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Rediscovering Minsky's wheel, one pundit at a time

by Migeru Mon May 9th, 2011 at 03:54:21 PM EST

Last week, the think-tank Bruegel published an article entitled ESRB should act on sovereign risk containing an extremely important idea:

The ESRB is the institution uniquely placed to make such an assessment [of the systemic implications of a Greek debt restructuring]. First, it has probably the best access to the kind of data needed to make such an assessment. The ECB - providing a large part of the infrastructure of the ESRB - knows which banks use Greek bonds as collateral for the open market operations and should therefore have a good picture of exposure to Greek bonds. The ECB should also have fairly detailed information on the interbank market, from which contagion across banks can be assessed. Last but not least, the ESRB has the legal authority to request data from the national and European supervisors needed for such an assessment.  The assessment would obviously have to take into account the possible contagion effects.
Leaving aside the perhaps understandable (given the state of economic conventional wisdom) but still inexcusable (especially in an economist) confusion between open market operations (what the article says) and main refinancing operations (what the article should say, as open market operations are both anonymous and uncollaterallised), here we have a restatement of a truth which is central to Hyman Minsky's book Stabilizing and Unstable Economy. Namely, that the Central Bank should emphasize refinancing operations (i.e., collateralised lending) through the discount window (a term more familiar to the general public than main refinancing operations) over open market operations as a way to foster greater financial stability. I'll explain in detail why this is so after the fold, with quotes from Minsky. In any case, it's a good thing that, 25 years after Minsky wrote his book and 4 years into the biggest financial instability crisis since the Great Depression, somebody is finally thinking along these lines.

Incidentally, the credentials of the author of that Bruegel piece are perhaps good news:

Guntram Wolff has joined Bruegel from the European Commission's DG for Economic and Financial Affairs. In this position, Guntram worked on the macroeconomics of the euro area and the reform of euro area governance, drafting and coordinating reports to the Eurogroup, the EFC and the Hermann van Rompuy task force on the reform of the governance of the EA and the EU.

Prior to joining the Commission he was an economist in the economics and research departments of the Deutsche Bundesbank focusing on German and EU public finances, sovereign bond markets and macroeconomics of EMU.In the Bundesbank, he coordinated the research team on fiscal policy. Currently he is also an adviser to the International Monetary Fund.

See? German economists associated with the Bundesbank, EU Commission, and IMF are not all insane.


Modern central banks have two main ways of managing liquidity in the financial sector: the discount window and open market operations. Open market operations consist of direct purchases and sales of financial instruments in the open market, and the central bank can use them to tweak asset prices and interest rates in an anonymous way. On the other hand, what the US Fed calls the discount window and the ECB calls main refinancing operations consist of collateralised lending to eligible institutions (banks), which enter into short-term (typically a week) repurchase agreements for eligible collateral. That is, an eligible bank will exchange an eligible asset for cash from the central bank, at a discount or "haircut" (e.g., to lend 100 the central bank may demand that an asset worth, say, 105, be posted as collateral, for a 5% haircut), and agrees to repay the cash (with interest) and recover the collateral after a set period of time. The central bank determines the interest rate of the repos at the discount window, and also the amount of cash available for such lending. In this way, the Central bank can also set interest rates. By setting the "haircut" (discount) on a given asset class, it can also affect the open market prices without actually buying or selling the asset itself.

It should be apparent that the discount window allows the Central Bank to peek into the balance sheets of commercial banks in a way that open market operations don't. When the ECB buys a Greek bond in the open market (obscurely called the "Securities Market Programme" in the last 12 months) it doesn't know who sold it the bond, and even if it does it's immaterial because the bond is now the property of the ECB. However, when the ECB accepts a Greek bond as collateral at the discount window (main refinancing operations in ECB parlance), it knows who holds the bond in their portfolio. The more I think about this the more I hope the Bruegel scholar just made a typo and not a conceptual error when writing his piece.

On the other hand, open-market operations would be appropriate to the Central Bank's function as a market-maker of last resort. Sadly, though, current Central Bank practice has degenerated to the point where all they think they can do is tweak interest rates for uncertain monetarist macroeconomic effects and this through open market operations only. It is certainly a lot easier for the central bank to do things that way: proper regulatory use of the discount window to keep tabs on the commercial banks' balance sheets is a lot more work than to meet once a month in the open market committee and decide to move the target interest rate by a quarter point or not at all, and to buy or sell some bonds, and then get all mysterious at the press conference.

Currently, because of Central Bank over-reliance on open market operations, there is even a stigma attached to banks using the discount window - if a bank taps the discount window, the logic goes, it must be because it cannot fund itself in the money markets. In this way, by under-use of the discount window and over-use of open-market operations, Central Banks have managed to lose their single most important supervisory tool to assess the quality of bank balance sheets. If the ECB really cared about financial stability, it would greatly increase bank reserve requirements while providing unlimited liquidity (at asset-appropriate discounts) at the weekly refinancing operations, and it would use open-market operations for market-making of last resort.

Unfortunately, the odds of the ECB taking financial stability seriously in the near future are slim. As evidence, take the fact that

the German chancellor wants to extract substantive concessions for supporting the Italian central bank governor [Draghi for ECB president]. ... Secondly she wants Jens Weidmann, who is officially inaugurated as the Bundesbank president today, to succeed to Draghi as the chairman of the Financial Stability Board (FSB).
together with Jens Weidmann's words at his own inauguration as Bundesbank President:
While acknowledging that financial stability had become an important aim for central banks after the crisis he stressed that the primary goal remained pri[c]e stability. “On this point there must not be any compromises for central banks”, he stressed.
Whoa, and then what does he think of unlimited liquidity at the discount window?
According to Weidmann the crisis had created the wrong incentives and therefore the exit from the special measures and the normalisation of monetary policy remains a priority.
Not good at all. And then, to top it all up
Wolfgang Proissl takes a look at Jens Weidmann, and concludes that he will be the most important central banker in Europe next to the ECB’s new president, due to Germany’s relative weight in the ECB, but also the over-representation of southern Europeans in the ECB executive board (though this will change if Lorenzo Bini Smaghi were to step down). ... He says Weidmann was already the strongest candidate for the succession of Draghi in eight years time.
Without further ado, let me now bore you with the turgid writing of Hyman Minsky 25 years ago:
If the Federal Reserve acts as a normal-functioning supplier of funds to banks through the discount window, then as long as banks value this source of funds they will conform to business and balance-sheet standards set down by the Reserve banks. On the other hand, if Federal Reserve credit is supplied to banks by means of open-market operations in government securities, then the customer relationship between a member bank and the Federal Reserve loses its power to affect member-bank behavior. The power of the Federal Reserve to affect member-bank behavior through normal banking relations was much diminished after World War II. This diminution of Federal Reserve clout, to use a concept drawn from Chicago politics, was not offset by an increased sophistication of Federal Reserve examination and regulation of banks. [pp. 52-53]
Commercial bank reserves mainly result from the ownership of government securities by the Federal Reserve. The government security/open market technique of supplying reserves to the banking system is not the only way reserves can be furnished. Prior to the Great Depression, a major part of reserves that were not based on gold were based on borrowings by banks at the discount window. The resurrection of the discount window as a normal source of bank reserves is a way of tightening Federal Reserve control over commercial banks. If commercial banks normally borrow at the Federal Reserve discount window, they will necessarily accept and be responsive to guidance by the Federal Reserve [p. 282]
If bank reserves are largely the result of discounting short-term paper tied to the ownership of business inventories, then as loans fall due and are repaid bank reserve balances fall. To bring reserves to target levels, banks would have to discount paper and there would be a continuing business relation between banks and the Federal Reserve. Thus, a major necessary reform [for financial stability] is for the federal reserve to shift from the open-market technique to discounting. The discount window method for creating the reserve base induces favorable terms for the hedge [non-speculative, non-ponzi] financing of short-term positions and blunts the tendency towards fragile financing structures. [pp. 361-2]
(All references to page numbers of the 2008 hardcover edition by McGraw-Hill of Stabilizing an Unstable Economy)

Display:
If the ECB really cared about financial stability, it would greatly increase bank reserve requirements while providing unlimited liquidity (at asset-appropriate discounts) at the weekly refinancing operations, and it would use open-market operations for market-making of last resort.

I would argue that reserve requirements should be increased to 100 % of insured deposits and wholly abandon open market operations (except in sovereign bonds, which it should buy at par whenever issued). This would enable the central bank to impose appropriate margin requirements on all lending which receives liquidity from the central bank. Margin requirements which can, ultimately, go all the way to 100 %, cutting off central bank liquidity to that particular loan type altogether.

