Perversely, there have been some readers who have tried depicting advocates of Modern Monetary Theory as bank-friendly and supporters of the current order. This charge is bizarre given that MMT proponents like Randy Wray and Bill Black were loud critics of predatory bank conduct several years back, particularly during debates over reregulation. The fact that they’ve focused more on how destructive austerity is and technical aspects of MMT in recent years shows how short memories are in the blogosphere. Although this post is mainly about monetary cranks, and how they can be both useful and destructive, it also included issues of bank reform.
By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally published at EconoMonitor
Horatio: He waxes desperate with imagination.
Marcellus: Let’s follow. ‘Tis not fit thus to obey him.
Horatio: Have after. To what issue will this come?
Marcellus: Something is rotten in the state of Denmark.
Horatio: Heaven will direct it.
Marcellus: Nay, let’s follow him.
Hamlet Act 1, scene 4
Marcellus is right, the Fish of Finance is rotting from the head down. It stinks. As Hamlet remarked earlier in the play, Denmark is “an unweeded garden” of “things rank and gross in nature” (Act 1, scene 2). The ghost of the dead king appears to Hamlet, beckoning him to follow. In scene 5, the ghost tells Hamlet just how rotten things really are.
Denmark, is of course Wall Street or London. Far more rotten than anyone can imagine.
In the aftermath of the Great Recession, we all wax “desperate with imagination”, looking for explanation. For solution. For retribution!
The financial system is rotten. Our banking regulators and supervisors failed us in the run-up to the crisis, they failed us in the response to the crisis, and they are failing us in the reform that we expected in the aftermath of the crisis.
Heaven will not save us, either. The Invisible Hand is impotent. Just wait for Scene 5!
In times like these, we thrash about, desperate for ideas, for imagination, for leadership. There’s nothing unusual about that. Read the entry, monetary cranks, by David Clark in The New Palgrave: A Dictionary of Economics, First Edition, 1987, Edited by John Eatwell, Murray Milgate and Peter Newman.
You’ll find many of the same proffered reforms bandied about now. Many of them make sense, or at least partial sense. I’ve always used that entry in my money and banking courses as an example of sensible ideas being rejected by the mainstream, labeled “crank” to discredit them.
When I use the term monetary cranks, I use it as a term of endearment. We need some cranky ideas because all the respectable ones failed us. There is nothing, and I mean literally nothing, that will come out of the mainstream that will be of use.
The “Great Crash” (as JK Galbraith called it, AKA the “Great Depression”) generated a similar outpouring of “cranky” proposals. Even quite mainstream and respectable economists got involved. A group of them published “the Chicago Plan”—supported by Irving Fisher, Milton Friedman, and Henry Simons.
The idea was to prevent another run-up in speculative fever by restricting banks. They could issue deposits but could not make loans. To ensure safety of the deposits, they’d hold only the safest assets—such as US Treasuries. (For more on the history of the Chicago Plan, see the great book by my good friend and Levy colleague, Ronnie Phillips, (1995) The Chicago Plan & New Deal Banking Reform, Armonk, NY: M.E. Sharpe.)
Hyman Minsky wrote an endorsement for the book, but he also wrote that the Narrow Banking plan was aiming to “fix what is not broke”. Yes, the plan would carve out a section of the financial system that would remain safe—the payments system. However, with a central bank that acts as a lender of last resort and with the treasury providing deposit insurance, our payments system is perfectly safe.
You want proof? We just went through the worst (global) financial crisis since the 1930s with not even a hiccup in our insured deposit system.
True, our uninsured money market mutual fund system faced disaster, and required expansion of the government safety net to save it. And virtually every other part of our financial system also had to be rescued. As my Ford project team has documented, it took $29 TRILLION of subsidized loan originations by the Fed to prop up Wall Street, London, and Brussels.
But the protected deposit-based payments system went through unscathed.
(The UK did have a hiccup, precisely because it did not offer 100% insurance; it had to expand insurance to 100% to stop bank runs that never occurred in the USA.)
So what do our monetary cranks want to do? Well, a lot of them want to go back to the Chicago Plan. They want to solve a problem that does not exist.
Like Minsky, I don’t object. Maybe there is a better way to do the payments system. Personally, I’ve always liked the idea of a nationwide, universally accessible, government-funded, postal savings system. Let’s go for it.
It’s a crazy idea only in the USA. It is easy to find PSSs around the world. Last time I looked, the Japanese PSS was the biggest “bank” in the world (but maybe one of the bankster banks has surpassed it now—propped up, fed, clothed and diaper-changed by Uncle Sam).
We do not have to reinvent the wheel. We don’t need a Chicago Plan. Let’s just restore the US Postal Saving System (which, as I recall, lasted into the 1960s).
Centralized Committee of Experts
However, the crank can be taken too far. Some—even the FT’s Martin Wolf??—are not talking about carving out a tiny part of the financial system, but rather are talking about lock-stock-and-barrel replacing it with narrow banks. (See the great critique by Ann Pettifor, Out of thin air – Why banks must be allowed to create money, http://www.primeeconomics.org/?p=2922.)
Now that is cranky.
The idea seems to be that we don’t need no stinking banks—at least the kind we’ve got now.
As I’ve been arguing, our banks “create money” (in the form of demand deposits) “out of thin air” when they make loans. It seems that everyone except Paul Krugman now gets this. And lots of people don’t like it, including Martin Wolf.
So we’ll eliminate that kind of banking, and just let narrow banks take in deposits and then buy safe treasuries. No more money creation out of thin air.
Who will do the lending? There are two options. We could allow specialized intermediaries that would take in savings and lend them out. Or we could have special government banks. I’m only discussing the first of these today.
While the cranks who support private intermediaries have not explicitly stated it, what they seem to be proposing is a riff on Islamic banking. The idea is that savers can lend their saving to investors. Sure it is risky! The savers effectively share in the rewards or the losses incurred by the investors.
In many religions, interest is (or at least was—damn usury!) prohibited, but there is nothing wrong with sharing profit (or loss). Since matching savers and investors is time-consuming, special intermediaries rise up to perform that function (taking some of the profit off the top).
As an enterprise model, this is as old as the hills—going back to Mesopotamia. As Michael Hudson argues, the interest rate charged was 20% or 33% depending on the type of economic activity (lower for commercial, higher for consumer).
In its modern dress, the proposal is to set up a centralized nongovernmental committee of experts to decide who gets the loans.
According to Pettifor, this is pushed by the “UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’. Furthermore, Wolf argues, private commercial banks would only be allowed to: ‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’”
For me, that’s a crank too far.
First, I do not like centralization and I worry about a committee of experts deciding who is going to get credit. I like the idea of having thousands of decentralized financial institutions making such decisions.
I like a variety of types of financial institutions as well: credit unions, local community banks, mutual savings and loans (those were the old thrifts that offered mutual shares and made mortgage loans; they never failed and they served their communities), and even some mid-sized banks with a few branches.
(I also support government development banks, which lend for public purposes. And there is a need for direct lending by Treasury for student loans and other public purposes. However I would not want to eliminate private lenders or cooperatives and mutuals. I do not believe government will generally do a good job of underwriting—so I would favor government direct lending where the public interest trumps good underwriting, and leave the rest to “private” lenders, including coops etc.)
Second—and maybe more importantly—the proposal is based on a fundamentally flawed view of the saving-investment and deposit-loan relationship.
For those who’ve got Econ 101 under their belt, it is based on the loanable funds notion that “saving finances investment”. As we’ve known since Keynes, that is precisely wrong. I won’t go into it here, but it is best to think of this the other way round: investment creates the income that can be saved.
But if the Keynes view is right (and of course it is right), then what finances investment (and any spending in excess of income)? Credit. Where does it come from? Out of thin air.
I can just hear our cranks: “There you go again, that is what we want to eliminate!”
Yes, I understand. But crankiness can only take you so far. You’ve got to have the correct theoretical framework. As Pettifor rightly says in her piece, if we really did limit our finance to saving, then we’d run our economy right into the ground.
Saving is a two-step decision: a decision to NOT spend, and then a decision to hold your saving in some form. Only a portion of saving will ever make it into our intermediary to finance loans. (Some portion will go into the narrow bank, some portion will go under the mattress in the form of currency.) Each period, the amount saved, lent, and then spent would probably decline (leakages into those mattresses).
Yes, you could instead grow government (“thin air money creation”) to fill the demand gap. Government deficits create saving. I’m all for sufficient government spending to fulfill the public purpose. But I think there’s also important private purposes. As I’ve argued before, the sizes of government is mostly a political decision (with economic effects). The US (along with Japan) desires a government sized at the small end of the scale; France is on the big end. I’ve got nothing against French-sized government. The majority of Americans are not with me on that.
We need that thin air money creation to keep the lending, spending, and growing moving forward. At least some of it needs to come from the private sector fulfilling the private purpose–maybe less than in years past, but sufficiently large that government budget deficits are not likely to fill the hole if we eliminate private thin air money.
Now, before I’m accused of advocating the full-speed-ahead excesses of late 1920s banking or early-to-mid 2000s banking, let me say that (with rare exceptions, as discussed above) lending requires underwriting (credit assessment). I do want “experts” to do that. I want every community bank, credit union, or mutual thrift to have committees of loan officers to do the underwriting.
What failed us is that the biggest global banks decided underwriting is not needed. They got rid of their loan officers. They off-loaded all their loans to securitization. There is absolutely no hope that a Citi or a BofA will ever do good underwriting again.
I agree with our cranks (I’m as cranky as they are) about shutting down all of the biggest financial institutions. They serve no public purpose, and their business model ensures they cannot serve any private purpose, either, except enriching the top tenth of one percent.
However, we need “thin air” money creation, albeit with decentralized and incentivized underwriting determining which activities ought to get financed. (Good underwriting is incentivized if loans are held to maturity.)
The Limits of Legislation
But here’s a more fundamental question. Is it really possible to legislate away “thin air money creation”?
As Minsky said, “Anyone can create money” (How? Thin air.), “the problem is to get it accepted.”
How can government prevent me from writing “IOU five bucks”? Our economy is based on “I-O-U’s” and “U-O-ME’s”. Since the time of Mesopotamia, we’ve run up bar tabs—cleared at harvest time on the threshing floor. Retailers routinely receive wares on trade credit, payable thirty days hence.
If you think about it, it’s all trade credit of some sort or other. You work for a month and accumulate wage claims on your employer. At the end of the month he gives you a credit redeemable at a bank, which gives you a credit redeemable at another bank.
And we’ve carried this to the “nth” degree–$700 trillion of contingent commitments, promises to pay if exchange rates move, if someone’s credit gets downgraded, if a peasant dies, if the Fed moves rates.
Now, how the heck do you eliminate all of that? And why would you want to?
Yes, some of it stinks, like that rotten fish head in Denmark. But do you really want a centralized committee somewhere trying to tell you whether you can write an IOU for five buckaroos? Or whether you can place a bet that sterling will rise against the dollar?
Or that your peasant will die? (Wait a minute, that one certainly ought to be illegal—a go to jail or to the gallows sort of crime.)
Here’s my proposal: let a thousand flowers bloom, but don’t protect all of them from wilting.
Carve out various sectors of the financial system that are designated “public-private partnerships” that do have safety net protection, but are closely regulated with respect to what they can do. Further carve them up so that they perform designated public purpose activities. Some help to run the payments system (keep them very safe); others make mortgage loans (closely watched to guard against lender fraud); some make commercial loans (with good underwriting); others provide investment services (with more risk but transparently revealed).
Horses for courses. We’ve got a huge and complex economy with varied financial services needs.
Right now, we have far more finance than we need. Exactly how much of it we could eliminate as unnecessary is up for debate. I wouldn’t be surprised if our economy would actually run better if finance was downsized by 90%–that would put it somewhere near where it was in the early postwar period—the so-called golden era of US capitalism.
But we’re not going to eliminate all excesses through legislation. We can, however, refuse to support excess and refuse to rescue the perps of excess. The warning should be explicit and it must be believable. That is hard, no question about it.
Some will say that with Wall Street running our government, you’ll never remove the safety net of the biggest, crookedest, riskiest banks. They might be right. But if they are, I cannot see how they will do the impossible: legislate away Wall Street’s excesses.
Simon Johnson, who wants to break up the biggest banks, made an interesting point when we shared a panel in Washington last year. He really believes it is not only possible to break them up, but that it will happen. Why? Because there is growing support among all the banks that are not “too big to fail”.
