The Center of the Universe

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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Canadian success story…

Posted by WARREN MOSLER on November 22nd, 2010

Doesn’t look like Canada was all that immune from the crisis to me?

Ok, their banks didn’t fail or need data transfered from one account at the Bank of Canada to another to keep them open for business.

So what? Look what happened to unemployment- real life for real people.

And it’s still a good 2% higher than it was only a couple of years or so ago.

And we are in a resource boom.

Yes, unemployment benefits are said to be generous, so out of work people maybe don’t suffer as much financially as in other places. But taking them at their word, and if history is any guide, they would take a job at reasonable pay and produce useful output if there were jobs available.

Yes, their federal budget deficit remains too small/ unemployment too high.
And they aspire to sustaining a federal budget surplus and high net export revenues, which, if successful, means reduced real terms of trade and a standard of living lower than otherwise.

My proposal- offer a national service job to anyone willing and able to work that pays a bit more than unemployment, and then cut taxes or increase public spending (depending on politics/needs) until that pool of labor in that national service job gets down to maybe 3% of the labor force, which will also coincide with a pretty good measure of what the current full employment deficit is.

19 Responses to “Canadian success story…”

  1. Mr. E Says:

    And use the monetary channel to control lending levels.

    I have been wondering what a target level of lending leverage should be for any economy. We talk much here about the superiority of the vertical channel for aggregate demand support. However, we do not spend as much time talking about the effect of bank lending.

    Minsky’s main idea was that booms create the conditions that result in panics, largely through the lending channel. Expecations of good times lead firms to over lend and over borrow, and these loans turn out to be unsupportable in bad times. So, any economy would want to constrain lending during good times. My question is: What is that appropriate level of lending.

    I consider leverage in the economy to be total lending/total deficit. It is a rough guide, but heck at this point, I don’t have any other metrics to go on- so I made this one up.

    If you look at total debt in the U.S., we are about at 500% of GDP. Our public debt is about 100% of GDP. So we’re at 5X leverage. Every trader knows that 5X leverage is a huge amount of leverage over an entire fund. For an economy, 5x leverage is impossible to sustain.

    But what is sustainable? What is a good ratio?

    Re: Canada

    They can run this low surplus deficit regime because it is funded by oil. Take away oil and they would be screwed. they happened to run into a massive oil price runup which has sustained their housing bubble. You’ve seen the vancouver “Crack shack or million dollar mansion” website right?

    http://www.crackshackormansion.com/

    good for a few laughs

    Similar Houses sell in Hammond, In for about $40-$60k Vancouver must be pretty nice.

    Reply

    Adam Short Reply:

    Warren:

    I don’t mean this as a criticism but am truly curious – it seems that given the number of articulate experts you have at your disposal through CFEPS and your other alliances, why isn’t there someone on TV talking about this more regularly?

    I would think with the right PR company (Kearns and West is probably the one, but there are others) you could get much, much more exposure for these ideas at this point in history, and for a very small amount of money.

    I heartily recommend you guys look into some sort of coordinated PR strategy because I would love to see you on TV and in WaPo/NYT Op/Ed pages on a more regular basis. Cut down on my heartburn.

    APS aka RG

    Reply

    WARREN MOSLER Reply:

    right now none of us have the $ to spend on PR, but donations welcome!

    Reply

    WARREN MOSLER Reply:

    If the lending in the economy is causing an inflation problem, there is a political imperative to address it.

    If it’s somehow just keeping the real economy going at full employment any actions taken to reduce lending and aggregate demand would need to be ‘replaced’ by a fiscal adjustment, unless full employment in the real economy isn’t a priority

    Reply

    Keith Newman Reply:

    Mr. E @ 10:35

    Ha! Ha! Ha!
    Very funny!
    Actually oil (mostly), but also natural gas, hydroelectricity and various kinds of rocks (copper, gold,etc…)

    Reply

    Ralph Musgrave Reply:

    Re the “target level of lending”, lending involves forgone consumption. The optimum level of lending is the level at which the pain or disutility of lending equals the utility or benefit derived from borrowing. Or to be more exact, it’s the MARGINAL cost and benefit that need to be equalised.

