Dan Kervick: Beware of Rule by Central Banks

By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives

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.

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.

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.

Yet it’s not as though we don’t know how to promote economic production, deliver income and boost unemployment when the private sector fails to deliver as much of these social goods as we need. As a monetarily sovereign country, the US government can finance an expansion in spending that does not require either new taxes or burdensome debts left to posterity. What people want the Fed to do – somehow push new, spendable monetary assets into the real economy – the political branches of the government can do better, and in a much more direct and effective way. What is called for is a renewed commitment to fiscal policy, not more exercises in conventional and unconventional central bank policy. We need to return fiscal policy to the front and center of our national discussion of economic policy.

Fiscal policy and the political branches of government are needed to do what the central bank can’t, and to restore our sick economy to health. But there is another reason that we need to rediscover the power and capabilities of fiscal policy. The incessant debates about the virtues of monetary policy tend to encourage people to take an excessively technocratic and abstract view of our nation’s economic policy needs, and to reduce those needs to the rubric of “macroeconomic stabilization.” But our nation doesn’t just need jobs in general; we have specific national needs for specific kinds of work. We don’t just need more production and spending in general; we need to produce and buy specific kinds of things to advance urgent public purposes. The macroeconomist sometimes views spending on a bridge or a school as spending in the abstract; spending that is justified by the mere fact that we need more spending of some kind. But the citizen sees these actions mainly as spending on a bridge or a school – something we do mainly to buy something we need. That’s why monetary policy is a lame substitute for engaged fiscal policy in a democracy. A central bank can, at best, only concern itself with the public purpose of managing the flow of money and credit in general; but the public has very specific purposes in mind.

We are faced with imposing national problems of social decay, public underinvestment, incoherent and feckless national purpose and unconscionable underemployment of people and resources. These are problems that can’t be fixed by Fed money management and expectations setting, and many of them are challenges of national scope that manifestly exceed what we can expect from the hurly-burly and hustle of private sector entrepreneurialism. Solving these problems is going to take an activist national government, and a politically engaged and committed public, directing serious resources toward unmet public purposes. We’re way beyond the point where the only macroeconomic policy we need from the national government is the limited kind of “stabilization” that can be provided by the Fed. Our country is broken and our future prosperity is in deep jeopardy. We need to define large goals, set challenging tasks and get to work. It is time to get people to stop looking to the Fed to do the jobs that can only be accomplished effectively by the American people acting with purpose through their legislative representatives. There is no pure monetary policy cure for what ails us.

One prominent current enthusiast for monetary policy is Scott Sumner, who uses his blog The Money Illusion to promote an approach to monetary policy called “market monetarism”. The core policy recommendation of market monetarism is that the Fed should target the aggregate level of dollar spending in the country, and maintain a stable rate of increase in that level, which includes engineering catch-up spending in subsequent years if spending in prior years false short. Sumner has no doubt at all that the Fed could hit this target if it truly sets its mind to it.

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?

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.

I find Sumner’s assault on fiscal policy and Congressional action to be both economically misguided and politically disturbing.

First, it is hard to understand the practical difference between “steering the nominal economy” and “fixing other problems”. The economy consists in the production and exchange of things of value, and one can measure those values in various ways. One way is to measure goods and services by their current market values as expressed in dollars. But economists have also devised various methods of abstracting away from the fluctuating current dollar as a measurement standard, so as to get at some more stable measure of value that allows for meaningful comparisons across times and places. They thus distinguish between nominal and real measures of value. But while one can distinguish analytically between nominal and real measures of economic activity, there is no such thing as the “nominal economy” that can be separated out for the “other things” and steered independently of those other things. It’s all the same economy, whether its values are measured in nominal terms or real terms.

Perhaps what Sumner has in mind is not dollars as a nominal measure of value, but as a medium of exchange. We live in a monetary economy, and dollars are one of the things that are produced and exchanged in that economy. So the proposal might be that it should be left to the central bank to steer the part of the economy involved in the production and exchange of dollars, and leave it to fiscal policy to steer the part of the economy in which other things are produced and exchanged. But the fact is that almost every transaction that takes place in the United States takes place in dollars. The dollar economy is the real economy, and the real economy is the dollar economy. The economic system which consists of both money and the things money buys is an organic whole of integrated human activity. There is no plausible way of regulating or managing one without regulating or managing the other.

Nor is there a real-world way of institutionally separating the macroeconomic stabilization functions of government from public investment and redistributive operations of government. It’s all part of the same job.

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.

People frequently rail against the pork barrel spending and earmarks that result from the legislative process. But the pork barrels don’t worry me nearly as much as handing our economy over to another generation of theory-addled elitists like Alan Greenspan. As part of the democratic process, representatives come from all over the country to look for the resources to deliver the things their constituents want and need. They wrangle and haggle. And yes, in the process they land a few “bridges to nowhere.” But most of what they get are bridges to somewhere. The people in New Hampshire might not like the way the people in Georgia use their share of our national resources, and the people in Georgia might feel the same way about the people in Oregon. But the end result is that things get built; people are hired; public goods are created; national and local needs are met; things get done.

My sense is that Americans are dead tired of a corrupt and aimless government that can’t or won’t do anything important anymore; that works energetically to deliver resources to its masters in the plutocracy, but then holds up its hands and says “Sorry, out of money!” when suggestions for the pursuit of major public purposes are advanced. It doesn’t have to be this way. America hasn’t always had a Congress full of can’t-do seat-warmers, small thinkers and penny pinchers determined to castrate the national government and let bankers and CEOs run the world. There have been times in our history when we have actually managed to organize our vast resources to accomplish important things and invest public resources in our future.

We have an election this year. I suggest we use it to ditch the empty suits, the plutocratic shills and the small minds, and fill their spots with people ready to act.

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  1. Fire Marshall Bill

    yeh. it’s like your house is on fire, the fire department finally shows up, then finds the youngest member of your household and starts explaining combustion theory to them.

    a long while later, your hair on fire, and baby is now a piece of charcoal, you ask, “And what should we and/or you do?”.

    they hem and haw a bit, then decide a controlled burn is the least-worst solution to the problem at hand (after first discussing the problem with colleagues around the country via video sat phone conference call).

    suppressing the much deserved desire to scream, you say, “you mean you want my house to burn down faster?”.

    1. KnotRP

      You just don’t get the Economic Equilibrium Theory of Combustion. The Rate of combustion is the amount of mass of a material that goes through combustion over an amount of time. It can be expressed in g/s or kg/s. Being Professionals, with Phds, we used very sophisticated software on expensive super computers to solve your house’s combustion equation for the lowest “amount of time” spent burning, to minimize the damage. The equations are a bit Wonkish, and you clearly wouldn’t understand them, not being a PhD, so trust us….we know what we’re doing…despite all prior evidence to the contrary.

    2. MyLessThanPrimeBeef

      It’s hard to tell.

      It could be that the house is already burned down, with the victims staying up all night long bravely to fight what turned out be a losing battle. What they need now is a good 8-hour sleep to recover.

      But here come the salespersons of the local privatized water company telling them to pump more water on the house, because, well you gotta save the house!

      Which one is it?

  2. Matthew G. Saroff

    OK, this is a good illustration of the differences between the Neo Keynesians and the MMT Theorists.

    The former think we need fiscal intervention, and the latter think that we need monetary intervention.

    You know, if the monetary intervention made it to ordinary people (See Bernanke and Helicopters), I’d agree with MMTk, but right now all that money is going to parasites in the financial sector.

