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NKlein1553
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Last comment, I promise. I do think though that most economists in the PKE tradition, including the MMT/MMR folks, would in fact say that QE is an asset swap. Because that is what QE is. I don't think many would disagree that swapping one asset class for another would have an affect on the prices of those assets. So no surprise about the swings in the stock market. Not sure citing swings in the stock market is much of an argument for anything though. Stock market goes up, stock market goes down. QE or no QE certainly has an impact on those swings. The real question is whether those swings are doing much to impact the things that matter to people like the unemployment rate, the poverty rate, concentration of wealth, etc. I'm not saying the answer to that question is no, just that the performance of the stock market is not necessarily much related to any of those things.
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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I have no idea why that comment came out so broken up. Sorry. In any case, that was my attempt to describe Post Keynesian economics. It helps to have something to compare it to, although I'm sure I've created a bit of straw man. My broader point is that PKE is a broad and old school of thought that encompasses the work of many famous economists. MMT/MRR (which are rather different and many of the proponents of each school of thought don't much get along by the way) may draw from the work of PKE economists, but they are not the same thing. I'd think you know that Mark.
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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Classical economics is about the exchange of scarce resources; (PKE)economics is about production.
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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In the (PKE)worldview by contrast, the economy is generally assume to be operating within the boundaries of its production possibility frontier so there is little need for a discussion of how to allocate scarce resources because resources are not in fact scarce. Opportunities for free lunches abound.
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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In the classical story, markets exist to allocate scarce resources and prices are the mechanism by which goods and services are distributed.
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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Following in the footsteps of Keynes, (PKE) economists do not assume resources are fully employed. In fact, most (PKE) economists assume the opposite, that a surplus exists. While the very first thing practically every mainstream economics textbook will introduce is the concept of scarcity, (PKE) textbooks generally begin with a discussion of how surpluses are generated.
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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Postkeynsenian economics (PKE) dates back to roughly the late 1940's and early 50's. Most of the better known economists involved in the development of (PKE), including Michal Kalecki, Roy Harrod, Joan Robinson, Nicholas Kaldor, and Piero Sraffa, are associated with the Cambridge school of economics in the United Kingdom (although Kalecki and Harrod taught at the London School of Economics, I believe).
Toggle Commented Sep 18, 2013 on Links for 09-18-2013 at Economist's View
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A few years ago I tried writing out an explanation that post with a graph to help me conceptualize the point about the EITC. Not sure if I got everything correct, but it helped me think things through. https://docs.google.com/file/d/0ByTmDvGmojCpZFdUTE44XzV3b00/edit?usp=sharing
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Thanks, that's a very nice post by Robert Waldmann. It reminds me of one of my all time favorite posts by JW Mason. Mason makes the case that the public provision of many kinds of services (like health care and education) is much more efficient than subsidizing consumers to buy these services from private producers. http://slackwire.blogspot.co.il/2010/09/public-options-general-case.html "...the important thing is those of us seeking an incremental de-marketization of society, should recognize that the logic of the market is often on our side."
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More coverage please: http://tv.msnbc.com/2013/08/29/largest-fast-food-strike-yet-reaches-the-south/ Fast food workers staged a nationwide strike across dozens of American cities on Thursday morning, demanding a $15 per hour wage and the right to form a union. The strike, which is believed to be the largest in the industry’s history, included work stoppages in regions of the country which had never seen concentrated fast food labor activism before.
