent costs after the real estate collapse that began in 2007 and went critical in Sept. 2008 also would involve deflation, but Fed policy has been oriented to avoiding that outcome. But that policy has discouraged acknowledging and writing down the inflated asset values created around that over priced real estate.

This has left us in a situation where the financial sector remains "levitated" well above the remains of any true foundation on which it could rest. The consequences of this situation are certain to be worse than the consequences of forcing a writedown of counterfeit MBSs, CDOs, etc., as we continue to expand liabilities and guarantees and incur additional costs as a consequence of not resolving the underlying situation. Meanwhile the economy is paralyzed with no end in sight.

The Great Depression of the 1930s had consequences that cannot be compared to the recessions that we experienced from the end of WW II to 2004. There will soon come a point at which it will be impossible to deny that our current situation is also a depression. Unfortunately, the economic understanding that enabled us to cope with economic down turns is being actively repressed from memory in the perceived interests of the wealthy. And the consequences of this emerging depression are likely to be worse and the prospects for recovery more remote due to exhaustion of cheap oil reserves and other resources.

Once the impending developments have become undeniable there will be little argument that had the Fed intervened to pop the real estate price bubble in 2003 the USA and the world would have been much better off. Then we will only have remaining the excuse: "Who coulda knowed?" And we know the answer to that: "Economists and social critics that the Fed, the Executive Branch, almost all of the Congress and the media refused to acknowledge or consider."

Developments in the USA in the next two years could well make it clear that no political solution will emerge to resolve the crisis. "The last, best hope for Democracy" will have been turned into "the People's" worst nightmare. Things will be worse in absolute terms for the very wealthy, but, relatively, they will be vastly better off than the rest of society.

All that remains is to determine what can be done that can get a better understanding of the existing crisis across to enough people to make a difference. This is clearly a man made disaster and it doesn't have to be this way.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 08:18:36 AM EST
[ Parent ]
Things will be worse in absolute terms for the very wealthy, but, relatively, they will be vastly better off than the rest of society.

You, a human being, own a large cattle ranch where you feed your cattle with ... feed, not grass. Something happens, your financing goes kaput, and you have to decide who will starve, the cattle or your family.

Human = the few very wealthy

Cattle = the rest of us.

Can we predict what the solution will look like?

The good news ... it's only a life sentence. You eventually leave this planet of idiots.

by THE Twank (yatta blah blah @ blah.com) on Mon Nov 8th, 2010 at 08:35:06 AM EST
[ Parent ]
Returning housing prices to levels first time buyers could afford and which are within shouting distance of rent costs after the real estate collapse that began in 2007 and went critical in Sept. 2008 also would involve deflation, but Fed policy has been oriented to avoiding that outcome. But that policy has discouraged acknowledging and writing down the inflated asset values created around that over priced real estate.

Or a few years of modest inflation combined with constant nominal housing prices.  

by MarekNYC on Mon Nov 8th, 2010 at 08:45:49 AM EST
[ Parent ]
And we can see how well that has worked out in Japan.

The median now in Reseda, Los Angeles County, is $340,000. In January, 2006 it was >$500,000. And while interest rates are at all time lows it will still take two very good incomes to qualify. But those kinds of jobs are in serious decline. Combine that fact with the consideration that there is a serious cloud over the title of any home mortgaged after 2003 and the fact that a significant portion of the real estate that owners would like to sell is being held off the market for various reasons, the shadow housing market, and we can see that housing prices have 10-20% further to decline, if not more.

That drop will only create more "air" beneath the stated values of the MBSs and CDOs in the Fed's sardonically named Maiden Lane "special vehicles" and the trash taken on by Freddie and Fanny. Thus the gap between pretense and reality will only widen for a while. Of course that is not the situation in all areas, only some of those areas with the largest number of houses and mortgages.

The real question is if the decline in real estate prices is greater than the decline in the ability of potential buyers to qualify. We are likely to get "modest inflation", especially since the CPI does not include increases in the cost of food or energy, nor, I believe in medical care. So to the potential buyer it is likely to seem that they have even less money that they can save.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 11:33:18 AM EST
[ Parent ]
CPI does include food and energy. Core CPI doesn't. Both include health care.

And we can see how well that has worked out in Japan.

Japan has had zero inflation.

You are right that affordability is the real question, but as long as nominal housing prices go up more slowly than nominal wages, you can even have falling real wages while housing gets more affordable and borderline mortgages rise above the waterline.  Krugman has recently been pushing for a 5% inflation target.

by MarekNYC on Mon Nov 8th, 2010 at 11:51:57 AM EST
[ Parent ]
Japan has had zero inflation.

What I was really talking about was the policy of allowing time to cure an overpriced real estate market. That has not worked out so well in Japan. If we could get several years of 5% CPI core inflation in the USA it would make the problems more tractable. But it is far from clear that this can be accomplished by the current means. Massive fiscal stimulus could do the trick - no doubt. But pumping more money into only the financial sector could have many (officially) unintended consequences. Already it is producing new asset bubbles in gold, commodities and stocks.

But the problem remains that we have a criminalized financial sector and that it has become grossly over-sized and a parasite on what is left of the "real economy". This COULD be cured with vigorous prosecutions of the malefactors, but that is unlikely with Mr. Don't Look Back.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 12:10:06 PM EST
[ Parent ]
Or a few years of modest inflation combined with constant nominal housing prices.

Yes. That is one way to "write down" the fraudulent debt.

The trouble is that it's really hard to see a plausible mechanism for causing inflation in the current environment.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 03:18:14 PM EST
[ Parent ]
I think you're right, but where folks like Jake and others are arguing, based on the Minsky-school stuff, for a more aggressive monetary policy engagement in such issues -- that is, expanding (i.e. constraining) the central bank mandate to include bubble management in addition to price stability, economic growth, and full employment -- I think that an alternative look at monetary theory will argue the opposite. It will argue that fiscal policy -- how things are distributed -- are much more useful and precise means of managing things like asset bubbles. It's not Greenspan's low interest -- low unemployment monetary policy that caused the crisis, in other words.  It's the Bush tax cuts. Had the higher Clinton era taxes been able to continue to retire excess cash from circulation be taking it out of the hands of the wealthy, they likely would not have been able to bid up assets so high.
by santiago on Mon Nov 8th, 2010 at 11:10:35 AM EST
[ Parent ]
Jerome has made similar comments, if I read him correctly. He proposes higher marginal tax rates on the wealthy and I would add higher estate taxes, especially on estates over a few million dollars. The Clinton rates might do it if combined with aggressive closing of tax loop holes and pursuit of off-shore havens.

But I do not think we can allow the regulators the option of not regulating. The Fed had the explicit power to enforce lending standards since the early Clinton Administration years, and, implicitly, for a lot longer. Had lending standards been maintained and vigorously enforced, had Greenspan accepted then what he said Saturday at Jeckel Island on Saturday, that fraud must be prosecuted in the financial sector, we would not be in the situation in which we find ourselves. If Obama accepted today that financial fraud must be prosecuted we might be on the road to some recovery.

How can the Greenspan Fed's refusal to consider the possibility of mortgage origination control fraud be excused, especially in the light of what was learned from the S & L crisis? Do you have an practical answer for how to deal with regulators who refuse to regulate? It seems to me to involve a re-education of the whole electorate. Instead we are just getting more of the same lying bull shit as we got before the crisis, but now it is even clearer just how bi-partisan the problem is.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 11:52:33 AM EST
[ Parent ]
The problem of regulators refusing to regulate is actually a lot more widespread and ambiguous than just the matter with monetary policy and banking we're discussing here. It's an area of new research in the policy studies field actually. It turns out that cases of not regulating, or over-regulating, are more common than not and are actually important means of contesting policy in a democracy where so much of the work of governance is performed by bureaucratic infrastructures which relate more directly with the stakeholders of an issue than macro-level legislative bodies are able to.

In other words, actual policy is usually designed as well as implemented within the bureaucratic implementation or regulatory structures of governance, and the deliberately ambiguous nature of democratic law-making provides for this. The high school civics model of democratic governance has simply always been a fiction, it turns out. Non-compliance with the intention of a law by regulators (or stakeholders -- for example unauthorized immigrants) may be as much a feature of democratic society as it is problematic. And policy making occurs strategically with regulatory non-compliance already in mind. It's yet another check and balance on the problem of the tyranny of the majority endemic in all liberal democracies.

Greenspan was very clear about his philosophy regarding credit standards in the post-9/11 world while Fed chair.  Contrary to the conservative majority and his normal constituency, he advocated for looser lending standards precisely because he thought fear of loss given the 2001 recession and uncertainty regarding the wars had to be counteracted by encouragement of risk taking, a decidedly Keynsian point of view and one that was absolutely right. Where Greenspan was wrong was where he had no policy authority even if he did have an opinion -- tax cuts. Taxes should not have been cut because tax cuts are used differently by the rich than by the poor, contrary to what Greenspan and other conservatives, as well as even many Keynesians, assume.

(Poor people may react to windfall wealth gains by increasing spending because increasing consumption provides more utility given where they are in life.  The rich, on the other hand, may react to windfall wealth gains by increasing their wealth-securing activities, not necessarily by increasing their investments in productive things. Keeping their wealth may be more important to rich people than making even more wealth, despite notable exceptions to the contrary. A simple, individual  model of decreasing returns to higher wealth provided by the standard, neoclassical concave utility function implies this. The empirical work coming out goes both ways on this question so far, however.)

The bubble, therefore, may have been solved by simply inhibiting rich people from doing dumb things with their windfall wealth that tax cuts provided to them.

by santiago on Mon Nov 8th, 2010 at 01:43:59 PM EST
[ Parent ]
Greenspan was very clear about his philosophy regarding credit standards in the post-9/11 world while Fed chair

You don't actually connect his opinion on tax cuts with 9/11, but as it's in the same paragraph it leaves that impression. Greenspan was pushing for tax cuts in his  testimony on January 25, 2001, to the U.S. Senate Committee on the Budget (here is the first reference I found), right after Bush's inauguration. I recall the way it was covered at the time treated his opinion as being much more important than other people's opinions.

by gk (g k quattro due due sette "at" gmail.com) on Mon Nov 8th, 2010 at 03:03:29 PM EST
[ Parent ]
Yes, you're right. I used 9/11 for brevity. He pushed for tax cuts as a standard, Keynesian fiscal response to the 2000-2001 recession. But he continued to justify them subsequently due to the fear factor brought on by the uncertainties and costs imposed on businesses in the post-9/11 world.
by santiago on Mon Nov 8th, 2010 at 04:14:20 PM EST
[ Parent ]
Tax cuts are only Keynesian when combined with other policies that push up aggregate demand.

Greenspan was never a Keynesian in that sense - or indeed in any other sense.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 8th, 2010 at 04:40:08 PM EST
[ Parent ]
Except that the Keynesian policy playbook, pre-2008, doesn't differentiate between tax cuts or direct government spending, nor did Keynes himself. Both lead to increases in aggregate demand and deficit spending. Where the conservatives like Greenspan depart from Keynes is their insistence on keeping tax cuts after the recession ends, which according to Keynesian theory is exactly what leads to exaggerated booms and the consequently larger busts -- what others now call bubbles.  As Krugman often argues, mainstream Keynesian economics (i.e., the Hicks and Samuelson formulation of it that gets so derided around here at times) provides a perfectly good framework as it is today for explaining the crisis and how to recover from it. Where I disagree with that assessment, however, is that it didn't adequately distinguish between how rich people and everyone else reacts to getting a stimulus check. People like James Galbraith are making that argument only now.
by santiago on Mon Nov 8th, 2010 at 05:25:52 PM EST
[ Parent ]
Almost. The motivation of Keynesians is to distribute money so everyone can spend it. This Makes Stuff Happen in the economy - q.v. China, which is very possibly the most Keynesian country in history. (Albeit supported by some fancy forex footwork.)

The motivation of the NCE types is to hoard money so they can spend it - and screw everyone else. And the lie is that they will generously share it and graciously allow stuff to happen if only the bad, bad government doesn't steal it from them.

In practice, against all reasonable expectation, they never do share it. As Jake said, they Ponzi it instead, which is very definitely not a good Keynesian outcome.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 8th, 2010 at 05:45:12 PM EST
[ Parent ]
santiago:
Except that the Keynesian policy playbook, pre-2008, doesn't differentiate between tax cuts or direct government spending, nor did Keynes himself.

But who kept that "Keynesian policy playbook, pre-2008"?

Keynes has been dead 40 years and there are all sorts of Keynsians and Post Keynsians about, each emphasizing a different set of recent developments. Steve Keen produced a three sector dynamic model in 2009 that showed a significantly greater social benefit for a stimulus provided directly to businesses than a similar stimulus provided directly to banks.


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 9th, 2010 at 05:52:24 PM EST
[ Parent ]
Greenspan was very clear about his philosophy regarding credit standards in the post-9/11dotcom world while Fed chair. Contrary to the conservative majority and his normal constituency, he advocated for looser lending standards precisely because he thought fear of loss given the 2001 recession and uncertainty regarding the wars had to be counteracted by encouragement of risk taking, a decidedly Keynsian point of view and one that was absolutely right.

Having not yet reached Keynes on my reading list, I shall refrain from commenting on whether that is an actual Keynesian or a "crass Keynesian" policy stance. But it's wrong. You do not counteract insecurity about future incomes in the wake of a serious financial Panic by tolerating even more gambling in the financial markets. You counteract insecurity about future incomes in the wake of a serious financial Panic by having the sovereign provide a guaranteed back-stop to incomes, by using its unlimited creditworthiness to act as investor of last resort.

Backstopping incomes both restores economic activity and reduces the power of the financial sector over the rest of society. Simply dismantling restrictions on the financial sector gives the financial sector more power over the rest of society - power that it has demonstrated time and time again that it is unfit to wield.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 03:25:26 PM EST
[ Parent ]
At the time, it wasn't considered gambling because securitized loan performance was so good. So the fear was that despite having no evidence to the contrary, banks would tighten their lending standards when stimulus was needed, just like now but on a smaller scale. That's pure Keynesian school thinking -- and where Friedman agreed with Keynes, actually.  
by santiago on Mon Nov 8th, 2010 at 04:18:34 PM EST
[ Parent ]
At the time, it wasn't considered gambling because securitized loan performance was so good.

My mistake. Strike "gambling" from the record, please, and replace with "buying into Ponzi scams."

So the fear was that despite having no evidence to the contrary,

Other than the fact that a structurally identical (except that it revolved around stocks rather than real estate) Ponzi scam had just blown up in everybody's face.

The solution to lack of aggregate demand is not lending more. It is spending more. Implicitly, this means government spending, because the government is the only economic entity that can spend in excess of its income without borrowing.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 04:36:05 PM EST
[ Parent ]
Don't forget the peak oil argument though. That argument said (indeed says) that there were real consequences to scarce resources and that high prices for some things may be one of those. Assets were being bid up to reduce further claims on them, as even Krugman argued regarding oil, but was easily expanded to land based on the same constraint paradigm.
by santiago on Mon Nov 8th, 2010 at 05:14:16 PM EST
[ Parent ]
Land is unlikely to display the same price behaviour as oil when it is a constraining factor on the economy: Urban and suburban land is reusable, which means that supply will always have a finite price (agricultural land is more properly treated as renewable, since it will degrade if over-exploited - but we're talking (sub)urban land here). Oil, on the other hand, is consumable, which means that the cost of supply can and will go to infinity when attempting to exceed certain quantities of production.

So the analogy does not hold: In an economy of highly inelastic demand, a pure demand-destruction price shock will be much more notable than a mixed supply-increase/demand-destruction shock.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 06:12:54 PM EST
[ Parent ]
You're advancing an hypothesis there, not an accepted fact. It might very well be right, and research should be able to confirm it if it is, but there are currently other competing hypotheses out there which are consistent with the evidence so far and which also may be right until more evidence shows otherwise. Namely, land might be reusable in some ways but not others. Since it is exclusive in use and there are finite, fixed quantities available, and it can get pulled out of other people's use for very long periods of time, it might actually behave the same as a non-renewable resource in many market conditions.
by santiago on Tue Nov 9th, 2010 at 10:57:41 AM EST
[ Parent ]
You are essentially arguing that there is no difference between resources that can be reclaimed at a finite cost and resources that cannot be reclaimed. That may be true, but if it is, we would expect to see no difference between the economics of oil and copper in a supply-constrained scenario. It's hard to put to the test, of course, because we've never really been supply-constrained in copper, and we haven't been supply-constrained in land since the railroads made it profitable to displace the local population of the American Great Plains.