For the most part, those smaller banks played no role in the shenanigans that led to the crisis. They increasingly recognize the huge public subsidies given to the “banksters” (I use that term accurately to designate those institutions that are run as control frauds—as Bill Black calls them) in the form of low interest rates plus a government backstop in the event that their bad bets go wrong.
He might be right. It might be easier to break them up and shut them down than to legislate away their excesses. Heck, much of what they did is already illegal!
The Role of Monetary Cranks
Yes, the rotting fish on Wall Street and in London stinks. We need downsizing. We need reform—not only of the financial system that exists, but also of the crisis response that we will need when the system fails next time. You can be sure there will be a next time.
This is the time for monetary cranks.
No good ideas will come out of the mainstream. They never saw the crisis coming, indeed, their advice in the speculative run-up made the crash not only inevitable but much worse than it would have been. They were behind the bail-outs of Wall Street and London. Their rescue of the banksters will hasten and deepen the next crisis. Do not listen to them.
We need to remember two things, however, as we assess the proposals of our cranks.
First, there is no final solution. There is no magic reform that will prevent another crisis. As Minsky said, “stability is destabilizing”. Any successful reform will lead to the recreation of instability that will lead to another crisis.
Second, it is essential that the reform proposal is based on a coherent and valid theoretical framework.
One way to judge the monetary cranks that are proposing reforms is to ask: “Where were you a decade ago?” Did you see “it” (the crisis) coming? Did you have a coherent theory which explained why a financial crisis would occur? Is your proposal consistent with that theoretical framework? What the heck is your monetary framework?
Money, money, money, money, money, money, money. Money makes the world go round… Except when it doesn’t. I glad you said that the is no final solution. There is probably NO solution. It is a condition, not a problem. Sometimes it makes it harder to learn how to live with a condition if people are busy looking for “solutions” that don’t exist. “Let’s wait until we invent the magic bullet!” In his 1934 BBC radio address, “Is the economic system self-adjusting,” Keynes ranged himself with the cranks: “The heretics of today are the descendants of a long line of heretics who, overwhelmed but never extinguished, have survived as isolated groups of cranks….Now I range myself with the heretics.” http://ecologicalheadstand.blogspot.ca/2011/02/self-adjusting-economic-system.html
Always and everywhere it’s about the money! But who gets the LEGAL right to keep that money is Always decided by Governments which always claim to care about ALL the people, but when all is said and done it eventually becomes clear that the laws were manipulated for the benefit of the .01%.
Money has clearly corrupted the public discourse and we have a government corrupted by money to thank! There is a solution the 99.99% just don’t see, and that is by design!
A world corrupted by money will continue until ALL CentaMilliomaire$ and Billionaire$ are TAXED out of existence!
Both MMT and Positive money share a belief in creating money out of thin air the only difference is at what level the decision of how much to create and to whom it should be directed.
No, there are more significant differences. As Dirk Bezemer wrote in an e-mail:
A quarter of GDP runs on trade credit. Much of the rest is car loans, students loans, supermarket credit, … If official money is constrained the public invents new forms. Neither central banks nor commercial banks control the money quantity. Effective “100%” money would require additional regulation to stop and strangle all that. But even in the USSR that was not possible – the was a huge grey economy. It would be a regulator’s nightmare.
Also, how would 100% reserves work? The central bank must provide reserves on demand if the system is short, unless it is happy to see interbank rates shoot to infinity. So the market leads reserves, not the other way round. Positive Money say the central bank would determinine quantity but the market would determine allocation. The distinction is a fallacy. If the market sends 90% of it to mortgages, is the central bank going to sit on its hand and let nonfiancial business starve of credit? Of course not. So again, market allocation leads the central bank to provide funds.
Positive Money promotes a fantasy.
25% of GDP on trade credit times 0.25 year duration for payment of the bill = 6.25% of free money needed to be provided by the government. Easy !
Car loans ? leasing funded by long term resources can do the job
Student loan and supermarket credit ? Since when this blog promotes overpriced education and debt slavery for the masses ?!?
Furthermore the market INDEED sends 90% of “it” to mortgages. Non financial business are not starved of credit, they are rightfully afraid of it should expectations don’t realise. What they are starved of is the equity needed to try risky ventures.
There is simply no way a committee can make these kinds of decisions in a democratic manner. There are very good things in Positive Money, but I cannot accept a central group which will be unable to fulfill its function. The PM idea is that the committee will determine quantity to be spent while politicians will decide how it will be spent, but these are in reality the same thing.
In their paper on Sovereign Money Creation it is explained that:
. . . it is important that politicians are not directly
given control over money creation, because of the risk
that political pressures could lead the government to
abuse this power to create money. Therefore, the deci
-sion over how much new money to create should be
taken, as it is now, by the Monetary Policy Committee
(MPC) at the central bank in line with their democrat
-ically mandated targets. Likewise, the process should
be designed so that the central bank is not able to gain
influence over government policy. In practice this
means that the MPC and the Bank of England should
not have any say over what the new money should be
used for (this is a decision to be taken solely by the
government) whilst the government should have no
say over how much money is created (which is a deci
-sion for the MPC).
In theory the committee is isolated from political decisions regarding fiscal priorities. Yet on the very next page we are told:
Before any decisions are made regarding the
amount of money to be created through SMC, the
government must decide what any money created
through SMC will be used for. This is important, as
what the money is spent on will determine SMC’s effect
on demand (for example, increases in government
spending tend to have a larger economic effect than tax
How does a committee which is assumed to have no power in assigning legislative priorities supposed to determine quantities of money spent without proceeding on the basis of what it thinks government wishes to spend on? Will the committee be called into special session each time a cop demands a raise not accounted for or sewer renovation in a Welsh village goes overbudget? In what methodology can the billions of transactions which occur daily in the United States be mediated by a centralized and politically unaccountable group?
We need more de-centralization and more democratization, not less.
The notion of a central committee making these decisions is problematic but it must be remembered that the current system does not avoid this problem. Although nominally local, loan officers at local and regional and international levels are subject to committees. Bill Black has identified the problem of a Gresham’s Law at work in these local places and the standard that emerges is criminogenic with bad practices driving out good.
Regulators such as Professor Black learned a great deal about how to keep a system in line during the savings and loan crises but the regulators were not the only ones learning. The skills and practices needed to co-opt and hi-jack a financial system have been honed to the highest order
All you say may be true, but it is also true that geting three million heading the same direction is far more difficult that doing the same with thirty. I’m under no illusions regarding the ease with which any institutuon can be corrupted. If every reform I wanted were passed and enforced with the spirit in which it they were intended, it would still be a matter of time before they broke down and perverse incentives took root. All we can do is delay it long as possible.
I think you’re debating the point for the sake of debating, not for the sake of getting closer to the truth. Look: Yves made the point:
Presumably, according to the PM proposal the SMC would create the reserves or at least allow them to be created by the MPC of the Central Bank. So, the market would still lead reserves, and not the Governmental agencies. It doesn’t matter whether reserve requirements are 0% or 100%, the market would still lead reserves which could not be constrained without having a deflationary effect.
So, your comment is beside this point. Yves never said that the Government would have a problem providing 6.25% of “free money.” She implied that the 100% reserve proposal would not constrain reserves unless the SMC wanted to impose deflation on the economy.
Also, you might note that the 6.25% isn’t “free money,” it’s trade credit. In other words, it doesn’t add to net financial assets (nfas) in the private sector and therefore doesn’t add to the “equity” in the economy, and so wouldn’t solve the problem of providing “equity” for risky ventures.
Non-financial businesses are starved of equity? Evidence, please. Apple, for example, is sitting on “mountains of cash” (always has, IIRC).
“” If official money is constrained the public invents new forms.””
And, you’re rationale for postulating the big “””IF”” is what exactly?
WHY would public money creation be constrained in any way shy of potential GDP?
Scarcity….the bogeyman against sound money and public purposed fiscal freedom, against a sovereign, fiat money system of public issuance.
Public issuance ensures public purpose as best we can.
What else do you have except imagined public incompetence?
The SMC would be staffed by the same kind of people, economics and banking technocrats, who now sit on the MPC and the FOMC. We know from what committees like this have done in the past that they will constrain public money creation out of a desire to constrain inflation, and that they will be biased against full employment, since that’s what these sorts of technocrats do.
Public purpose can be accomplished “as best we can” by fiscal policy, including deficit spending” that closes gaps between social, economic, and cultural realities we see around us and the conditions we want to see. It can’t be achieved by restricting all money creation by banks through lending to a centralized committee appointed by parliament or by Congress. If you think it can then please show me the causal chain from 100% reserve creation by the Government through a centralized SMC to public purpose. Will 100% reserve banking lead to full employment without actual legislation providing for a job guarantee? Will 100% reserve banking lead to enhanced Medicare for All without actual legislation passing something like HR 676? Will 100% reserve banking provide Government programs accelerating the transition to renewable energy foundations for our economy? And so on.
In every case, the answer to these questions is no and also show that its fiscal policy which is the key to our problems, not ineffective systems to restrict money creation by banks associated with lending and placing it under the control of a central authority like the SMC.
If you want to create 100% money creation by public authorities because you’re in principle opposed to private money creation, then I can understand and empathize with that view. But if that’s the way you feel, then you shouldn’t be supporting the PM view, you should instead be supporting a new decentralized system of publicly-owned banks that will not speculate in markets, but will perform necessary lending functions. That would restrict and eliminate most private money creation while still facilitating reserve creation from the bottom up.
I don’t think I’d support that policy because I think that the issue of public vs. private ownership of banks creating money through loans is less important than the issue of decentralization and also because I think that institutions like community development banks, cooperative banks, credit unions, banks devoted to funding innovations, and other small private banks can contribute to public purposes. Nevertheless, I think the view that private banks shouldn’t be profiting off an ability to create money supported by government is a reasonable one, and if that’s what you believe then by all means pursue it. But don’t undermine the potential effectiveness of that kind of reform by supporting a proposal that provides for a centralized authority, which will almost surely lead to top-down deflationary biases in the economy. We have enough of that now.
Before reading this I had you targeted for the group recommending the Monetary Authority Members, but since have foretold that you would recommend the same FOMC people who work for the international financial capitalists, you are losing your progressive creds.
But, in reality, those same Members would now have the new task of managing the money supply without inflation or deflation if they want to keep their jobs.
So, it gets kind of personal to do the right thing rather than enrich your buddies like the present debt-purveying system does.
Your lack of faith in the government when it comes to the money system that the government created, after great personal and national suffering to achieve the power to do so, is unsettling…..
as otherwise uncharacteristic of how to achieve progressive socio-economic change.
The largest ‘driver’ of governmental ‘corruption’ is the private money power as it exists.
That which we fought against.
A lot needs doing.
Have a little more faith in yourself.
Well, first, to have me pegged, you need to read this book, which is, large part about public money creation in the many Trillions through platinum coins. So, your reading that I have a problem with public money creation is pure nonsense.
Second, I most emphatically didn’t recommend that the same kind of people who staff the MPC would also staff the SPC. I stated that these are the sorts of people who would be “elected” to serve on the SPC if history is any guide.
Third, your comment that elections would focus SPC members on price stability is exactly what I fear, because the way that has been interpreted by members of the MPC and the FOMC is that they must prevent inflation and they always lean over backwards to prevent inflation at the expense of full employment. That is history, not conjecture. It has been the pattern at the Fed since its inception. It’s always screw the workers, and protect the wealth against erosion by inflation. How can you be blind to this?
Fourth, I have no lack of faith in the Government when it comes to money creation, but that doesn’t mean I believe that the Government isn’t subject to political pressures that undermine public purpose. Your very last paragraph indicates that you are just as worried as I am about private money corrupting public purpose. However, you think that happens because private banks can and do create money through the fractional reserve system at some multiple of the reserves.
But this is a fallacy. The fractional reserve system and the money multiplier do not apply these days to the creation of money. That system is a hangover from gold standard days that exists in form only, but doesn’t function in the same way it used to to multiply money.
What does cause the creation of money is the demand for loans accommodated by banks and ultimately by the Federal Reserve and the willingness of these institutions to accommodate demand. This would not change under PM. Whether reserve requirements are 0%, 50%, 90%, or 100% the issue will still be whether the system will accommodate loan demand or not.