    1. YankeeFrank

      No MMT does not suggest more monetary intervention. In fact, MMT doesn’t say much that is prescriptive, but it says a lot that is descriptive. Now, many MMT scholars in fact believe that fiscal policy and strong government action are appropriate, and some even believe in a jobs guarantee. But to say that MMT theorists believe in monetary policy as a cure all, or even as a large part of any solution, is just plain wrong.

      1. Fire Marshall Bill

        Mighta gotten confused then.

        MMTer saying “Hello”

        “Loans preceed deposits”


        “bank lending is NOT, we shout, NOT constrained by reserves!”

        or, the more sophistaicated version snobily used at MMT cocktail parties

        “money creation is endogenous”

        MMTer saying “Goodby”

        “The US is kingdom, er, Sovereign, with monopoly power to issue its own fiat currency”

        The conversation in between:

        “This is how the money system works and why your understanding of it is inadequete or just plain wrong.”

        if you ask whether they think MMT is really cool
        or devilishly evil:

        MMT IS REALLY COOL!!!!!!!!!!!!!!!

        1. MyLessThanPrimeBeef

          When no one borrows, reserves will be obsolete, unless you’re talking about reserve wines.

          1. Fire Marshall Bill

            Without pondering this question too long, I think if no one borrows, it’s all reserves at the Fed and we have defacto 100% reserve banking. Or maybe it’s not 100% reserve banking because the math does a sigularity minsky moment that lasts a long time. My math is very rusty.

            It wouldn’t work that way with good wine, methinks.

        2. Binky Bear

          If banks don’t require any assets or deposits then why doesn’t every adult in America have their own bank?

      2. MyLessThanPrimeBeef

        To only those MMTers who say printing more money is the solution, if, as the questioner above asks, it is all being leaked away, what should we do?

        1. Fire Marshall Bill

          The Twist!

          Took me a while to find this answer, but fed fans and/or MMTers should be impressed with this.

          This is from ZH, and I have to admit their explanation doesn’t pass the lucidity test, but sometimes we all type things up in too much of a hurry sometimes. But I’ll type my attempt at clarification after the ZH excerpt.

          The basic idea with Operation Twist is the fed was to pressure down long term treasury bond rates by buying them with fed money created out of an IBM computer and combine that with liquidity draining sales of short term treasuries owned by the fed.

          This program goes from about last october thru june of this year. problem is they will be just about out of short term treasuries when the program ends.

          Problem with that is any more QE can’t be sterilized, ie be inflation neutral.

          Unless, and this is something that concerns me – but not anyone else yet – we get the treasury basically re-capitalizing the fed. I have only a vague idea of how that works, but essentially the treasury prints up some new bonds and gives them to the fed, gratis. And they did do that to the tune of $300B, I believe, back when they did QE1.

          Problem with that is the fed can now sell them to drain liquidity (fight inflation) and the taxpayer has more bonds to pay off.

          Problem with that is fighting inflation causes even more tax liability. MMT says you increase tax *payments* to fight inflation, not tax liability.

          So if you are convinced the Fed does MMT – this puts another little wrinkle in your belief system. If you think this sucks, I would agree with that, just wait until they do it with all the bad MBS out there and bail out the banks again.


          Yesterday, Goldman’s Jan Hatzius, piggybacking on what has now become a prevalent belief among Wall Street economists following a “leak” from the WSJ’s Jon Hilsenrath, predicted that the FOMC minutes would hint at more easing, in the form of “sterilized” interventions, or in other words, an extension of Operation Twist. There is, however, one problem with this analysis. It is total BS, for a simple reason that for every bond on the long end that the Fed buys (and it has bought a whopping 91% of the 20-30 year gross Treasury issuance), it has to sell one in the 3 Month – 3 Year maturity interval. And therein lies the rub. As Bank of America shows below, at the end of Twist in June there will be just 2 months worth of Treasurys available for sale. What could fix this? Well, instead of ZIRP until 2014, Bernanke could say the Fed would keep rates at zero until 2016 or even 2018, and proceed to sell all Fed holdings in the 3 month – 5 year or 3 month – 7 year intervals. This however, would make the entire bond curve an epic farce, shifting the belly to beyond the 10 year point, and in the process blowing up the MBS market due to total collapse of traditional convexity heding strategies. Which we don’t think is likely unless the world is coming to an end. In other words, anyone hoping that Twist will be extended, is wrong, and in turn it means that any real option for the Fed’s NEW QE will be the outright monetization (aka LSAP) of either USTs or MBS, ala QE1 and QE2.

          BofA explains further:

          Extending Twist is a limited option, as the Fed will have only about $175 bn of short-dated Treasuries (3 months to 3 years) in its SOMA portfolio on June 30. That would allow two to perhaps three months of further twisting at the current pace — i.e., into September. That does buy some time, but the Bernanke Fed has not been one to go for half-measures or small steps since the crisis began. If the outlook warrants more easing, we still see QE3 as the most likely tool chosen.

          The ZH part I didn’t like:

          Bernanke could say the Fed would keep rates at zero until 2016 or even 2018, and proceed to sell all Fed holdings in the 3 month – 5 year or 3 month – 7 year intervals. This however, would make the entire bond curve an epic farce, shifting the belly to beyond the 10 year point, and in the process blowing up the MBS market due to total collapse of traditional convexity heding strategies.

          My reason that they can’t or won’t do that is the bonds sales would raise interest rates a lot, everywhere on the curve. But ZH are trader guys….

          But just thought I’d post that. Watching TV is boring.

          1. Fire Marshall Bill

            One thing I like about talking to myself is it makes me think harder.

            I guess the fed could sell its stock of long term treasuries it has in order to sterilize new purchases of MBS. Market forces aside, what’s swaping AAA credits among friends?

            That’s all the thinking I want to do about that.

  3. bluntobj

    “We have an election this year. I suggest we use it to ditch the empty suits, the plutocratic shills and the small minds, and fill their spots with people ready to act.”

    Wasn’t this the objective of the Tea Party? They certainly got bogged down in the politics afterward.

    Is this the objective of Occupy Wall Street? I’m not sure, as they don’t appear to be running any candidates, and their style basically is one that rejects the system.

    Filling spots with people ready to act is laudable, but what actions will they be ready to take? Given the nature of politics, people who are willing to sell competitive advantage granted through government are the most likely to get elected and stay elected. Are those actions the kind you want to have made?

    The view this “chuck ’em all out” position is contrasted against is rule by bureaucratic financial elite. Yet again, the nature of politics will co-opt candidates into the system, allowing a “chuck ’em all out” position to be a tool with which to maintain power by the elite.

    After a further reading of the post, the following were considered “empty suits, the plutocratic shills and the small minds”:

    can’t-do seat-warmers
    small thinkers
    penny pinchers determined to castrate the national government

    My questions here are:

    What makes someone “can’t do”? Is it refusal to vote on massive legislation that is “publicly beneficial”, but then delivers massive payoffs to campaign contributors? Ideological refusal motivated by upholding the party line? What is it?

    Who is classified as a “small thinker”? Are they people who care about the details in legislation? That need to read a bill before they vote on it? (Insert Obvious Speaker Pelosi quote here). That don’t want to create massive overarching programs whose consequences are not well thought out but will be harvested for competitive advantage by every interested party?

    What makes someone a “penny pincher”? Is it the desire to actually HAVE a budget? Is it the desire to NOT vote for deficit spending or massively expanded social programs or war funding that will only increase with the passage of every fiscal year? In our personal lives, isn’t it rational to be fiscally prudent? Have those who have engaged in prolific debt spending not crashed and burned horribly, losing everything in the process? Is our refusal to apply these same ideas to government, and look at the financial disasters in history wise?

