MMT on Bernie’s Dream Team to Write Lesiglation to Revamp the Fed!

Top Economists to Advise Sanders on Fed Reform

October 20, 2011

WASHINGTON, Oct. 20 – Nobel Prize-winning economist Joseph Stiglitz and other nationally-renowned economists agreed today to serve on a panel of experts to help Sen. Bernie Sanders (I-Vt.) draft legislation to reform the Federal Reserve.

Sanders announced formation of his expert advisory panel in the wake of a damning report that faulted apparent conflicts of interest by bank-picked board members at the 12 regional Fed banks.

Top executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank’s policies during the financial crisis, the Government Accountability Office investigation found. The dual roles created an appearance of a conflict of interest, according to the GAO.

After the report was issued Wednesday, Sanders said he would work with top economists to develop legislation to restructure the Fed and tighten rules on conflicts of interest, ensure that the Fed fulfills its full-employment mandate, increase transparency, protect consumers and reduce income inequality.

Sanders’ panel of experts includes:

Joseph Stiglitz, the 2001 winner of the Nobel Prize. The economics professor at Columbia University is a former chief economist for the World Bank.

Jeffrey Sachs, director of The Earth Institute and an economics professor at Columbia University. He also is special advisor to United Nations Secretary-General Ban Ki-moon.

Lawrence Mishel, president of the Economic Policy Institute, the premier research organization focused on U.S. living standards and labor markets.

William Black, associate professor of economics and law at the University of Missouri, Kansas City. He worked with the Federal Home Loan Bank Board, the Federal Savings and Loan Insurance Corporation and the Office of Thrift Supervision.

Nomi Prins, a senior fellow at Demos, was a managing director at Goldman Sachs, a senior manager at Bear Stearns in London, a senior strategist at Lehman Brothers, and an analyst at the Chase Manhattan Bank (now JPM Chase)

Jane D’Arista, an Economic Policy Institute research associate, has written on the history of U.S. monetary policy and financial regulation, The former Boston University School of Law professor previously served as a staff economist for Congress.

Tim Canova, professor of economics and law and co-director of the Center for Global Law & Development at the Chapman University School of Law in Orange, Calif. He was an early critic of financial deregulation and warned of the dangers of the bubble economy.

Robert Johnson, senior fellow and director of the Project on Global Finance at the Roosevelt Institute. He was chief economist of the Senate Banking Committee and a senior economist for the Senate Budget Committee.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. He was a senior economist at the Economic Policy Institute, a consultant for the World Bank and the Joint Economic Committee of the U.S. Congress.

Gerald Epstein, chair of the economics department at the University of Massachusetts at Amherst. Epstein also is the co-director of the Political Economy Research Institute.

Robert Pollin, co-director of the Political Economy Research Institute and economics professor at the University of Massachusetts-Amherst. He has worked with the Joint Economic Committee and the U.S. Competitiveness Policy Council.

Stephanie Kelton, assistant professor at the University of Missouri, Kansas City and a research scholar at the Center for Full Employment and Price Stability.

James K. Galbraith, professor of government at the Lyndon B. Johnson School of Public Affairs. He served in several positions on the staff of the U.S. Congress, including Executive Director of the Joint Economic Committee.

The need for major reforms at the Federal Reserve was driven home by the GAO findings announced Wednesday and in an earlier report issued on July 21. Both unprecedented audits of the Federal Reserve were required by a Sanders’ amendment to last year’s Wall Street reform law.

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57 Responses to MMT on Bernie’s Dream Team to Write Lesiglation to Revamp the Fed!

  1. pshakkottai says:

    What happens if the reserve requirement is greatly increased for the middleman? And more deficits are introduced directly into the economy as needed.

    Reply

    WARREN MOSLER Reply:

    I don’t know what, operationally, that means?

    Reply

    pshakkottai Reply:

    @WARREN MOSLER,
    I was thinking money creation by fractional reserve will be reduced and more direct creation by the central bank (combination of fed and treasury)by deficit funding will reduce interest rates to states for example help the economy. Mandatory state banks would do the same( like the State Bank of North Dakota.) How much reserve is a good reserve for banks?
    In India it is 25% for example.

    Reply

    WARREN MOSLER Reply:

    the fractional reserve dynamics you mention are applicable to fixed exchange rate regimes but not with today’s floating fx regime.

    the govt/congress can already lend to states at any rate it wants.

    state banks don’t accomplish that. ND’s ‘success’ is from massive revenues from resource extraction, etc. and not the bank.

  2. Awakened Sheep says:

    Beowuf said: Right, so the question becomes, how can the Fed be reformed along MMT lines while appearing to the Kucinich/Rothbard crazy bus that they’ve won?