However, and more to the point, the fact that there is a difference in the underlying physics of the two commodities means that it is incumbent upon those who would draw analogies between them to establish that they actually do behave in the same manner under a supply constraint, not upon those who point out the difference to prove that they do not.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 11:10:02 AM EST
[ Parent ]
In some ways yes, but supply constraints can show up in two ways -- actual reduction in quantities available, or constraints in quantities available that can be obtained at acceptable prices (acceptable being that which allows people continue doing as before with that resource).  There is no reason to believe, a priori, that actual physical reduction in a resource is any different than constraining a renewable resource through other means, such as excluding its use for some social purposes.  There might be a lot of land available, for example, but almost none of it is available any more more the kind of economic development in dispersed site housing without taking it away from other use of it. So, since you can't assume that markets for it should view them any different, a priori, it is just as incumbent upon those who would hypothesize that oil behaves differently than land to prove it than the other way around.
by santiago on Tue Nov 9th, 2010 at 11:48:02 AM EST
[ Parent ]
There is no reason to believe, a priori, that actual physical reduction in a resource is any different than constraining a renewable resource through other means, such as excluding its use for some social purposes.

The central point is not whether the resource is physically reduced or not. The central point is whether it is possible to reclaim previously used resources. If it is possible, then you will always have a supply response to a price hike (if the resource in question is traded on a reasonably competitive market, which houses and oil are but natural gas is not). If it's impossible, then you can't necessarily expect a supply response to a price hike. Ceteris paribus, this causes sharper spikes for non-recoverable resources than for recoverable resources.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 02:38:21 PM EST
[ Parent ]
That's a good point, and its a good hypothesis. But it might not be as simple, either. Although consumed oil itself may not be possible to reclaim again regardless of how high its price gets, substitutes for oil, including energy savings, can be, and the substitution effect should cause the price of oil to fall the same as if oil itself was renewable. (That was Julian Simon's thesis in his famous bet against Paul Erlich, anyway.) So there are some reasons to expect the that the hypothesis might not work.  Has it been looked at before, I wonder?
by santiago on Tue Nov 9th, 2010 at 04:28:53 PM EST
[ Parent ]
Those are good points, but all of those effects are also true for the reusable resources. In the case of urban land, public transit is a substitute for parking lots, for instance.

So I'll still maintain that, ceteris paribus, you'll get harder price shocks from non-recoverable resources. And even if ceteris may not be paribus, because it is easier to employ substitutes for oil than for land, you'll still not see a virtually vertical gain in price for a recoverable resource based purely on the fundamentals: A vertical (or near enough as makes no matter) gain in price requires that you can jump from a regime in which prices are set by the most expensive supplier needed to clear the market, to a regime in which the least expensive demand destruction is used to clear the market. This is only possible if you have zero or near-zero price elasticity of supply. Which really shouldn't be the case for reusable resources in any but the most contrived scenarios.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 07:02:11 PM EST
[ Parent ]
Excuse me, first you basically echo Eugene Fama on how bubbles don't exist and now you give us Julian Simon?
Dr. Bartlett has the following to say on Julian Simon:
""" Chief amongst these optimists was the late Dr Julian Simon, formerly professor of economics and business administration at the University of Illinois, and later at the University of Maryland. With regard to copper, Simon has written that we will never run out of copper because "copper can be made from other metals." The letters to the editor jumped all over him, told him about chemistry. He just brushed it off: "Don't worry," he said, "if it's ever important, we can make copper out of other metals."

Now, Simon had a book that was published by the Princeton University Press. In that book, he's writing about oil from many sources, including biomass, and he says, "Clearly there is no meaningful limit to this source except for the sun's energy." He goes on to note, "But even if our sun was not so vast as it is, there may well be other suns elsewhere." Well, Simon's right; there are other suns elsewhere, but the question is, would you base public policy on the belief that if we need another sun, we will figure out how to go get it and haul it back into our solar system? (audience laughter) """

Are you serious?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 07:03:21 PM EST
[ Parent ]
Well, Eugene Fama and Julian Simon are exactly the people that Greenspan listened to, and they are not flakes nor are their ideas.  They might be wrong about things, but you have to take their ideas very seriously when trying to argue against them not dismiss them because, ad hominem, they were the deans of the neoclassical establishment.  Julian Simon was right, after all, in his bet with Erlich, remember.  
by santiago on Tue Nov 9th, 2010 at 08:01:37 PM EST
[ Parent ]
Well, Eugene Fama and Julian Simon are exactly the people that Greenspan listened to, and they are not flakes nor are their ideas.

Dude. Simon thought that copper can be made from other metals. That's about as flaky as it gets.

I think it's safe to dismiss Simon out of hand when discussing the implications of resource constraints, since he clearly failed to understand the most basic physics and chemistry that governs those constraints.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 08:19:30 PM EST
[ Parent ]
But he won a bet on commodity price trends within his lifetime! That has to count for something as, in Fama's world, if you are not able to make money betting you don't know anything.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 04:27:48 AM EST
[ Parent ]
The markets can remain irrational longer than you can remain solvent.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 08:05:54 AM EST
[ Parent ]
I was going to volunteer that as a reply to Fama's
That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 09:02:16 AM EST
[ Parent ]
That's a misrepresentation of what actually occurred. He was one step ahead of his detractors in that exchange.  He meant that given scarcity, people would find substitutes for copper for most things, including use of other metals or or new inventions, because its not the chemical makeup of copper that matters but its function for human use.  That's why I invoked him for the oil problem too.  There are lots of possible substitutes for oil because energy is the function people are after, not the oil itself.
by santiago on Wed Nov 10th, 2010 at 09:06:36 AM EST
[ Parent ]
That's utter nonsense.

Firstly if that's what he meant, why didn't he say it? It's not a difficult distinction to make.

Secondly there are no alternative metals. The chemical makeup of copper defines its function and its usefulness. The only alternatives - silver would do, at a pinch - are less plentiful and far more expensive.

I expect you believe we can make the sun out of other suns too?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 09:13:05 AM EST
[ Parent ]
Um, he did say it.  You are reading a misrepresentation of what he said.  Buy his books if you want to see what his real argument was.
by santiago on Wed Nov 10th, 2010 at 09:27:08 AM EST
[ Parent ]
Nope.

In the words of the man himself, as quoted at Cato:

We have in our hands now--actually, in our libraries--the technology to feed, clothe, and supply energy to an ever-growing population for the next 7 billion years. Most amazing is that most of this specific body of knowledge was developed within just the past two centuries or so, though it rests, of course, on basic knowledge that had accumulated for millennia.

Indeed, the last necessary additions to this body of technology--nuclear fission and space travel--occurred decades ago. Even if no new knowledge were ever gained after those advances, we would be able to go on increasing our population forever, while improving our standard of living and our control over our environment. The discovery of genetic manipulation certainly enhances our powers greatly, but even without it we could have continued our progress forever.

The man was a kook - of Palinesque stature. No two ways about it.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 09:37:05 AM EST
[ Parent ]
I can't speak to whether he was a kook or not. He has said some disturbing things, as well as other rather more humane things (he was a significant contributor to efforts to improve the rights and conditions of illegal immigrants, for example, long before that ever became a popular progressive issue).

But what he says in that quote is a lot different from saying that he is ignorant of chemistry and therefore an idiot.  He is making a serious argument there that can be refuted or not with evidence.  His argument is that we have enough knowledge, technically, for no limits on human population, that the only limitations are social ones and and the eventual death of the sun.  

Is that actually wrong, and how if it is? That's how to respond.  Not, "He's ignorant of physics."

I think he is actually wrong. That without new technology, some of which may be physically impossible, there may be limits to population growth that we will have to contend with because the costs of adapting, even if physically possible, will outweigh the costs of just dying off. But that's a dispute settled with empirical evidence, not accusations of one or the other being an ignoramus.  He is making a serious and influential argument here with real policy implications, and it should be addressed seriously.

by santiago on Wed Nov 10th, 2010 at 10:12:12 AM EST
[ Parent ]
No, anyone who thinks that humanity can expand without physical constraints for the next seven billion years based on what we already know is suffering from kookiness of the first water.

It's not even an argument. It's blind, wilfully ignorant, self-regarding wishful thinking.

Argument this sloppy, stupid and wrong wouldn't last a week in a physics or engineering department.

But the difference between physics/engineering and economics is that in the former you have to prove stuff works, empirically.

In right-wing economics it's clear you can just say whatever you feel like saying, with no evidence of insight or intelligence. Shabby expedience is entirely enough.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 10:54:44 AM EST
[ Parent ]
You asserting again, not arguing.  In what way, specifically, can knowledge from physics or engineering that he is apparently ignorant of actually address what he's saying? Other economists did argue with him, with pretty well reasoned ideas, from what I recall at that time, and some engineers (of which there are many at CATO, engineering being a field dominated by anti-government types from what I can see) came to his support as well. This just isn't the open and shut case you contend it is.  Can you specify, in specific terms, why he is wrong?  Where is the technical know-how today actually lacking that would make, ignoring the economics of it for the moment, continued human population expansion, on earth or throughout the solar system, impossible?  I can think of a few things off hand, but most would still have to invoke economic arguments of benefits vs. costs to get there.
by santiago on Wed Nov 10th, 2010 at 11:21:49 AM EST
[ Parent ]
His argument is that we have enough knowledge, technically, for no limits on human population, that the only limitations are social ones and and the eventual death of the sun.  

Is that actually wrong, and how if it is? That's how to respond.  Not, "He's ignorant of physics."

Yes, he's ignorant of basic physics, and basic geology, if he labours under the delusion that nuclear power makes energy too cheap to meter, as he appears to do in this example. It is highly questionable whether the proven reserves of fissionables would be able to sustain our current electricity consumption for two centuries, let alone massively expand it for several millennia.

For that matter, he's ignorant of the behaviour of the exponential function if he believes in sustained population growth over the next seven billion years. A fairly conservative population growth rate of one half of one percent per year translates into a doubling of human population in just 140 years. Seven billion years... that's fifty million doublings, or a hair over fifteen million orders of magnitude. That's a one with fifteen million zeros after it. It really doesn't matter what population figures you start out with when you tack fifteen million zeros on it. So no, there will not be sustained population growth for the next seven billion years. And any high school student with a passing grade in introductory mathematics should be able to tell you that.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 01:48:39 PM EST
[ Parent ]
heh

I hadn't seen Jake's comment about "Exponential Growth" when I wrote my comment in today's Open Thread.

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

by ATinNM on Wed Nov 10th, 2010 at 02:12:27 PM EST
[ Parent ]
That's being too literal again and missing his point.  He means 7 billion in the sense of "a gazillion," not in the sense of having actually working out the math because that isn't necessary to address his point, either to attack it or defend it.  

His argument is just that adaptation plus a big universe allows for ever increasing population, not that any given growth rate is sustainable for 7 billion years. It's an important argument, either to contend with or support, because it frames policy options vastly differently from a zero or negative population growth argument with which it debates, which says that any population growth rate likely to lead to a catastrophe of some kind.

by santiago on Wed Nov 10th, 2010 at 10:35:23 PM EST
[ Parent ]
He means 7 billion in the sense of "a gazillion," not in the sense of having actually working out the math because that isn't necessary to address his point, either to attack it or defend it.

You may be right.

Clearly, whenever an economist says '7 billion' he really means 'a gazillion.'

Thinking about this, it pretty much explains everything that's happened to the US economy since 2001.

As Colman would say - comedy gold.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 10:57:37 PM EST
[ Parent ]
Sigh.

Still not getting the exponential function and what "doubling times" mean...



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 11th, 2010 at 04:39:55 AM EST
[ Parent ]
No, that's not right.  The presumption of any constant growth rate of humanity is a straw man argument. You can have growth at a declining rate, for example, or a waxing and waning of growth, or even periods of negative growth which, on average over time is still an average positive growth rate. Simon makes no such assertion of any specific rate of growth because his argument doesn't hinge on any rate of growth.
by santiago on Thu Nov 11th, 2010 at 03:34:31 PM EST
[ Parent ]
But yes, he does miss the insight of his own argument this way, I neglected to add.
by santiago on Thu Nov 11th, 2010 at 03:36:55 PM EST
[ Parent ]
Well obviously, the words 'ever growing population' couldn't possibly be taken to mean a population that's ever growing.

Just as seven billion clearly means 'a gazillion.'

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean - neither more nor less."

Lewis Carroll, Through the Looking Glass - 1871

Alas, I think we should try to remember that in the end, Mr Dumpty's fate was not a happy one.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 11th, 2010 at 04:00:20 PM EST
[ Parent ]
To be simplistic about it, like with the assumption of a constant, albeit low, growth rate as you provided, "ever growing" could also mean an always positive growth rate that is decreasing over time. It doesn't change Simon's argument to think of ever growing as a general concept instead of as a given specified function that may or may not be true.

What would change Simon's argument is showing that growth at any rate is impossible if followed for a long time.

by santiago on Thu Nov 11th, 2010 at 04:11:47 PM EST
[ Parent ]
An exponential decline down to a remnant population between 1% and 10% of today's is likely to be sustainable and could even conceivably result in an increased quality of life for that population, unless they attempted to run their society along neo-liberal lines and with Neo-Classical Economics. And while that process would involve a growth rate, albeit a negative rate, I have trouble imagining that Fama or Simon would embrace such a goal or a policy that would lead to such a goal.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 11th, 2010 at 04:26:30 PM EST
[ Parent ]
That's being too literal again and missing his point.  He means 7 billion in the sense of "a gazillion," not in the sense of having actually working out the math

No, that's not being too literal.

He gives a number. When you give a number - a hundred years, two hundred years, seven billion years, whatever - then the reader should be able to reasonably expect that there is some justification for that number. Every time you pull a number out of your ass it requires a separate and explicit apology for imposing upon the reader's credulity, since the reader might otherwise assume that there is prior evidence for choosing that number over any other number - evidence that does not, in fact, exist in this case.

And in fact there is a reason why he picked that particular number. He picked that particular number because that particular number is as close to "forever" as you can get: It's the approximate remaining lifetime of the Sun. So it's not just a random number he pulled out of his ass. It's a specific number he pulled out of his ass for a specific reason, which means it's perfectly fair game to point and laugh when basic back-of-the-envelope arithmetic will tell you that it's a spurious number.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 08:56:00 AM EST
[ Parent ]
It's not just a random number, but it is a number that doesn't have to tie to any assumed rate of growth or any better number than someone can provide.  

If someone worked out the math better and said, no, it's really 3 billion years for some reason, or 5 million years, or 10,000 years or whatever, it wouldn't change the outcome of his argument unless the number was considerably less than what one presumes, arbitrarily, is an important limit.

Even if Simon can't do math at all, it's similar to Christopher Columbus' discovery of America.  Columbus got the math wrong and calculated the earth to be smaller than it was thus making the trip to India shorter than it really is. But that doesn't change the fundamental, world-changing insight that he had in any way -- that you can profitably travel around the world in the other direction, from east to west instead of west to east, to get to India.

Likewise, Simon's insight is not so easily dismissed even if you can refute some of the numbers he had given in support of it -- that there is no reason to presume that human population growth actually be limited by merely linear projections of resource use and availability into the future because people can adapt to scarcity.

by santiago on Thu Nov 11th, 2010 at 03:48:15 PM EST
[ Parent ]
That insight was not that new, but the profitability hinged on the size of the planet.

Christopher Columbus - Wikipedia, the free encyclopedia

Columbus therefore estimated the distance from the Canary Islands to Japan to be about 3,000 Italian miles (3,700 km, or 2,300 statute miles), while the correct figure is 19,600 km (12,200 mi). No ship in the 15th century could carry enough food and fresh water for such a long voyage and the dangers involved in navigating through the uncharted ocean would have been formidable. Most European navigators reasonably concluded that a westward voyage from Europe to Asia was unfeasible. The Catholic Monarchs, however, having completed an expensive war in the Iberian Peninsula, were desperate for a competitive edge over other European countries in the quest for trade with the Indies. Columbus promised such an advantage.

Had he not stumbled on unknown land he would have been an utter failure, because he did the math wrong.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Nov 11th, 2010 at 04:25:21 PM EST
[ Parent ]
Perhaps (but perhaps not as well), but that idiosyncrasy still doesn't change the truth of being able to go the other way around the world to get there, which is the essential part of the insight.
by santiago on Thu Nov 11th, 2010 at 05:29:55 PM EST
[ Parent ]
Yes. Yes it does.

It was perfectly well known that it was theoretically possible to go around the world in the other direction.

If you had the ability to magically create food and fresh water out of thin air to supply your crew for the duration of the trip.

If not for what you dismiss as an unimportant idiosyncrasy, Columbus would not have returned home in abject failure, he would not have returned home at all. For all practical economic purposes, the Pacific Ocean was not crossable with 16th century technology. Full stop.

The difference between Columbus and every other schmuck out there was not that he had any unique insight. It was that he had a desperate sponsor who didn't do the math, and was willing to bet the lives of his crew on an Oil E. Coyote forecast. Rather like Julian Simon, actually.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 05:55:48 PM EST
[ Parent ]
I'd agree with you about the Pacific Ocean not being crossable with 15th century technology, but Magellan would like to have a word with you about the effectiveness of 16th century technology...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Nov 15th, 2010 at 02:46:06 AM EST
[ Parent ]
OK, the Pacific was crossable. But assuming the Americas hadn't been there, the combined Atlantic, Pacific and water-that-should-have-been-America would probably not have been. Nevermind that it wouldn't have been profitable to do so...