Right now, the banks lend first, and then the monetary authorities accommodate the post-hoc need to fulfill reserve requirements. Under PM the banks would have approved loan applications, contingent on the reserves already being credited to the banks making the loans. So, over time there would be accumulating loan applications and pressure of a very political nature being placed on the SPC to accommodate. So, now it comes down to why we would want to give a centralized committee the authority to make the decision to accommodate, rather than leave that decision to a network of decentralized banks? That is, do we want centralized control of the money supply and credit issuance to people who want to borrow, or do we want this determined by a bottom-up process. I vote for a bottom-up process with extremely strict banking regulations, prohibitions against speculations, heavy punishments for violations, small private, public, cooperative, and community banks, and a return to boring banking. I think that will be less subject to abuse and private corruption than the private banking system constrained by an SPC type of centralized money supply authority.
Finally, I get the weird feeling in these discussions about PM, that PM supporters like yourself think that “money” and debt-based money creation by private banks is the root of all evil in the economy, so you want to change the private to government in that system to solve the problem. The trouble with this is that money creation accompanied by private debt doesn’t increase net financial assets. It leaves balance sheets of the parties in the same net position. This doesn’t help the 99%. It doesn’t help the poor. It doesn’t help the have nots. The best way Government can increase their net financial position and provide greater wherewithal for everyday living is through injections of deficit spending into the economy, and the Government’s ability to do that nothing to with PM.
It can be done right now, without PM, either through traditional Government debt issuance methods, which I don’t favor because they create the political and messaging problem of the debt, or through a number of other methods, including the one I prefer which is platinum coin issuance followed by Federal Reserve accommodation filling the public purse with enough credits to pay off the national debt as it falls due and cover all deficit spending. This solution, outlines in my e-book is much superior to the positive money solution, because it will provide the political and messaging context for progressive fiscal policy that can restore a health economy and more equal and just economic and social order.
You should read Firestone’s book. He does a better job of explaining MMT than Wray and Mosler.
Thanks, Jerry. High praise, indeed!
“”you should instead be supporting a new decentralized system of publicly-owned banks that will not speculate in markets, but will perform necessary lending functions.””
Yeah, Joe, we know the leaned MMTers and the State Banking advocates are a mutual admiration society.
OK, so what would state bank “lending functions’ do that existing state development, housing, student and agriculture funding efforts are not doing now?
Appreciate an answer consistent with the preferred, and only, Bank of North Dakota state-bank model.
And these vague calls for much-ballyhooed “decentralization” is totally indicative of the failure to understand the role of money in a national economy.
There is zero evidence that a decentralized money system would have any advantage on overall economic betterment.
But “decentralization” is chic.
Add that to your meme.
Things are looking up.
“” I think that institutions like community development banks, cooperative banks, credit unions, banks devoted to funding innovations, and other small private banks can contribute to public purposes.”” Of course.
We have cooperative and credit union banks now that do community and regional banking. We DO need more of those. But people and businesses have to JOIN to take part in that effort.
I was the community development director, I managed a cooperative that borrowed from cooperative banks, I am a member of a credit union, so don’t give me this EITHER ..OR thing about direction.
There is a fork in the road ahead.
Public money, cooperative banking, credit unions and local currencies, and yes state banks, can all be on the same road in that fork.
Private debt-contract based money with collection of perpetual, compounding interest on every dollar ever created, with your government borrowing that money, is on the other.
Don’t buy into the false choices out there.
Joe has been consistent, coherent and logical in his responses to you because he wants to have a real dialogue. You have replied by evading every attempt to engage you in a substantive fashion and you aren’t going to be allowed to get away with it.
I insist you respond directly to the questions you have been asked if you expect others to accept you’re here to discuss these issues in good faith:
How will full reserve banking serve the public purpose? How will it constrain bank lending?
How will the proposed monetary committee which, according to the PM website will be housed in an unreformed central bank identical to those which currently exist, be rendered immune to deflationary bias?
How will you ensure that it is not run by economic conservatives as has been every such committee since institution of modern central banking?
How will these committee members be held accountable and how will you prevent it from being stacked by another Ronald Regan or George Bush?
Why do you believe the ideological assumptions of a technocratic and unelected group of bankers should supersede the authority of the public’s elected representatives to authorize spending?
Are you willing to accept further loss of democratoc control regarding government policy, and why do think that loss of democracy will be to the public benefit?
Who gets to choose your monetary committee?
The great thing about your comment is saving it for posterity to show how wrong you are.
“”Why do you believe the ideological assumptions of a technocratic and unelected group of bankers should supersede the authority of the public’s elected representatives to authorize spending? “”
Gawd, from where did you get such a notion?
Can you quote some reform proposal where such asinine thinking has been advanced?
The irony of your question is that it should be addressed to MMT in promoting the Status Quo.
It is THEY who want to believe the ideological assumptions of the bankers …..in issuing the money……. over those of our elected representatives.
And there is ZERO connection between the monetary authority and ANYTHING to do with government spending.
Conjuring up red herrings is getting to be a full-time job around here.
Give us all a break. We’re not talking about the explicit reform proposal offered by PM. WE’re talking about what reality and history have taught us to expect from foolish ideas proposing that so-called “independent” technocrats be given the centralized authority to make top-down critical decisions about the money supply and the economy. It’s no good dodging this issue. Such committees always have a political bias. In capitalist systems the bias is almost always toward the interests of established wealth and never towards the interests of most of the people.
Further, MMT is not promoting the status quo. Read any MMT book: Randy’s latest, Warren’s books, Bill Mitchell’s books, my book: All of us advocate for substantial changes in Government policy. You haven’t read any of our books or you wouldn’t make a statement so blatantly false. Try reading them and then cite examples of our defense of the status quo. Even my replies here, as well as Randy’s propose changes to the status quo that are very substantial.
Huh? “your government borrowing that money” It’s quite clear that MMTers don’t believe that our government has to borrow money at all.
1. It isn’t OUR Government. It might be YOURS; but, I disavow it and do as much as possible to deny it support financial or otherwise.
2. QE isn’t quite borrowing. Taxing most certainly is not borrowing.
3. MMT Quacks either don’t believe what they themselves promote or they are fools for believing that counterfeiting currency can change the supply of actual resources available or that counterfeiting does not erode the purchasing power of BOTH the currency already in existence AND labor itself…
#3: Agnotology on both branches of the either/or.
As well as biased BS full of labeling and name-calling.
Sorry, is this misplaced, or did I forget where I said that?
Out of context, MMT says the government is the monopoly issuer of the currency and spends money into existence….by keystroking.
MMT says the government does not need taxes or debt proceeds in order to spend.
That taxation is a policy mechanism to control inflation.
That debt-issuance isn’t necessary for funding government but to provide preferred capital assets to capital markets, as the job of government is to accommodate the liquidity preferences of investors. That last part is only slightly tongue-in-cheek.
So, yeah, out of context, but MMT ers don’t believe that our government HAS TO borrow any money at all.
It’s part of Treasury cooperating with the private banking system.
Or some such.
So, what? Do you have a criticism showing MMT is wrong in making these claims about fiat sovereign nations?
Whoa! Another JF question needing an answer.
Better get on that right away.
Do I really need a criticism of the MMT construct that says the government does not need to borrow in order to fund its spending?
How ’bout instead of me having to prove the negative – that it is not true, that MMT have to provide ONE TREASURY OFFICIAL to come on these, or your, pages and state that it is true that government doesn’t need money from debt issuance to supplement taxation as a revenue source in order be able to pay its Bills?
It’s a bald-faced falsehood.
It’s a stylized and shoehorned construct that has zero empirical evidence to support it…….. no money science, no government finance or public debt-management protocol, no evidence whatsoever.
What is the “government budgeting constraint” except that spending must equal income, and income must come from taxation, changes in DEBT levels, and intergovernmental transfers???
Do I really have to criticize the notion that the Treasury Department does not know that it does not have to borrow bank-credit money in order to survive; and that the Government shutdowns relative to the insidious DEBT-ceiling debates are merely ill-informed public servantude.
What was it you think they were designing down at Jekyll Island?
The banks create and issue the money, and the government, even in a sovereign fiat money system, where monetary autonomy has been compromised to private interests, MUST BORROW.
Alan Greenspan has already done that.
So, June, I can’t help but notice that you don’t pick up on any of the points I made in my replies, with the exception of my mention of State banks. In fact, you don’t even really reply to my preference for a decentralized except to use labeling and humor to try to marginalize my support for it.
Based on this performance, I’m just going to assume that you accept my replies to your original claims as valid, since you don’t contest them. Moving back to the decentralization point you say:
Actually, I’m just comparing a decentralized approach to loan origination, which incidentally involves the ability for banks to create deposits with a centralized approach to money creation, which would incidentally involve periodic constriction of both money and credit by an extremely small elites whose biases are very likely to be to through employees under the bus in order to make the work safe existing hoards of money. You also say:
But I’ve already stated that I’m on the side of most of what you favor here, and also pointed out that I’m all for Government creation of very large quantities of money in the many trillions, and also prefer Government issuance of fiat money to pay down previous public debt subject to the limit and also to cover future deficit spending so that the Government doesn’t issue debt instruments as a routine aspect of its deficit spending. So, what are we arguing about here?
The main thing I can see is that I think your choice between two alternatives is the false one because it assumes that the only alternative to using banks to create loans and deposits is 100% reserve banking. But again, that view is false. We can have large scale public creation of money for the purpose of providing net financial assets for the 99%, along with a decentralized public, private, or mixed credit issuing system that avoids the danger of a conservative elite restricting credit and creating deflation and depression. That choice doesn’t fit your mental stereotypes; but nevertheless it is the better because less risky choice, provided that the banks are small and strictly regulated by laws that are strictly enforced.
Finally, you asked me about state banks and tried to dragoon me into an answer that relied on the North Dakota model. However, I never mentioned the North Dakota model. My preference is for more comprehensive state banks that would serve individuals and small businesses, and would offer full banking services and credit to all who need loans. My State Banks would be non-profit, staffed by civil servants, and would provide a public option to provide competitive constraints on purely private banks, community development banks, cooperative banks, credit unions and other non-government banking entities. Such banks could not speculate and they would offer very low cost loans forcing private banks to compete by keeping their own costs and rates low. These banks would share some functions with North Dakota, but mainly they would provide a public option driving down costs in each state.
Yes, getting money from central banks / reserves into the economy is the real challenge. Distribution and flow are the keys. The entities that decide who gets what – commercial banks, financial institutions and other large corporations – will always have the real power, and their interests are not aligned with those of the broader population, nor of global ecosystem health. And no, profit maximisation does not yield the best of all possible worlds. The market is not democratic as touted by the fundamentalists. Its power distributions are entrenched and enmeshed with political power.
I believe that the challenge is to design a money system that copes robustly with modern realities: the end of economic growth, rapidly advancing technological prowess, deeply entrenched corruption due to terribly distorted and unhealthy distributions of power, productive manufacturing potential that requires ever-less human labour (less and less purchasing power in the broader population), broken health and education systems, etc. IMO these realities demand a total overhaul of the money system (and thus of democratic processes generally), but the infamous powers that be are so against this change that collapse will happen first. After that point, these pretty discussions will be more or less moot.
This comment isn’t relevant to the post. What exactly are you commenting on? And where do you get this:
The Federal Reserve has authority to provide all the reserves it wants to provide to banks right now, and its also driven the FFR down to near zero in the process of providing those reserves to banks. So, don’t you think that if better distribution and flow of reserves is our problem that this is due to the fact that Congress isn’t providing the needed deficit appropriations to finally end “the long depression,” create full employment, and restore an expanding economy?
One nice way to get around the distribution, even with Congressional deficit spending, is to either 1) deficit spending through the people, or 2) if without deficit spending, then money creation through the people spending it into existence.
This way, we have
1 Decentralized decision making
2. no trickle donw, as the money gets to the people directly
3. no misuses, like buying spying tools or drones…or political favors.
I’m afraid you’ll have to flesh out the details of this for me. I have no idea what you’re proposing.
I hope to hear your critique of this idea of Money Creation via the people spending it into existence, instead of the government spending it into existence.
Presently, the government borrows a certain amount of money to spend. Of that amount, the portion the Fed buys become money.
That’s money creation via the government spending it into existence.
So instead of the government spending it on say, drones or spying tools, we set aside the amount the Fed will buy, and credit that amount to the people’s accounts at the Fed (each has one).
This way, instead of the government’s centralized decision making, we have decentralized decision making by the people (all the people) on spending the new money.
With this, we get money directly to the people, instead of the government spending it by patronizing, say, MIC corporations, hoping for some to trickle down..