    WARREN MOSLER Reply:
    October 22nd, 2011 at 5:16 pm

    working on it

    *********************************

    I find myself wondering now if proposing a change to our whole current monetary system that makes it more understandable to the average Joe might make it gain traction more quickly, than trying to explain how things actually work now (MMT). Thoughts?

    MMT says Government spending creates money and taxes destroy it. If you proposed as system explicitly as such, would it be more widely accepted/supported?

    MMT says Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects. – If the proposal made this obvious, would it be more widely supported, easier to teach, explain, support?

    This is more a marketing issue, but also realizing that packaging matters. Who cares what box our corn flakes are sold in, so long as we get everyone eating the new corn flakes.

    Of course those inside the movement (MMT insiders) know why and how this works, and the others just see it as a really smart new way of doing things that supposedly ends all the evil, bad, and downside restrictions of the way it used to be done.

    You use MMT (the last 40 years of evidence) to teach the powers that be how the system is really not a change, just a change in how the system is packaged that makes it more understandable, and easier to market.

    For the avid gamers out there: “I liken learning MMT to playing your favorite video game with the controls inverted. Up is down, down is up and left is right.

    Reply

  3. Awakened Sheep says:

    Seems to be more movement on revamping the fed. Found this Kucinich bill:

    http://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf

    Not sure if anyone has seen this, or reviewed it?

    Reply

  4. Cathy Mason says:

    There is what could be called a “web of debt scenario” that is being promoted on progressive blogs like Common Dreams and Firedoglake. Part of it is that the Fed is structurally flawed and was created by and for banksters. The claims of these Fed bashers don’t seem to accord with what I understand from MMT, but my grasp of MMT isn’t strong enough to counter them. Below is an example:

    “It is not simply “the Fed” – it is the Federal Reserve System. It’s the Fed +fractional reserve lending +interest. Our money is created by the Fed lending money it creates out of thin air to the government, at interest; the banks – starting with this initial money injected into the system by the government, create money out of thin air through fractional reserve lending, at interest. ______________________________________________________________ The point is, all money in the system is created AS DEBT – the system literally creates infinite debt that can never ever be repaid. The dollar has lost 96 percent of its purchasing power since the Fed was created – created by bankers, for their benefit (if the Fed is sssoo great, why did they have to craft the legislation in secret and push it through Congress with lies? And if it is supposed to “stabilize the system”, why did the Great Depression occur 16 years later?).

    The point is to get rid of the middle man – private bank cartel – and the government can create its own non-debt money. The government could then increase the money supply by, say, 2 to 3 percent per year to keep up with growth, but, with climate change and Peak Oil/Peak Everything, we need to go beyond the idea of growth and move toward a Steady-State economy. _________________________________________________________ The present system leads to infinite debt and thus economic catastrophe one way or the other, so any temporary “gains” by individuals are illusionary. Inflation is indeed a hidden tax that robs people of their labor. Every time a bank creates money via fractional reserve lending, it is expanding the money supply, creating money as debt at interest, which absolutely requires the creation of more money-as- debt to pay the interest – ad infinitum. Every time more money is created, it dilutes the value of already existing money. It is a system of debt slavery. You really ought to watch Zeitgeist: Addendum. As I have said before, so many on this board are sssooo obsessed with demonizing libertarians that they cant bring themselves to admit that the Libs are correct in seeing the problem, they just dont have the true solution. The present system is immoral, and that should be the bottom line.”

    Reply

    Tom Hickey Reply:

    @Cathy Mason,

    Sounds good to those who don’t know much, but part of it is not it’s well-thought through and the other part of it is bonkers.

    Reply

    beowulf Reply:

    @Cathy Mason,
    The point is to get rid of the middle man – private bank cartel – and the government can create its own non-debt money.

    This is exactly the crazy that’s short-circuited by Tsy spending with US Notes and the Fed managing rates with Fed bonds. :o)

    Reply

    WARREN MOSLER Reply:

    Yes, it’s pretty much both wrong and misleading.

    Reply

    Art Reply:

    @WARREN MOSLER,

    Heck of a melange…a hearty AMI/Keene/Kucinich stew with a Murray Rothbard chaser…?

    Reply

    beowulf Reply:

    @Art,

    Right, so the question becomes, how can the Fed be reformed along MMT lines while appearing to the Kucinich/Rothbard crazy bus that they’ve won?

    WARREN MOSLER Reply:

    working on it

    Tom Hickey Reply:

    @Beowulf,

    I think that if the Fed and Treasury were consolidated under Treasury and currency were issued directly without any offset, The AMI/Kucinich folks would be happy. That is entirely consistent with one MMT policy option. I think that they would be even happier if Warren’s proposals were adopted also.