    Finally, I would posit that this post attacks rule by the central bank, but proposes that we should be ruled instead by Legislators that have the following qualities:

    1. Can-do, will always vote for more legislation

    2. Big thinkers, will create and pass massive new bureaucracies that will affect all aspects of life that are seen as a “problem”

    3. Prolific spenders, will always vote for more money, more debt, more spending, and will happily operate without a budget or thought of adherence to one.

    4. Plutocratic shills, because it will be so easy to co-opt anyone with the above qualities. Look at Obamacare, Card Check, War spending, NDAA, Stimulus, TARP, Solyndra, Dodd-Frank, and so many more.

    TL;DR version: Until the government’s ability to grant competitive advantage in return for favors or money is removed, any attempt to reform the system from the inside will fail.

    The “chuck ’em all out” argument is simply Brer Rabbit pleading not to be thrown into the briar patch.

    1. Dan Kervick

      In the context of the article, “can-do” and “willing to act” means people willing to drop the austerity mania and deficit hand-wringing, and vote to spend serious money out of the public treasury on long-deferred national needs.

      1. bluntobj

        Thank you for that clarification.

        May I extend from your argument then that if the money is not available from current receipts, then it must be borrowed or raised by tax levy to accomplish these farsighted goals?

        If we are discussing significant increases in spending, in addition to current shortfalls, then the amount of deficit spending may be conservatively estimated as, to pick a number for the sake of discussion, double the current deficit?

        So perhaps $3 trillion dollars a year or more?

        It begs the question: Is this good?

        1. F. Beard

          It begs the question: “Did you read the article?”

          As a monetarily sovereign country, the US government can finance an expansion in spending that does not require either new taxes or burdensome debts left to posterity. Dan Kervick

          Moreover, if the banks were put out of the counterfeiting business then the US Government could create by spending a LOT more money and would need to just to counter deflation.

          1. bluntobj

            I read the article. My question stands: Is it good?

            Merely because the author states that a course of action is good does not make it so.

            “…US Government could create by spending a LOT more money and would need to just to counter deflation.”

            Um. Postulating that the only thing needed is to open up the printing presses, or the equivalent, and that the consequences of such are not comparable with crushing debt burdens or crushing taxes ignores the history of such actions and their effects on nations.

            Is the argument here that there will be no ill effects to spending through money creation?

          2. F. Beard

            Is the argument here that there will be no ill effects to spending through money creation? bluntobj

            Putting the banks out of the counterfeiting business – so-called “credit creation” – would be MASSIVELY deflationary as existing credit is paid off with no new credit to replace it. The US Government could fill that deflationary hole with deficit spending with no change in the total money supply (reserves + credit) if the deficit spending was metered appropriately.

        2. Dan Kervick

          Bluntjob, the US government, as the issuer of the nation’s currency and not a mere user of the currency, has the unique power to run what I called in a previous post at New Economic Perspectives a “pure deficit”: Unlike a household or a business, it can simply spend more than it receives in revenue, without adding any debt to finance the gap. The decision to issue debt to offset or “fund” government spending is a voluntary governmental choice. We don’t need to do it.

          This procedure would be a substantial departure from current practice, but there is no constitutional impediment to Congress changing that practice. Congress could determine that it wants to run a pure deficit of any size of its choosing – the gap between its targeted tax revenues and targeted spending – and could then order the Fed to credit the Treasury Department’s account by that quantity. End of story. The only constraints on this activity are price stability considerations. We have to get people to understand that this option lies within the scope of Congressional powers.

          For more on this see my post of “The Public Money Monopoly” at NEP.

          1. bluntobj

            Again, thanks for the clarification. I’ll look at the post.

            Of course, price stability is not an issue. The US government has mandated prices for goods and commodities before, and can do so again. With the passage of the Healthcare mandate, Congress can also mandate demand for a much wider range of products, and subsidize consumers who cannot afford the mandates. This should offset the negative effects of “pure deficit” spending.

          2. Calgacus

            Haven’t had the time or health to post an adequate response to that post, or see whether others have, but I would warn others that Dan’s article is not MMT. Thankfully, I noted some of the MMT profs briefly disputing it. Mitchell-Innes is right, and Dan K is wrong. In a very Anglo-American empiricism, analytic, Humean, philosophical way. Hume’s econ was better than his philosophy, I think, though. Dan imho does not understand M-I, who certainly was talking about “modern” fiat currency. An example of making things more complicated than they really are and maybe sneaking the commodity theory in the back door by unconsciously redefining basic concepts like debt. Nobody can spend without increasing their indebtedness, because money, always and everywhere, is debt.

            A government issuing bonds in return for currency isn’t going into debt, but basically just offering a currency printed in a different color. Whoop-de-doo. Or something like the amusingly eccentric old British practice of using guineas =21shillings for the upper classes & pounds =20shillings for the tradesmen.

          3. Dan Kervick

            Hume is a person who I have studied a lot as a scholar. But his monetary theories have not had a very large influence on my views on the nature of money. My understanding of money is based on a combination of the usual main MMT influences: Innes, Knapp, Keynes, Minsky and MMT thinkers like Warren Mosler, Stephanie Kelton and Randall Wray. Probably no two of those individuals have exactly the same view of money, but there are important similarities among all of them.

            My views were particularly strongly influenced by Warren Mosler’s “tax-driven” money view, especially as developed in a paper he wrote with Matthew Forstater called “A General Analytical Framework for the Analysis of Currencies and Other Commodities”. Mosler does not cite Innes in that paper. He argues that once a government has established a value for the money it issues by imposing a tax obligation, one can analyze that money using the kind of framework usually applied to commodities.

            The disagreement about Innes is on a relatively minor point. Innes and some of the MMT scholars have argued that all money is debt. My view is that while this is true of all of the derivative forms of commercial money in a modern economy, and was true historically for the institution of money in general, the government’s money in a modern fiat system is not an IOU. I accept the chartalist views developed by Knapp and Innes and their MMT successors that hold money is a “creature of the state”, and that the fact that a government establishes tax obligations that can only be discharged with the government-issued money plays a large role in establishing the value and acceptability of the government’s money. But I argued that just because the government pledges to accept its money to discharge tax obligations does not make that money an IOU, a debt or a liability of the the government. My argument was that if the state’s money were an IOU, then if it pays you with that money it still owes you something. I think this idea is in conflict with the idea that payment with fiat money is a means of final payment. Once you have been paid in that form, you are no longer owed anything.

            I consider this to be a bit of a recondite theoretical point, and not a substantial departure from the general framework developed by other MMTers.

          4. jake chase

            What ought to be done is depressingly simple. The federal government should hire everyone now unemployed (or dissatisfied with his current job) at a living wage of $20 per hour. They can all be put to work fixing the roads and bridges out of Manhattan. That would solve the traffic problem. Indeed it would eliminate traffic. If other work is needed they can search for the records now irretrievably lost in our existing Federal offices.[When I worked at the SEC forty odd years ago, everyone knew never to send a file to records, because once you sent it the file was gone forever] In no time the federal government would be the only employer. Fine. Then it can start taxing at 1950 rates the corporations and executives who will no longer be exempt on the ground of job creation. Next, the government can impose McKinley tariffs on all corporate imports, opening the door to new American production by protected small business willing to pay a living wage. In a few years there will be major corporations, no executives, no need for government leaf raking jobs. Moreover the roads and bridges out of Manhattan will be fixed and traffic can begin moving again. As for those records in federal offices, finding them is a job that will never disappear. We can save it for emergencies, as an alternative to war.