In case we decide to bypass the Fed and let the government issue money directly, that money should be, again, 1) first of all, approved by Congress and 2) then given to the people to spend into existence, and not to the government to spend into existence, avoiding political favors or enriching more MIC corporations.
The Government issues debt and sells it at auction when it deficit spends. The Fed does not buy the debt immediately. What happens is that the deficit spending is spent into the economy. The money paid for the debt instruments is taken out of the private economy. The net financial asset left isn’t the money. It’s the debt instruments that were sold at auction.
Presently, the government borrows a certain amount of money to spend. Of that amount, the portion the Fed buys become money.
No, it’s net financial asset creation at the end of the initial round of transactions. There’s also money creation when the Government spends, and an equal volume of money destruction when the debt instruments are sold.
People don’t need accounts at the Fed. If Congress legislates helicopter drops to people, then the Government must spend that into the economy by placing each person’s share of the helicopter drop in a bank account set up at the bank of that person’s choice.
Let me see.
1. Initial financial asset creation, with government spending the money buying products and services from the private sector (into the economy) and an equal amount of destruction (taken out of the economy) when the debt instruments are sold.
2. When the Fed buys the debt instruments, money is created.
What I mean by money creation by the people spending it into existence, compared with the government spending it into existence is, instead of the government actually spending the money from the debt instruments (buying drones, for example), we give that money directly to the people, either into each person’s choice or at the Fed (it really doesn’t matter).
There’s nothing operational here, I’m sorry. “Each person’s choice or at the Fed” is so broad as to be meaningless. There is no proposal here to react to.
First of all, if I didn’t respond to this kind of day-old or more comments before, it was not because I was being rude. I didn’t eve know they were there.
OK, I hope I can do justice to Kervick and Joe’s ideas.
The ‘each has an account at the Fed’ is Dan’s idea. A fine idea at that.
The ‘bank of your choice’ is from Joe’s comment somewhere earlier in this thread.
Hymen Minsky made the point that anyone “can” create money, but it is also true that not everyone “may” create money. Professor Wray”s Magic Porridge Pot, the ability to create “thin air” money is limited. Although there is a distinction between thin air money and other money at its inception once in the system it has the same status and is indistinguishable from all other money. The only regulation required for Positive Money is the same regulation needed against counterfeit. All transactions must require a debit to an account somewhere in the system.
A short system is a product of current practices that would have to change and require new strategies under Positive Money. A possible alternative to a system starved for credit is an injection of cash, created out of thin air, equally to all citizen (or residents) which the market would then allocate.
Sorry, but what does PM have to do with helicopter drops of debt free money to everyone? Whether PM is passed or not, such grants would have to be appropriated by Congress. They have nothing to do with 100% reserve banking and 100% Government money creation.
Your specific comments on Randy’s views seem incoherent to me. What is your point, and why is it relevant to Randy’s critique of PM?
The notion of the helicopter drop of free money was in response to Yves scenario of a market seizing up for lack of the ability of the system to respond to tight credit markets. Helicopter drops are not specific PM, they are just something that could be done to ease a tight credit market. MMT could avail itself of such a strategy.
My point is that even though as Minsky said anyone “can” create money not anyone “may” create Money. In any system that is not commodity money there will be a decision as to who “may” create money, that is from MMTs point of view who can create money for payment of taxes. Professor Wray believes that granting this permission to banks is a good idea. I don’t, but that doesn’t mean I disrespect the view.
Positive money is a transfer of the permission of who “may” create money to a different group of people. My specific point here is that even though a thousand loan officers and underwriters may seem to give a robustness to the system they in fact become very similar and have their own problems as well
My entire point with great respect to professor Wray and the great crew they have assembled in Kansas City is that both Modern Monetary Theory and Positive Money recognize the sovereign right of the people to take back their money system from the crooks They just disagree about who should have permission to create money and who should receive that created money
I think they disagree on more than that. But thanks for your clarification of your position.
Please note that MMT doesn’t believe that granting the right to banks to create high-powered money is a good idea, and MMT also insists that currency, coin, and Government generated reserves can only be created by Government or its very closely regulated agents such as the regional Fed Banks. That’s a very important point in MMT covered by the Theory of the hierarchy of money.
This comment is a word salad. Here’s the Minsky quote:
They “can,” and they “may.” The outcome will not be as they wish, but they certainly “may.”
Wasn’t trying to change the Minsky quote or meaning, just a little piggy backing.
Whether or not you were trying, you succeeded!
“”Also, how would 100% reserves work? The central bank must provide reserves on demand if the system is short, unless it is happy to see interbank rates shoot to infinity.””
I congratulated your writings on Amir and Atif at houseofdebt.org. The Princeton and U-Chicago economists posted an excellent paper that analyzed the Fisher, Graham, Douglas et al paper called The 1939 Program for Monetary Reform, a 100 Percent Money and 100 Percent Reserve proposal.
If you read that paper, you would see how misinformed your postulated answer to your own question turns out to be.
There is NO reserve-following-credit phenom at work in full reserve banking and 100 Percent Money.
RATHER, the government creates ‘real money’ reserves by issuing that real money.
ALL of the government created money is IMMEDIATELY on deposit at private banks, providing the mechanism that enables lending on that basis.
In a more modern parlance, as used by Lord Adair Turner in his proposal, the government issues only base money, or M-zero, totally cash-liquid money, so that all money in circulation has that revered HPM quality. Except that, having eliminated bank-credit money, there’s no, theoretical, money-multiplier,
From Volcker’s Group of Thirty publications….
The ignorance of most economists with regard to full reserve banking is abhorrent.
The paper by Amir and Atif at houseofdebt.org is an attempt to provide some basic understanding of the issue.
I suggest a read there for all truly interested observers, coupled with the paper that they discuss.
Neither is the Emporer of claimed “scarcity of money” (OMG), clothed.
Just read all those links and NONE of them dealt with the issues raised by Yves, Dirk, and Randy–THE PAYMENTS SYSTEM.
If you think they do, please cite text or pages. Otherwise, you’re irrelevant to the issues raised in the post.
So, where’s my reply……and where’s my earlier question about where’s my reply?
What’s happening here, fearless??
I suggest you go and actually work at a commercial bank. The loan is made and reserves obtained afterward regardless of the reserve requirement. Anyone with actual experience can tell you this and you have yet to articulate what suddenly changes when going from a 99% requirement to 100%.
And as stf has alreay noted, your links do not say what you are claiming they do. Either you’re being deceptive or you don’t understand what you’re talking about.
Re :”Yes, you could instead grow government (“thin air money creation”) to fill the demand gap. Government deficits create saving. I’m all for sufficient government spending to fulfill the public purpose. But I think there’s also important private purposes. As I’ve argued before, the sizes of government is mostly a political decision (with economic effects). The US (along with Japan) desires a government sized at the small end of the scale; France is on the big end. I’ve got nothing against French-sized government. The majority of Americans are not with me on that.
We need that thin air money creation to keep the lending, spending, and growing moving forward. At least some of it needs to come from the private sector fulfilling the private purpose–maybe less than in years past, but sufficiently large that government budget deficits are not likely to fill the hole if we eliminate private thin air money.’
I don’t share that view.
First, “small government” can still issue vast quantity of money if it accumulates reserves at the Central Bank level and gives it to professional managers. This is what Singapore is doing with GIC and Temasek and it works quite well (most people ignore that Singapore, a AAA country, has more than 100% Debt to GDP ratio !).
Second, the vast majority of bank loans go to real estate. Martin Wolf pointed that only 10% of UK banks balance sheet goes to commercial financing. Even in the US or Japan, that 10% can be covered by government issued money that its owner are going to lend (truth to be told, most commercial ventures should be financed by equity anyway). The remaining 90% for real estate can be taken care of by covered bonds, refinanced or not at the Central Bank.
Voila, no maturity transformation, cyclic crisis from time to time to keep everyone on their toes, but no systemic ones.
The part about growth:
‘We need that thin air money creation to keep the lending, spending, and growing moving forward…’
We owe it to ourselves to be open to the idea that happiness can be there, even with negative growth, but with less wealth inequality (not just less income inequality).
On the other hand, as we have an imperial currency, printed new money can wreak havoc in many places in the world.
Poverty, lack of work, etc can be addressed more surgically, as I posted earlier in the BIS thread:
Poverty is best addressed with remedies that aim at targets that at least are close to the causes.
A wealth tax with 100% of the money going to the people directly.
Less worker exploitation
Money creation via the People spending it into existence
Massive fiscal stimulus via the government spending is another form of trickle down with 2 problems
1. Time lag
2. Cut by the middle men (i.e. corporate contractors, especially Military Industrial Complex corporate contractors)
Relevance to the post?
This is no more serious repeated here than it was here or when it was repeated before and before and before and before. If you’re going to make a serious proposal, then get your own blog and write it up and be prepared to defend it (as Wray et al. are). Ceaeless repetition of talking points with no analytical backup whatever is not policy advocacy. It’s agnotology.
” I like the idea of having thousands of decentralised financial institutions making such decisions.”
Decentralisation of decision making only work when people don’t follow each other. It simply does not apply to the financial sector. Anyone who spent more than a week in a bank branch credit department knows that lending decision are mainly constrained by what the competition is doing.
“As long as the music is playing, you’ve got to get up and dance.” Charles Prince
“Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally” Lord Keynes
It may not apply to the financial sector as currently dominated by the TBTF banks (of whom Charles Prince was an executive). You’re generalizing from our specific and degenerate case to all cases, and that won’t do.
Decentralization of decisions.
That would sound like it’s an endorsement for money creation via the People spending it into existence, instead of the government spending it into existence.
Decentralization of loan decisions and consumer decisions, not decentralization of creation of net financial assets. Big differences here.
Decentralized decision making on how the newly created money should be spent.
Before we have those the Government needs to spend the helicopter drops into peoples’ accounts.
The thing that is broke is the Fed no longer being just a lender but diving into the private markets as the largest single buyer. I wonder why more people don’t discuss the possible outcomes from this. If you’re the 2nd or 3rd biggest buyer and you know the Fed will one day sell all its holdings, would you be willing to maintain your positions ? The rational thing to do would be go all cash, or even plunge into hard assets and stay there indefinitely. What are the ramifications of our central bank also being the largest single market participant? If the Fed never plans to sell its holdings, then is it really a central bank? If the Fed is no longer our central bank, then do we even have a central bank now? This whole thing has become theater of the absurd. The architects of this just want everyone to quietly go along with it, under pain of having masked gunmen show up at their door. For their part those gunmen aren’t asking who it is they’re serving. It’s little comfort saying we told you so to the political hacks who sent us down this road of moral hazard, but indeed we did warn them not to pay off $Trillions in defaulting private debts using public money.
We should ask ourselves where we are trying to get to. If we are trying to get back to the old normal of banks doing all the money creation, then the Fed needs to stop its asset purchases right now and sell all its holdings on the open market. The banks also need to open their books and (attempt to) sell all their loans on the open market. That would be a true market-clearing event. If most of that debt turns out to be near worthless, then so be it. We get a whole bunch of fat-cats scurrying around with no money and trying to sell their property to raise cash (as it should be). Of course I would shed a single tear for each and every one of them who missed a mcmortgage payment on the mcmansion.
Is there a way to fix things without a “catastrophic” market clearing event? By now it has become apparent to a growing number of people of all political persuasions and all walks of life that we are not going back to “normal.” We are on the path to zombification and seem destined to stay on this path as long as possible. What will the result be? We might stay on the path for years or decades. Or there may be something that finally breaks the narrative of central bank omnipotence and brings on a deflationary crash or hyper-inflationary reset. The latter sounds a lot more appealing because it has the potential be to over quickly, and it might also galvanize people to wake up from their political slumber. We need a new monetary/financial system that can work in a world of limited energy and with low (or no) growth. I do not see any political will whatsoever to move in that direction voluntarily, and I suspect that we need to be dragged kicking and screaming into Hank Paulson’s abyss only after all other alternatives have been tried and failed. Am I wrong? Is it healthy to hope for collapse if that is the only way to get back to a solid foundation?
Well a few decades ago, they could have gone pay-as-you-go to fund boomer pensions but it would have been clear that these would have been skimpy from the get go because it would have been clear that baby bust generation would have had to support a baby boom generation.
So, in the hope of creating wealth, they opted for market based pensions. For a while it worked and everyone thought they had a chance of living a cushy retirement. Governments thought they had found the holy grail. But historically, easy money has always led to catastrophe as it always entails generating more paper to fund hedonistic depreciating asset based lifestyles.