    I think we agree pretty much over where we want to end up as far as the AMI/Kucinich folks are concerned. We just disagree on how to get there. Moreover, some aspects of what they propose don’t get them where they want to go because they haven’t thought things through or don’t understand operations.

    The Rothbard folks are not going to be satisfied with anything short of getting government out of the picture entirely, so I don’t think any MMT option will ever be able to satisfy them.

    Awakened Sheep Reply:

    @WARREN MOSLER,

    I think I found the paper where this whole idea comes from written by Kaoru Yamaguchi of Japan called “Modeling the American Monetary Act Completed” or AMA for short.

    http://monetary.org/wp-content/uploads/2011/09/DesignOpenMacro.pdf

    Have you reviewed this, could you do a point by point?

    Here’s what I think, not sure if I’m completely accurate – relative MMT newbie here.

    Funny thing is he remodels our system to ultimately be what MMT says we already have (but common thinking continues to misunderstand). So in essence it appears that MMT and American Monetary Act (AMA) are in some agreement.

    Since he does not understand our current monetary system (90% of economists and policy makers also do not, as well as almost all citizens) and equates Gov debt with business or private debt, and issuance of treasuries with borrowing and possible interest rate climbs, and he assumes gov. have to tax to spend. Due to all this misunderstanding he looks for a better system. What he finds is a system that is nearly the current system but he just doesn’t know it.

    MMT states that new money only comes into existence by deficit spending.
    AMA would remodel the system to make it so (even though it already is).
    MMT states the natural rate of interest is zero (issuance of treasuries set an interest floor).
    AMA would remodel the system to make it so.
    MMT states the money to buy treasuries and pay taxes comes from gov. deficit spending.
    AMA would remodel the system to make it so.
    MMT says that the US gov. is not revenue or borrowing constrained and the only constraint to deficit spending is inflation.
    AMA would remodel the system to make it so.
    MMT says the Fed’s attempts to use monetary operations to manipulate or raise interest rates to stave off inflation which is an unnecessary and very blunt and ineffective tool and sees no real need for the Fed except as lender of last resort and to provide interest rates satisfactory for savers.
    AMA would remodel the system to make it so.
    MMT says the issuance of debt by the gov. is not necessary except for an old gold standard law that is still used that says it has to.
    AMA would remodel the system to make it so.
    MMT says fractional reserve banking doesn’t exist and banks are not reserve constrained for lending, they are capital constrained as well as having a viable credit worthy borrower with good collateral.
    AMA would remodel the system to end fractional reserve banking which ended in 1939. Requiring 100% reserves – not sure what that would mean.

    and so on, and so on, and so on.

    Reply

    WARREN MOSLER Reply:

    seems you have a good handle on it!

    Art Reply:

    @Cathy Mason,

    Let’s see if we can help.

    “Our money is created by the Fed lending money it creates out of thin air to the government, at interest”

    A fine example of making sh*t up. When the fed govt spends, it instructs the Fed to create money. Legally, the Fed cannot lend directly to the USG. A small part of the interest paid by the Treasury on securities held by the Fed [(1) Fed's FOMC purchases them on the open market with newly created money in order to hit its interest rate target(s) and (2) UST instructs Fed to create the money that pays the interest] is used to cover Fed operations, and the rest is “returned” to the UST.

    “starting with this initial money injected into the system by the government, create money out of thin air through fractional reserve lending, at interest”

    It used to work that way under a gold standard, where mines and mints injected and banks levered off of that, but now banks don’t have to wait for ‘base money’ injections. They create reserves whenever they make a loan (the horror!). But they can only make loans to willing borrowers and within the capital constraints imposed by regulators. As for interest, it’s true that debt in the aggregate cannot be serviced without continuing growth of credit and/or (and ultimately, as credit growth has a limit, despite what these folks believe) net financial assets, i.e., sovereign deficits (govt net spending or net additions to financial assets by central bank).

    “all money in the system is created AS DEBT – the system literally creates infinite debt that can never ever be repaid”

    Nonsense. Much (usually most) money comes about via credit creation (sounds a lot scarier to use “system” and “DEBT”), but as far as net (i.e., unencumbered by credit) financial assets go, they can only be created by sovereign deficits (e.g., lower taxes:spending or spending:taxes ratio, central bank interest payments on reserves or purchases of non-govt securities, etc). Non-debt money absolutely does exist, and it drives the amount of debt that can ultimately be created and successfully serviced. (Despite having four letters, debt should not be a four letter word.)

