"The recent exchange on the nature of banking among Paul Krugman, Scott Fullwiler, Steve Keen and others has been feisty and instructive. But some readers might be left wondering whether the whole exercise is too wonky by half. The anatomical details of banking systems might be juicy and interesting for the academics who like to dissect those systems and dig deep into their entrails. But how significant are the details for practical questions of public policy? They are in fact very significant."
That's important because for me that's what any discussion should keep in mind. I'm all for examining the "anatomical details" of the banking system provided there's a punch line-it's importance for public policy. What I did appreciate is that Dan left behind the discussion about Krugman-who as he and other MMTers have admitted is basically one of the good guys and actually discussed Scott Sumner.
This is good as Sumner is a real opponent for MMT. He says fiscal policy has no role in crises and this is diametrically opposed to what MMT believes. To be sure not all MMTers agree that Krugman is a good guy, Bill Mitchell-whose blog I like-goes a little far today in my opinion suggesting Krugman has committed some cardinal sins of academic discourse sins so grave that he should be removed from the NYT. That is for me total overkill. Get rid of Krugman you'll probably get someone much less progressive though Mitchell thinks we could get rid of him and get someone more progressive-I doubt it. It's like the Firedoglake liberals who hate Obamacare so much and hope that the SJC does knock it down, so we can get single payer. Sure, that will be the first bill Boehner will introduce once the verdict comes in.
At least Kervick trains is sights on someone who is a real opponent of MMT.
"The functional details of institutions matter, and without understanding how the banking system actually works it is impossible to distinguish causes from effects in our attempts to guide that system toward the service of the public good. Conventional textbook models of banking and monetary systems are responsible for widespread commitment to the money multiplier and loanable funds models of the relationship between central bank reserves and the volume of bank lending. Relying on these models, some prominent economists and pundits have been telling us throughout our recent economic crisis that we can address the problems of a stagnating economy and persistently high unemployment with the reserve management tools of monetary policy alone."
"Even worse, some monetary policy hyper-enthusiasts seem to view the Fed has having vast powers to manage the nation’s overall spending level and adjust the nation’s money supply up and down though mysterious and occult mechanisms that extend well beyond the grubby plumbing of the credit system. The Wizard of Fed, it seems, can control the economic minds of Americans though imperious pronouncements on his expectations for the future. Hundreds of millions of Americans, one is led to believe, pay close attention to the Beloved Leader and await his determinative dicta, and then adjust their own behavior accordingly. L’État, c’est Ben. The nation’s central banker is the glass of financial fashion and the caller of the economic tune."
"Incongruously, this picture of an America enthralled under a slavish devotion to the oracular sayings of Chairman Ben is often brought forth as an instance of the “rational expectations” approach in economics. Allegedly, the lemming-like congruence of expectations precipitates its own self-generating rationality. Since we all know that we have all tacitly agreed to enslave ourselves to the nation’s central banker, when we then proceed to conform to the general goose-stepping we are behaving quite rationally."
"Now I ask you: speak to several of your neighbors tonight and ask them who Ben Bernanke is and what he does, and then consider whether this precious conceit of the court theorists of the financierati has the slightest grounding in empirical reality. I have no doubt that this picture describes the attitudes of some relatively small number people. My guess is that most of the people in question watch CNBC and Bloomberg all day, and manically shuffle their money hither and thither in the asset markets as the tipsters tip and the news items roll in. But down on Main Street where the real economy lives, and where people are too busy working all day – or at least trying to get work – to spend time playing games in the markets? Does the average citizen’s step either quicken or slacken to the cadences called by the Fed chairman? Does the average consumer go to the store looking for a washing machine or an iPad on the Fed’s say-so? It’s doubtful."
"This inordinate faith in and reverence for the power of the central bank and the Central Banker has had a profound effect on national policy over the past several decades. The US Congress has assigned to the Fed the “mandate” to achieve full employment, and many now routinely excoriate the Fed for failing to fulfill that mandate. And yet, while there may be more the Fed can do, there is little evidence that the Fed actually has any substantial degree of control over demand and employment in the real economy, at least in a circumstance in which interest rates have fallen as low as they can go. In fact, as various adventures in conventional and unconventional monetary policy have continued to fail, the evidence mounts that faith in monetary policy is misplaced, official mandates notwithstanding. We might as well assign to the Air Force a mandate to deliver pink ponies to every child in America. Just as there is no reason to think that Air Force brass and fighter pilots are particularly well-prepared for satisfying the equine needs of America’s eager tots, it seems increasingly clear that the Fed is not the agency of government best suited to parachuting real jobs down across America."
I'm not sure that I share his level of skepticism of the Fed as an institution. I agree more with someone like Galbraith that the Fed used to take it's full employment mandate seriously, but since Volkcer in particular hasn't. In addition, I tend to agree with him that Super Monetarists like Sumner put too much faith in monetary policy alone to fix any and all problems, however, I don't know that proponents of monetary policy necessarily need to assume that the average person closely watches Fed policy for it to work. It's the effect on the investment community rather than the larger society that is relevant-as it commands huge resources.
