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Socratic Economics XII: Utopian Government Finance

by Zwackus Fri May 25th, 2012 at 04:29:20 AM EST

Reading here on ET has given me a few ideas as to how government finance and the money supply work.  I'm curious to see what people think, and to have my thinking corrected by the infinite font of wisdom that is ET.

  1. Money is created by government spending and bank lending.
  2. Money is destroyed by taxation.
  3. The purpose of taxation is not to fund government, but to manage the money supply, and to penalize or support certain activities in the economy.
  4. There is no special connection between government spending and inflation - government spending is an inflation driver only in the circumstances in which the same spending by private entities would be inflationary.
  5. Maintaining a connection between government spending and taxation is completely pointless.

If these are reasonably correct, then what exactly are the outer boundaries for a workable system of government finance?

front-paged with minor edits by afew


  1. What is the purpose of Treasury Bonds?  They are certainly not funding the government - so what are the doing?  Could they be dispensed with entirely?
  2. Rather than destroying money via taxation, would it be more sensible to regulate the monetary supply by limiting the ability of private banks to create money?  Or banning it altogether, and centralizing monetary creation entirely in a central bank?
  3. Is modern econometric data sufficient for the management of inflation through targeted destruction of inflationary pressure via taxation to be possible?  That is, if taxation is to be used as a tool of monetary destruction, and not of government funding, then can that tool be used with sufficient agility?

Discuss?

Part of the Socratic Economics series

Display:
Rather than destroying money via taxation, would it be more sensible to regulate the monetary supply by limiting the ability of private banks to create money?  Or banning it altogether, and centralizing monetary creation entirely in a central bank?

One of the things I have learned on ET is that the key function that ought be performed by banks is the underwriting. This involves judgements of the financial viability of the purpose for which money is to be created via a loan, the overall business environment in which the borrower will invest the loan and of the competence and character of the borrowers. When banks perform those duties with integrity very few loans go bad.

The banks have the advantage of being closer to and more knowledgeable about the borrower and of being more aware of local conditions. Small local banks still have most of these desirable characteristics. So centralization of all money creation would have to create a central system that performed those functions better than local institutions. And the criterion should be the quality of underwriting that existed prior to the mid '70s, imo.

All of the above, of course, presumes the continuation of a debt based money system. There are other systems, such as those Chris Cook is proposing, but the same function of underwriting would still be required. While our minds might be concentrated on the dangers of a small number of immensely wealthy individuals and the corporations through which they operate seizing control of the government, we also have to be concerned with such a government then seizing control of all money creation, and, to me, the situation is already sufficiently disastrous and I would not want to risk making it worse. But present conditions are far from any conception of utopia - aside from those of the banksters.  

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 24th, 2012 at 12:02:35 PM EST
That isn't underwriting, that's risk assessment. And it's a very specific kind of risk assessment that is just an enforcement of capitalist values - i.e. profit - with no consideration of social consequences.

In this context banks exist as an officer/executive class that chooses which projects are 'valuable' and kills those that aren't.

In other words, banks decide policy according to standard economic criteria.

The problem is that those criteria are inherently political. So leaving banks to decide project viability is also inherently political.

Alternatives are possible, but they would require some thought and debate about values and viability, and the creation of an explicit agreement - let's call it a constitution - with clearly stated social aims and values.

As a culture I don't think we're ready to have that debate yet.

In the meantime, banks continue to run things because we have an implicit set of (capitalist) goals.

The results are often criticised, but the aims rarely are.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 24th, 2012 at 01:16:32 PM EST
[ Parent ]
In this context banks exist as an officer/executive class that chooses which projects are 'valuable' and kills those that aren't.

In other words, banks decide policy according to standard economic criteria.

The problem is that those criteria are inherently political. So leaving banks to decide project viability is also inherently political.

Precisely: credit is a political function, which is a poorly understod idea that needs to be spread more widely. After all, if it's a political function why is it done for profit and under a corporate veil of secrecy? Shouldn't it be done in the public interest and under "freedom of information" standards of transparency and accountability?

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Thu May 24th, 2012 at 04:48:44 PM EST
[ Parent ]
So, keeping with the idea of radical and utopian proposals, should they be either

1 Nationalized, organized into a rational network that evenly covers all areas, and given explicit goals and directions by the relevant political bodies?

Or

2 Subjected to radical governance reform, so that they are democratically accountable to community stakeholders and the citizenry as a whole?

Or, should private profit seeking banks be allowed to coexist beside option 1 or 2 style banks?  If so, why?

by Zwackus on Thu May 24th, 2012 at 08:03:15 PM EST
[ Parent ]
I don't see why private or for-profit banks shouldn't be allowed to coexist with public credit institutions. In particular, because of the example of vendor finance or consumer credit upthread, in practice there will always be private institutions operating as banks.

The issue is that, at least in the EU, we have pretty much legislated public banks out of existence by calling them "illegal state aid" (because, being not-for-profit, they can provide cheaper credit than private banks) and have decided to privatize them.

The Global Financial Clusterfuck is possibly causing at least part of the banking sector to be nationalised, and at least part of the population to demand democratic accountability from at least the nationalised banks. So this may not be as radical as you think it is. Give it a few more years of clusterfuck.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 01:06:13 AM EST
[ Parent ]
In other words, banks decide policy according to standard economic criteria.

...

Alternatives are possible, but they would require some thought and debate about values and viability, and the creation of an explicit agreement - let's call it a constitution - with clearly stated social aims and values.

As a culture I don't think we're ready to have that debate yet.

It would appear that Keynes was ready to at least discuss the idea that policy is judged on business principles when it perhaps shouldn't be 75 years ago...
When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how 'wasteful' loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly 'wasteful' forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict 'business' principles. For example, unemployment relief financed by loans is more readily accepted than the fiinancing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of  the world but involved the disutility of labour, is the most acceptable of all solutions.

(From _The General Theory, quoted here, for instance)

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Thu May 24th, 2012 at 04:53:15 PM EST
[ Parent ]
TBG:
In other words, banks decide policy according to standard economic criteria.

The problem is that those criteria are inherently political. So leaving banks to decide project viability is also inherently political.


Agreed. Unfortunately, however, not even all of those in banking have a clear understanding of this. Most likely just assume that what they do is 'natural' - TINA. Even fewer outside of banking have any idea. So the real challenge is to make the methods and ends to which money is created explicitly political. That is a profoundly radical proposition.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 24th, 2012 at 07:29:09 PM EST
[ Parent ]
And not just radical, but, in present reality, very likely doomed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 24th, 2012 at 08:49:47 PM EST
[ Parent ]
Risk assessment and loan decisions are an entirely different issue, which I didn't touch on at all.

By limiting the ability of private banks to create money, I mean something a bit more drastic.  Right now, every bank loan creates new money.  That money does not come from savings (fractional reserve myth), but is created anew.

Should private banks have that ability, or should all currency creation be handled directly by the Treasury?

by Zwackus on Thu May 24th, 2012 at 04:33:43 PM EST
[ Parent ]
Credit creates money. You cannot legislate private credit out of existance.

You're conflating "currency" and "money", too.

Anyway, when ACME department stores sells an ACME widget on credit (buy it now, pay it in six months) it creates credit. If the consumer credit payments from widget sales can be bundled into a tradeable financial obligation (i.e., securitised) the ACME widget-backed securities can function as money. You don't need ACME bank to do the securitization, but it can be a useful partner in the transaction. You're surely not proposing to bank consumer credit or vendor finance, and the widget loans need to be monetised for ACME to have an operating cash reserve to make more widgets. Well, not necessarily need but it makes life a lot easier.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Thu May 24th, 2012 at 04:46:54 PM EST
[ Parent ]
Okay.  Point taken.
by Zwackus on Thu May 24th, 2012 at 07:55:51 PM EST
[ Parent ]
Note that the reason banks are regulated deposit-taking, not loan origination. This is an important point. Credit is created naturally in private transactions as soon as time to pay is allowed. You shouldn't need a government official to rubberstamp the fact that you contracted with somebody else to exchange some goods or services at some time in the future.

Banks are given the ability to take money from people in the form of deposits withdrawable on demand, and not keep the money at hand. In fact, they are allowed to create such deposits, withdrawable in physical cash, when making a loan to such customers, without necessarily having the cash on hand. To avoid bank runs, state deposit insurance was invented. In fact, given that just about anyone could take other people's money or give them credit, what distinguishes a bank from a non-bank is deposit insurance.

What needs to be protected (from being destroyed in a bank run) as essential infrastructure is the payment and clearing system, of which current accounts are a key part, and that is the reason for bank regulation.

The peculiar feature of the current crisis is that the bank run is mostly in the interbank market, not in customer deposits. So this needs some more thought.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 01:20:06 AM EST
[ Parent ]
Being pseudo-Socratic:

What difference does the origin of the bank run (in this case interbank) make?

by Metatone (metatone [a|t] gmail (dot) com) on Fri May 25th, 2012 at 06:17:08 AM EST
[ Parent ]
It was a blind spot - the interbank market is, of course, not insured like deposits are.

It just goes to show that the credit business was funding itself in the money markets, not via deposit-taking.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 06:44:26 AM EST
[ Parent ]
So does this suggest that one change of regulation should be not to measure the reserves of a bank, but the deposits?

(In terms of considering how much money a bank has in it?)

by Metatone (metatone [a|t] gmail (dot) com) on Fri May 25th, 2012 at 08:05:47 AM EST
[ Parent ]
No, it suggests that the central bank should fund private banks directly, rather than through manipulating the interbank market.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 08:45:32 AM EST
[ Parent ]
In other words, unlimited central bank liquidity against good collateral is not a bad thing. See Rediscovering Minsky's wheel, one pundit at a time from May 9th, 2011
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


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 10:25:47 AM EST
[ Parent ]
Actually it suggests something different - the whole scheme of government guarantee of deposits is unworkable and should be abandoned.
by rootless2 on Sat May 26th, 2012 at 04:34:01 PM EST
[ Parent ]
And replaced with 100% reserve banking, which is workable because banks are not reserve-constrained but capital-constrained.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 03:33:36 AM EST
[ Parent ]
i don't see how 100% reserve banking can work.
by rootless2 on Sun May 27th, 2012 at 07:23:38 AM EST
[ Parent ]
Because the central bank provides the liquidity in unlimited quantity. Liquidity is an unambiguously public good, and so should be provided by the public.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 08:03:43 AM EST
[ Parent ]
well, i'm on the verge of being tossed from the site for objecting to the theory that the Jew Bankers Control the World, so you'll have to discuss this without my help.
by rootless2 on Sun May 27th, 2012 at 08:37:16 AM EST
[ Parent ]
Troll rated for trolling the site moderators.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 10:57:03 AM EST
[ Parent ]
Uh, no.

That would be stupid. Gold standard levels of stupid.

A deposit flight can, and absent a depositor guarantee will, force a perfectly sound bank to close up shop because it has to liquidate perfectly sound assets at firesale prices. There is no public benefit to this. This should not be in any way controversial - in terms of historical experience, banking without deposit insurance is right up there with land wars in Asia.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 08:01:45 AM EST
[ Parent ]
Deposit guarantee is being shown to be to be unworkable and enormously expensive. If the public has to guarantee banking, it would be cheaper and more equitable to simply have guaranteed postal banks and let the private market take care of itself.

Minsky's proposal of making access to CB borrowing and deposits universal (and not via bank monopoly) plus the establishment of safe savings deposit accounts in a postal bank produces stability without a bank cartel.

by rootless2 on Sun May 27th, 2012 at 08:41:24 AM EST
[ Parent ]
Deposit guarantee is almost certainly less expensive and unworkable than allowing your payment clearing system to collapse.

Nationalizing the clearing system is an obvious alternative, of course, but so is a split between the lending and the deposit system with both remaining in private hands. The important point is to ensure that the investment bankers can't take deposit accounts hostage, because you can't not save the deposit accounts - depositor insurance or no depositor insurance. Precisely how this hostage taking is prevented is less important than preventing it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 08:52:11 AM EST
[ Parent ]
The error in your analysis is the theory that there is some clean form of banking that does not share the dangers of "investment banking". However, bank panics are possible in banking sectors that are not permitted to engage in investment banking. The US S&L disaster is a case in point. Minsky correctly noted that in the 1960s, US banking system was periodically seizing up, requiring disruptive and costly national intervention - during a period when legal separation of investment and "commercial" banking was still enforced. The theory that in the absence of securities investment, bankers are immune to bad judgement, bubbles, fraud, and panics is not a tenable one.

The New Deal and EU methods of government support for and regulation of cartelized banking is flawed on several levels  - not the least of which is that such an arrangement appears to generate enormous political influence for financial concerns.

Instead of committing oneself to a vast government regulatory apparatus dedicated at enormous cost to protecting a financial system in which the entire economy is transformed into a fee generating support for a banking system run by morons, I suggest the alternative of separating out the goal of protecting the economy from bank panic and the goal of protecting banks.

by rootless2 on Sun May 27th, 2012 at 10:26:50 AM EST
[ Parent ]
The error in your analysis is the theory that there is some clean form of banking that does not share the dangers of "investment banking".

Historically, crashes have not come from the payment clearing system. Splitting it off from the loan origination system seems, therefore, to be an obvious sort of thing to try.

However, bank panics are possible in banking sectors that are not permitted to engage in investment banking. The US S&L disaster is a case in point.

Actually, the S&L crash postdates the repeal of the separation between investment and commercial banking. But that's sort of beside the point, because the fundamental cause of the S&L crash was that Volker made the S&Ls insolvent with his insane rate hikes in the late 1970s and early 80s.

That's a consequence of letting crazy people run your central bank, not really a fault of the S&Ls.

Which is not to say that the S&Ls were without fault - merely that even if they had been without fault, their balance sheets would not have survived Volker. They were structurally long forward and short spot, and that's not the sort of balance sheet you want to have when "inflation first" nutballs take over the central bank.

Instead of committing oneself to a vast government regulatory apparatus dedicated at enormous cost to protecting a financial system in which the entire economy is transformed into a fee generating support for a banking system run by morons, I suggest the alternative of separating out the goal of protecting the economy from bank panic and the goal of protecting banks.

You're still going to need a vast government regulatory apparatus dedicated at enormous cost to protecting the domestic financial system.

Because the economic function of banking - deciding who gets to defer what payments and which ventures get to command the nation's resources on what amounts to an authority's say-so - ultimately involves someone, somewhere putting pen to paper and signing his name under a judgment call. Judgment calls will occasionally blow up in your face. If they did not, they would not be judgment calls. If you're good at making judgment calls, they will blow up in your face infrequently. If you're bad at making them, they will blow up in your face with greater frequency. Which means you need to supervise the ones making the judgment calls.

That's just a cost of governing a monetary production economy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 10:44:33 AM EST
[ Parent ]
"Historically, crashes have not come from the payment clearing system. Splitting it off from the loan origination system seems, therefore, to be an obvious sort of thing to try."

It might be obvious, but not to me. What do the private institutions that accept deposits in your system do to generate profits? Charge fees for clearing? Do you then ban the bond market and the operation of money market funds?  What about all the systems that people are hard at work at that disintermediate banks from clearing operations at all?

Volcker's rate hikes were necessary, if you accept his goals, to rescue COMMERCIAL US banks that got into trouble by making purely commercial loans to torture states in South America. No investment banking at all - not a security in sight.

A public deposit system plus access to discount window would be pretty simple. Cash could be safely stored in the national bank. Short term liquidity requirements could be met at the discount window- actually I think that this was a brilliant insight of Minsky.  On the other hand, profit making financial investment could be left to the market and this would maintain the critical connection between the possibility of profit and the possibility of loss - a connection that seems to get lost in a regime of bank guarantees.

by rootless2 on Sun May 27th, 2012 at 11:06:03 AM EST
[ Parent ]
What do the private institutions that accept deposits in your system do to generate profits? Charge fees for clearing?

As long as the central bank pursues an activist interest rate policy, they can redeposit with the CB to obtain the policy rate, or (what comes to the same thing, bar the interest rate) buy treasury securities and rediscount them with the CB at the policy rate in the event that they needed liquidity. They would then earn money on the spread between the rate (if any) they pay to depositors and the CB's policy rate (or the spread between the bond rate and the deposit rate or policy rate). Plus whatever fees they would charge for such services as debit cards (though such fees would probably need to be capped by regulation) and acting as middle man for citizens wishing to buy foreign currency (they shouldn't be allowed to accumulate foreign currency liabilities, but there is no harm in letting them hold and sell foreign currency).

If at some future date we wanted to move to a full-time zero rate policy, then it would obviously make more sense to nationalize them.

Do you then ban the bond market and the operation of money market funds?

Not as such, no. But its character would change markedly under a system where loan-originating banks funded directly from the central bank. And shrink.

What about all the systems that people are hard at work at that disintermediate banks from clearing operations at all?

Well, you can always disintermediate banks from clearing operations. That's called "paying cash." For a lot of payments it's not terribly practical.

Any other clearing system would have one or more of the functions that are currently grouped as "banking." Which is why I think "banking" is a misnomer - modern banks do a lot of different things that have greater historical than operational connection.

A public deposit system plus access to discount window would be pretty simple. Cash could be safely stored in the national bank. Short term liquidity requirements could be met at the discount window- actually I think that this was a brilliant insight of Minsky.

Yes, that's essentially what I propose. Except that I note that there is a perfectly habitable halfway house in which you have private service providers actually running the ATMs instead of the CB.

Is it necessary to stop at this halfway house? No. But nor would it be particularly harmful.

On the other hand, profit making financial investment could be left to the market and this would maintain the critical connection between the possibility of profit and the possibility of loss - a connection that seems to get lost in a regime of bank guarantees.

A complete withdrawal of government intervention in the financing of investments would almost certainly lead to too little investment, because you would have to draw all investment from someone's equity. An important point of having a central bank provide liquidity for investment banks is that this allows private actors to borrow, indirectly, from the government, instead of from other private actors exclusively.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 11:36:51 AM EST
[ Parent ]
In the Eurozone required reserves are a fraction of regulated deposits.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 09:15:23 AM EST
[ Parent ]
8%?
by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Fri May 25th, 2012 at 11:57:55 AM EST
[ Parent ]
8% is regulatory capital as a fraction of risk-weighted assets.

2% is required reserves as a fraction of deposit liabilities.

Central bank reserves are high-powered money and so count towards regulatory capital.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 02:35:19 PM EST
[ Parent ]
In EMU countries?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 25th, 2012 at 04:45:14 PM EST
[ Parent ]
The 8% of RWA comes from the Basel capital accords. The 2% is the reserve requirement from the Eurosystem and it applies to
Overnight deposits, deposits with agreed maturity or period of notice up to 2 years, debt securities issued with maturity up to 2 years, money market paper
Other liabilities have lower reserve requirements.

Oh, wait, since January this year the reserve requirement in the Eurozone is 1%... <facepalm>

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 04:51:04 PM EST
[ Parent ]
Re 1% reserve requirements: Wouldn't want to unnecessarily burden already shaky banks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 25th, 2012 at 07:13:33 PM EST
[ Parent ]
As far as I know it is slightly higher in the US, nevertheless I find the percentage very low. My uneducated hunch is that it fosters unaccountablility.
by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Sat May 26th, 2012 at 05:32:08 AM EST
[ Parent ]
Of course it does. It would be possible to operate with 100% reserve banking. The banks would have to hold reserves with the Central Bank in an amount equal to their insured deposits. They could do this by accessing "unlimited liquidity against good collateral" from the Central Bank's "discount window". But then the banks would have to exhibit large amounts of "good collateral" to the Central Bank in order to operate.

Currently they are indeed accessing "unlimited liquidity against good collateral" and parking oodles of "excess reserves" with the central bank. It might be possible for the European central bank to hike the reserve requirement without impacting the actual reserves being held. However, the ECB remunerates required reserves at the same rate it charges for liquidity, and penalizing excess reserves by paying 0.75% less on them. So, raising the required reserves would result in the private banks making a little more money from the Central Bank on their reserves.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Sat May 26th, 2012 at 05:45:43 AM EST
[ Parent ]
So (one of) the bottom lines is why isn't the Central Bank doing a better job of policing collateral- or can it, how is collateral gamed by elites and what suggestions can be made to better the situation.

Just how important is this matter to the general crisis?

by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Sat May 26th, 2012 at 06:57:23 AM EST
[ Parent ]
One issue here is the separation between the monetary authority (the ECB) and the regulators, supervisors, and bank-capitalizers-of-last-resort, and the fact that except for the ECB all the rest are national in scope.

So in the Eurozone the liquidity provision is disconnected from the supervision. This was the point of the Bruegel piece I satirised here

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.
The Bruegel article brings into sharp focus the fact that the ECB know all this but is funcionally disconnected from "macro prudential regulation" and bank supervision.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sat May 26th, 2012 at 08:19:29 AM EST
[ Parent ]
Excellent piece- curious it didn't end up in Socratic Economics...
by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Sat May 26th, 2012 at 04:47:36 PM EST
[ Parent ]
I wasn't asking any questions...

It belongs more in the Central Banking 101 series.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 03:32:40 AM EST
[ Parent ]
You're surely not proposing to bankban consumer credit or vendor finance

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 12:59:48 AM EST
[ Parent ]
What makes "fractional reserve" a myth?
by rootless2 on Sat May 26th, 2012 at 04:47:50 PM EST
[ Parent ]
The fact that bank lending is not limited by current reserves in the system because the CB has to supply the necessary base money to defend its policy rate.
by generic on Sat May 26th, 2012 at 04:57:46 PM EST
[ Parent ]
But don't individual banks operate on the fractional reserve system even if the CB can tweak the fraction and also change money supply in other ways?
by rootless2 on Sat May 26th, 2012 at 05:00:21 PM EST
[ Parent ]
They first extend loans and then have to come up with the necessary reserves.

See here for example here:
Steve Keen's DebtWatch No 31 February 2009: "The Roving Cavaliers of Credit" | Steve Keen's Debtwatch

Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:
by generic on Sat May 26th, 2012 at 05:13:14 PM EST
[ Parent ]
I don't see how the ordering makes the difference.

The model of how an individual bank operates seems to be still that it has a certain stock of cash and a statistical flow of payments, deposits and withdrawals that permits it to issue credit.

The thing that struck me as odd about Keene's presentation is that most credit in our current economy has nothing to do with bank reserves at all. When IBM issues bonds or sells on time or books orders or commits to pay for equipment or salaries, it essentially creates "money" without any involvement with bank reserves. So as I read Keene, I had the feeling that he was disputing about something peripheral. Perhaps I missed the point.

by rootless2 on Sat May 26th, 2012 at 05:29:07 PM EST
[ Parent ]
It's mostly important as a counterargument against the claim that monetizing government debt leads directly to the Weimarpocalypse. If the money supply never was a constraint on bank lending then increasing it won't lead to runaway inflation.
Of course if you already work under the assumption that everyone can create credit this insight won't be all that earth shattering to you.

