Guest on Reuters Insider

>   
>   (email exchange)
>   
>   Hi Warren – No, its not live. It’s going to be taped in two separate segments, and probably put
>   up on the platform on Monday. FYI, its not cable TV, but internet. We also do live shows, infact
>   most of them are live. We did a live FOMC show this week on Tuesday which included former
>   Fed governor Mark Olsen and and Bill Ford from the Atlanta Fed. We wanted to have you
>   appear on that occasion but the timing didn’t work.
>   

Link will be posted when available.

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226 Responses to Guest on Reuters Insider

  1. Winslow R. says:

    Combining the Fed/Treasury might provide small benefits in terms of clarifying monetary operations, but would likely need to be preceded by a struggle to eliminate the Fed’s ‘slush’ funds supporting neo-classical research into the importance of an independent CB.

    Reply

  2. Tom Hickey says:

    Strategically, I think that Anon is correct in recommending that MMT’ers propose the changes necessary to align Treasury/cb ops with the operational reality of the currency monetary system most effectively and efficiently. (Scott’s general case).

    I also agree with Scott that MMT’s should be making policy-makers aware of how to use the existing rules to run an MMT-based approach to fiscal and monetary policy. It is quite obvious from past behavior that governments, cb’s, and international institutions will bend the rules and their mandates if need be. MMT can show them a better way to do this, which is consistent with operational reality and actually conforms to the rules. (Scott’s special cases)

    The problem with the latter “special case” approach, as we have seen from criticism of the Fed, ECB, etc., is political. Various factions typically attack such approaches as “cheating,” “overstepping bounds,” etc. As Warren observed, Treasury actually reacts to the rating agencies, even though there is no risk of sovereign default.

    Better to get a proposal out there that dispatches these kinds of reactionary forces with a comprehensive plan for change along with a complete rationale based on achieving full employment and price stability.

    I am thinking of something on the order of the position statements that Jamie Galbraith has submitted recently, e.g., to the Catfood Commission, organized with main points and a rationale for each.

    Others have done this, e.g., the Ron Paul End-the-Fed movement, and the American Monetary Institute, which has gotten as far as a bill proposed by Rep. Kucinich. Similarly Ellen Brown with the state banking proposal; there are initiatives to establish state banks in almost a dozen states last time I heard. These groups have strong political followings push their agendas.

    Reply

    ESM Reply:

    A lot more good would flow from “End-the-Ratings-Agencies” than “End-the-Fed”. And it would be easier to accomplish too. The problem with the Fed Dead-Enders is that most of them want to end the Fed for the wrong reasons.

    Reply

    Tom Hickey Reply:

    “The enemy of my enemies is my friend (for the time being).”

    Right now central banking is the greatest threat to liberal democracy and national sovereignty. This is where global integration under a command system is emanating from.

    Reply

    WARREN MOSLER Reply:

    i’d say the largest threat is from the failure to understand monetary operations

    Tom Hickey Reply:

    Warren, I agree on that economically. However, I am concerned about the political threat that cb independence and interdependence among cb’s constitute. I am sure that these people are well-meaning, and I agree that the direction is toward increasing globalism, but I don’t trust the direction they are taking to get there.

    If they understood monetary ops, that would be a help. but there is still Rodrik’s trilemma to deal with, and I think they know this and have an agenda to force increasing integration at the expense of either national sovereignty or liberal democracy, since the three can’t all exist together. This is clear in the case of the EU/EZ, for example.

    anon Reply:

    agree on the rating agencies

    and I think the institutional investors who bought ABACUS were much more the problem than Goldman who shorted into it

    the two are related in a way

    Reply

    vjk Reply:

    Agree many times over on rating agencies. Not entirely sure about the Fed/Treasury fusion.

    Agree on Abacus style CDS “products”. The level of not only financial but commonsense ignorance of the “investors” who bought Abacus is beyond belief.

    Re. shorting. Actually, it was Paulson, not Goldman, who shorted it with GS being the “facilitator” of such shorting. I vaguely recall that Goldman lost some small change(couple hundred millions)in the Abacus game.

    anon Reply:

    right, although Goldman was the one punished for brokering/enabling the short – same in principle

    ESM Reply:

    Yeah, but the SEC complaint was largely frivolous. ABACUS was a synthetic CDO, meaning that it was composed entirely of credit default swaps, and therefore a zero-sum game. If there was to be a long, there had to be a short.

    Something similarly stupid happened during the hearings where Lloyd Blankfein testified. One congressman was horrifed to find out that when a client bought a stock from Goldman, Goldman was in fact selling that same stock at the same time — to the client of course.

    Just for the record, I am no fan of Goldman. I think their influence within government (not just the US) is unseemly, and I think their reputation for screwing clients is well-deserved. But the stuff the government attacked them on was almost designed to make Goldman look better.

    WARREN MOSLER Reply:

    agreed.

    anon Reply:

    “Yeah, but”

    ?

    I agree, as per my previous

    beowulf Reply:

    I am thinking of something on the order of the position statements that Jamie Galbraith has submitted recently, e.g., to the Catfood Commission, organized with main points and a rationale for each.

    A good speech can change minds, but it takes an Act of Congress to change the law. One thing I give Kucinich credit for is that he (after much procrastination) introduced a bill (the NEED Act). Nothing gets rolling until its put on paper. Once a bill is drafted (and a Member found to sponsor it) then there’s something concrete to bug the politicians to support.