"The problem in America is not bankers who won’t lend. Corporations are already sitting on record-setting amounts of profits and cash, but production and hiring are not booming. The problem is that ordinary people at the foundation of our economy, the people whose desires for goods and services drive the production that employs our resources, are lacking income. They do not want more credit and more debt. They want more income."
That I agree with whole heartedly. Now he gets into Sumner:
"Sumner recently launched a blistering attack on a new paper by J. Bradford DeLong and Lawrence Summers. DeLong and Summers argue in that paper that “discretionary fiscal policy where there is room to pursue it has a major role to play in the context of severe downturns that take place in the aftermath of financial crises.” But Sumner is having none of it. Here is part of his tirade:
So let’s start over. The Fed is unwilling to provide enough monetary stimulus. OK, now what is the point of this paper? Is this to train our future econ PhD students? Are we trying to teach them the optimal policy regime? Obviously not. The optimal regime relies on monetary policy to steer the nominal economy, and fiscal policy to fix other problems. So we are going to defend the model how? A blueprint for failed states? For banana republics? Fair enough, but ask yourself the following question: In a failed state, which is more incompetent branch of government; the central bank or the legislature?"I find Sumner’s assault on fiscal policy and Congressional action to be both economically misguided and politically disturbing."
Yes, the Fed is bad. But Congress is downright ugly. Deep down most economists are technocrats. They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.” And how do economists view our Congress? The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain. So are we supposed to change our textbooks in such a way that the fiscal multiplier is no longer zero under an inflation targeting regime (as the new Keynesians had taught us for several decades?) And on what basis? Because the Fed might be so incompetent that we need Congress to rescue the economy? In what world does that policy regime actually work? If you have a culture that has its act together, such as Sweden or Australia, the central bank will do the right thing. If not, then all hope is lost.
Ok, I share is concern.
"But what is really disturbing about Sumner’s attitude is his haughty and unembarrassed contempt for democratic processes. Sumner actually believes the US should be seen as a failed state and banana republic if it fails to devolve responsibility for it economic fate onto the shoulders of an unelected, elite-governed and autocratic central bank, and away from its stupid and incompetent elected representatives. But my guess is that most Americans, schooled in reverence for democratic traditions and citizen responsibility of self-government, would view things from quite the opposite perspective."
"Members of Congress might be corrupt, bungling and in some cases outright incompetent – and these three traits make their sorry presence felt in some eras more than others. But as democratic citizens we know where our obligation lies in such circumstances: Throw the bums out, get a better Congress and then hold their feet to the fire to serve the public interest. If we simply pack it in instead, neglect our obligations, and dispose of our democratic institutions when they are not functioning properly, and then hand everything over to cadres of arrogant and aloof technocrats with minimal democratic accountability, we will have lost more than a few jobs."
"Lately, in their zeal to defend to powers of the central bank, we have been getting some truly radical, and frankly dangerous, calls from central bank enthusiasts to allow the Fed to appropriate to itself all sorts of broad spending powers that every American schoolchild has learned are the prerogative of the United States Congress and the people who elect them. And sure, if we allow the central bank to become a second, unelected Congress that can conduct a second channel of fiscal policy by crediting bank accounts and buying things, without any direct democratic accountability or debate over its spending decisions, then it can no doubt have the same kind of macroeconomic impact that an unleashed Congress and Treasury could have. But if we do cross that Rubicon and go down that authoritarian road, turning the Fed into some kind of neo-Soviet Stroibank empowered to spend and command real national resources outside the normal democratic process at the behest of a technocratic elite, we will probably never get our democracy back"
I'm not entirely sure I follow Kervick here. His main complaint with monetary policy is that he thinks it's undemocratic. He seems to be close to saying that even if it works we shouldn't want it as it compromises our democracy. This suggestion is particularly there in the part where he says,
"sure, if we allow the central bank to become a second, unelected Congress that can conduct a second channel of fiscal policy by crediting bank accounts and buying things, without any direct democratic accountability or debate over its spending decisions, then it can no doubt have the same kind of macroeconomic impact that an unleashed Congress and Treasury could have. But if we do cross that Rubicon and go down that authoritarian road, turning the Fed into some kind of neo-Soviet Stroibank empowered to spend and command real national resources outside the normal democratic process at the behest of a technocratic elite, we will probably never get our democracy back."
I kind of feel like our democracy is already left the barn. I'm not quite sure that if the Fed can have a great marcoeconomic impact I'm willing to tie it's hands because it violates the pergogative of Congress. I mean Congress has abdicated it's job. It has failed.
"Members of Congress might be corrupt, bungling and in some cases outright incompetent – and these three traits make their sorry presence felt in some eras more than others."
Yes, they are particularly making their presence in this era. Listen, I didn't elect this Congress. I would never vote for a tea partier in a million years. I wouldn't even vote Republican though some of our fireagger buddies tell us by all means elect Romney, end ACA this will lead us to a true progressive country.
As Mike Kinsley once said-after Bush beat Dukakis in 1988-democracy can goof. The people elected a terrible Congress in 2010. So I'm not going to stand on ceremony. If fiscal policy can do the job I'll take it. But if it abdicates lets have monetary policy. Or some combination between-my preference.