      2. Fred Cratchet

        Again, that’s a bit naive. We’re spending, according to the folks who run the country, right where we need to. Bombs, jets, guns, ships, jails, security, tanks, cyber apparatus, Lockheed, Northrup and so forth. Indeed, this employs quite a few folks, allowing them to keep their mortgages paid, take vacations and most importantly, buy things.

        By Central Banks are you refering to TBTF? Probably not, but the question is worth asking.

  4. The Dork of Cork

    But the banks run the economy as most of the money is bank credit – indeed almost the entire western built envoirment since at least 1987 is a product of bank credit.

    The MMTers have it right in the sense that the RATIO of vertical and horizontal money needs to get back to something like a 8 to 1 ratio at the very least – when that happens maybe the guys in Congress can achieve something of significance via fiscal spending……….otherwise their efforts good bad or indifferent will always be dwarfed by mainly pointless bank credit “investments” which merely consume any surplus available to consume.

  5. Eureka Springs

    Occupy, in its truest form is leaderless. To expect it to promote leaders is to have never understood occupy. Whether one agrees with occupy about this i sure wish more people could wrap their head around the leaderless concept even just a little. Tea party on the other hand is entirely authoritarian based.

    That said, the Green Party should be joined by many independents and even more democrats… in droves, right away. Especially if you want to get out of/and say NO to the two corrupt parties as immediately and loudly as possible..

    1. Sparkie

      “it seems increasingly clear that the Fed is not the agency of government best suited to parachuting real jobs down across America.”

      Ummm…not trying to be a nitpick here, but the Fed is NOT an agency of government. It is privately owned by a consortium of banks, that controls our money supply. “Government” has little control over the Federal Reserve, unless you want to count the periodic Congressional testimony that the Chairman has to endure every now and then when he gets called to Capitol Hill to inform us about how our money supply is being managed.

      ….poor Andrew Jackson must be rolling in his grave. ;)

      1. Dan Kervick

        The Fed was created by an act of Congress, and exercises some of the inherent monetary authority of the US government under an explicit statutory delegation of that authority which, Constitutionally, belongs to Congress. Congress can at any time claw back as much of that authority as it wants and exercise it directly.

        The Fed Board of Governors web site has a “.gov” extension, and Ben Bernanke is a government appointee.

        1. Carla

          Bernanke may be a “government” appointee, but it is pretty obvious to regular people that the banks are running the “government.”

          1. Fire Marshall Bill

            Origonally the fed was given a 100 year charter, but that got changed sometime in the 1930s.

            Since then congress has had the power to make changes to the fed, or I guess disappear them all together, but that would take some really good worm-hole-black-hole math modeling to determine the consequences in advance.

            The actual member banks are and always have been private, but the Board of Governors are appointed to terms.

            One annoying change congress did do was add the “maximize employment” to the “stable prices” mandate. Now Congress can tell the fed that the fed is the Job Creator.

            Not so surprising is the financial elites took over just about everything. Looks to me like the Fed Board, Congress, Treasury, Supremes and even the White House! Then there are the lesser agencies too.

            We also get mysterious puppet masters in common citizen orgs too – Tea Party, AARP fighting the evil entitlement of social security, who knows what else.

            It’s spooky!

        2. psychohistorian

          In the mean time the Fed is private banking, not public and the money is private not public and the profits from the utility of banking for the public go to private individuals.


  6. Max424

    The American Fascist State will continue to run on autopilot, as long as its most vital national resource, money creation, is controlled, not by the people, but by an unelected elite.

    Note: At this point, once they’re inside the Beltway Castle walls, elected representatives either quickly get with the program, or are they immediately ostracized.

    Some day soon, if they don’t play along, they will be executed.

    Same goes with the “free” press.

  7. Kukulkan

    Well, I’m starting to think that Paul Krugman’s position (that MMT is “just word games and continual insistence that the members of the sect have insights denied to us lesser mortals.”) has been pretty much vindicated by recent exchanges here on Naked Capitalism.

    We get told that the banks can create money out of thin air — except when it’s inconvenient to the theory, in which case the idea that banks can create money out of thin air is “non-sense”. I kept hoping someone would explain what the difference between the two situations (can create money out of thin air, can’t create money out of thin air) is, but so far no one has. They won’t explain it. Or, perhaps more likely, can’t.

    Steve Keen’s post compares Krugman’s economics to the Ptolemaic system in astronomy, with the implication that MMT is like the Copernican system, both simpler and more closely matching reality. However, the Ptolemaic system replaced an earlier explanation for the visible movement of the planets, namely that they were gods and that they moved faster or slower and sometimes appeared to change direction because they wanted to and trying to predict and understand these things was just foolish.

    Given Philip Pilkington’s ranting against models, supported by Yanis Varoufakis, and allowing for the fact that both the Ptolemaic and Copernican systems were models, it becomes clear that MMT isn’t a step towards a better model — no, models are bad – it’s a retreat into the-planets-move-that–way-because-they-want-to approach to phenomena. The banks sometimes can and sometimes can’t create money out of thin air because… just because. It really is a form of mysticism.

    That’s why all we’re getting is a series of posts condemning and insulting Krugman rather than attempts to explain the theory in a way that makes sense and which actually addresses the problems people raise. As Krugman said “there’s no there there”. This ongoing series of posts are demonstrating that far more effectively than anything Krugman could have written.

    1. Dan Kervick

      It’s not a spectator sport. Just read the actual work and evaluate it. Here’s are a couple of good places to start for MMT:




      Steve Keen does actually work on developing sophisticated mathematical models of Minskyan credit dynamics. Some of his work is available on his website. Keen is not usually regarded as MMT, but is part of the broader school of thought of which MMT is a part called “Post-Keynesianism”.

    2. diptherio

      “This paper contends that the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of
      analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand for loans if it wishes to.”

      –Piti Disyatat, Bank for International Settlements

      Riddle me this, who do you suppose knows more about how bank lending works, Paul Krugman or the BIS?


    3. Philip Pilkington

      Hahaha. Good stuff.

      My ‘rants’ are against models that try to model people and their behavior. So are Yanis’. Models that do aggregates of people (Keen’s) and balance-sheets (Godley and Lavoie) are far better.

      But no matter. Continue to portray the opposition as nihilists. It’s so much easier.

      1. Kukulkan

        Philip Pilkington wrote:

        But no matter. Continue to portray the opposition as nihilists. It’s so much easier.

        I’m not trying to portray you as anything. And, as far as I can tell, you’re not the opposition. I’m just pointing out that you and other advocates for MMT are coming across as a bunch of complete bullshit artists.

        The claim is that banks can create money out of thin air. Okay, I’m willing to entertain the idea. So I ask what seems like an obvious and reasonable question given that as a premise:
        If banks can create money out of thin air, then how does having any need to back it up with reserves of money in any way constrain them? If a bank has to have 10% reserves, for example, then when it lends $100 to someone rather than just creating $100 out of thin air, why don’t they just create $110 — $100 to lend and $10 to add to their books to meet the reserve requirement?

        How is it possible for banks to go bust – that is, have insufficient money to cover their needs?

        Instead of getting an answer to either question — and one answer could presumably address both — I get given a run-around. I get told that I don’t understand — well, yes, I don’t. That’s why I’m asking questions; to try and alleviate my ignorance. I get pointed to sources that it turns out don’t address the question. I get accused of being the opposition (opposition to what?) and trying to portraying those that I’m asking for clarification from in a negative light.