    Al Sheahen of US Basic Income Guarantee wrote a great article about his efforts a few years ago to draft and then lobby for a negative income tax bill. Its worth reading since this is the sort of road any monetary reform bill would follow (hopefully with a happier ending). From a political science standpoint, Sheahan’s piece is pretty interesting, though clearly Sheahen should have called it, Congress Doesn’t Make A Law. :o)
    http://webcache.googleusercontent.com/search?q=cache:dPYANnacIksJ:www.usbig.net/papers/169-Sheahen-BIGbill.doc
    http://www.amazon.com/Congress-Makes-Law-Stephen-Bailey/dp/0231017413

    As for the Kucinich bill, leaving aside his bad policy choices, the bill is too long. Its could have been profitably cut by at least 80% (I won’t even bother linking it, a 10 page preamble? geez). The shorter the bill the better, its easier to explain and it decreases the hiding places for lobbyist to hide amendments.

    Reply

  3. anon says:

    SF:

    “going back to the original statement or attempt at one, how about “the Tsy can spend by crediting bank accounts in unlimited fashion at roughly the Fed’s target rate provided the latter is instructed to credit bank reserves in corresponding fashion (i.e., instructed to provide an overdraft to the Tsy) OR an arbitrage between the rate the Tsy can issue securities and the Fed’s target rate is sustained”?

    The latter would suggest that if such an arbitrage is not roughly sustained for any reason, then there is an economically significant difference between receiving an overdraft at the Fed’s target and issuing bills. At that point, the only recourse would be to require the Fed to provide overdrafts or for the Fed to purchase Tsy’s in the open market at an announced price roughly corresponding to its target rate.

    If none of those three occur–overdrafts at the target rate, issuing securities at an arbitrage against the target rate, the Fed purchasing at roughly its target rate–then I would grant that there is an economically significant constraint (albeit self-imposed, but a constraint nonetheless) on the Tsy’s ability to credit bank accounts. (And, in fact, this has been my position for several years now.)”

    generally OK with this, but let me go one level up first

    It seems to me that MMT has taken the existing “Rube Goldberg” monetary mechanism and demonstrated how it “really works” as per your description above. The option then is to identify that existing mechanism as that of a currency issuer, as per your statement about crediting bank accounts. The idea being that the government is really not financially constrained despite all of these self-imposed contraptions. Then some (most?) in MMT seem to say – that’s what it is and we’ve show that’s what it is, so what’s the point in saying that it needs to be changed?

    I look at it a little differently. I look at the banks and their customers and then I look at the government, and what I see is a set of agents all with cash management disciplines, all defined by deposit account relationships with (other) banks. I then define all of those entities as currency users. The only entity that is not a currency user is the central bank, which is a currency issuer. I would go further and define commercial banks as both currency users (reserves) and currency issuers (deposits created by loans, viewed as a private sector peripheral extension of the central bank’s core ability to create currency).

    In the case of the government, MMT looks through that arrangement and suggests properly for the most part that it doesn’t really impose any financial constraint on the government, at least not in nearly all cases.

    I have two problems with that general approach to design for the monetary system. The first is perception, particularly by those market agents who don’t understand MMT. If there are actually people out there who think that the government can go “bankrupt”, then those people logically would think (in theory at least) that the government can run out of money in its Fed account because “nobody will want to buy our bonds.”

    So I look at that and ask what’s the harm in proposing a change to the system which assists in eliminating that perception? MMT shows how it actually works and that its not really necessary to change the system – but why not change the design just to make it that much clearer as to how it works? What do you have to lose?

    The second point is that unfortunate interruptions in the existing mechanism are still possible. These are things that can complicate treasury’s cash management function, in theory or practice. I see Warren made the point that auctions fail all the time, although I don’t quite understand it. But consider a “bond market crisis” of sorts in which a 30 year auction fails. Maybe treasury/Fed would smooth it out very quickly with TTL transfers, other mechanisms, etc. But the point is that the existing mechanisms contribute like a catalyst to the misperception by the market that the government “can’t afford” to do what its doing and provide feedback to the market that the government “needs” to issue these bonds.

    So I think the MMT view is that there are enough ways around any potential blips that the system doesn’t require changing. My view is that changing the system actually reinforces the MMT understanding of how things work and gets rid of all the clutter in front of that view.

    One more technical point: One of the dimensions here is the notion of arbitrage per se. If reserves were priced at an overnight rate and if treasury only issued 1 day bills, then the conditions for arbitrage could be defined to near perfection. There would be no apparent reason for banks to avoid purchasing 1 day bills where the yield started to exceed the reserve rate.

    As soon as the term structure of treasury debt starts to deviate from the term structure of reserve pricing, then arbitrage formulation becomes more problematic, because it depends in part on judgements about expected monetary policy, which can be very heterogeneous across agents as wells as volatile over even short time frames.

    An extreme case where an auction might fail for example would be a bond market “crisis” in which buyers would step away simply because they’re not comfortable with the idea of trying to catch a falling knife. This is compounded to some degree by the fact that banks must allow for such risk explicitly in their capital management. These situations typically don’t last very long, but it does illustrate a pricing situation that differs dramatically from the simple no bonds reserve pricing that would be available automatically in an alternative monetary structure.

    More generally, my focus is really not the question of equivalent economics across different monetary design alternatives. Its more that proving or demonstrating equivalence becomes unnecessary when proposing a system that is streamlined to the point that such proof becomes moot. It seems to me there is no debate about these sorts of questions if the central bank is combined operationally with the treasury function. Sure the existing structure can be backed out as economically equivalent in most cases, but that’s not really my point.

    Reply

    Scott Fullwiler Reply:

    “I have two problems with that general approach to design for the monetary system. The first is perception, particularly by those market agents who don’t understand MMT. . . . ”

    Sure. No problem there.

    “So I look at that and ask what’s the harm in proposing a change to the system which assists in eliminating that perception? MMT shows how it actually works and that its not really necessary to change the system – but why not change the design just to make it that much clearer as to how it works? What do you have to lose?”