I think we should be clear that people didn't forget fiscal policy because they started reading Scott Sumner, our Congress failed to do it's job so people turned to monetary policy and reading Sumner.
I do agree that he oversells monetary policy at the expense of fiscal. What I'm looking for more,, myself, anyway, is more technical understanding of how monetary policy vs. fiscal policy really works. Interestingly Sumner wrote a piece yesterday where he out and out said, he doesn't want to bother talking about a transmission mechanism-it's too difficult and evidently not that important.
For a long time he has been criticized for no transmission mechanism and he always demurred from giving one. Now he's saying to forget about it:
"We should abandon attempts to find a monetary policy transmission mechanism. It’s too complicated. We know (intuitively) that 100 to 1 monetary reforms immediately lower all nominal aggregates in proportion; both the price level and NGDP immediately fall by 99%. How is it different if monetary policymakers suddenly double the monetary base, as in Hume’s thought experiment? One difference is wages and prices and debt are sticky during money supply changes, but not during monetary reforms. The other is that monetary reforms are expected to be permanent, whereas a doubling of the money supply might be reversed in the future. Recent NK models treat money as a financial asset, where its real value is very sensitive to changes in its expected future real value. So that makes the monetary transmission mechanism even more complicated. We need to deal with some wages and prices being sticky, some being flexible, and also with asset prices that are strongly impacted by future expected NGDP. There are a million transmission mechanisms; better to keep them inside the black box and focus on what we can measure and control."
So that would be one place a meaningful discussion-as I envision it-might take place. Is that problematic? I know that Keynesianism considers a TM of cardinal importance. Interestingly, Sumner managed to get in a shot at MMT:
"I’m sympathetic to Nicks Rowe’s argument that changes in the monetary base are what the central bank “really really” controls. But now they also directly control the interest rate on reserves. I hate IOR for two reasons:
1. It makes monetary policy even more complicated.
2. MMTers seem to like interest on reserves."
However, AFG made this thought provoking comment in the comment section:
"The more I read it, the more I find this whole MMT/Krugman/Market Monetarism debate to be boring. None of you disagree on the substantive theoretical economic issue, you disagree on DEFINITIONAL and POLITICAL ISSUES."
"First though, you’re own theory only allows you to ignore talking about the Best transmission mechanism once you have identified a single POSSIBLE transmission mechanism. Chuck Norris doesn’t have to fight because everyone knows he will win. But if his arms were amputated, his threats would lose credibility."
What was more interesting still was when commentator DWB tried to clarify the differences between MMT, Krugman and MM:
No i completely disagree, here are some big ones as i see it, FWIW:
1. MMTers (or excuse me, “Post Keynsians”) DENY that reserves constrain lending. It took about 275 posts on Nick Rowes blog to get to the heart of the issue: MMTs think that the fed elastically supplies reserves at the target rate (true for only about 6 weeks). What happens when the Fed no longer targets interest rates but targets MS, or when the Fed changes IR targets after 6 weeks… well, I am still a little unclear on because I get responses like “well, then the CB is doing fiscal policy”. what? I am leaving out all the REALLY fringe stuff on Keen’s blog. Some MMTers think IOR is *good* and some pointless (because reserves do not constrain lending). I am not even sure MMTers understand the implications of their own theory.
2. Krugman/DeLong: The line of thought here goes either the Fed is unwilling (FOMC members are boneheads), or unable to steer the economy (esp at the ZLB, for example, because the real rate of interest is negative and they cannot push inflation high enough). Fiscal policy is only effective when “not offset by monetary policy”. Krugman/DeLong like to build roads and stuff, but mainly because the see the FOMC as impotent at the ZLB.
3. Market monetarists: read Scott’s above post. monetary policy works, (most) FOMC members are boneheads (ok i added that last part). They picked the wrong goal and keep moving the goalposts. If we try fiscal policy then the Fed will just tighten so it wont work. (Fisher was out jawboning the 2014 rate promise again this week i saw, and the minutes say the 2014 rate promise is conditional on the economy, so people who think they cannot take that away…).
The economics debate between 1, 2, and 3 is very fundamental
AFG later retorted to DWB that he finds these difference underwhelming.
One decent suggestion of the difference between monetary and fiscal policy was by a commentator, Greg, on my last post about this. He mentions
"Mike Sankowski over at Modern Monetary Realism, a new web site. Mike used to head up Traders Crucible and he had a series of posts about the ineffectiveness of monetary policy vs fiscal. His primary point was that monetary policy is really designed to work via the real estate lending channel. Apparently over 80% of bank activity is real estate related, so it ends up being an ineffective way supporting broad based production and is simply a tool to enrich land owners."
This makes some sense. I mean, fundamentally, if tomorrow the Fed announced it was going to spend $50,000 today to stimulate the economy and it had two ways it could do that-either buy a couple of treasuries or send it in a check to your house would you think of these two actions as equal even if a macroeconomist declared that the actions were identical in effect on the economy?