Further, and more interestingly, this would allow the central bank to discriminate between different loan types, both in terms of funding cost and margin requirements. It could, for instance, cut the balls off someone trying to short its currency or blow a real estate bubble, while leaving revolving business credit unchanged.

The central bank might then actually become a useful instrument for industrial and macroeconomic planning.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 9th, 2011 at 04:17:03 PM EST
In fact, I would argue that financial stability would be well served by completely separating the issuing of loans from the taking of deposits. In that system, all loans would be funded at the discount window, from borrower margin (or bank equity) and in the money markets, and deposit-taking banks would be simply the middle-man between the depositor and the central bank (and service provider for the clearing system). The deposit-taking banks would then make money on the spread between the rate of reserve remuneration and the rate paid to depositors.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 9th, 2011 at 04:24:37 PM EST
[ Parent ]
guvment selecting winners? (ie a public body selecting who deserves loans and who doesn't, ie evil socialism)?

Wind power
by Jerome a Paris (etg@eurotrib.com) on Tue May 10th, 2011 at 04:29:55 AM EST
[ Parent ]
Open markets = markets = good.

Discount window = backdoor regulation = bad.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 10th, 2011 at 05:41:40 AM EST
[ Parent ]
Just look at Jens Weidmann's words. Who cares about financial stability when you can protect the net worth of lazy money?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 05:56:12 AM EST
[ Parent ]
No. At most, it is the central bank picking losers. For almost every ordinary loan agreement (real estate, revolving inventory credit, credit to consumer durables, etc.) you can make hard-and-fast rules. My suggestions would be:

  • Rediscount no more than 72 % of the value of the collateral, and no more than 90 % of the value of the loan

  • Don't rediscount loans collateralised with financial assets

  • Rediscount everything at 0 % interest unless discretionary powers are invoked. Recall that the margin will still have to be funded in the money markets, and under this system the money markets will not be fixed at the policy rate. So the final effective rate can still be substantial.

  • Intervene in the ForEx markets to prevent the currency from appreciating by more than N % pr. month, in terms of the real exchange rate against a trade-weighted basket of currencies, where N is a publicly announced number somewhere between 1/3 and 1. Additionally, offer private firms and foreign central banks currency swaps out of foreign currency at currently prevailing exchange rates.

  • Irrespective of the above, procure sufficient hard currency reserves and/or currency swaps with appropriate central banks to cover the gross total domestic hard currency liabilities.

  • Do not defend the lower bound of the exchange rate, but do act as market maker for currency swaps into foreign currency between private firms and other central banks (this can be done cheaply, since a currency swap with a central bank carries no default risk). Do not charge for this service (the other central bank can, however).

This should be sufficient to prevent most bubbles, so discretionary margin or interest rate hikes for certain activities should be rare and individually justified to the parliamentary central bank oversight committee.

I believe that there are compelling due process arguments for limiting the discretionary powers of unelected central bankers. So I'm completely on board with the monetarist insistence on predictable, rules-driven central banking. I just radically disagree about the nature of the appropriate rules.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 10th, 2011 at 10:07:39 AM EST
[ Parent ]
This sounds reasonable. I didn't and still don't know what to make of this:

I would argue that reserve requirements should be increased to 100 % of insured deposits

A 100% reserve requirement would seem to be likely to collapse the money supply. I would think that a better approach would be to impose personal liability on gross failures of underwriting.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 10th, 2011 at 12:27:26 PM EST
[ Parent ]
A 100% reserve requirement would seem to be likely to collapse the money supply.

The idea is that these reserves are funded by repoing enough good assets at the discount window.

Suppose, for the sake of argument, that the repo haircut is 5%.

Then, in order to cover 100 worth of deposits you have to repo 105 worth of eligible assets.

The bank balance sheet could well consist of an additional 100 worth of debt on the liability side, 20 worth of equity, and 115 worth of other assets, which may or may not be eligible collateral for repos. To wit:

Assets			| Liabilities
======================================
eligible assets 105 + x | debt	   100
other assets	115 - x | deposits 100
			| equity    20
I fail to see why requiring that 105 worth of eligible assets be pledged at the discount window in exchange for 100 in cash would collapse the money supply.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 12:53:58 PM EST
[ Parent ]
It obviously would not. I did not understand that he was recommending a 100% repo rate. It sounded to me like he was suggesting that each bank have 100% of the capital it loans as a reserve against losses, which made no sense.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 10th, 2011 at 01:43:52 PM EST
[ Parent ]
The idea is: for financial stability you need a large reserve requirement, with reserves furnished by unlimited liquidity at the discount window.

Jake proposes that possibly a maximum justifiable level of reserve requirements is 100% of insured deposits, not of the entire balance sheet.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 01:55:25 PM EST
[ Parent ]
Well, you could demand full reserves for the entire liability side. But I'm not sure why you would. The purpose of demanding full reserves for insured deposits is that it allows you to cleanly and expeditiously separate the parts of the bank that mustn't fail (checking accounts and revolving credit) from the parts that can and should be put through ordinary bankruptcy proceedings when the bank is insolvent.

Any further reserves serve only to protect suckers in the money markets from being separated from their money. And, suckers being suckers, they will presumably find another way to go about losing their money if you block this avenue.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 10th, 2011 at 02:34:18 PM EST
[ Parent ]
I had thought he was talking about the reserve capital requirement of each bank, which has fallen from 10% to, perhaps, 3% in some banks. You might see why I thought that might collapse the money supply. Nomenclature.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 10th, 2011 at 06:17:00 PM EST
[ Parent ]
No, I think we're talking about exactly the same thing. And you're also right that the theory is that raising the reserve requirement shrinks the money supply.

Wikipedia claims in the US the reserve requirement is 10% for demand deposits and zero for time deposits. Now, how is the theory

The reserve requirement can affect monetary policy, because the higher the reserve requirement is set, the less money banks will have to loan out, leading to lower money creation, and maintaining the purchasing power of the currency previously in use. The effect is exponential, because money that is loaned out can be re-deposited; a portion of that money may again be re-loaned, and so on.
compatible with my argument above that
in order to cover 100 worth of deposits you have to repo 105 worth of eligible assets.

The bank balance sheet could well consist of an additional 100 worth of debt on the liability side, 20 worth of equity, and 115 worth of other assets, which may or may not be eligible collateral for repos. To wit:

Assets			| Liabilities
======================================
eligible assets 105 + x | debt	   100
other assets	115 - x | deposits 100
			| equity    20
I fail to see why requiring that 105 worth of eligible assets be pledged at the discount window in exchange for 100 in cash would collapse the money supply.
Maybe it's that the standard theory is bunk, but I'm reluctant to claim that just yet. The wikipedia article has interesting cross-country and historical data on reserve requirements...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed May 11th, 2011 at 02:05:05 AM EST
[ Parent ]
Maybe it's that the standard theory is bunk

There's no "maybe" about that. The "money multiplier" (which is simply the inverse of the reserve requirement) is a completely ex post construct which offers no constraint on private bank lending.

As long as the central bank is targeting an overnight interbank rate via open market operations, reserve requirements (if remunerated at the policy rate) can be set to as high a number as the fraction of (current reserves + acceptable paper for open market operations) to total insured deposits on the private banks' balance sheet. Beyond this point it would lose the ability to conduct open market operations, because the central bank would run out of valid paper to buy, but that is the only reason you can't set reserve requirements to ten million per cent if you wanted to.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 11th, 2011 at 03:07:09 AM EST
[ Parent ]
(Well, you might get some Funny effects if you jack reserve requirements higher than 100 % while remunerating reserves, unless you take care to ensure that banks cannot exploit the reserve remuneration with bogus loans.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 11th, 2011 at 03:11:02 AM EST
[ Parent ]
Currently the ECB's reserves are remunerated at the repo rate. Which means that, apart from the haircut, it's free for eligible banks holding eligible assets to satisfy reserve requirements. Which is why tapping the marginal lending facility should be a sign of distress (why pay 2% overnight when you can do a free weekly repo?). By the way, the ECB's reserve requirement is 2% of deposits.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed May 11th, 2011 at 03:54:43 AM EST
[ Parent ]
The wiki article is quite informative. But I suspect that the effects on the money supply of the monetary multiplier depends on market psychology -- whether the market is dominated by greed or fear -- as, even with zero reserve requirement, the bank still has to find customers who want to take out loans.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed May 11th, 2011 at 09:33:14 AM EST
[ Parent ]
But I suspect that the effects on the money supply of the monetary multiplier depends on market psychology

There is no money multiplier. There is only interest rate, margin requirement and the volume of creditworthy customers. Those are the operational constraints - the "money multiplier" is an ex post accounting construct that only appears to be stable because financial regulators impose a stable liquidity requirement. In the zero lower bound to the interest rate, the "money multiplier" looks like it drops, because liquidity requirements cease to have meaning when liquidity is free. The second you raise interest rates materially above zero, the "money multiplier" will, in an open market operation regime, go back to being the inverse of the liquidity requirement, because the central bank is forced to drain all reserves that are surplus to requirement via open market operations before the interbank rate goes up.