    Again, no problem there. My point was to show the conditions under which it didn’t matter in an economically significant way–i.e., that sovereign govt’s right now could do as MMT suggests they can. And that comes down to the interest rate. But, yes, that’s different from proposing the “optimal” For instance, as Warren notes above, he’s been proposing the Tsy only issue Tbills for years now “as the least disruptive way to get from here to there,” while, obviously, at the same time it isn’t what he has often proposed as his first choice even if the difference isn’t economically significant right now.

    “The second point is that unfortunate interruptions in the existing mechanism are still possible . . . . ”

    Yes, agree. That’s why I had to qualify with “if” above. Marshall and Rob in pvt emails believe that bond traders could disrupt things because they think govt needs to finance deficits. Ratings agencies, etc. So, they proposed operation twist 2 last year. I think that’s less likely, particularly if the govt only issues bills (a standing proposal from us for several years running for improving things operationally, by the way, even if it doesn’t go all the way), but the probability of some problem occurring isn’t 0 even then, granted.

    “So I think the MMT view is that there are enough ways around any potential blips that the system doesn’t require changing.”

    Again, I would state it more as the govt can right now behave as a sovereign currency issuer even if things aren’t optimal operationally. There could be problems, but they can be worked around if that happens–for instance, stop issuing notes/bonds, cb target the term structure, etc. Point taken, but recognize the different intent.

    “My view is that changing the system actually reinforces the MMT understanding of how things work and gets rid of all the clutter in front of that view.”

    I would agree. I think all MMT’ers would, too.

    “As soon as the term structure of treasury debt starts to deviate from the term structure of reserve pricing, then arbitrage formulation becomes more problematic, because it depends in part on judgements about expected monetary policy, which can be very heterogeneous across agents as wells as volatile over even short time frames. . . . ”

    For a 3-month Tbill, that has never mattered except during 1979-1982 when the Fed allowed the funds rate to fluctuate within a very wide band on a daily basis. But, yes, as you go further out, it matters more and more. And, again, I wouldn’t argue the probability of it not happening in 3m bills is 0.

    “More generally, my focus is really not the question of equivalent economics across different monetary design alternatives. Its more that proving or demonstrating equivalence becomes unnecessary when proposing a system that is streamlined to the point that such proof becomes moot.”

    Yes, no problem there. Again, though, we don’t want to tell Obama that he can’t do anything now because the system isn’t operationally pure in an MMT sense. He and leaders of other sovereign govt’s can get moving right now, and there’s little economic significance in the difference under the vast majority of scenarios–the ECB has even shown that non-sovereigns can get away with it when the cb decides to buy their debt, and that’s even easier for a cb like the Fed to do if necessary. Different point than the one you are making, which again I don’t disagree with, but hopefully you understand our approach, too.

    It seems to me there is no debate about these sorts of questions if the central bank is combined operationally with the treasury function. Sure the existing structure can be backed out as economically equivalent in most cases, but that’s not really my point.

    Reply

    ESM Reply:

    Agreed.

    The main problem of course (which Scott has alluded to) is that combining the Fed and the Treasury isn’t going to happen any time soon, and possibly not ever. We need some MMT-consistent action now — actually, we needed some 4 years ago. If it wasn’t for automatic stabilizers, probably accidently built into the system, we would be in some serious deep doodoo right now. Even so, the economy is still pretty stinky.

    Reply

    Scott Fullwiler Reply:

    “It seems to me there is no debate about these sorts of questions if the central bank is combined operationally with the treasury function. Sure the existing structure can be backed out as economically equivalent in most cases, but that’s not really my point.”

    Had to run so couldn’t respond to this. Completely agree. We’ve been arguing at cross purposes, obviously, and unfortunately (VERY sorry!), though I think it’s important to recognize that the two aren’t mutually exclusive (and I think you already do)–most govt’s are already set up to run functional finance policies, while at the same time there are or should be formal proposals for institutional changes that are preferable to current setups for the reasons you’ve given above.

    Reply

    anon Reply:

    I think it would be quite interesting if some of the MMT writers were to publish a little more on what a combined function would actually look like. (Maybe I’ve missed it but I think its normally treated as a consolidation perspective top level, based on existing pieces, without too much drilling down into a unified function.)

    The interesting point I think that I haven’t mentioned yet is that the operational “fusion” of the two balance sheets is only the “visible” accounting result. At the same time, some pretty important policy drivers lie beneath the surface, which is the strategic consolidation of a group within the government that would steer both fiscal and monetary policy at a unified level. I.e. the institutional independence of current monetary policy apparatus is effectively abandoned, which I think is fairly supported by MMT.

    At the same time, I can envision a portfolio management function that steers the mix of reserves, currency, and debt based on integrated government balance sheet management. From there you can look at the elimination of debt, if desirable, but all the options are open for complete government liability management under one roof.

    Reply

    anon Reply:

    SF,

    actually didn’t see your earlier when I wrote the above

    thx

    would just modify then, with the idea that there’s a dual track way of approaching this

    I appreciate the MMT approach that emphasizes the failure of many to understand what is in place now, apart from any idea of reconfiguration

    against that MMT context, it might still be interesting to see an essay of some sort or a chapter in a paper on pros/cons/necessity or lack thereof of changing the existing configuration – maybe something for the UMKC blog?

    WARREN MOSLER Reply:

    so the congress that decides to spend x and tax y sets up this arrangement of tsy/fed/self imposed constraints/etc. that sort of works ok most of the time to get the funds into the accounts of whoever sells its goods and services to the US Govt.

    it’s not that the govt. can become insolvent.

    it’s that the govt can fail to make payments because it’s tied itself in (k)nots.

    Reply

    anon Reply:

    :)

    Reply

  4. Tom Hickey says:

    This is a large body of literature. You’ll have to take my word for it unless you want to take the time to look at some it. And I suspect that there are others here to back me up on it. I find it hard to believe that no one else here is paying attention to this.

    Do they provide any evidence that oversight has been effective at detecting ponzi or fraudulent lending in time?