But for an individual bank the difference is that it extends credit without taking reserves into account. When the so created deposit gets transferred and is not canceled out by an offsetting transaction or the time comes when the bank has to post the required reserves it acquires them via the money markets or the CB.

by generic on Sat May 26th, 2012 at 06:23:18 PM EST
[ Parent ]
ok. so if the question is whether neoclassical bs about money supply/inflation makes sense, you me and keene are in agreement that it's just bs.

BTW: Marx is making an argument that would have shocked the neoclassicals but is similar to Smith. Here's smith arguing in favor of state limits on interest rates to limit junk bonds


The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent. the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which
were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.
by rootless2 on Sat May 26th, 2012 at 06:40:45 PM EST
[ Parent ]
I don't see how the ordering makes the difference.

Demonstrating that the order is that money is created and then reserves are obtained also tends to undermine the conservatives' analogy between government finance and household finance. As most households cannot print their own money, whereas countries with their own fiat currency can. The government can spend as necessary by 'spending the money into creation', whereas the household cannot.

In time of war governments never let their spending be constrained by their tax revenues, and, in fact, it is much more true that governments first spend money into creation and then collect some of it in taxes. It follows that, during times of downturns, the government can spend to employ the unemployed up to the point that such new employment begins to drive up the cost of labor. Keynes was aware of this and argued that failing to provide employment for those willing and able to work when there were unmet needs only resulted in potential useful production being lost for ever. Kaleki gave an excellent speech on this subject - The Political Aspects of Full Employment.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 26th, 2012 at 09:41:22 PM EST
[ Parent ]
but of course that is the nature of credit. It doesn't matter whether the merchant who sells you a copy of Atlas Shrugged on credit already has sufficient assets to purchase a copy to restock the shelf or whether she gets credit from the distributor. Both happen at various times. There is nothing mysterious about it.

Banks merchandise is just cash.

by rootless2 on Sat May 26th, 2012 at 09:56:59 PM EST
[ Parent ]
I don't see how the ordering makes the difference.

The order tends to make a difference in causal relations. Of course, one should be wary of post hoc, ergo propter hoc fallacies.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 03:26:54 AM EST
[ Parent ]
Many countries have no reserve requirements.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 03:25:49 AM EST
[ Parent ]
The economists' model of a single (aggregate, "notional") private bank (representing the aggregate balance of the banking system, with interbank obligations netted out) which takes deposits and "multiplies" them successive by a credit multiplier is demonstrably wrong as a description of how deposits and credit are created, as well as leading to dangerously wrong conclusions about the banking system. The "reserve multiplier is ex-post-facto.

Hence "fractional reserve is wrong".

More nuanced is "banks are not reserve-constrained, they are capital-constrained".

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 03:29:54 AM EST
[ Parent ]
The purpose of taxation is not to fund government, but to manage the money supply, and to penalize or support certain activities in the economy.
Taxation also has a redistributive function. In theory, by taxing excessive wealth or income. In practice, by taxing the poor through regressive taxation.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Thu May 24th, 2012 at 05:14:33 PM EST
Money is created by government spending and bank lending.

But the kind of money created by government spending and the kind of money created by bank lending are different. The former kind can be called "high powered" and the latter kind "low powered," because only the former kind is acceptable in payment of taxes and in court-enforced settlements of debt. (Though this distinction is complicated somewhat by the existence of deposit insurance.)

Money is destroyed by taxation.

And by amortisation of loans. If taking out a loan creates money (and it does), then paying it back destroys money. This is most easily seen by a symmetry argument: If there were a symmetry break, I could take out a loan, pay it back immediately and have net created or destroyed money. Which is obviously nonsense - such a pair of operations would change no balance sheet and transact no economic activity.

The purpose of taxation is not to fund government, but to manage the money supply, and to penalize or support certain activities in the economy.

To manage effective demand, not money supply.

There is no special connection between government spending and inflation - government spending is an inflation driver only in the circumstances in which the same spending by private entities would be inflationary.

Yes. Buying a widget is buying a widget. It cannot in any rational theory matter whether the one why buys the widget is the government or some private actor.

Maintaining a connection between government spending and taxation is completely pointless.

No, there is a connection. It's just not a cutesy rule of thumb like "balanced budgets." The connection is that both arms of the public budget are useful for implementing policy.

If these are reasonably correct, then what exactly are the outer boundaries for a workable system of government finance?

In extremis, the operational constraint on government activity is the total potential economic activity in the part of the world where it can effectively project decisive power. In practise, the desirable scope of government economic activity is considerably narrower than that.

But attempting to come up with some generally applicable rule for judging the optimal aggregate size of the government is a profoundly silly endeavor. Some things are better done by the government, some are better done by the private sector. Privatizing the former and collectivizing the latter to meet some quota for optimal government size is, well, stupid.

What is the purpose of Treasury Bonds?

In theory: To regulate long-maturity interest rates.

In practice: To subsidize idle wealth.

Could they be dispensed with entirely?

Yes.

But if you want to run activist interest rate policy, you may not want to dispense with them entirely.

Rather than destroying money via taxation, would it be more sensible to regulate the monetary supply by limiting the ability of private banks to create money?

Two different beasts: The one destroys high-powered money, the other low-powered money. Both are needed.

Or banning it altogether, and centralizing monetary creation entirely in a central bank?

There is an argument for having private banks to provide a private equity cushion between the central bank and loans to businesses. Banking ultimately, at some point, involves putting pen to paper and making a judgment call. Judgment calls will occasionally blow up in your face. If they did not, they would not be judgment calls, they would be something you could code a computer program to do.

Having a private equity cushion between the central bank and an investment that blows up can serve a useful function. Because it sets a benchmark for how frequently and severely investments are allowed to blow up in your face, and (provided sufficient political will exists to take insolvent banks out back and shoot them) a natural mechanism for ensuring that people who should not be making judgment calls are purged when enough of their judgment calls blow up in their face.

Is modern econometric data sufficient for the management of inflation through targeted destruction of inflationary pressure via taxation to be possible? That is, if taxation is to be used as a tool of monetary destruction, and not of government funding, then can that tool be used with sufficient agility?

Yes, provided the political will to do so exists.

The constraint on fiscal stabilization policy is, in this day and age, political rather than technical.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 24th, 2012 at 07:02:56 PM EST
a natural mechanism for ensuring that people who should not be making judgment calls are purged when enough of their judgment calls blow up in their face.

And currently we have the opposite - government that rewards those who make judgement calls which blow up in their face.

In fact this is the key problem. Take away all the economic nonsense (and tradition) about debt, credit, profit, bonds, CDOs, derivatives, and the rest, and the only question that matters is - who makes the important decisions?

In Rational World, people who make good predictions and useful decisions would be rewarded.

In Econo-World, the opposite happens. People who can monopolise and game the system are allowed to make decisions, driving out those who have useful predictive and creative talent.

It's a kind of intellectual Gresham's Law - the dead-handed rule of the useless.

And given the (unstated) rules of politics and economics, this state of affairs is inevitable.

I suspect that all systems reduce to two actors - the mature, who have a practical interest in useful collective outcomes, and the sociopathic, who are only interested in benefiting themselves.

No political or economic system can work while the latter are given any more than very limited power.

This is not fundamentally an economic problem. It's not even a political problem in the usual sense.

It's more the political equivalent of discovering that germs and viruses make you ill, therefore basic standards of cleanliness and hygiene are necessary for health.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 24th, 2012 at 07:23:50 PM EST
[ Parent ]
In Rational World, people who make good predictions and useful decisions would be rewarded.

In Econo-World, the opposite happens. People who can monopolise and game the system are allowed to make decisions, driving out those who have useful predictive and creative talent.


Meanwhile in the real world, those who have the ability to contest and obtain power are allowed to and rewarded for making decisions. The ability to contest and obtain power is no guarantee of, in fact not even an indicator of, the ability to make useful decisions.

This tendency can be ameliorated and deferred, but probably not eliminated, by imposing institutions that value useful decisions over useless ones. But since the world is complicated, and human ability to gauge intertemporal cause and effect relationships is limited, flim-flam artists will always be able to con a lot of people into believing that they can eat their cake and have it too. The fact that their policies are unsustainable and must eventually fail does not provide any political advantage for reality-based operators until some time after they have already failed.

For instance, any clear-headed analysis of Greece's economic situation would conclude that (a) it is not in Greece's best interest to remain in the Euro, (b) Greece does not get to decide whether there is a Euro to remain in, and (c) attempting to remain in the Euro, conditional upon the Euro continuing to exist, is very likely to be unsustainable.

Most Greeks still want to try, so any party that wants to win elections has to promise to set itself up for failure by trying.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 02:06:23 AM EST
[ Parent ]
JakeSThe former kind can be called "high powered" and the latter kind "low powered," because only the former kind is acceptable in payment of taxes and in court-enforced settlements of debt.

Private bank money is completely indistinguishable from central bank money. The distinction between high powered and low powered money is illusory - a canard.

Less than 3% (ante QE) of money in circulation has been central bank money  - ie notes and coin. It follows that the vast bulk of taxation is settled with private bank money.

Taxation destroys central bank money AND private bank money and it is pretty much the only thing that does.

Repayment of or default in respect of private bank loans cancels/terminates the debt but the money remains in existence.

Treasury debt is in fact dated Treasury credit, whereas fiat currency is undated Treasury credit created by the Central Bank as the Treasury's fiscal agent, and by private banks as look-alike or counterfeit (choose your language) fiat currency.

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

by ChrisCook (cojockathotmaildotcom) on Thu May 24th, 2012 at 09:40:05 PM EST
[ Parent ]
So, a bank makes a loan of $5,000,000 to Company Y.  On repayment, the bank receives $5,000,000 + interest.  

In fact, the Bank has $5,000,000 + interest more than it had before the loan was made, because prior to the loan the money did not exist to begin with.

by Zwackus on Thu May 24th, 2012 at 11:44:13 PM EST
[ Parent ]
No, the bank has interest - expenses more than it used to have, because the deposit disappears when the loan is paid back. The bank strikes out your loan on its books and strikes out the corresponding deposit from its books. It doesn't keep the deposit on its books (well, it could but that clearly has no economic meaning, because it would be money the bank owed to itself).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 01:48:34 AM EST
[ Parent ]
Repayment of or default in respect of private bank loans cancels/terminates the debt but the money remains in existence.
I don't see it. Repayment of the debt shrinks the bank's balance sheet just like giving the loan expands it.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 01:27:07 AM EST
[ Parent ]
This is one of the discussions I wanted to provoke.
by Zwackus on Fri May 25th, 2012 at 02:22:31 AM EST
[ Parent ]
The money created by the loan has been used to buy (whatever the object of the loan was), in other words has joined the mass of money in circulation.

Meanwhile, in repaying, the creditor has withdrawn money from circulation.

In the bank's books, repayment cancels out the loan.

What's left of the money created by the loan? Nothing that I can see.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 25th, 2012 at 04:49:30 AM EST
[ Parent ]
creditor debtor pfff...
by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 25th, 2012 at 04:51:41 AM EST
[ Parent ]
The money created by the loan has been used to buy (whatever the object of the loan was), in other words has joined the mass of money in circulation.

The mass of money in circulation "circulates" by jumping from one deposit account to another.

Or do you mean the money has been withdrawn into cash?

In any case, until the money is used to pay back the loan it's mostly "in a deposit somewhere".

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 05:35:35 AM EST
[ Parent ]
Cash or deposits (and moving around), the main point is that an equivalent sum to what goes out comes back in (to the bank that made the loan). Ie there is no net creation of money.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 25th, 2012 at 05:51:15 AM EST
[ Parent ]
Let's say Simple Bank is in run-off, and all it has left on its balance sheet is one term (dated) loan from Borrower A of $10m and on the other side of its balance sheet a wholesale (dated - overnight) deposit from Depositor B of $10m.

It will also have capital of (say) $1m, which represents an ownership/equity claim (not a debt claim) over its $1m of (undated) deposits held in reserve with the Central Bank.

Borrower A walks into Simple Bank and hands over $10m as a cheque drawn on Bank X.

Simple Bank credits Borrower A's account and closes it. Simple Bank then transfers the $10m it has received to the bank account at Bank Y of Depositor B, and closes his deposit account.

It will be seen that the $10m still exists and has not been destroyed. It simply went from Bank X to Bank Y via Simple Bank.

What then happens is that Simple Bank makes transfer payments to the bank accounts of its shareholders thereby distributing the $1m it holds in reserves and enabling it to cancel its capital and wind itself up.

The problem is that the word 'liability' is used in a bank balance sheet to conflate two completely different obligations.

An undated deposit is a quasi-equity credit obligation: a dated deposit is a completely different debt obligation, and may often - when a secured debt - represent a conflicting claim over the same assets.

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

by ChrisCook (cojockathotmaildotcom) on Fri May 25th, 2012 at 07:15:37 AM EST
[ Parent ]
ChrisCook:
It will be seen that the $10m still exists and has not been destroyed.

In your example, Depositor B's deposit of $10m got lost somewhere.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 25th, 2012 at 07:32:42 AM EST
[ Parent ]
No, it went to Bank Y.

I don't understand why SimpleBank had the money from Bank Y in the first place. (Interbank loan?)

In any case - it's clear that end-user lending, including lending to businesses and individuals, works by completely different rules to interbank lending.

It also works by completely different rules to the money casinos markets, where apparently it's possible to gamble with the same sums over and over, more or less indefinitely.

This matters because government is in the loop for the domestic credit market, but very much out of the loop of the international casino market.

Let's not forget that OTC trades are - as the quaint phrase says - 'largely unregulated.'

This means that individuals and institutions in those markets can have the benefit - through sheer pretence - of money that either doesn't exist or they have no true claim to.

This also means that governments 'borrowing' from these casinos is the biggest scam in history. Governments have no business allowing the casinos exist, never mind allowing them - by slight of pen - to become (de facto insolvent) lenders to nation states.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 25th, 2012 at 07:45:36 AM EST
[ Parent ]
This interbank international financial casino is where I really got the impression that money is simply created by private banks.  If private banks were not somehow creating money, then it would not be possible for there to be in existence several hundred trillion dollars worth of various speculative instruments, many times in excess of the total world GDP.

So, ban it entirely?

by Zwackus on Fri May 25th, 2012 at 07:52:17 AM EST
[ Parent ]
The money exists by fiat, in the worst possible way - i.e. not at all.

But the problem is that this 'business' isn't just managed by the banks. It's also created by hedge funds and other players.

What's really needed is a diagram showing true cash flows, which includes offshore havens and other money sinks, and the influence of speculation and other (so-called) sources.

Once you get past basic derivatives used for cost planning by businesses, the rest of this financial activity is almost completely specious. It's purely imaginary, made entirely of baroque betting obligations.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 25th, 2012 at 08:24:50 AM EST
[ Parent ]
'sleight of pen' indeed.

these guys have been calling the shots since the de medici era.

time to flip the pancake.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri May 25th, 2012 at 08:35:07 AM EST
[ Parent ]
Cue in Private money and "shadow banking system".
What do bankers do when such a tsunami of capital comes their way daily? When between 3 and 5 billion dollars, net, passes through their fingers every morning of each week? They find ways to make it grow! To breed on their behalf. Thus, the 80s, the 90s and the naughties saw an explosion of private money minting by Wall Street on the back of the daily capital tsunami that flowed to America to feed the Minotaur.


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 09:13:55 AM EST
[ Parent ]
The full banking system in this example (prior to repayment) is:

Simple Bank: Credit: 10 mil to customer A, 1 mil government bonds. Debit: 10 mil in deposits to customer B, 1 mil equity.
Bank X: Credit: 11 mil government bonds. Debit: 10 mil deposits to customer A, 1 mil equity.
Bank Y: Credit: 1 mil government bonds. Debit: 1 mil equity.

Then customer A takes his deposit from bank X and uses it to pay down the loan. Now the system looks like this:

Simple Bank: Credit: 10 mil to Bank X, 1 mil government bonds. Debit: 10 mil in deposits to customer B, 1 mil equity.
Bank X: Credit: 11 mil government bonds. Debit: 10 mil interbank to Simple Bank, 1 mil equity.
Bank Y: Credit: 1 mil government bonds. Debit: 1 mil equity.

Then customer B takes out his deposit from Simple Bank, and puts it in Bank Y. Now the balance sheets look like this:

Simple Bank: Credit: 10 mil to Bank X, 1 mil government bonds. Debit: 10 mil interbank to Bank Y, 1 mil equity.
Bank X: Credit: 11 mil government bonds. Debit: 10 mil interbank to Simple Bank, 1 mil equity.
Bank Y: Credit: 10 mil to Simple Bank, 1 mil government bonds. Debit: 10 mil in deposits to customer B, 1 mil equity.

The operative point here is that the first step destroys 10 mil deposits. The interbank loans that are left behind are just the shadow of the customers having moved their deposits around between banks. In a large banking system, these shadow movements will either mostly net out (because customers move their deposits between all banks equally), or they will not (if there is a secular deposit flight from some banks to some other banks, as there is in this example).

The latter situation is the sort of crisis we currently have.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 09:05:48 AM EST
[ Parent ]
Nope.

You're being bamboozled - like everyone else - by the difference between an undated equity 'liability' and a dated debt liability

Day One: Simple Bank raises 1 mill in equity and receives cash from the investors which is held as an (undated) 1 mill demand deposit with the central bank.

This is an asset with no corresponding debt liability, and represents the capital underpinning its capability to create credit.

Simple Bank then creates a (dated) 10 mil loan to customer A, and in order to balance its books must acquire 10m of dated (term) deposits (debt liabilities) to balance its dated (term) asset (the Customer A debt).

As Simple Bank winds down its book it manages its book of term deposits so as to ensure they expire prior to or on the same day as the term loan, and this ends up with a single (say) overnight deposit from depositor B.

The bank aims to make a surplus from the difference between the interest paid to the term depositors, and the interest received from the term borrower A, and it achieves this over the course of the life of these loans and deposits.

This is achieved through further credit creation by Simple Bank which simply credits the accounts of recipients (eg staff, management, depositors) with freshly minted money.

Suitable debits and credits are made on Simple Bank's P & L account reflecting this current expenditure and income.

ie Simple Bank both lends AND spends fiat currency look-alikes into existence as necessary.

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

by ChrisCook (cojockathotmaildotcom) on Sun May 27th, 2012 at 10:15:55 AM EST
[ Parent ]
Yes, bank spending creates bank money as well, and destroys bank money through interest payments. This bank money, by virtue of being guaranteed by the sovereign, takes on some aspects of high-powered money.

But in any given time period interest earnings and wage, maintenance and profit expenses are likely to be both a good deal smaller and much closer to parity than loan origination and amortization. Hence the emphasis on banks creating money by lending.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 10:54:54 AM EST
[ Parent ]
Whether banks lend or spend 'look-alikes' of central bank money into existence is immaterial.

This money can only be destroyed by the central bank as fiscal agent of the Treasury.

Private banks cannot destroy the money they create: it remains in existence as the mathematical echo of the transaction for which it was created.

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

by ChrisCook (cojockathotmaildotcom) on Sun May 27th, 2012 at 07:18:13 PM EST
[ Parent ]
So what about defaults? Do they or do they not destroy any money? The money is apparently somewhere, but not with the debtor or his bank. Or is it (most likely?) already in that or other bank "taxed" away from circulation?

Or is money nothing but representation of certain promises and obligations, and they really disappear when those obligations cannot be met?

by das monde on Fri May 25th, 2012 at 09:36:10 AM EST
[ Parent ]
Yes, those destroy money too, but in an uncontrollable way (and with knock-on effects).

In JakeS' detailed example downthread, you can have large balance sheets with lots of "private money" and as long as nobody rocks the boat nodody needs to suffer from the fact that half of the deposits have "left the building". The interbank balances will slowly be repaid in a circle and the balance sheets will shrink over time.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 09:39:57 AM EST
[ Parent ]
Nope.

Defaults do not destroy money: they destroy capital.

The money remains in existence, effectively locked in to the over-priced assets which the loans which created the money actually funded.


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

by ChrisCook (cojockathotmaildotcom) on Sun May 27th, 2012 at 07:22:28 PM EST
[ Parent ]
Defaults also destroy the value of assets, thereby reducing the amount of "money" lockd in their valuations.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 05:26:33 AM EST
[ Parent ]
Private bank money is completely indistinguishable from central bank money. The distinction between high powered and low powered money is illusory - a canard.

If that were true, banks could never become insolvent, because they could always exercise their power of seigniorage to create new legal tender.

In fact, banks cannot do this. They depend on deposit insurance to convert (a limited portion of) the liabilities side of their balance sheet into high-powered money for settlement.

Less than 3% (ante QE) of money in circulation has been central bank money  - ie notes and coin.

Central bank reserves are also central bank money, and so is, arguably, insured deposits.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 01:45:25 AM EST
[ Parent ]
Minsky: anyone can create money, the problem is to have it accepted

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 01:46:43 AM EST
[ Parent ]
Banks are restricted in money creation by capital requirements.

Deposit insurance affects only the mix of deposits.

The only central bank money is banknotes, coin and QE, and high and low powered does not come into it.

That's just the economic equivalent of epicycles.

The rest of the money in existence is created by private banks, who create the necessary credit to buy Treasury debt.

This has been the case since the (private) Bank of England first began to create gold-backed credit and to buy stock ie treasury credit, in dated (gilt-edged) or undated form.

That is when the privatisation of sovereign credit (and with it the seigniorage) began.

Virtually all central bank reserves consist of money created by private banks which has funded public and private expenditure and investment.

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

by ChrisCook (cojockathotmaildotcom) on Sun May 27th, 2012 at 07:34:37 PM EST
[ Parent ]
Can we induct this diary as Socratic Economics XII?

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 01:33:13 AM EST
Fine by me. Happy to oblige.
by Zwackus on Fri May 25th, 2012 at 02:17:06 AM EST
[ Parent ]
Given that government spending need not be constrained by tax revenue insofar as its spending policy is in line with the money supply/aggregate demand goals set for taxation policy, then spending could be conducted along these lines.

1 - Collective action best overseen at the national level is funded directly by the government, and entrusted either to government agencies or democratically accountable private entities.  Priorities and funding levels would be set with national need in mind, balanced against the current levels of aggregate demand.  Such spending could be effectively unlimited until human and material and capital resources are overstretched.

2 - Routine economic activity that is considered worthwhile would be funded through government loans issued by publicly owned banks.  Interest rates would be a policy decision entirely.