Alternatively, the central bank can obtain precisely the same effect by remunerating excess reserves at the policy rate, but this will lead to much pundit bullshitting about "inflation just around the corner" due to "excess reserves just waiting to be lent out." And since modern central bankers seem to pay more attention to pundits' inflationary expectations than to the state of the real economy, they'd likely chicken out and go back to open market operations, despite this being a materially worse option in terms of performing useful macroeconomic planning.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 12th, 2011 at 04:24:50 AM EST
[ Parent ]
There is no money multiplier because the mainstream-economics modelled process by which banks successively loan out deposits thereby multiplying them does not actually happen in that way, ever, anywhere.
The table below displays the mainstream economics relending model of how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money. Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.
That's what
There is no money multiplier. There is only interest rate, margin requirement and the volume of creditworthy customers. Those are the operational constraints - the "money multiplier" is an ex post accounting construct
means.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu May 12th, 2011 at 06:10:36 AM EST
[ Parent ]
So then what does happen in terms of interest rate, margin requirement and the volume of creditworthy customers?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu May 12th, 2011 at 07:06:53 AM EST
[ Parent ]
  1. You have a bunch of borrowers.

  2. Some of those borrowers are not creditworthy on the basis of their expected future cash flow. Banks are not supposed to lend them money.

  3. Some of the otherwise creditworthy borrowers are unable to put up sufficient margin to cover the requirement. Banks are not supposed to lend to those, because the bank might be wrong about their future cash flow and needs an equity cushion to protect itself from that risk.

  4. Some of the otherwise well-capitalised and creditworthy borrowers will be unwilling to pay the rediscount rate plus the markup to cover the bank's costs (and dividends). They will not borrow.

Monetary policy, as traditionally practised, pretends that #1 works perfectly. Since #1 works perfectly by assumption, #2 is unnecessary (so we can allow no-money-down adjustable-rate mortgages without a hitch). It then focuses all of its efforts on #3, and attempts to control inflation by jacking up the rate so high that people refuse to borrow.

I argue, first, that the central bank should be spending more effort on safeguarding financial stability by making sure you don't get runs on certain asset classes (including the country's ForEx reserves), and much less on safeguarding the return on lazy money by keeping inflation low. And, second, that financial instability arises when borrowers are not creditworthy (regardless of whether that money is cheap or expensive), and not when borrowers are creditworthy (again, regardless of whether the money is cheap or expensive). It is therefore much more sensible to focus on making sure the financial sector can't lend to people who are not creditworthy than it is to fiddle with the interest rate at which lending takes place.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 12th, 2011 at 01:28:15 PM EST
[ Parent ]
M'kay, that is understandable and sounds sensible.

But how is this related to the story of the wheel of loans and deposits that Migeru quoted? Is the premise of that story that the volume can be regulated by setting the interest rate?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu May 12th, 2011 at 03:18:11 PM EST
[ Parent ]
M'kay, that is understandable and sounds sensible.

But how is this related to the story of the wheel of loans and deposits that Migeru quoted?

Tangentially, I'm afraid.

The problem is that we have at least three main narratives of what banking is.

The Conventional Wisdom:

  1. Alice goes up to a bank and gives it one hundred gold coins, and the bank gives her a note saying she owns 100 gold coins in its vaults.

  2. Bob goes up and asks the bank to borrow fifty gold coins. The bank looks at Bob's business plan and decides to give him fifty gold coins. In return, Bob gives the bank a note saying that he will pay it back, with interest.

  3. Charles goes up to the bank and asks for thirty gold coins. The bank looks at Charles' business plan, decides that it wants nothing to do with it and tells him to sod off.

You can add various complications, such as fractional reserve banking, checking accounts where the gold never leaves the vault once deposited, except during bank runs) and such. But the basic narrative is that Alice deposits money, which the bank then uses to make loans.

Paper money, it is imagined, works the same basic way. Except that instead of digging it out of a mine you print it at a central bank, a notion which is slightly ominous and invokes images of wheelbarrows and invading Poland.

The orthodox liturgy

  1. The central bank prints money, and sells it to private banks, in exchange for securities of unimpeachable value (such as gold or government bonds).

  2. Private banks use fractional reserve banking to create new money. The ratio between bank money and central bank money is the "money multiplier."

  3. Alice, Bob and Charles go up to the bank and ask for loans. The bank looks at how much money it can create from the reserves it has, realises that it can only lend to one of them

  4. The bank asks the prospective borrowers what interest rate they are prepared to pay. Alice says 4 %, Bob says 5 % and Charlie says 12 %.

  5. The bank looks at Charlie's business plan, and tells him to sod off.

  6. The bank looks at Bob's business plan. Since it looks OK, and Bob offered a better return than Alice, the bank lends to Bob.

  7. By adjusting the supply of central bank money, the central bank can determine how many of the three the private bank is able to lend to. Allow it to lend to too many, and you get inflation. Allow it to lend to too few, and you get economic paralysis due to lack of investment.

  8. If the central bank overshoots the money supply enough to enable the private bank to lend to all three, the bank will have an incentive to lend to Charles even though he has a dodgy business plan, because it has free money lying around.

Again, you can add various embellishments to this (such as the interbank market), but this is the core narrative.

What actually happens

  1. Alice, Bob, Charlie and Dennis go up to a bank and ask for loans.

  2. The bank looks at the borrowers' business plans. It then tells Charlie to sod off.

  3. The bank asks how much margin the remaining three candidates are prepared to put down. Alice says 20 %, Bob says 20 % and Dennis says 15 %. Charlie doesn't say anything, because he isn't there anymore, but if he had been there he would have said 10 %. (Margin is the "money down" that you pay for out of your own pocket. So if you post a € 100.000 house as collateral for a mortgage at 20 % margin [or "20 % down"] then it means that you only want to borrow € 80.000.)

  4. The bank wants 20 % down, so it tells Dennis that it must regretfully decline his application.

  5. The bank asks what they are willing to pay. Alice says 4 % and Bob says 5 %. Charlie and Dennis aren't there, but if they had been they would have said 12 % and 5 %, respectively.

  6. The bank looks up the central bank's policy rate, which turns out to be 2 %. The bank knows that its overhead amounts to 1½ % of its portfolio, and estimates that Alice and Bob both have a 1 % risk of going bust. So it adds that as well, for a total interest rate of 4½ %.

  7. Since Alice can pay less than that, the bank must respectfully decline her application. Since Bob can pay more than that (and still have a viable business model), he gets to borrow.

  8. Having lent Bob money, the bank now has more liabilities that it needs to provide regulatory liquidity reserves for. It therefore goes to the interbank market to borrow the money at the central bank's policy rate.

  9. If the central bank discovers that banks can borrow in the interbank market for less than the policy rate, it sells some bonds. Since bonds are not valid for covering liquidity requirements, this removes liquidity from the interbank market, forcing the interbank market to ration liquidity by price. Conversely, if the central bank finds that banks must pay more than the policy rate to borrow in the interbank market, it buys some sovereign bonds, to depress the interbank rate.

The most important difference to notice is that the marginalist narrative pretends that the central bank prints money first, and then the private banks lend it out. Whereas in the real world, private banks lend out money, subject to the constraint that the loan must be remunerative given the interest rate target defined by the central bank. And only after the fact does the central bank prints money in order to defend its interest rate target.

So the central bank can't cause bubbles by "printing too much money" in an effort to keep interest rates low. What happens instead is that private banks fail to perform due diligence in steps 2 and 4. If the private bank allows Charlie and Dennis to slip past steps 2 and 4, then the central bank can't do anything about that. If the central bank wanted to crowd out Charlie and Dennis - who are bad risks - by raising interest rates, it would have to raise interest rates above 12 %, which would kill Bob's application stone cold dead as well.