If our leaders were to let assets implode, pensions would collapse and they’d suddenly have to print welfare cheques. Something tells me asset manipulation will continue as long as the retiring boomer cohort is alive or until the whole system collapses, whichever comes first.
Sorry, I don’t see the relevance to this post. Why are you commenting?
Rather than feeling “endearment” from Randy’s illogical attempt to address what was going on with the Chicago Plan, and the more important 100 Percent Money proposals that followed, as a reform advocate I feel like I’ve been through the Silkwood shower, with significant effort made to remove something not seen.
Desperation seems the motivating factor today.
“”Hyman Minsky wrote an endorsement for the book, but he also wrote that the Narrow Banking plan was aiming to “fix what is not broke”.
This is one of those classic stylized anecdotal presentations, which delivers nothing meaningful to inform readers, like, did he say that in the Ronnie Phillips book Forword….NO.
When did he say that? In the ’80s, way before what is in the below link from Bard.
In the Forword, as it was written while Minsky was obviously becoming more appreciative of the 100 Percent Money proposals, he had this to say:
“”We now have in place the institutional prerequisites for a successful 100 Percent Money scheme.””
“”Ronnie Phillips in this volume has recovered part of the memory of those exciting days in the 1930s when the best of abstract thought was wedded to the need to resolve pressing crises.We owe him a debt of gratitude for reminding us that the economists and public figures who participated in the discourse of the 1930s were sophisticated thinkers who were alert to the issues that are now to the fore: the creation of a financial system that is consistent with a full utilization of resources and which provides for the broad-based economic well being that is a prerequisite for a strong and viable democracy.””
Here Minsky calls for a new National Monetary Commission to fix what ails us.
Wray’s portrayal of Minsky’s ideas on full reserve banking and 100 Percent Money are misleading, intentionally, by stylized self-selection of quotes to support Randy’s conclusion that nothing is REALLY broken.
Obviously, Minsky disagreed.
.”We now have in place the institutional prerequisites for a successful 100 Percent Money scheme.””
And THAT was twenty years ago.
Wray only studied under Minsky and worked with him for years. Co-authored with him. So, yeah, you’re probably right–he had no idea what Minsky thought. #sarcasm
Not to mention Kregel–also a colleague of Minsky–wrote 2 years ago basically the same thing Randy does here.
Hey, it’s not like June is under any obligation to make an argument or justify anything. It’s very adult to spam-slander people in the hope something sticks. Just hurl an accusation and run away! June will teach you.
Another word salad. June writes:
In the post, Wray writes:
If that’s not “REALLY [all caps from commenter] broken,” I shudder to think what Wray thinks is broken.
Pro tip: If you’re going to distort on author’s views, don’t do it on the same page where the author expressed them.
I quoted from Randy’s post, including the TITLE.
Yeah, be criticizes bank regulators and banks…..lots of creds there……. but that says absolutely nothing about monetary reform, which is the subject of Randy’s “crank too far” posting here.
Your critique seems of style and not substance…..if you get it.
Minsky said the money-finance system was broken, and in need of reform.
Randy says the cranks want to fix what was not broken.
Here’s a clue for you.
Refrain from trying to be cute when out-gunned by reality.
It stands as unbecoming to your “pro” status.
You did indeed, making your assessment of what Wray said even less reality-based. You claim that Wray believes that “nothing is REALLY broken” when Wray also says the system is “rotten.”
More dressing with your salad?
Check the attitude, June. It doesn’t qin you any points.
For once try addressing an actual point. If you think the payments system is where reform is really needed then spit it out and explain why.
Splendid, one of the clearest pieces of writing I’ve seen on the swirls of confusion about the “printing presses” of banking, private or FED.
Now for a question to Randall and anyone else to hop in on: I’ve discussed this with friends who admire Gal Alperovitz’s new book and call for co-op banks or state banks. If Soros were to toss one billion dollars in that direction as “seed money,” can these institutions be viable if they work with a 5% lending rate and salary and rewards structure radically lower than the conventional banks? Is there anything inherent about that rate of return that means it can’t work? There is a tremendous need right now for loans in the range of $10,000 for customers to pay down (or pay off) their outstanding conventional credit card debts whose interest rates are between 10%-16% – and maybe worse. What would a loan committee of such a co-operative new institution think about this process? Why haven’t such “remedies” sprung up from existing institutions, especially the medium or smaller size banks? Is it simply because that’s not what the competition is doing, or are such rates, again, just not viable?
Thanks for this comment. I would love to see an answer to this question.
(I think one thing Black would say is that there’s a Gresham’s dynamic at work; it’s always easier just to steal than to loan…)
Sounds like you’re suggesting not so much a state bank but a public or non-profit debt relief bank. In theory no, there’s nothing to prevent this from functioning. The primary issue is what underwriting standards one sets. A bank under these circumstances will not be able to absorb large losses and the people it is loaning to are already heavily indebted and are therefore an increased risk.
“But if the Keynes view is right (and of course it is right), then what finances investment (and any spending in excess of income)? Credit. Where does it come from? Out of thin air.”
Simple … money that the government spends into existence without borrowing it … That money is then circulated and ends up in banks for investment.
‘Carve out various sectors of the financial system that are designated “public-private partnerships” that do have safety net protection.’
Sort of like the one Goldman Sachs and Morgan Stanley enjoy with the Federal Reserve, in which they masquerade as deposit takers and in turn receive safety net protection and zero-percent borrowing privileges?
As Yves said in the intro, nice job ignoring what MMT has said about reforming the financial system in dozens of previous blogs, papers, and books.
Watch what they do, not what they say.
Today’s Federal Reserve already IS a public-private partnership.
Replacing it with other ones will turn out the same (i.e., badly).
“watch what they do, not what they say” ?????
So what, MMTers traveled back in time to corrupt the Federal Reserve? This is what you’re going with?
We could allow specialized intermediaries that would take in savings and lend them out. Or we could have special government banks. I’m only discussing the first of these today.
Let’s wait for Randy Wray’s second installment – on “special government banks”. Then we’ll have the whole picture of his views on the current debate over banking reforms.
The fallacies in this article qualify Randy for a ‘cranky’ merit badge of his own.
With uninformed missives like:
“”How can government prevent me from writing “IOU five bucks”?””
Like, as if, 100 Percent Money would try to prevent private IOUs.
Monetary scribes often join the notion of ‘credit’ with ‘money’, and Randy’s entire flawed understanding stems from his embrace of this claim by Mitchell-Innes.
But his IOU is assumed to stem from the fact that I gave Randy FIVE BUCKS.
Which I had.
Which I lent to Randy.
His IOU is merely a promise to repay me the FIVE BUCKS of real money.
Even if I pass along Randy’s IOU to someone else who would accept it based on my or Randy’s assumed creditworthiness, it would NEVER have the quality of money.
Randy lives in a computerized-accounting fantasia, one in which he constantly discovers new money theories.
In a 100 Percent Money world as advocated by MINSKY, again…..
“”We now have in place the institutional prerequisites for a successful 100 Percent Money scheme””
……..there would be no need for government to tell anyone to not circulate IOUs or ANY other form of credit, as long as it did not involve money creation, and, if they were banks, had the real money to lend.
These claims are more conjured fallacies of construction that attempt to discredit people like Fisher, Douglas, Simons, etc.
People of whom, again, MINSKY said “”…..were sophisticated thinkers who were alert to the issues that are now to the fore…””:
He called for a 21st century National Monetary Commission.
Instead we get MMT and the 21st century claim that these alert, sophisticated thinkers are monetary cranks.
Because they advocated for public money.
And the government being “the monopoly issuer of the currency”.
Get the irony?
They (cranks) advocated for what MMT claims we have now, but, obviously, we do not.
IF you don’t prevent private IOUs then you don’t prevent private money creation. You don’t even understand the proposal you’re in favor of. But then again, neither does Positive Money.
“”IF you don’t prevent private IOUs then you don’t prevent private money creation. You don’t even understand the proposal you’re in favor of. But then again, neither does Positive Money.””
I already covered Randy’s $5 example, but maybe it’s not here.
Please explain how a private IOU, like from you to me, or from shadow bank to hedge fund, creates any money.
Why would you issue one to me if I didn’t lend you the sawbuck that I already had?
There’s a loan transaction, an IOU and ZERO money creation.
If Hedge Fund “B borrows a $Billion from giant Shadow Bank “A”, and issues its IOU in return, then there’s a loan transaction, an IOU and zero money creation.
Only the regulated depository-institutions in the commercial banking sector creates money by making loans.
PLEASE refrain from telling me what I do not know.
I give you the quote that corrects Randy’s misleading headline, and I give you Minsky’s commendation for the reformers’ proposals, and you give me this.
Getting desperate it seems.
Do you really want to have a discussion? You seem to make points worthy of that, but your tone is so off-putting why should anyone respond to you with any seriousness? I surely won’t–if you want a serious discussion, you should start off that way, like Randy did.
Funny thing about “discussions”. After being attacked and shot down as cranks or tin foil hatters for awhile, one adopts a more defensive position.
Same thing happened to me last week where I was defending Greenwald’s freedom of the press on The Daily Banter. Except there I was labeled a racist libertarian, which is ludicrous. But these guys really didn’t want to argue about NSA transparency and worked hard to steer the conversation elsewhere. By the time somebody came along that wanted to talk about the Constitution, arguing against textualism (new concept for me, requiring much google-fu to catch up on), I was still in fight club mode and almost missed the discussion.
A crank is a crank. NC isn’t about making its readers more stupid.
I would argue that your definition of “crank” is based on your own confirmation bias in this case.
All one need do here to have a productive discussion is make the effort. June doesn’t do that: he/she attacks, misdirects, obfuscates and refuses to engage when challenged.
Given his/her failure to defend PM on any point whatsoever I don’t think they really care about it, it’s just something to beat other people over the head with. If PM were the idea rapidly gaining popularity June would be attacking it from an “MMT” perspective.
“”IF you don’t prevent private IOUs then you don’t prevent private money creation. You don’t even understand the proposal you’re in favor of. But then again, neither does Positive Money.””
I already covered Randy’s $5 example, but maybe it’s not here.
Please explain how a private IOU, like from you to me, or from shadow bank to hedge fund, creates any money.
Why would you issue one to me if I didn’t lend you the sawbuck that I already had?
There’s a loan transaction, an IOU and ZERO money creation.
If Hedge Fund “B borrows a $Billion from giant Shadow Bank “A”, and issues its IOU in return, then there’s a loan transaction, an IOU and zero money creation.
Only the regulated depository-institutions in the commercial banking sector creates money by making loans.
PLEASE refrain from telling me what I do not know.
I give you the quote that corrects Randy’s misleading headline, and I give you Minsky’s commendation for the reformers’ proposals, and you give me this.
Getting desperate it seems.
Could you please not copy and paste the same response to different people? It’s hard to figure out who you’re responding to. Thanks.
Yes, I’m sure you would. Adding… Your principal extended to its logical conclusion would require that every comment be relitigated from initial premises. Na ga happen.
I’ll further posit that the place to look for new and legitimate, non-cranky schools of thought is not an endless mish mash of incessantly repeated talking points.
“”First, there is no final solution. There is no magic reform that will prevent another crisis. As Minsky said, “stability is destabilizing”. Any successful reform will lead to the recreation of instability that will lead to another crisis.””
Gee, may as well go home, eh?
Or join MMT-think.
Except, Minsky’s comment was not meant as some universally-applicable philosophical discovery, but specific to the monetary-economic system in question, that of pro-cyclical fractional-reserve banking , where money costs and thus money supplies ebb and flow to CAUSE the next round of results.
That’s ALL he was saying.
Any suggestion for reform to the money system as Minsky recognized was necessary “for a progressive democracy” is denigrated with words like magic potion or reform, silver bullet, final solution, etc., etc., and reformers become the ‘silver bullet’ advocates, which, as we know, never work in the real world without Tonto’s help.
Given all Tobin, Shumpeter and Friedman called Fisher the greatest economist of the 20th century, what do you have to offer to deny the validity of his 100 Percent Money proposal?
Given that even Minsky came to see the validity of Fisher’s proposal, he had far advanced beyond that quote…..I believe from the mid-80s…….that there was nothing broken to fix.
In calling for a new Monetary Commission, he said…
“”In the past, serious changes were the result of serious public inquiries.
I suggest that enough is amiss in our financial and banking structures that it is time to go back to the
drawing board and determine what the monetary, financial, and financing arrangements should be in the
Get it, Randy?
Enough is amiss to go back to the drawing boards.