3 - Taxation would exist to deflate overheated sectors of the economy, prevent the long-term accumulation of wealth, discourage undesirable economic activity, and as a tool of overall industrial policy.  This would be set and managed in coordination with spending policy, but not as a limit on spending policy.

4 - Treasury Bonds, being pointless, would not exist.

5 - Austerity, as such, would be entirely meaningless.

by Zwackus on Fri May 25th, 2012 at 02:35:51 AM EST
"Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

All of these desiderata assume that money creation is done by people acting in the interests of all. The problem is to create a system that reasonably insures that outcome and to do so starting from a situation where those who are effectively in charge of creating money are doing so in the interests of a very small group of wealth holders who have used that wealth to grab control of the various countries comprising the global economy - effectively dozens of Mayer Rothschilds. And they also control the world's media.

Bringing about a situation where in even one major country the money supply is placed under the control of democratically accountable institutions and people and utilized to further the public good is a nontrivial task. The basic terms of discussion have been deliberately formulated to make such a development difficult and have to be undermined and challenged. L. Randall Wray at New Economic Perspectives, for instance, has been conducting ongoing discussions on the practicalities of a Job Guarantee program.

Perhaps a set of basic principles by which the money supply could be regulated could be formulated in such a way as to be fairly readily comprehended by most who will even venture to consider that some alternative to the present system is necessary. Having ready answers to such basic questions would seem helpful.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 25th, 2012 at 10:19:27 PM EST
[ Parent ]
Well, I titled this Utopian Government Finance for a good reason.  Still, I think it's important to have properly long-term utopian goals floating around in the back of one's head, if anything to occasionally push the Overton Window to the left, when the chance appears.

The left has been accused of having no ideas, and while those accusers are not exactly the best intentioned, there is a grain of truth to it.  "Maintaing the status quo and manage things rationally" is not the most horrible plan of action, but it's also not exactly visionary.

Your catechism idea is pretty good.  There has been talk before of putting together a sort of intro to ET Common Wisdom, so that new readers could quickly figure out what exactly we're talking about.

by Zwackus on Sat May 26th, 2012 at 02:22:44 AM EST
[ Parent ]
Above, it is proposed that there are basically two possible means of removing money from the economy:

  1. Government taxation

  2. Bank loans being repaid (subject to the Chris Cook controversy)

I feel instinctively that this can help provide an alternative explanation to the 70's - stagflation episode that has been used so successfully by the right in promoting neoliberalism...
by Metatone (metatone [a|t] gmail (dot) com) on Fri May 25th, 2012 at 08:04:07 AM EST
I have half a mind to take price developments in the '70s and strip out changes to the terms of trade, policy rates, tax structure, etc., and see how much actual domestic inflation is left after you do that.

My guess? Not a lot.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 08:51:21 AM EST
[ Parent ]
Well, we know that, in the USA, the real wages of the bottom 80% has declined since 1970. We also know that, prior to 1970 it was common to have only one significant wage earner in a family and that after 1990 single wage earner families have become the exception. We have more stuff, but it is questionable that the quality of our lives are better.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 25th, 2012 at 04:56:07 PM EST
[ Parent ]
Can we view loan repayment as taxation for the benefit of real governing analysts and deciders? The routine described in the diary seems to have more sense if we just change the meaning of "government" a little bit :-)
by das monde on Fri May 25th, 2012 at 09:28:46 AM EST
[ Parent ]
You can view debt as servitude, interest rate payments as tribute, and principal repayments as emancipation.

And credit is a political function.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 09:31:29 AM EST
[ Parent ]
The purpose of taxation is not to fund government, but to manage the money supply, and to penalize or support certain activities in the economy.

So what is Government Debt? Is it the Common Wealth, or the Common Burden? What obligations does it put on governments and nations?

Indebting governments does look like a convenient way to rob nations. You let one dictators to borrow and buy military toys, and that "loan" will give you interest later from all subsequent good or bad governments. The IMF and troika will force that state first to default on its social obligations rather than to you.

Or what about privatization, so massive in the 90s? Governments there supposedly give away some public wealth for some money - does that money "disappear" like taxation?

Or is it all just a mind game, lasting while enough suckers accept told rules without much questioning? Or just a power game, steered by those who can enforce or escape any agreements or consensus?

by das monde on Fri May 25th, 2012 at 09:57:13 AM EST
Zwackus asks
What is the purpose of Treasury Bonds?  They are certainly not funding the government - so what are the doing?  Could they be dispensed with entirely?
Government debt is a throwback to the time of commodity money, when governments needed to fund their expenses in coin and, though they could back debt issues by their power of future taxation, they couldn't create gold. So they had to goad gold hoarders to lend the government their gold by offering to pay interest.

When your national currency is not a global reserve currency or you're a Euro member state you need issue state debt backed by your future power of taxation in order to access hard currency.

So what is Government Debt? Is it the Common Wealth, or the Common Burden? What obligations does it put on governments and nations?
Government Debt, then, is a mark of servitude to the hoarders or issuers of hard currency.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 10:02:14 AM EST
[ Parent ]
[governments] could back debt issues by their power of future taxation and/or plunder (with a nod to Jake's parallel comment).

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 10:23:01 AM EST
[ Parent ]
I have long argued that the interest rate is a measure of the tribute being paid to accumulated wealth. But ZIRP then poses a conundrum. Do we have a ZIRP because so much of accumulated wealth has been shown to be bogus?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 25th, 2012 at 05:01:08 PM EST
[ Parent ]
Surely we have ZIRP because now the top echelons own so much of the wealth, no-one has anything to pay tribute with.

Of course if the rulers had more feudal powers, they'd find ways to strip more out of the rest of us... but luckily that's not the case for now...

by Metatone (metatone [a|t] gmail (dot) com) on Fri May 25th, 2012 at 05:55:57 PM EST
[ Parent ]
If so -- how embarrassing! Because their official economic theories are derivations of the marginalist and it would seem that we have reached the point of diminishing returns on the extraction of wealth by the 0.1% from the rest of the population.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 26th, 2012 at 12:40:39 AM EST
[ Parent ]
Of course if the rulers had more feudal powers, they'd find ways to strip more out of the rest of us... but luckily that's not the case for now...
ZIRP means that the state charges Zero to the top echelons of wealth for maintaining the value of that wealth. The top echelons of wealth are surely fleecing the rest of the world as usual, and the ZIRP ensures that they earn a good spread on it.
A disturbing snippet from the summit was a statement by Angela Merkel, as reported by Frankfurter Allgemeine, in her argument against eurobonds. She said that the problem with eurobonds were low interest rates, which in the past had led to bubbles and other distortions. (One of the principal attractions for eurobonds is to reduce the extremely high borrowing costs of the periphery. It is one thing for Merkel to object to eurobonds on political and legal grounds, it is quite another to insists that interest rates in these countr[ies] should remain high.)
(seen in the Salon after last week's EU summit)

In other words, it's fine for Germany to fund itself at 0.07% at two years and it's also fine for other countries to pay several percent higher than that. The commercial banks enjoy the ZIRP and charge people and firms upwards of 5 percent for trade credit and higher for consumer credit.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Sat May 26th, 2012 at 04:05:45 AM EST
[ Parent ]
It feels like there's a peculiar pseudo-symmetry between Merkel's folk beliefs about interest rates and JakeS's ideas that low inflate results in money not being used productively...
by Metatone (metatone [a|t] gmail (dot) com) on Sat May 26th, 2012 at 05:32:45 AM EST
[ Parent ]
Reverse Merkel's preference for who gets the lowest rates and economies might start to heal.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 26th, 2012 at 08:59:03 AM EST
[ Parent ]
It's a question of whether money is captive or not.

In neoclassical land, capital and money are indistinguishable, and since capital is not captive, neither is money. This means that unless you pay tribute to the holders of money, they will pick up their toys and leave.

In the real world, money and capital are fundamentally different, and money is captive in some ways while capital is captive in others. This means that if you do pay tribute to holders of money, they will be content with collecting the tribute rather than making productive investments.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 26th, 2012 at 11:31:01 AM EST
[ Parent ]
That we have such a concentration of wealth and that so much of that wealth is, effectively, held as cash or equivalents shows that the wealth holders have accumulated and are accumulating that wealth for its own sake and in defiant disregard for the needs of the broader society. There are plenty of socially beneficial investments available that would greatly increase the general welfare but the wealth holders, by and large, do not care and would see such investments as a loss of their relative power and wealth. Having, as they do, control of the money supply, fiscal policy and the instruments of governance they can find no other purpose but to continue to run up the score, as it were. Nemesis may offer the best chance to bring about change for the better.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun May 27th, 2012 at 04:29:23 PM EST
[ Parent ]
Of course if the rulers had more feudal powers, they'd find ways to strip more out of the rest of us... but luckily that's not the case for now...
Yanis Varoufakis: For Europe's sake Greece must renege on its bailout commitments - my op-ed in Le Monde (25 May 2012)
Consider the following indisputable facts:
  • A week ago the bankrupt Greek state borrowed  4.2 billion from Europe's bailout fund (the EFSF) and immediately passed it on to the European Central Bank (ECB) so as to redeem Greek government bonds that the ECB had previously purchased in a failed attempt to shore up their price. This new loan boosted Greece's debt substantially but netted the ECB a profit of around  840 million (courtesy of the 20% discount at which the ECB had purchased these bonds).
  • During the same week, the fiscally stressed Spanish government was injecting large amounts of capital into Spanish banks. Simultaneously, to help finance the Spanish state, the ECB has provided large loans to Spanish banks (at 1% interest rate) which they then re-lent to their `saviour', i.e. the Spanish state, at interest rates often exceeding 6%.
  • For the Greek and the Spanish governments to be `allowed' to borrow the monies involved in the operations described under 1 and 2 above, the ECB and the European Commission (plus, in Greece's case, the International Monetary Fund) demanded of them that they deflate their economies through savage spending cuts which will, with mathematical precision, reduce the national income from which loans, new and old, must be repaid.
  • Average interest rates in the Eurozone (even if we exclude the three countries that have fallen out of the markets and have received `bailouts', and include Germany's crisis-induced ultra-low rates) are at least 1.5% higher than nations with a higher average degree of indebtedness, e.g. the UK.
The German Chancellor (correctly) argues that we cannot escape a debt trap by accumulating more debt. However, consider facts 1,2&4 above: they constitute a typical case of adding debt to debt; of insolvent states borrowing in order to pay a Central Bank that is lending to insolvent banks which, at once, receive capital from insolvent states and lend to them part of the money they themselves borrowed from the Central Bank!
Looks to me like the feudal overlords are doing just fine extracting interest tribute out of the rest of us.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sat May 26th, 2012 at 11:00:16 AM EST
[ Parent ]
So what is Government Debt? Is it the Common Wealth, or the Common Burden? What obligations does it put on governments and nations?

Government debt in its own currency (which is the only sort of debt a smart government accepts, ever) is a vehicle for controlling the long-maturity end of the risk-free yield curve. It's an interest rate policy instrument. It never has to be paid back in real goods and services, because it can be paid back in newly printed money (which money is, in turn, merely receipts for prepaid taxes, and the level of taxation is under the government's control).

Government debt in other people's currencies works just like Swabian Housewife Economics tells you it does: You have to pay it back by selling real stuff to real people who may or may not want to buy your stuff.

Money is a token of state power. When a non-US country's government borrows US$, it borrows a representation of the ability of the US to visit extreme violence upon somebody. When it doesn't pay the US back, the somebody the US visits extreme violence upon is the government in question.

When the US prints US$ or T-bills, it essentially says "at some future point in time, I will come to someone and demand that they hand over US$ (which I will pay for T-bills), and if they do not have US$ to hand over, I will visit extreme violence upon them." This makes people want to have US$, because the US government is very good at inflicting violence and most people would therefore rather it did not do so upon them.

Indebting governments does look like a convenient way to rob nations. You let one dictators to borrow and buy military toys, and that "loan" will give you interest later from all subsequent good or bad governments. The IMF and troika will force that state first to default on its social obligations rather than to you.

Yes, lending hard currency to governments of negotiable virtue is the favoured contemporary way to exercise colonial power.

One should be a little careful about the causality here: It is not necessarily true that by not accepting such loans your government will not be subjected to colonial aggression. It may be that your cabinet ministers will start suffering unfortunate accidents until you do accept such loans. Making a serious effort to avoid dollar loans used to be a significant risk factor for plane crashes among Latin American government officials.

Or what about privatization, so massive in the 90s? Governments there supposedly give away some public wealth for some money - does that money "disappear" like taxation?

Yes and no. The money you take in when you privatize an asset is destroyed, but typically that money was created just moments prior by the purchaser's bank as a loan.

Or is it all just a mind game, lasting while enough suckers accept told rules without much questioning? Or just a power game, steered by those who can enforce or escape any agreements or consensus?

Yes.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 10:17:23 AM EST
[ Parent ]
What a bunch of cynics we are.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 10:21:38 AM EST
[ Parent ]
Neither irony nor cynicism can beat this reality (a guess).
by das monde on Fri May 25th, 2012 at 10:25:57 AM EST
[ Parent ]
If that's cynical, then all honest historians and economists are cynics.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 02:10:55 PM EST
[ Parent ]
Like Ice Cream Headache put it in Never Going to College Again:

I learned that those that study history,
only do it so they're not surprised
when we stumble into war again
and make the same mistakes again
they say: We knew it all the time!

Would link it if I could find it.

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

by A swedish kind of death on Fri May 25th, 2012 at 04:41:23 PM EST
[ Parent ]
well we see clearly now what happens when the public errs on the other side of the equation.

there is nothing more cynical than this global heist in corporate profits uber alles.

people, principles, democracy, the wealth of nations, just bumps in the road to this bunch...

 

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat May 26th, 2012 at 08:10:34 AM EST
[ Parent ]
Well, of course
Modern cynicism, as a product of mass society, is a distrust toward professed ethical and social values, especially when there are high expectations concerning society, institutions and authorities which are unfulfilled. It can manifest itself as a result of frustration, disillusionment, and distrust perceived as due to organizations, authorities and other aspects of society.

...

One active aspect of cynicism is the desire to expose hypocrisy and to point out the gulf between society's ideals and its practices.

Social cynicism results from excessively high expectations concerning society, institutions and authorities: unfulfilled expectations lead to disappointment, which releases feelings of disillusionment and betrayal.

How can historians and economists be honest and not be cynics?

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sat May 26th, 2012 at 08:14:50 AM EST
[ Parent ]
The money you take in when you privatize an asset is destroyed, but typically that money was created just moments prior by the purchaser's bank as a loan.

So what is the point of privatization for the government, or gain for the public?

by das monde on Fri May 25th, 2012 at 10:24:33 AM EST
[ Parent ]
It represents asset stripping to service hard currency debt.

Or simply neoliberal plunder.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 10:26:53 AM EST
[ Parent ]
In theory, to divest the public of assets that are better managed by the private sector. Licenses for the electromagnetic spectrum and the NSA's divestment of its Internet backbone are successful examples of this.

In practice, it is far more common for privatization to be a way to strip the public sector of assets and hand them to oligarchs.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 10:32:35 AM EST
[ Parent ]
At best, privatization is giving all the power to (direct or effective) rentiers.

The main role of post WWII governments as we knew them was perhaps being exclusive, special, benevolent rentiers.

For practical purposes, rentiers (including  financiers) are the government or the kings most of the time.

by das monde on Fri May 25th, 2012 at 10:40:25 AM EST
[ Parent ]
In theory, to divest the public of assets that are better managed by the private sector. Licenses for the electromagnetic spectrum and the NSA's divestment of its Internet backbone are successful examples of this.
In those cases, the public assets are leased to private managers, nod sold. One could argue that road tolls can fall under the same category.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri May 25th, 2012 at 10:43:17 AM EST
[ Parent ]
OK, a better example may be the public divesting itself of land that was reserved for a potential infrastructure project. Far-sighted governments will reserve moderately large tracts of land for potential rail and highway alignments (or harbours or airports) for projects that they do not wish to build now but may wish to build in the future.

Once such a project is built, many or most of the possible alignments become uneconomic to exploit in the future, because once an alignment/site has been constructed, there are great economies of scale in expanding it rather than preparing a new alignment/site.

The public may have use for some of this land, but it is unlikely to have pressing use for all of it - if it did, it would be unlikely to be able to withstand the political pressure to release it for use in the first place. There is no particular reason for the government to hang on to that excess land.

In practice, of course, results vary. In Stuttgart, such land sales have famously been a source of graft surrounding the S21 project. In Copenhagen, when the bridge to Malmö was built a great deal of land was released from rail alignment reservations, and this appears to have been a success. (The income from the sale spectacularly failed to meet projections. But those projections were summoned from la-la-land to appease the balanced budget quacks in parliament.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 25th, 2012 at 02:04:27 PM EST
[ Parent ]
The bridge to created huge housing price inflation in Malmö. Untaxed windfall to rentiers. Paid by public building the bridge.
by kjr63 on Sat May 26th, 2012 at 06:27:14 AM EST
[ Parent ]
Fred Harrison on the Copenhagen-Malmö bridge:

http://www.youtube.com/watch?v=Vx2STNZ07Mc

by kjr63 on Sat May 26th, 2012 at 06:34:21 AM EST
[ Parent ]
More about taxes and distribution of wealth:

http://www.youtube.com/watch?v=6ZkfmY1PMng

by kjr63 on Sat May 26th, 2012 at 06:46:55 AM EST
[ Parent ]
Not inflation. - It raised the real value of property in Malmø, since all of it was now much closer to Copenhagen in terms of travel time, and fast access to a metropolis is valuable. This was indeed a windfall to current property holders, but increasing the net wealth of the world in this fasion is the entire point of infrastructure.
by Thomas on Sat May 26th, 2012 at 10:37:47 AM EST
[ Parent ]
There is real estate inflation going on in Malmö, and in a sense it is facilitated by the bridge. But the bridge is not the fundamental reason - the fundamental reason is that the DKK is overvalued relative to the SEK. The bridge simply permits Copenhagen residents to arbitrage against this difference (at the expense of the other half of the Danish population, who pay for subsidizing the overvalued exchange rate).

Although a case can be made that this is not properly inflation, as it is a real change in the terms of trade between Copenhagen and Malmö.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 26th, 2012 at 11:38:34 AM EST
[ Parent ]
Yes, real value.

This was indeed a windfall to current property holders, but increasing the net wealth of the world in this fasion is the entire point of infrastructure.

No. The point of infrastructure is to increase the productivity of the real economy. The property ownership just captures increasing unearned incomes.

by kjr63 on Sun May 27th, 2012 at 01:50:52 PM EST
[ Parent ]
Is the bubble more bubbly there then in Stockholm or Gothenbourg?

Since we have had a general housing bubble going on for some time now - that still refuses to burst - the bridge may or may not have made it worse in Malmö but it then needs to be seperated from the general one.

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

by A swedish kind of death on Sat May 26th, 2012 at 04:01:27 PM EST
[ Parent ]
NSF not NSA. One has a lot more money than the other.
by rootless2 on Sat May 26th, 2012 at 01:26:22 AM EST
[ Parent ]
There is no gain for the public. It just creates private rent incomes. It's an additional cost to labour and capital and a direct cut to wealth creation. If government wants to collect "extra money" it can always collect user fees much more than what they get by selling assets.
by kjr63 on Sat May 26th, 2012 at 06:17:03 AM EST
[ Parent ]
It gives the society a few rich people.
by das monde on Sat May 26th, 2012 at 09:27:13 PM EST
[ Parent ]
The aspiration of a barbaric society to create "leisure class" (Feudal lords).
by kjr63 on Sun May 27th, 2012 at 01:53:09 PM EST
[ Parent ]
And the speculative money?
by PerCLupi on Fri May 25th, 2012 at 11:48:37 AM EST
There is no special connection between government spending and inflation - government spending is an inflation driver only in the circumstances in which the same spending by private entities would be inflationary.

"... only in the circumstances in which the same credit-financed spending by private entities would be inflationary."

Whether the same income-financed private spending would be equally inflationary in the same circumstances depends in part on the financial asset circuits that they would otherwise flow into. If income-financed purchases of financial assets are helping fuel asset-price inflation, and that asset-price inflation is helping to fuel goods and services inflation, then the inflationary impacts of income-financed private spending might be partially offset.

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

by BruceMcF (agila61 at netscape dot net) on Fri May 25th, 2012 at 02:04:34 PM EST
by kjr63 on Fri May 25th, 2012 at 03:44:31 PM EST
How does this sound?

Direct issuance of currency by the central government, through the Treasury.

Concentrate all private citizen bank deposits into a single, state bank, or perhaps a network of more localized state banks.  Tie it directly to the Treasury, so it is, by definition, incapable of insolvency.

This bank would have as its mission

1 - Manage and protect deposits.
2 - Efficiently process payments.
3 - All consumer-level credit and loan operations.  Credit cards, car and home loans, etc.  Interest rates and loan volumes would be set according to the government's larger macro-economic policy, not according to issues of profit.

A similar, parallel network of commercial banks, perhaps also directly tied to the Treasury, would perform similar functions for corporate and business entities.

by Zwackus on Sat May 26th, 2012 at 09:01:29 PM EST
I think this understates the importance of taxation which (a) creates the value of fiat money (which must be used to pay taxes) and (b) funds the police/military which underpin the whole economic system.
by rootless2 on Sat May 26th, 2012 at 11:07:05 PM EST
No, taxation doesn't fund anything. Government spending happens independently of any tax income.  Taxation simply destroys money, in the same way that replying a loan destroys money.  That is the whole point of this diary.
by Zwackus on Sun May 27th, 2012 at 03:11:20 AM EST
[ Parent ]
But the power of taxation to underpin the value of fiat money (by making it desirable to hold) is indeed important.

From Reinventing Money: Comment on the Wörgl Experiment with Community Currency and Demurrage ( by Thomas H. Greco, Jr., May 9, 2002)

The Wörgl experience has often been heralded by modern day Gesellians as proof of the effectiveness of demurrage in stimulating the circulation of currency, and thus, as the main feature that is necessary for the economic advantages of a community currency to be realized. But does the evidence support such a conclusion? The fundamental question, in the Wörgl case is this: Would the Wörgl currency have been just as effective without the demurrage feature, as with it?

...

He [von Muralt, in his piece on the Woergl experiment] further provides figures that show substantial increases in revenues from local taxes (From the numbers he cites, one can compute a combined increase in such local tax revenues of more than 61%), arguing that, "These are increases which can only be accounted for by the payment of arrears; but they are not as substantial as those cited by the burgomaster." He reports the burgomaster's observation that "taxes were eagerly paid" and sometimes paid in advance. He concludes that, "This eagerness to pay taxes may be, in my opinion, simply owing to the fact that the business man who finds at the close of the month that he holds a considerable amount in relief money, can dispose of it with the greatest ease and without loss by meeting his parish obligations. A change of attitude has manifestly taken place.  If formerly the paying of taxes was deferred to the last, now it occupies first place. It would be therefore highly desirable to inquire whether, parallel to the increased tax payments there is not an increased indebtedness towards other creditors, e.g., towards the suppliers in Innsbruck and Vienna. I have no data bearing on this problem." That last point is certainly an important one.