    The above optimum is not attained if we allow fractional reserve banking and maturity transformation, two of the main activities of commercial banks. Reason is that the two latter activies create funds for lending out of thin air. In other words we need to go way beyond Basle III, and demolish large chuncks of the banking industry.

    The assets and liabilities of the banking industry have multiplied about ten fold in real terms in the US and UK over the last twenty years: to what benefit, I don’t know, apart from creating a load of cr*p like NINJA mortgages and CDOs.

    The reduction in aggregate demand caused by a wholesale attack on the banking industry (contrary to what banksters will tell you) can easily be made good by creating and feeding monetary base into household pockets.

    The governor of the Bank of England, said recently: “Of all the many ways of organising banking, the worst is the one we have today.”

    Reply

    zanon Reply:

    Ralph: we do not have fractional reserve banking (in that reserves do not contrain lending) nor do we have maturity transformations, because banks do not take liability of one maturity and transform them into asset of different maturity.

    what we have is a banking industry that does not care whether loans will be paid back.

    Reply

    NKlein1553 Reply:

    Hey Zannon, I’ve got a quick question I thought you might be able to answer. Recently I’ve seen a lot of commentary about how the latest quantitative easing operations are causing, or are going to cause, large problems for third world countries due to carry trades or other mechanisms that will lead to “hot money,” pouring into undeveloped markets causing asset price inflation, adverse currency adjustments, and other such things. Obviously I think such commentary is misguided because quantitative easing operations, as currently envisioned by the Fed, merely swap longer term Treasury Bonds for short terms reserves and as JKH has put it, these reserves are “trapped,” in the interbank market. That is, as you and others have taught me, reserves are only used for interbank settlement purposes and are not “lent out.” Therefore, quantitative easing operations cannot, in and of themselves, be the cause of carry trades, hot money, and other such things.

    However, recent data others have pointed out to me does seem to indicate an increase in carry trades and other such speculative behavior of late. I have responded to this data by stating one possible interpretation for why this may be occurring is that quantitative easing operations do reduce yields on longer term bond investments and this in turn has caused investors to look to other markets (perhaps abroad) to gain access to higher yielding investment opportunities. I was wondering if you would agree with this assessment. Or if not, what is your explanation for the recent uptick in carry trades and other speculative activity? Thanks for your help, or anyone else’s.

    Ralph Musgrave Reply:

    Zanon: “we do not have fractional reserve banking (in that reserves do not constrain lending)”. Agreed. I was using obsolete ideas and terminology (suitable for people who have not caught up with how banks work, i.e. the majority of the population). For the benefit of Centre of the Universe readers I should have said something like “the loan of money created out of thin air by private banks leads to an above optimum level of lending”.

    Re your claim that private banks don’t do maturity transformation (MT), about 95% of economists think that thay DO, (i.e. that banks borrow short and lend long. So I’d like to know why you think banks don’t do MT. I appreciate that an individual bank when considering a request to lend $X does not make sure it has $X of excess deposits before granting the loan. In that sense there is no MT. But long term, an individual bank (or a shadow bank industry firm) cannot lend willy nilly. I.e. each bank has to make sure its deposits expand at about the same rate as loans, doesn’t it?

    WARREN MOSLER Reply:

    banks try to optimize their return on equity. they compete for and try to make all the good loans they can, up to the limits of their capital. then they try to raise more capital

    banks can fund loans after they make them

    banks aren’t allowed by regulation to have a duration gap.

    NKlein1553 Reply:

    I’m also curious about how MMTers interpret maturity transformation. I’m pretty sure I’ve seen Mr. Mosler make mention of the phrase on several occasions, although I can’t provide links.

    In regard to deposit growth matching lending growth, my understanding of the MMT position is that on a macro-economic level it is a non-issue. The act of loan creation itself creates the deposits necessary to match the credit extension process. The Fed will then come in and supply reserves as necessary for commercial banks to meet their reserve requirements so that the Fed can hit its Federal funds Rate target. For example, see part two of this post by Winterspeak:

    http://www.winterspeak.com/2010/02/post-keynesianism-in-nutshell.html

    “When a bank makes a loan it does not drawn down a deposit. It simply creates the loan and credits a receivable asset. This then creates credits a deposit liability at some other bank in the system. If these two banks are the same, then nothing further happens…”

    Here is how I interpret these sentences:

    Assume there are three parties to the credit extension process; Bank A, Bank B, and customer Klein. Customer Klein takes out a loan from Bank A.