Further, you will notice that Alice was actually a good risk (same margin and default risk as Bob), and was able to pay more than the bank needed in and of itself (the bank needs 2½ %, she could pay 4 %). So why did the central bank kill her investment by imposing a further 2 % return requirement? Because the central bank wants to suppress investments that would be profitable on their merits, in order to create enough spare capacity (read: Unemployment) in the economy to prevent inflation.

What Mig was proposing is that instead of steps 8 and 9 above, the central bank should offer to lend the bank money directly to cover its liquidity requirements. Because that way, the central bank can get to take a look at the bank's balance sheet (since the bank has to post collateral).

What I did was take it a step further, and argue that the central bank should demand that private banks put up the whole loan amount, but then offer to lend the bank the money that it needs to post, up to a certain margin requirement. Because then, if the private bank allows Charles and Dennis to slip through bullets 2 and 4, the central bank can say "look, Charlie is a bad risk - we won't lend you any money with his note as collateral," and then the private bank will have to go gamble with its own money (as opposed to being able to gamble with money it borrows, in effect, indirectly from the central bank through the interbank market).

Moreover, the central bank can also say "look, Dennis may be a good risk, but we're only lending you 72 % of the value of his house (and only 90 % of the value of his mortgage), because you need to put up ten percent margin on your loan, and someone - you or Dennis or someone else, we don't care - has to put up twenty percent margin on Dennis' loan." So the bank is allowed to lend to Dennis, but it has to find the proper margin somewhere.

As an aside, the Austrians are conceptually stuck in the Conventional Wisdom "commonsense" view of money. Which is why they seem to be superficially in agreement with people who actually understand money: Both groups criticise the orthodox liturgy, from a perspective that focuses on the interaction of debt with financial stability.

The difference is that the Austrians (a) are actually a step further removed from understanding money than the marginalists. And (b) have taken leave of their sanity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 12th, 2011 at 06:08:28 PM EST
[ Parent ]
So to answer your original question, Mig and I were discussing steps 8 and 9 of the third narrative. ARG asked a question about how my recommended policy would influence step 2 of the second narrative. Which is an unanswerable question, because step 2 of the second narrative is arrant nonsense.

So the discussion switched from Mig and I geeking out over the fine details of how to turn a central bank into a useful instrument of macroeconomic policy, into disabusing ARG of the false narrative implicit in his question. And that's probably why it became unintelligible.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 12th, 2011 at 06:18:51 PM EST
[ Parent ]
The fourth narrative is that you can only really understand what's happening by removing all money and accounting from the discussion.

Some relevant questions:

What does it mean that a business plan sucks? How does the bank know? Is the bank correct? [So - insert paragraph about actuarial risk analysis here. But...]

To what extent do the banks themselves create the social conditions in which certain business plans can be guesstimated to suck, while others appear not to?

What is the true cost of the percentage cut taken by the banks? Is that cut a good use of social and natural resources?

How could "business" - let's pretend we know what that means - be organised in ways that don't require these costs?

These questions don't have obvious and simple answers.

In fact, I think providing good answers to them would be rather like removing the idea of god from medieval politics.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 12th, 2011 at 07:18:53 PM EST
[ Parent ]
What does it mean that a business plan sucks? How does the bank know?

Somewhat related: If the bank actually had to put up the whole amount the central bank would have to duplicate the whole credit evaluation process since nearly all funding would stem from the discount window. Or am I completely wrong?

by generic on Thu May 12th, 2011 at 10:27:53 PM EST
[ Parent ]
The Central bank can police the internal workings of its regulated banks. It can look at the repo'ed portfolio a bit at a time, by sampling. Remember the commercial banks receive liquidity from short-term (weekly, in the ECB's case) repos. An asset that was accepted last week can become unacceptable next week, or experience a higher haircut.

It's a bit like quality control or customs inspections. You don't want to inspect every item in every box in every container but if you sample and do find a faulty item you can quarantine an entire shipment pending further investigation.

Evidently, running the discount window properly would require a lot more manpower than banking supervisors currently deploy...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 04:28:22 AM EST
[ Parent ]
That's a feature, not a bug. As the system works today, the central bank (or the Treasury, but that comes to the same thing) ends up footing the bill for bad lending in any event. Might as well put them in the loop.

On the other hand, if the central bank imposes a 10 % haircut for the bank on top of the 20 % margin it forces on the borrower, it can probably make do with rules of thumb for most asset classes. Few houses are 28 % below their official valuation even in a deep crisis. They might drop 28 % below the bubble value, but the CB would only be on the hook for 72 % of the official value. The rest would be margin - something that would, in itself, discourage bubbles.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 04:30:08 AM EST
[ Parent ]
Also, if an untrained intern has difficulty understanding the asset, it shouldn't qualify as collateral at the discount window.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 04:36:56 AM EST
[ Parent ]
What does it mean that a business plan sucks? How does the bank know? Is the bank correct? [So - insert paragraph about actuarial risk analysis here. But...]

Here's a business plan that sucks:

  1. Collect underpants
  2. ?????
  3. Profit!

Now, in an ideal world it's the job of the bank to have specialist analysts whose job it is to study business plans and the running operations of businesses in particular industry sectors. That's what banks are supposed to do: concentrate the risk-analysis function of society. Ask Jérôme what his porject finance work was actually about.

How do venture capitalists decide a business plan sucks? Are they correct?

If the government wants to lend directly to worthy projects, how does it know they're worthy? It is correct?

In the ideal world, too, there are a multitude of banks each specialising in a different mix of products, industry sectors, consumers and geographies. until two years ago, if you wanted to build a wind farm and your local bank didn't understand the risks, you switched banks and went to Jérôme's bank... Then Jérôme left the bank...

In the real world, of course, people lend to their golfing buddies or on the basis of whether the business plan is a spiffy ppt, the banking sector is incresingly concentrated so there is less opportunity to go to a different bank for funding, and so on...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 04:35:45 AM EST
[ Parent ]
Here's a business plan that sucks:

Ironically, you've chosen a business plan that doesn't necessarily suck at all. (Although it does seem to be illegal now.)

That's what banks are supposed to do: concentrate the risk-analysis function of society.

...

In the real world, of course, people lend to their golfing buddies or on the basis of whether the business plan is a spiffy ppt, the banking sector is incresingly concentrated so there is less opportunity to go to a different bank for funding, and so on...

Bingo.

My point is partly that finance is supposedly about risk analysis in the same way that job interviews are about finding the best person.

Supposedly it's a formal, serious process. In practice it's often a bit of a pantomime, where you'll be assessed on your dress sense, social caste, and overall seriousness as much as on the numbers.

Has there even been a formal study of the predictive accuracy of investment models? Consumer credit scoring seems a fairly simple solved problem - providing nothing blows up - but is there any evidence that business plan risk analysis really does model investment outcomes accurately?

As for VC - the standard VC game is to throw a lot of money at various projects and hope some of it sticks.

It turns out to be fairly easy to make money like this in any market where large IPOs and/or sales to a bigger idiot are possible, because you only need one big success in every ten or twenty to be in profit overall - and you can write the other losses off against tax.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 05:54:38 AM EST
[ Parent ]
My point is partly that finance is supposedly about risk analysis in the same way that job interviews are about finding the best person.

Economics is politics, money and accounting are about power, and banking is part of political planning about who has the power to get things done. How's that?

The conceptual metaphor "money is a thing" (specifically, a gold coin) is particularly damaging in this setting. Politically, fiat money and expansionary fiscal policy means "if you have a worthy project you won't have to stay idle", whereas hard money means "you can only do what I tell you to".

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 06:24:17 AM EST
[ Parent ]
I'd prefer:

Economics is politics, money and accounting are about power, and banking is part of political planning about who has the power to get things done.

The conceptual metaphor "money is a thing" (specifically, a gold coin) is particularly damaging in this setting. Politically, fiat money and expansionary fiscal policy means "if you have a worthy project you won't have to stay idle", whereas hard money means "you can only do what I tell you to".

Or what I allow you to - because the ability to block constructive and useful effort is as much a part of the syndrome as the ability to sponsor it.

This is what I was implying earlier about business plans. For example in energy, some forms of energy get subsidies, while others - especially renewables - are considered inherently unserious, and don't. Therefore finance models for renewables have to be more precise, the risk analysis has to be absolutely cast-iron, and so on. While other modes - like nuclear - get a pass.