Toggle Commented Aug 29, 2013 on Links for 08-29-2013 at Economist's View
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I also agree that some of the PKE, M.M.T, MMR, etc. criticisms of monetarism and other mainstream schools are off base (for example, I rarely see any of the popular writers from those schools dealing with any of the other channels). That's why even if I sometimes doubt your conclusions Mark, I really enjoy reading your comments and sometimes engaging with you. You are probably the most demanding commentator when it comes to being able to present an opposing argument. This is very valuable.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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I agree with you about the accounting identity nature of the money multiplier and that's why I wrote "If the algebra above is being portrayed as simply a description of how the money supply can be decomposed into its constituent parts like the money base the Fed adjusts in its attempt to hit a federal funds target rate (pre-2008), excess reserves, etc. I don't really have a problem with this." Also agree that it is important to have an understanding of how the various parts of the equation interact. I think that is what the author "JKH" in the link above is trying to do, albeit descriptively, rather than algebraically. My problem is that Professor Krugman seems to endorse the proposition that commercial banks lend out reserves to non-bank retail customers. I don't think this is correct and the fact that it is incorrect has implications for at least one of the nine "channels" you and Mishkin describe as paths through which monetary policy affects variables of importance to the general public like output, employment, etc. (the credit channel). If QE increases reserves by a great deal, at least a simplistic reading of the money multiplier story, would indicate a large increase in the provision of credit should be expected to be forthcoming. I believe JKH's description is a good explanation of why that increase in credit provision won't materialize, at least not from commercial banks.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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I like the Mishkin textbook and appreciate your recommending it on the website here. It is very clearly written and I generally find it has appropriate qualifications. The Samuelson textbook does not have much in the way of appropriate qualifications when it comes to the money multiplier story. Maybe because it is fairly old. Most of the textbooks I've seen are from the early 2000's, as that is when I was an undergrad. The high school and AP curriculum for NY at least also does not spend nearly enough time on the appropriate qualifications and definitely gives the impression that increasing a bank's access to reserves will directly result in that bank loaning those reserves to its commercial retail customers. When I was teaching, I did what I could to present a more nuanced view, but its difficult because kids, for the most pat, like black and white answers that will translate into better grades on the AP test. Frankly, I don't think Professor Krugman has been helpful in his debate with Cullen Roche at least in presenting a more nuanced view of how bank lending works.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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I'm also curious how you market monetarists (I think that's how you characterize yourself, correct Mark?) describe the continuous decline of money multiplier going back to the 1990's depicted graphically here: http://research.stlouisfed.org/fred2/series/MULT And what that means for monetary policy effectiveness. Is it your position that we should be using a broader money supply measure like M2 and the if we would do so the relationship between the monetary base and the broader money supply would be stronger? Or is there something else? I'm pretty ignorant of what the market monetarists think of the money multiplier story.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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Thanks, yeah, I just noticed that right before you posted. I actually had it correct initially, but when I posted my comment it didn't show up the first time. That was really frustrating because unlike anne is always recommending people do, I did not save the comment before hitting the post button. I had to re-write the comment from memory and was rushing. I broke the comment up into two parts because typepad was not letting me post it together. Do you know if there is a size limit to comments? I didn't think the whole comment was that long, but I don't know why else it won't let me post the two comments above as one.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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If the algebra above is being portrayed as simply a description of how the money supply can be decomposed into its constituent parts like the money base the Fed adjusts in its attempt to hit a federal funds target rate (pre-2008), excess reserves, etc. I don't really have a problem with this. But usually textbooks (especially undergrad textbooks) will portray some sort of direct causation from an increase in the money base to the broader money supply. For example, on page 527 of Samuelson’s 2001 textbook the author writes “for every additional dollar in reserves (provided by the Fed) banks create $10 of additional bank deposits or bank money.” This implies a commercial bank will lend reserves it receives from the sale of say a treasury bond, for example, to the fed directly to its retail customers. At least that is the way I find most readers interpret the passage. I don’t think this is an accurate operational description at all of the way the banks operate. For my opinion of what an accurate description looks like, see the article I link to above.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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This is from Mishkin, p. 415 (which I bought about a year ago at your recommendation btw): m = 1 + (C/D) / [(RRR + (ER/D) + (C/D)] where: m = the money multiplier C = currency held by the public D = checking deposits RRR = required reserve ratio ER = excess reserves