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 15th, 2010 at 09:44:11 AM EST
[ Parent ]
Can I point out in passing that comparing some idiot gibbering about the inevitable immortality of the human race with Columbus is a completely facile argument anyway?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 15th, 2010 at 09:51:13 AM EST
[ Parent ]
Actually, we don't know any of that.  We don't know that crossing a combined Atlantic-Pacific stretch was truly impossible with 15th century technology at all.  Just that it seemed really hard and was more likely to end in failure than the shorter Atlantic crossing. During that age and for the next century or so, most voyages of all kinds ended in failure for lots of other reasons.

Columbus just said, it's theoretically possible, so let's try it, and he convinced himself and his patrons that it would actually be easier because of calculation mistake. The mistake might have been dreadful, but there were many other factors more likely to cause Columbus' trip to end in failure than that at the time, and due to good luck, none of them occurred either, allowing Columbus to both prove his first insight true as well as finding something really big and unanticipated in the process.  

by santiago on Tue Nov 16th, 2010 at 01:50:50 PM EST
[ Parent ]
i think the polynesians were sailing vast swathes of the pacific way before the C15-16th.

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Tue Nov 16th, 2010 at 02:33:08 PM EST
[ Parent ]
Good point.
by santiago on Tue Nov 16th, 2010 at 02:34:00 PM EST
[ Parent ]
Simon's insight is not so easily dismissed even if you can refute some of the numbers he had given in support of it -- that there is no reason to presume that human population growth actually be limited by merely linear projections of resource use and availability into the future because people can adapt to scarcity.

This apparently makes sense to adherents of Neo-Classical Economics. Perhaps that explains why they deny that financial bubbles occur, that they can be seen as they inflate and that they can be managed in the long term interest of society. A better question just now seems to be if the world economy can successfully recover from the most recently burst bubble.

To others, this "insight" seems more like folly and wishful thinking. Prudence would seem to dictate that we take seriously the pending depletion of the fossil energy resources on which the increasingly complex societies of the last two hundred years have been built. Without access to the highly favorable EROIs that were available until the 1970s, much, if not all, of that complexity could undergo a dramatic collapse in the not too distant future.

The problems for the next two decades are likely to be learning to deal with declining marginal returns on the investments required to provide the energy to drive our cultures. Renewable energy sources provide positive marginal returns. I have seen figures of up to 20:1 for wind. But that may be inadequate to support systems that were built up during times of 50:1 returns.

My fear is that by denying the existence of foreseeable constraints we will run into them very hard and, instead of moving gracefully to a scenario in which we rely on 20:1 returns from renewables, we end up in a near total collapse of the culture. We have to consider that, by blindly following hopeful scenarios and denying the possibility of negative scenarios we could end up needing to rebuild all of our coastal cities on higher ground in a world in which 20:1 returns on investment are the best obtainable. And we could end up having to do that in a social context where a tiny minority possesses almost all disposable wealth and control of the apparatuses of government and has no interest in the survival of the bottom 90% of income earners in the society. But that might get us back to a population less than 10% of what we have today.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 11th, 2010 at 04:53:30 PM EST
[ Parent ]
There are two arguments being conflated here (and I don't mean just your comment).  One is an efficiency (or growth) argument, and one is an equity argument.  That the world will recover from the latest economic calamity is a forgone conclusion -- of course it will, because it already has. Neoclassicals argue that collective efforts should not try to intervene in this process, while Keynsians argue that collective action should be attempted.  The reason Keynsians argue this, however, is NOT because it will lead to higher growth than would occur otherwise.  Rather, it is because it will prevent the poorer among us from having to experience deprivation.  That is, Keynsian analysis is, first and foremost, an equity argument, not a growth argument.  Keynes framework, even in its later Minsky versions, doesn't argue that the world will collapse if government doesn't stimulate demand and employ people.  Rather, Keynes framework argues that doing so keeps more people alive and better off than otherwise.

Neoclassical economics, on the other hand, doesn't argue that the poor will be better off if government keeps its hands off the economy and lets the forces of "creative destruction*" do its necessary work in a recession.  Rather they just argue that more growth will happen if it's done that way instead of through stimulus packages of some kind.  

Both views may be mutually consistent. We need to keep that in mind here.

*I know. "Creative destruction" is not a neoclassical idea, but it has been invoked, improperly, to apply to the current crisis and the imagined purging that it performs on weak parts of the economy.

by santiago on Thu Nov 11th, 2010 at 05:43:36 PM EST
[ Parent ]
That the world will recover from the latest economic calamity is a forgone conclusion -- of course it will, because it already has.

In which fictional alternative universe?

Strip out financial sector income, and the world hasn't recovered. And until and unless the non-financial sector recovers, the financial sector incomes are Monopoly money. The stock market produces nothing, runs nothing, builds nothing, creates nothing. A stock market rally therefore does not indicate a recovery. A recovery in wind turbine production, a recovery in steel production, a recovery in employment, those are real indicators of a real recovery.

The reason Keynsians argue this, however, is NOT because it will lead to higher growth than would occur otherwise.

No, of course not. The fact that it demonstrably does lead to higher growth is a nice aside, but not central to the point.

Neoclassical economics, on the other hand, doesn't argue that the poor will be better off if government keeps its hands off the economy and lets the forces of "creative destruction*" do its necessary work in a recession.  Rather they just argue that more growth will happen if it's done that way instead of through stimulus packages of some kind.

The neo-classicals are demonstrably wrong on the facts. Keynesian interventionist economics produce higher growth overall.

Both views may be mutually consistent. We need to keep that in mind here.

Only in the fantasy world in which the neo-classicals are not full of shit. Which they are in the real world, where their policy prescriptions always lead to lower growth, cycle-averaged, than responsible policy prescriptions.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 06:05:16 PM EST
[ Parent ]
JakeS:
The neo-classicals are demonstrably wrong on the facts.

they know that, their job is to keep a straight face act properly innocent under the rigorous media glare.

JakeS:

Keynesian interventionist economics produce higher growth overall.

and why would they actually want that? that would be deflationary, (most of all to their egos).

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Nov 11th, 2010 at 06:48:16 PM EST
[ Parent ]
Some of them are, obviously, simply whores. But a lot of them really do believe that they are on a sound empirical footing, for a variety of reasons. Now, I happen to disagree with their confidence in the quality of their empiricism, but that is a discussion that really can only be fruitfully carried out in the presence of concrete data.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 08:09:06 PM EST
[ Parent ]
JakeS:
for a variety of reasons.

any good valid ones? the concrete data is always hindsight, no?
so it's on faith partly, and the power to convince/dupe others that this time it really really really will work.

just because it didn't before, doesn't mean anything because this time is new and different!

trust us, even wrong, we know more than you...shit happens!

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Nov 12th, 2010 at 10:27:56 AM EST
[ Parent ]
It's not that cut and dried. Usually. You're dealing with numbers that can often be sliced in several different ways, so you can't attribute to malice what is adequately explained by confirmation bias.

There are a few cases where their empirics are simply out-and-out sloppy, such as the way they analyse unemployment. And there are some cases where they resort to blatant cop-outs, such as financial shocks being exogenous. But for the most part, their models are not blatantly wrong as long as you massage your data in a not too extravagant fashion.

There's a substantial component of black magic to statistical data analysis, no matter how rigorously you do the math. Because there is no theory-neutral method for deriving which of the infinitely many possible mathematical models you want to compare your data to. So there's plenty of room for honest mistakes, even in the natural sciences. Add in the fact that economics deals with data that's so noisy that most physicists wouldn't even bother trying to extract a signal, and, well...

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 12th, 2010 at 12:05:47 PM EST
[ Parent ]
thanks teach, a pitch perfect reply for my comprehension levels!

all the other economists say the emperor is naked, any that spin even illusive clothes get the (well-paid) jobs being Serious.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sun Nov 14th, 2010 at 08:41:00 AM EST
[ Parent ]
No, the facts don't actually indicate that higher growth results from Keynesian intervention compared to non-intervention if you're talking about the long term.  That's neither something hypothesized by Keynesian theory or supported by evidence, largely because that it not what Keynesian theory is meant to address. Keynesian theory is about reducing unemployment and deprivation as a policy priority, not maximizing economic growth, which is seen as a secondary outcome, but not a primary one. It is a primary one for neoclassical views of macroeconomics, however, but it still remains largely unknown. It may be true, but even if it is, it doesn't mean that the Keynesian view is false because they have different objectives.
by santiago on Thu Nov 11th, 2010 at 11:58:05 PM EST
[ Parent ]
No, the facts don't actually indicate that higher growth results from Keynesian intervention compared to non-intervention if you're talking about the long term.

Yes, they do. There is a measurable anticorrelation between economic instability and long-run growth. Pro-cyclical policies hurt long-run growth. Either because they are intrinsically stupid, wasteful and destructive, because "long-run" growth is really just a series of short-run growth cycles, and pro-cyclical policies disrupt short-run growth, or (usually) both of the above.

Keynesian theory is about reducing unemployment and deprivation as a policy priority, not maximizing economic growth,

Yes and no. It's about reducing unemployment and deprivation, but the way it does so is by ensuring maximum possible growth. Keynesian economics - or at least the crass Keynesian economics that resulted after the academic economists were done with re-casting Keynes in terms of Walrasian epicycles - is primarily about sidestepping questions of equity by ensuring the highest possible growth.

It is a primary one for neoclassical views of macroeconomics, however,

Yep. Even by its own official meterstick, neo-classical economics is pure FAIL.

Of course, the official productivist meterstick never had anything to do with the actual objectives of those who dogmatically insist on clinging to their Walrasian epicycles...

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 12th, 2010 at 10:52:46 AM EST
[ Parent ]
No, the facts don't actually indicate that higher growth results from Keynesian intervention compared to non-intervention if you're talking about the long term.

Actually, Richard Koo presented a good, well supported argument that such intervention is less costly than not intervening at the inaugural meeting of George Soros' Institute for New Economic Thinking in April, 2010. He drew from The Bank of Japan's experience during Japan's "Long Recession" after the real estate bubble of the '80s collapsed. BOJ raised interest rates too soon and produced a "double dip" out of poorly founded concerns about the effects of deficits. The double dip resulted in lost production. BOJ found that repairing the additional damage was more expensive than continuing the stimulus would have been.

A link to the video presentation is here.

Koo's slide presentation is here.

And Yves Smith's coverage with lots of links and intelligent commentary is here

(Sorry for the late response. I was traveling Friday and this morning and will be again Sunday and Monday morning.)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 13th, 2010 at 04:43:57 PM EST
[ Parent ]
Yes, it has been argued, and is often done so in public policy debate, but I'm arguing that such propositions really miss the point and ultimately weaken the Keynesian case. Irregardless of how fast the economy might grow, the Keynesian argument has always been to maximize employment to ensure that deprivation is minimized. This means that even if it is true that an economy grows slower by trying to employ everyone, introducing the possibility of inefficiencies, it's still superior to another policy that would allow high unemployment to persist even if there was higher overall economic growth.
by santiago on Mon Nov 15th, 2010 at 10:57:37 AM EST
[ Parent ]
What Koo argued was more that ignoring the need to maintain full employment, which I agree is a key goal of Keynes, with the aim of reducing the deficit will actually result in an increase of the deficit over what would have been the case had full employment been maintained. This is much more true now, with such stabilizers as unemployment insurance and welfare, that it was in the '30s. (Of course pressure will continue to build to eliminate those stabilizers.)

I would love to see the goal of full employment taken seriously by the Fed, Congress and the Administration. Were it taken seriously, robust fiscal policies could readily be employed to start doing a variety of greatly needed social tasks, from maintaining employment in K-12 and post-secondary education, repairing deteriorating infrastructure -- roads, bridges, and sewage treatment facilities, putting in place electrical transmission infrastructure coordinated with the construction of windmills along the front range of the Rockies, converting our rail infrastructure to electric power, etc.

But even more important would be reversing the last 40 years worth of policies on "globalization" so as to encourage, to the maximum possible extent, repatriation of manufacturing to the USA. But this would require that policy be directed towards the welfare of the population as a whole rather than exclusively to the benefit of those with great wealth.

What has served to discredit Keynes in the USA, to the extent of those who have even heard of him, is the caricature of him as favoring squandering of government money pointlessly. This has consisted of taking rhetorical flourishes of his that made sense in the context of the mid-1930s, even if they were written to make a point, not as a policy recommendation, and presenting them as what Keynes would have us do today. Indeed, it is almost impossible to further damage the popular image of Keynes in the USA.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 15th, 2010 at 05:03:18 PM EST
[ Parent ]
That the world will recover from the latest economic calamity is a forgone conclusion -- of course it will, because it already has.

In which fictional alternative universe?
Well, just this past September the NBER dated the end of the recession in June 2009. And the folks at VoxEU agree:
Global industrial production continues to recover - something for which policy deserves considerable credit (as we have argued on this site, see Almunia et al 2009 and O'Rourke and Eichengreen 2009). But before indulging in self-congratulation, policymakers should note that the level of industrial production is still 6% below its previous peak (figure 1). (At the trough it was 13% below its previous peak.) It follows that considerable excess capacity remains in a number of important economies. Exiting now from policies of stimulus in those countries would therefore be premature.
Instead, we got austerity...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 12th, 2010 at 02:50:03 AM EST
[ Parent ]
ARGeezer:
My fear is that by denying the existence of foreseeable constraints we will run into them very hard and, instead of moving gracefully to a scenario in which we rely on 20:1 returns from renewables, we end up in a near total collapse of the culture.

the most concisely -and elegantly_ put raison d'etre for ET that i've read so far.

very nice

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Nov 11th, 2010 at 07:04:52 PM EST
[ Parent ]
If someone worked out the math better and said, no, it's really 3 billion years for some reason, or 5 million years, or 10,000 years or whatever, it wouldn't change the outcome of his argument unless the number was considerably less than what one presumes, arbitrarily, is an important limit.

He gave a number. That makes it his responsibility to back it up with plausible calculations.

Our society gives a quite inordinate persuasive weight to numbers. Padding his argument by citing some astronomically huge number is simply lying unless he has some reasonably plausible arithmetic to back it up.

He is not a crackpot because he is wrong. He is a crackpot because he is pulling numbers out of his ass.

"Population can continue to grow at some unspecified, perhaps non-constant, rate forever" is not an argument. That's solipsistic wankery. Of course population can continue to grow at the rate of one person per millennium essentially forever. In order for his argument to have any formal meaning at all - in other words, in order for him to not be a complete crackpot - you have to assume a growth rate that will be statistically distinguishable from zero.

No such growth rate exists for which population can continue, using only current technology, to grow for seven billion years, or one billion years, or one million years or even ten thousand years.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 05:47:09 PM EST
[ Parent ]
He meant that given scarcity, people would find substitutes for copper for most things, including use of other metals or or new inventions, because its not the chemical makeup of copper that matters but its function for human use.

Materials science has been looking for that substitute for more than twice as long as I have been alive. Copper was never particularly cheap, it's just that all the elements and alloys that have the same physical properties (electrical conductivity) and chemical properties (low reactivity) are even more expensive.

Even assuming that such a material exists, the best zeroth-order guess for when it will be available on an industrial scale is therefore around half a century from now.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 01:35:18 PM EST
[ Parent ]
Substitutes have already been found for some of the most intensive uses of copper, however. PVC tubing has mostly replaced copper in plumbing, for instance. In most cases, simply doing things differently allows close to cost-free adaptation given an increase in prices.

I think the coming phosphate wall within a century or so is likely to be the real test of Simon's thesis, and I'm not betting with Simon for that one.  All available mined phosphate, a necessary fertilizer for industrial (and even modern organic) agriculture, is projected to be exhausted within a century or so, at which time really only recycling much more expensive phosphate from human sewage is expected to be possible, providing an effective limit on more population until knew knowledge can figure something else out, if ever.

by santiago on Wed Nov 10th, 2010 at 11:06:36 PM EST
[ Parent ]
The 'deans of the economic establishment' think copper is made from other metals?

And you're defending them with the argument that just because they're wrong about something trivial, like a belief in alchemy, doesn't mean they're wrong about everything?

Dude - someone who makes such a basic mistake has no business being taken seriously about anything.

You could pick a hundred people off the street at random and most of them would know more about the real world than this.

This isn't even about economics - it's about policy being set by adults who are nowhere close to meeting undemanding high school requirements for basic scientific literacy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 9th, 2010 at 08:30:25 PM EST
[ Parent ]
ThatBritGuy:
someone who makes such a basic mistake has no business being taken seriously about anything
No, the problem is not making a mistake or being ignorant. The problem is holding on to the mistake after careful correction.
Simon has written that we will never run out of copper because "copper can be made from other metals." The letters to the editor jumped all over him, told him about chemistry. He just brushed it off


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 05:03:15 AM EST
[ Parent ]
And the fundamental problem behind this is the fact that our elites, including (and perhaps especially) in the press, are accountable to no one but themselves and the class they represent.
by redstar on Wed Nov 10th, 2010 at 05:15:52 AM EST
[ Parent ]
I don't think it's either/or. Lack of knowledge suggests lack of education. Lack of willingness to correct a mistake suggests arrogance.