And all this because the financial industry has a bias against certain kinds of activity, and a bias towards other kinds of activity.

The rationalisations that support these arbitrary decisions use the rhetoric of risk analysis and the rest. But the reality is that the industry simply likes certain kinds of activity more than it likes other kinds, for reasons that are either irrational or sociopathically self-interested.

So while Jake thinks banks aren't so bad akshually, I think banking in its current form is an epic disaster on the scale of the Black Death or a major natural catastrophe.

For two reasons:

The first is that perfectly reasonable - and welcome - kinds of activity are vetoed in favour of other activities that are stupid and self-destructive. The industry's record of failure on this is absolutely reliable.

The other is that instead of preventing and minimising risk, banks actually create it - in obvious ways through asset inflation that destabilises productive economies, through speculation, and by vetoing efforts towards stable and productive activity.

So you have the paradox - or the Big Lie - of an industry which claims to be engaged in strategic risk management for everyone's benefit, but which is actually the primary creator of risk and social insolvency.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 05:51:02 PM EST
[ Parent ]
For example in energy, some forms of energy get subsidies, while others - especially renewables - are considered inherently unserious, and don't. Therefore finance models for renewables have to be more precise, the risk analysis has to be absolutely cast-iron, and so on. While other modes - like nuclear - get a pass.

But the problem here is surely that risk analysis that is not absolutely cast-iron gets a pass, not that people are actually doing their jobs when assessing wind farm finance?

What I want to do is force banks to either (a) demand equally cast-iron risk assessment from other sorts of projects, or (b) go play with their own money. Option (b) is, of course, only of rhetorical interest, to counter claims that I want to nationalise credit creation, since banks utterly abhor the though of playing with their own money instead of the central bank's.

So while Jake thinks banks aren't so bad akshually, I think banking in its current form is an epic disaster on the scale of the Black Death or a major natural catastrophe.

The black death killed off a double-digit percentage of the European population. Unless the banksters manage to trigger a sufficiently bad depression that it results in a serious shooting war (a possibility that I am a lot less sanguine about dismissing than I was a year ago), they will not rack up that sort of body count, however damaging their activities may otherwise be.

The first is that perfectly reasonable - and welcome - kinds of activity are vetoed in favour of other activities that are stupid and self-destructive. The industry's record of failure on this is absolutely reliable.

Cock-ups happen. Some of those cock-ups are even intentional. Others will be systemic. The solution to that problem is to create checks and balances - reduce the power of bankers and increase the power of parliamentary, civil service and civil society organisations. It is not to abolish the institution that makes cock-ups. If we did that with any consistency, we would soon run out of social institutions.

So you have the paradox - or the Big Lie - of an industry which claims to be engaged in strategic risk management for everyone's benefit, but which is actually the primary creator of risk and social insolvency.

The point of having banks is not to reduce risk. The point is to increase it in a reasonably controlled manner. Because a society without banks runs too few risks, and therefore misses out on benefits it could have obtained.

The key term here is in a reasonably controlled manner. The problem currently is that there is too little control of the risk, and that is the problem that I am addressing.

It is not the only problem with banking as it is currently practised. Among the more prosaic problems are endemic fraud and rampant racketeering. But dealing with those are outside my area of expertise.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 06:58:15 PM EST
[ Parent ]
But the problem here is surely that risk analysis that is not absolutely cast-iron gets a pass, not that people are actually doing their jobs when assessing wind farm finance?

No, the problem is that rhetoric - in the form of a thing called "risk analysis" - is being used to implement strategy without public discussion or democratic oversight.

Put simply, banking subverts democracies and leads democracies away from stability (and sanity.)

There is no good real-world reason why we don't already have a culture that uses renewables for energy. Absolutely none.

The fact that we're still desperately fighting a battle that shouldn't even have been started forty years ago, when the obvious rational choice was a move to renewables, proves just how distorted the decision-making process has become.

The black death killed off a double-digit percentage of the European population. Unless the banksters manage to trigger a sufficiently bad depression that it results in a serious shooting war (a possibility that I am a lot less sanguine about dismissing than I was a year ago), they will not rack up that sort of body count, however damaging their activities may otherwise be.

They already have. Not in Europe - but have you seen the state of Africa recently?

Of course we assume it couldn't happen here, because we're privileged and special.

We aren't. We're disposable. Ask Greece or the poor in the US.

This is a critical point. We have to broaden our experience to take an honest look at what's happening. Just because it's not happening to us personally doesn't mean what's happened to others is trivial.

The point of having banks is not to reduce risk. The point is to increase it in a reasonably controlled manner.

What risk do you mean, exactly? What physical bad consequences result if a bank backs a "risky" project that is deemed to be a failure by current accounting standards? (Assuming that a project fails for reasons other than banker whim in the first place.)

Not economic consequences - physical and social consequences.

When you can prove to me that the physical and social consequences of a failed "risky" enterprise are reliably worse and more damaging than the (largely imaginary) economic consequences, then I will believe that banks have a useful role to play.

Until then, banks are a problem - possibly the problem - and not a solution.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 07:47:42 PM EST
[ Parent ]
There is no good real-world reason why we don't already have a culture that uses renewables for energy. Absolutely none.

Well, no, but what does that have to do with banks?

I can name the politician who killed US wind dead. I can name the politicians who killed the Danish offshore sector. They didn't need any help to do that.

Wind is crucially dependent on market structure. And the banksters don't decide that - the politicians do. Now, it may be that those politicians have been bought and paid for by the banksters, which means that you need to stop the banksters from buying politicians.

They already have. Not in Europe - but have you seen the state of Africa recently?

I am perfectly aware that there is a civil war in Libya. But I don't see how the banksters have much of anything to do with that.

What risk do you mean, exactly? What physical bad consequences result if a bank backs a "risky" project that is deemed to be a failure by current accounting standards?

People lose their homes.

People lose their incomes, which in our current institutional framework means that they will have to rely on charity and hand-outs to get food.

You get gas-fired power plants used for baseload, because of a failure to price in the systemic cost associated with increased gas reliance, and the systemic risk of monocropping your source of electricity.

When you can prove to me that the physical and social consequences of a failed "risky" enterprise are reliably worse and more damaging than the (largely imaginary) economic consequences, then I will believe that banks have a useful role to play.

But... you have more risky enterprises with banks than without. So that's an ass-backwards sort of demand to make.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 14th, 2011 at 04:29:13 AM EST
[ Parent ]
Well, no, but what does that have to do with banks?

If banks were capable of intelligent reality-based strategic management, they would have been fighting the other corner, surely?

I am perfectly aware that there is a civil war in Libya. But I don't see how the banksters have much of anything to do with that.

In that case you might want to become more perfectly aware of the rest of Africa too.

People lose their homes. [...]

Er - you do realise that the only reason all of your examples have been happening for the last few years is because of the state of the banking industry?

I was looking for examples of what happens when banks aren't in the way. You provided a list of failures that have been created by banking.

This is rather odd, and worrying.

To repeat - I am talking about social transactions which are not financialised, and not primarily for profit or the generation of the abstract feudal debt management system known as "interest."

It might be useful at this point to think about what that might involve.

But... you have more risky enterprises with banks than without.

No, you don't. This is exactly the point of the argument. You have more risk and instability when banks are pretending to manage the economy - because in reality, the banks have very little interest in decreasing risk, and they can make more short-term profit when risk increases.

Banks can deny certain kinds of business models if they happen not to suit them - but the proper definition of "suit" is not "too risky", it is "not obviously profitable enough."

But these rules are only for the little people, not for the banks themselves. If risk explodes - as it always seems to - the stranglehold the banks have on government means they can always steal public cash.

The whole financial industry is predicated on the (accurate) assumption that it is possible to profit hugely from risk.

This is not a good basis on which to expect much useful risk limitation to happen - as reality bears out, repeatedly.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat May 14th, 2011 at 11:57:29 AM EST
[ Parent ]
In that case you might want to become more perfectly aware of the rest of Africa too.

Unless you believe Africa begins somewhere north of Greece, I don't see where you're coming from here.

I was looking for examples of what happens when banks aren't in the way. You provided a list of failures that have been created by banking.

Well when banks are not in the way, you don't get electricity in the first place. Nevermind gas-fired baseload.

Yes, the government can take over the strategic planning role currently fulfilled by the banks. The government can also monitor the banks to make sure they do their job. You have not provided any argument for why one of these solutions is universally superior to the other.