        Well, I’m sorry, but if the fact that you can’t answer simple straightforward questions puts you in a negative light, that’s more a reflection on the inadequacy of your ideas than it is on any motivations I may or may not have. Perhaps if you just answered the question, that you put you in a positive light.

        I’m not the one who introduced the comparison to Ptolemaic system to the discussion, that would be Steve Keen. If you think it’s invalid, take it up with him. He obviously thought it was valid and, since he’s one of the main advocates of MMT, I’m willing to accept that it is.

        So, how do we model the ability of banks to create money out of thin air to make loans but not to cover reserves. Is the answer we are trying “explain the behavior of people” and that can’t be done, so banks choose not to use their ability to create money out thin air when they’re in trouble, preferring to go bust, for inexplicable reasons. Or is it that they can’t create money out of thin air, and so go bust because they just don’t have the money?

        And, if banks can’t create money out of thin air, then how do they do so when making loans? Or is that claim incorrect.

        The obvious answer seems to be: Banks can’t create money out of thin air.

        If a bank has $1,000 in deposits and a requirement to keep 10% reserves, that means:
        The bank can lend $900 of that $1,000 out to others, but has to keep $100 back as a reserve.
        Not (as it’s frequently portrayed):
        The bank can led out $9,000 based on the $1,000 it has in reserves, thus effectively creating the $9,000 out of thin air.

        If this is correct, then it means:

        I. There is only a finite amount of money available and banks – like individuals, companies and governments — are limited by the amount they happen to have;

        II. Money that pools in one location, whether through rent, interest, profit, saving, whatever, is money that’s unavailable elsewhere, thus reducing the amount of money available outside the pool(s).

        III. The only way to pay off outstanding debts is cut back on spending elsewhere and to draw money out of the pools it has gathered in by offering desirable goods and services to those controlling the pools — i.e. fire sales and privatization.

        As such, the MMT claim that banks can create money out of thin air seems to just be wishful thinking to avoid the unpleasant consequences of the way things are.

        By contrast, the NeoClassical economists seem to be arguing that people have to do III above because that’s the way things are and, as such, there is no alternative. Unpleasant, but if that’s the case, then that’s the case.

        The Keynesians seem to arguing that III is true, but that the situation can be alleviated by the government running up debt — spending money it doesn’t have — and then paying off that debt once things improve by getting the money out of the pools it has accumulated in through taxes and the like — but not taxes on the pools, but rather taxes on other things that the money will flow through once it’s drawn out of the pools by the improved economy.

        All that seems obvious.

        However, I’m willing to admit that it might be wrong. After all, the “obvious” answer is that the sun and other planets go around the Earth, but it turns out that’s not the case, so the “obvious” answer may not reflect reality.

        The classic signs that one is dealing with bullshit are:
        i) those peddling the bullshit refuse to answer questions;
        ii) instead they try to change the subject;
        iii) a common way to do so is by attacking the person asking the questions.

        Right now, you guys are batting there-for-three on the bullshit scale. Still, in the vague — and I suspect, increasingly misguided — hope that there is something to this MMT stuff, I’m going to ask again:

        Can banks create money out of thin air?
        If no, then where does the money for loans come from?
        If yes, then why can’t they use that money to pay off their own debts, thus avoiding going bust?

        As a follow-up question:
        If banks can’t create money, then where does money come from? Since it seems that the amount of money available is greater now than it was in the past. How is this increase achieved?

        I hope those questions are simple and clear enough that they can be answered.

        Still, I’m prepared to just be given another run-around and be insulted again for daring to ask them.

    4. Philip Pilkington

      By the way, the analogy is all wrong. Both Ptolmeic and Copernican theories were trying to model planetary movements. Not people. So, they were not attempts to explain behavior in any way.

      Neoclassical models try to explain the behavior of people. They fail to do this at the most basic level because the psychology embedded them is the intellectual equivalent of a man banging two rocks together.

      When we attribute desire or motivation to the planets we are engaging in an anthropomorphic error. But when we attribute desire or motivation to people we are reasoning correctly.

      If we then recognise that people are complex and not conducive to modelling we realise that we have to take a different approach. So, we must try to look for something that ‘moves’ more like the planet (i.e. has no desire or motivation). Keen believes that we should aggregate individuals based on their income (class-based approach). Other social sciences have done well taking this approach. Godley and Lavoie think we should look at movements between figures on balance sheets. That is my preferred method (and MMT’s).

      One last point: what is a system that tries to model people epistemologically speaking? I put to you that it is a religious or ethical system. That’s what religion does. It gives the adherent ‘model people’. The adherent then tries to get real people to act more like the models. So, my criticisms — which come at this from a different angle than Keen (did you equate the two for rhetorical savvy?) — are that economists today aren’t even close to doing astronomy. In their current methodology they are more like theologists.

  8. Steven

    Is analytic metaphysics an update on carnival quakery?

    “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. ”

    20 million [a day] is spent buying off, er..lobbying our legislature. The statement is appallingly idiotic.

    1. Dan Kervick

      What is the alternative? You are free to stick your head up your ass and rage at the darkness if that is your preference.

      1. Fred Cratchet

        Struck a nerve there? How’s the view from the white tower? I assure you it’s different from ground zero or reality – your credibility fell even further then expected. Surely there’s a number of semantic games, paragraphs in length, to expound on that phenomenon.

          1. Fred Cratchet

            Enlightened ideas are always welcome. Challenging the status quo shouldn’t mean derision, insults or worse, but that’s the typical response.

        1. Dan Kervick

          I just have little patience for people who have convinced themselves that that they have reached the height of political sophistication because they now recognize the imperviousness of the power structure to change – but who also think it is important to mock those who are not content to huddle up in a sneering ball in Loserville along with them.

          I had enough of that kind of kid’s stuff decades ago. But if people want to go through life blubbering in their issues of Counterpunch, they can be my guest.

          My view is that if you don’t like whose in power, the only option is to either suck it up and deal with it, or develop a plan to take power away from some of those who have it.

          1. bluntobj

            Mr. Kervick,

            “develop a plan to take power away from some of those who have it.”

            I opine that the ideas you are promoting here will not take power away from the plutocratic elite, but will instead enhance their power to terrifying new heights.

            If I understand the core of the argument, you are proposing to give the power to issue currency through the use of “pure deficits” without limit to a governing body that is firmly controlled by the plutocratic elite, and that has a solid track record of co-opting and subverting anyone that challenges its power.

            To prevent this occurrence, you propose the “Chuck ’em all out” strategy. I opine that the Power Elite loves to hear the “Chuck ’em all out” argument as it guarantees that their power will be retained through fractured and divisive opinion and reinforcement of the “Sports Team” mentality.

            You certainly do have a good point about negativism. I agree with you. I merely differ in solution. I prefer the Opt-out strategy.

          2. citizendave

            “…you are proposing to give the power to issue currency through the use of “pure deficits” without limit to a governing body that is firmly controlled by the plutocratic elite, and that has a solid track record of co-opting and subverting anyone that challenges its power…” bluntobj

            I would elaborate on the term “pure deficits” as I understand it in this context. Being a monetarily sovereign nation, the United States government already has the power to spend money into the economy without first receiving revenue, and without borrowing. I believe Dan calls it “pure deficit” because it does not incur debt. We would spend in excess of what we can raise by normal means. We created it, so we don’t need to pay it back.

            This is much different from how we normally operate. Normally we are constrained by what we can raise in tax and other revenue, and what we permit ourselves to borrow. In our common way of thinking, our normal approach is good fiscal policy, like running a household or a business, wherein we limit our spending to avoid bankruptcy. But the US government is not a household or a business, it is the government of a monetarily sovereign nation. Upon the creation of the government, we the people gave ourselves the power to create money. The fact that we don’t exercise that power (as far as we know) doesn’t mean we don’t have the power.