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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Agree on your larger point though that you have to look at the whole life of a loan, rather than just the point of creation. JKH's "Loans Create Deposits--In Context" http://monetaryrealism.com/loans-create-deposits-in-context/ is quite good (but as always, a bit overlong) on this point. So yes, I understand that while banks do not lend reserves to their non-bank customers, they do lend and borrow reserves in the interbank market and these revenues/costs do play a role in a bank's liquidity management operations. In general, I have to admit I'm a bit confused about the substance whole Roche/Krugman debate. Coming from the perspective of someone who has taught introductory economics, I wish Professor Krugman could just come out and say clearly commercial banks do not lend reserves to non-bank customers, rather than engaging in this hand-waving: I understand (and understood all along) that banks don't actually lend reserves, but was using and will continue to use "lend reserves" as a "shorthand" (shorthand for what exactly, I'm still not clear on). If Professor Krugman were to do that, then maybe he could also get behind an effort to start reforming the way the money multiplier model is taught to intro economics students. As someone who has had to teach AP Micro and Macro economics to high school students, I can tell you first hand the impression pretty much every student gets from the way the money multiplier is presented in the standard curriculum (NY curriculum anyway) is that banks loan out reserves to their non-bank customers. That's frustrating and it is difficult for me at least to present a more nuanced view about how money market account managers serve different functions in banks than loan officers when the textbook paints such a such a clear (but misguided) picture of how money creation occurs.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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I hate to be a nitpick, but I believe you are confusing credits and debits in the second part of your sentence: "It's true the bank begins by crediting a new liability on the books, rather than by handing over assets and debiting the asset account." Bank A makes a new loan to customer Z. Bank A credits (increases) customer z's deposit account (a liability for bank A and an asset for customer Z). The first part of your sentence is correct. However, when bank A credits customer z's deposit account it does not have to CREDIT (decrease) any pre-existing asset in its asset account. The substance of your claim is correct, but the terminology is wrong. "Crediting" an asset account subtracts from that account. "Crediting" a liability account adds to that account. It's confusing because the same word means the opposite thing, depending on whether you're talking about an asset or liability account. Same deal with the word "debiting." Debit a liability account means "decrease" from that account, but debit an asset account and you are increasing it. http://www.accountingcoach.com/online-accounting-course/07Xpg02.html
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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Also, in the same comments section, commentator "Ramanan" defends the same Tobin paper Professor Krugman mentions from another more hostile commentator: http://monetaryrealism.com/bank-reserves/#comment-31940 In national accounts the central thing is production activity and hence banks are intermediaries. Silly adamance on the use of the phrase “intermediaries” in your comments. “Do you now see why he fundamental does not understand system?” You randomly pick some statements and are trying to prove you are Holier Than Thou. There is a specific historic context to all this. A bank of course is limited in lending if it cannot attract deposits. The cost of deposits matters. Try opening a bank – why would anyone lend you at market rates. You need credibility in the markets. So of course for a single bank, there is a theoretical maximum. Even borrowing from the central bank is limited by the amount of collateral a bank can provide. Around the time it was thought that interest ceilings would limit the amount of lending by banks. It took experiments by the Federal Reserve to see that this is not the case. Plus – in the next page Tobin does say a bank can borrow reserves from the central bank and hence is not constrained by reserves and also that the textbook description is misleading. Do you have any writing by M.M.Ters in the 1970s? Were they born with an understanding of money? If you are simply interested in “loans create deposits #enufsaid”, good luck! Anyway better attitude here http://bilbo.economicoutlook.net/blog/?p=9574
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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I would like to highlight a point a commenter named Nick Edmonds at "Modern Monetary Realism," (a website Cullen Roche contributes to) that is relevant to the Krugman piece "Commercial Banks as Creators of Money." The article above the comment is rather long, but is also a very informative addition to the Roche/Krugman debate. http://monetaryrealism.com/bank-reserves/#comment-30742 ...One important difference between a bank loan and any other loan is what happens to the lender’s balance sheet. With a non-bank loan, the lender starts with an asset (monetary or otherwise), and in the making of the loan exchanges that asset for a different asset, being the rights against the borrower (ignoring accounting issues about whether de-recognition is appropriate). With a bank loan there does not need to be an asset to start with. When the bank debits its loan ledger, it can do so by crediting a liability (the deposit account), rather than having to credit another asset. Now, we could have a system whereby lending always involved reserve transfers. For example, we could imagine that borrowers were prohibited by regulation from holding accounts with their lending banks, so that loans always had to involve transfer to another bank. If all such transfers were then on real time gross settlement, then every loan would indeed involve the lender exchanging one asset (reserves) for another (rights against the borrower). In that scenario, I think there is a sense in which banks could be said to be lending reserves. However, there is a common understanding that when A lends something to B, that means that B has use of it for the period of the loan and not A. That perception may or may not right, but the problem is that if you say that banks lend reserves, many people think that implies that bank is giving the borrower use of some reserves for the period of the loan. That is not what is happening. The reserves are only used for settlement. If I lend you my car, you have use of my car and I don’t. Even if you lend it on to someone else, only one person can ever have use of it at one time. Stock-lending means that the total of all long positions in the stock can exceed the amount of stock in issue, but only one person receives the real dividend and gets to exercise the voting rights. There are no rights or benefits attaching to reserves that could accrue to a borrower during the term of loan that might suggest that the borrower has use of the reserves in that period. The problem with saying that banks lend reserves is that it suggests that the lender is faced with a choice of using the reserves itself or lending them out. This is clearly wrong. Banks need reserves to settle the loan payments; they don’t need them to support their outstanding loans. If a bank wanted to make some new loans, it would never have to consider calling some existing loans in order to get back the reserves to do so. The reserve function is as a flow, not a stock.