    “if [the Fed] is supposed to “stabilize the system”, why did the Great Depression occur 16 years later?”

    The 1913 conspiracy theories are half-baked (some grains of truth to them, but not a lot), and there’s plenty of good work on the Fed and the GD; top of my head, some of Robert Mundell’s writings or speeches, HC Johnston’s book Gold, France and the Great Depression…not enough space to outline it here. But if the Fed was last destabilizing in 1929-1934, then it would seem to be doing an OK job-?

    “The point is to get rid of the middle man – private bank cartel – and the government can create its own non-debt money.”

    It already does create its own “non-debt money”! The Fed is hardly a private bank cartel, and consumers seem to like having a private credit system.

    “The government could then increase the money supply by, say, 2 to 3 percent per year to keep up with growth”

    Volcker tried something like that (see Milton Friedman’s “k percent” rule) and it was a disaster. Monetary velocity is non-stationary. A functioning credit system aggregates the signals that can clue policymakers in on the optimal range of deficits, overnight int rates, whatever. But some of these folks seem to want to do away with it. Bad idea.

    “The present system leads to infinite debt”

    No it doesn’t. Good grief.

    “and thus economic catastrophe one way or the other”

    Financial catastrophes actually, and they have a lot more to do with political economy and institutional and human behavior than the existence of the Fed and private credit. Financial crises also occurred under precious metals standards.

    “so any temporary “gains” by individuals are illusionary.”

    ["Illusionary" tells me this person might not be all there.] When the system is poorly run, it can be true that there are no or negative net gains in the aggregate. But there are always individuals who are better off under any scenario.

    “Inflation is indeed a hidden tax that robs people of their labor.”

    Not quite–it “robs” people of their savings, i.e., past labor. In nominal terms, it actually rewards (in the short-term at least) current and future labor.

    There’s probably some confusion here re relative price shifts, such as higher food and energy prices and their impact on lower income households. But that’s not inflation, it’s a relative price shift having to do with monopolies and oligopolies, political economy, and (since the 1970s) financial speculation and (since the late 1990s) asset allocation fetishes (e.g., pension funds “investing” in commodities). A recent academic paper by two mainstram economists found that only about 15-20% of what we measure as “inflation” is actual inflation (lower purchasing power of money). That’s not bad, especially with the rate of population growth the world has experienced.

    “Every time a bank creates money via fractional reserve lending, it is expanding the money supply, creating money as debt at interest, which absolutely requires the creation of more money-as- debt to pay the interest – ad infinitum.”

    So what? This is exactly how it worked under most forms of the gold standard too. Under their ‘govt money’ proposal, a similar dynamic would still exist, e.g., with positive economic growth and/or higher savings desires etc, such money could easily become deflationary (i.e., insufficient supply of it).

    “Every time more money is created, it dilutes the value of already existing money.”

    Only when every relative economic variable stands stock still!!! Though widespread, this one is truly maddening (really dumb too). Under every monetary system known to humanity, including precious metals standards, the supply of money has tended to increase over time. And there is absolutely no direct correlation between that and money’s value; those other economic variables (population, productivity, trade balances, saving/velocity, etc etc) determine how a marginal unit of money impacts the value of the existing stock of money.

    Hope that helps…

    Reply

    Tom Hickey Reply:

    @Art,

    Nice summary, Art, although it may not be understandable to some of the people that putting forward these ideas. I would put it very simply this way.

    If you get what you want, the result will be a return to the past when credit was extended almost exclusively for investment, i.e., to business, and consumer credit was practically non-existant other than on very stringent terms, generally short term, like 30 days on revolving store credit. Returning to that world would drastically change most ordinary folk’s lives, it would be very deflationary, and the result would be a much less robust economy, with many fewer options from most people. The ownership class would continue to live high off the hog, and workers would find themselves having to save up cash for purchases, collateral, and down payments. Not an inviting future. It would be a step back toward Dickensian times. Be careful what you wish for.

    Reply

    Cathy Mason Reply:

    @Art, It helps a lot! Thanks! Some of it I’ll have to mull over as this subject matter is not up my alley (as liberal arts English major type).

    Those who think this way are convinced the Fed is a private bank cartel and is doing the bidding of banksters. And of course they are completely unaware of the difference between “sovereign debt” as you call it and the debt you and I incur, which is one of the most exciting ideas from MMT – the government can never run out of money, so sovereign debt is not a problem in and of itself.