    Yes. Bill Black is a former regulator. People in the know were jumping up and down over this well in advance. Basically, the regulators were called off.

    Do they provide any evidence that an overnight interest rate set to 0 will not ALL OTHER THINGS EQUAL trigger more private borrowing than a strictly positive one?

    Not their concern, but none of them mentions rates as the problem leading to Ponzi finance.

    Reply

    MamMoTh Reply:

    I find it hard to believe that no one else here is paying attention to this.

    Me too. It seems all the little technical details about the Fed/Tsy operations are more interesting. Thanks for your answers.

    Yes. Bill Black is a former regulator. People in the know were jumping up and down over this well in advance. Basically, the regulators were called off.

    So supervision has been ineffective.

    Not their concern, but none of them mentions rates as the problem leading to Ponzi finance.

    It’s still my concern. I’m not saying low rates are the only cause of Ponzi finance, but that, all other things equal, you will have more Ponzi finance with low rates.

    I see the overnight interest rate as an instrument to reign in the amount of horizontal creation of bank money. A blunt instrument indeed, but an efficient one and not necessarily effective at preventing Ponzi finance.

    I can’t see what are the advantages of relinquishing that instrument.

    Reply

    Tom Hickey Reply:

    MamMoth: Black was a one of the S&L regulators brought in after the crisis. He is a lawyer and financial forensic specialist. Over 1000 people went to the pokey. So no one material in this crisis and Black is warning that the game of control fraud continues apace.

    Interest rates are relatively ineffective to regulate finance, especially when the game gets going. For example, if the Fed had raised rates to slow down the housing bubble, an effect would also have been to slow the economy as a whole, which would have been like trying to kill a fly with a hammer. Moreover, the Fed has not been willing to use rates to regulate finance anyway. The Fed doesn’t consider asset appreciation to be inflation, and raising rates is a blunt instrument that affects the entire economy.

    The problem was predatory lending and control fraud, as Black, Tavakoli, Smith and others were warning for some time, as early as 2004, I believe. Regulators took no action to prevent the bubble from forming and growing, when they were told where and how lines were being crossed. The problem was that the people in charge of regulation and oversight were neoliberals that believed all government intrusion in markets is unnecessary and detrimental.

    There was no need to slow the economy by raising rates when applying existing laws and regulations would have addressed the problem. The problem was intellectual capture (neoliberalism) and regulatory capture (subornation).

    From the Minskian vantage, the more effective way to prevent bubbles from forming is taxing economic rent to discourage rent-seeking rather than rate increases, as well as recognizing the stages of the financial cycle and increasing regulatory oversight as financial instability threatens. Instead, the cops on the beat were told to take a vacation.

    Reply

    ESM Reply:

    “The problem was predatory lending…”

    Real predatory lending was immaterial in scope. 99% of loans were quite beneficial to the borrower. It was investors who were hosed, not borrowers.

    ESM Reply:

    “The problem was that the people in charge of regulation and oversight were neoliberals that believed all government intrusion in markets is unnecessary and detrimental.”

    Oh, and for the record, I strongly disagree with this assertion. The problem was fundamentally caused by government. Creating a ridiculous system of skewed incentives and then expecting a patchwork of regulations to fix problems as they arise is completely unworkable.

    WARREN MOSLER Reply:

    and letting the deficit get too small

    and without the expansion phase of the sub prime thing, the last recovery would have been more like this one

    Tom Hickey Reply:

    The problem was fundamentally caused by government.

    Of course, government was the problem — after it was captured and rigged.

    ESM Reply:

    “Of course, government was the problem — after it was captured and rigged.”

    I think we agree there.

    Tom Hickey Reply:

    I can’t see what are the advantages of relinquishing that instrument.

    It is a costly instrument in terms of a subsidy for bondholders. Subsidies constitute dead weight and are inefficient. There are better uses of public funds for public purpose.

    If interest rates were proven to be an effective tool, I would agree with you. But they are not, which is another reason MMT’ers would like to get rid of this unnecessary subsidy.

    Reply

    Neil Wilson Reply:

    It’s more than a subsidy for bondholders. It is effectively an import subsidy – the currency sits at a higher rate than it otherwise would do.

    If that is the case then non-zero bond rates are what has created economies that live on the kindness of foreigners at the expense of domestic businesses.

    Which is a crazy way to run a shop.

    Tom Hickey Reply:

    IF that’s the case, Neil, then there can be government (cb) time accounts for the external sector with negotiated rates without borrowing in foreign currencies.

    WARREN MOSLER Reply:

    how about just leaving all govt liabilities as non interest bearing

    ESM Reply:

    Is MMT finally breaking through to Barry Obama?

    Government Lays Out Case Against Bonds

    Nope, doesn’t look good for poor Barry.

    Peter D Reply:

    LOL, classic :)

  5. MamMoTh says:

    Tom:Setting the overnight rate doesn’t mean that all interest rates and yield all go to zero.

    No, but it means interest rates will be lower than with a positive overnight rate. So the risk of excessive private sector indebtedness can only increase right?

    Reply

    beowulf Reply:

    Not really, since only banks can borrow at the overnight rate (well Tsy too since short term rates usually are in sync with Fed Fund rate). Since the Federal Reserve is in the price fixing business, if “excessive private sector indebtedness” is a concern, it has the authority to direct banks to increase prime rate markup over overnight (from current 3.0% markup) while leaving overnight rate itself alone. Since we’re at zero bound, the Fed could conceivably direct banks to cut the prime rate markup (until the late 80s, prime rate markup varied but averaged half what it is now).
    http://www.interfluidity.com/posts/1160447599.shtml

    Of course that’s crazy talk (most of the big banks have one foot in the grave and one foot on a banana peel as it is), but at the very least the Fed could stop banks from pricing loans based on LIBOR.

    Reply

    MamMoTh Reply:

    OK, I should have added all other things equal.