Toggle Commented Aug 25, 2013 on Links for 08-25-2013 at Economist's View
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You raise a good point Mark. If interest rates on treasury bonds rise, the spread between spot and forward prices on future repo contracts would diverge, perhaps sharply. How much of a divergence would be based on a number of factors such as the settlement date of the contract, inflation expectations, etc. I was just a baby during the Volcker era and have not done any in depth reading on the effect Volcker's policy had on the repo market. I don't suppose you have any links to interesting papers in that library of studies of yours, do you? On a broader level though, I'm not sure how effective a counter-example Volcker era policy is. The language you quote Mark was too strong on my part. I agree with you that a truly committed central bank can arrest inflationary pressure in the broader economy (obviously there are real world examples of central banks doing so; the Volcker era being the prime example). However, I think the existence of a well-functioning repo market, a pre-existing supply of liquid marketable securities, and a stable financial sector are mitigating factors that can limit a central bank's ability to control the price level. If a central banker like Volcker has to inflict 10.8% unemployment on his (one day perhaps we'll be able to say or her) country in order to tame inflation, I wouldn't call that kind of monetary policy successful in controlling the price level. You've been critical of Volcker in the past so I think you might agree.
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"In a near credit economy, the worry about "money" aggregates is overblown, IMHO." A corollary to this is that rather than being "confident the Fed can do this (prevent inflation)," we should examine other means of regulating the price level. I am not sure how open Dr. Thoma is to an idea like this, but among prominent New Keynesian he has been amongst the most skeptical of the Feds powers in the current recession. I wonder if he would be open to ideas like a financial transactions tax, a real estate tax, or even something creative like Lerner and Colanders "Market Inflation Plan" http://cat.middlebury.edu/~colander/articles/real_theory_inflation.pdf as ways to control the price level. Of course, these things could be supplementary to any action the Fed takes. IMHO, too many post-Keynesian and other heterodox economists paint these ideas as an either/or proposition. I'd be particularly interested to know if Dr. Thoma has ever engaged with the MAP idea.
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"Having the money stockpiled and available makes people and businesses feel safer in bad economic times, but once things improve there's a danger that quite a bit of the pent up demand could hit the marketplace all at once creating large upward pressure on prices. So long as the Fed can vacuum up the money through open market operations, or hold it in place with mechanisms such as paying higher interest on reserves as conditions improve there won't be an inflation problem." I am a bit skeptical of Dr. Thoma's analysis here. A hypothetical federal open market operation conducted to constrain inflationary pressure would involve the Fed selling financial instruments (presumably treasury bonds) from the asset side of its balance sheet. The buyer would receive a bond and reduce its reserve liability (assuming the buyer is a bank. I think, but could be mistaken, all primary dealers that engage in transaction with the Fed are banks. If I am wrong and individuals or businesses can transact with the fed, they would get a commercial bank deposit, not a reserve). So the buyer will now have a treasury bond asset. If there is a great deal of demand in the economy, what is to stop the new treasury bond asset holder from simply entering into a repurchase agreement to obtain either cash or more likely access to a commercial bank deposit? Treasury bonds are the most liquid financial assets. I don't really see a good reason why a bank, business, or individual holding one kind of "money" (commercial bank deposits or reserves) should be any more or less inflationary than holding another kind of money (treasury bond), given the existence of a stable and functioning repo market. In general, I tend to view inflation as the result of too much demand for goods and services running into some supply constraint. In a near credit economy, the worry about "money" aggregates is overblown, IMHO.
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"The point about the difference between the monetary base and the money supply is important. Money piling up in banks is not inflationary, it has to be spent to create the demand needed to force prices up." Exactly right and not nearly well enough understood. Although, it doesn't have to be just "money piling up in banks." Whenever I meet someone hysterical about the increasing money supply, I like to ask them if they are a Simpsons fan. If they are, bring up the example of Mr. Burn's trillion dollar bill. As long as that bill sits in Mr. Burn's glass case, it doesn't have any affect on the economy. They usually get that. =)
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