            I look at it like I look at my retirement savings account. Our rule is that we won’t touch my retirement savings unless or until it becomes necessary. In the meantime I try to make ends meet in the usual socially-acceptable ways. But if we were to suffer a recession or depression, with a bad local economy, and no legal way to obtain money to pay the rent and eat, I would not continue to leave that retirement savings untouched. And that’s how it is in our current economy. We’ve been handed a huge debt, with on-going budget deficits, with many millions unemployed. There is important work we could be doing, enough to quickly reach full employment, but instead we impose fiscal austerity on ourselves, to the further detriment of the vast numbers of unemployed people. Fiscal austerity is laudable for a household or business with a huge burden of debt, but it is not necessary for the US government to be so constrained. We have the power to inject money into our economy, debt-free and unconstrained by income or the ability to borrow.

            So what’s the downside? The suggestion is that spending money into the economy as “pure deficits” would cause the Members of Congress to act in ways they don’t normally act, free of the normal constraints of fiscal policy. While reading Dan’s article I wondered how we could get fiscal policy and monetary policy to coordinate with each other. The unelected Fed seems to tend to gear monetary policy toward the interests of the financial elites, instead of the people of the nation. In the kind of democracy we grew up believing we had, our Congress would tailor fiscal policy to the interests of the people who elected them. Some people advocate putting the functions of the Federal Reserve back into the Treasury. We could imagine a system in which fiscal policy and monetary policy would be more closely coordinated, and aligned more with the interests of the people. The economy would serve the people, rather than vice versa. If the normal constraints of fiscal policy would not govern spending by Congress in a “pure deficits” scenario, then perhaps monetary policy from Treasury could limit the quantity of money spent into the economy.

            Maybe the bankers don’t like the idea of pure deficit spending because it would seem to deprive them of interest income. But much ordinary economic activity would ensue, the economy would grow, and bank business would increase. Everybody would prosper.

  9. OregonTime

    Gotta keep fightin’ the good fight even in the face of possible total defeat. Yves knows! That’s what NC is all about. Great read!

  10. Vinz Klortho

    MMT works fine as a monetary system, with one fairly severe and extreme constraint:

    The immediate execution by half-hanging, disemboweling and drawing and quartering of any elected official, government, Federal Reserve or banking/credit system employee that causes, enables, authorizes or in any way otherwise facilitates the spending of money in excess of the productive capacity of the economy.

    Put that into legislation, and I’m good to go.

    Let’s gut Maxine Waters and Nancy Pelosi as an example to get started.

    Vinz Klortho

    1. F. Beard

      The immediate execution by half-hanging, disemboweling and drawing and quartering of any elected official, government, Federal Reserve or banking/credit system employee that causes, enables, authorizes or in any way otherwise facilitates the spending of money in excess of the productive capacity of the economy. Vinz Klortho

      Care to be hated by the Lord’s soul?

      The LORD tests the righteous and the wicked, and the one who loves violence His soul hates. Psalm 11:5

      Yves, I rarely ask that anyone be banned but Klortho is scumming up the joint.

      1. ebear

        I have a better idea. Put up a scoring system like Zero Hedge and we’ll see who gets voted off the island first. After we all read our bibles of course, so we have the correct attitude.

  11. Vinz Klortho

    MMT will only realistically work in a system with a much smaller government, and hence is reasonably compatible with Austrians, Ron Paul, gold standard folks, and true conservatives. Here’s why:

    1) Money is power

    2) MMT gives the government the ability to create large amounts of money

    3) Corrupt individuals will get elected or work for companies to get control of that power.

    4) If corrupt individuals or companies control the ability of the government to create large amounts of money, the MMT monetary system will fail.

    Therefore, the only possible successful form of government operating under the MMT monetary system must be one that minimizes the amount of money the government creates, ie a government that is “small” relative to the productive capacity of the economy.

    Vinz Klortho

    1. F. Beard

      Therefore, the only possible successful form of government operating under the MMT monetary system must be one that minimizes the amount of money the government creates, ie a government that is “small” relative to the productive capacity of the economy. Vinz Klortho

      Wrong. If government money was de jure and de facto legal tender for government debts ONLY then excessive government money creation would make taxes EASIER to pay since government money would be CHEAPER in real terms.

      I’ve pointed this out to you once, haven’t I?

  12. Jeff Berg

    “America hasn’t always had a Congress full of can’t-do seat-warmers, small thinkers and penny pinchers determined to castrate the national government and let bankers and CEOs run the world. ” Wrong, we’ve always had that. The stakes are much higher now, agree? Many suggest revolution, not preservation of what is broken. This doesn’t mean violence, unless the State descends into that level of paranoia.

    1. Dan Kervick

      Revolutions almost always mean violence. People who who aim to overturn an existing regime have to expect that the defenders of the existing regime will fight to defend and preserve it. You could call that paranoia. But in general people who have built something they are committed to don’t walk away from it without a fight.

      In any case, if someone is interested in a revolution, I think they need to present a concrete vision of what the post-revolutionary order is supposed to to look like, along with a plausible action plan for achieving the changes they have in mind. Otherwise, most people will conclude that there is absolutely no reason to believe that the new order will be a significant improvement on the existing one.

      1. Doug Terpstra

        On revolutions, Charles Hugh Smith, a prolific thinker, financial analyst, virtuoso musician and author, has a new book:

        “Resistance, Revolution, Liberation: A Model for Positive Change” http://www.oftwominds.com/blog.html

        When we see the word “revolution,” the shared imagination conjures up images of violent political upheaval. I use the word not to denote the bloody overthrow of a political order, but to describe a blossoming of understanding so profound that it leads to peaceful transformation of our social order, economy and culture.

        Concerted action flows from ideas that make sense of what no longer made sense in the old worldview. Thus a revolution in understanding leads to transformative action in the real world.


        In effect, academia, government and the financial sector select out, corrupt or marginalize anyone challenging the Status Quo. What remain are trivialized speculations that threaten no power structure and superficial analyses that implicitly support a parasitical and predatory Status Quo by studiously ignoring the pathologies of our social order and economy.

        As a result of these forces, “public intellectuals” from academia, government and the government-dependent private sector [like Krugman] are incapable of critical thinking that threatens the intellectual foundations of the Status Quo. In the current system, their financial self-interest can only be served by joining the Upper Caste of the neofeudal social order and loyally serving powerful financial and political Elites (the modern-day equivalent of landed aristocracy and nobility). The pool of leadership has thus been poisoned as potential leaders have been corrupted into complicity. Leadership of the peaceful transformation to a sustainable, just and free society thus falls to all who have opted out, been selected out or marginalized; the citizenry must lead, as their leadership has become hopelessly corrupted by the system that enriches and empowers the Upper Caste and the Elites it serves…

        …We are running out of time to parse irrelevancies.

        Thus “serious thought” that implicitly supports the Status Quo via ritualistic appeals to social control myths, simulacra critiques and pseudo-realities becomes the opposite—trivial and superficial.

        Those benefitting from our sociopathological, neofeudal Status Quo (as well as those who have been persuaded that their participation benefits them) will see no need for revolution. Indeed, they will view any transformation as a threat to their personal share of the Status Quo perquisites. But fundamental transformation is no longer a choice, whether you believe the Status Quo serves your self-interest or not. The unsustainable will crumble and another arrangement will take its place.