To repeat - I am talking about social transactions which are not financialised, and not primarily for profit

Since most European economies have been money-based since before they were industrialised, you may have a hard time finding any significant volume of industrial production that has ever taken place outside the monetary system.

You have more risk and instability when banks are pretending to manage the economy

A moment ago you were arguing that risk really wasn't so bad, so we didn't want to prevent it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 14th, 2011 at 03:11:54 PM EST
[ Parent ]
The fourth narrative is that you can only really understand what's happening by removing all money and accounting from the discussion.

I don't think that's right. If you want to make sensible policy you have to understand your policy tools. Money and accounting are powerful policy tools, so you need to understand how the institutions in your economy react to them.

What does it mean that a business plan sucks?

That it is illegal, in violation of good business practise or not remunerative.

How does the bank know?

In a properly run economy, banks would have specialists on staff or retainer to evaluate business plans.

Is the bank correct?

Not always. If I were overly concerned with inflation, I might view that as a problem. But I'm not, so I don't.

To what extent do the banks themselves create the social conditions in which certain business plans can be guesstimated to suck, while others appear not to?

To a very large extent. Banking is fundamentally a political planning function. That's why parliaments periodically have to reassert democratic authority over banks that grow too big for their britches.

What is the true cost of the percentage cut taken by the banks? Is that cut a good use of social and natural resources?

Banks are essentially vehicles for providing private firms with state power (money). In a properly run economy, the advantage of having banks is that they can go tits-up, which should result in their management getting relieved of the jobs that they apparently found too onerous to do properly. A central bank, of necessity, cannot go bust in its own currency (that's why CB balance sheets are where crap assets go to die).

So having the private banks as a go-between between the central bank and the private firms who borrow is a vehicle for purging incompetent government bureaucrats by pretending that they are private bureaucrats.

How could "business" - let's pretend we know what that means - be organised in ways that don't require these costs?

You could abandon technically sophisticated, capital-intensive industrial mass production.

But if you're not going to do that, you need economic actors who do political planning, because technically sophisticated, capital-intensive industrial mass production requires planning, and planning is always political. You can have the state do that. You can have the firms themselves do it. You can have the banks do it. Or you can have someone else do it. But I've yet to see any evidence that properly run and supervised banks are sufficiently more corrupt, wasteful an incompetent than properly run and supervised politicians elsewhere in society.

Honesty and competence in your politicians: Accept no substitute.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 04:58:26 AM EST
[ Parent ]
I don't think that's right. If you want to make sensible policy you have to understand your policy tools. Money and accounting are powerful policy tools, so you need to understand how the institutions in your economy react to them.

No. If you want to make sensible policy, you have to decide what sensible policy looks like, and make your policy aims clear, objective, and explicit.

You can't allow your tools to define that for you - which is what money and accounting do.

Economics is a political tradition. It's not a fact of nature. It's one particular proposed solution to one set of problems.

That it is illegal, in violation of good business practise or not remunerative.

That's a circular definition - apart from the "illegal" part. (And we know from Goldman etc that even that's up for debate.)

It doesn't examine what "not remunerative" means socially.

E.g. if a business is "remunerative" because it destroys other businesses and social networks, is that really a valid criterion for its continued existence?

But I've yet to see any evidence that properly run and supervised banks are sufficiently more corrupt, wasteful an incompetent than properly run and supervised politicians elsewhere in society.

If you accept that banking is essentially strategic planning - which I agree with, up to a point - it becomes inevitable that banks cannot remain supervised and accountable, because they're already at the top of the political food chain and are able to wrap it around themselves.

If banks and businesses are implicitly political, they should be explicitly democratically accountable.

If they're not democratically accountable, they have no business making policy.

Otherwise this:

Honesty and competence in your politicians: Accept no substitute.

is an impossibility.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 05:38:58 AM EST
[ Parent ]
No. If you want to make sensible policy, you have to decide what sensible policy looks like, and make your policy aims clear, objective, and explicit.

Clear, objective, explicit. Pick any two.

You will always need to give your regulators some amount of discretionary power. Otherwise, you'll be playing a never-ending game of whack-a-mole with too-clever-by-half rules lawyers who move to the next exploit as soon as you close the previous one. The only way to deal with rules lawyers is to be clear and explicit, but not too objective.

You can't allow your tools to define that for you - which is what money and accounting do.

I know roughly what I want to do.

I want everybody to have the option of living in a reasonably functioning, technically sophisticated industrial society, where they are free from arbitrary violence (social, physical and economic).

But when I'm making policy proposals, I don't make them in terms of the end point I'd like to see. I make them in terms of the institutions and policy tools that actually exist and are available to policymakers, and check that they are consistent with the end point I'd like to see.

It doesn't examine what "not remunerative" means socially.

That's not a bug, that's a feature. I don't want banks to be making that decision, because I think that they're structurally inclined to make bad decisions in that area of policy. Parliament and civil society are much better places to make that decision.

E.g. if a business is "remunerative" because it destroys other businesses and social networks, is that really a valid criterion for its continued existence?

No, but then the solution is to make the business non-remunerative or non-legal. Banks enable business, they do not (or at least should not) run it. Or if, as is the case for certain intoxicants, this is impossible then at least tax the shit out of it.

If you accept that banking is essentially strategic planning - which I agree with, up to a point - it becomes inevitable that banks cannot remain supervised and accountable, because they're already at the top of the political food chain and are able to wrap it around themselves.

Well, if the (proper function of) the Civil Service is essentially strategic planning, which no-one of sound mind will presumably dispute, then couldn't you say the same thing for it?

If banks and businesses are implicitly political, they should be explicitly democratically accountable.

Yes. That's part of the point of giving the central bank a de facto veto over their political decision, and then making the central bank accountable to Parliament. As Jerome perspicaciously noted at the very beginning of this thread.

If they're not democratically accountable, they have no business making policy.

Yes and no. Courts are not democratically accountable in the conventional sense. Yet no sensible person would suppose that they are not making policy. And that is generally seen as desirable. Civil society organisations are not democratically accountable in the traditional organisation-flowchart-of-government sense either (and indeed the difference between "civil society organisation" and "special interest pressure group" is mostly whether you agree with them or not). Yet nobody could doubt that they make policy, and sometimes do it better than Parliament.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 06:11:15 AM EST
[ Parent ]
Clear, objective, explicit. Pick any two.

Why?

I'm not talking about regulation. I'm talking about stating explicit political goals and monitoring progress towards them, or away from them.

Currently the banks have their cake, and they don't just eat it they sell it over and over.

They can state fuzzy goals like "low inflation", they can move the goal posts that define how inflation is calculated, they can enforce policy that is supposed to influence inflation, and they can shrug and say "Oops - we didn't see that coming" when that policy doesn't work.

Regulation isn't the problem here. Neoclassical brain rot is.

But when I'm making policy proposals, I don't make them in terms of the end point I'd like to see. I make them in terms of the institutions and policy tools that actually exist and are available to policymakers, and check that they are consistent with the end point I'd like to see.

And what happens when you not only don't get the policy you want, but you do get policies which are clearly destructive to the policy you want?

Well, if the (proper function of) the Civil Service is essentially strategic planning, which no-one of sound mind will presumably dispute, then couldn't you say the same thing for it?

No, because the proper function of the Civil Service is implementation, not strategy. It's not the job of the Civil Service to decide whether a high speed rail line should be built. It's the job of the Civil Service to try to get it built as cheaply and reliably as possible once the decision to build it has been made by ministers.

Yes and no. Courts are not democratically accountable in the conventional sense.

On most political science courses, courts are considered an explicit part of the machinery of government. If there's a constitution, the role of the courts is usually defined in it, typically on the basis of checks and balances. Voters don't elect judges, but there is a clear relationship between courts and elected houses.

Banks are not considered an explicit part of the machinery of government.

The original role of the Bank of England was coin counting and bill settling. It had no other function. Currently in most countries there is no explicit constitutional relationship between banks and the other parts of the government machine. The central bank may be mentioned, but the rest of the industry won't be.

And yet we find that banks - not just the central bank, but industry figures in general - have more influence on policy than voters, courts, elected assemblies or individual ministers.

So I'll say again: this should be considered a privilege, it should be made explicit, and if banks want to play the policy game the most useful thing a democracy can do is to define their role explicitly and make them explicitly accountable - not in the sense of being required to send a letter to the Chancellor, as the Bank of England currently is, and not in the sense of regulation, but in the sense of having the effectiveness and wisdom of their policy choices formally debated, questioned and tested in public - to destruction, if need be.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 06:20:31 PM EST
[ Parent ]
I'm not talking about regulation. I'm talking about stating explicit political goals and monitoring progress towards them, or away from them.