But I'd guess these are right-wingers, so finding those two qualities working together as militant ignorance shouldn't be a surprise.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 07:24:32 AM EST
[ Parent ]
I think arrogance comes first and makes it possible to write about metals without bothering to learn the first thing about them.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 09:00:14 AM EST
[ Parent ]
Some elements have been created from other elements in high energy physics experiments by bombarding one element with nuclei of another and obtaining either fusion or fission products as an output. Whether there is a feasible chain that results in a stable isotope of copper I do not know. This process has been likened to alchemy and got some coverage in the popular press. It may be to what Simon was referring.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 12:37:10 PM EST
[ Parent ]
Yes, I can see that.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 12:43:35 PM EST
[ Parent ]
I see no evidence that his understanding of physics is deep enough to know about that process.

It's also insanely expensive, produces tiny quantities, and tends to leave radioactive debris behind, so it's not going to be a practical alternative to digging useful stuff out of the ground.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 01:08:56 PM EST
[ Parent ]
It's also insanely expensive

Of course. But it is not impossible that the cost could decline and better means than accelerators could be found to accomplish the same task. Likewise, it is possible that "high temperature" superconducting materials, such as the iron alloys now under development, could prove to be superior alternatives to copper for many applications, or that some version of carbon nano-tubes might emerge for high temperature applications. Probably not for twenty or thirty years, but then copper will likely still be available at some feasible price for 20 years. However, it is questionable to base policy on "might emerge", especially absent serious commitments to R&D.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 02:03:33 PM EST
[ Parent ]
Copper is already scarce and valuable enough to be worth stealing. Network Rail in the UK has been dealing with incidents where power and signal cabling has been stolen from the trackside, because it's so easy to fence.

As prices increase, so will thefts. So one of the side-effects of resource scarcity is cannibalised infrastructure. At some point it's going to become too expensive to replace, which is when things stop working.

Assuming the inevitability of a literal deus ex machina which will solve these problems is a faith-based argument, not a reality-based one.

I'd have been more persuaded if there had been any attempt to quantify or monitor innovation over time - but this is NCE, so that was never likely.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 02:24:00 PM EST
[ Parent ]
As far ago as the mid-'90s in South Central LA during the construction of the Maxine Waters Skill Center for LAUSD thieves went onto the roof and ripped out all of the copper piping for the HVAC, along with the condensers and electrical contractors had learned to lock copper wire into shipping containers over night and then to hire a night and weekend watchman, complete with a trailer, to call police should wholesale efforts, such as attempts to steal the containers or break into them occur.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 04:40:08 PM EST
[ Parent ]
Of course. But it is not impossible that the cost could decline and better means than accelerators could be found to accomplish the same task.

Quantum mechanics would beg to differ.

Even if you strip out all the energy waste (which is in itself entering the realm of magitech), the energy cost would still be prohibitive. That's just the way the fundamental physics of the problem works out. It is already cheaper today to send a robotic mining probe to the asteroid belt between Mars and Jupiter than it will ever be to synthesise metals in an accelerator (and no, you won't get around the need for an accelerator until you find a way to alter the electroweak force - and a device that did that would be a weapon of mass destruction that would make nukes and weaponized ebola look like toys by comparison, even if it were possible at all, which it isn't).

Likewise, it is possible that "high temperature" superconducting materials, such as the iron alloys now under development, could prove to be superior alternatives to copper for many applications,

For a sufficiently wide definition of "many" or a sufficiently narrow definition of "applications," yes. The "high temperature" in "high temperature superconductor" means "higher than the boiling point of liquid nitrogen," not "room temperature." The latter is widely considered a form of magitech on par with cold fusion.

Now, high temperature superconductors are nifty little things, and they will certainly make a lot of devices a lot cheaper to operate (medical imaging devices come to mind). But while liquid nitrogen is cheap, it is not something you want to have every odd Joe fuck around with (which rules out its use in most commercial electronics), and it is completely unsuitable for cooling long-range transmission cables.

or that some version of carbon nano-tubes might emerge for high temperature applications.

Unlikely. The electron structure of nanotubes makes it more likely that they will behave like semiconductors than full conductors. Again, useful and interesting, but not a viable substitute for noble metals.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 03:05:47 PM EST
[ Parent ]
I did say "not impossible" and 'it is questionable to base policy on "might emerge", especially absent serious commitments to R&D.' Perhaps Simon was referring to technology to be supplied by space aliens.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 04:42:26 PM EST
[ Parent ]
Some elements have been created from other elements in high energy physics experiments by bombarding one element with nuclei of another and obtaining either fusion or fission products as an output.

Indeed, with a linear accelerator, a magneto-optical trap and a neutron source, it should be possible to create any isotope you want by starting with a Bose-Einstein condensate of hydrogen and adding protons and neutrons one at a time. However, the energy cost of this operation is prohibitive for any industrial use - and the energy cost is embedded very deeply in the physics, it's not something you can ameliorate sufficiently with clever engineering.

Whether there is a feasible chain that results in a stable isotope of copper I do not know.

There isn't. All reaction chains that start by bombarding a stable isotope with one or two particles involve other subgroup metals which are almost equally uncommon, and which in any case have their own industrially interesting uses.

Oh, and the energy cost would be ridiculous.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 02:49:33 PM EST
[ Parent ]
santiago:
you have to take their ideas very seriously when trying to argue against them not dismiss them because, ad hominem, they were the deans of the neoclassical establishment
I consider that reason enough to dismiss neoclassical economics, to be honest.

Angels on pinheads, srsly.

This is like scholasticism. It's completely divorced from reality, and trying to change it from the inside is pointless. Better to build something else and stop trying to learn it well enough to mount a critique, let alone building up enough status within the establishment to have a snowball's chance in hell of having the critique acknowledged.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 04:17:54 AM EST
[ Parent ]
Migeru:
Better to build something else and stop trying to learn it well enough to mount a critique,

you touch on something here... by the time i understand all the multilayer in fixes, the tripletalk, the up-is-down orwellisms, and the gibberish jargon, it will be all over but the digging the garden to survive...

sigh

as for building something new, we're all ears!

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 10th, 2010 at 07:28:04 AM EST
[ Parent ]
santiago:
Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.

jared diamond notwithstanding?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 10th, 2010 at 09:34:18 AM EST
[ Parent ]
It's not divorced from reality. The essential argument is this: The physics don't matter because humans can adapt to any physical limitation through adaption or new technology, outcomes of market responses to scarcity. If physical constraints do matter, as those of us here argue, why do they matter? Why can't substitutes or new technological innovations allow us to adapt to scarcity in copper, oil, or anything else, forever.  The answer has nothing to do with understanding the chemistry of metals, because such understanding has only increased the capacity for humans to adapt to scarcity thus far, never decreased that capacity. This is why Simon argues that understanding what copper is physically is irrelevant -- it's the function of copper that matters, not its chemistry. The only relevant thing is whether you can show why real constraints to growth actually exist given human capacity so far to adapt to such constraint with technology.
by santiago on Wed Nov 10th, 2010 at 09:40:42 AM EST
[ Parent ]
I think that Mig's argument was that all of NCE is so divorced from reality and immune to criticism that we might as well start building something that works instead of wasting effort building careers INSIDE NCE in a futile attempt to change it from within.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 12:47:32 PM EST
[ Parent ]
I started out 6 years ago trying to read Samuelson and it was all downhill from there...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 12:50:55 PM EST
[ Parent ]
I was more or less reacting to this, too:

ARGeezer:

I believe that santiago is framing his arguments in those terms that would be necessary were he to present those arguments to others within the church of "mainstream" economists and that he is so doing because, in order to be considered by those in that mainstream, this is how they must be framed. It also seems that he sees problems with that mainstream and would like to advance approaches that could remedy those problems.

...

From this point of view santiago is providing those of us here with a pacing activity that allows us to sharpen our arguments. This should not be a thankless activity, so I offer him my thanks for his contributions. It may be that "mainstream economics" is so ensconced and entrenched that no arguments that could significantly change it will be allowed, but we won't really know unless we try.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 12:55:27 PM EST
[ Parent ]
I suspected so. But if NCE is "the enemy" it is always good to know your enemy better. And, regardless of his personal beliefs, it is obvious that santiago well understands the thinking common in "the mainstream."

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 01:56:25 PM EST
[ Parent ]
No, NCE is not 'the enemy'.

NCE is pure misdirection - it hides 'the enemy' behind a wall of rhetoric.

Attempting to parse the rhetoric is futile. Attempting to deconstruct and argue with the rhetoric directly is also futile, although it can be an amusing hobby if you're that way inclined.

'The enemy' relies on the appearance of inevitability to project and maintain power. Challenging that lie directly will always be more effective than trying to argue with a wall of nonsense.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 02:06:19 PM EST
[ Parent ]
You have to make a serious attempt at parsing the discourse and deconstructing it. But eventually you need a bit of self-confidence to allow yourself to conclude that yes, it is rhetoric, misdirection and a smokescreen.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 03:43:29 PM EST
[ Parent ]
It's not divorced from reality. The essential argument is this: The physics don't matter because humans can adapt to any physical limitation through adaption or new technology

Several Mesoamerican and Polynesian civilisations (or, rather, ex-civilisations) would beg to differ. Once you chop down the last tree, it's pretty much game over.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 02:15:59 PM EST
[ Parent ]
Kind of.

Firstly almost any good-faith reality-based model of economics will be more useful and accurate than NCE. If there's any reasonable attempt at honesty and rigour, devising better models won't be hard.

But that's not the issue. The issue is devising a political system which makes it impossible for NCE or any equivalently self-serving rhetorical narrative to invade and overrun the body politic.

NCE itself is meaningless gibbering and spitting. It's a political game token, not a scientific model.

But the dominant influence of NCE and the right is evidence of fatal weaknesses in the tools and ideas that structure policy and decision making.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 01:23:13 PM EST
[ Parent ]
Simon's point is valid and a serious one here. He is not arguing that physically impossible things are true.  He is instead arguing, as can be seen by any direct reading of his work instead of misquotes of it by others, that people respond to scarcity by adapting and technological advancement so far has more than kept up with the scarcity of resources. Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.  Simon is arguing that since humans have done so up to this date, why presume that any apparent scarcity in the immediate future is going to be any more of an obstacle.

It might not be correct, but misrepresenting his understanding of chemistry is not the way defend your position.  Address the real argument he is making: Given that people can adapt and substitute abundant resources for scarce ones, why should we think that oil (or any other critical resource constraint) is ever going o be a serious problem for humanity instead of just a local problem to be solved by some humans?

by santiago on Wed Nov 10th, 2010 at 09:19:47 AM EST
[ Parent ]
santiago:
Given that people can adapt and substitute abundant resources for scarce ones, why should we think that oil (or any other critical resource constraint) is ever going o be a serious problem for humanity instead of just a local problem to be solved by some humans?

why do you think hemp's illegal?

makes good plastic! (amongst many other useful things...)

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 10th, 2010 at 09:36:23 AM EST
[ Parent ]
santiago:
Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.
Wikipedia: Nauru
Throughout the first half of the 20th century, Nauru was a "rentier state". Nauru is a phosphate rock island, with deposits close to the surface, which allow for simple strip mining operations. This island was a major exporter of phosphate starting in 1907, when the Pacific Phosphate Company began mining there, through the formation of the British Phosphate Commission in 1919, and continuing after independence. This gave Nauru back full control of its minerals under the Nauru Phosphate Corporation, until the deposits ran out during the 1980s.[4] For this reason, Nauru briefly boasted the highest per-capita income enjoyed by any sovereign state in the world during the late 1960s and early 1970s. When the phosphate reserves were exhausted, and the environment had been seriously harmed by mining, the trust established to manage the island's wealth became greatly reduced in value. To earn income, the government resorted to unusual measures. In the 1990s, Nauru briefly became a tax haven and illegal money laundering centre. From 2001 to 2008, it accepted aid from the Australian government in exchange for housing a Nauru detention centre that held and processed those who had tried to enter Australia in an irregular manner.[5]
Yeah, I guess you have a point. You can always recycle your strip-mining operation into a money laundering tax haven, and when that folds into a prison complex.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 09:40:21 AM EST
[ Parent ]
santiago:
Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.  Simon is arguing that since humans have done so up to this date, why presume that any apparent scarcity in the immediate future is going to be any more of an obstacle.

Only if you ignore every famine in the history of the world.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Nov 10th, 2010 at 10:09:30 AM EST
[ Parent ]
Actually, no, as Amartya Sen discovered and for which he was awarded the Nobel prize.  Few famines have ever been the result of physical scarcity of food.  Rather, they have typically been the result of inequitable distribution of food.  In the major 20th century famines in Ethiopia and Bengal, for example, Sen discovered that there was more than enough food available for people right in the immediate areas of greatest starvation.  People just lacked the means -- income -- of getting a hold of it.  
by santiago on Wed Nov 10th, 2010 at 10:16:40 AM EST
[ Parent ]
With global trade, no local famine needs to occur. Before global trade, Jared Diamond has covered some of the cases.

Looking at the Bengal 1943:
Bengal famine of 1943 - Wikipedia, the free encyclopedia

On 16 October 1942 the whole east coast of Bengal and Orissa was hit by a cyclone. A huge area of rice cultivation up to forty miles inland was flooded, causing the autumn crop in these areas to fail. This meant that the peasantry had to eat their surplus, and the seed that should have been planted in the winter of 1942-3 had been consumed by the time the hot weather began in May 1943.[7]

And Bangladesh in 1974:
Bangladesh famine of 1974 - Wikipedia, the free encyclopedia

From April to July, Bangladesh was hit by heavy rainfall and a series of devastating floods along the Brahmaputra river, with notably destructive incidents in May, July [5]

There was enough food available, but the decrease in food production caused famine nevertheless. It did not need to - given other circumstances - but it did.

So the resource constraint was evidently there, even if it did not need to lead to famine.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Nov 10th, 2010 at 10:52:46 AM EST
[ Parent ]
With global trade, no local famine needs to occur yet.

FIFY.

As populations increase and food production is reduced because of the effects of global warming, current surpluses will disappear.

At a guess, this is likely by the end of the decade.

See e.g. here.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 11:01:38 AM EST
[ Parent ]
And this might well be true, especially considering that mineral phosphate which is key to industrial agricultural production, is due to run out in about 120 years.  

Nonetheless, the facts remain that despite geometric growth in the human population over the last two centuries, food has always been in abundance.  Indeed, if food were not in abundance, population growth would not have occurred.  There does seem to be physical limits to producing more food, but objectively, it has always seemed that way and nonetheless people have figured out how to produce, in any given time period, enough to feed a growing world population on ever few inputs per calorie.  

by santiago on Wed Nov 10th, 2010 at 11:32:00 AM EST
[ Parent ]
You're confusing 'two centuries' with 'forever.'

This is basic logic. Your argument reduces to 'This happened recently, and therefore it must continue happening.'

But that's not an argument. Given that obvious constraints are visible and predictable, it's just nonsense.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 01:11:59 PM EST
[ Parent ]
True, we can find examples of closed societies or other  historical episodes that experienced absolute scarcity -- not enough stuff regardless of how you distributed it.  And those are valid arguments against Simon's view of things. However Simon's point that in the last 200 years -- capitalism basically -- we have developed a social system of adaptation to scarcity that allows population to always grow (which is not the same as having no limits) is still a serious argument that cannot dismissed so easily -- there is a lot of truth in it, which is why it has proven so compelling.
by santiago on Wed Nov 10th, 2010 at 07:04:08 PM EST
[ Parent ]
That would be a lot more reassuring if we hadn't had a continually accelerating expansion of our energy footprint in the same period. The reality is that industrial society has never been tested in the context of a serious energy scarcity. And there's excellent physical reasons to believe that industrial society will not, in fact, work in the context of serious energy scarcity.

Hence the imperative to ensure that energy never does become scarce, by planning ahead, something markets are, by design, incapable of doing.

Another reality is that our decisionmaking processes are no longer those of an industrial society. We cannot put a man on the moon today, not because we lack the technical expertise, but because we lack the institutional and political infrastructure that makes such feats of engineering possible. At the zenith of industrial civilisation, we wiped out smallpox without even trying very hard - in the present day, the program to wipe out polio was de-funded within an inch of total victory because the present value of completely wiping out a disease that was substantially under control was judged to be less than the cost of doing it.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 07:33:55 PM EST
[ Parent ]
santiago:
we can find examples of closed societies or other  historical episodes that experienced absolute scarcity
You do realize the global economy is a closed system?

It's like the mercantilist/austere insanity that passes for conventional wisdom among the global policy apparatus right now. If everyone is a net exporter, where are we exporting to? Mars?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 11th, 2010 at 04:48:29 AM EST
[ Parent ]
Diamond actually contradicts Sen's extensive study of the Bangali famine, in which he found that was actually ample supplies of rice in storage in the affected area for both food and seed.  The problem was that farmers hoarded the rice for seed in excess of what they actually needed because the price of it had gotten so high.  I've looked at both arguments before, and from what I could see when I did, the evidence supported Sen's argument better -- there was plenty of rice to go around, just not enough money. Hence the famine was a socially imposed constraint, not a physical one.
by santiago on Wed Nov 10th, 2010 at 11:26:15 AM EST
[ Parent ]
So production goes down, prices goes up, hoarding starts and famine occurs.