        The process of the unsustainable collapsing under its own weight and being replaced with a new, more sustainable model is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux…

        Given the entrenched nature of the neofeudal Elites and the Upper Caste that serves them, it is no surprise that revolution carries a negative connotation, as if any change that isn’t instigated and directed by our corrupt leadership is considered illegitimate and dangerous to the social order. …

        … Perhaps the Status Quo has it backward, and it is the uncontrollable dissolution of the unsustainable financialized State that we should fear, and the peaceful, transformative revolution we should welcome as a positive development for all—even those who cling to all that is unsustainable.

        Part 2 of the Introduction will run tomorrow.

      2. Blunt

        In other words, Dan, you truly are an academic theorist with no grounding in the “real world?”

        You are suggesting that for a revolution to be possible and be acceptable in your mind the fabricators of such a movement would need to be able to precisely predict the future and write guarantees to the effect that all would go according to the prospectus you would have them produce that would show out the arcana and details of such a future.

        Rather more extreme than you and MMTers are willing to manage to do yourselves.

        Perhaps not getting so worked up over trolls would be more helpful. None of us are so brilliant that someone won’t be able to pick at pieces of our arguments.

        Predicting the future might not be a half-poor idea when it comes to finding a prophylactic against becoming so disturbed by trolls or those in disagreement that one lashes out and merely calls them “morons” or “idiots” as if that is retort enough to their objections.

        Keep your kewl, dude. You’ll come off better that way.

        1. Dan Kervick

          I’m just saying that success in any endeavor requires a plan of some kind. Not a detailed blueprint necessarily, but at last a plan.

          1. Blunt

            Not to argue just for it’s own sake, but no one’s found the plans yet for a small something that worked out pretty well for a couple of hundred years when the planning seems to have been done after the fact. The British Empire. *smile*

            Having a plan doesn’t seem to guarantee much of anything except that it seems to mollify those who desire planning. Having done more than a few policy seminars in graduate school I am very aware that planning falls under the academic rubric and generally works better in seminars than in most other aspects of life.

            I suspect that the central banks would tell you they had detailed plans. Just not plans that detailed the great recession and it’s various aftermaths. See what I mean?

            I’m not against planning, just against the idea that having a plan somehow makes things safer or more subject to working the way we plan them. Makes things less messy or subject to error or delay or outright failure.

            As far as revolution’s concerned I was once concerned about what happened to the rulers and minions of the ancien regime during and afterwards. Not so much anymore. I imagine that the slicing action of the guillotine will take care of most of the pain.

  13. craazyman

    These Days

    I have a hard time getting that Whitman “On Crossing Brooklyn Ferry” feeling any more. You look around you and what is it? It’s anxious faces falling away, the faces on the street, they fly away with every glance. I don’t know if it’s just me, or if it’s something much much bigger, something enveloping everything and separating everything, something pushing everything into an infinity of solitudes. How can cooperation grow out of this? How can money grow out of this? Mr. Kervick correctly locates culture at the center of money. And the Fed and the Congress, they follow it around like the ducks follow their mama. Mr. Keen was the first one to mention “arse and tit” and then Mr. Krugman referenced the function of the buttocks. After that, it became quite a festival of language and precision. Still, one wonders, since it’s all just something imagined, if there’s a force that drives the imagining that somehow shapes the imagining. I hate to sound Jungian here. Wish I had more that made sense. In Crossing Brooklyn Ferry they were workman, who created from nature and imagination with their hands. But now so few do. Maybe that’s part of it.

  14. OSR

    “We have an election this year. I suggest we use it to ditch the empty suits, the plutocratic shills and the small minds, and fill their spots with people ready to act.”

    This advice is about as useful tits on a snake, due to the fact that it is merely addressing the symptoms of a deeper, systemic malady. Elections have become a farce because all of the choices have already been compromised long before the voters learn their names. The only choice that elections afford is which set of campaign contributors gets to subvert the will of the people. Do you really think that McCain would have done anything differently than Obama?

    However, the answer is so absurdly simple that it’s startling. Just about all of our current social and economic problems are symptoms of the same disease: Campaign contributions have perverted democracy to the point that the public is no longer represented. Thus, the solution is clear: We need a constitutional amendment that bans all campaign contributions of any kind by any entity. Furthermore, we need to equate violation of the amendment with treason and impose draconian penalties accordingly. The result would be government by representatives whose behavior was governed solely by the best interests of their constituents.

    1. WSMassiv

      Nice deviation. This is not the issue. Lets revert to the TOPIC of the article. Money. Creation of and Policy of.

      People like you part of the reason NOTHING will EVER get done.

    2. JCC

      No offense towards you, I understand your frustration, but your advice is about “as useful as tits on a snake”.

      Which one of your choices that “have already been compromised long before the voters learn their names” is going to propose “a constitutional amendment that bans all campaign contributions of any kind by any entity”?

      I suspect it may be all those that are following the Krugman vs Keen debate and/or reading NC regularly, i.e., none.

      1. Dan Kervick

        I think this is a good point. A lot of people have the right instincts in wanting to get “money out of politics.” But I don’t think there are a lot of good ideas out there yet as to how.

        My feeling is that you can’t ever really get money out of politics. But you can hope to succeed in dramatically shrinking the gap between the very unequal amounts of money different citizens have in our society.

        This is no pipe dream. In the US, the ratio of CEO to worker pay is in the hundreds. In countries like Japan and Sweden it is 11 to 1 or 12 to 1. Since there are actual, highly functioning contemporary societies that work like this, it clearly something we could aim for and hope to achieve. It doesn’t involve creating some Libertarian-Anarchist Valhalla.

  15. mcarson

    These are real questions, don’t be jerks just because you’re smarter than I am.

    I understand Krugman, I’ve been reading him since Bush. Through him I’ve discovered Delong and Beat the Press.

    Krugmans stimulus spending makes sense to me. I can see a WPA program working. I understand the research on higher tax rates. I see the stats on no middle class income gains the last 30 years. I know what the rentiers are up to, and would like to stop them.

    What do MMT’s want to do that Krugman is against?
    If he got out of their way what good thing would happen?
    Do they have anything better than a new WPA and a 50% top tax rate?

    1. Dan Kervick

      I think the short answer is that Krugman believes, as I understand it, that monetary policy is fully effective except in unusual circumstances characterized by liquidity traps, and so increased spending on the fiscal side is just a kind of emergency measure.

  16. Doug Terpstra

    This article states a lot of self-evident truth, but it’s based on a fundamentally flawed premise: that America is a representative democracy or republic. In practice, it makes little difference whether “we ‘allow’ the central bank to become a second, unelected Congress” or ‘allow’ the current [s]elected Congress on the Hill conduct fiscal policy. This is especially obvious post-Citizens divided. The Criminal Reserve Cartel chairman and all branches of government, executive, legislative, and judicial, are all ultimately chosen, albeit under different guises, and serve at the pleasure of the same oligarchy, the same 0.1%. We really do not have any choice in the matter thru the normal process.

    This is the critical premise the American people MUST finally understand, that democracy has gone bye-bye. The rest is chatter. I’m with OSR, Jeff Berg, and Steven, though I might not put it as indelicately. Many more have finally swallowed the red pill thanks to Obama. That’s what Occupy is all about and why it can’t be co-opted by the Democratic Party. Real change will require nothing less than a revolution—hopefully peaceful—perhaps made possible by the next, greater financial collapse.

  17. K Ackermann

    Because I’m not smart enough to yet contribute meaningfully to this conversation, I’ve starting reading Jesus De Soto’s little book on banking(pdf). It’s 938 pages, but being from the Austrian school, I’m sure De Soto cuts right to the chase and skips all the historical crap.

