Something Is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke

L. Randall Wray | June 30, 2014

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. continue reading…

Comments


End of Week Links 6/27/2014

Michael Stephens | June 27, 2014

Ann Pettifor, “Out of thin air — Why banks must be allowed to create money

“In his regular column, Martin Wolf called for private banks to be stripped of their power to create money. Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. … 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.’

Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so. I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s. Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around.”

Related: Jan Kregel, “Minsky and the Narrow Banking Proposal: No Solution for Financial Reform

Jayati Ghosh, “Locking Out Financial Regulation

“This agreement [the Trade in Services Agreement (TISA)] is apparently supposed to be “classified” information – in other words, secret and unknown to the public that will be affected by it – for a full five years after it … enters into force or the negotiations are terminated!

That an international treaty that has binding and enforceable obligations can be treated as secret for five years after it comes into force is not only bizarre but almost unthinkable. The need for such secrecy would be inexplicable even if such agreements were actually in the interests of people whose governments are involved in such negotiations. That secrecy is sought would on its own be reason for concern, but the little that has been leaked out of the state of the negotiations suggests even more reasons for alarm, especially because such a deal would have far-reaching implications for financial stability and adversely affect everyone in the world.”

J. W. Mason, “Where Do Interest Rates Come From?

“What determines the level of interest rates? It seems like a simple question, but I don’t think economics — orthodox or heterodox — has an adequate answer.”

Noah Smith, “What I learned in econ grad school

“… this was back before the financial crisis, at the tail end of the unfortunately named “Great Moderation.” When the big crisis happened, I quickly realized that nothing I had learned in my first-year course could help me explain what I was seeing on the news. Given my dim view of the standards of verification and usefulness to which the theories I knew had been subjected, I was not surprised.”

Eric Schliesser, “Milton Piketty

“Piketty is the true heir of Milton Friedman. This claim might seem perverse if one focuses on policy. But if one looks at (a) methodology, and, crucially, (b) the conception of what economics might be about, ultimately, then Piketty’s book is an attempt to return economics to an approach that was never really dominant, but that can be book-ended between Adam Smith’s Digression on Silver (or Hume’s population essay) and Friedman’s (1963) Monetary History.”

Comments


To Consolidate or Not to Consolidate, That Is the Question (or maybe it isn’t)

L. Randall Wray |

This is another short post on MMT, a sort of follow-up to my post from a couple of days ago. There was an interesting response to various comments on my piece, which was posted up on Mike Norman’s website.

We got the typical: “oh you MMTers always want to consolidate the Fed and Treasury, but really the Fed is a private institution that is not a part of government,” and “in reality the Treasury cannot spend unless the Fed will allow it to spend, otherwise it must get tax revenue before it can spend,” and hence “really, government spending is constrained by its revenue, just like a household or firm.”

In reality, what MMT has shown—from the very beginning of the creation of the approach—is that you can consolidate or deconsolidate and the balance sheets end up in exactly the same place. The MMT logic holds no matter how you do it: government creates a money of account, imposes a tax in that unit, spends currency denominated in the unit, and collects taxes paid in its own currency.

And, of course, the Fed is not a private institution but rather is a creature of Congress and no more independent of government than is the Treasury, the DOD, the DOT, or the IRS. The Fed is normally allowed to set the overnight interest rate target free from the everyday kind of politics—but all of these other branches of government also have some independence from party politics. Well, the IRS right now is being subjected to some of that.

Anyway, the response was by someone called Calgacus, who often makes quite interesting and thoughtful comments. I thought it would be worthwhile to repost the response here, along with a few comments of my own. The angle taken here on the “consolidation issue” is pretty novel. continue reading…

Comments


“Who Is Minsky and Why Should We Care?”