    Reply

    Tom Hickey Reply:

    Not really, because interest rate setting involves the Fed in anticipating inflationary expectations, which it is not particularly good at, and the overnight interest rate is a blunt instrument to boot. The market is quite capable of calculating, and it can be argued, better capable than the FOMC. Hayek makes a good case for this in “The Use of Knowledge in Society”.

    MMT holds that fiscal policy is more apt since it can be tightly targeted as well as codified, and adjusted as necessary iaw special circumstances, which politicians definitely hear about from their constituents.

    Tom Hickey Reply:

    According to MMT, private sector indebtedness (dissaving) is based on sectoral balances and fiscal policy iaw functional finance. MMT considers private sector indebtedness to be a function of demand leakage, e.g., due to a fiscal surplus.

    Problems with credit quality arise, leading to financial instability, and this can be addressed through regulation and oversight, as well as discouraging rent-seeking through taxation of economic rent.

    Reply

    MamMoTh Reply:

    Tom: Problems with credit quality arise, leading to financial instability, and this can be addressed through regulation and oversight.

    So you believe that it is more effective to deal with problems in credit quality with the oversight of thousands of technocrats than with a few technocrats setting the overnight rate?

    Is there any evidence that oversight has been effective at detecting fraudulent behaviour in time?

    Reply

    wh10 Reply:

    I think this is Elizabeth Warren’s crusade.

    I also believe that interest rates, while potentially a precipitating factor, were not the prime cause of the crisis. The crisis could have still happened without low rates. At the core, this was about mortgage lenders flipping loans, which were made with hardly any documentation, to banks for securitization and the resulting principal-agent problem (lenders end up not caring about quality and securitizers know these things are selling like hot cakes). I think the most obvious and direct way to address the crisis is to regulate the loan origination process. I don’t know the details of Warren’s goals, but I would imagine this is would be a component. You could also target the finance/derivatives/capital requirements side of the problem, but I think you would get a lot of push back from Wall Street and I still don’t believe this was the heart of the problem. You also risk stifling innovation/progress, though that is certainly debatable.

    Tom Hickey Reply:

    Have you been following William K. Black, Yves Smith, Janet Tavakoli, Elliot Spitzer, and others with intimate knowledge about this, including MMT’er Randy Wray? This has almost nothing to do with rates.

    MamMoTh Reply:

    No, I don’t have enough time for that.

    Do they provide any evidence that oversight has been effective at detecting ponzi or fraudulent lending in time?

    Do they provide any evidence that an overnight interest rate set to 0 will not ALL OTHER THINGS EQUAL trigger more private borrowing than a strictly positive one?

    If they do I’d appreciate any links.

  6. Neil Wilson says:

    “If a long period of low interest rates is one of the main causes of the current crisis,”

    That’s a big if. Low interest rates aren’t the main cause of the current crisis.

    Ponzi lending on an asset bubble caused the current crisis.

    It should be possible to design lending so that rates can remain low and projects can be given the capital to proceed – but it should be based on the capitalisation of an income stream not some asset.

    Reply

    MamMoTh Reply:

    As a point of logic, with lower interest rates you will have at least as much Ponzi lending than with higher interest rates, all things equal. Probably more. The subprime crisis started with a hike in interest rates, right?

    Reply

    Tom Hickey Reply:

    Low rates did not cause the crisis, although they may have played a role in it, and raising rates did not precipitate the crisis, although they may also have had a role in it, since many factor came together to create the perfect storm. But interest rates played a relatively minor role. See the voluminous work of Prof. William K. Black, for instance. Interest rates are barely mentioned.

    Reply

    MamMoTh Reply:

    Wynne Godley:
    The end of the housing boom was triggered by a very sharp increase in interest rates (to 15 per cent in 1989) that was necessary to combat rising inflation – and, hopefully, to protect sterling.

    Why Gordon’s Golden Rule is now history

    Reply

    WARREN MOSLER Reply:

    yes, and we discussed the interest rate channel more than once

  7. Ramanan says:

    this overarching view of flows by the Fed reinforces point part c), which is that the Fed is very separate from treasury in the process of adjusting system reserves in response to such flows – it is reacting to treasury’s impact on system reserves in total as a result of net system activity through treasury’s deposit account at the Fed

    Very well said.

    Plus to add to the discussion, there are no repos – atleast not in the scale of the auction size. The proceeds hit the TGA and then transferred back to the TTL. Its true that these are coordinated but in the sense you mentioned above, but its not a proof that their balance sheets have to be necessarily combined.

    Reply

    Ramanan Reply:

    Should add – during periods of high tax inflows, the TTL is not able to absorb due to shortage of collateral for keeping public funds (as pointed out by vjk) so during those times, more repos are done.

    Reply

    anon Reply:

    “Plus to add to the discussion, there are no repos – atleast not in the scale of the auction size. The proceeds hit the TGA and then transferred back to the TTL.”

    an important point

    again highlighting the operational nature of treasury as a “currency user” – there is no magical, inextricably linked reserve fusion of treasury and Fed operations just because of the auction settlement process – the Fed works around the treasury AND the treasury works around the Fed, in terms of cash management – and cash management as you have pointed out many times is a critical treasury function – and cash management defines it as an operational currency user

    Reply

    Neil Wilson Reply:

    To be a currency user cheques have to bounce at some point. When does that happen?

    Reply

    anon Reply:

    the actual operational rules define currency user:

    – positive balance maintained at the Fed
    – no overdraft

    your definition is arbitrary, based on the assumed treatment of a situation when the rules are broken

    but the intended meaning of the rules themselves is to define the operational role of treasury as currency user

    the rules define the role of currency user, not the treatment of rules broken

    as I mentioned before, Bill Mitchell has actually become quite precise on this point, over the past year – since “Marshall’s longest” – he qualifies this point more so now, which is a good thing – but better just to standardize the no bonds proposal

    Neil Wilson Reply:

    The reality defines the situation. Currency users get to the point where they can’t pay the bills.