  18. Hugh

    Kervick in the comments decries revolution as a solution for the 99%, but the fact is that over the last 35 years the 1% have conducted an ongoing coup against the 99%. He is correct that revolutions are inherently violent but he is wrong about its agents. The 1% have inflicted great violence on the 99% in their acquisition of power. Look at the millions out of work, the millions of houses in foreclosure, the tens of millions on foodstamps, the tens of millions without any or adequate healthcare insurance, the tens of thousands who die each year due to the lack of such insurance, the tens of millions who have seen their pensions and retirement funds evaporate in the Wall Street casino, and the tens of millions up to their neck in debt. Look at their endless, pointless wars. Look at the surveillance state they have constructed. Look at the trillions they find for themselves. Look at the trillions they wish to cut going to the rest of us. This is all violence, and it has been going on for decades.

    If and when the 99% take back the country that has been stolen from them, that will be revolution and there will be violence. But while it is an open question whether the 99% will use violence, it is a dead certainty that our elites will resort to violence to keep both their power and their loot.

    As I indicated above, it is possible for the 99% to take back power non-violently (on their part), but we have to be clear this does not mean they can be either passive or non-confrontational. And we have to be clear about the limitations and timeline for this approach. Even if tonight we decided to come together and select candidates of the 99% for all national, state, and local offices, we would have to get those candidates on the ballot. Taking the national level, even if they all won, we would achieve complete control of the House and the Presidency but only 1/3 of the Senate. It would take two more years and again a complete sweep to gain control of both the Executive and the Legislature. So during this time the reactionary forces of the Democratic and Republican parties could continue to stymie and sabotage any real effort at change. We could face two years of debilitating gridlock. And of course there would still be a corporatist anti-99% Judiciary to deal with. We would have some ways to counter some of this. Senators representing the 99% could make life hell for the rest of the Senate. And we could neutralize a lot of the financial players by beginning investigations and prosecutions of them. But the real key would be the willingness of the American people to demonstrate both on a large scale and often in a very in your face way to the legacy party pols who remained. And not just those pols but the rest of the agents and representants of the kleptocratic process, the judges, the media, the academics, in short the rest of the country’s elites.

    If we go this route, it has to be understood that it is going to be a long term process and that we all have to be committed to it.

    As I noted earlier in a comment in another thread, we already have a straightforward platform, a commitment of the 99% to the 99%: good jobs at a living wage for all who want one, good infrastructure, good housing, good banking, good education, good healthcare, good retirement as well as an end to the wars, limits on wealth inequality, and the reining in of corporations.

    The ideas are all there. We need to start acting on them. We have time to act before the November elections, but we must begin acting now.

    1. psychohistorian

      I agree and thank you for the comment.

      As probably expected i want to add…Nationalize the Fed!

  19. Linus Huber

    Laws and rules in a country are meant to reward behaviour that is positive for the public in general and punish unethical and for society negative behaviour. This is the spirit of rule of law that made Western Society successful.

    The present actions by Central Banks and Governments the world over do not simply violate the principles of Free Markets but violate increasing the spirit of the rule of law by affecting property rights when transferring costs of mal-investments from the originators (or actual investors) to the general public. Capitalism has to be suspended temporarily to avoid a much larger disaster. Well, the much larger disaster is the fact that we left all principles that made us successful and we are closer to the planned economy of the UDSSR than ever. You just cannot have it both ways, either you accept that errors are dealt with where they occur or you lose on grounds that affect the fabric and rules of the whole society.

    At present we get closer and closer to ending up with a very authoritarian government if people do fail to exercise their power at the ballot box to effect serious changes in the integrity of their leaders. The beneficiaries of the present Crony Capitalism will certainly do their best to avoid real change.

  20. Dennis

    Sigh. I understand that in college people learn how to ramp up their word count due to the arbitrary nature of page minimums but for the sake of clarity, is it really necessary to wrap an interesting essay in verbosity this much? Even the writer himself grows tired of throwing in meaningless sentences and about a 1/3rd of the way through starts making his point in clear English — and the points become more powerful, not less!

  21. Matt

    While I agree with pretty much everything this post says, I fail to see how it addresses the dispute between Krugman and Keen/Fullwiler. Krugman has been calling for more fiscal policy too, on the basis that monetary policy is ineffective at the zero bound.

  22. Susan the other

    We are currently operating on a default model that is terminally crippled by its own contradiction: The Fed’s mandate is to do two things: 1. to protect the dollar from the erosion of inflation, and 2. to create full employment.

    I ask you, Is this the very height of political irresponsibility? We all know this will never be resolved. It’s the equivalent of the very model of an oxymoron. We have to make some decisions here. Fiscal, political decisions.

  23. Darren Kenworthy

    “The dollar economy is the real economy, and the real economy is the dollar economy. The economic system which consists of both money and the things money buys is an organic whole of integrated human activity. There is no plausible way of regulating or managing one without regulating or managing the other.”

    While is possible that the last assertion is in some sense true, the statements preceding it are not. Various complex physical systems produce resources that humans can use to survive and prosper. Humans are an integrated part of these systems, and are subject to the same laws. Humans are capable of imagining processes and objects that are not subject to these laws (Hume makes some observations about this penchant in his “Inquiry Concerning Human Understanding”). Magic is an excellent example of such an imaginary process, along with alchemy, religion and what is sometimes called “economics”. All these inventions of the mind are potentially useful, but they are also fundamentally divorced from the “real economy” governed by physical laws. We forget the difference at our peril.

  24. Charles Yaker

    To the Auther Dan Kervick., Enough already. We know you get the point but can you explain it to somebody with barely an eighth grade education and also explain what ey have to do to change things. Because wiout at your just preaching to the choir.

  25. Michael W

    America was set up as a republic not a democracy. Americans like to think they have a democratic republic; unless Plato was an idiot this is impossible. He designed the republic to be run by elites -in this day and age that translates to wealthy elites. A democracy is run by the majority of average voters; America has a lot of votes but no democracy.
    If America was a democracy the government would not be continually stalemated by design and the legislators would be able to translate the human and social values of the majority to affect laws and lives so that the economy becomes much more balanced and the wealth created from it much more equitable distributed instead of the top 1% getting the vast majority of the economic benefit.
    In a democratic government the national bank would be owned by citizens not Wall Street as the Fed is “owned” not by Americans but by the largest private banks – and it serves its masters exceedingly well. A truly national bank would serve its masters – all American citizens.
    A real national bank would immediately wipe out national and state and municipal debt the same way the Fed helped its friends with a twenty nine trillion dollar transfer.
    The Fed is supposed to be a national bank but it is run by private bankers for the benefit of themselves and their friends – this is one of the main reasons for the horrible state of the American economy. The economic rubic currently used forces American workers to compete with the slave wages of third world countries through phony “free trade” agreements which are really “one-way trade” agreements as the third world countries like China or Malaysia, Indonesia etc. will never ever buy American manufactured goods. There is almost no way any government can positively affect the lives of ordinary American families as long as we export middle class jobs to slave wage jurisdictions and import low quality cheap products.
    A truly national bank whose objective is full employment instead of protecting and enriching the economic top 1%, would indeed revive our middle class and return America to economic prominence, instead of being driven to the economic death’s door while the top 10% (the top 1% plus the next 9% who are apologists, wannabees and sycophants to the super wealthy.
    Whatever the demerits of effective real democratic control of our economy by a truly national bank (not the elite controlled Fed), it can hardly be worse than the result of our government and country being run by the Fed by and for the economic top 1%; and the prospects that it would be far better are very very likely!

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