    It is only because customer Klein may deposit the newly created money he has received from Bank A’s loan in Bank B that bank A would be short reserves and would have to go looking for additional reserves in the interbank market or, if necessary, go to the Fed discount Window. If customer Klein doesn’t deposit his newly created money in a different bank, then Bank A will not have to go looking for reserves. While this is a very unlikely scenario because customer Klein presumably took out a loan to spend money on something and the act of spending will transfer deposits from one bank to another (assuming the entity he purchases something from doesn’t shop at bank at the same financial institution customer Klein does), on a macro-economic level this shouldn’t make a difference. The act of creating a loan itself is what expands the deposit base. The Fed always provides the additional reserves necessary to match that deposit expansion so it can hit its Federal Funds Rate target.

    I hope that was a coherent explanation. I’m sure someone will correct me if I’ve made mistakes.

    Jill K Reply:

    Gasp!

    zanon Reply:

    Nklein: I was once in hedge fund industry. what i remember is that sometime it is market, and sometime it is oligopoly. what i mean is that russia default on rouble, and all of a sudden brazillian textile mill cannot roll over its corporate paper. what is connection between russia and brazil cotton? In real terms, nothing. But their financial intermediaries in both case are hedge fund, and suddenly you find siberian tractor equity is correlated with brazil underpant manufacture.

    my point is that with hedge fund, it is all very technical. it is certainly possible that “quest for yeild” may drive up any number of asset, and rising asset price create further asset price increase you get gets bubble.

    Still, developing country can manage FDI if it governs itself well. if it governs itself badly, then it screwed no matter whats.

    Ralphs: Required Reading has all of this well documented. Basically, a bank is capital constrained not reserve or deposit constrained. So, when considering a new loan, in short term bank wonders if it has required capital to make it, in longer term it sees if profitability of loan is above cost of capital required to make that loan. As Nklein says, loan gets extended, so the long term asset (receivable) created out of this air, and this then generates short term deposit somewhere else in system, and reserves shift to make sure all checks are clear. In no instance is bank taking any form of short term liability and “transforming” it into long term loan, which is what “maturity transformation” means.

    operationally banks do a lot of liquidity management to try and balance maturity of asset and liability. most do not like to operate in ON IB market, or worse at discount window. But this maturity matching is operational, like keeping your oil changed. It does not drive or enable lending, like having petrol in tank. That is capital

    Jill K Reply:

    Sorry. That gasp was meant to be in response to Zanon who said
    “what we have is a banking industry that does not care whether loans will be paid back.”

    That’s a weird thing to say.

    zanon Reply:

    Jill K: What is weird? Securitization means you don’t care if loans will be paid back, you only care if they will be given good rating by Moodys and then moved off your books.

  2. Joe Canadian Says:

    Mr Mosler,
    I live in Canada. Thank you for calling out the Canadian ferry tale story of “how great Canadians are going”!

    I often used a simple test to see how Canadians are aware of how bad we are doing, I ask them: what is the unemployment rate? Most of them, believe it or not, would typically respond “between 4% and 6%”!!

    8% unemployment rate is total and complete disaster. Canadian economists are covering themselves in ridicule by calling this “the new natural rate”!!

    Reply

  3. Elli Davis Says:

    I don’t want to look like a person who cannot sympathize with those losing their jobs, but come on, two percent rise during the times of crisis is not so bad at all. Certainly I am not hinting that there shouldn’t be measures taken to get the unemployment level down to 3% or so. Just let’s not be too sceptical about Canada’s economic performance.

    Reply

    WARREN MOSLER Reply:

    If Canada ever got it right unemployment would always be under 4%, best I can tell

    Reply

  4. Keith Newman Says:

    For those interested, the Canadian Labour Congress has done an analysis of the Canadian labour market: http://www.canadianlabour.ca/sites/default/files/pdfs/recession-watch-04-winter-2010-en.pdf

    Reply

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