It is broke.
And we need to fix those financial and monetary arrangements in order make it work.
So Minsky advocated a Commission. So what? Surely that’s not the same as advocating a Central Committee for Money Creation (or some such), despite the similarity between “committee” and “commission.”
It couldn’t be more clear that Wray (or “Randy,” as you call him) regards the system is broken; it’s just that (a) not everybody who sees the system as broken (b) advocates the solution you advocate. Your comments consistently confused (a) and (b).
Actually, Minsky correctly observed that progressive change happens after broad public policy discussion, and that either IS, or IS NOT true.
His Monetary Commission suggestion was to have a broad public policy discussion about money, banking and finance, something advanced from the Columbia parade of MMT-speakers.
His are the shoulders from which Randy claims to be pontificating, while he totally ignores the reality of Minsky’s later conversion to acceptance of the 100 Percent Money proposal…..in contrast to Randy-the-shoulder-stander calling those proposals “cranky”.
Were I Minsky, I’d say to Randy, get on my proposal for reform to promote a progressive democracy, or get off these shoulders.
You’re totally off-base here and if you read the paper, Minsky ABSOLUTELY says the time for the 100 Percent Money proposal was apparent, and the 100 Percent Money proposal IS a proposal for a national monetary AUTHORITY.
Get some facts straight, puh-leez.
“”It couldn’t be more clear that Wray (or “Randy,” as you call him) regards the system is broken…””
Yeah, and that’s why he titled the post, “…… fixing what ain’t broke”, and then made a vague reference to Minsky addressing the misplaced point of reform.
To be clear, all of Randy and MMT’s observations about our fiscal problems as addressed by post-Keynesian policy constructs are correct, what they all get wrong is the money solution.
Because they don’t think there’s a money “problem”.
Your “Randy” comment is as usual about form over substance.
On form over substance: I believe in the unity of form and substance, a perfectly respectable position (except, possibly, to those who have mastered neither).
June, your reliance in this reply on an appeal to authority is the last refuge of scoundrels. Look Randy and many of the rest offered specific reasons why PM won’t work and also explanations about why it is a solution to a non-problem (the fractional reserve banking problem). You have yet to answer our arguments. Your attempts here to introduce arguments from authority won’t save you from the lack of substance in your replies.
What I posted was a quote from MINSKY fora national monetary commission to have a public policy discussion on money, banking and finance, because he thought the system WAS broken…… in obvious contrast to Randy’s claim that reform proposals, from Fisher to Positive Money, were trying to fix what ain’t broken.
And you accuse this the last refuge of scoundrels.
Why not say what it was that was either in error, inappropriate or scoundrel-ous.
Nowhere did I appeal to authority.
But I am perfectly willing, eager in fact, to discuss any specific criticism of any public money proposals.
What are they?
I thought we were not discussing PM in particular.
And where are Randy’s specific criticisms on the PM proposal?
For your information, the only reference I see to Positive Money’s work is Randy’s inaccurate presumption taken from what Ann Pettifor posted.
“” According to Pettifor, this is pushed by the “UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’.””
I totally addressed the error of this quote and Randy’s assumption that ‘independent of government’ means ‘outside of government’, but in reality it means independent of elected party politics.
I have answered every point raised for which I have the time.
This continuous ‘you’re not being responsive’ is both wrong and heavy-handed.
What questions are still out there?
The problem is that we think money is a commodity, thus the question of how does it get created out of ‘thin air.’ Money is a contract, an obligation, an IOU! If understood and focused on clarifying that distinction, most of these conceptual issues would go away. As it is now, most people, including many smart and rich ones, think of money as some physical property which they possess, like a house, or land, or gold. It is not. Physically it is, at most, a piece of paper. Effectively it is a contractual right to some portion of value produced by a larger organization or community.
Its. Value Does. Not. Come. Out. Of. THIN AIR!!!! It’s value is based on the wealth and legal responsibility of the institution issuing that IOU. The fact is that money is not a form of private property, anymore than a road is private property. Like a road, it is a public medium/utility. You very much don’t hold the copyright to that piece of paper, nor are you responsible for its value, except as a member of the community issuing it. It is the very fact that it is interchangeable/fungible, with all other such notes, that makes it function. You own your car, your house, your business, but you don’t own the roads connecting them and no one cries socialism over that. Money is effectively the same thing, a medium.
If people did begin to understand that it is a form of public utility, they would start to become far more careful what value they extract from personal relations and environmental resources, to trade in this medium. Not only would this make a healthy society and the environment legitimate stores of value to be protected and strengthened, but more organic and local mediums of exchange would grow up in the many crevasses of society and such needs as elder and child care, primary education, local public works, etc, wouldn’t need the input of large national currencies to function. Then people wouldn’t be obsessed with collecting large amounts of this currency and so re-enforcing the power of those issuing it.
Reality is bottom up and when it breaks down, that’s where we start from again.
Great comment Merryman.
As the box of the orthodox gets ever more constrained, the category of crank gets ever more diverse.
“[T]hin air” = social relations of mutual obligation.
“social relations of mutual obligation.”
Think of it as a ‘quantum’ of energy/obligation. While we tend to think of the quantum as a particle, since we tend to be object oriented, it is more a holographic expression of the entire wave. Units of money are like that, rather than discrete units, they are small obligations of the whole.
If we view them as property, then “Possession is 9/10ths the law,” but if we treat them as a contract, the responsibilities go both ways and those seeking to harm the issuer could risk having their rights voided.
It is the basis of MMT that “Money is debt.” Even currency and coins are debt. See Randy’s MMT primer here: http://neweconomicperspectives.org/modern-monetary-theory-primer.html
I understand the value of money as an asset is that it is someone else’s obligation. My point is that this makes it a contract, not a commodity. If we begin to publicly define the monetary system/money as a public utility, much like a road system, rather than a form of private property, it would drastically change how it is perceived. It is the economic circulatory system. Originally society’s central nervous system, ie. government, was largely a private enterprise, aka. monarchy and when those running it lost sight of their larger social function, they lost the job. It took a lot of trial and error to make “mob rule” work, but eventually systems evolved. We are now basically going through a similar process with the economic circulation system.
OK. I agree.
We’re all, somewhat, cranks here. First, no one is going to radically change a monetary system that has developed incrementally over a hundred years. We can grump, and I can have a complaint too. In this system, when credit is dished out, the bigger you are the better terms you can get. Put another way, the smaller you are, the greater the interest surcharge you must pay to borrow money. So the larger the firm, the faster the firm can grow by using credit, snuffing out the small guys. There is a remarkable consequence to that fact when looked at over time. The consequence is that markets eject participants until there is just one big buyer and one big seller in any given market. Or a cartel on either side. There’s where your instability occurs, in my view. Solve that problem, and you’ve made some progress from a policy standpoint. And Yves is right about not monopolizing the creation of money, by the way. A more promising system would be just the opposite of 100 percent reserves, that is letting anyone create money as needed at any time.
No, we are not. Let’s not have false equivalence, please.
I’m sorry. I thought being a “crank” was desirable temporarily for the purposes of this particular post. Of course you are correct, and I do apologize.
Anyone can create money now. There is no law on the books stopping you from issuing the Paully and attempting to pay your neighbor’s kid with it for mowing your lawn. You may have a problem persuading him to accept it but that doesn’t mean you can’t create a currency.
Banks are not constrained by the existence of or lack thereof a reserve requirement. You and I accept their money because it is backed by the state’s currency, just las the Paully would likely be accepted by the kid under the same circumstances.
As a compromise, let the government create money, as it is written in the Constitution, but for the people to spend it into existence.
Actually, it is not a compromise. It is what it should be.
A little story. When I was at the University of Chicago, some 35 years ago, I did a term paper for an econ and public policy class on how to design a currency system that did not require usury. I came up with a plan for a dual currency with greenbacks and redbacks, the one with a positive value and the other with an equal and opposite negative value. Put the two together in an account and they would cancel each other out. Or create equal numbers of each out of nothing, like matter and antimatter. To buy a banana, you could either pay the merchant with a greenback, or take the banana and accept a redback from the merchant. One advantage of the system was being able to pay off your debts to anyone who would accept your redbacks, not just any one creditor. The interest rates for debt would not be set by a bank, rather the rates would float implicitly in the settlement amounts negotiated on the fly for all transactions, and usury would never be charged as such. To keep people honest, I remember there was some kind of challenge bankruptcy procedure, but at the time there was no practical way to keep people from burying redbacks in their back yard to get rid of them, not at least in 100 percent of the cases. I think the system could work now, because of mobile devices and barcode scanners that would permit keeping track of everyone’s balances during each transaction. Anyway, I got an A from Roger “the Dodger,” probably the smartest man I ever met, and those weren’t easy to get from that place.
The Government has to spend so that people can get it and then spend or save it.
Joe, please see my comment at 8:30PM.
I hope you can critique it.
The point is the government doesn’t have to. We can let the people (ourselves) spend it.
The government decides how much (you might call it allocate, you may call it create), and the people spend —– not conflict of interst.
The government creates and spends – conflict of interest.
The people create and the people spend – conflict of interest, again.
Perhaps the biggest thing wrong with all this discussion is its focus on money. Ultimately, we are not dealing with a money problem but with the purposes for which that money is used, with the issue of sustainable wealth creation and consumption. The next biggest flaw is the focus on 1930s issues and solutions. Wray says as much towards the end of this piece but he gets the order wrong. It should I believe be:
1. the reform proposal is based on a coherent and valid theoretical framework;
2. there is no final solution. There is no magic reform that will prevent another crisis.
The Chicago Plan is based upon (IMHO) such a valid theoretical framework – one spelled out in some detail by Frederick Soddy in his “Wealth, Virtual Wealth and Debt” (2nd edition if you can get it). The essence of that framework is the fundamental importance of energy and the laws of thermodynamics in the creation of wealth:
THOUGH it was not understood a century ago, and though as yet the applications of the knowledge to the economics of life are not generally realised, life in its physical aspect is fundamentally a struggle for energy, in which discovery after discovery brings life into new relations with the original source. (the sun or nuclear energy depending on how far back you want to go, Steven)
WEALTH, VIRTUAL WEALTH AND DEBT, SECOND EDITION, p. 48
Wray’s colleague, Dr. Hudson, has got a lot of this right. The wealth created by the Industrial Revolution was the product of advances in science and technology that allowed us to make use of those original energy sources (fossil fuels). See Hudson’s “America’s Protectionist Takeoff” or his dissertation. Where ‘civilization has gone off the rails’ is in the use of those capabilities for purposes of destruction, not more wealth creation, approximately the beginning of the 20th century.
The Chicago Plan, Keynes and Soddy were also a product of their times, times in which huge chunks of money sat idle because it’s holders feared their banking and financial system would lose it using fractional-reserve banking and other forms of financial engineering to create more debt-based money – up to and beyond the point they had created ‘debts that can’t be repaid (and) won’t be’. The Chicago Plan backers and Soddy (from whose concept of ‘positive money’ their plan was derived) apparently thought that creating money that wouldn’t vanish in a debt-deflation storm would be enough to insure that money was always available for use in the real Main Street economy.
Keynes, on the other hand, apparently believed the holders of money unwilling to risk it in the marketplace could be cheated out of its value, in Keynes’ words “euthanized”. His scheme may have worked at least a little bit, at least in the beginning. For him, Minsky, Wray and the MMT crowd that may have been good enough. (Perhaps Keynes’ most memorable observation is “In the long run we are all dead.”) But their ideas fail to address the more fundament question, ‘what is wealth?’ Wray says the “notion that “saving finances investment”. … is precisely wrong. … it is best to think of this the other way round: investment creates the income that can be saved.”
If we have learned anything from Keynes, Wray, the MMT theorists and the 2008 financial crisis, you don’t even need investment to create income, i.e. money. We can create it out of thin air for pressing social needs. Those needs, however, don’t include the preservation of a parasitic banking and financial system. If Soddy’s theory of wealth is correct, the place to start is investment in the creation and efficient use of energy, maybe investing enough to resolve the question of whether there will ever be a safe nuclear fusion reactor other than the sun.
Investment / money / capital doesn’t create wealth any more than Marx’s “working class”. The latter may still be required to run all the machinery. People are still required as the source of new ideas on how to make things better, faster, cheaper. But if Wray, the MMT crowd and the Federal Reserve are right, the money to implement those ideas can be created out of thin air.