If that does not fit your definition of scarcity, then your argument becomes:

Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies social constraints enter before physical.

In effect, before absolute lack hits, relative lack begets class war.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Nov 10th, 2010 at 02:05:18 PM EST
[ Parent ]
Given that people can adapt and substitute abundant resources for scarce ones, why should we think that oil (or any other critical resource constraint) is ever going o be a serious problem for humanity instead of just a local problem to be solved by some humans?

That particular exercise is called "shifting the burden of proof."

It is not incumbent upon those who point out that a growth path is unsustainable to prove beyond reasonable doubt that there is no conceivable way in which human ingenuity can possibly circumvent the constraints that make it unsustainable. It is incumbent upon those who argue that it is sustainable to provide a plausible story of how the constraints that make it unsustainable are going to be circumvented.

"The market will provide," which is what Simon's argument boils down to when you strip out his 17th century understanding of chemistry, is not a plausible story. "Technological advance will provide because it has done so in the past" is not a plausible story. A plausible story involves technology that is at worst on the second tier from the top of xkcd's researcher translation diagram, and it involves a back-of-the-envelope calculation of what development regimes will render it unsustainable w.r.t. its two or three most obvious constraints.

And the reason that the burden of proof is upon those who argue the what-me-worry position to provide a plausible story is that if we adopt a what-me-worry stance and they are wrong, then the result will be anywhere from unpleasant through to catastrophic. Whereas if we adopt a development path that is known to be sustainable under currently commercially available technology, the result will at worst be merely suboptimal.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 02:45:23 PM EST
[ Parent ]
The problem of regulators refusing to regulate is actually a lot more widespread and ambiguous than just the matter with monetary policy and banking we're discussing here.

This is all useful information on the current state of the field. But how does it justify willful neglect of even an attempt to investigate and control fraudulent mortgage origination and financial control fraud when the FBI is warning of an avalanche of fraudulent loans and we have the recent history of the S & L debacle, the resolution of which occurred on Greenspan's watch. It seems that the justification for Greenspan was something like: "these alleged frauds are keeping the market booming going into the election and are totally dwarfing the impact of the Iraq war deficit spending and tax spending on tax cuts for the rich. If they are frauds, they are beneficial frauds and we should let them continue." But even after the election of 2004 he let the fraud run. How can any of it be justified. If he didn't see it it was because he refused to look AFTER it was pointed out to him.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 05:52:01 PM EST
[ Parent ]
It explains that Greenspan was not being willfully negligent.  He was instead directly contesting policy, along with others of his conservative, free-market coalition, based on earnest, if mistaken, beliefs about how the world works, in an institutional setting which allows him to do that. While it helps our side to paint him as a lawbreaker and crook, it's also important not to take that kind of talk too seriously -- to recognize it as propaganda and not truth.  That's because we also have to retain the ability to contest power in the same way, and truth is always the winning argument. Even when lies carry the day with people, it is because people believe them to be true, so taking care with the truth is fundamental.
by santiago on Mon Nov 8th, 2010 at 06:10:43 PM EST
[ Parent ]
It explains that Greenspan was not being willfully negligent.  He was instead directly contesting policy, along with others of his conservative, free-market coalition

You say tomAto, I say tomAHto. All you're explaining here is what ideology led him to be wilfully negligent of his duty to regulate the economy.

In government, you are held to a "knew, or should have known, at the time" standard. If you turn every refusal to regulate into a legitimate policy contest (which is a valid point - civil disobedience is a perfectly legitimate direct action tactic), then you should also accept that those who take this form of direct action are held to a higher standard of foresight than those who do not. Preventable ignorance is a weak excuse for technocrats, but no excuse at all for policymakers.

In other words, you cannot implement a policy prescription - in this case laissez-faire - which has a solid two-century history of FAIL wherever and whenever it has been attempted, and then walk away from the resulting FAIL with an "oops, my bad. Sure didn't see that coming."

While it helps our side to paint him as a lawbreaker and crook, it's also important not to take that kind of talk too seriously -- to recognize it as propaganda and not truth.

Lawbreaker, no. And I don't believe that anybody here ever suggested that Greenspan committed actionable crimes. Crook, though, he certainly was (and is).

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 06:31:20 PM EST
[ Parent ]
If you kill someone because you believe the wrong thing, the person is still dead.

If you kill an economy because you believe the wrong thing, the economy is still dead.

'Oopsie - my bad' isn't usually considered a valid legal defence in either situation.

It's a remarkable argument to pretend that somehow it is. If an engineer, architect, doctor or some other professional makes a mistake that results in lost lives, the professional is considered responsible, and may be sued.

But somehow the rules are different whenever banking is involved. Apparently in banking it's quite acceptable to do anything at all without personal or legal consequences, no matter how other people are affected.

The only exception to this rule is if an action damages a bank's standing - see e.g. Nick Leeson.

But otherwise, anything goes.

It's really quite strange.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 8th, 2010 at 06:55:18 PM EST
[ Parent ]
Not to be too technical, but actually in both cases those are usually successful legal defenses.  A doctor, for example, who kills a patient while earnestly treating that patient is often found not liable, even in litigious USA, as long as it cannot be proven that his mistake was not an honest one given the technology and state of knowledge in the field at the time. It's basic legal defense -- if anyone in a similar position with the same knowledge could also have made the tragic mistake, then "sorry, my bad," is an acceptable defense and people get acquitted all the time in all sorts of alleged crimes with it.  That's just life.
by santiago on Tue Nov 9th, 2010 at 11:54:54 AM EST
[ Parent ]
Yeah, but Greenspan was chelating the economy a the time.

The difference is that in the economics profession, the quacks are running the institutional review boards.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 02:31:14 PM EST
[ Parent ]
I think you're right, but where folks like Jake and others are arguing, based on the Minsky-school stuff, for a more aggressive monetary policy engagement in such issues -- that is, expanding (i.e. constraining) the central bank mandate to include bubble management in addition to price stability, economic growth, and full employment

That's not what I'm arguing. I want central banks to pop bubbles and kill shadow banks and leveraged investment trusts. That's the only thing I want central banks to do.

Real economic growth is of questionable value in a mature industrial economy. Nominal economic growth is and full employment are the job(s) of fiscal policy. And fuck price stability - we're not on a gold standard anymore. No need to act the part.

I think that an alternative look at monetary theory will argue the opposite. It will argue that fiscal policy -- how things are distributed -- are much more useful and precise means of managing things like asset bubbles. It's not Greenspan's low interest -- low unemployment monetary policy that caused the crisis, in other words.  It's the Bush tax cuts. Had the higher Clinton era taxes been able to continue to retire excess cash from circulation be taking it out of the hands of the wealthy, they likely would not have been able to bid up assets so high.

There is certainly a case to be made for that, It's the case the people like Bill Mitchell is making, by the way: That we should stop using the central bank for economic planning, and rely exclusively on fiscal policy to achieve growth, full employment, price stability and protection against financial panics. The central bank would then function exclusively as a clearing house, rather than a policymaking institution.

This suggestion has a lot of merit, and I have no doubt that it would work better than the current system. But the merit that I see in keeping a central bank as a unit for killing spurious financial assets is that its function as clearing house can be used to give it a far more direct and detailed view into the composition of the balance sheets of private banks than the Treasury will ever be likely to obtain.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 03:11:27 PM EST
[ Parent ]
I really don't see how anybody with even the most cursory knowledge of the economic history of the first world over the last century or two can claim otherwise.

Since economic history is generally absent form economics curricula...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 09:00:00 AM EST
[ Parent ]
I think part of the problem that makes convergence in this discussion difficult is the differences between the theoretical formulation, analytical approach and language used in contemporary "mainstream" economics and the and that employed by non economists and economists not in the mainstream. We are looking at the same set of data from different paradigms.

I believe that santiago is framing his arguments in those terms that would be necessary were he to present those arguments to others within the church of "mainstream" economists and that he is so doing because, in order to be considered by those in that mainstream, this is how they must be framed. It also seems that he sees problems with that mainstream and would like to advance approaches that could remedy those problems.

But for a variety of reasons, the approach utilized in "mainstream economics" is fundamentally different from that used in physics, math, engineering, psychology, biology, sociology, anthropology and other scientific disciplines from hard to soft. Those of us who are not part of "mainstream economics" or who are not formally trained as economists have complained about this issue repeatedly and, IMO, with great merit, but, largely, futilely.

Criticisms of a discipline from the outside tend to bounce off that discipline. This is especially the case in economics, where the true legitimizing agency for the discipline is not scientific validity or conformance with observable reality, but the appeal that the approach in the discipline has to those who have most of the money -- the bankers and their biggest clients.

The most difficult, yet the most satisfying task in an argument is to defeat your opponent from within his system. And this is the most likely to have an immediate effect. Even if that defeat does not carry the field, if it carries a significant minority of that field, it creates a new reality. A new approach can do this if it provides a competitive edge to those who employ it.

But this comes back to the problem that so many of those with great wealth prefer the existing form of economics for the utility it offers in rationalizing their activities and that they have used their economic power to grab control of the political system, which they then have used to insure that nothing that seriously disturbs their game is allowed to gain traction. A competitive edge doesn't matter if there is no competition, and currently that is largely the case. When outright criminality is allowed to flourish unhindered, science is either perverted or silenced.

From this point of view santiago is providing those of us here with a pacing activity that allows us to sharpen our arguments. This should not be a thankless activity, so I offer him my thanks for his contributions. It may be that "mainstream economics" is so ensconced and entrenched that no arguments that could significantly change it will be allowed, but we won't really know unless we try.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 6th, 2010 at 11:53:23 PM EST
[ Parent ]
ARGeezer:
From this point of view santiago is providing those of us here with a pacing activity that allows us to sharpen our arguments.

hear, hear. no amen corners needed.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sun Nov 7th, 2010 at 08:09:27 AM EST
[ Parent ]
santiago:
it's asking a lot for a policymaker to go outside of the available consensus

this argument really borders on the disingenuous. by that logic what's the point of appointing regulators at all? we wouldn't want them to 'go outside the consensus'? how can they do their job?

adding 'in a democracy' at the end makes it even odder. in what political system are people less constrained to stay in (enforced) consensus than (so-called) democracies?

scare quotes because democracy has always had to compromise to survive at all, and because of that has never been more than incompletely accomplished, and most importantly cannot survive in any thing like a pure form without extensive, rigorous, universal education in civic, political and economic world history, including many historians such as Zinn, not just the usual brainwashed codswallop served up presently...


"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Nov 5th, 2010 at 06:52:48 PM EST
[ Parent ]
I disagree. It is the central problem of political economy in general, and particularly in a democracy, that policymakers retain the support of their constituents for the actions they take.  This means that it is, by institutional definition, illegitimate for a policymaker to adopt a theory of how the world works that is not shared by his or her constituents as the basis of making major policy changes. And if a policymaker did try to do that, he or she would quickly be shown the door by those same constituents. That's just reality. And it means that blaming a policymaker for having a mainstream view of the world, even where that view was subsequently proven to be wrong by historical events, is unreasonable and unfair.

No one outside of a radical fringe (albeit growing), even today, actually believes the world view of Minsky, so before it is reasonable to expect any policymaker to be able to site that view of the world when advocating a policy change, Minsky has to be mainstreamed. That is happening, particularly with the growing behavioral economics field and the clout on Wall Street that Case and Schiller have gained, but it isn't there yet, and it was even further away when Greenspan was in charge.

But this basic rule is key, especially in a democracy: only mainstream frameworks for thinking about things can become reflected in policy (everyone from Lakoff to Chomsky have supported this), so if you want your outsider view of the world to become reflected in policy, you have to mainstream it first. That's why Barry Goldwater lost in the 1960's, but his outsider view of the world holds supreme today, allowing even crazier people like Rand Paul to get elected to high office.

by santiago on Sat Nov 6th, 2010 at 02:34:22 PM EST
[ Parent ]
blaming a policymaker for having a mainstream view of the world, even where that view was subsequently proven to be wrong by historical events, is unreasonable and unfair.

Euthanasia was a mainstream position in Germany in the '30s and '40s. We still hanged the concentration camp commanders.

Tarring and feathering the prominent proponents of the failed mainstream view is a necessary part of the process of marginalising the current mainstream. Greenspan is one of the prominent proponents of the failed Laissez-Faire mainstream view, which means he needs to get run out of town on a rail. Whether it is fair or not doesn't really matter (and for the record, I don't think it's the least bit unfair - Laissez-Faire has failed, failed again and failed miserably every single time it's been tried, so mainstreaming it in the '70s was very little short of economic and academic treason.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 02:44:08 PM EST
[ Parent ]
The camp commanders were not hung for euthanasia, but for murder genocide, two different things entirely unless you want charge the Dutch medical establishment with genocide.

But on the other point you're right, I have nothing against tarring and feathering Greenspan's mistaken view of the world, so if that is your purpose, go for it.

by santiago on Sat Nov 6th, 2010 at 03:07:27 PM EST
[ Parent ]
Well, genocide was also a mainstream position at the time.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 03:09:58 PM EST
[ Parent ]
Yes, and that is why it occurred. Advocating against genocide in wartime Germany would likely get you killed because it would be viewed as a radical position.

The consensus in support of that view had to be changed and marginalized, and in the case of Germany, it required military action by outside forces to do so.

by santiago on Sat Nov 6th, 2010 at 03:13:08 PM EST
[ Parent ]
Is the economic analogy to be taken seriously here?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 09:25:16 AM EST
[ Parent ]
That neoliberalism must be defeated by mobilizing troops, attack neoliberal economists strongholds, invade their home territory and place them on trial for crimes against humanity?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Tue Nov 9th, 2010 at 03:53:03 PM EST
[ Parent ]
It is the central problem of political economy in general, and particularly in a democracy, that policymakers retain the support of their constituents for the actions they take.

No, the central problem of a 'democracy' is to remove choice from constituents while appearing to leave it in place.

This is what NCE is designed to do. And it's done it fairly effectively, by baffling voters with smoke and bullshit and There Is No Alternative rhetoric.

As for 'mainstream frameworks' - the Nazis, the Soviets and the early medieval theocracy all had their own versions of 'mainstream frameworks', and they all turned out to be self-destructively wrong.

No one cares if a framework is mainstream if it destroys your culture.

The point of progress is to modify policy so that it does insightful, reality-based things, not moronic ideologically approved ones.

At least - that's the plan, unless you're more interested in creating a Capitalist Politburo where you can create truth simply by repeating it often enough, and hoping no one notices you're lying through your teeth.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Nov 6th, 2010 at 02:51:07 PM EST
[ Parent ]
No, what I have described is a feature of democracy.  That the problem policy advocates must solve is to gain consensus for their views before they can be implemented.

What you are describing is one, among many, possible strategies for doing so.

by santiago on Sat Nov 6th, 2010 at 03:09:56 PM EST
[ Parent ]
No, what I have described is a feature of democracy.  That the The problem policy advocates must solve is to gain consensus for their views before they can be implemented.

This is self evidently true. But the process by which that is accomplished is much more concerned with propaganda and rhetoric than with solid analysis of policy implications. Thus there are two problems involved. One is developing and making coherent and respectable an alternative analysis to the current "mainstream" view. The other is winding up a sufficient majority of the population to insist that this alternative be adopted.

Towards the latter end, which progressives tend to ignore, different approaches are required. I would suggest that a fruitful approach would be to popularize the notion that we have a system of "cafeteria law enforcement" and "cafeteria regulatory enforcement" and that we have had a political system, a legal system and a regulatory system that has had NO appetite for investigating criminal and civil fraud in the financial sector.

This notion has come about through the efforts of think tanks funded by self-interested wealthy individuals who have spent tirelessly to convince the US electorate that markets are self regulating and that attempts to impose regulation by government bodies will impair the "efficiency" of those markets.

The results of that effort has been three fold:

  1. Laws such as Glass-Steagall have been repealed.

  2. Regulators have been appointed, such as Alan Greenspan, who do not believe in regulating.

  3. The highly profitable manipulation of the financial system from Wall Street has enabled the financial sector to, in effect, buy the federal political process.

The average US citizen now has at risk their Social Securtiy and Medicare coverage in retirement, their state and private pensions and even the security of their title to their houses. Worse, with the organs of the federal government rented out to the financial sector, that government has become an instrument of oppression of the people in the interests of a tiny minority of wealthy individuals.

It is time to stop worshiping the wealthy and to stop buying the false views of the nature of society that they have been selling us. If the people want to have a constitutional government that works in their interests they have to break the hold that big finance has over our government. THIS WILL NOT BE ACCOMPLISHED BY DESTROYING THE GOVERNMENT AND THE ABILITY TO GOVERN.