    I ask again – at what point do the bills stop getting paid? If that never happens, then you have an entity that can ‘de facto’ spend before it earns.

    And that is a currency issuer.

    Matt Franko Reply:

    Neil,

    Don’t you know that we can’t break “The Rules”?

    Do you not value the concept of ‘Legal Precedent’?

    ;) Resp,

    Ramanan Reply:

    The way this is presented here is by saying that the Treasury and the Fed have created a complicated system to make sure that cheques do not bounce. That complicated system is cash management. Cheques do not bounce because the persons doing cash management do their jobs seriously.

    Of course the Fed won’t take the extreme step of bouncing the cheques but that doesn’t give the privilege to the Treasury on being careless about cash management.

    Its difficult for cheques to bounce because the Treasury has foreign reserves and other securities such as MBS which it can sell anytime in case its forecasts of revenue and expenditure go drastically wrong.

    anon Reply:

    “Currency users get to the point where they can’t pay the bills.”

    you’re just constructing an ever more layered definition to fit to your conclusion

    I can make up my own definition as polar opposite and say I’m a currency issuer because I can write cheques on a line of credit – it’s my action that’s created the money

    but a currency user is an entity with a constrained deposit account with a bank – even MMT admits to self imposed constraints

    sounds like you just want to contradict that and say self imposed constraints aren’t constraints at all

    and all I’m saying is make the whole thing a lot clearer than that obliqueness and obfuscation by using a standard banking based definition of currency user, and then rolling the central bank into treasury to make treasury a currency issuer – a bank basically

    that’s what MMT is really about – turning the fiscal function into a bank

    anon Reply:

    good comment Ramanan

    the intention of the current system is very straightforward

    and it conflicts with MMT’s desires

    SO CHANGE THE SYSTEM!

    propose it!

    stop being so indirect about it all!

    anon Reply:

    i.e. stop the wussiness now, MMT

    Neil Wilson Reply:

    “Cheques do not bounce because the persons doing cash management do their jobs seriously.”

    Cheques do not bounce because the amount of taxes that come in plus the reserve accounts which get swapped for bonds will always equal spending.

    Neil Wilson Reply:

    “but a currency user is an entity with a constrained deposit account with a bank”

    If I have a ‘constrained account’ and nobody ever stops cashing my cheques, then by defacto I have an unconstrained account – whatever it says on a piece of paper somewhere.

    The constraint is when bills stop getting paid – which they won’t due to the nature of the money circulation.

    anon Reply:

    “Cheques do not bounce because the persons doing cash management do their jobs seriously.”

    again, that’s exactly right

    that’s what makes the issue of government cheques bouncing a straw man in the context of this discussion – they don’t bounce inevitably because the treasury function follows its prescribed rules as a currency user that never surfaces the issue of testing whether or not they can bounce- that’s the whole point here – not that they won’t bounce if treasury happens to f*** up on its cash forecasting function

    anon Reply:

    “but its not a proof that their balance sheets have to be necessarily combined”

    not sure of your meaning there

    I haven’t said they need to be combined

    I just don’t see the point of MMT unless they are combined – for clarity, i.e.:

    a) elimination of central bank independence as a policy objective

    and

    b) elimination of any market perception that the combined entity would rely on borrowing – in fact the option could be totally left open as to borrow or to issue reserves – and that option would always exist as a matter of normal operations

    otherwise, the argument that auctions can never fail just because of pricing arbitrage, while not an unreasonable argument, has absolutely no dependence on understanding monetary operations or MMT – so what’s the point? You have those who say auctions can never fail and those who say the government is bankrupt – why not just make it obvious what the facts are via operational consolidation – with the ongoing availability of simply crediting bank accounts without borrowing as a normal course option?

    instead of all this other roundaboutness

    Reply

    Ramanan Reply:

    “I haven’t said they need to be combined”

    Yeah didn’t mean to say you said it.

    Reply

    anon Reply:

    I actually suspected not, just wanted to be clear

    :)

    ESM Reply:

    Sorry to intrude on your and Anon’s mutual admiration society meeting, but you guys are picking nits. Fine, I’ll concede that the Treasury is a currency user rather than a currency issuer, but I never claimed it wasn’t. I claimed it didn’t matter.

    The Treasury is a bill, note, and bond issuer, and my example showed that the Treasury can issue any number of bills it wants if given enough time to do so operationally. I have said explicitly that the Treasury can print bills like the Fed can print cash.

    Now, when you can issue as many T-bills as you want, which of course means you can acquire any amount of dollars, then you have unlimited (nominal) spending power. Personally, I consider bills and bonds to be money, if not currency, so the Treasury clearly has the ability to print money (of course, we all do to the extent that an IOU is money).
    In the Treasury’s case, this money will always be worth very close to its face amount in dollars.

    That’s a consequence perhaps of things exogenous to the current institutional structure, but my main point, and I still stand by it, is that nothing has to change and that MMT helps to understand why.

    Reply

    anon Reply:

    picking nits, or exposing a muddle

    there’s no way that time is an element in a operational “proof” that auctions can’t operationally fail

    can you please highlight your argument there again? thx

    Reply

    ESM Reply:

    There’s always some positive amount of reserves held by banks at the Fed which is earning whatever the Fed wants to pay on reserves overnight (which used to be zero). Suppose this amount is X. The Treasury can auction/issue T-bills up to X, although it would be prudent to issue T-bills only up to, say, X/2, so that the auction is competitive.

    The Treasury then spends the X/2 dollars it raised. The X/2 dollars ends up back in bank reserve accounts, and the amount of investable reserves is now back up to X again, and the Treasury can auction/issue another X/2 in T-bills (net). It may have to rollover any maturing T-bills, but that adds to investable reserves, and the maturing T-bills presumably would be rolled over into new ones.