Human labor doesn’t create wealth? Oh, OK. (Apparently the working class isn’t the source of “new ideas”…)
Looks like I struck a nerve. Next to energy, those new ideas are, of course, the only other possible candidate as a source of genuine wealth creation. And, like energy, investment in the potential of people to conceive and develop those ideas to the point they are beneficial to the community (i.e. education) is another legitimate investment sink. But with mechanization / economies of scale there are limits to how many of those ideas can be employed – not to mention the physical bodies of those who conceive them and the workers required to run the computers and machinery that produce most of today’s commodity wealth.
I will go so far as to concede that we will always need a “working class” employed in the production of life’s necessities if only to have some comprehension of the shortcomings of existing ways of doing business. But the “new ideas” food chain here is: 1-scientists who ‘think for fun’, 2-engineers and people who know how to run the machinery they create to turn ideas into real-world wealth.
We will always need new ideas but with computerization and the development of robots, I am not longer certain we will need the physical bodies of the “working class”. We may always need hands-on workers like doctors, nurses, sanitation workers etc whose skills may not be, at least cost-effectively, automated. My guess is, however, that whether or not we do, their lives are valuable in and of themselves whether or not they produce any profit for those who live off of money acquired honestly or created out of thin air.
If you don’t own the means of production, you’re working class by definition, although temporary pay and bennies can cushion the reality, sometimes for years. There were a ton of scientists who “thought for fun” doing pharmaceutical research in NJ until Big Pharma decided to shut down the labs and lay thousands of them off. The same applies to your “engineers,” as Boeing, for example, guts the unions in Seattle.
“Wealth” is not a term with an obvious meaning. Piketty, for example includes net financial assets in his definition of “wealth,” and he also equates “wealth” and “capital.” Others define wealth differently. Since you don’t offer a definition of wealth or an explanation of how you’re using the term, I’m not sure what you mean, why you wrote this comment, or why it is relevant to this post.
Yves, I really like your intro. It says a lot more in a lot fewer words. Personally, my part confusion/part comedic reaction to the talk about being “focused more on how destructive austerity is and technical aspects of MMT” is premised not in a short memory but a long one*. The US has never tried austerity in my entire lifetime. It is a complete fiction, a convenient villain unconnected to actual American policy. The majority of all net deficit spending in the entire history of the country has been conducted under Bush and Obama. Dick Cheney is the face of deficits don’t matter. Is it bad luck for Wray that his ideas supported the Bush tax cuts and the invasion of Iraq? Sure. That’s how the cookie crumbles when someone claims a scientific discipline, particularly when one claims that their ideas solve problems in the real world.
The notion that the problem of the past decade or so is that government hasn’t gotten bigger enougher is funny. Especially the notion from some MMTers that the massive expanse of federal power is so obviously desirable that it can’t even be critiqued by intelligent people.
When Wray justifies JG workers making less money than academic economists like himself, or doctors, or lawyers, or police chiefs, I’ll take MMT seriously. Until then, I will keep chuckling. We have a distributional problem, not an aggregate one. A management problem, not a monetary one.
*I do have one technical dissent: contrary to what Wray and others claim, buffer stocks don’t work. Just try buying a penny made of copper or a quarter made of silver. The political system magically changes the rules right when the anchor is about to do something, like a treat always just out of reach of a dog on a race track. Run a little faster and maybe daddy warbucks will give you a little somethin’ somethin’…
I would like to say that
1. Small government ≠ no government
2. Small government ≠ Big Business
3. Big Government and Big Business can exist side by side simultaneously
4. Big People is desirable.
5. Big People + Small Business + Small Government can work.
6. Big People + Big Business + Big Government, while not ideal, gives the People a fighting chance.
When Wray justifies JG workers making less money than academic economists like himself, or doctors, or lawyers, or police chiefs, I’ll take MMT seriously.
A. That JG workers necessarily make less money than any other particular job is not part of any JG proposal. The JG is just a proposal that people can get some fixed positive quantity of money from the state, the JG wage – when they say they want it. With a JG, everyone is on the Centralized Committee of Experts creating money – the distribution problem is addressed as directly as possible.
B. Your implicit proposal is for a JG wage of $0. How is this not obviously less egalitarian and more unjust and tyrannical than the JG? So I think by your own standards, your position deserves to be taken less seriously than MMT.
The US has been “trying austerity” for a long time. It is not indicated by the size of the deficit, but by the unemployment rate. There may be MMTers who argue for sizable expansion of federal power, but they certainly aren’t the majority, or even prominent.
Perfect response. Thank you.
So what do you propose? Should there be a gap between JG workers and top public employees, or not?
Why not just make them CEOs of Apple or, hell, let them run the Fed? Nice logic, there.
1) What’s the beef with Apple? MMT theoretically supports market-based economics, but it doesn’t like companies that actually produce products that their customers like in the real world?
2) Let them run the Fed? Well, I do agree that the average high school dropout would be a better Fed chair than any PhD appointed by the President and confirmed by the Senate.
Not sure why you remain fixated on the possibility of a difference between a “top public employee” and a JG worker. Public employees do not earn incomes to be even a drop in the bucket regarding inequality, for one thing. For another the JG is intended to create a floor to force up the entire wage structure. Everyone who earns their living will benefit, so why you want to pit various public employees against each other while leaving those who are wealthy from unearned income out of the picture makes no sense.
That indifference toward inequality is precisely what I am pointing out.
Quite the contrary to public employee inequality being not even a drop in the bucket, it is at the very heart of the problem. The soft corruption of careerism is what has warped our publicly supported institutions in law, medicine, academia, media, banking, etc. into servants of the elite.
Oh, please. As the thread shows, there’s been a discussion of the level to set the wage at, and most MMTers settled at a living wage with benefits. That’s hardly “indifference.” It’s 100% certainly not indifference beside the current brutal system that regulates the economy by throwing people out of work. The quest for a more humane way of handing economic cycles was one of the drivers behind Bill Mitchell’s original work on the JG years ago.
Washunate:So what do you propose? Should there be a gap between JG workers and top public employees, or not?
That is not for me to decide, my personal preference would be for a JG wage on the high end of current proposals. Say $20/hour. Do you think there is anything wrong with federal workers having different wage levels now? In any case, the JG is a proposal to decrease the gap – if people so desire, to zero – so how one can worry about this gap & oppose the JG is incomprehensible. Wray is just saying in that quote that the JG is not meant to reduce current federal workers pay, nor must it be the uniform wage for all federal employees it seems you prefer. In any case, in any society likely in the near future, there are going to be wage differentials, if not in the public sector, in the private sector. Why some public sector jobs – more dangerous, undesirable or difficult ones – might not reasonably pay some premium – why this would be so catastrophic or hypocritical – is obscure.
STF: Thanks for the kind words.
So why not dispense with the buffer stock voodoo? Just raise the minimum wage to $20 an hour. Ah, because people will be ‘unemployed’. Well, why not just provide universal unemployment insurance?
“Why some public sector jobs – more dangerous, undesirable or difficult ones – might not reasonably pay some premium – why this would be so catastrophic or hypocritical – is obscure.”
Is that really what you’re advocating? Dangerous, undesirable, or difficult? What does that have to do with wage scales at universities, hospitals, courts, police departments, media companies, banks, and so forth?
You obviously don’t understand the JG proposal very well.
Here’s Randy from 2000 (!) when we used the term ELR (employer of last resort) more than JG, but they are equivalent:
“The ELR will eliminate the need for a minimum wage, as the ELR wage will become an effective minimum wage. It could also establish the base package of benefits that private employers would have to supply. It could replace unemployment compensation, although it could be simply added on to give workers who have lost their jobs more choices. In the US well under half of the officially unemployed even qualify for unemployment compensation. The point is that no matter what social safety net exists, ELR can be added to allow people to choose to work over whatever package of benefits might be made available to those who choose not to work. Obviously, generous benefits to those who do not work can affect willingness to work. The ELR benefit and wage package should be set higher than the benefit package given to similar individuals who do not work, but even this is not absolutely necessary. If ELR enhances one’s access to desirable private and public sector (non-ELR) jobs, then some individuals will choose to work in the ELR program even if this means taking a benefit cut. However, if society values work, it seems far more reasonable to reward ELR workers with a better compensation package than they would receive if they did not work.”
Let me repeat the key points—
1. YOu can add a benefits package to a JG
2. You can add JG to any sort of social safety net, including, say, a basic income guarantee.
3. The key point is that whatever you offer people for not work (feel free to fill in your own preferred amount here), you offer them more when they do work. But they still have the choice.
4. In later papers, MMT is clear that JG workers in should be paid a living wage at the very least in the wealthier nations. Some JG supporters even propose JG jobs at different skill levels (with pay commensurate with skill); that’s not agreed by everyone, but some, and worth debating.
“…if society values work…”
Your point, if any? If you want a different political economy that doesn’t value work, please feel free to set forth your ideas in positive form. These endless rounds of gotcha become tiresome.
Last year, you were wanting me to write less. So now you don’t like more concise responses?
So let’s flesh this out. Which I have been doing, by the way.
There are only three possibilities about the amount of aggregate work performed in our society:
1) We should do more.
2) We should do the same.
3) We should do less.
Can we agree that MMT focuses on option 1?
If we can’t even agree on that, then Modern Money is even more of an academic semantic black hole than I thought.
stf, Lambert wanted me to write less last year, so I have been trying to be more concise in comments after the initial description, but there is a lot of thought behind it (to the extent that any non-academic can engage discussion of a matter where people are paid to spend their lives thinking about this).
What I have encountered is a disconnect between the political rhetoric about what MMT can solve and the actual details about how MMT solves this.
I completely agree with you that MMT makes the need for a minimum wage obsolete. Minimum wage and social insurance are a competing approach to MMT.
What I find hilarious is then when somebody tries to tell me they’re not in competition.
The key difference is the extent to which we value work. Value is a matter of personal preference; it is not an objective truth. If one wishes to increase output, the aggregate amount we work, MMT makes a lot of sense. If one wishes to focus on meeting basic needs (or even, specifically, on working less) then minimum wage + social insurance makes sense. I’m not trying to convince MMTers they are wrong. Perhaps that is what is confusing?
Rather, I’ve been pointing out there are other perspectives, such as being more concerned about inequality. Top professors, doctors, lawyers, and others don’t make a little bit higher wages than the typical worker. They make a lot more.
Finally, on the point of implementation, I would observe that the very fact that there is no one authoritative proposition on what is a JG shows that the details are all that matter. The principle of government directed work can result in anything from slavery to utopia. Given how the US has worked in practice over the past couple decades, this gives me great caution about which end of the spectrum would be closer to reality.
Or to say it differently, if it’s closer to the utopia side, that’s awesome. What I have been pointing out is that if it’s awesome, lots of people are going to want to join the party. Yet for some bizarre reason, people have been disputing that basic observation. Some people have been trying to tell me that JG will be awesome, but it won’t attract very many applicants.
That to me makes no sense.
P.S., I’m assuming here you have some basic knowledge about compensation policies since you’re talking about them.
But in case you’re not familiar with the data, I highly encourage checking out these two links:
Public employees making over $90K a year are in the top ten percent of all wage earners in the country.
The ruling class isn’t the problem, civil servants earning more than $7 an hour is the problem. If we’d just all concentrate on making the Postal Service clerk poorer then America would be better off.
washunate is a right libertarian. Anything other than an all-powerful elite and a majority in squalor is an affront to liberty.
You think a society that pays academics, lawyers, doctors, police chiefs, and others significantly higher wages than most workers can be stable and prosperous over the long term?
You think this kind of wage disparity is unrelated to the rot in our public institutions? It’s just coincidence?
P.S. This link is handy when talking about Wray.
“As will be discussed in the next section, the government simply announces the wage at which it will hire anyone who wants to work in the public sector, and then hires all who seek employment at that wage. We will call this the basic public sector employment (PSE) at the basic public sector wage (BPSW). Of course, there will still remain many (non-PSE) jobs in the public sector that are not a component of the PSE and that could pay wages above the BPSW. It is also important to emphasize that PSE policy is not meant to substitute for current public sector employment (PSE workers should not displace current public employees).”
I’d prefer to talk about Wray’s work, rather than Wray, but presumably the usefulness of this quote will be set forth in due course.
I love the obtuseness. Or maybe that’s not even the right word.
Either MMT proposes a class system, or it doesn’t. Either some publicly supported workers should make a lot more than others, or they shouldn’t.
Those are mutually exclusive options.
The JG proposal is that the Government guarantee a job offer at a living wage to all who want a full-time job along with good fringe benefits. That wage would then become the de facto minimum wage, since all private sector businesses would have to pay their people a better wage to get their services.