Instead, the political process has to be taken back by a party that is pledged to break the power of big finance over the government and the people, by, if necessary, destroying the big financial corporations. ALL THAT IS REQUIRED TO BREAK THE BANKS IS TO ENFORCE EXISTING LAWS FOR CRIMES THAT HAVE ALREADY BEEN COMMITTED.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 9th, 2010 at 03:17:44 PM EST
[ Parent ]
santiago:
Bubbles are simply not well established phenomenon.
Dude, stop channelling Eugene Fama if you want me to take you seriously. According to him, there was no bubble: Rational Irrationality: Interview with Eugene Fama : The New Yorker

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market--that there was a credit bubble that inflated and ultimately burst.

I don't even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It's easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can't exist?

They have to be predictable phenomena. I don't think any of this was particularly predictable.

Unless I'm misunderstanding Fama, it appears in his opinion a recession came out of the blue (in polite company you'd say "an exogenous recession occurred") and this caused the credit crisis.

Financial economists' reaction to the present crisis has been universally hilarious. Take, for instance, what Fama himself was saying before the crash, as quoted by Krugman: Ketchup and the housing bubble

So I ran across this revealing late-2007 interview with Eugene Fama. In it, Fama dismisses the whole idea of bubbles:
Well, economists are arrogant people. And because they can't explain something, it becomes irrational. The way I look at it, there were two crashes in the last century. One turned out to be too small. The '29 crash was too small; the market went down subsequently. The '87 crash turned out to be too big; the market went up afterwards. So you have two cases: One was an underreaction; the other was an overreaction. That's exactly what you'd expect if the market's efficient.

The word "bubble" drives me nuts. For example, people say "the Internet bubble." Well, if you go back to that time, most people were saying the Internet was going to revolutionize business, so companies that had a leg up on the Internet were going to become very successful.

I did a calculation. Microsoft was an example of a corporation that came from the previous revolution, the computer revolution. It was hugely profitable and successful. How many Microsofts would it have taken to justify the whole set of Internet valuations? I think I estimated it to be something like 1.4.

And he expresses confidence over housing (rather late in the game, wouldn't you say?):
Housing markets are less liquid, but people are very careful when they buy houses. It's typically the biggest investment they're going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.
What this made me think of was an old paper by Larry Summers mocking finance economists as the equivalent of "ketchup economists", who believe that they've demonstrated market efficiency by showing that two-quart bottles of ketchup always sell for twice the price of one-quart bottles.
Bubbles are like porn, nobody can write down a model that satisfies the neoclassicals but everyone who isn't a neoclassical economist knows one when they see one.

And part of the problem is that the neoclassical framework simply doesn't have the language to describe a bubble because a bubble is a non-equilibrium phenomenon. I mean, for them even the business cycle is exogenous to the economy!

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 08:25:28 AM EST
[ Parent ]
This Fama character would be funny if he weren't taken seriously by the Serious People.

Does a credit bubble mean that people save too much during that period?

No, it means that there is no such thing as "loanable funds."

I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.

That is a reflection of Fama's ignorance, not of the state of the art.

That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it.

Wow. He's basically saying that if you can't time the popping of the bubble, you can't identify the bubble. Or, to put it in other terms, a model that tells you that you are at risk of an earthquake, and describes how an earthquake will affect a building, is worthless if it doesn't tell you precisely which month the earthquake will occur in.

He seems to have confused the roles of economist and speculator.

Oh, and some people did make obscene amounts of money by being short during the crash.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 11:37:56 AM EST
[ Parent ]
This Fama character would be funny if he weren't taken seriously by the Serious People.
Show some respect, we're talking about a Bank of Sweden Phony Nobel Prize winner.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 06:43:29 PM EST
[ Parent ]
JakeS:
An important part of Greenspan's job as a central banker was to make sure that he was measuring the right things.
He even presided over the discontinuing of the M3 data series.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 5th, 2010 at 05:55:08 AM EST
[ Parent ]
True, but this was simply because no one had ever used that series to make monetary policy up to that time.  That they should be using it is pretty contested among outsiders still, let alone central banking insiders.
by santiago on Fri Nov 5th, 2010 at 12:01:02 PM EST
[ Parent ]
No matter, I think it was irresponsible to do so from a fundamental point of view.

It's not like the cost to the St Louis Fed of keeping track of monetary aggregates was so prohibitive.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Nov 5th, 2010 at 02:07:15 PM EST
[ Parent ]
The cost to the Fed was probably not so big, but I have a feeling that some junior level economists charged with assembling and reconciling the mostly private data every month just hated doing it, especially because they're bosses didn't ever look at it, and suggested eliminating it as a "process improvement" of some kind. It is an interesting question though -- what really was the decision making process to get rid of it, and were there ideological considerations or not?
by santiago on Fri Nov 5th, 2010 at 04:27:48 PM EST
[ Parent ]
Actually monetary theory has a very explicit policy goal, which is usually part of the legal mandate of central banking functions in most countries: maximize employment, growth, and price stability. It's a straightforward optimization problem

No, it isn't a straightforward optimisation problem, because the three things they're trying to optimise are not generally compatible. There are special cases where two or even all three are compatible, but in general you will be faced with a political trade-off.

Full employment may well reduce growth in a mature economy, if people use their added economic security to work less (or if full employment is achieved by reducing the "full time" work year). This would, incidentally, not be a bad thing. Growth may well be inimical to price stability. The relationships between inflation and other economic variables are far more complicated than most economic models give them credit for, but there is no good reason to suppose that growth will always be benign in terms of price stability. And pursuit of price stability has, on the actual historical record, done nothing particularly good for employment, full or otherwise.

So interest rate policy is politics, and should therefore be brought under the ambit of responsible government, rather than being cordoned off in an institution as hopelessly corrupted by money market folkviews as the central bank.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 05:40:15 PM EST
[ Parent ]
seems more like a fact than a theory!

as for new and cynical, isn't this the oldest game in the book being seen for what it is?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 3rd, 2010 at 06:12:57 PM EST
[ Parent ]
It certainly does seem like a fact. But is it? Establishing whether things that seem so really are so is the difference between analysis and mere rhetoric.
by santiago on Wed Nov 3rd, 2010 at 09:56:24 PM EST
[ Parent ]
Considering you've described the Greenspan era as a period of high employment and growth, when in fact it led to shrinking incomes, a loss of around half a million jobs, and a cataclysmic near-total financial collapse which was only prevented by a miraculous and unprecedented tax payer handout, I don't think I'm the one who's being dishonest with the facts.

Perhaps you could put the textbook rhetoric and FUD to one side for a while and explain who you think profited from the Bush years, how, how much, and why.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 12:22:37 AM EST
[ Parent ]
The Greenspan era -- the 1990's, what we really should refer to as the Clinton-Greenspan era -- actually had increasing real incomes and very low unemployment rates.  You're entitled to your own opinion, but not your own facts.  

What this shows is that monetary policy alone isn't sufficient for equity. It requires an equitable fiscal policy as well, which was accomplished during the Greenspan years by low unemployment, low inflation, and higher taxes on the wealthy.  Bush reversed the taxes and the house of cards came down.  But that was Bush's, and Congress's, actions, not the purview of monetary policy regardless of Greenspan's opinion on it.

by santiago on Thu Nov 4th, 2010 at 07:33:54 AM EST
[ Parent ]
Unless I missed something, Greenspan was very much in charge during most of the Bush years. And he was certainly one of the key architects of the avoidable economic meltdown at their end.

As for the Clinton years - this is what was really happening.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 08:05:30 AM EST
[ Parent ]
No denying that he had a hand to play in the meltdown.  However that doesn't mean he wasn't also trying to keep both inflation and unemployment low, which was also the case.

And as for the Clinton years, inequality did increase, but so did real wages across the board. Equity, however, is not the purview of the Fed or monetary policy in general in any country.  Growth and price stability are.

by santiago on Thu Nov 4th, 2010 at 02:08:50 PM EST
[ Parent ]
No denying that he had a hand to play in the meltdown.  However that doesn't mean he wasn't also trying to keep both inflation and unemployment low, which was also the case.

So your defence of Greenspan is that he's an incompetent fuckwit ideologue, not a malicious fuckwit ideologue?

Y'know, when he's running the second-biggest central bank on the planet that explanation does not strike me as being wholly reassuring.

And as for the Clinton years, inequality did increase, but so did real wages across the board

This, however, has never prevented Greenspan from opining on it from the bully pulpit of the Federal Reserve Chair. A point that should not be neglected when evaluating his legacy and his impact upon actual economic policy.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 06:10:46 PM EST
[ Parent ]
Ahem.

The Great Unravelling

the monetary authorities aided and abetted the fraud by doing their best to convince financially unsophisticated people that a toxic mortgage made sense. "ARM" above stands for "Adjustable-Rate Mortgage", and this is what none other than Alan Greenspan had to say about those in February 2004:
One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise. Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. Calculations by market analysts of the "option adjusted spread" on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners' annual after-tax mortgage payments by several thousand dollars. Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

He was saying this when the interest rates were at historical lows. When interest rates are at a low one would want to lock in the low rates, not gamble that rates are going to go even lower. So, while it was true in 2004 that mortgagees would have benefitted if they had entered into a variable rate mortgage years earlier, it was not true that the right thing in 2004 was to offer (and accept) variable rates. People who were paying attention were not amused
There are already numerous variable and short-term instruments available for the sophisticated (or naive) homeowners. Greenspan's speech is an encouragement to use these short-term instruments. As the Wall Street Journal comments, "It is almost unheard of for an official of the central bank to offer advice on interest rates, over which it has enormous influence."

We would go much further than this: unless Greenspan clarifies his comments, he must resign. Calling on homeowners to leverage their personal finances using short-term debt is a financial distress call. Greenspan must be desperate to get consumers to take ever more money out of their homes, to inflate home prices. He can only make such a statement if he knows short-term rates will stay low for years to come, at any cost. The "cost" will be sharply higher long-term rates and a faltering dollar.

We very much hope that Greenspan will put his words into perspective. It is our view, however, that Greenspan is indeed desperate and means exactly as he said. Greenspan's entire monetary policy has been based on wealth creation through higher real estate prices; he is taking this concept to new levels thereby risking an unprecedented real estate bubble, and a subsequent collapse of unprecedented proportions.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 08:10:07 AM EST
[ Parent ]
Being wrong is different than being obstructive. Defending toxic mortgages, as clearly wrong as it is now to everyone, is still consistent with the central banks policy mandate -- price stability, low unemployment and economic growth.

The argument that Greenspan was not doing his job on unemployment, price stability and growth is clearly false, even if it is true that Greenspan's mistaken and biased-toward-the-rich view of the world led to the collapse. Incompetence is different than opposition.

by santiago on Thu Nov 4th, 2010 at 02:12:54 PM EST
[ Parent ]
Defending toxic mortgages, as clearly wrong either malicious or flat-out insane as it is now always was to everyone who understands the instruments in question, understands central banking and isn't dumber than a box of hammers,

Fixed it for you.

is still consistent with the central banks policy mandate -- price stability, low unemployment and economic growth.

Uh, no. It promoted the mother of all inflationary episodes. And just because the central bank wasn't looking doesn't mean this wasn't being measured; Case and Shiller were recording and measuring at the time, and they were very clear that real estate prices were way, way out of line.

Incompetence is different than opposition.

Only to an extent. There comes a point where the only difference is the applicable epithets.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 06:17:56 PM EST
[ Parent ]
Greenspan was the man who invented the phrase, "irrational exuberance" which Schiller afterward used to title his now famous book on bubbles. Greenspan's concern predated Schiller's work, which shows that Greenspan was at least attentive to the problems, even if he eventually didn't act in time.

Greenspan screwed up in the housing crisis in the same way that Churchill screwed up in Gallipoli. They made honest, if tragic, misjudgments of the facts based on incorrect ideas about how the world worked.  They didn't try to rip anyone off, which is what he's been charged with in this discussion.

by santiago on Thu Nov 4th, 2010 at 09:25:33 PM EST
[ Parent ]
Greenspan's concern predated Schiller's work, which shows that Greenspan was at least attentive to the problems, even if he eventually didn't act in time.

So he did know what was going on. Didn't you just say that he was taken by surprise?

They didn't try to rip anyone off, which is what he's been charged with in this discussion.

Not by me.

I don't know whether Greenspan was getting a kickback from the Ponzi scams he helped fuel, of whether he did it to satisfy his own religious belief in the magic of financial markets.

I really don't much care either.

I just know that he wasn't doing his job. Because if he had been doing his job, he would have denied access to rediscount facilities for member banks invested in CDOs, CDS' and the rest of the alphabet soup derivatives. That was such an easy call: If you don't understand the instruments in question, do not allow them to be traded.

Oh, and he would've popped the housing bubble in 2006, when it was bleeding obvious to anybody who wasn't dumber than a sack of hammers that there was a housing bubble.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 09:44:14 PM EST
[ Parent ]
Actually Greenspan was fond of appearing - by video link - at those motivational 'invest your way to paradise with a positive attitude' seminars, which turned out to be one of the kookier and more damaging drivers of the US real-estate meltdown.

Many people found them inspiring enough to lose entire fortunes. So it goes.

Did he rip off anyone off personally? Well - unless you count the entire US Main St economy, I suppose not.

Is being a pimp any better than being a madam?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 09:51:43 PM EST
[ Parent ]
Did he really? Certainly not when he was Fed chair.
by santiago on Thu Nov 4th, 2010 at 10:10:50 PM EST
[ Parent ]
Yes, he very much did. Keynote addresses, no less.

See Life Inc, by Douglas Rushkoff for the details.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 10:17:38 PM EST
[ Parent ]
Why don't you save me the trouble of buying a book I'm not going to read and tell me yourself, because I find that incredible.  Who did he address? And when? And what did he say?  Every syllable Greenspan ever uttered as Fed Chair was reported on and analyzed umpteen ways in the financial press, so I really doubt that's the case, but I always like surprises ...
by santiago on Thu Nov 4th, 2010 at 10:24:21 PM EST
[ Parent ]
Do your own research. Buy the damn book and read it yourself.

And we can continue this when you're done catching up with the facts, hmm?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 10:39:59 PM EST
[ Parent ]
Hmmm? Can't actually name the facts that you claim exist?  wtf?

Hey, I believe you. I don't need source, just what the event you claim occurred actually was.

by santiago on Thu Nov 4th, 2010 at 10:47:16 PM EST
[ Parent ]
santiago:
Why don't you save me the trouble of buying a book I'm not going to read and tell me yourself, because I find that incredible.
Sorry, you're out of line here. You were given a claim and when you asked you got a reference.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 5th, 2010 at 05:52:17 AM EST
[ Parent ]
No, I disagree.  I don't question the source or even that the event occurred, nor do I doubt TBG's honesty in any way.

I just want to know what it actually was that happened, since TBG cited it, and I shouldn't have to pay money in order to do so. (I could, reasonably, be expected to have to pay money if I doubted the source itself, which I don't.) TBG should be able to say what the event he was referring to was rather than making a general claim that something extraordinary happened but refuse to say what it really is that actually occurred. Who did Greenspan address, and when, and under what circumstances? Since he brought it up, it is incumbent upon him to clarify what he is even talking about as a bare minimum.  

by santiago on Tue Nov 9th, 2010 at 01:46:50 PM EST
[ Parent ]
For the record, I concur.

Saying "Greenspan said X, and it says so in book N" isn't enough. Saying "Greenspan said X, in 200X, when speaking to NN" is much better, and not much more work. All it requires is for TBG to look up the place in the book, which he really ought to do anyway (I've lost count of how many times I thought a book I've read gave a more precise and/or better sourced account of things than it actually did).

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 02:30:25 PM EST
[ Parent ]
santiago:
increasing real incomes

but how real were they? bubbles create the illusion of wealth, but if for every dime you earn, the bank makes a dollar off mortgaging the probability you'll keep earning your dime, and it's based on phantasmagorian 'trust' and 'faith' in the institutions, then it becomes child's play to make people feel richer....for a while...

if it leaves too many underwater when the hot air escapes, it makes you ask how 'real' those incomes were, for all that you could hock the probability of them continuing, which they will never under normal ebbs and flows.

just as you can't get markets to yield huge dividends reliably, yet that was spun as a probability too!

i think you're both right, actually...

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Nov 4th, 2010 at 08:18:33 AM EST
[ Parent ]
Wealth is different than income. But even regarding wealth, all of that is after the fact -- information not clearly available to policymakers at the time, so it doesn't support an argument that Greenspan was not making an honest attempt to do his job.
by santiago on Thu Nov 4th, 2010 at 02:15:01 PM EST
[ Parent ]
But even regarding wealth, all of that is after the fact -- information not clearly available to policymakers at the time,

... unless, of course, they had taken out a subscription to the Financial Times or had been paying attention to the Case-Shiller index. Or had bothered to read the memos that the Bank of International Settlements in Basel was sending to them.