    It’s a perpetual motion machine, although I suppose that if you had to rollover $10T T-bills with only $100B of reserves in the system, there might be some bank which held out for a higher yield and that could be costly. In theory there is no limit, although in practice I think that going up to $10T of T-bills could cause some problems that the Fed might want to take steps to mitigate.

    By the way, the availability of Fed repo for T-bills makes this process much easier, and in fact may allow the Fed to issue up to X or even higher than X in each step.

    ESM Reply:

    should have typed Treasury not Fed below:

    “By the way, the availability of Fed repo for T-bills makes this process much easier, and in fact may allow the Treasury to issue up to X or even higher than X in each step.”

    anon Reply:

    thx

    I do have problems with that sort of rationale

    first, there’s no reserve constraint on banks buying treasury debt directly; they can always borrow from the Fed at the end of the day – that holds for lending and it holds for treasury debt

    second, in normal times, pre-crisis, there is never a material build up of treasury cash at the Fed simply due to auction settlement; that’s empirically evident – the reason being that any material reserve drain from auction settlement itself can always be transferred back same day to the TTL accounts – it is for that the reason that the repo aspect is a red herring, since it doesn’t provide any meaningful cumulative reserve injection by the end of the day

    in any event, what you’ve described is not a proof that banks or bank customers will buy treasuries merely because of operational cash management arrangements

    on the other hand, as I said before, your pricing arbitrage argument in its generality is a reasonable one, but that’s got nothing to do with what you’ve described – all that’s saying is that somebody will buy if rates go high enough. I accept that roughly, although not completely – although I don’t feel its worth debating since its close enough to the truth in almost all circumstances

    Scott Fullwiler Reply:

    “on the other hand, as I said before, your pricing arbitrage argument in its generality is a reasonable one, but that’s got nothing to do with what you’ve described – all that’s saying is that somebody will buy if rates go high enough. I accept that roughly, although not completely – although I don’t feel its worth debating since its close enough to the truth in almost all circumstances”

    OK, so we roughly agree then (??).

    going back to the original statement or attempt at one, how about “the Tsy can spend by crediting bank accounts in unlimited fashion at roughly the Fed’s target rate provided the latter is instructed to credit bank reserves in corresponding fashion (i.e., instructed to provide an overdraft to the Tsy) OR an arbitrage between the rate the Tsy can issue securities and the Fed’s target rate is sustained”?

    The latter would suggest that if such an arbitrage is not roughly sustained for any reason, then there is an economically significant difference between receiving an overdraft at the Fed’s target and issuing bills. At that point, the only recourse would be to require the Fed to provide overdrafts or for the Fed to purchase Tsy’s in the open market at an announced price roughly corresponding to its target rate.

    If none of those three occur–overdrafts at the target rate, issuing securities at an arbitrage against the target rate, the Fed purchasing at roughly its target rate–then I would grant that there is an economically significant constraint (albeit self-imposed, but a constraint nonetheless) on the Tsy’s ability to credit bank accounts. (And, in fact, this has been my position for several years now.)

    Hope I’m shedding more light than heat.

    WARREN MOSLER Reply:

    auctions fail all the time

    Tom Hickey Reply:

    Ron Paul is right! End the Fed! Think of all the Ron Paul followers MMT can pick up. :)

    Reply

    Mr. E Reply:

    Warrens idea to go after this crowd was great.

    Reply

    Tom Hickey Reply:

    Seriously though, I think that the argument should be based on operational efficiency. There are many ways to change the presently existing rules to reflect operational reality, but why not go for the most efficient way by simplifying and eliminating that which is unnecessary, using Ockham’s razor?

    The Fed as it presently exists is not needed and can be eliminated by consolidating cb with Treasury. This would have a lot popular political support in the US as the moment, too. It also eliminates are the FUD about the Fed as a private institution, as well as the conspiracy theory about the Fed being a private institution through which the international banking cartel controls the US.

    Best of all it would end Fed “political independence” and put monetary operations under the aegis of a government agency responsible to elected politicians who are accountable to voters. It would also make it easier to set interest rates to zero, since who in their right mind would want government controlling interest rates and yields instead of markets?

    It makes a lot more sense to me to promote legally consolidating the Treasury and cb functions in a single government agency, issuing currency directly without the offset, and recognizing that the natural rate is zero than to jiggle with the existing system.

    In addition, explaining why this is the most efficient way to deal with the operational realities of the current system educates people about those realities and how to take advantage of them in order to achieve full employment along with price stability, which the mainstream presently thinks to be unachievable.

    Why not just demand the ideal instead of compromising off the bat? Maybe negotiations will lead elsewhere, but that is a political reality to be dealt with as it arises.

    That leaves MMT’s position regarding the external to consider. Dani Rodrick lays down the basics, I think, in The inescapable trilemma of the world economy. MMT needs to take a position regarding that trilemma, in which holds that democracy, national sovereignty, and global economic integration cannot all exist together. Two are possible but not all three together.

    MMT seems to hold democracy and national sovereignty, and presupposes that economic integration is also possible. If Rodrick is correct, that is a contradictory stance. Is there something wrong with Rodrick’s trilemma? It looks correct to me.

    What we are seeing in the EU/EZ is the test case for global economic integration. The issues are democratic politics and national sovereignty v. integration. Many lessons to learn by observing this dynamic. Globalism is the thrust of this century, and economic globalization come along with it. Does MMT have an answer?

    Reply

    anon Reply:

    Tom,

    You just wrote something that should be put front and centrer into Warren’s mandatory readings list.

    In addition to being a philosopher, you’re a strategic thinker.

    And I say this as somebody who’s not even sure yet he would support such a proposal – just that its something MMT should logically support based on all of its writing and thinking on this subject – too much of which is back door in my view.