Can you give an example of a clear, explicit and objective policy goal, and a clear, explicit and objective way to measure how it is attained?

Regulation isn't the problem here. Neoclassical brain rot is.

Neoclassical brain rot unfortunately produces inappropriate (lack of) regulation. And insane constitutional amendments. If it did not, it would not be a major problem. So if and when the neoclassical brain rot is purged, we must have workable policies to replace the neoclassically-inspired garbage that's been foisted upon us.

And what happens when you not only don't get the policy you want, but you do get policies which are clearly destructive to the policy you want?

Then I organise in a political party or a civil society organisation that can exercise useful amounts of power over decisionmaking and is broadly sympathetic to the policy I want. Or, if no such civil society organisation is available, I attempt to become A Very Serious Person so I can influence policy directly. I don't hold much hope at this point on either count, but one does not need hope in order to put up an honest fight.

But I can't do that until and unless I know what policy I want. Or rather I can, but then I'll get taken for a ride.

the proper function of the Civil Service is implementation, not strategy. It's not the job of the Civil Service to decide whether a high speed rail line should be built. It's the job of the Civil Service to try to get it built as cheaply and reliably as possible once the decision to build it has been made by ministers.

On the contrary. It is precisely the civil service's job to decide whether a given rail line should be built, given the government's overall fiscal and infrastructure policy. It is the minister's job to light a fire under the civil service to get them to produce reasonably coherent policy proposals on matters that interest him. And it is the minister's job to then reject, approve or decide between the proposals presented to him. But he has neither the staff, the training nor the institutional support to conduct serious strategic planning himself.

So I'll say again: this should be considered a privilege, it should be made explicit

I don't understand the need for private banks to be placed explicitly in the government chain of command. Private banks exist at the pleasure of the central bank and financial regulator - if the latter two so desire, they can pull the plug on any and all banks' business model almost literally overnight.

Make the central bank subservient to parliament, rather than this neoclassically-inspired "independent central bank" bullshit (which is in reality simply a bit of sophistry to avoid saying "bankster-run central bank"). Give it a financial stability mandate. And a clear and explicit standing order to use its big stick to beat any misbehaving private bank firmly about the head until it mends its ways or goes tits-up.

If you still have problems with misbehaving banks after that, we can start talking about constitutional amendments.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 07:44:55 PM EST
[ Parent ]
Jake:
ARG asked a question about how my recommended policy would influence [the effects of the money multiplier, as discussed in the wiki article]. Which is an unanswerable question, because [the idea of a money multiplier] is arrant nonsense.

I think we need to keep in mind that all of these concepts are constructs, some more useful than others. The "money multiplier" is a further elaboration of "the velocity of circulation" which was used to attempt to explain why available money could appear to increase or decrease while there was no change in base money. Both versions have been used by various economic textbooks to attempt to educate freshmen over the last half century, in part because the underlying phenomenon is important, and they were of some use in that respect. After all, there was, presumably, a need for Tobin to publish Commercial Banks as Creators of "Money" a half century ago. So describing them as "arrant nonsense" is a bit flippant and off-putting, even if substantially true, considering that this was what was taught to 90% of everyone who has ever taken ANY economics course. So your comment became unintelligible because you were "geeking out" and dismissed the implicit question rather than answering it in an understandable context.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 13th, 2011 at 11:31:09 AM EST
[ Parent ]
The "money multiplier" is a further elaboration of "the velocity of circulation" which was used to attempt to explain why available money could appear to increase or decrease while there was no change in base money. Both versions have been used by various economic textbooks to attempt to educate freshmen over the last half century

Well, yes, the money multiplier mythology is very useful in the context of schooling people in the neoclassical view of banking.

For understanding the how the actual institutions of modern economies... not so much.

So describing them as "arrant nonsense" is a bit flippant and off-putting, even if substantially true, considering that this was what was taught to 90% of everyone who has ever taken ANY economics course.

True. In my defence, when I wrote that I was in the middle of a Macro 202 assignment that was particularly stuffed with other, but similar, forms arrant nonsense. I may have been letting off a little steam that I could not well permit to enter into a liturgical work.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 04:01:56 PM EST
[ Parent ]
So it seemed. No problem. Just saying.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 13th, 2011 at 05:08:00 PM EST
[ Parent ]
This is comment gold. Make it a diary...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 04:19:34 AM EST
[ Parent ]
Think I found an explanation:

MMT AND THE OPERATIONAL REALITIES OF THE MONETARY SYSTEM | PRAGMATIC CAPITALISM

First is the accounting logic of real-world transactions. Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable.  A typical example used by MMT'ers is the loanable funds market, which posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy.  This model is simply inapplicable to our current monetary system in which bank loans are created "out of thin air" without the requirement of prior reserve balances or deposits to "fund" the loan's creation.  Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases.  Similarly, there are macroeconomic accounting identities, such as the often-cited sector financial balances equation in which the domestic private sector's net saving of financial assets is by definition equal to the government sector's deficit and the current account balance.

So has deposits nothing to do with the amount that can be borrowed out? What about the reserve requirement?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu May 12th, 2011 at 04:45:55 PM EST
[ Parent ]
Suppose, for the sake of argument, that the repo haircut is 5%.

Then, in order to cover 100 worth of deposits you have to repo 105 worth of eligible assets.

I prefer counting haircut the other way - so a 100 % haircut means "we're not taking that."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 10th, 2011 at 02:21:51 PM EST
[ Parent ]
Let me rephrase...

Suppose that the repo haircut is x. Then, in order to cover 100 worth of deposits you have to repo 100/(1-x) worth of eligible assets.

In my example x is 5% so I made a mistake of about 0.25%...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 04:23:36 PM EST
[ Parent ]
I recall a "Repo 105" post from a couple of years ago that explained the process WRT Lehman Bros. That might have been the source of adding the "haircut" onto the principle rather than subtracting it from the "high power money" the central bank provides back to the client bank in return for what is "repoed".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed May 11th, 2011 at 09:38:32 AM EST
[ Parent ]
From the point of view of the borrower, the haircut is added to the amount you have to borrow, as I did. Though, properly, it's not 1+x but 1/(1-x) as Jake pointed out.

From the point of view of the lender, obviously, the haircut is a discount on the value of the collateral.

I want to borrow 100, I need to pledge 105 worth of assets.

I am receiving an asset worth 100 as collateral, I will offer a loan of 95.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed May 11th, 2011 at 09:48:56 AM EST
[ Parent ]
Should have said "source of the convention describing the process by" adding the haircut to the amount "repoed".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed May 11th, 2011 at 10:07:58 AM EST
[ Parent ]
In my example x is 5% so I made a mistake of about 0.25%...

Yes, but just moments prior I was talking about 28 % haircuts, and then it's no longer a wholly trivial matter...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 12th, 2011 at 11:20:19 AM EST
[ Parent ]
Right, then the difference between 1/(1-x) and 1+x is a whole 10%.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu May 12th, 2011 at 11:30:24 AM EST
[ Parent ]
I was at a conference on the economic crisis today at which nearly all the main speakers were US economists - including a student of Minsky Randal Wray, William K. Black and Stephanie Kelton, all MMT economists from Kansas.  There solution was that Ireland had no option but to default and withdraw from the Euro citing flaws in the Optimum Currency Area theory and the Maastricht Treaty.

I (rhetorically) asked the question why, given that our problem was primarily with Germany, we were inviting a bunch of US economists to provide a solution.  Where there no sane German economists we could build bridges with?  The not altogether convincing response from the Chair was that the German government had systematically prevented the preferment of sane economists and so none could be found.

I think I need a better explanation for the German Government pursuing policies which are demonstrably unsustainable and damaging to the entire Eurozone.  If I get time, I will try to write a summary diary on the MMT approach.  Chris Cook received a favourable mention from one of the Irish economists who spoke. The impression I got is that the Irish economic mainstream is starting to line up behind Morgan Kelly, having treated him as a pariah for so long.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 9th, 2011 at 06:30:09 PM EST
Considering that MMT is itself a fringe movement within American economics and that the US economic establishment is firmly Friedmanite, why would you find it unsatisfactory that the German economic establishment is firmly Austrian? Even in France, sane economists are having trouble being accepted. And in Continental Europe ministers of education tend to have a strong influence on curricula even at the university level. So I find it eminently plausible that the German Government (if you include in it the Bundesbank) "had systematically prevented the preferment of sane economists".