Michael Stephens | June 25, 2014

These two interview segments, with Marshall Auerback and Edward Harrison (at 23mins), feature some basic discussion of Hyman Minsky and his view of financial crises:

 

Comments


Daniel Alpert at the Minsky Summer Seminar

Michael Stephens | June 24, 2014

On Saturday, Daniel Alpert delivered the closing remarks at the Levy Institute’s Hyman P. Minsky Summer Seminar:

Minsky had the rarely seen ability to stand back from all he had learned—even at times from his own mentors—and not only see and articulate what was misunderstood, what wasn’t working, but also to explain why conventional wisdom is often not always all that wise and why markets often proceed in delusional fashion.  And by this I mean not merely the often irrational animal spirits of markets, nor the Keynes’ casino, nor his beauty contest, but an almost collective agreement to ignore the most obvious of fact-pictures staring right back at us.  And often, to ignore them because they force consideration of exogenous variables that aren’t readily incorporated into existing mainstream models, to ignore them because they are too heterodox to be considered by those who have invested their lives work in developing and interpreting mainstream theory, or to overlook them because they involve understanding the often obtuse complexities of actual market operations that go beyond ivory tower theories of market behavior.

Read Alpert’s full remarks here.

Comments


Inequality, Unsustainable Debt, and the Next Crisis

Michael Stephens | June 18, 2014

In The Guardian, Dimitri Papadimitriou warns that the combined forces of persistent inequality, shrinking government budgets, and the US trade deficit are setting the stage for another private-debt-driven financial crisis:

Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn’t going to be propelled by an export bonanza, or by a government investment boom.

It will have to be driven by spending. Even a limping recovery like the one we’re nursing along today depends on domestic demand – consumer spending not just by the wealthy, but by everyone else.

We believe that Americans will keep consuming at the same ever-rising rates of past decades, during good times and bad. But for the vast majority, wages and wealth aren’t going up, so we’re anticipating that the majority of Americans – the 90% – will once again do what was done before: borrow, and then borrow more.

[...]

The more – proportionally – that the top 10% has prospered, saved and invested (naturally, the gains found their way into the financial markets), the more the bottom 90% has borrowed.

Look at the record of how these phenomena have travelled in lockstep. In the first three decades after the second world war, the income of the 90% rose at the same pace as its consumption. But after the mid-1970s, a gap formed – the trend lines on earning and outlays spread apart. Spending continued apace. Real income, meanwhile, stagnated. It was lower in 2012 than it had been forty years earlier. That ever-increasing gap between income and consumption has been filled by borrowing.

Papadimitriou also points out that corporations, which pulled back after the recession, are once again increasing their debt (this began in 2010), and the expectation is for non-financial corporations to add some $4 trillion in debt between now and 2017.

If these debt-fuelled spending dynamics (on the part of corporations and the bottom 90 percent households) don’t come to pass, then we’re looking at a period of low growth and high unemployment–“secular stagnation”–instead.

There are a number of lessons here, but I’d like to highlight two, in case they aren’t obvious. First, even if you aren’t persuaded that income inequality needs to be addressed for reasons of fairness, then financial stability concerns alone should suffice. Second, in the absence of some impending export boom, continuing to reduce the budget deficit at a record pace is the height of recklessness.

Read the Guardian piece for more. The underlying macroeconomic research comes from the Levy Institute’s most recent strategic analysis: “Is Rising Inequality a Hindrance to the US Economic Recovery?

Comments


Tax Bads, Not Goods

L. Randall Wray | June 17, 2014

This is another installment in the series on the MMT view of taxes. I’m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and “green jobs.” Along the way he made two particularly insightful comments on MMT and taxes that I’ll use to introduce this installment.

First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years,” at least, as Keynes put it in his Treatise on Money. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US.

It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure.

Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds.” We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them.

You cannot run out of a unit of measure!

The “dollar” is the measuring unit in which we keep our monetary records. We cannot run out.

Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be “tax bads, not goods.”

We’ve previously established that “taxes drive money.” We’ve also established that from the perspective of the sovereign that creates the money, the purpose of the monetary system is to move resources to the public sector.