At what point does ignorant, ideologically driven incompetence become malicious and wilful neglect? I mean, it's not like this thing was hard to see coming. I saw it two years before Greenspan (claims he) did, and I did it in my spare time using only a civilian internet connection and no access to government databases or the technical literature.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 06:24:00 PM EST
[ Parent ]
You and all of the economists who "predicted 9 out of the last 5 recessions" saw it.  But that's a lot different than being the man in the arena who actually has to make the right call with lots of uncertainty either way.
by santiago on Thu Nov 4th, 2010 at 09:31:44 PM EST
[ Parent ]
There was no uncertainty whatsoever that CDOs are a Bad Idea.

There was no uncertainty whatsoever that there was a housing bubble.

There was no uncertainty whatsoever that the dollar was (and is) overvalued.

There was no uncertainty whatsoever that the FIRE sector(s) held (and hold) an unhealthily large fraction of US economic activity.

All I'm saying is that there is an upper limit to how many blindingly obvious facts you're allowed to overlook and still be able to claim that you made an honest try but fucked up.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 09:51:16 PM EST
[ Parent ]
Well - as Santiago says - on ET we may be allowed our opinions, but not even he is going to be allowed to play fast and loose with the facts. :)
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 09:53:34 PM EST
[ Parent ]
Maybe it was clear to you, because you are such a rare genius after all.  But although there were some who also shared your opinions, they were just that at the time - opinions.  There was no way to be sure, especially if you were operating under a mistaken mental model of how the world works. Greenspan wasn't the only smart person, of all political ideologies, who didn't get it in time.
by santiago on Thu Nov 4th, 2010 at 10:03:16 PM EST
[ Parent ]
Look, that CDOs are Bad News wasn't a judgement call. This is not even a halfway debatable point: If you are a financial regulator and you see a financial instrument that you do not understand, then your job is to learn what it is and what it does. And your job is also to make life living hell for the people who trade that instrument until you do understand it. And nobody who understands how CDOs work could possibly be under the delusion that they were anything but a scam. This isn't a grey area where reasonable people could reasonably disagree: They were explicitly marketed in so many words as devices intended to skirt the regulatory solidity requirements.

When the largest financial market in the jurisdiction where you're supposed to be a financial regulator is made up of instruments that are explicitly marketed as a way to engage in regulatory arbitrage break the rules, then you are not doing your job. I really don't see how you can pretend that killing the shadow banking system stone cold dead wasn't in Greenspan's job description as central banker.

Now, Greenspan is on record saying that he doesn't like regulation, because he suffers from an Ayn Rand-inspired ideology. When somebody who is supposed to enforce regulations that he has stated his principled opposition to happens to fail to enforce those regulations... then I don't think it's unreasonable to ask if he failed on purpose. But ultimately it's not terribly relevant whether he wasn't doing his job because his extremist ideology blinded him to the blindingly obvious, or he didn't do his job because he knew full well what was going on and liked what he saw. The bottom line is that he wasn't doing his job.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 10:28:37 PM EST
[ Parent ]
When the argument boils down to 'was this stupid or was this knowingly fraudulent?', trying to defend the stupid and/or fraudulent thing seems like it might perhaps not be the most convincing of all possible arguments.

Considering that Wall St seems largely powered by fraud and reliably acts fraudulently, I wouldn't be surprised to discover that fraud was involved.

But to an extent it doesn't matter. In this case it's obvious that two wrongs made the Right.

It's not our job to decide which one was greater.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 5th, 2010 at 06:26:20 PM EST
[ Parent ]
santiago
But the circuitous theory is also an example of what I would call too much focus on accounting definitions and too little on understanding of what is really going on when banks make loans or governments print money, spend it,  and then collect it back in taxes again.

When the entire public discourse about the role of money, the process of creation of money and the implications of those factors for government policy are systematically obscured by being conducted in language and terms that are appropriate to an economy utilizing a gold standard, when IN FACT that economy IS NOT on a gold standard, but IS, in fact, on a fiat money standard, and when therefore different constraints apply, it is therefore of the essence of any possible solution to get the discussion changed to one based on terms, language and context that ARE appropriate to the economy under discussion. Therefore the discussion of such processes as how money is actually created in the economy under discussion and of accounting principles as the three sector balance approach, which shows that public debt translates to private savings and that the only way both the public and the private sectors can simultaneously save is if and to the extent that the country runs a trade surplus, are also of the essence.


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 02:01:17 PM EST
[ Parent ]
I agree.
by santiago on Wed Nov 3rd, 2010 at 04:27:20 PM EST
[ Parent ]
Wiki:
Circuitism also models banks and other firms separately, rather than combining them into a representative agent as in mainstream neoclassical models.

Steve Keen has published a dynamic model with a separate banking sector, business sector and a worker sector: Solving the Paradox of Monetary Profits. The opening paragraph follows:

Bruun and Heyn‐Johnsen (2009) state the paradox that economics has failed to provide a
satisfactory explanation of how monetary profits are generated, even though the generation of a
physical surplus is an established aspect of non‐neoclassical economics.1 They emphasise that our
ability to explain phenomena like the Global Financial Crisis (GFC) will be limited while ever we are
still unable to explain this fundamental aspect of capitalism.

In fact this paradox can be solved very simply, using insights from what is known as "Circuit Theory"
(Graziani (1990) and Graziani (1995)). Graziani's brilliant insight was that a credit economy must be
using a non‐commodity as money, since the alternative of "an economy using as money a
commodity coming out of a regular process of production, cannot be distinguished from a barter
economy" Graziani (1995, p. 518). From the insight that in a credit economy, an intrinsically
valueless token is nonetheless accepted as full payment in the exchange of goods, Graziani derived
the conclusion that:

any monetary payment must therefore be a triangular transaction, involving at least three agents, the payer, the payee, and the bank... Since in a monetary economy money payments go necessarily through a third agent, the third agent being one that specialises in the activity of producing means of payment (in modern times a bank), banks and firms must be considered as two distinct kinds of agents. Graziani (1995, pp. 518‐519)

Steve provides output plots showing bank account balances over time for the bank, the firm and the workers and is then able, following Marx, to derive a function for the surplus, or profit, and another for the division of the surplus between the workers and the firm. Using these he can then generate a plot for wages and profits as a time function of the surplus.

Over a year the total flow of wages well exceeds the value of the initial loan used to establish the business, as the workers are paid bi-weekly and thus, as Marx described, the money circulates many times through the system.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 10:04:49 PM EST
[ Parent ]
(To get the paper you have to click "download". It is a short PDF.)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 10:06:02 PM EST
[ Parent ]
I think Moesler has the best explanation in your piece, but there doesn't seem to be any real theory going on yet...

Because what they are discussing is observation of reality more than theory. The theoretical base seems to be mostly post-Keynesian, but in order for that THEORY to get due attention and gain traction they see it as first necessary to deconstruct the exiting conversation and remove the approaches that are not required by the current reality. These include all of the limitations which were and are a reality for currencies based on a gold standard.

Perhaps it would be better to present this as a pure issue of political economy, were there such a thing today. But the myth of separate spheres for politics and economics also still holds center stage in the public consciousness, at least of those who have any consciousness of these matters.

From such a view point current policy is simply the application of raw political power to extract money and wealth from the bottom 99% of the population and transfer it to the top 1%. It is for that purpose alone that the vast majority of the suffering of most of the populations is necessary. The actual functioning of the economy would be greatly enhanced by reversing that policy and directing resources and employment especially to the bottom 90% of the population. That would create demand.

But to do that it would likely be necessary to write down much of the fraudulent debt that was created by the top 0.1% of the population as a means of their own enrichment. This should also be done from the necessity to maintain the rule of law and any semblance of justice in our societies. But, again, raw political power is preventing us from "looking back" and prosecuting the crimes of the financial sector.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 11:31:25 AM EST
[ Parent ]
santiago:
Chris Cook offers a competing idea of money which tries to tie it more to real commodities, such as energy, which has the theoretically satisfying property of limiting the kinds of commitments that people can make to each other to the actual physical properties of real resources that people actually have ready to hand.

In fact you are forgetting my proposal for perhaps the most important type of currency of all, which is a unit redeemable in land/location rental value. Note that more than two thirds of money in existence came about from mortgage-backed credit creation and is therefore deficit-based but land-backed.

 John Law's proposal in 1705 of a currency for Scotland was an intermediated (by a public bank) and land-backed approach as distinct from unitisation - ie units redeemable in payemnt for land rentals - which is a land-based approach to currency.

I made a presentation a couple of weeks ago to the top 20 UK housing associations in respect of the use of a 'co-ownership' partnership framework for occupation of and investment in land. The outcome of this model is a new asset class of units redeemable in rental value ie undated credits based upon the productive value of land.

The application of this partnership model on a wide scale to create and unitise 'Rental Pools' would achieve a form of debt/equity swap - which is what Buiter and Taleb among others are saying is the only solution to unsustainable debt.

I see this approach as 'reversing the polarity' of the currency so that it becomes a direct - dis-intermediated - claim over land rental value, rather than - as now - ain indirect intermediated claim over a claim over land rental value aka mortgage-backed credit created as an interest-bearing loan by a credit institution aka a bank.

Such a currency has exchange control built in - to a degree - since the currency would, by definition, only be redeemable in payment for rental in the area or country of issue. That would not prevent it being accepted internationally of course, by anyone who had a requirement for goods and services from the issuing country.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 3rd, 2010 at 05:41:35 AM EST
[ Parent ]
ChrisCook:
I made a presentation a couple of weeks ago to the top 20 UK housing associations in respect of the use of a 'co-ownership' partnership framework for occupation of and investment in land. The outcome of this model is a new asset class of units redeemable in rental value ie undated credits based upon the productive value of land.
What prevents more rental units being issued than can possibly be redeemed?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 05:44:42 AM EST
[ Parent ]
A registry held by the custodian and transparent to all members, for starters.

Plus a 'Manager' member of the Pool who operates the policies agreed between investors (capital partners) and occupiers (capital users).

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 3rd, 2010 at 06:30:58 AM EST
[ Parent ]
That still doesn't prevent them issuing 50 years' worth of rental units for money today, and having no money left for maintenance in a year's time and nothing else to monetize.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 3rd, 2010 at 09:01:27 AM EST
[ Parent ]
Of course it does.

Even if a manager went bonkers and agreed to a massive over-issue, the potential investor would be able to see and evaluate the number of Units already in issue; the lifetime of the productive asset; yada yada.

That's the sort of due diligence people like J do every day of the week.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 3rd, 2010 at 05:06:19 PM EST
[ Parent ]
Which is fine until someone securitises/bundles/sharks and resells the units as AAAAA++++ top grade investment bonds, three thumbs up, no worries guv, etc.

How many people have J's resources, and are able to understand due diligence well enough to do it properly?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 12:27:38 AM EST
[ Parent ]
Yeah, and precisely for that reason we didn't have a subprime CDO2 crash 3 years ago.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 03:41:54 AM EST
[ Parent ]
The same principles that apply to any form of investment in productive assets apply to 'unitised' production from an asset held in custody.

I happen to believe firstly, that a direct, dis-intermediated, investment in a productive asset is likely to be superior in outcome to an indirect - intermediated - investment, and secondly, that a transparent mechanism will likely be superior in outcome to an opaque one.

Do you or TBG disagree on either count?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 10:32:52 AM EST
[ Parent ]
In theory, yes. In practice you're going to need expert knowledge of Industry A to assess the likely value of units created by Industry A.

Most people hand their portfolios over to intermediaries, precisely so they don't have to worry about anything more detailed than an initial investment and a return.

So that intermediation layer is deeply embedded in the financial industry. It defines a huge part of it, and you could argue - if you accept the value of investment in the first place - that it provides an indispensable service.

In reality it's populated by sharks who don't have a problem making a quick buck at the expense of both customers and creators of value.

If you're expecting investors to perform their own due diligence - most of them won't. And if there's an intermediation layer, how does your scheme stop it becoming as corrupt and dangerous as it is today?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 10:39:11 AM EST
[ Parent ]
You are quite correct.

That is why professional advisers operating as service providers would be key market participants.

I don't see these people as 'intermediaries' unless they buy from and sell to the client.

The move from an agency relationship to a partnership relationship is a bit more subtle, but there's no reason why such financial service providers should not be 'managing partners', rather than conflicted intermediaries as now, covering costs, and with a performance-based bonus, perhaps.

Indeed, that is exactly how the IFA industry has been evolving, prodded by the FSA. Hedge funds are routinely LLPs these days, while Master Limited Partnerships are along these lines.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 12:09:55 PM EST
[ Parent ]
ChrisCook:
professional advisers operating as service providers would be key market participants
Like, say, credit rating agencies?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 12:19:40 PM EST
[ Parent ]
Same problem of faulty enterprise model.

Credit rating agencies should never operate 'for (shareholder) profit' and neither should any other utilities such as exchanges and clearing houses.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 01:08:52 PM EST
[ Parent ]
You can prevent them by charter from operating for shareholder profit.

How, precisely, are you going to prevent them from operating for management profit?

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 08:09:31 PM EST
[ Parent ]
It seems to me that this always boils down to insuring that "money creating agents" employ sound underwriting practices and experience drastic penalties when they do not. Our current attitude towards breaches of sound underwriting seem to be "Boys will be boys!" This is aided in no small part by the fact that what the boys are doing is very obscure to most of the population.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 3rd, 2010 at 08:37:40 AM EST
[ Parent ]
... a "modern theory about money", since the status of money is a matter of observation and, according to MMT, pretty much what you say here ... its explaining how the economy works without having to lie about the way that Modern Money works, or, IOW, Theory that incorporates Modern Money.

"Modern" because the rules of behavior that govern economies are subject to ongoing change, and the lies told by the neoliberals under Bretton Woods about how things worked become even more egregious lies about how things work under prevailing monetary institutions.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Nov 3rd, 2010 at 04:13:14 PM EST
[ Parent ]
Stephanie Kelton was at pains to note that the term "Modern Monetary Theory" was not one created by those doing the work that has been so described. Especially the word "theory" seems a deliberately pejorative term employed by those who would wish to continue to present systematic mis-description of the operational constraints on our monetary system. By labeling observations of how the existing system actually works a "theory", detractors seek to inherently challenge the validity of the observations without having to refute them. They are reduced from the status of an uncomfortable empirical observation to the status of a "mere" theory advanced by marginal, "unserious" people. That is why I suggested that this approach might better be described as the "Actual Monetary Practice School."

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 01:09:08 PM EST
[ Parent ]
ARGeezer:
They are reduced from the status of an uncomfortable empirical observation to the status of a "mere" theory advanced by marginal, "unserious" people.
Hey, just like "evolution is just a theory" and "global warming is just a theory"...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 01:33:26 PM EST
[ Parent ]
While ChrisCook's units are quite valuable as assets, as money they would be prone to the same flaw as any other intrinsically valuable asset used as money, that the monetary unit can rise in value due to an intrinsic rise in value of the underlying asset, which results in a self-inflicted crippling deflation.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Nov 3rd, 2010 at 04:17:37 PM EST
[ Parent ]
BruceMcF:
that the monetary unit can rise in value due to an intrinsic rise in value of the underlying asset,

Not if the underlying asset is held by a custodian, and what is being monetised is the 'use value'.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 3rd, 2010 at 05:00:07 PM EST
[ Parent ]
Use value of anything in particular can either rise or fall with changes in demography, technology and culture.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Nov 4th, 2010 at 06:37:28 PM EST
[ Parent ]
Of course. So the price of a Unit of currency will vary.

The $64 billion question is: in what absolute Unit of account/measure - or 'Value Standard' as I prefer to think of it - is the price denominated?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 06:45:49 PM EST
[ Parent ]
Use value is measured in time of use. It is not infinite.

If I have 50 apartments I can maybe sell 2000 to 3000 apartment-years worth of units, but no more.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 06:56:56 PM EST
[ Parent ]
The capital invested in the apartments is finite, and will depreciate: the location value will not depreciate, although it may vary in price.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 07:46:37 PM EST
[ Parent ]
Yes, I think you're right, although Chris disagrees in his comment and I haven't thought it through yet.  But I have another criticism of Chris's idea, assuming that it did work as he states and essentially limits commitments to the amount of available usable things: Is that efficient?  I don't think so. It would seem to leave a lot of waste on the table in the form of idle resources.  

As an example consider how airlines employ legions of statisticians to figure out how to overbook flights to minimize the number of unused seats.  It turns out that occasionally having to turn people away from their flight and compensate them for the trouble outweighs the cost of flying with empty seats.  

It is possible that this is also true in complex economies. The risk and resulting cleavage from occasionally having some people unable to deliver on their commitments might be less than the benefits of being able to more fully use available resources by allowing a certain level of overcommitment. Fractional banking could well be of value simply because it allows a more efficient use of finite resources than would occur if people were limited to what they could conceivably get their hands on and use, which is how Chris's system works, as I understand it.

by santiago on Wed Nov 3rd, 2010 at 10:26:33 PM EST
[ Parent ]
santiago:
But I have another criticism of Chris's idea, assuming that it did work as he states and essentially limits commitments to the amount of available usable things:

That's not in fact what I am suggesting, and I responded off-line to JakeS in reply to the same point, where he rightly said that Unitisation requires a sustainable flow, rather than a 'stock'.