...

The fact that the local populace were, as a whole, substantially in arrears on their tax dues to the parish would certainly assure a high level of acceptance (locally) and a continuing demand for the local currency, at least until such time as  those tax arrears had been paid. This "tax foundation" is, after all, the primary reason for public acceptance of any government-issued currency. In light of this, I maintain that the demurrage feature had little to do with the success of the Wörgl experiment, and that the results would have been largely the same without it. The demurrage feature may have, however, as von Muralt, intimates, given the payment of local taxes priority over the payment of private bills by the populace, but the small savings derived from following that course make it doubtful. I would think that the threat of property seizure would provide a far stronger incentive for the payment of tax arrears than would the avoidance of a small percentage loss on the currency.



guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Sun May 27th, 2012 at 03:22:01 AM EST
[ Parent ]
Yes, that is an important point, and I should have made clearer that I agree entirely.
by Zwackus on Sun May 27th, 2012 at 06:36:35 AM EST
[ Parent ]
What this illustrates, incidentally, is that local currencies are, in part, a protectionist measure for local communities. By introducing a currency which is only legal tender inside the local community, you effectively erect a barrier to imports from the rest of the country.

The emergence of local currencies, in other words, is a local response to a gross failure of central government macroeconomic planning.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 08:19:18 AM EST
[ Parent ]
Adding: The parallels to the company town of American 19th century history should be obvious.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 08:21:49 AM EST
[ Parent ]
I think that's not correct.
by rootless2 on Sun May 27th, 2012 at 07:20:56 AM EST
[ Parent ]
One of the more confusing things the MMTers assert is that taxation doesn't fund anything but rather only retires cash from circulation in the economy, similar to the way a central bank raising interest rates by selling securities would retire cash from the economy.  This just isn't correct.

Taxation in the form of requiring people to pay the government in units of currency is an effective, albeit imperfect, means of conserving real, physical resources for public use instead of private use.  That's why you can't just print more money and spend it endlessly without inflation appearing.  So, taxation really does fund defense, public welfare, and other governance activities because it really does keep people from using resources for other ends.

To the extent that real resources, such as human hours of time, physical space constraints, and finite mineral resources, are limited, the trick to money is to get it to match as closely as possible the real resources limitations.  Taxation effectively forces people to provide real resources, particularly their own time, to community ends instead of private satiation of wants and needs.

by santiago on Sun May 27th, 2012 at 04:23:19 PM EST
That's an... interesting argument. It would be helpful if it were true.

In practice what happens is that even if you consider taxation as revenue, the revenue is often spent on corporate welfare and not on directly useful social welfare.

Even when the alleged social welfare budget is huge - as with the UK's NHS - much of the money is wasted because of corporate profiteering and faked up private-style management, which enforces 'competition' that actually just diverts resources back to the same old shareholders and investors who profit from the private sector.

Useful social investment is very much the exception and not the rule. And of course it's considered anathema and heresy by the Serious People, who doubt its very existence as an article of free-market faith.

Of course taxes could be used as a justification for social investment, and they certainly were in the past. Although it remains debatable whether they're actually needed, or whether they're merely a very indirect and rather rhetorical form of fiscal control.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun May 27th, 2012 at 04:50:59 PM EST
[ Parent ]
Where resources get spent has nothing to do with the fact that taxation effectively does prevent private allocations of limited resources of time, space, and energy and instead diverts it to community uses. Those community uses may include corporate welfare, or anything else, but that's a different, normative, issue entirely.  
by santiago on Sun May 27th, 2012 at 05:09:04 PM EST
[ Parent ]
I'd say it is the spending, not the taxation that does that.

I think I have read Keen write something to the effect that if all taxes were discarded, inflation would rise as more money chased the same resources. Looks reasonable to me, but then again it is translated by my memory.

Anyway, taxes goes away, inflation increase, but the state still gets their time, space, and energy. That is, as long as the currency is still accepted as currency, removing all taxes might make people question the point of holding the governments money.

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

by A swedish kind of death on Sun May 27th, 2012 at 05:16:13 PM EST
[ Parent ]
The state does not necessarily get their time, space, or money if taxes go away.  Rather, taxes are the policy instrument which allows the state to reserve such resources.  If the state did not tax, and only spent, as often occurs, the spending would indeed divert resources to community ends, but only to the extent that private spenders did not simply offer more in exchange -- inflation.  In recession conditions like the present where there may be vast amounts of unused resources, such spending is not inflationary because there is little competition for the resources, but in the case of non-recession conditions, without taxation there would be no way to reserve sufficient resources for public ends or to actually engage in community discourse over those ends.  
by santiago on Sun May 27th, 2012 at 05:22:21 PM EST
[ Parent ]
Except that governments can simply decide to print money without collecting it first.

So - no.

And in spite of the common wisdom, printing money rarely - if ever - creates inflation if the money is spent on social investment.

Rising asset prices, forex nonsense - i.e. herd-like thinking among speculators - and speculative bubbles are far more likely to be inflationary, in the very practical sense of creating an economy in which essential stuff costs more.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun May 27th, 2012 at 08:14:45 PM EST
[ Parent ]
You're missing the point entirely.

If you claim that taxation doesn't destroy money and simply moves it from one place to another, then it matters hugely where the money goes.

If the money ultimately goes to private actors, the private actors get to decide on private allocations of time, energy etc by either spending it or hoarding it.

The important questions are:

  1. Who spends the money?
  2. How do they spend it?

In the case of corporate welfare, it certainly isn't being spent on community welfare in any useful, relevant or meaningful way.

Far from preventing private (rather than public) resource and time allocation, this kind of redistribution actually guarantees improved resource access for the lucky recipients.

The people who lose are the ones who miss opportunity because of taxation, without receiving reasonable and proportional benefits.

In very simple terms, taxation is like club dues.

When done properly everyone pays and everyone benefits. When done improperly the majority pay to support a privileged minority who charge the club vastly inflated prices for their services.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun May 27th, 2012 at 07:49:37 PM EST
[ Parent ]
I made no such claim about taxes and money. Taxes do destroy money, just like central bank sales of assets destroys money by retiring money from circulation. But money is only valuable to the extent that it commands real resources -- time, space, and energy -- in an economy.  And taxation actually does prevent the private use of resources by reserving it for state use.

Corporate welfare is a special case of private interests in control of the public purse, but to an extent so is social welfare.  Both are outcomes of a governance process where a given, value and interest-based coalition has prevailed over others, providing for different spending and taxing outcomes to benefit their constituencies or themselves.  That is, it is an expected outcome of a governance even if obscene from a social justice and good of the polity standpoint. "Should be" is not the same thing as "is."

by santiago on Mon May 28th, 2012 at 12:18:38 PM EST
[ Parent ]
Taxes do destroy money, just like central bank sales of assets destroys money by retiring money from circulation.

You are still omitting the fundamental difference: Taxes destroy government securities, open market operations merely alter their term structure.

The two are fundamentally not equivalent - the central bank cannot (except by usurping the Treasury through purchase of private sector assets) add or diminish the total stock of government securities.

Without a commodity peg (an exchange rate peg does not suffice), there is no operational difference between a treasury note and a central bank bill, except that one pays interest and the other does not (and with developed forward markets for commodities, I am not certain that the difference exists even under a commodity standard).

So central bank asset purchases do not, in fact, destroy money, when the definition of "money" is taken to include all government-issued monetary instruments.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 12:49:42 PM EST
[ Parent ]
Central bank asset SALES destroy money, not purchases, because the central bank exchanges the government security on its balance sheet for an amount of cash which is destroyed. Taxes do the same thing to money, but without any exchange of equivalent, less-liquid wealth taking place. The distribution of burdens, however, is not likely to be the same.  Taxes are likely to limit people's use of a society's resources in much different ways than raising interest rates will, with different people affected.
by santiago on Mon May 28th, 2012 at 03:19:56 PM EST
[ Parent ]
Central bank asset SALES destroy money, not purchases, because the central bank exchanges the government security on its balance sheet for an amount of cash which is destroyed.

But the government security in question is a monetary instrument. The CB can control interest rates XOR the term structure of government liabilities. As long as the central bank is committed to defending its policy rate (which is always), it therefore has no discretionary power to refuse to reverse that transaction when I want to get rid of my treasury security and spend the money.

Thus, given an interest-rate targeting central bank, the only differences between a treasury bond and cash are that (a) T-bonds pay a different interest rate and (b) I have to pay a bid-ask spread to my bank if I want to spend a T-bond, while I have to pay a debit card charge if I want to spend my legal tender.

So no, the central bank does not create and destroy money during ordinary open market operations.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 03:57:39 PM EST
[ Parent ]
Except that central banks change the target rate, the process of which destroys or creates money through the instruments described above.  The CB is not a passive actor but a powerful organizer of resources through its policy directives to change target interest rates, among other things.
by santiago on Mon May 28th, 2012 at 04:05:09 PM EST
[ Parent ]
It is the change in the rate of interest which destroys money, not the open market operations. You can fix the yield curve precisely as effectively without ever issuing, nevermind buying, a single treasury bond. And this would create or destroy money just as effectively, because the money it creates and destroys is low-powered private bank money, not high-powered government money.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 04:12:55 PM EST
[ Parent ]
I'm not sure that's true.  The open market operations are the instrument through which interest rates are managed by a central bank. And such operations do literally take paper cash out of circulation and send it to the shredders as bank notes are retired from circulation net of the exchange of a security for those notes on a bank's balance sheet.  But you might be right.  What were you thinking?
by santiago on Tue May 29th, 2012 at 12:37:16 PM EST
[ Parent ]
Given that paper cash is a small percentage of total "accounting" cash, that the amount of paper cash is determined by the demand for currency, and that central bank transactions with commercial banks are in "accounting" cash, I don't see how open market operations "literally shred paper cash".

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 12:46:46 PM EST
[ Parent ]
The paper cash is just illustrative of the actual destruction of money that is going on when a central bank sells a security.  The balance sheet entries of cash is reduced in the public's ledgers by the amount it paid for the security, which disappears from circulation in the economy altogether.  If a central bank decides it wants to increase the money available, it simply buys a security, which may be a new one due to increased treasury spending, or it may be from an existing one held by the public without any new spending by a government's treasury.
by santiago on Tue May 29th, 2012 at 12:56:08 PM EST
[ Parent ]
If a central bank decides it wants to increase the money available, it simply buys a security, which may be a new one due to increased treasury spending, or it may be from an existing one held by the public without any new spending by a government's treasury.

No, if the public decides that it wishes to increase the money available at the central bank's current policy rate, the public will sell a treasury security to the central bank. The central bank has no agency here, because the central bank is defending an interest rate target which is set independently of the public's demand for cash.

The issue of agency is important, because it obviates the distinction between treasury security and cash - both are monetary instruments.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 01:09:44 PM EST
[ Parent ]
The central bank isn't required to buy anything from the public, and certainly not at a price the public demands.  In order to keep interest rates at a given level, if a bank wants to sell a security in exchange for cash to the central bank, the central bank will sell a security back to the public to keep its balance sheet of securities at the level the central bank desires, not the level the public desires. The central bank therefore, does have the agency.
by santiago on Tue May 29th, 2012 at 06:00:21 PM EST
[ Parent ]
That implies a surrender of the power to set interest rates. If you want to control interest rates by means of open market operations, you have to treat the CB's balance sheet as a buffer stock.

This should really not be controversial. You can fix price XOR volume, and the CB is fixing price, not volume.

CBs used to experiment with targeting volume of monetary instruments outstanding, back when Friedman was fashionable. This was uniformly abandoned in favour of targeting interest rates, because targeting volume was an epic failure.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 06:06:53 PM EST
[ Parent ]
No, because the CB creates its own balance sheet by printing bank notes and exchanging them for assets held by the public.  There is no buffer stock of anything because the CB has the power to create and destroy money at will due to the institutional frameworks set up in modern governments, and that power is what allows it to change interest rates. The CB is the agent because the CB determines what interest rate it wants and creates or destroys cash money to get it there.

Interest rates have become targeted not because it was wrong to control money supplies , but because it was too hard to measure how much money was out there because of risk aversion is not constant, among other things.  So interest rates are a proxy measure for money quantities.

by santiago on Wed May 30th, 2012 at 12:37:43 AM EST
[ Parent ]
No, because the CB creates its own balance sheet by printing bank notes and exchanging them for assets held by the public.  There is no buffer stock of anything because the CB has the power to create and destroy money at will due to the institutional frameworks set up in modern governments, and that power is what allows it to change interest rates.

That is the power that allows it to use the money supply as a buffer stock to defend the interest rate. What you are describing here is precisely the operation of a buffer stock.

The CB is the agent because the CB determines what interest rate it wants and creates or destroys cash money to get it there.

The CB is the agent in determining interest rates. Once it has determined the interest rate it wants to target, its agency ends. You cannot simultaneously fix interest rates and money supply, because you use unlimited supply at a fixed price of the latter to fix the former.

Interest rates have become targeted not because it was wrong to control money supplies , but because it was too hard to measure how much money was out there because of risk aversion is not constant, among other things.  So interest rates are a proxy measure for money quantities.

No. That's just not how the cause and effect works. Credit decisions are not made based on the amount of money in circulation. No businessman bases his decision to borrow or lend on the volume of money outstanding (aside from a few speculators who are as likely as not to lose their shirts from it). Every businessman looks to the interest rate to determine borrowing and lending.

When you fix the money supply, you allow the interest rate to vary with the idiosyncracies of the private sector. This is extremely stupid. Gold standard levels of stupid. Because the supply of money is totally irrelevant to anything other than determining the interest rate. While the interest rate is extremely relevant to a lot of real economic activity. In particular, there is no quantity of money fairie that will automagically translate an expanded money supply into greater economic activity, as predicted by the quantity fallacy of money.

Targeting the quantity of money while letting the interest rate float is therefore a bad policy. Targeting interest rates and letting the quantity of money float, OTOH, is the correct way to go about interest rate policy. This is not a matter of simple administrative ease. It's a matter of quantity targeting being based on the quantity fallacy of money - a fundamentally bad model of how the economy works.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 04:31:57 AM EST
[ Parent ]
But you might be right.  What were you thinking?

The way the central bank influences the actual economy is by way of the yield curve. Nobody running a productive business has ever checked the monetary aggregates before making or taking out a loan. In fact when speculators bet based on monetary aggregates (and they do with some regularity) they usually end up losing their shirt. Everybody involved in productive business checks the interest rate before lending or borrowing.

One way the CB can fix the yield curve is by buying and selling Treasury securities on the open market. If the CB wants to do that, then it has no discretionary power to influence outstanding volume (Micro 101: In an open market you can fix price XOR volume). That means that when I plan my expenditures and manage my portfolio, I can treat Treasuries as cash (with a few caveats about Treasury valuation under changing interest rates, which are unimportant for the present discussion).

Another way the CB can fix the interest rate is by offering a support rate for excess reserves, and offering to rediscount private bank loans. This does not need to involve Treasury securities at all.

The two are economically equivalent, since the causal channel for influencing the macroeconomy is through the interest rate (in fact under certain assumptions about rules-based interest rate policy can be proven to be exactly equivalent).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 01:21:31 PM EST
[ Parent ]
That's only partially true.  The reason that central banks print money in large amounts during a financial crisis or recession is only secondarily related to interest rates or yield curves.  The main reason is to avoid deflation because everyone is dumping assets and thus driving the prices of assets down.  So the CB buys a bunch of those assets to keep their values up and just prints the money to do it. That is what's happening now in the US, as it has been since 2007.  

Regarding open market operations, there is no implication that you can't change the interest rate by changing the volume of money in circulation. Indeed, changing the volume of money in circulation is principal way of changing interest rates. You're thinking of central banks too passively.  Big central banks the Fed and presumably the ECB aren't in the business of defending interest rates or defending anything -- they're in the business of actively forcing interest to change in order to either reign in lending or to stimulate it, and they do this by manipulating the supply of money in circulation.

by santiago on Wed May 30th, 2012 at 12:50:16 AM EST
[ Parent ]
The reason that central banks print money in large amounts during a financial crisis or recession is only secondarily related to interest rates or yield curves. The main reason is to avoid deflation because everyone is dumping assets and thus driving the prices of assets down. So the CB buys a bunch of those assets to keep their values up and just prints the money to do it. That is what's happening now in the US, as it has been since 2007.

The Fed isn't buying non-treasury securities (and if it is, it's encroaching upon the treasury's job), and Treasuries have a habit of going up during a crisis.

What happens in a crisis is that the interbank market breaks, because banks don't trust each other. So instead of borrowing from each other to affect clearing, they borrow from the central bank as a go-between. This causes a drop in interbank loans and a rise in central bank reserves, as the CB buys treasury securities and rediscounts bank assets to defend its interest rate target.

That, alone, cannot prevent deflation. What it does prevent is system-wide bank runs. Which is a good thing, but totally unrelated to the market value of securities.

What also typically happens is that the CB stops pussy-footing around and starts targeting the whole yield curve for interest rate policy (this is essentially the consequence of QE - lowering the long end of the yield curve). This does to some limited extent prevent deflation, by raising Tobin's q through a lowering of the long-maturity risk-free rate. But the cause-and-effect story here is still firmly about interest rates, not about the volume of money in circulation.

Regarding open market operations, there is no implication that you can't change the interest rate by changing the volume of money in circulation.

That's not what I'm saying. What I'm saying is that once you have committed to an interbank interest rate target, that target dictates how great a volume of central bank reserves you must add to or take out of the interbank market. If you try to add or take out any more or less than that, interest rates diverge from your target. Which is Very Bad. Hence, if you want to fix the yield curve, you lose control of your portfolio composition, and if you want to control your portfolio composition (for some curious religious reason, because there is no practical reason for the CB to want that as long as it is only transacting in treasury securities), then you lose the ability to fix the interest rate.

The sequence of events goes like this:

  1. CB announces this week's interest rate target.
  2. Banks make lending and other portfolio decisions based on the interest rate target, because they know that the CB can and will make good on the target.
  3. Banks find themselves with inadequate or surplus reserves, relative to the regulatory reserve requirement.
  4. The central bank, assuming that it wants to make good on its interest rate target now has no choice about how many securities it must buy or sell (assuming that the private sector has a well-defined demand curve for treasury securities). It must buy enough to plug any hole in the volume of regulatory reserves, or sell enough to harvest all excess reserves from the system.

There is precisely one volume of purchases or sales which allows the CB to defend the interest rate target it declared in step 1), so in step 4) the CB has the choice between transacting precisely that volume of securities or going back on its interest rate target. In principle, the CB could change the regulatory reserve requirements in real time to match the increased or reduced lending desired by the private sector at the target interest rate. But in practice that is a lot more difficult, because it requires the CB to be able to forecast changes in private sector behaviour.

The only agency the CB has left after it has committed to its interest rate target of the week is in deciding which sorts of securities it wishes to sell or buy. Because the CB typically defends only the short end of the yield curve it is free to adjust its portfolio however it wants at the long end, and let the price shake out however it wants to shake out. But this is a silly anachronistic relic of the gold standard - there is no good reason for the CB to not fix the entire yield curve, in which case it would have to accommodate private demand for currency with the relevant maturities.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 04:15:10 AM EST
[ Parent ]
The Fed isn't buying non-treasury securities (and if it is, it's encroaching upon the treasury's job), and Treasuries have a habit of going up during a crisis.
Well, well... The Central Bank as the Market Maker of last Resort: From lender of last resort to market maker of last resort (Buiter and Sibert, 13 August 2007)
Today, external finance to non-financial corporations and to financial institutions is increasingly provided not through banks but through the issuance of tradable financial instruments directly to the financial markets or indirectly to the financial markets through banks and other financial institutions whose assets are, thanks to securitisation and similar techniques, liquid in normal times.  Now that financial markets (and non-bank financial institutions) have increasingly taken over the function of providing credit and all forms of finance to deficit spending units, a credit crunch or liquidity crunch manifests itself in a different way from the world described by Walter Bagehot's lender of last resort (see Walter Bagehot (1873), Lombard Street: A Description of the Money Market).

Today, a credit crunch or liquidity squeeze manifests itself as disorderly financial markets. Because of pervasive Knightian uncertainty (risk that is perceived as immeasurable and not possible to calculate or quantify), fear and in the limit, panic, little or no trade occurs in certain classes of financial instruments (say subprime mortgage-backed `collateralised debt obligations' CDOs) because there is no market maker with both the knowledge to price these financial instruments and the deep pockets to credibly post buying and selling prices. The precise way in which such micro-market failure (the failure to match willing buyers and sellers at prices acceptable to both) occurs differs for exchange-traded instruments and over-the-counter financial instruments (instruments for which bilateral bargaining over a deal is the normal exchange mechanism), but the solution is the same: the central bank has to become the market maker of last resort.

Is it the job of the Treasury to be the market-maker of last resort?

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 30th, 2012 at 04:38:04 AM EST
[ Parent ]
That's not market-making, that's investment (speculation, actually, but who's counting).

And yes, the Treasury is the investor of last resort. Because public investment should be accountable to parliament. Of course the simple solution is to fold the central bank into the Treasury, in which case the distinction disappears. That would also have the gainful effect of breaking the stranglehold of insane gold standard proponents on the central bank.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 05:01:02 AM EST
[ Parent ]
See here. It appears that Buiter has evolved from his original 2007 advocacy of "market making of last resort" to
Concentrating too many financial stability responsibilities, including macro-prudential and micro-prudential regulation, in the central bank risks undermining the independence of the central bank where it is likely to be useful -- the conventional monetary policy roles. The non-inflationary loss-absorption capacity (NILAC) of the leading central banks is vast. For the ECB/Eurosystem we estimate it at no less than EUR3.2 trillion, for the Fed at over $7 trillion. This is tax payers' money that is not under the effective control of the fiscal authorities. The central banks have used their balance sheets and their NILACs to engage in quasi-fiscal actions that have been essential to prevent even greater financial turmoil and possible disaster, but that also have important distributional impacts between sectors, financial institutions, individuals and nations.
so maybe you are in agreement after all.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 30th, 2012 at 05:16:34 AM EST
[ Parent ]
In addition to Buiter's comments via Migeru, three other things:

  1. Changing an interest rate IS agency.  That's a very powerful extra-market intervention. You really don't need a CB to have any more agency then that.