Clearly we do not want to move all resources to the public sector; we want to leave some for the “private purpose.” Further, we want some “efficiency” (I’ll leave the definition of that vague for now) in this process, in the sense that while we want to move some resources to the public sector we do not want to discourage useful private sector activity.

It would be even better if this process of taxing to move resources to the public purpose actually encouraged more activity that was beneficial for pursuit of both public and private purposes.

So we need to think about what kind of tax can “drive” a currency, without diminishing private initiative.

For example: what if we taxed paid work at a rate of 15% in an effort to “drive the currency”? continue reading…

Comments


Are German Savers Being Expropriated?

Jörg Bibow | June 14, 2014

Last week the ECB’s governing council agreed on interest rate cuts and some fresh liquidity measures. The policy move has sparked off quite some excitement in all kinds of corners. Certainly financial markets highly welcomed the ECB’s much-awaited new easing initiative, with stock indices surging and bond yields plunging to record levels. International commentators generally felt that the ECB was – finally, if belatedly – doing the right kind of thing. And, generally speaking, the European political body seems to be sufficiently famished, and perhaps also a little terrified by the recent EU parliament election results, to welcome any perceived easing of pain. Only one party felt seriously short-changed by the euro’s independent guardian of stability: German savers.

In Germany, the ECB’s latest policy decisions, featuring a negative interest rate to be paid by banks to the ECB for lending to the ECB by means of its deposit facility, triggered an across-the-board outcry orchestrated by the German media, ranging from heavyweight tabloid Bild to the mouthpiece of Germany’s conservative intelligentsia Frankfurter Allgemeine Zeitung. German savers appear to be up in arms against the ECB’s outrageous decision to shave 10 basis points off its key policy rate and introducing a negative rate on its deposit facility. The president of Germany’s savings bank association declared that the ECB’s move amounted to expropriating German savers. And former ECB executive board member Jürgen Stark, who had resigned back in 2012 for “personal reasons,” which seemed to be all too clearly related to the ECB’s government bond buying program, was glad to add fuel to the flames by declaring in an interview that the ECB was breaching its mandate.

The German media reaction to the ECB rate cut is more than a bleak statement about the quality of economic journalism in Germany. One probably has to concede that it also well reflects the general state of mind and German psyche about Europe’s common currency project and the havoc it has wreaked across the continent. There are some important lessons here for Germany’s euro partners – and beyond.

First of all, these events once again highlight that in the German euro debate superficial morals prevail over any economic expertise. In Germany, saving is by its nature always virtuous. Savers, as creditors, occupy the moral high ground. Creditors are simply morally superior to debtors. In fact, debtors are suspected to be afflicted by some moral defect. As savers apparently have a moral right to get paid interest, the ECB’s move is seen as expropriation; its decision to make the creditor pay what seems like a “Strafzins” (penalty interest rate) for lending to the debtor seems outright immoral.

Within these pseudo-moralistic dimensions inspiring the German euro debate economic reasoning is conspicuous for its absence. It is somehow lost that there can be no creditor without any debtor. It is also lost that Germany as a nation can only run a current account surplus if other nations run deficits and pile up debts. So it has never entered the German national debate that Germany only managed to balance its public budget thanks to other countries’ willingness to borrow and spend on German exports. Instead, morally, it seems a clear-cut case that Germany has done everything right. If there is trouble in the system, it must be because of others’ failures and moral deficiencies. continue reading…

Comments


McCulley on Fed Policy, Inflation, and the Taylor Rule

Michael Stephens | June 13, 2014

Paul McCulley, a familiar face at Levy Institute events (he gave a keynote at our Rio conference and at last year’s Minsky Summer Seminar), is back at PIMCO and his first note is (predictably) worth a read.

His latest essay looks at Federal Reserve policy from the standpoint of what McCulley terms the Fed’s “secular victory in the long War Against Inflation” and discusses, among other things, how the Great Moderation fed into Minskyan financial instability, how we should think about the Fed’s “neutral” real policy rate, and what this means for the question of whether stocks and bonds are overvalued. Here he is on the Taylor Rule:

The “neutral” real policy rate is not secularly constant.