The reason that I see Location; Energy; and Knowledge as 'Factors of Production' - appropriate for 'unitisation' with undated credits - is the fact they do, or can, give rise to such a sustainable flow. Unlike (say) gold, or non-renewable carbon fuels.

I see a carbon levy - and the Unitisation of a carbon pool into currencies - as potentially an important policy. This is because to do so offers IMHO a workable transitional mechanism to the funding of investment in renewables and energy savings which is complementary to both carbon taxes (politically difficult) or Carbon (C02) credits - which are 'deficit-based' and aim to monetise by administrative fiat something intrinsically worthless (sound familiar?).

Unitisation also potentially offers an alternative to energy subsidies in profligate energy producing nations. ie increase carbon fuel prices to global levels, and compensate populations with an energy dividend of Units, which they could either use on profligate fuel consumption, or more likely, they would cut consumption and exchange Units for something else of value.

In order to buy and hold a Unit redeemable in payment for use value of one of these three Factors, an Investor would require a discount to the 'physical' market price for spot consumption/use, depending on the amount bought.

That market price will depend on the number of buyers and sellers. At the moment there are any number of investors with a gazillion $ aiming to 'hedge inflation' and getting negative real returns who would love an investment that offered such a return.

I reckon that for a Unit in a major 'Rental Pool' the market return for what is a pretty much 'risk-free' return (being backed by government payments) would be less than RPI + 1%. Take into account the absence of debt, and then the funding cost of what is essentially 'Public Credit' or National Equity becomes pretty compelling.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 01:54:07 PM EST
[ Parent ]
While ChrisCook's units are quite valuable as assets, as money they would be prone to the same flaw as any other intrinsically valuable asset used as money

It's even worse than that, because it's a multiple-standard system, where Units backed by several different sorts of specie are in simultaneous circulation.

There used to be a gold/silver double standard system in most of Europe for a couple of decades in the 19th century. It was a massive PITA. Now imagine three or four (or infinitely many) standards.

Do. Not. Want.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 07:13:26 PM EST
[ Parent ]
It's even worse than that, because it's a multiple-standard system, where Units backed by several different sorts of specie are in simultaneous circulation.

And none of them will be as liquid as fiat money. Or metal money, for that matter, since people didn't generally want to hold gold or silver coinage for the use value of the metal...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 4th, 2010 at 07:35:32 PM EST
[ Parent ]
There's no reason why a single pool of land rental value could not be created for each country within asuitable framework.

I reckon that Units that emanate from that Pool would be pretty liquid.

Likewise, Units emanating from energy pools within a global energy clearing union framework could come to be pretty liquid, too.

As I responded to JakeS, I see the need for only one Value Standard (Unit of Account) and that is an energy unit. This Unit of account/measure is distinct from any Units of energy currency which may be priced against it.

I agree that this distinction is not easy to get one's head around.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 08:00:33 PM EST
[ Parent ]
I don't imagine lots of standards.

I imagine one single standard, and that is an energy standard consisting of an absolute Unit of energy.

The difficult thing to grok is that a Unit of Currency: whether a currency based on energy value(and these may come in different variants) ; a currency based on land rental value; a gold-based currency; or yer good old $, £ and $ based on nothing much at all, are entirely independent of the abstract Unit of Value against which they may be priced in value exchanges.

 

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Nov 4th, 2010 at 07:54:14 PM EST
[ Parent ]
Could you give an example?

Take the apartment building, place it in Spain. Or a windfarm in France. Any example really, as long as you are prepared to explain the gritty details of it.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Nov 5th, 2010 at 05:54:43 AM EST
[ Parent ]
I'm not going to go into gritty detail on this site at the moment.

You'll just have to wait for the book....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 5th, 2010 at 04:11:52 PM EST
[ Parent ]
Cop-out.

In any case, when any of these examples was discussed in some detail years ago people failed to be satisfied.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 08:20:47 AM EST
[ Parent ]
Migeru:
In any case, when any of these examples was discussed in some detail years ago people failed to be satisfied.

Some people are never satisfied lol.

But to be fair, I have done a great deal of work since then on developing the concepts I was exposing for criticism, constructive and otherwise, on ET.

It's not clear to me how much nitty gritty is being looked for here, but I do have an issue with exposing at this point some of the detailed solutions I have developed to regulatory, taxation and legal issues in particular.

I certainly don't consider that as a 'cop out', although you are free to do so.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Nov 9th, 2010 at 04:55:03 PM EST
[ Parent ]
I you are making money of consulting this, I understand you being hesitant to share to much.

I just figured that it might be advantageous to develop one standard example - whatever you choose - and developing that one so that you can - if asked - answer any question with how that particular example would work. And then use that specific example as your go to example.

The discussions seem to get stuck in similar tracks, and it is my guess that a standard, well-crafted example might serve better then a theoretical framework.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue Nov 9th, 2010 at 06:40:00 PM EST
[ Parent ]
ChrisCook:
I don't imagine lots of standards.

I imagine one single standard, and that is an energy standard consisting of an absolute Unit of energy.

Would a residential rental use unit be denominated in energy units?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 5th, 2010 at 05:57:24 AM EST
[ Parent ]
Migeru:
Would a residential rental use unit be denominated in energy units?

Why not?

It's currently denominated in £, $  or whatever, and these are totally abstract as units of account.

But if we consider residential rental, we find it consists of the use value of the location; and the use value of the other factors of production invested in the location.

In my analysis energy - as a factor of production - is embedded and/or expended in creating the relevant building, and also in creating the infrastructure which makes a location valuable.

The bare location has a use value which does not depreciate, but the energy invested in the location and its environs, in whatever form, does.

Likewise, Knowledge - as a factor of production is deployed - and in its subjective form (between the ears) gives rise to the greater part of what we think of as the use value of 'Labour'.  What Keynes called 'unqualified' Labour aka Manpower may be considered to be Energy, I think, but it is Knowledge (skills, experience, ingenuity, creativity, common sense; yada yada) which enables that Energy to be put to most valuable use.

The other form of Knowledge used in buildings is objective 'intellectual property' and includes designs - of tools and buildings, and increasingly IT eg CAD software.

But the key point is that a Unit of energy is relevant to peoples' everyday experience.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 5th, 2010 at 04:02:00 PM EST
[ Parent ]
Migeru:
Would a residential rental use unit be denominated in energy units?
Why not?

It's currently denominated in £, $  or whatever, and these are totally abstract as units of account.

Because I though the point was that the rental unit was denominated in (time)x(floor area) of use of a particular grade of residential property, or something of the sort. The fact thst it's priced in the prevailing unit of account is incidental to the idea that what I'd be purchasing would be a certificate redeemable for, say, "one month's occupancy of a two-bedroom apartment".

Buying a certificate worth "one barrel of oil's equivalent of rent" is not what I think of when I hear you talk about "rental units".

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 08:32:49 AM EST
[ Parent ]
A rental unit is a Unit redeemable in payment for the use of land and buildings which are within a particular 'Rental Pool' agreement. It relates to the flow of use value of that location and the capital ('money's worth' of knowledge and energy) invested in the location.

A Rental Pool (created within a 'Land Partnership' agreement) is not dissimilar to a Condominium except that whereas a condominium is externally financed by secured borrowing, investors in a Rental Pool are also party to the agreement which governs the use of a particular location and the capital invested in it.

The Holiday Property Bond scheme approaches the Unit concept in that HPB investors acquire Points by way of a return on their investment in Holiday Property Bonds (which are an asset they may pass on, and sell.

Points give them the right to occupy any of a Pool of HPB properties, and there are different rates for redemption of Points eg High, Medium and Low season, and different Point redemption rates by country and size of property, I guess.

The use value of a particular location in large part derives from public investment in the surrounding infrastructure, and (more often than not) from private investment in building on the site itself.  While a pure 3D location cannot be said to depreciate (although its amenity value may change), the energy embedded in it, and in the vicinity, will depreciate and must be maintained, through continuing investment of energy and knowledge, or the property will eventually be unfit for use.

So a rental payment for the use of residential property relates to the use of the location and the capital invested in the location, and I think that two 'rentals' are appropriate.

Firstly, in return for the exclusive use of the location, an occupier might be expected to pay to the Pool community of which he is a member a proportional share of the use value of the location.

The location rentals collected would then be distributed equally to Pool members, with the result that those who have greater than average use of a location (both in terms of area and amenity) make a net transfer to those who have below average use of location. I see this as being consistent with the same principle which underpins Land Value taxation.

Secondly, in return for the use of the capital invested in the land the occupier should pay a 'capital rental', and it is this which is 'unitised' and sold to Investor members of the Pool. It is also this Pool to which an occupier contributes when he maintains the property himself, and in that case he would be credited with Units to the value of the depreciation/ maintenance charge he would otherwise have to pay.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Nov 9th, 2010 at 04:46:39 PM EST
[ Parent ]
These things were rather directly touched in my diary. The power of dollars and euros is not only because of taxes, but also because you can payoff any debt with them. That is what legal tender means. If this Modern Monetary Theory ignores that a lot of money is created as credit via the Fractional Reserve Banking, and that the value of money comes from credit obligations and expectations, it is a rather worthless unless the governments and central banks "symbiotically" cooperate along certain self-determined strict lines. Theories are out there so that various people would find ways to rationalize and accept the economic mess. The only constant in any "realistic" policies is comfortable welfare of the richest.
by das monde on Thu Nov 4th, 2010 at 08:02:10 AM EST
[ Parent ]
I don't think the so called modern monetary theory ignores this, from what is posted here anyway. It actually points out pretty directly that money is not a commodity and that thinking about money as if it were can lead to wrong policy implications. So your diary is on board with them.

My criticism wasn't with their theory or ideas, but that they're not going far enough to actually come up with an alternative theory of what money is and how it really works, which I argue is necessary in order to actually advocate for alternative policy prescriptions to the ones based on a conventional understanding of money as a commodity.

by santiago on Thu Nov 4th, 2010 at 04:57:43 PM EST
[ Parent ]
I think that's a feature, not a bug.

One of the things that I keep finding annoying about economic models is that they start with theoretical assumptions, and then construct a language to talk about them. That's an ass-backwards way to go about modelling the real world. If you want to model the real world, you start by constructing a language that describes the observed reality, and then you use that language to build theories. Because then you can discard a theory without having to reconstruct the entire language you use to talk about the world.

Now, in economics you can't really get away with having a universal common language, the way you can in physics. But it is still a worthwhile exercise to start with directly observable facts (e.g. "the price of stuff is what people pay to obtain stuff, as denominated in some reference") and the most widely accepted institutions (such as double-entry bookkeeping), end by applying different sorts of behavioural assumptions (intertemporal utility-optimising, animal spirits, herd behaviour, strategic decision, etc.). Because the theories of motivation are, while the most interesting in terms of crafting policy, also the most difficult to directly put to the test. By adding them last, you can rapidly run a large variety of different behavioural models through the gauntlet, whereas if you build one particular behavioural model into the bedrock of your theory, you have to recast the entire theory if you want to test another behavioural model.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 07:42:38 PM EST
[ Parent ]
The problem is that your directly observable fact are already based on a certain model. Whatever you're observing will have taken that model as its starting point.

This why pseudo-physical theories are doomed to failure, except in situations with very narrow and well-defined boundary conditions.

Macro is really just politics hidden behind numbers. You're trying to quantify behaviour, psychology, tradition, custom, faith, mythology and anthropology - not stuff that actually exists in any useful way.

The give-away is that if rules and accounting practices need to be changed for political reasons, they will be changed for political reasons - right down to core definitions of what is and isn't considered cash, debt, credit, and so on.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 4th, 2010 at 08:32:30 PM EST
[ Parent ]
What you're describing is pretty much what economists actually did, starting with the classical era. They described the real world the way they saw it and then started to come up with theories to explain the patterns.  And this is where it's gotten us.  It's not bad methodology why economics has apparently gone wrong -- it's simply that the theories are proving inadequate given more and more facts, so people are re-working them, while others are still defending them. Normal stuff.

Some of the people are apparently in an outsider group working on the "modern monetary theory" stuff. They're doing a good job, actually. Problem is, I see a pattern in their work that they haven't identified yet, and it looks like the reason they haven't identified it is because they're caught up playing language games with accounting terms in the same way neoclassical economics gets caught up playing language games with differential equations. If money isn't a commodity, then it's not an accounting entry either.  It must instead be a relationship, as Chris Cook has also argued here.  But if it's a relationship, then you can start theorizing about it using the language and terms already established to talk about human relationships, instead of reverting to the accounting world that you've already argued is insufficient to describe monetary phenomenon.  

by santiago on Thu Nov 4th, 2010 at 08:57:36 PM EST
[ Parent ]
What you're describing is pretty much what economists actually did, starting with the classical era. They described the real world the way they saw it and then started to come up with theories to explain the patterns.  And this is where it's gotten us.

Well, no.

When you build a Walrasian general equilibrium model, you start by assuming behaviour and then derive the measurable quantities. What you should be doing is constructing a language that allows you to talk about the measurable quantities without invoking behavioural relations - or at least a language that is sufficiently modular that you can swap out behavioural assumptions as and when they prove unfit for describing the real world.

The real test of whether you've built your meta-model framework with sufficient flexibility is that you can provide a coherent answer to the question "what happens if relationship X is wrong?" The marginalists can't answer that question if you take X to be "economic actors have well-defined preferences which they optimise their behaviour to satisfy."

A physicist can (with some effort) provide a plausible answer to the question "what if we lived in an alternative universe where the change in momentum was proportional to the square root of the applied force?" Marginalists' heads explode if you ask them "what if people follow strategies rather than optimise utility?"

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 4th, 2010 at 09:22:24 PM EST
[ Parent ]
No that's just not how Walrus or anyone else did their work, as I've discussed with you before.  They observed reality first, and then theorized about the patterns they observed, with the help of Smith's already well established, and also observation based, framework.  Smith's theory was so compelling at the time that it had already been adopted outside of economics by Darwin to theorize the patterns he saw in natural selection, so they were not pulling some arbitrary assumptions out of thin air as you seem to believe.  They were honestly applying scientific methods to study social phenomenon, and the fact that it turned out to be problematic for a number of reasons doesn't mean the approach was corrupt.
by santiago on Thu Nov 4th, 2010 at 09:40:54 PM EST
[ Parent ]
I agree that economists at least up through Marx were doing the best they honestly could to explain the operation of the economy they were observing. I also think that it has been reasonably well established that the interests of those who paid the salaries of most economists after about 1875 used that power relationship to influence the attitudes of the economists when ever they could and that this became a serious factor in the development of neo-classical economics. It certainly was a factor with Ely, who had a near-career death experience early and learned what he must not write and say if he is to be employed in "serious" positions.

This time period coincides with the development of financial capitalism, the "professionalization" of economics and its introduction as a normally available curriculum in university education. I am not sufficiently acquainted with Walras to know how this applied to him. Both Gaffney and Upton Sinclair are pretty clear on the influence Morgan, Rockefeller and other business moguls had on the versions of economics taught at their universities.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 4th, 2010 at 11:34:51 PM EST
[ Parent ]
So what difference does it do to see that money is created when the treasury pays out money and destroyed when taxed? Political difference that is?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Fri Nov 5th, 2010 at 07:06:26 AM EST
It makes a huge political difference because you don't fund spending out of taxes: you tax to remove excess money from spending.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 5th, 2010 at 07:14:11 AM EST
[ Parent ]
It means, among other things:

  1. You don't issue bonds in order to get money. You issue bonds in order to keep a certain overnight interest rate. (Incidentally, this means that you can dispense with issuing bonds and just have the central bank pay interest on deposits by its member banks. Although bonds may allow you to manipulate the yield curve - they shouldn't, if financial markets behave like the textbooks say they do... but, well, they don't.)

  2. How much money you can (net) spend is not constrained by anything other than the risk of inflation (which depends at least as much on the distribution of the spending as it does on the quantity - cue quantity theory of money quacks' heads exploding). Specifically, it is not constrained by previous spending; a sovereign government will never have to "pay back" the deficits they incur today. This means that there is no conflict between deficit spending enough to ensure full employment today and deficit spending enough to ensure full employment tomorrow.

  3. Since the role of taxation in supporting spending is now obviated, the other two roles of taxation in the modern economy can take priority: Controlling price movements and enforcing macroeconomic stability.

  4. Inflation doesn't hurt you until it goes some way into the double digits. If your internal trade is denominated in arbitrary tokens rather than some tangible specie, it really doesn't much matter how many zeroes are on your bills. The only thing that matters is that inflation is low enough that you will have spent most of your money by the time it is significantly degraded as a store of value. Contrast this with the case where you had a gold standard or a fixed exchange rate target, in which case simply having higher inflation than your trading partners (irrespective of the absolute level) reduced your competitiveness and led your industry to leave for greener pastures.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 08:02:58 AM EST
[ Parent ]
In a deflationary environment and in a liquidity trap it makes all the difference. Accept that as fact and there is no good reason not to spend to employ people to do socially necessary tasks so long as that does not, by itself, produce wage push inflation.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 9th, 2010 at 06:03:12 PM EST
[ Parent ]


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