  2. It doesn't really matter if a CB buys mostly treasuries (the US Fed bought even non-government securities in the last crisis as well) it still has the same effect of relieving deflation for the same reason -- it replaces income producing assets in the market with cash, because people would rather hold (hoard) cash.  This is the part of (pre-Hicks) Keynes that Friedman never disputed, just enhanced by adding non-treasury securities to the mix.  The assets that the CB does not buy are still traded privately for higher value as sellers sell into a more liquid market where cash is plentiful.  That's why stock markets recovered so quickly, for example in the last crisis without providing much stimulation. QE isn't really about stimulation -- it's about satiating the temporary demands for cash hoarding of highly risk averse investors to prevent deflation.  Just buying treasuries fills the financial assets market with the cash that is demanded of other asset holders who want to sell.  Targeting interests rates is the policy instrument -- changing cash in circulation to meet demands for cash hoarding is what is actually going on.

  3. Banks do NOT know that a CB will make good on a declared interest rate, and neither CB policy nor banking investment policies presume any such knowledge about CB intentions. Bank regulations specifically require banks to have operational plans in place for major movements in interest rates due to unexpected, major CB policy changes, and surprising a market with an interest rate announcement is often a tactic CBs use.  
by santiago on Wed May 30th, 2012 at 06:17:40 AM EST
[ Parent ]
  1. Not in dispute. The point is that the CB does not manage the money supply, because it is managing interest rate. The money supply is totally irrelevant to any economic analysis - any and all impacts it can possibly have are wholly subsumed in the impact of the interest rate.

  2. a) Treasuries are cash-equivalent. Hoarding treasuries is hoarding cash, and vice-versa. When the CB buys treasuries, it is lowering the risk-free interest rate for long maturities, which of course would, ceteris paribus, raise the value of risky assets. b) The CB can fix the yield curve without ever touching a treasury security, so clearly the relevant cause and effect story here is about the yield curve, with the volume (and term structure) of cash in circulation an irrelevant aside.

  3. Banks do know that the CB will defend the interest rate it has announced until the CB sets a new interest rate target, which it will then defend. That the CB moves the interest rate target around is irrelevant to the argument - it's still targeting an interest rate, not a monetary aggregate. All the actual causal mechanisms are mediated by the interest rate - the monetary aggregates are fully endogenous given the policy rate. When the gold bugs pitch a hissy fit about the central bank printing fifty trillion dollars, they are keeping their eyes on a shiny irrelevance, not on the ball. Those fifty trillion dollars will go away literally overnight the second the CB boss holds a press conference saying that the policy rate is now non-zero.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 06:35:04 AM EST
[ Parent ]
Here's the issue:  The interest rate is a measure of money, not money itself.  While theoretically the supply of money relative to demand is wholly incorporated into the interest rate, it might not actually be true. For example, it won't be true in conditions of zero-bound interest rates where the demand for money in order to hoard cash remains high.  Therefore it doesn't really help to understand what it going on by just looking at interest rates.  That would be like saying the speedometer on your car is all you need to know about the engine, since it goes up when you press the gas peddle and you can defend your speed just by moving your foot and targeting a number on your speedometer

Defending a stated interest rate what is irrelevant since maintaining an interest rate can have no purposeful effect on the supply of money.  Only attempts to change the interest rate by policy means can do that. The point of analysis has to be when an interest rates changes -- what causes variance -- not when an interest rate is maintained.  What's interesting is what changes when money is created or destroyed, not what stays the same when money isn't created or destroyed.

by santiago on Wed May 30th, 2012 at 07:21:15 AM EST
[ Parent ]
Here's the issue:  The interest rate is a measure of money, not money itself. While theoretically the supply of money relative to demand is wholly incorporated into the interest rate, it might not actually be true. For example, it won't be true in conditions of zero-bound interest rates where the demand for money in order to hoard cash remains high.

That's just a plain wrong way to think about the monetary system.

In order to keep interest rates at the zero bound, the CB has to keep pumping in money to satisfy demand for money. Otherwise the interest rate will not remain at the zero bound. You set the interest rate, and the volume of money follows. Nobody cares about the volume of money except those who insist on setting the interest rate through open market operations (and the gold bugs, but fuck the gold bugs).

Therefore it doesn't really help to understand what it going on by just looking at interest rates.  That would be like saying the speedometer on your car is all you need to know about the engine, since it goes up when you press the gas peddle and you can defend your speed just by moving your foot and targeting a number on your speedometer

But the causality does not flow from the engine to the gas pedal. The driver decides that he needs or wants a different speed, and then he injects more or less gas into the engine. How the engine works determines the bounds within which the driver can select his desired speed - you cannot go below zero, and you cannot go above such-and-such without wrecking the engine, you can't accelerate faster than so-and-so without losing grip, etc. But as long as he remains within these operational parameters, causality flows from the driver's selection of a target speed to the volume of gas intake into the engine, not the other way around.

Likewise, the driver does not care about the technical specifications of his fellow motorists' engines. He cares about their location, momentum and attention to the traffic. Because in no case should he place himself in a position where the technical specifications of the other drivers' engines matter (that is called a "crash" and drivers tend to not want those).

Defending a stated interest rate what is irrelevant since maintaining an interest rate can have no purposeful effect on the supply of money.  Only attempts to change the interest rate by policy means can do that. The point of analysis has to be when an interest rates changes -- what causes variance -- not when an interest rate is maintained. What's interesting is what changes when money is created or destroyed, not what stays the same when money isn't created or destroyed.

Money is created and destroyed when you defend an interest rate, in accordance with the idiosyncracies of the money markets. It's just that it's totally uninteresting, because the cost of printing or destroying money is a few electron volt to change a few bits in a few servers. What is interesting is how the economy reacts to the interest rate - and this is interesting regardless of whether the interest rate is kept constant or changed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 07:43:56 AM EST
[ Parent ]
Follow the causality.  Money is created and destroyed when you actually create or destroy money.  An interest rate is an outcome of that action not the cause of it.  Ergo, in order to change a given interest rate in an otherwise competitive market for such a thing, a CB has to either create new money and put it into circulation or retire existing money from circulation.  The causality runs from money creation/destruction to interest rate outcomes, not the other way around.
by santiago on Wed May 30th, 2012 at 12:41:18 PM EST
[ Parent ]
Follow the causality.

That's what I'm doing and you're not.

Money is created and destroyed when you actually create or destroy money. An interest rate is an outcome of that action not the cause of it.

No.

The CB can declare that it will rediscount all sound collateral at the target rate (open tender fixed rate refinancing operation in the ECBuBa lingo), and pay the target rate on any deposit made to it. The decision on the rate here clearly precedes the creation of money, and under the conventional rules of causal inference consequence is not permitted to precede cause.

Banks simply don't look around for liquidity before making loans. They look up what the yield curve is this week, maybe think about where they believe the yield curve is going to go in the future, and make or deny loans based on that.

Having done so, they go hunting for liquidity. And if the CB refuses to provide liquidity for the banks who have made their dispositions based on the CB's announced yield curve, then the monetary clearing system stops working. The CB can do that only in the same sense and to the same extent the monarch in a constitutional monarchy can refuse to sign bills into law.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 01:39:49 PM EST
[ Parent ]
Of course a decision precedes an action, but that's not the same as causing it. The decision isn't the same thing as the causal action itself.  When I wake up in the morning, I decide to drink a cup of coffee.  But unless I go through the effort of making the coffee, in which a small chance of failure is inherent, I won't actually be able to drink it. Just deciding I will drink coffee doesn't make the coffee magically appear.  

And banks actually do go around looking for liquidity before making loans.  The liquidity, or the expectation of it, comes first.  If it didn't, the bank's check wouldn't clear to the borrower.

You can guess around the future yield curve shape, but CB policy normally has less power over its shape than you seem to believe, and banks have even less insight into future CB policy shifts, so there's little to be gained by such games. Instead lenders just react to the supply signals of money availability and the demand signals for loans and cut the best deal where they can that day.  

I was a member of an ALCO (asset and liability) committee of a major bank for several years. And the way the business works is that if the capital markets are forthcoming with cheaper cash, the green light goes on to the sales force to be more aggressive in lending. If the cap markets look tight -- like it might take a week to sell a bond instead of a day --  then you tell your loan officers to rein it in and pass on more borrowers. Supply is as important as demand when it comes to liquidity and lending.  

by santiago on Thu May 31st, 2012 at 12:10:27 AM EST
[ Parent ]
And banks actually do go around looking for liquidity before making loans.  The liquidity, or the expectation of it, comes first.  If it didn't, the bank's check wouldn't clear to the borrower.

That's just simply not true. This should not be a controversial point. Even the BIS has pointed this out.

You can guess around the future yield curve shape, but CB policy normally has less power over its shape than you seem to believe,

That is only because our central bankers are incompetent fuckwit ideologues who remain enamored of gold standard anachronisms and cutesy rules of thumb. When the going gets trough, the central bank does lower the long end of the yield curve, albeit in an uncoordinated and haphazard fashion. That's what QE and LTRO are all about.

If our central bankers were prepared to abandon their gold standard upbringing, they could fix the whole of the yield curve, and there'd be fuck all anybody could do to challenge it. Simply offer to pay the target rates on time deposits of a specific maturity, and to rediscount all loans at fixed rate. It may be the case that they can't fix the yield curve in backwardation without opening themselves to arbitrage between different maturities. But you should never want to fix the yield curve in backwardation anyway.

I was a member of an ALCO (asset and liability) committee of a major bank for several years. And the way the business works is that if the capital markets are forthcoming with cheaper cash, the green light goes on to the sales force to be more aggressive in lending. If the cap markets look tight -- like it might take a week to sell a bond instead of a day --  then you tell your loan officers to rein it in and pass on more borrowers. Supply is as important as demand when it comes to liquidity and lending.

What you're describing here is the rate at which you can get bonds off your balance sheet, which is somewhat tangential to the present discussion. The present discussion assumes that you have a functioning banking sector with banks that keep their loans on their balance sheet. And that your financial regulator comes down like a ton of bricks on brokerages that pretend to be banks (like they do in your description).

Basically, if you're not willing to keep a bond on your balance sheet, you shouldn't be underwriting it in the first place.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 02:36:35 AM EST
[ Parent ]
I don't think you're aware of how banking actually works.  Banks really can't lend unless they already have cash secured for doing so, and there are many regulations in place to prevent it. They seek liquidity first, and only once they have it, they'll make loans.  But they'll never do so if they haven't secured the cash, especially now, after the crisis.  And the discount window was never even used before the crisis.  

What I've described is the way all banks work, especially those that keep their loans on their balance sheets.  In order to lend, you need capital, and while you can get a certain amount of capital from borrowers, the vast majority of capital is obtained from capital markets in the form of bonds (not asset backed securities) -- they are the same as depositors but more expensive.  Before the crisis, a billion dollar bond could sell in about 15 minutes.  Today it takes 1-3 weeks to sell a bond if you're not the US government, so banks have become less aggressive in making loans, some of them adopting internal 120 day liquidity policies or similar things, even if unneeded -- they keep 120 days of cash or near cash assets to cover all payments for 120 days, which means they don't make loans until a bond has already been sold to cover it. Could they just go to the Fed window and get the money to cover things if the cap markets didn't cover them? Yes, but no one wants to do that (except Goldman Sachs), so they don't lend until they are certain the cash in place.  That's just how the real world works.

by santiago on Thu May 31st, 2012 at 05:29:09 AM EST
[ Parent ]
I don't think you're aware of how banking actually works.  Banks really can't lend unless they already have cash secured for doing so, and there are many regulations in place to prevent it. They seek liquidity first, and only once they have it, they'll make loans.  But they'll never do so if they haven't secured the cash, especially now, after the crisis.  And the discount window was never even used before the crisis.  
Isn't that basically Krugman's position in the recent debate with Steve Keen?

I thought the consensus was that Keen had won that debate, and his position was that banks are not reserve constrained but capital constrained which means they lend first and seek liquidity later.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Thu May 31st, 2012 at 05:34:09 AM EST
[ Parent ]
I just saw that Krugman never conceded, not that there was any consensus.  But the issue isn't really what they theoretically could do.  It's what they actually do.  And, for better or worse, banks really do constrain themselves and the borrow first and only lend once their own capital is in hand.  You just don't see banks lending money they doesn't already have, and if it happens it's noteworthy. No bank wants to be written about in the press that the Fed or ECB had to cover their check to a borrower.  Never happens.
by santiago on Thu May 31st, 2012 at 06:38:42 AM EST
[ Parent ]
Er - the whole point of the blurred line between investment and retail banking was that it made it possible for banks to claim assets from 'investments' they didn't really have.

If banks behaved as prudently as you say, bail outs would never be necessary.

And while basic retail lending was part of the problem in 2008, the real issue was that banks were lending against insane gambles in the investment market.

Since all the banks were doing the same things, they no longer trusted - and no longer trust - each other's creditworthiness.

Never happens.

I take it reading the amount of time you've spent reading the news in recent years is zero?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 31st, 2012 at 07:05:18 AM EST
[ Parent ]
We're not in this problem because banks lent money they didn't have.  We're in this problem because banks didn't understand the risks of default derivatives and the counter-party risks that can develop from them. It was an insurance problem, not a lending problem.

Banks really never (I'm sure it happens occasionally, and makes the financial news when it does) go to the central to cover their checks for loans they made but didn't have the cash. Still don't and didn't do it in the crisis. That's why lending has dried up actually.  

by santiago on Thu May 31st, 2012 at 07:23:29 AM EST
[ Parent ]
We're not in this problem because banks lent money they didn't have.  We're in this problem because banks didn't understand the risks of default derivatives and the counter-party risks that can develop from them. It was an insurance problem, not a lending problem.

We're in this problem because banks lent money that would never be repaid. Then they used securitization to turn loans into private money (liquid, tradeable assets). When the solvency of the underlying became doubtful, the liquidity of the securitizations evaporated. The money supply deflated, and so did the asset sides of balance sheets. Derivatives just amplified the problem.

Banks also used derivatives fo hide lending as off-balance-sheet hedges, thereby bypassing the credit controls that might have prevented that lending from taking place given that the debt carrying capacity of their counterparties was exhausted.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Thu May 31st, 2012 at 09:22:17 AM EST
[ Parent ]
But apart from that banks weren't lending money they didn't have.

They were just making shit up from thin air and pretending they were liquid. Until they weren't any more.

This is also known as lying.

I can't say I'm surprised Santiago advises on a CB board. His grasp of economic fridge logic is exactly what I'd expect from someone who never has to deal with real money, and who is apparently unaware of the existence of - never mind the causes of - recent bank busts in the UK, Iceland, Spain, etc.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 31st, 2012 at 11:29:23 AM EST
[ Parent ]
In fairness it is not obvious that the advisory board of a regional central bank is a place where foundational theories of banking are regularly discussed, however desirable that might be. A clubbish atmosphere is more to be expected and issues that go to the root would only be discussed when events forcefully pressed them on the board - if then. And most of the really breathtaking expansions of the Fed's balance sheet, such as the Maiden Lane SIVs and the QE operations occurred as a result of actions at the NYFRB or the Federal Reserve Board in D.C. Unfortunately, most board members and board advisers then probably convinced themselves that the problems had been dealt with. If everyone agrees that a particular MBS is AAA then it will be AAA until it isn't. Institutional biases can be quite strong.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 31st, 2012 at 01:14:17 PM EST
[ Parent ]
If santiago is in the US, he clearly enjoys the advantages of a proper bank resolution system such as the FDIC which has resolved thousands of banks over 80 years over single weekends, with up to 60 banks being resolved in a single week during the S&L crisis.

The European banking regulation, supervision and resolution regime is shameful in comparison.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Thu May 31st, 2012 at 01:35:45 PM EST
[ Parent ]
True, but I find Santiago's 'explanations' make my head hurt - and not in a good way.

If there's a consistent understanding of banking there, it's so at odds with how the system really works in practice that it's almost impossible to imagine the gulf being bridged.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 31st, 2012 at 02:22:05 PM EST
[ Parent ]
I just saw that Krugman never conceded, not that there was any consensus.

Well, with apologies to quantum physics, this is like the Bohr-Einstein debates which Einstein never quite conceded but everyone else knew who won.

Act III: Krugman Declares Victory

On April 1, Krugman returned with a post warning Rowe against any attempt to "engage the monetary mystics in a rational discussion." He cites a 1963 paper by economist James Tobin arguing that monetary controls can be effective even with banks existing.

Krugman's critics think this was an odd thing to do because no one was arguing that banks mean monetary controls are ineffective. And it was even odder, because Tobin also wrote a paper called "Commercial Banks as Creators of Money," which supports the views that Krugman is arguing against.

The next day Krugman returned with a post that claiming his opponent maintains that banks can "create unlimited amounts of inside money, never mind the size of the monetary base."

The Unlearning Economics blog thinks this is a "sleight of hand," because that really wasn't what anyone was claiming at all. The claim, rather, was that lending isn't reserve constrained.

By noon yesterday (Monday), Krugman was beginning to declare victory in the debate.

"That's the bottom line: the Fed controls credit conditions, except when we're in a liquidity trap and it's pushing on a string. Everything else -- all the talk about banks creating money, and yes, all the gotchas my critics think they've found in what I'm saying -- is irrelevant to the actual economic discussion," Krugman writes.

A few minutes later he returned with a post declaring "OK, I'm done with this conversation."

Later, he updated it with this: "I'm all for listening to heretics when they offer insights I can use, but I'm not finding that at all in this conversation, just word games and continual insistence that the members of the sect have insights denied to us lesser mortals. Time to move on."

That's probably wishful thinking on Krugman's point. He may move on, but this debate will no doubt be picked over on blogs until kingdom come. Or, you know, until another Eurozone country goes kerplunk and everyone gets distracted.

(MSNBC: Paul Krugman vs. MMT: The Great Debate, 3 April, 2012)

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Thu May 31st, 2012 at 09:16:05 AM EST
[ Parent ]
Could they just go to the Fed window and get the money to cover things if the cap markets didn't cover them? Yes, but no one wants to do that (except Goldman Sachs), so they don't lend until they are certain the cash in place.

If nobody wanted to do that, there would be no volume on the ECBuBa's MRO in normal times.

And there is, so they do.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 07:45:25 AM EST
[ Parent ]
IS there any volume at the ECB's window?  There was almost no volume at the US Fed's window before the crisis.  The stigma was too great.  And its going back to that.  

http://research.stlouisfed.org/fred2/series/DISCBORR

by santiago on Thu May 31st, 2012 at 07:54:34 AM EST
[ Parent ]

(Click to embiggen)
Source (h/t afew)
The big, persistent drops in 2008, 2009/10 and early 2012 are artifacts of big LTRO tenders. So actually the ECBuBa's crisis management strategy has driven volume off the MRO.

Incidentally, note the noise here. You thought the interest rate was a noisy signal? This is a noisy signal. And that's not surprising. After all, the ECBuBa is targeting the interest rate and floating the MRO tender.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 08:59:25 AM EST
[ Parent ]
That's really interesting. I've never looked at the ECB's data on that before, and it is vastly different than the US, regardless of periods of crisis or not.  

Now I wonder what Britain looks like.

by santiago on Thu May 31st, 2012 at 12:30:56 PM EST
[ Parent ]
I am going to be so bold as to suggest that banking as actually practised can be different in different countries (or whatever the relevant division is) even if it is under the same formal rules. So the study of actual banking would then need to study different processes which when compared may give new and interesting conclusions.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu May 31st, 2012 at 04:36:47 PM EST
[ Parent ]
I don't think the Fed has anything that corresponds to the MRO. What the Fed does, AFAIK, is something that corresponds to the ECB's marginal lending facility (or "penalty rate" in the vernacular). At least, that European banks use the way you say American banks use the Fed's discount window.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 07:19:16 PM EST
[ Parent ]
Another way of putting it is to describe the other ways that a CB or other authority can go about changing an interest other than the process of printing or shredding (figuratively in most cases) cash and using it to buy something else of value that other people are holding on to.  It matters because there are other consequences to having too much or too little money than just interest rates -- namely inflation or deflation, which erodes the usefulness of money as a medium of exchange and measure of value and a predictable storage of value.
by santiago on Wed May 30th, 2012 at 12:58:35 PM EST
[ Parent ]
Another way of putting it is to describe the other ways that a CB or other authority can go about changing an interest other than the process of printing or shredding (figuratively in most cases) cash and using it to buy something else of value that other people are holding on to.

The CB can declare that it will pay its policy rate on all deposits, and lend at its policy rate against all sound collateral.

The interest rate is now fixed for that maturity, and there is nothing anybody can do to challenge that interest rate short of sending armed men to the central bank. No money has been created and destroyed at this point.

People now start availing themselves of this facility, and only then does money begin being created and destroyed. The volume of money being created and destroyed is a consequence of the interest rate the CB decided to announce when it announced the unlimited fixed rate tender.

It matters because there are other consequences to having too much or too little money than just interest rates -- namely inflation or deflation,

Ah, the quantity fallacy of money makes its appearance.

Inflation and deflation is governed by the state of effective demand. The quantity of money is a consequence, not a cause, of price levels. If you want to argue that the causality runs from the monetary aggregate to the price level, you need to provide either a really compelling cause-and-effect story or a Granger causality test showing that relationship.

which erodes the usefulness of money as a medium of exchange

You need to prove that. With data. AFAIK, there is no data that that the usefulness of money as a medium of exchange depends in any meaningful way on inflation as long as the annual rate of inflation remains in the positive single digits.

and measure of value and a predictable storage of value.

Money isn't supposed to be a measure and predictable store of value over a time scale of years and decades. Money is supposed to be a measure and store of value only over a time scale of months and quarters, since that is the time scale that business is transacted on.

If money is a predictable measure and store of value over years and decades, it means that you are paying people for not investing their money. That's stupid and counterproductive to the process of capital accumulation, which is the source of industrial prosperity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 01:52:51 PM EST
[ Parent ]
Well to find data to prove your point (and you're the one with the burden here because every economist from Keynes (the original Keynes too) to Friedman to Krugman agrees with my explanation of how it works  (I haven't even seen anything from Keen that disagrees with it), you have to pose your question as a falsifiable hypothesis.  So what is it and what is the data that proves it?

It seems to be that you're arguing that changes in interest rates cause changes in money supply instead of changes in money supply causing changes in interest rates.  But I'm not sure if that's what you mean.  I think it sounds rather more like a word game than something you can provide falsifiable data for, but have at it.

Part of the issue seems to be wrapped up in the problem of assuming that because a powerful government-like actor declares something, that everyone just follows it without any further effort on the part of the powerful actor.  This may be where you're not seeing how it's a non-trivial to change an interest rate.