And then when I point out that 175 million Americans, give or take, are unemployed, out of the labor force, in prison, or working a crap job, I get ridiculed for suggesting that tens of millions of people would apply for a job that actually paid a living wage with good benefits.
Also, this shows how MMT entrenches two of the things that are wrong with our current system: 1) the monopoly on income possessed by formal employment, and 2) the linkage of employment with other benefits, especially employer-based health insurance.
YOu’d be hard pressed to find an MMTer in favor of connecting employment and health insurance. The point made in earlier literature is that health insurance could be provided as part of the JG wage package since currently unemployed generally don’t have health insurance. It’s not against national health insurance, though–just because a paper doesn’t say everything you think it should say doesn’t mean the author is necessarily against what you think it should say.
BTW, Stephanie did a series on healthcare several years ago: http://www.cfeps.org/health/index.htm
Right, I think we’re in agreement here. MMT is silent on health insurance.
There is nothing about MMT that adds to our understanding of the various options for healthcare policy.
“the monopoly on income possessed by formal employment” [modulo, I assume, self-employment, the informal sector, barter, even the horrible glibertarian sharing economy, Graeber’s “every communism,” etc.]
Do feel free to set forth your alternative in a positive fashion. The “any stick to beat a dog” tactics against MMT become tiresome, especially when there are glimmers, as here, of an alternative that for some reason you are not willing to share.
Depends on what you mean by “austerity.” There are different kinds. I’ve written a lot about that. The US is very close to macro-economic austerity right now; it has been practicing microeconomic austerity for quite a long time in that the deficit is never large enough to compensate for demand leakages to savings and the foreign sector. The consequence of this is that some parts of the US population are continuously in microeconomic austerity, though not the 1% of course.
Neither Randy, nor MMT ever asserts that deficits don’t matter. Randy has even written a post called “Deficits Do Matter, Just Not in the Way You Think.” Google it! Also, Randy never contends that the Government needs to get bigger. All he says is that deficit spending hasn’t been large enough to compensate for aggregate demand leakages and need to be bigger, whether that means that Government needs to get bigger or not is a political choice which MMTers thinks people ought to debate.
So the platinum coin isn’t a game changer after all? Politicians do, in fact, know that they can print dollars and give them to their friends regardless of the faux debt ceiling charade?
Please show where Joe said or implied this, instead of posing the rhetorical question.
Uh, that’s literally the language Firestone was using.
Thank you for this post Yves and Prof. Wray. I look forward to the next one. And I do appreciate the style. Nothing I like better than being taken from one logical sentence to the next. The postbank thing is what I’d like to see happen as soon as possible. Diversity and decentralization in banking is such an organic model it’s hard to find fault with it. And shutting down the TBTF banks is just about everyone’s long held hope. That money is synonymous with purpose should be understood by everyone – especially those great pretenders at the BIS (most recently) and exorbitant returns are without purpose. In one of your essays, I would love to read a few paragraphs about the destabilization that war causes. My latest paranoia is a nagging feeling that Bush took us to war without the money to pay for it and so his administration cooked up a scheme whereby every homeowner in America would volunteer the money through their mortgages. And it fell apart asap. And nobody will ever be able to trace it. Too cranky?
I wanted to address this part separately as it deals with a specific issue:
“…with a central bank that acts as a lender of last resort and with the treasury providing deposit insurance, our payments system is perfectly safe.”
Did anyone else notice how cavalier the tone was in this section? Wray just had the public assume the deposit liabilities of the entire banking system.
They didn’t notice the cavalier tone because it wasn’t. Let’s put your quote from Wray back in context, shall we?
I don’t see making a claim and then backing it with historical evidence as being “cavalier” in tone or substance. In fact, it’s one the things that separates a scholar from a crank. Your mileage may vary, and apparently does.
Not even a hiccup? We had to backstop the criminals to the tune of tens of trillions of dollars and thousands of get out of jail free cards.
And even with that, we still raised FDIC deposit insurance from $100K to $250K. (as a side note, it’s fun to compare deposit insurance to median wages over the past few decades…)
What you are saying is that it’s a ho hum event that we live in a system of political economy where the government has to backstop the TBTF because otherwise, it would wipe out depositors? The public, not the banks, are responsible for what happens to the money owned by depositors?
My mileage apparently varies considerably on this front. That’s cool if I’m the only one worried about it. Indeed, that may actually be highly instructive of the state of our groupthink and projecting policy forward if no one else is bothered by that.
We already bailed out the GSEs, and their debt was explicitly not backed by USFG. It makes sense that some point down the road, the government will be overtly subsidizing deposit insurance. It’s already a quiet subsidy to the big banks as they pay a lower rate than they should for the protection.
You obviously don’t know what is meant by “the payments system.” Hint–it doesn’t include any of the things you’re mentioning. We would agree those are all serious problems. But the payments system wasn’t.
Once again, a grossly out of context quote. Washunate writes:
Let me restore it:
The deposit insurance has nothing to do with the squillions we sent to the banksters via the bailouts, Maiden Lane, etc.
Now, Washunate could have written, “Not even a hiccup in our insured deposit system? Congress raised the insurance limit to $250,000!” But (a) that’s not what Washunate wrote, and (b) Washunate needs to show this had anything to do with the need for “get out of jail cards,” which Washunate doesn’t, and (c) Congress passing that law looks like a pretty successful move to protect the small depositor, to me, so now we’re down to the semantics of “hiccup.” So far as I know, no small despositors lost out.
Pro tip: When you’re going to take interlocutor’s quote out of context, try not to do that in the very same comment thread. It’s just too easy to check.
Wray responds (having asked me to post this):
I wonder if socialist systems are also financial systems?
If not, and if we have a hybrid capitalistic/socialistic system, does that give one hope that we can banish financial instability?
Even if they are, knowing mixing one prime number with another prime number can give one a non-prime number, or mixing an odd number with another odd number can again give one a non-odd number (i.e. an even number), does it mean it’s possible mixing two financial systems (one capitalistic and the other socialistic) can give us a non-financial system, thus avoiding financial instability?
What’s a “socialist system” according to you?
It can be any system other than a capitalist system.
The reason I asked was Lambert made a statement about capitalist systems. And I wanted to know how much it applied to our system, which many have said is not purely capitalist system.
And I used the example of a hybrid capitalist/socialist system. But it doesn’t have to be, for the intent of my original question…as long as it’s a hybrid system not purely capitalist.
I think you need to re-examine that assumption. Feudal and mercantilist systems were neither capitalist nor anything which could conceivably be called socialist. I’d suggest limiting socialism to the original definition of proletarian control of the means of production, which can take many different forms.
Let’s try again.
If we are not a 100% capitalist system, then, are we a 100% financial system?
I think we’re a financial system as long we’re using money. But since you really haven’t said what a financial system is, I’m not sure that’s what you mean.
I was responding to Lambert’s comment about financial systems, as quoted from Minsky.
If there is any question about what a financial system is, perhaps we have to ask him or Minsky.
Is there a significant difference between, as you write, a 100% financial system and 95% financial system?
What would make one economy more financial? I suppose we could define it as one in which more transactions are conducted in financial assets, but if that’s the case then no, a 100% financial system does not and likely cannot exist. The second you exchange something without involving money then your economy no longer qualifies.
I did find this an interesting question, by the way.
“[Socialism] can be any system other than a capitalist system.” This is beyond unserious. Binary thinking at its worst. See other comments for their responses.
I’m also at a loss to know what statement I am alleged to have made. WordPress does support the HTML link tag.
“When I’m wrong, I change my mind.” JMK
Only if you think deflection is the same thing as changing your mind.
Adding, here’s a discussion of what Keynes really said. And another.
Paraphrased, actual JMK quote was:
“When my information changes, I alter my conclusions. What do you do, sir?”
According to Wikipedia it was a
“Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in “The Keynes Centenary” by Paul Samuelson, in The Economist Vol. 287 (1983), p. 19; later in The Collected Scientific Papers of Paul Samuelson, Volume 5 (1986), p. 275; also in “Understanding Political Development: an Analytic Study” (1987) by Myron Weiner, Samuel P. Huntington and Gabriel Abraham Almond, p. xxiv; this has also been paraphrased as “When the facts change, I change my mind. What do you do, sir?”
Like I said, deflection, though it’s always nice to see a great writer like Keynes quoted.
The PM et al mobs emotive psychological positioning – argumentation style always reminds me of another human institution, epicenters are the usual suspects for some unknown reason….
Banks create money “out of thin air” by creating debt at the same time. As we have things set up, nearly all of our money is debt created. The problem: banks are pro-cyclical. They create too much money during boom times and too little money during bad times. During bad times people on the whole suffer from lack of money. The poor and unemployed suffer in particular. Also, because we have a debt-money system, although gov’t could create the money that people need, people in general are afraid of any increase in gov’t debt. So the gov’t, as now, may not create enough money.
The proposed solution: don’t let banks create money. Full reserve banking. But that goes from one extreme to the other.
What is wrong with a system by which, in normal times, banks create debt-money, but in bad times, the treasury creates the money needed in the form of currency? The national debt would not increase, and might even decrease. The result would be a system with a mix of debt-money and currency where the currency is a sizable fraction of the total money supply. I don’t know, but having a currency buffer might reduce the size of economic booms and busts.
I cannot say that such a system would be a solution, or even an improvement, but I would like to know what is wrong with it. :)
There’s no reason for the rule you offer. We can use money creation by banks as part of the loan process, reserve creation by the Fed in the process of implementing monetary policy and creation of money without issuing debt by the Treasury, at all times. Details on how the Treasury alone can create money are here.
There is nothing inherently wrong with instability. The only truly stable pattern is the flatline on the heart monitor. What we need to recognize is that any action necessarily creates reactions and they tend to be particular to the situation. What we have in this situation is an enormous wave of notational, tail wagging the dog wealth which is overwhelming the entire world and all political and social structures trying to cope with it. The 1%ers and bankers and politicians might be riding this wave, but what is creating it is the assumption that money is a form of commodity and everyone has to have it. At this point, it really doesn’t matter what is being proposed as an alternative, because this is the bomb we are riding and unless we find a way to defuse it, the damage will define humanity for the foreseeable future.
“There is nothing inherently wrong with instability. The only truly stable pattern is the flatline on the heart monitor.”
We do not have to choose between instability and stagnation. Natural systems often exhibit homeostasis. Homeostasis is neither stagnation nor instability. For half a century the US experienced prosperity without the economic instability of the late 19th century. Then we deregulated and got a return to instability, followed by a severe crisis and another depression or possibly a lost decade or two.
Then again we could have riding an updraft of world domination;
Once again, I am late to Yves’ party. I really like this piece, but either don’t understand Randy Wray, or I disagree. You see, I happen to view profit seeking as the engine that drives things like control frauds. Take away the profit and you remove the motivation for fraud. So, how do you take away the profit motive from finance. Simple, have the public sector do it. Randy, what I am arguing is not that publicly run institutions are more efficient, or innovative than private banks. In fact, I suspect that public institutions are not more efficient or innovative (my word, what would we ever do without ARM’s, CDO’s, CDS’s, etc., etc.) and that we would be lose and gain by that deficiency. But we wouldn’t have Magnetar or Paulson’s Trade of the Century (and its so young!). Perhaps we wouldn’t have ATMs either, but when the handful of broadly beneficial financial “innovations” dreamt up by wild-eyed Wall Streeters are seen in the light of 2007-who-knows-when credit crunch I find myself willing to wait in line for the next human teller. And I happen to believe that the innovative power of profit-seeking is way overblown. Much human innovation has occurred without a whiff of profit. Seriously Randy, why do you hold out a hand for for-profit banking?
Oops, no edit feature. Poor proofreading. This “…(my word, what would we ever do without ARM’s, CDO’s, CDS’s, etc., etc.) and that we would be lose and gain by that deficiency.” Should read, “…(my word, what would we ever do without ARM’s, CDO’s, CDS’s, etc., etc.) and that we would gain by that deficiency.” Pardon me for clogging your blog Ms Smith.
Should have just deleted the whole thing instead of rewriting one lousy sentence. It was all garbage anyway–nothing but a gross misrepresentation of what Wray was actually saying.
Why don’t you ask Wray whether he still beats his wife, while you’re at it? Talk about trying to impugn someone with a loaded question. . .
Interesting how we didn’t have those things for 50 years after the GD, either, until we started deregulating. But we did have private banking. Hmmmm.