    Nice job.

    I sincerely hope my endorsement doesn’t trouble you.

    My work may be done.

    MamMoTh Reply:

    It would also make it easier to set interest rates to zero, since who in their right mind would want government controlling interest rates and yields instead of markets?

    I do. If a long period of low interest rates is one of the main causes of the current crisis, who in their right mind would want interest rates set to 0?

    Tom Hickey Reply:

    I sincerely hope my endorsement doesn’t trouble you.

    Anon, the basis of philosophy as a social activity — and the ancient Greeks who began the process of critical thinking in Western civilization took it as such — is debate. The historical development of knowledge has been dialectical. You, Ramanan, and others who are at times critical of what you perceive as MMT “orthodoxy” add to the MMT debate. I welcome that debate and have learned from it. It illuminates the fine points.

    Tom Hickey Reply:

    MamMoTh: I do. If a long period of low interest rates is one of the main causes of the current crisis, who in their right mind would want interest rates set to 0?

    Setting the overnight rate doesn’t mean that all interest rates and yield all go to zero. It means that the market sets rate based on market conditions instead of what a small group of technocrats thinks about inflationary expectations. This arguably distorts the market and in practice (NAIRU) it leads to using unemployment as a tool to target inflation. The point of MMT is that fiscal policy is a more efficient and effective means than monetary policy using NAIRU and Taylor rules.

    beowulf Reply:

    The Fed as it presently exists is not needed and can be eliminated by consolidating cb with Treasury.

    I don’t know Tom, MacArthur didn’t need to depose the Emperor of Japan to rule the country like a Roman Caesar (William Manchester’s great MacArthur bio is titled, of course, “American Caesar”). The fiscal, monetary and banking systems need to be reformed to be sure but we will need a Federal Reserve (or replicate something just like it) to manage the banking system.

    Since there’s STILL white space in my one page monetary reform bill (so far: fund govt spending via issuance of debt ceiling-exempt US Notes, cap interest rates at WWII’s .375% short term cap), put the Federal Reserve under the control of the Secretary of Treasury.

    12 USC 246 (delete the struck lines)
    any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

    You don’t have to lay anyone off or print any new letterhead, simply put the Fed on the leash and tell the Secretary its his job to take it for walks. Once in a while the Fed chairman could come over to the Dai-Ichi Insurance Treasury Building to pay his respects.
    http://www.nightscribe.com/Military/ww2/images/macarthurHirohito.jpg

    Tom Hickey Reply:

    What I saying, Beowulf, is that the Federal Reserve Act of 1913 is sooo 1913ish. Yes, its been jiggled with but we need an overhaul starting from a zero base, asking the question of what is the most efficient way to deal with this under the current monetary system. MMT’ers point out that the Fed and Treasury are de facto consolidated already, so why not must make it de jure? Plus, getting rid of the Fed is politically hot right now. Everyone can see that the Fed is being run for Wall Street, while throwing Main Street under the bus. Why not ride the crest of the wave?

    But my greatest concern going forward wrt the Rodrik trilemma is the threat that cb political independence poses for democracy and national sovereignty. The last thing we need is a world managed by central bankers and their cohorts. I would just as soon see central banking consigned to the dust bin of history.

  8. anon says:

    “should have said, the necessary addition to reserve balances is provided”

    the usual type of correction made my point in spades

    the point being part a) that the Fed provides system reserve balances to enable funds rate targeting that is effective, essentially by the end of the day

    the point being part b) that the Fed couldn’t really give a damn as to the components of any treasury flow “disruption” on a given day – it looks at all expected flows and adjusts system reserves accordingly

    this overarching view of flows by the Fed reinforces point part c), which is that the Fed is very separate from treasury in the process of adjusting system reserves in response to such flows – it is reacting to treasury’s impact on system reserves in total as a result of net system activity through treasury’s deposit account at the Fed

    treasury is a currency user

    the Fed is a currency issuer

    the Fed as issuer will issue new reserves or redeem existing reserves in accordance with its system setting objectives, taking into account ALL treasury flows on any given day that may affect system reserves in total as well as all private sector flows that may dislocate the distribution of the prevailing level of system reserves

    the Kelton article had something to do with treasury’s own ability to contribute constructively to the Fed’s operational objective by minimizing system net reserve disruption by using TTL accounts rather than its account at the Fed for all transactions

    either way, both TTL accounts and the treasury Fed account are accounts of a currency user – not a currency issuer

    the Fed issues the currency – which is bank reserves used for settlement and interest rate control; and actual notes issued to the public

    treasury liabilities are not currency

    P.S. Ramanan is at least an expert in not responding with “ridiculous” as a primary form of engagement in discussion

    any particular reason why you keep regularly correcting yourself in discussion?

    Reply

    Tom Hickey Reply:

    the Fed issues the currency – which is bank reserves used for settlement and interest rate control; and actual notes issued to the public
    treasury liabilities are not currency

    Both are agencies of the USG. “Currency issuer” and “currency user” do not accurately apply, at least not in anywhere near the same sense as government is the currency issuer and nongovernment is the currency user. The Fed in no sense controls the Treasury, even though it is “politically independent.”

    In the present setup, the Treasury is securities issuer and the Fed is currency issuer. They are tandem operations that are closely coordinated.

    Positing the possibility of market failure is simply positing the failure of the US government to coordinate its operations, which is remote.

    Reply

    WARREN MOSLER Reply:

    both issue govt liabilities

    Reply

    Scott Fullwiler Reply:

    “any particular reason why you keep regularly correcting yourself in discussion?”

    Just trying to be as precise as possible. God forbid I forget to dot an “i” somewhere when you’re the one reading it.

    Reply

    anon Reply:

    in that case, I’m honoured

    Reply

    Scott Fullwiler Reply:

    :)

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