In your example, you seem to assume that there are unlimited supplies of adequate collateral available and that there is no difference in risk between them or their associated borrowers, and this just isn't the case because we don't live in an unlimited world.  Mortality imposes limits that even CBs must contend with.

by santiago on Wed May 30th, 2012 at 07:22:34 PM EST
[ Parent ]
Well to find data to prove your point (and you're the one with the burden here because every economist from Keynes (the original Keynes too) to Friedman to Krugman agrees with my explanation of how it works  (I haven't even seen anything from Keen that disagrees with it), you have to pose your question as a falsifiable hypothesis.  So what is it and what is the data that proves it?

Pick your favourite monetary aggregate. Pick your favourite macroeconomic indicator. Run your favourite statistical causality test.

My hypothesis is that if it is possible to show causality in one direction, that causality will be from the macroeconomy to the money supply - that is, the supply of money is endogenous.

It seems to be that you're arguing that changes in interest rates cause changes in money supply instead of changes in money supply causing changes in interest rates.

I'm arguing that you can only commit to defending an interest rate if you are willing to accept the money supply that the private sector wants, conditional upon that interest rate. Fix the interest rate and you have to print or burn unlimited and unrestricted amounts of money in order to make that interest rate target happen.

That commitment means that you cannot set a separate target for money supply. You cannot simultaneously say "M0 must be at $ 1 tn." and "interest rates must be at 1 %." To achieve the former, you have to let the market decide the interest rate. To achieve the latter, you have to supply the market with however much currency it wants to use at the given interest rate. This should not be in any way controversial - it's Micro 101 textbook stuff: The difference between the CB imposing zero elasticity on the money supply and the CB imposing infinite elasticity on the money supply.

Now, if you don't want to call the commitment to print unlimited and unrestricted quantities of money "losing control of the money supply," then fine, we can call it something else. But the fact of the matter is that the central bank can't simultaneously decide that it wants a given interest rate and that it wants to supply a given quantity of money. And the fact of the matter is that given this choice, the CB always chooses to defend its interest rate target over its quantity target.

In your example, you seem to assume that there are unlimited supplies of adequate collateral available and that there is no difference in risk between them or their associated borrowers,

Those are all demand side. The CB isn't fixing the retail rate - it can't do that without going into the retail banking business, because it does not decide the retailer's markup over the policy rate. The CB fixes the risk-free rate.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 03:00:08 AM EST
[ Parent ]
The interest rate is a measure of money, not money itself.  While theoretically the supply of money relative to demand is wholly incorporated into the interest rate, it might not actually be true.
That rings so wrong I cannot quite put my finger on why it's wrong.

How can interest rate be a measure of money? You're saying price is a measure of stock. Supply and demand are measured in units of stock, therefore they determine a price if the market clears. So the price contains information on the supply and demand. But in reality what it contains information on is the marginal supply and marginal demand. It tells you nothing about the aggregate stock. Price is, to a first approximation, entirely independent of the volume transacted at that price. It's just an indication that the market cleared and some volume was transacted.

The thermodynamic analogy of all this is as follows: prices are intensive quantities (such as temperature, pressure, various potentials) and stocks are extensive quantities (such as energy, volume, matter amounts). Extensive quantities (stocks) are always defined. Intensive quantities are only defined in local equilibrium, when two different systems are in contact across a boundary. Similarly, prices only exist when the market clears, so there are two different stocks and come quantity is transacted. Also, extensive quantities need not be conserved in the presence of a "reservoir", which is an effectively infinite system which enforces the constancy of an intensice parameter at the expense of extensive parameter nonconservation. For instance, the way to model chemistry is to assume that particle numbers are not conserver because there is an infinite reservoir of matter available which enforces a chemical potential (a cost of taking a new particle out of the reservoir). Similarly, the central bank being solvent by fiat it's effectively infinitely big and can fix the yield curve for any asset at the expense of money nonconservation.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Wed May 30th, 2012 at 08:55:41 AM EST
[ Parent ]
Interest rate is the price of money, a measure of its value relative to other things. It is an indicator, and an imperfect one at that, not the thing itself.
by santiago on Wed May 30th, 2012 at 12:42:34 PM EST
[ Parent ]
I'm not talking about measuring the stock of money. With an interest rate as an indicator of its relative value, you don't need to know anything about the stock of money to change the interest rate by increasing or decreasing the stock of it.  But that doesn't mean that interest rates are anything more than an indicator for the outcomes of real acts of creating or destroying stocks of money.
by santiago on Wed May 30th, 2012 at 12:46:52 PM EST
[ Parent ]
That's like saying temperature is nothing more than an indicator of internal energy.

That doesn't make internal energy interesting of the ocean your power plant is using as its heat sink in any way meaningful or interesting to the operation of the power plant.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 02:00:41 PM EST
[ Parent ]
That's like saying temperature is nothing more than an indicator of internal energy.

But it isn't. Temperature is a property of equilibrium across a boundary, so it is far more interesting than internal energy.

Similarly price is a property of a clearing market, and it's far more interesting than stock.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Wed May 30th, 2012 at 04:07:46 PM EST
[ Parent ]
The Fed isn't buying non-treasury securities

Maiden Lane I & II were SIVs set up by the Fed, IIRCC, to hold the dodgiest 'assets' falling out of the AIG fiasco. That is why there was so much anguishing by some over the deteriorating quality and increasing size of The Fed's balance sheet.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed May 30th, 2012 at 11:50:47 AM EST
[ Parent ]
Central bank asset SALES destroy money, not purchases, because the central bank exchanges the government security on its balance sheet for an amount of cash which is destroyed.

In so far as the assets in questions can be repo'ed on demand at the Central Bank's discount window in exchange for cash, they are money.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 05:35:44 AM EST
[ Parent ]
And insofar as the assets in question cannot be repo'ed on demand at the CB, they are usurping a treasury operation.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 06:22:08 AM EST
[ Parent ]
But, as I understand it, there is generally no requirement that securities must be accepted at a central bank discount window -- it's up to the central bank to decide whether or not to buy the asset and at what price.  A central bank can actually refuse to buy an asset, and very few entities even have access to discount windows, which is why it's not equivalent to cash.
by santiago on Wed May 30th, 2012 at 06:25:14 AM EST
[ Parent ]
But, as I understand it, there is generally no requirement that securities must be accepted at a central bank discount window -- it's up to the central bank to decide whether or not to buy the asset and at what price.

The discount window isn't buying. The discount window is (over)collateralized lending. Hence the name.

A central bank can actually refuse to buy an asset, and very few entities even have access to discount windows, which is why it's not equivalent to cash.

But all lawfully managed banks have access to the discount window, which is why such securities are cash-equivalent for banks, and cash-equivalent less a bank's bid-ask spread for everyone else.

The central bank can, of course, refuse to accommodate. The central bank can also refuse to provide cash for the ATMs.

In practise, that would crash the payment clearing infrastructure. The ECBuBa is the only central bank in the world that can get away with even threatening to do that, much less actually doing it. And we've seen how well that works out.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 06:42:01 AM EST
[ Parent ]
Not all lawfully managed banks have access to the window, and they have to exchange securities for collateral which is the same as buying cash with a security -- collateral determined by CB policy, which it can change when it wants and make it different for different banks based on some risk criteria if it wants to.  This makes the window costly and not the same as cash -- you have to be in a special club to ever use it: be in the bank club and be accepted by the CB for discount window access.  CBs refuse a discount window to banks that they perceive as problematic or outside of their regulatory purview, which means that the credit of the bank matters, another reason why even low risk treasury securities are not the same as cash.  They just aren't as liquid as cash and are in less demand relative to cash when risk aversion is high.
by santiago on Wed May 30th, 2012 at 07:31:52 AM EST
[ Parent ]
Not all lawfully managed banks have access to the window, and they have to exchange securities for collateral which is the same as buying cash with a security

Yes. This. Precisely. Bingo.

Swapping a ton of grain for a treasury security is precisely identical to swapping a ton of grain for cash, because I can always rediscount the treasury with the CB.

collateral determined by CB policy, which it can change when it wants and make it different for different banks based on some risk criteria if it wants to.

Yes, and when it does that for treasury securities, the economy breaks. So it tends to not do that for treasury securities. Except when, like the ECBuBa, it is run by crazy people.

CBs refuse a discount window to banks that they perceive as problematic

No. Rediscounts are collateralized. CBs which ordinarily prefer to use open market operations to conduct their interest rate policy extend rediscount facilities precisely to the banks which are perceived as problematic.

or outside of their regulatory purview, which means that the credit of the bank matters, another reason why even low risk treasury securities are not the same as cash.  They just aren't as liquid as cash and are in less demand relative to cash when risk aversion is high.

That's what Bill Gross thought too.

He lost an eight or nine figure sum (of other people's money) betting on that.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 07:51:43 AM EST
[ Parent ]
None of that refutes the argument that CBs are agents, not the passive actors.  They set and change the policies which create or destroy money in circulation in an economy, and banks follow those policies in order to go about their operations, and they are sanctioned when they don't (or bailed out as the case may be, which is another act of CB agency when it occurs since not all banks get bailed out).  
by santiago on Wed May 30th, 2012 at 12:51:52 PM EST
[ Parent ]
The CB is an actor. It sets the interest rate.

Having done so, however, its agency ends. You can't simultaneously fix interest rate and money supply. That would overdetermine your system.

And the one that makes a difference for how people go about their business is the interest rate. So if you want to influence how people go about their business (i.e. exercise power), you should be keeping your eye on the interest rate, not the monetary aggregate.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 30th, 2012 at 01:30:38 PM EST
[ Parent ]
If the interest rate were as important and interesting as you say, then a zero interest rate would have caused people to do a lot more than they are, but they're not.  Why? Interests rates are not stimulative -- that's the basic lesson of Keynes that even Friedman had to agree with -- so they're not what you should be looking at.

Interest rates aren't causal -- they're outcomes of the more interesting stuff going on behind them -- only one part of which is the action of the central bank to try to set a rate against all of the other forces arrayed against it.  Defense is the wrong word to use because it really is an assault on millions of other actors who have their own ideas and objectives in mind, just like any agent that tries to organize a bunch of people to do one thing and not a million other things they would otherwise do instead. It's not an easy job and fails more often than it succeeds because of the mortal limitations of our existence.  

by santiago on Wed May 30th, 2012 at 08:16:26 PM EST
[ Parent ]
Rather interest rates are very weakly causal compared to the actual actions of organizing people do things that fiscal spending can do.  Real things are the instruments that cause interest rates to occur, and printing more money and giving it to banks causes the banks to use that money to lend it in normal times, and the banks then lower their interest rates in competition with each other to try to make a buck off another borrower.  The rate itself is a mere outcome of the actions of some people --bankers -- trying to use the money they've been given by the CB to make a buck.  
by santiago on Wed May 30th, 2012 at 08:21:53 PM EST
[ Parent ]
Rather interest rates are very weakly causal compared to the actual actions of organizing people do things that fiscal spending can do.

That is certainly true. But there is no fiscal effect in central bank open market operations in treasury securities.

Real things are the instruments that cause interest rates to occur, and printing more money and giving it to banks causes the banks to use that money to lend it in normal times, and the banks then lower their interest rates in competition with each other to try to make a buck off another borrower.

But that will lower the interbank rate. If the central bank is committed to defending a certain interbank rate (and it always is), then it cannot simply print money and leave it with the banks. On the other hand, as long as it is committed to defending an interbank rate (which is always), it cannot refuse to fund a loan granted by a bank with access to the interbank market.

It can refuse to fund loans if it is defending its target yield curve through rediscount operations rather than open market operations. That's one of the advantages of rediscount-based interest rate policy. But in that case it is pretty obvious that the money that is created is created in reaction to lending rather than as a cause.

The rate itself is a mere outcome of the actions of some people --bankers -- trying to use the money they've been given by the CB to make a buck.

If that were true, the interbank rate would fluctuate wildly. And it doesn't, so it isn't.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 02:58:47 AM EST
[ Parent ]
The interbank rates DO fluctuate a lot. Even the overnight rate.  It takes a lot of work for CBs to bring them back to targets. Failure is frequent.

Look them up on FRED: http://research.stlouisfed.org/fred2/series/USDONTD156N

by santiago on Thu May 31st, 2012 at 05:39:28 AM EST
[ Parent ]
That's not a particularly noisy signal, but yeah you get a little noise when you insist on using open market operations to defend the interbank rate.

Now let's play that game with the EONIA:

(h/t Migeru)

The red line is the rate on the ECB's overdraft facility, the orange is the MRO rate, the green is the ECB's deposit rate.

Notice three things about this figure: 1) Eonia always stays within the bounds given by the deposit and overdraft rates (the one exception is at the boundary between two policy rate changes). 2) Most of the variance is on the closing day of the regulatory liquidity reporting period. 3) The EONIA rate does not deviate from the MRO rate, except in two periods of special note: Immediately preceding the introduction of the Euro as physical currency, where it deviates upward, and when the interbank market suffered a heart attack, where it collapses to the support rate.

Now, questions:
Q1: If banks always secure liquidity before lending, why are there spikes at the closing day of their liquidity accounting period?
Q2: What prevents the ECBuBa from setting the deposit and overdraft rates closer together? Why can they not be set arbitrarily close together?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 08:10:42 AM EST
[ Parent ]
Again, really interesting.

On question 1, banks usually have internal liquidity requirements that they try to comply with, so they could be going to the market to get back in compliance with their own internal treasury requirements and not necessarily chasing money down to clear their checks to borrowers. But the difference in the Euro experience makes me wonder now.

On Q2, my guess would be that if it's too close together there wouldn't be enough profit in the arbitrage game for enough people to do the work of bidding the EONIA to its policy desired level.  There may also be transaction cost issues to contend with.

by santiago on Thu May 31st, 2012 at 12:52:16 PM EST
[ Parent ]
But suppose the EONIA is below the support rate. Then no bank would lend money into the interbank market - they would all simply pile it into the CB's deposit facility. That's less work than finding another bank that you trust to lend to. Conversely, if the EONIA rate is above the penalty rate, a bank would have to be unusually dumb (or have no good collateral) to borrow on the EONIA rate rather than just making a phone call to the CB. That is, you wouldn't need third-party arbitrageurs, because the primary market actors would do all the arbitrage you need.

The spread between the penalty rate and the MRO rate is essentially the ECB saying "if you can't plan your liquidity needs a week ahead, we will soak you to the tune of one percentage point." While the spread between the support and MRO rates is the ECB's bid-ask spread.

Now, the former may be very reasonable. But I cannot help but ask myself what a CB needs a bid-ask spread for? It's not like it has to turn a profit - it's a piece of public infrastructure, not a joint stock company. Of course, it may be to encourage banks to settle what liquidity needs they have between themselves without going through the CB, to reduce CB administrative overhead. But IMO that's short-sighted: When banks go to the discount window, you get to look at their balance sheet - if you jack up liquidity requirements high enough, you can get real-time surveillance of every bank balance sheet in the country!

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 07:36:57 PM EST
[ Parent ]
Santiago, considering that you sit on an advisory board to a CB, that you "find really interesting" these charts of the interbank and policy rate history of the Euro, and that you mention the stigma of going to the Fed's discount window "is coming back", I would appreciate it if you could comment in more detail on the two diaries Central Banking 101: the EONIA heartbeat where JakeS got the "very interesting charts", as well as Rediscovering Minsky's wheel, one pundit at a time which is about the difference between monetary policy conducted through the discount window vs. open market operations.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Fri Jun 1st, 2012 at 06:37:53 AM EST
[ Parent ]
We really ought to go over the comments for the EONIA heartbeat diary and condense the conclusions into a more readable format.

Oh, well, after the exams, I guess.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 1st, 2012 at 07:09:18 AM EST
[ Parent ]
I must have missed those discussions at the time.  I'll look at them. Gracias.
by santiago on Fri Jun 1st, 2012 at 09:54:04 AM EST
[ Parent ]
If the interest rate were as important and interesting as you say, then a zero interest rate would have caused people to do a lot more than they are, but they're not.

Conversely, if the money supply were at all important to any macroeconomic variable, then the doubling or tripling of base money over the past few years would have made people do a lot more than they are doing. Every inflation chickenhawk on the planet has been going all Chicken Little over the explosion in the money supply, and yet no inflation has happened.

Why? Interests rates are not stimulative -- that's the basic lesson of Keynes that even Friedman had to agree with

That's certainly true. Fiscal action is stimulative, because it adds to demand. But trading treasuries for cash - in either direction - is just a passive balance sheet operation. It has no fiscal consequence.

Interest rates aren't causal -- they're outcomes of the more interesting stuff going on behind them -- only one part of which is the action of the central bank to try to set a rate against all of the other forces arrayed against it.  Defense is the wrong word to use because it really is an assault on millions of other actors who have their own ideas and objectives in mind, just like any agent that tries to organize a bunch of people to do one thing and not a million other things they would otherwise do instead. It's not an easy job and fails more often than it succeeds because of the mortal limitations of our existence.

Huh?

When was the last time a central bank failed to fix the interbank rate, except in the presence of a ForEx or specie peg? Which are bad ideas precisely because they prevent the government from printing arbitrary amounts of money in pursuit of its macroeconomic objectives.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 03:13:44 AM EST
[ Parent ]
Money supply is important not for spending but for keeping cash hoarders happy until their risk aversion can go away.  That's what monetary policy and QE is all about, not stimulating the economy. Only fiscal policy can really do that.  Monetarists don't believe in stimulus at all. They're like organic foodies.  They just don't want the government involved period, and believe that if they can stabilize financial markets, pure preferences will come back when people's fears are done.  But their views on monetary policy as a security blanket are completely consistent with Keynes on this point. Print money to avoid deflation. Induce government spending to actually stimulate the economy.
by santiago on Thu May 31st, 2012 at 05:45:17 AM EST
[ Parent ]
Considering that most monetarists are completely averse to printing money, and claim that printing money is inherently inflationary, and that deflation isn't necessarily a bad thing, I don't have any idea how you got to this.

Keynes did of course say that government spending could stimulate the economy. But I've yet to see any monetarist say the same.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 31st, 2012 at 07:10:51 AM EST
[ Parent ]
I sit on an advisory board to a CB, and this is what we talk about there.

Friedman also said the same thing numerous times. "We're all Keynesians now."  He just didn't think that justified government intervention regardless.  The real difference between monetarists and Keynesians is not that fiscal spending won't work, it's that it's morally wrong even if it does.

There are a bunch of people today arguing that fiscal spending won't work, and Krugman spends his time pointing out that they don't even read their monetarist prophets if they believe that.

by santiago on Thu May 31st, 2012 at 07:27:35 AM EST
[ Parent ]
santiago
Print money to avoid deflation. Induce government spending to actually stimulate the economy.

By simply crediting accounts of citizens with money the Treasury could 'spend money into creation'. This would seem to combine monetary and fiscal policy.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 31st, 2012 at 09:59:21 AM EST
[ Parent ]
But it might matter which citizens get the money.  Many of them might just do the same rational thing everyone is doing anyway and causing the recession -- hoarding the money.  I think it actually takes a government to forcibly make people go to work by actively hiring people to do jobs like building things, etc.  Otherwise people might rather just stay home and wait.
by santiago on Thu May 31st, 2012 at 01:13:10 PM EST
[ Parent ]
But it might matter which citizens get the money.

Agreed. This is why the LAST thing one would want to cut would be money to the unemployed and those on welfare. In 1962 my roommate was taking econ out of Samuelson and there was a discussion of this issue. When he brought this up I and our other roommate responded "Give the money to students!" They would be certain to spend it. It would beat Hell out of putting them further in debt with student loans, >90% of recipients would be certain spent on daily consumption and it is educating the citizenry along with improving their career prospects. The current system of student loans is both insane and mean spirited and is counterproductive to the overall attempt to reduce the debt to GDP ratio of the country.

But Steve Keen's idea to directly credit citizens' accounts with, say, $100,000 each, with the requirement that it be used first to pay down debt, if any, would even marginally help the wealthier in society and many of the younger citizens who happen to have little debt could use that money for college, should they so wish. Given the balance sheets of most individuals at present, it is highly doubtful that money 'paid into circulation' via such a method would result in wage inflation as there is a large labor pool to be absorbed before labor shortages become a real problem. Another benefit would be that by calling such action exercise of monetary policy it might fall within the discretion of the Fed and Treasury - QE for the people.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 31st, 2012 at 03:14:14 PM EST
[ Parent ]
I was thinking about that and there is a big problem with Keen's idea.

If you give each citizen $100,000 and tell them first to pay down debt with that, many, perhaps most, will use all of that money to pay down their debts because they are underwater right now in a mortgage on a property that is worth much less (many times 100,000 or more) than they owe. So the bank get's their money and they still have no more spending power to do anything. The bank does, but it won't, because if it would, it would already be lending that money out and spending it.  

So Keen's idea as you've explained it is really the same thing as the ECB bailout of Greece idea.  The money is really bailing out banks, not gong to individuals to spend.

by santiago on Fri Jun 1st, 2012 at 12:29:35 PM EST
[ Parent ]
Now, I am not opposed the government hiring people and get work done, I have argued for it many times. But I would also like to note, that people who lack basic stuff like food, housing and access to socially important services like transportation and tele-communication are very unlikely to hoard money. So if the government is out of ideas on how to put money in the hands of people who will spend it, I suggest going outside and put money in the hats and jars on the pavement. It will be spent quickly enough.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu May 31st, 2012 at 03:22:27 PM EST
[ Parent ]
santiago:
They're like organic foodies.

in what way?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu May 31st, 2012 at 06:06:44 PM EST
[ Parent ]
There is a strain, perhaps only in the US, of radical organic types who reject all government intervention in their ability to grow and sell organic produce however they see fit.  In their opinion, the government is so fully in the hands of big agriculture and industrial procedures that it will never do anything but destroy the REAL organic product.

On the other hand, if the government butts out, they'll grow and expand and create utopia, or something.

Anti-government ideology lives on the left, too.

by Zwackus on Thu May 31st, 2012 at 06:48:20 PM EST
[ Parent ]
It's not the government intervention that I'm comparing organics too.  It's that fact that so many people consume organic as a moral choice, not merely for taste or health, just like monetarists want to avoid government intervention as a moral choice, even if it would be good for the economy.
by santiago on Fri Jun 1st, 2012 at 12:35:16 PM EST
[ Parent ]
thanks for your explanation.

do you have a problem with that? pretty harmless form of moral grandstanding, if i understand your meaning.

here in italy they don't want farmers even meeting up and trading produce, gotta have a finger in every pie.

just another charm on the bracelet...

as for organic food eating without any health or taste reason, i would imagine that's pretty rare, wouldn't you say?

i guess not wanting your food dollar to support the poisoning of the land and water table for future generations and the pesticide industry could be reason enough!

not to mention all the healthcare bills you dodge with a little extra outlay...

now back to abacus clicking, sorry for the topic hijack.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri Jun 1st, 2012 at 01:42:19 PM EST
[ Parent ]
I don't have a problem with that at all. I do it all the time myself.  