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon May 9th, 2011 at 06:44:35 PM EST
[ Parent ]
I was being ironic.  I joked privately with Professor Black that the Irish had a long tradition of sending aid workers to the third world espousing progressive economics, intermediate technology, small is beautiful type community development projects whilst Ireland did exactly the opposite at home.  Listening to US economists espousing policies for Ireland totally at odds with the US mainstream had a similar feel to it in reverse.

More seriously, I do think it important the Ireland builds alliances with progressive German economists if we can find any and was disappointed none had been found/invited.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 9th, 2011 at 06:58:56 PM EST
[ Parent ]
There are a few sane German economists:
Lucas Zeise, in his column in FT Deutschland, says the outbreak of lies is the best metric for the pending break-up of the eurozone. He recalls various currency crises from the 1970s and 1980s, in which officials also lied that nothing would happen, until it happened. Zeise says two necessary conditions to avoid a break-up are the acceptance of a transfer union, financed, for example, by a tax on exporters, and the tolerance of large wage increases in northern European countries.
(Eurointelligence)

Sane outfits appear to include Die Zeit and its Herdentrieb Blog, most FT Deutschland columnists... Eurointelligence...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 04:22:11 AM EST
[ Parent ]
It has been some time since I've read Die Zeit, but I as I remember it the sanity is strongly concentrated in Herdentrieb.
by generic on Tue May 10th, 2011 at 07:07:38 AM EST
[ Parent ]
They did publish an article on Wörgl at the end of last year...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 08:05:40 AM EST
[ Parent ]
Fair enough. It was more their phase of pro Atlantic warmongering rather than their economics that made me drop them. Don't know if that is still going on.
by generic on Tue May 10th, 2011 at 08:48:41 AM EST
[ Parent ]
I think it's fair to say there are sane economists everywhere, but that one of the ways the neolib stranglehold is perpetuated is by systematically filtering them out of jobs, promotion, academic recognition.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 10th, 2011 at 05:47:57 AM EST
[ Parent ]
As in most dictatorships, only members of The Party are allowed to advance their careers beyond a certain point.

Dissent is tolerated as long as it remains ineffective.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 10th, 2011 at 06:40:11 AM EST
[ Parent ]
I am jealous of your opportunity. I presume you are familiar with their site, New Economic Perspectives. All three are at the University of Missouri, Kansas City, which is a major island of sanity in the US academic economics landscape. They were probably invited because, between them, they have the relevant experience and expertise to appropriately analyze the current situation in Ireland. The two economists, Randall Wray and Stephanie Kelton can cover the economic theory and specific applications and Wm. K. Black is an expert on control fraud in banks, which is what should be investigated and prosecuted in the cases of the banks that ended up in NAMA.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 9th, 2011 at 11:08:05 PM EST
[ Parent ]
From their website:

Mitch Daniels' ode to learning to treasure your husband's mistress  By William K. Black

Cead mile failte romhat - one hundred thousand greetings to you from Dublin. My UMKC economics department colleague and I are presenting ideas on how Ireland could respond to its banking, budget, and financial crises.

This is the second part of my series of articles on benefit-cost analysis, prompted by a discussion at CIFA's recent ninth annual meeting in Monaco. This part focuses on the logic employed by the nation's leading advocate of requiring benefit-cost tests before allowing any regulatory actions. Governor Daniels (R. Indiana) previously served as President Bush's Director of the Office of Management and Budget (OMB). In 2002, OMB Director Daniels explained to a Competitive Enterprise Institute (CEI) audience why formal benefit-cost analyses by OMB mirrored "everyday life."

   "We need to remind people, that cost benefit analysis is part of everyday life. Perhaps you've heard of the couple out dining one evening, when a lovely, much younger lady passed by the table and visibly winked at the husband. His wife, not missing a thing, said, "Who was that?" After some hemming and hawing, he finally confesses: it's his mistress. She said, "That's it! I always feared and suspected. It's over, I want a divorce." "Now dear, not so fast. You [do] realize if that happens, no more diamonds on your birthday, fewer of those shopping trips to New York, what about the country club charge account?" About that time, another couple passed by and she said, "Isn't that your friend Jim from the office?" He said, "Yes." "Well who's that young woman with him?" "Well, that's Jim's mistress." She says, "Aha! Ours is prettier." [laughter]"

http://www.whitehouse.gov/omb/speeches_cei_regulatory052202
Mitchell E. Daniels, Jr., Competitive Enterprise Institute Speech, 05/22/2002

Again, one cannot compete with unintentional self-parody. Daniels chose a metaphor to defend benefit-cost tests that lays bare many of the worst aspects of formal benefit-cost tests by economists. Daniels delights in his tale of how an unfaithful, rich, powerful, and older man cheats on his wife, humiliates her in public, and essentially prostitutes his wife and his mistress. Perhaps the worst aspect - and here Daniels is simultaneously acute and clueless - is the wife's use of the word "ours." When elites use their dominant power to exploit and corrupt less powerful people they also seek to impose a false construct on their victims that makes them appear to be beneficiaries rather than victims. The macho male meme is that his domineering control of his wife's life and decisions constitutes "protecting" his wife. She is supposed to perceive and express a debt of gratitude rather than resentment to her oppressor.


More at the site.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 9th, 2011 at 11:17:53 PM EST
[ Parent ]
Is there a list of conference participants or a conference website anywhere? Were any Spanish economists in attendance?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 03:44:56 AM EST
[ Parent ]
Programme linked, no Spanish (or Portuguese or Greek).

I am awaiting copies of presentations to assist in writing diary.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue May 10th, 2011 at 06:13:47 AM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue May 10th, 2011 at 06:14:19 AM EST
[ Parent ]
Were there any people there whose native language wasn't English?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 06:17:42 AM EST
[ Parent ]
The speakers where all American, Irish, or Americans in Ireland.  In fairness, Feasta and Smart taxes, the groups which organised the the conference, are small, largely voluntary groups linked to the Greens and outside any mainstream - academic, media or political.  

They did well to organise the conference, and remarkably, charged nothing for it beyond a request for voluntary donations.  The only public figure I noticed at the conference was Dan Boyle, Chair of the Green party, widely held as responsible for ensuring Green economic policy became almost indistinguishable to Fianna Fail's.  The Greens lost all their 6 parliamentary seats (and Dan's Senator post) at the last election.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue May 10th, 2011 at 06:32:30 AM EST
[ Parent ]
I suggest that the issue is that economics is politics, and polities are fragmented along cultural and linguistic lines. Hence, no Continental European economists at the event, but some Americans were there.

And so it is entirely possible that economics actually diverges along national boundaries.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 06:37:13 AM EST
[ Parent ]
Your "turgid writing" quote from Krugman's NYT blog also brought up the comment thread. Many are slams, some are informative. The one below is droll:
Yes. It took you decades to discover keynes. And that turned out pretty good. If you had discovered it before you would have never won the Sveriges Riksbank Prize in Economic Science. Good for you.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 9th, 2011 at 11:22:59 PM EST
I was glad to see that Krugman was referring positively to Minsky, Fisher and Keynes. I cannot speak about Minsky, but Fisher's writing is far from turgid and Keynes offers so many insights per page as to make it highly worthwhile to wade through any difficult parts. (Not that I have yet finished The General Theory.) One commenter noted that Minsky's biography of Keynes presented the ideas of both men quite readably. I may order it.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 9th, 2011 at 11:30:30 PM EST
[ Parent ]
I have said before and will say again that, if his assessment of the book was
There's a deep insight in there; both the concept of financial fragility and his insight, way ahead of anyone else, that as the memory of the Depression faded the system was in fact becoming more fragile. But that insight takes up part of Chapter 9. The rest is a long slog through turgid writing, Kaleckian income distribution theory (which I don't think has anything to do with the fundamental point), and more.
then, unfortunately, Krugman didn't get it.

Or maybe it was just that a lot of stuff in the book was known to him from other sources and new to me when I read it...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 01:36:07 AM EST
[ Parent ]
Well, if Krugman found Minsky's book turgid, he could find a lucid exposition of his ideas for a non technical audience here.  :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 10th, 2011 at 12:15:27 PM EST
[ Parent ]
And the quotes you supply from Minsky are not exactly examples of turgid writing. But perhaps finding them turgid removes one from the necessity to write things that might remove one from the prized category of Serious PeopleTM  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 9th, 2011 at 11:39:56 PM EST
[ Parent ]


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