It evolves as a function of changing “real” economic variables – demographics, technological progress, productivity, etc. – as well as changing institutional arrangements, notably changes in the degree of regulation of banking and finance, domestically and internationally. Thus, the notion of a “fixed” center of real policy rate gravity for prudent monetary policy is an oxymoron.

Which is why, for me, it is so befuddling that the Fed, and thus the markets, still clings – even if reluctantly – to one man’s estimate of an “equilibrium” real fed funds rate, made in 1993: John Taylor, who assumed it to be 2%, which, in his own words, was because it was “close to the assumed steady state growth rate of 2.2%.”

And that assumption became embedded in his ubiquitous Taylor Rule.

[...]

… that’s the origin of the 4% number that, to this day, the FOMC prints as its “longer-term blue dot” for where the fed funds rate “should be” (if the Fed were, theoretically, pegging the meter on both of its mandates).

I’ve got to hand it to John, whom I’ve known and liked for a very long time: Twenty-one years on, and you are still hardwired into the catechism of Fed policy!

But surely, economic life has changed since 1993, about the same time that Al Gore was inventing the Internet.

I believe the FOMC’s 4% nominal longer-term blue dot – which implicitly embeds John’s 2% real rate assumption – is wrong, unless we want to say that 2014 is 1993 redux. I don’t.

Read the whole thing.

Comments


The Supposed Decade of Flat Wages Was Worse Than We Thought

Michael Stephens | June 12, 2014

It’s well known that the wages of US workers have become disconnected from productivity growth, with real wages growing much more slowly than advances in productivity over the last several decades. This is a key part of the story of widening income inequality.

But these observed trends actually understate the degree to which working people have been left behind. New research reveals that the US economy is doing a worse job passing on productivity gains to workers than the wage growth (or even stagnation) numbers suggest.

The Levy Institute’s Fernando Rios-Avila and the Atlanta Fed’s Julie Hotchkiss looked back to 1994 and tried to see what proportion of real wage growth since then can be accounted for by key changes in the demographic profile of the labor force: principally, the fact that the average worker has become older (i.e., more experienced) and more educated.

What they found is that over 90 percent of real wage growth between 1994 and 2013 was due to demographic shifts. And the 2002–13 period, commonly referred to as the decade of flat wages, is more accurately described as “a decade of declining real wages within age/education worker profiles.” If we control for demographics, wages are back to where they were in 1998. That’s what you’re seeing in the red line below:

Real Wages vs Fixed Real Wages_Levy Institute

Of course, generally speaking, the fact that we have a more educated workforce is good news. But we also want to know the extent to which workers with a particular demographic profile—workers with a given level of experience and/or education—are seeing increases in compensation as labor becomes more and more productive. “When describing the evolution of well-being in the population,” Rios-Avila and Hotchkiss suggest, “an official index for a ‘fixed’ wage trend might be more appropriate for policymakers.” Such an index would paint a disappointing picture of the last decade.

Since 2002, wages have fallen for workers at all levels of educational attainment (this is true whether or not we take ageing into account). And as you can also see in the next figure, when we control for changes in the age/experience profile within each educational grouping, workers without a college diploma are being paid less than they were in 1994 (the gradual erosion of their wages over 2002–08, combined with the recession and unimpressive recovery, have wiped out all the gains these groups at the lower end of the educational scale made from 1994 to 2002).

Fig4B_Wages by Education_Age Fixed

The authors also find that gender and racial wage gaps have shrunk by less than it may appear over the last decade, once we account for demographic changes. Controlling for shifts in the average age and educational attainment within each group allows us to disentangle reductions in pay inequality between male and female workers that are due to, say, women’s educational advancements outpacing men’s, from other sources of progress (or lack thereof) in gender-based wage inequality.

To see the full results, download their new policy note.

Comments