I just find it interesting that monetarists are essentially arguing the same thing.  They know that fiscal spending is what's needed to improve the economy, but they cannot advocate for that because government spending of any kind is worse than keeping high unemployment.

However, there really isn't a compelling body of scientific evidence making an argument for significantly improved health outcomes from eating organic food.  I like it because it seems like it must be cleaner and more wholesome, but there really isn't much evidence for that. The main health beneficiaries are probably the farmers, not the consumers.  Organic sometimes seems to taste better, but often it's because of some other factor that has nothing to do with organic.  For example, an heirloom tomato tastes better regardless of how its grown, but it just so happens that many of them are grown organically anyway, so organic gets the credit for it, not the genes.  

The classic taste test for outing morally informed food tastes versus objectively informed tastes is to compare grass-fed versus corn-fed beef in blind taste tests, organic or not.  The vast majority of blind taste tested consumers tend to choose corn-fed beef because the additional fat content in corn-fed beef strongly stimulates pleasure senses on the human tongue and brain in a way that the more lean grass-fed beef simply cannot, unless it's a really expensive cut that has been fed with dozens of different clovers or whatever.  However, if you ask those same consumers, myself included, which they'd prefer, many more of them still prefer grass-fed because it sounds more organic or ecological or wholesome or something.  It's a moral preference, not an objective taste choice.  

And, to bring birth control moral preferences back into it, I am always amused by hard core foodies who are incensed about the amount of hormones used in dairy production and found in all sorts of places in the environment, causing health issues. It turns out that a large number of the folks who so hate hormone treatment in cattle use it even more intensively in their own bodies or encourage its use by their friends and family members in the form of artificial birth control, which finds its way into water and other things that people consume when it gets tossed in the garbage or expelled in human waste, just like dairy hormone treatments do on a smaller scale.

Nevertheless, it's never a winning argument to bring up because moral preferences are still valid even when they contradict a person's own factual preferences.

by santiago on Fri Jun 1st, 2012 at 03:52:22 PM EST
[ Parent ]
Hmm it'd be interesting to know the numbers, the amount of artificial hormones released through direct human (ab)use such as you mentioned, and the amount released by the factory farming.
My guess would be it's minor, (bad anyway...)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Fri Jun 1st, 2012 at 04:15:07 PM EST
[ Parent ]
Yes, there's a number of people doing research on it now, so it will be interesting to see. I got the info from a radio interview I heard a few months ago from one researcher looking at the problem of US boys with too much estrogen.

One thing, though, is to look at the population numbers. There are only about 9 million dairy cows in the US, only some of which are treated with hormones, probably less than half given the distribution of farm sizes.  There are over 150 million women in the US, only some of which are using birth control.  So the potential for human causes of hormones in the environment rather than dairy farm causes is certainly there, which makes it worth it for someone to study.

by santiago on Fri Jun 1st, 2012 at 04:30:25 PM EST
[ Parent ]
santiago:
too much estrogen

This is a huge question, and it's true we're off-topic.

But there are estrogen imitators or look-alikes of many kinds, and among them agricultural pesticides.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 1st, 2012 at 04:32:58 PM EST
[ Parent ]
Yes, you're right.  I'm not arguing for agribusiness here -- just showing how people who advocate for government to get out of private lives -- monetarist bankers -- can find all sorts of truths and facts to support their moral claims and values, just like others, such as organic food advocates, do in their domains as well.  And even where one's values are wrong, sometimes the facts they uncover are true.
by santiago on Fri Jun 1st, 2012 at 04:51:02 PM EST
[ Parent ]
And I do not want not to single out women here with this example. Just looking at the email spam ads for male testosterone treatments and the warnings about their crazy-bad health side effects in family members might even be a better example of the dissonance between insisting on hormone-free cattle but using hormones on yourself in ways that might actually injure other people around you more than milk ever could.
by santiago on Fri Jun 1st, 2012 at 04:58:40 PM EST
[ Parent ]
santiago:
There are only about 9 million dairy cows in the US,

what about all the pork, chicken, turkey, and beef cows?

perhaps this tangent off of 'pure economics' can serve to remind us that our existence depends more on good nourishment even than good banks and policies.

a fact one can easily forget in talk of spreads and bonds, discount windows and capital conjurings.

back to basics!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri Jun 1st, 2012 at 05:32:47 PM EST
[ Parent ]
Currently only dairy is subject to hormone treatments on any industrial level.
by santiago on Sat Jun 2nd, 2012 at 02:06:31 PM EST
[ Parent ]
totally right, and don't forget all those wannabe The Hulks, ball players jacking steroids and speed, (when they're not growing tits from too much estrogen).

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Fri Jun 1st, 2012 at 09:31:05 PM EST
[ Parent ]
And, to bring birth control moral preferences back into it, I am always amused by hard core foodies who are incensed about the amount of hormones used in dairy production and found in all sorts of places in the environment, causing health issues. It turns out that a large number of the folks who so hate hormone treatment in cattle use it even more intensively in their own bodies or encourage its use by their friends and family members in the form of artificial birth control, which finds its way into water and other things that people consume when it gets tossed in the garbage or expelled in human waste, just like dairy hormone treatments do on a smaller scale.

Without wishing to further derail the thread, that's not necessarily an inconsistent position.

Given that there exists a maximum safe release of hormones and their metabolites into the environment, it is absolutely, glaringly obvious that human medicinal treatments should be favoured over growth enhancers for animal farming. Likewise, if a hormone or its metabolites have undesirable (side)effects in humans, then it makes a great deal of sense to want to avoid contaminating one's food with them, regardless of their medicinal use. For the same reason that wanting to practice proper radiation hygiene is not inconsistent with using x-rays to aid in setting broken bones.

Controlled exposure to known dosages in the context of a well-defined medical trade-off between therapeutic effect and side effects is a whole different ball game from uncontrolled industrial contamination.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 1st, 2012 at 04:20:28 PM EST
[ Parent ]
We don't know who controls dosages better though. I'm thinking dairy farmers probably do given tight margins in that industry, especially if health insurance covers costs of human birth control pills making it less important for consumers to keep track of them instead of just buying replacements.  Also, the population differences are vast between only a few million dairy cows in tightly controlled conditions in a few small parts of the country and tens of millions of reproductive-age women everywhere, each with one's own agency for action, unlike cattle, thank goodness.

But in general, yes, you're right, it isn't necessarily inconsistent.  But the directionality of potential inconsistencies is about the same degree as that of monetarists who think that government encroachment on private lives of people has lots of yet-to-be-identified bad things too.

by santiago on Fri Jun 1st, 2012 at 04:40:28 PM EST
[ Parent ]
We don't know who controls dosages better though. I'm thinking dairy farmers probably do given tight margins in that industry,

But they have zero incentive to control how many of the metabolites remain in the end product, and that is likely to vary considerably.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 2nd, 2012 at 12:52:09 AM EST
[ Parent ]
There's truth in what you're saying about taste, but don't forget organic farming eschews short cycles in raising animals for butchery. So, if you compare an organic chicken with a standard non-organic, the taste difference is evident. Of course, if you compare with a chicken raised on non-organic inputs over an organic-rules lifespan, you'll be lucky if you can find a difference in taste. The important point being that, for an organic label, that longer lifespan is mandatory (and that the economic pressure in the non-organic field leads to shorter lifespans).
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 1st, 2012 at 04:27:57 PM EST
[ Parent ]
great point. it's 9 mill at one time, multiply through time and short lifespans, and it's loads more.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Fri Jun 1st, 2012 at 06:44:09 PM EST
[ Parent ]
It's a moral issue to monetarists, just a pragmatic one.  Monetarists don't want government involved even if it might help because such involvement is deemed so bad outright.

Organic foodies are similar (as is the Catholic Church on artificial birth control).  There is a moral claim that eating organic is so much better than any objectively identifiable claims to taste and health, so eating organic would still occur for its own sake.

by santiago on Fri Jun 1st, 2012 at 12:33:08 PM EST
[ Parent ]
santiago:
There is a moral claim that eating organic is so much better than any objectively identifiable claims to taste and health

There are even those who would consider it moral, in relation to world hunger, to disallow organic farming methods and advocate industrial agriculture as the only way to "feed the world". There are puritanical types everywhere.

But you are being restrictive. "Taste and health" are not the only, and arguably not even the most important, reasons for supporting organic agriculture. Organic farming avoids spreading pesticides in the environment, protects against soil erosion, makes less use of vital resources such as water, and above all works to maintain and improve soil fertility. What's more, it is a form of farming that the world's small farmers can practise without obligatory recourse to the expensive products of major agro-corporations.

So, a few cranks and prudes here and there...

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 1st, 2012 at 04:09:45 PM EST
[ Parent ]
Yes, I agree, taste and health are not the only or even the more important reasons for supporting organic agriculture.  But that's pretty much what monetarist bankers say about the economy too -- reducing unemployment and giving benefits to the poor are not the only, nor the primary, reasons for government intervention in private economic affairs.  Which means that values -- morality -- is as important to people as facts about the world and how it works.
by santiago on Fri Jun 1st, 2012 at 04:45:02 PM EST
[ Parent ]
santiago
If the interest rate were as important and interesting as you say, then a zero interest rate would have caused people to do a lot more than they are, but they're not.  Why? Interests rates are not stimulative...

Assuming that interest rates or many other factors always have the same effect is problematic. The effect depends on the investment psychology operative at the time. In boom times the operative psychology is competitive greed, in times of contraction it is fear. So different rules apply for different climates. When organizations are liquid but insolvent, as in a balance sheet recession, their only concern is to shrink their balance sheet back towards solvency. And even solvent organizations are risk averse. Assuming interest rates always have the same function confounds analysis.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 31st, 2012 at 09:51:02 AM EST
[ Parent ]
Yes, I agree.  That's what I find more interesting than notion that people just react to rates in predictable ways.

I have to try to learn that too at a personal level.  I am so insolvent but I just can't get myself concerned enough to try to shrink my balance sheet.

by santiago on Thu May 31st, 2012 at 01:09:46 PM EST
[ Parent ]
I am so insolvent...

I guess you are benefiting from the maxim that you don't suffer from making the same mistake that all others around you have made.  :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 31st, 2012 at 03:20:41 PM EST
[ Parent ]
To the extent that real resources, such as human hours of time, physical space constraints, and finite mineral resources, are limited, the trick to money is to get it to match as closely as possible the real resources limitations.  Taxation effectively forces people to provide real resources, particularly their own time, to community ends instead of private satiation of wants and needs.

If taxes were being paid in kind, such as labor corvee or tribute in goods, then this would be true.  But they're not, they're paid in value tokens.

The key difference, I think, between what I've been arguing (apparently derived from my secondhand understanding of MMT picked up at this site) and what you're arguing here is at least partly and empirical question.

Are the physical and material resources of society stretched to their outer limits by the existing private economy, so that any action by government must be funded by the destruction of the ability of private actors to call upon those material resources?  Is the economy so stretched that unfunded government spending would actually be inflationary?

It seems as if this is a question which could be answered through a proper program of econometric research.

That said, my gut intuition is that our economy is nowhere near that level of mobilization in numerous key fields.  If the industrial economy is facing a constant and severe crisis of insufficient demand, and there are masses of the unemployed sitting around doing nothing, then no, unfunded government spending is not going to cause inflation.

There needs to be a balance, clearly, between government spending and taxation.  When the private economy is truly stretched to its limit, that is the time when taxation should be used more aggressively to destroy value, and when spending must be reigned in.  But when the private economy is suffering contraction and collapse, or even just the doldrums of blah stagnation, then a different story should be told.

Not only is there no reason to engage in a program of austerity, there is no reason to rack up debt in order to do otherwise.

by Zwackus on Sun May 27th, 2012 at 05:03:35 PM EST
[ Parent ]
Value tokens, however, are not disconnected from in-kind resources.  In fact, they are, in low-inflation environments, usually pretty closely connected.  Which means that money usually IS an effective proxy for real resources in a given economy.

But you're right -- how connected a monetary instrument is, in a given time and place, to real resources is an empirical question. Most of the econometric research program of organizations such as the Federal Reserve Banks in the US, are devoted to measuring the strength of money as a proxy for real resources such as human labor precisely for the purpose of informing judgements by central bankers on monetary policy.  

by santiago on Sun May 27th, 2012 at 05:15:59 PM EST
[ Parent ]
In a related point, a lot of government spending is on goods where there are very obvious and easily understood utilization numbers - namely, people to perform services.  While it is theoretically possible to employ too many teachers or doctors and nurses, in the current situation it's rather hard to imagine.  As such, it's hard to think of reasons for such spending to be constrained by tax revenue.

 

by Zwackus on Sun May 27th, 2012 at 08:57:51 PM EST
[ Parent ]
Also, a lot of social services are labour-intensive but not resource-intensive. So spending newly created money into employing teachers or nurses (or entertainers) improves employment and reduces the resource intensity of the economy. And it makes people happier.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 05:38:05 AM EST
[ Parent ]
One of the more confusing things the MMTers assert is that taxation doesn't fund anything but rather only retires cash from circulation in the economy, similar to the way a central bank raising interest rates by selling securities would retire cash from the economy. This just isn't correct.

But of course it's not what the MMTers are saying either. Central bank open market operations don't retire any high-powered money from the economy that would not have been otherwise retired given the targeted yield curve. Taxation does retire high-powered money from the economy that would not otherwise have been retired given the targeted yield curve. The former does not influence demand, the latter does.

To the extent that real resources, such as human hours of time, physical space constraints, and finite mineral resources, are limited, the trick to money is to get it to match as closely as possible the real resources limitations. Taxation effectively forces people to provide real resources, particularly their own time, to community ends instead of private satiation of wants and needs.

No.

Taxing forces people to not use real resources. It does not in any way, shape or form ensure that those resources will be provided to the public. Public spending is what forces people to provide them to the community. And the crucial Keynesian insight (which is quietly done away with in the Hicks-Samuelson general equilibrium fairy tale) is that the majority of these real resources - particularly people's time - cannot be saved up. The public and private sector taken together can spend enough at any given time to use the full capacity of the economy, or it can watch the unused capacity go to waste.

The public cannot hoard man-hours against the day the elderly retire; in the real world there are no little gray men running a time-savings bank. The public cannot hoard assembly line days; there are no factory-goblins that will save up the hours that the assembly line stands idle and use them to retroactively produce goods at some future date. The public can hoard steel and grain and other commodities (and frequently does), but this is accomplished by spending money into existence, not by taxing it out of existence.

These distinctions are important, because the highlight that what policymakers need to focus on are the flows (nominal GDP, employment, rate of change of prices, etc.). Then the stocks (national wealth, population, price levels, etc.) will take care of themselves.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 05:56:39 PM EST
[ Parent ]
Taxing forces people to not use real resources. It does not in any way, shape or form ensure that those resources will be provided to the public. Public spending is what forces people to provide them to the community. And the crucial Keynesian insight (which is quietly done away with in the Hicks-Samuelson general equilibrium fairy tale) is that the majority of these real resources - particularly people's time - cannot be saved up. The public and private sector taken together can spend enough at any given time to use the full capacity of the economy, or it can watch the unused capacity go to waste.

True enough.  But without taxation you have almost no capability of reserving enough resources for public expenditure because only taxation allows for those resources to be set aside outside of a competitively priced market system.  Taxation in an exchange-based economy allows government to get a hold of resources without bidding on them with other, possibly more powerful bidders, in market frameworks.  So my point holds -- taxation DOES fund things, and by that I mean that it provides the funds -- the resources -- which can be put to use for public ends.

by santiago on Sun May 27th, 2012 at 06:26:15 PM EST
[ Parent ]
Untrue.

If the government enforces loan contracts in government money, rather than in private bank money, then the operations of the private banking system will generate a non-zero demand for government money for debt servicing and to hold against margin calls.

Further, the credit cycle will have periods during which it will over-commit society's resources and times during which it will under-commit society's resources. In principle, you could eat the inflation during the former periods and conduct your public investments during the latter, with no taxation whatsoever.

In practice, you will usually want a larger public sector than this will allow for under a properly managed business cycle. But that is a political decision, not an operational necessity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 27th, 2012 at 06:40:38 PM EST
[ Parent ]
But what gives money it's value then?  What ties it in some way to real resources if not a government specified claim on one's time, space, or energy?  This goes back to the old polis versus market argument in political science.

Without some kind of social actor with the power to make a claim on resources outside of a market framework, there would be no one with the capacity to compel anyone to divert resources to public ends instead of just hoarding resources in recessions and or over-committing them further in periods of prosperity, or even to compel contract enforcement in any form of money.  A self-declared government could print more money and use some of it to try to enforce contracts, but then so could banks, or warlords, or anyone else, resulting in inflation, or worse, civil war.  Taxation, and the implicit social contract of a unified government, solves that problem.

A market (like globalization as I've argued in another, recent diary's comments), can't exist without some kind of enforcement mechanism exogenous to the market itself. For government to have any power to declare the value of money for contract enforcement, it must have a non-market means of securing those resources and thus providing an exogenous value to them.  Taxation is a convenient policy implement for doing precisely that.

by santiago on Sun May 27th, 2012 at 07:07:03 PM EST
[ Parent ]
Contracts are enforced by law - i.e. ultimately by the threat of state violence, and by the state's claimed monopoly as the source of violence of last resort.

Taxation has nothing to do with this.

A self-declared government could print more money and use some of it to try to enforce contracts, but then so could banks, or warlords, or anyone else, resulting in inflation, or worse, civil war.

And this is exactly what has been happening for the last few years. The banks have decided to claim the machinery of state, with the ability to apply economic violence to those they consider transgressors - including nation states such as Greece.

The point is not to 'cure' Greece, it's simply to show Greece and the other PIIGs who's in charge.

The problem is that all government, including feudal monarchy, requires some consent from the governed.

Ultimately money has value because enough people have enough faith in it.

When that changes bad things happen, and governments - implied or explicit - lose their claim on power.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun May 27th, 2012 at 08:00:17 PM EST
[ Parent ]
Force is not free.  It's very expensive to tell people to reserve resources for others' use, and taxation has proven to be a relatively cost effective institution for doing that.  

It costs resources to pay bureaucrats and police to force people to do things, and unless the rest of society has already agreed to let a government do that sort of thing, banks, warlords, or anyone else can and do also get into the business of paying thugs to enforce parallel rules.  That's actually what happens in civil wars, in countries ranging from Afghanistan now to Columbia and Lebanon in recent history in extreme forms.  But even when people all agree with the concept of their government, it doesn't mean that they all agree with following the rules of that government, as people in Greece have shown in the past (tax evasion) and are showing now with a rejection of elected administrations that want to cooperate with German politicians.

Money has value because an authority that people believe will ultimately win any contest for power over how to organize people do things has issued that money and gives it a price.  Taxation is the instrument for which the price of money is given because through taxation a supreme social authority compels a specified amount of work (or wealth in lieu of work) that must be surrendered instead of used for private ends.  Without that extra-market action to specify the value of money through naked power, there is no reason for anyone to trust it.

by santiago on Mon May 28th, 2012 at 11:47:06 AM EST
[ Parent ]
Greeks rejecting the government is following the rules. The government structure is democracy.

One wonders, as well, if the so-called rules have already been undermined by an initial breach of faith, and that is a monetary system that seems stillborn, or to go back to the 2008 crisis, a fraudulent reliance on exotic financial instruments.

by Upstate NY on Mon May 28th, 2012 at 02:15:56 PM EST
[ Parent ]
Greeks rejecting the government is following the rules.

That this needs to be pointed out in this context reminds me of David graeber's article David Graeber: On Playing By The Rules - The Strange Success Of #OccupyWallStreet

My first take on the question came when The Guardian asked me to write an oped on Occupy Wall Street a few days later. At the time I was inspired mainly by what Marisa Holmes, another brilliant organizer of the original occupation, had discovered in her work as a video documentarian, doing one-on-one interviews of fellow campers during the first two nights at Zucotti Square. Over and over she heard the same story: "I did everything I was supposed to! I worked hard, studied hard, got into college. Now I'm unemployed, with no prospects, and $50 to $80,000.00 in debt." These were kids who played by the rules, and were rewarded by a future of constant harassment, of being told they were worthless deadbeats by agents of those very financial institutions who--after having spectacularly failed to play by the rules, and crashing the world economy as a result, were saved and coddled by the government in all the ways that ordinary Americans such as themselves, equally spectacularly, were not.


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 05:40:54 AM EST
[ Parent ]
Great point. I'm also reminded about something Varoufakis said about his teaching experience in this climate. He said kids do not seem engaged and energized in class. They have drawn out and blank looks. This was quite an eye-opener if your ever read his descriptions of the economics program that he founded at U. Athens. He used to be positively hyperbolic about it.

The phrase, "Do your homework," is ironic in light of the current situation.

by Upstate NY on Tue May 29th, 2012 at 08:51:08 AM EST
[ Parent ]
He might also be teaching morning classes to the hung-over.
by Zwackus on Tue May 29th, 2012 at 04:45:36 PM EST
[ Parent ]
just saw a report yesterday that ouzo consumption in greece is way down...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Fri Jun 1st, 2012 at 01:49:13 PM EST
[ Parent ]
I disagree.

It is straightforward to imagine a market with no intermediaries - whether private (shareholders) or public (treasury) - taking place within a suitable agreement as a framework of trust.

Any individual can issue an undated credit, and undated credit can also be based directly upon the use value of productive assets. eg stock (which is not the same thing as a share) returnable in payment for land rental.

Such credits may then be exchanged by reference to a unit of account which is relevant to and accepted by the participants in the market.

Such an abstract unit of account is completely independent of the value which may be exchanged by reference to it.

We are used to using completely baseless units - eg $, € and £ - as a unit of account, but in my view the only meaningful unit of account is an absolute unit of energy of a size relevant to everyday experience.

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

by ChrisCook (cojockathotmaildotcom) on Sun May 27th, 2012 at 08:01:30 PM EST
[ Parent ]
But what supplies the trust?  The credibility of enforcement or sanctions for violators of that trust is needed, and that must occur outside of the market framework itself because of the problem of what economists call "asymmetric information," or, in other words, dishonesty.
by santiago on Mon May 28th, 2012 at 11:50:20 AM EST
[ Parent ]
What gives the state money value under that system is that banks have to accept it in lieu of their privately issued money.

When bank money is plentifully issued, this will not be an issue, but private bank money printing inevitably leads to panics, and during those panics there are unutilized resources that the state can obtain by exploiting the unused resources caused by the private taxes that banks collect.

Of course in the real world the state will need some way to maintain a presence even when private money is plentiful, because it has to keep paying the police even when the police isn't breaking bankster heads. And of course relying on (even aggravating) the business cycle to create idle capacity in the economy is just about the dumbest possible way to do that. But as a thought experiment it is illustrative, because it emphasizes two important concepts: That banks collect the equivalent of taxes and that taxes do not provide real resources to the collector, they only deny real resources to the taxed. These two points in combination is what makes deficit spending during a depression useful.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 03:27:58 AM EST
[ Parent ]
Taxation is useless in a recession. Agreed. That's why permanent deficit spending by governments is sustainable, after all.  But given that there are, in fact, physical limitations to real resources, taxation does indeed secure those resources for state use by denying it to private users.  If no one is using those resources privately as in during a recession when capital and labor unemployment is so high, taxation costs the economy as a whole nothing, as does deficit spending.  But either one does costs individuals something depending on what they wanted to do with the resources they were hoarding, and spending or taxing does not distribute those burdens equally.  In deficit spending, capital-rich hoarders will be burdened less than in taxation plus spending.

The point about taxation is that unless a government is powerful enough to organize people to work for it, by paying taxes, no bank will credibly have to obey it regarding accepting government-issued notes for satisfying debts instead of its own issued notes.  The power of an entity, whether it is a bank or a government or a warlord, to organize others in a society determines the value of any money issued.  Taxation is how governments traditionally do that by specifying an amount of human labor that must be sacrificed to the government in a given time period.  So, when government print too much money, causing inflation, it is evidence of weakness in getting people to surrender their resources through non-market means.

by santiago on Mon May 28th, 2012 at 12:02:45 PM EST
[ Parent ]
In deficit spending, capital-rich hoarders will be burdened less than in taxation plus spending.

That rather depends on who you were going to tax.

But in any event the whole point of deficit spending is to penalize hoarders of money over labour and hoarders of capital.

So, when government print too much money, causing inflation, it is evidence of weakness in getting people to surrender their resources through non-market means.

Not necessarily. Obviously a stronger government could have simply enacted by fiat the denuding of outstanding credit balances corresponding to the effects of inflation, and then taxed and spent to accomplish the same spending aims.

However, when denuding credit balances is itself a policy objective (which is always when you are dealing with a monetary economy containing a private financial sector, because it makes the financial sector more stable and well-behaved), inflation is a useful macroeconomic tool, because it accomplishes this denuding at minimal administrative cost.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 12:10:54 PM EST
[ Parent ]
Even so, inflation is such a backdoor way of accomplishing it, with ambiguous outcomes in other areas, that it is obviously only done when the government is so weak (i.e., divided) relative to other forces in society.
by santiago on Mon May 28th, 2012 at 12:23:52 PM EST
[ Parent ]
Every human endeavor has "ambiguous outcomes in other areas." The fact that taxes can theoretically be tailored with arbitrary precision does not mean that they are in practice, or that the it is worth the administrative overhead of doing so.

Inflation as a deliberate policy instrument is the mirror image of Geselian taxes. So I suppose that you could argue that using inflation instead of Geselian taxes to accomplish the same policy objectives is a sign of weakness, because inflation also occasionally appears as an unintended (or deferred) consequence of other policies. But this is weak reasoning at best, because inflation also has much lower administrative overhead than Geselian taxes, to the extent that Geselian taxes are only employed when the government does not, for some reason have the power to create broad-based inflation - usually because it is a subordinate, non-sovereign level of government, or because it is foolishly pursuing an exchange rate peg.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 12:42:43 PM EST
[ Parent ]
Nevertheless, you just don't find any, or very many at least, examples of governments that deliberately use inflation as a strategy for securing resources for public use.  Rather, inflation is a byproduct of other strategies, seen by some as a positive byproduct and others as a negative one, but almost never as an end in and of itself, which is why it is "backdoor."  Taxes are overt and thus require the cooperation of many more elites, and that is why using taxes to reserve resources are evidence of a government having more power and using inflation is evidence of less power, all else equal.
by santiago on Mon May 28th, 2012 at 01:31:43 PM EST
[ Parent ]
The present European Union seems to provide a counterexample. Here where low inflation, and even outright deflation, is a sign of emasculated governments being looted by a group of elites which has managed to erect a very nearly impregnable fortress around the central bank. In this case, forcing the central bank to acquiescence to higher inflation would be a victory for government power. Since the central bank has placed itself totally beyond constitutional rule of law, and is now run more as a feudal fiefdom than an organ of the state.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 02:50:08 PM EST
[ Parent ]
That's not the case at all. What you have in the EU is a very strong government that just happens to be dominated by a coalition of elites who favor the interests of bankers. The same government could also remain just as strong if dominated by a coalition of interests favoring working people as a class, so it is not the government that is weak as an set of institutions but the working people's coalition that is weak as a political organization.
by santiago on Mon May 28th, 2012 at 03:05:58 PM EST
[ Parent ]
Under that definition of statecraft, the Chinese government under Mao was no stronger than the Chinese government in the warring states period - it just happened to be dominated by a different set of warlords.

So until and unless we agree on a coherent definition of what separates a government from a warlord, this is a discussion of semantics. One can equally well claim that the EU government is strong because it can successfully suppress popular revolt, as one can claim that it is weak because it cannot purge feudal patronage networks from its bureaucracy, even when they undermine the authority of the central bureaucracy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 04:03:00 PM EST
[ Parent ]
No, under Mao the warlords were mostly united, while under the warring states, they were not.  Unification of actors is what power means, so the government under Mao was observably much more powerful.
by santiago on Mon May 28th, 2012 at 04:07:15 PM EST
[ Parent ]
That definition comes with the non-trivial complication that under it government automatically becomes less powerful when different factions struggle to set government policy. Not because it is less able to force its will upon the residents of its jurisdiction, but simply because it has a less clearly defined will to enforce.

I'll argue that this is an undesirable property in a definition of "government power."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 05:21:35 PM EST
[ Parent ]
I'd argue that it is a very desirable property -- essential, in fact, for democracy to function.  Power, in political science, is generally thought of the cooperation of individuals with a larger group, either willingly or not.  More powerful means that there is more cooperation among a group's members and less cooperation means the group is less powerful.  A government automatically does become less powerful when different factions struggle over government policy, and this can be observed everywhere. If a government policy to regulate some activity or other is highly contested by powerful factions, the chance that such regulation will successfully occur drops considerably, all else equal.  And that's a good thing.
by santiago on Tue May 29th, 2012 at 07:17:02 AM EST
[ Parent ]
It's a good thing if you support the powerful factions.

If the powerful factions are a plutocratic minority it's very, very obviously a bad thing for everyone else.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 29th, 2012 at 10:31:13 AM EST
[ Parent ]
Another way of putting it:

Spending ORGANIZES society's resources toward either public or private ends depending on who does the spending and what it's for.  

Taxation SECURES society's resources for exclusively public ends by preventing their organization for private ends.

by santiago on Sun May 27th, 2012 at 06:30:17 PM EST
[ Parent ]
Public and private spending do not compete for the same resources. Public should own public resources, private private resources. Private business should not have any business in public wealth, rent-seeking, and public should not take resources away from private entrepeneurship in competitive markets.

Public wealth improves the productivity of private sector, it is not a zero sum game.

by kjr63 on Mon May 28th, 2012 at 04:46:41 AM EST
[ Parent ]
No.  That's just not how an economy works.  Start with a given universe, called a society, or a polity, or whatever.  Within that universe there is a given set of resources in terms of human time and talents, space, and energy. From that set of resources, both government and private organizers are limited in their actions.

Some efforts at organizing those resources, namely investment efforts, effectively increase those resources by increasing talents or technology, or by creating new spaces (such as conquering the wild west or building an internet), and those efforts may be government-ally organized or privately organized or both.  

But there is only one set of base resources from which either government or private organizers must work. There is nothing special about government as an resource-organizing entity if government doesn't do anything to separate itself from a market framework, and taxation is one way of doing that.  Taxation is one useful way for a government to pull a lot of resources outside of private markets for solely governmental use so that it doesn't have to compete in terms of prices with private actors for those resources.  

by santiago on Mon May 28th, 2012 at 11:26:47 AM EST
[ Parent ]
..by creating new spaces (such as conquering the wild west or building an internet), and those efforts may be government-ally organized or privately organized or both.

No. Humans don't create new spaces. The amount of "land" is fixed. We are talking here only about used and unused land. If land is owned by non-user, he collects rent ("=taxes") that crowds out capital and wages from the user. Government instead returns land values to the creators of land values, or gives it out to users without absentee charges like roads. Private finance capital crowds out private real capital, not the government. Government prevents finance capital to do this, by keeping public wealth public. Free for users to occupy.

There is nothing special about government as an resource-organizing entity

We enter into the realm of neoclassism..


Taxation is one useful way for a government to pull a lot of resources outside of private markets for solely governmental...

This surely does not mean labour.


..use so that it doesn't have to compete in terms of prices with private actors for those resources.

..but "space" and natural resources. The price of resources is public wealth. There is no need for government to pay itself. Taxation of rental value does not strip resources away from private sector nor markets. On the contrary, government taxation strips it away from rentiers, and allocates the resource to the user of the resource, private or public.

Land is always allocated by force. If the practical method is price mechanism, it is just a political choice who captures this free monopoly lunch. Wealth creators or rentiers.

by kjr63 on Mon May 28th, 2012 at 01:06:54 PM EST
[ Parent ]
The amount of land in the world is fixed, but the amount available to members of a given society changes, and taking possession of land is one way of doing it, and developing and instituting property rights, even intellectual property rights, is another way of creating more space available for economic activities of a society, even non-physical space in the case of intellectual property rights.

Neoclassicism maintains the opposite of what you appear to think.  Neoclassical thinking holds that government is indeed very different than other actors in society, which is why their normative viewpoint is to reduce its power so much.

Taxation is primarily about labor, since most people have to work a given number of productive hours to pay the government its due in taxes in order to enjoy any private benefits from their labor.  Wealthy people can avoid work and surrender instead some of their claims on society's resources instead of working, but those of us who have to work in order to spend privately are organized by our government toward that end through taxation first and foremost.  Without taxes, people don't have to work much less toward community ends instead of private ones, such as not working at all.

by santiago on Mon May 28th, 2012 at 01:40:29 PM EST
[ Parent ]
santiago:
The amount of land in the world is fixed, but the amount available to members of a given society changes, and taking possession of land is one way of doing it, and developing and instituting property rights, even intellectual property rights, is another way of creating more space available for economic activities of a society, even non-physical space in the case of intellectual property rights.

So that which is in the commons do not count until it has become enclosed?

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

by A swedish kind of death on Mon May 28th, 2012 at 03:10:45 PM EST
[ Parent ]
Even a commons can commonly belong to another group. In American history, the Midwest commonly belonged to the native indigenous. European powers then took it away from them, leaving the land in the common possession of Europeans.  This added to the overall space resources of the European settlers, even while the land remained a commons.
by santiago on Tue May 29th, 2012 at 07:27:56 AM EST
[ Parent ]
But the particular example you cited was intellectual enclosures, which typically reduce the total space available to society in order to extend private property privileges over the enclosed intellectual space to a particular interest group. There are examples of intellectual enclosure which has expanded society's immaterial space, but they are in the present day a minority.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 07:50:51 AM EST
[ Parent ]
Intellectual enclosures are interesting because they actually create spaces for people to use that would not otherwise exist -- Facebook for example.  But I'm really speaking in more general terms of non-physical spaces created by intellectual ideas, regardless of the exclusivity of property rights. For example, all of the non-proprietary activity of the internet, such as wikipedia or Mozilla is also such a space.  
by santiago on Tue May 29th, 2012 at 07:58:15 AM EST
[ Parent ]
Actually, Facebook depends for a great deal of its activity on violating intellectual enclosures. A good deal of pictures being shared on FB are in flagrant violation of TRIP treaties.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 08:05:15 AM EST
[ Parent ]
This added to the overall space resources of the European settlers, even while the land remained a commons.

It did not add resources nor increase them. Only the owner of the property was changed. No value was created.

by kjr63 on Tue May 29th, 2012 at 08:51:26 AM EST
[ Parent ]
That's not how to look at this. The resources available to the society of European settlers/Americans increased due to taking over control of lands formerly "controlled" by indigenous.  The resources of the American society was increased while the resources of indigenous society was reduced.  The relevant universe here is a society, not the world as a whole, because money and government occurs at the societal level, not the world level.
by santiago on Tue May 29th, 2012 at 09:46:02 AM EST
[ Parent ]
Yes, i can see your point, but you said previously:

Some efforts at organizing those resources, namely investment efforts, effectively increase those resources by increasing talents or technology, or by creating new spaces (such as conquering the wild west or building an internet), and those efforts may be government-ally organized or privately organized or both.

My point is just that "new spaces" are not created by investment efforts, but existing wealth is conquered. If europeans would have rented land from indigenous people, they would have gained the same resources. But they did not recognize the political privileges of indians. Whereas within european governmental framework such privileges are untouchable.

by kjr63 on Tue May 29th, 2012 at 11:24:40 AM EST
[ Parent ]
Revisiting old discussions of neoclassical theories of "wealth":
The essential attribute of wealth is "appropriability," to create which "the rights of property must be recognized and enforced Whoever makes, interprets, or enforces law produces wealth".


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 11:43:15 AM EST
[ Parent ]
Indeed. That is the core ideology of neoclassism. There are no unearned incomes. Monopoly rights, political privileges, are "real wealth" like the added value created by labour. But it goes further. Because all monopoly rights, political privileges, are real wealth, they should be sold and bought with money. Otherwise we would not have ideal "market equilibrium" and socially optimal wealth. Democratic government is an obstruction, it should get rid of.

Neoclassical equilibrium is not an equilibrium of production competition (controlled by "invisble hand"), but equilibrium of political power.

by kjr63 on Tue May 29th, 2012 at 05:49:05 PM EST
[ Parent ]
Looking back at J.B. Clark we can see that he could discuss the 'appropriation' of the lands of Native Americans so directly because in his youth that appropriation was in full final swing and because US triumphalism and sense of moral entitlement blinded his contemporaries to the monstrous nature of what was happening. The Franks had settled on underutilized land in the initial phases of their move over the Rhine and into the Roman Empire. William of Normandy had conquered England and killed Anglo-Saxons, but he had not killed non-combatants on any significant scale. While after the Civil War the USA consciously sought to destroy the main means of existence of the plains dwelling tribes and reduced their numbers to a small fraction of what they had been. But the vast majority of US citizens thought that this was necessary and right. Today the vast majority of US citizens consider the ongoing appropriation of their wealth by the FIRE sector of the economy to be necessary and right. Another 'appropriation' is in process.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 29th, 2012 at 07:28:27 PM EST
[ Parent ]
..appropriation of their wealth by the FIRE sector of the economy..  

Indeed. Private monopoly sector crowds out private market (competetive) sector in accelerating phase via the help of and by finance (money monopoly). All finance goes to that sector that gives the highest yield, and that is always the monopoly sector that captures all surplus from the markets, especially debt leveraged capital gains. That leaves no purchase power to labour. Only by keeping public wealth in the control of government can private markets be saved.

So, unlike santiago says there is no zero sum game between government and private markets.

by kjr63 on Wed May 30th, 2012 at 06:49:25 AM EST
[ Parent ]
I don't disagree in general.  But I think there are ways that investment, private or public, can create new spaces for a society.  The internet is one example of a space where economic relationships are now able to occur and grow due to investment in telecommunications and computing infrastructure and technological advances.  Likewise, the expansion of human economic activity into extraterrestrial space, whether in near earth orbit or elsewhere in the solar system, is an actual increase in space resources available to some societies who make such investments.
by santiago on Tue May 29th, 2012 at 12:29:13 PM EST
[ Parent ]
Yes, i agree to some degree with internet, but investment does not create land. Columbus' ships did not create America. Columbus' ships are capital that combined with labour create added value from existing space, that includes all existing universe that man has not made. If investment would create land, land would not actually exist. And it would be "capital" in economic sense. (That is also the neoclassical narrative = all market payments are from added value)
by kjr63 on Tue May 29th, 2012 at 06:06:02 PM EST
[ Parent ]
This was why the neo-classicals sought to redefine the terms to include land as a form of capital and money as a form of capital. That confounds the analysis that allowed George to justify the single tax as a tax on the unimproved value of land, which would have been most inconvenient to large scale insider land speculators, including railroad barrons and those obtaining the land made available for land grant universities. Not only did they get the land, but they also got the power to determine how the new subject of economics would be framed and taught.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 29th, 2012 at 07:34:13 PM EST
[ Parent ]
Neoclassicism maintains the opposite of what you appear to think.  Neoclassical thinking holds that government is indeed very different than other actors in society, which is why their normative viewpoint is to reduce its power so much.

Neoclassism sees problem only with democratic government. Ideal government according to neoclassism is created by political power of money. That also creates optimal "market equilibrium" and wealth creation. "Free markets" mean political power, allocation of monopoly rights, not production competition (and price setting by invisible hand).

by kjr63 on Tue May 29th, 2012 at 06:23:21 AM EST
[ Parent ]
When the government creates new money to it's consumption, it does not decrease the private resources. On the contrary, public spending increases private wealth.
by kjr63 on Mon May 28th, 2012 at 04:49:29 AM EST
[ Parent ]
When the government spends money, it organizes resources toward governmental ends instead of private ends.  If private individuals were not using those resources -- they were hoarding them -- then such government spending appears to create resources by maximizing employment.  But, in fact, it is merely tapping resources that individuals were unwilling to put to work themselves, probably for very rational reasons.  But if the economy was already at full employment, then government expenditures would crowd private investment and expenditures, taking private organization of resources away from private actors.
by santiago on Mon May 28th, 2012 at 11:30:52 AM EST
[ Parent ]
If private individuals were not using those resources -- they were hoarding them -- then such government spending appears to create resources by maximizing employment.  But, in fact, it is merely tapping resources that individuals were unwilling to put to work themselves, probably for very rational reasons.

Unwilling or unable.

In fact, in a monetary production economy, lack of money can make you unable to produce. This is obviously idiocy of the highest order, since money is free to society, while man-hours are not. The solution is to spend money into existence in order to fix the conserve man-hours and factory-days into durable goods, thereby conserving the limited resource by expending the unlimited.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 28th, 2012 at 11:46:05 AM EST
[ Parent ]
When the government spends money, it organizes resources toward governmental ends instead of private ends.  

No. Governmental ends increase more "resources" to private sector than they take away.

But, in fact, it is merely tapping resources that individuals were unwilling to put to work themselves, probably for very rational reasons.

Indeed. Seeking capital gains from asset price inflation. Free lunches by rent-seeking.

But if the economy was already at full employment, then government expenditures would crowd private investment and expenditures, taking private organization of resources away from private actors.

Yes. But the question is, which one is inflationary? And, if inflation is accepted in this case, why is it?

by kjr63 on Fri Jun 1st, 2012 at 08:27:15 AM EST
[ Parent ]
Taxation in the form of requiring people to pay the government in units of currency is an effective, albeit imperfect, means of conserving real, physical resources for public use instead of private use.  That's why you can't just print more money and spend it endlessly without inflation appearing.  So, taxation really does fund defense, public welfare, and other governance activities because it really does keep people from using resources for other ends.
You could just as well see that as an argument for why the function of taxation is to control inflation by withdrawing money from the private sector.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 05:45:53 AM EST
[ Parent ]
And why the government simply crediting individual accounts with money during times of stagnation or contraction should be the preferred method for the government to command resources in those times.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 29th, 2012 at 09:07:30 AM EST
[ Parent ]
Yes, taxation works that way to control inflation as well.  Taxing people retires cash from circulation and selling government securities retires cash from circulation.  Real resources, and commitments to do work for one another, are not changed by the change in the amount of money in circulation, although who can command those resources and commitments might change.
by santiago on Tue May 29th, 2012 at 09:51:34 AM EST
[ Parent ]
So, that is one of the points of MMT. Apart from its redistributive effects, taxation basically deflates the effects of previous government spending.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue May 29th, 2012 at 09:58:15 AM EST
[ Parent ]
Yes, it does. But taxes also have a non-monetary purpose, which is largely ignored by MMT writers -- to secure real resources for government use by preventing private use of those resources.  Government can't spend infinitely by just printing money because there are real resource constraints in time, space, and energy that have to be dealt with, especially during non-recessionary periods, so taxes are a useful way of making sure that people -- especially rich people who have more capacity to do this -- don't over-commit society's resources to private ends before the public ends can be met.
by santiago on Tue May 29th, 2012 at 12:19:48 PM EST
[ Parent ]
This is not ignored by MMT writers - every time they discuss taxes, they point out that the point of taxes is to make sure that there is slack in the private demand which the government can fill by spending.

But the fact is that we (the OECD ex Japan) have been in a "growth recession" since at least the Volker Depression, more probably since the last oil shock. And the fact is that we (the OECD incl. Japan) already have sufficiently substantial tax revenues that the ability of the state to force the private sector to not-spend is not in doubt. So what happens at full employment or if you roll back taxation all the way to zero is of considerably less interest than what happens in the institutional and historical situation in which we actually currently find ourselves.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 01:31:03 PM EST
[ Parent ]
This.

This, a thousand times.

I'm open to being told which fundamental resource it is that we've been short of for the best part of my lifetime that means we've been unable to even approach full employment.

But no-one seems willing to tell me.

by Metatone (metatone [a|t] gmail (dot) com) on Tue May 29th, 2012 at 02:26:55 PM EST
[ Parent ]
The political power to tell self-serving bondholders and their ph.d. prostitutes to fuck off and die.

Makes you want to bring back the guillotine it does.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 29th, 2012 at 03:04:04 PM EST
[ Parent ]
Heads adorning the tops of wrought iron fences might be instructive, were they not the heads of those fighting the existing system.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 29th, 2012 at 07:36:40 PM EST
[ Parent ]
Though either way would be instructive, TPTB would probably not choose heads on spikes as their mode of instruction.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue May 29th, 2012 at 07:38:12 PM EST
[ Parent ]
Couldn't these highly informative economic series be edited into a more accessible form with a glossary and put out as e-books on amazon or similar at a modest price?

It could help the tip jar and make it easier for we commoners to better grasp the arguments in question.  

by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Thu May 31st, 2012 at 04:18:28 PM EST
We should.

It'd be a lot of work, though.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 31st, 2012 at 08:05:14 PM EST
[ Parent ]
I can't follow much of the high finance theory, but I'm happy to volunteer help with general editorial duties, and to provide input on readability and comprehensibility to the informed non-professional.
by Zwackus on Mon Jun 4th, 2012 at 05:02:17 AM EST
[ Parent ]


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