    Reply

    WARREN MOSLER Reply:

    no one who’s taken a serious look at the fed thinks it’s functionally anything but a govt agency run for public purpose

    Jon Hooper Reply:

    @Cathy Mason,

    How can anyone take a serious look at the Fed when they are a totally opaque undemocratic body? If they have nothing to hide they should open their books. Full transparency should be the order of the day in our supposedly shining democracy. And if it is a true govt. agency transparency should just be a given.

    I think you are too trusting of these banksters. If MMT is going to succeed with people you can’t be seen as siding with bankster leeches and their star chamber like control of our money. I would rather see total democratic control of the money system by our elected representatives than this opaque pseudo govt. agency populated with bankster cronies. As crooked as our politicians may be, at least we get to kick them out once in a while.

    WARREN MOSLER Reply:

    i agree the fed should be fully transparent.

    Tom Hickey Reply:

    @Cathy Mason,

    “I would rather see total democratic control of the money system by our elected representatives than this opaque pseudo govt. agency populated with bankster cronies.”

    Jon, I would say that MMT’ers agree with the sentiment. However, there are different strategies and tactics for doing so. Study up on the MMT approach and then see what you think. It is practical and effective. Moreover, there is a visible path for accomplishing it.

    Jon Hooper Reply:

    @Cathy Mason,
    Tom, I am totally on board with MMT and even don’t mind the FED so much since it really doesn’t affect anything other than the interest rates. But politically in this anti-bankster climate I think we should not be seen as giving them too much slack, especially considering how they used their privileged position to help their cronies in the private sector. Cronies who then turned around and paid themselves billions in personal bonuses, while at the same time railing on the middle class for not being financially prudent and taking on risky home-loans.

    Tom Hickey Reply:

    @Cathy Mason,

    Jon, Bill Black has been the point man on this. He is often joined by Randy Wray. Warren’s reform proposals have been out there for some time. Seems to me that MMT is out front on this.

    Where do you see that MMT is behind on it. and what do you suggest could be done better?

    Jon Hooper Reply:

    @Cathy Mason,
    Tom, I’m a big fan of Bill Black and Randy Wray. I just think that pooh-poohing potential allies such as those who may have been coming out against the banksters from a “Web of Debt” or “Jekyll Island” perspective is not going to win any converts.

    I think agreeing up front that the Fed is part of the problem and then explaining how everything really works is better. Part of a problem I see with MMT is that it lacks passion, which is necessary for political change. It comes off as very technical and cold. I want people to understand that everything they have been told is a bunch of crap. All the “experts” have it backwards and upside down. That the neo-liberal policies are a discredited sham.

    I just want some kind of fiery MMT leader to emerge and expose the fact that the current economic and political leadership are idiots who are driving us off a cliff . I guess I want more anger, rather than the “Obama like” reasonable man approach. :-)

    Also, whether or not the Fed is run by a private cartel of bankers is debatable. But the fact that it is even a question means that it has to be opened up and that question put to rest. We have to be sure that it has the greater public good at its heart.

    ESM Reply:

    @Cathy Mason,

    “… fiery MMT leader …”

    LOL. I’ve got to get that on a t-shirt.

    Rodger Malcolm Mitchell Reply:

    @Cathy Mason, “Every time more money is created, it dilutes the value of already existing money. “

    “Dilutes” = inflation. Supply goes up, so value goes down; that’s the popular belief –if demand also doesn’t go up, which is exactly what has happened.

    Since we went of the gold standard, there has been zero relationship between federal deficit spending and inflation. See: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

    Rodger Malcolm Mitchell

    Reply

  5. Re conflicts of interest at the Fed, the nine members of the Bank of England’s Monetary Policy Committee include just one person currently employed by a commercial bank (Goldman Sachs). Plus there is one person with former connections with a commercial bank. The rest, far as I can see, are academics or people who have worked for years for the BoE. About the right mix?

    Reply

  6. Deus-DJ says:

    Remember that having team MMT on Bernie’s side means little in terms of what can be done in the Senate, the bigger issue here is how team MMT can affect the other economists on that list. If we get Stiglitz, Sachs, and others to join the MMT side then we’ve got ourselves an opportunity!

    Reply

    Deus-DJ Reply:

    @Deus-DJ,

    Jamie and particularly Stephanie’s ear is always available to Warren so Warren’s ideas will be available to Bernie at any time he wants to share them.

    Reply

    Art Reply:

    @Deus-DJ,

    It seems more likely that core MMT principles will be absorbed into the mainstream, similar to what has happened with certain aspects of supply side (e.g., marginal incentives; Bruce Bartlett wrote a great piece on that some years back, sorry I don’t have the link) and Austrian economics (e.g., malinvestment).

    In other words, mainstream macro will still just be macroeconomics, but MMT thinking will have reshaped certain aspects of it, if all goes well.

    Reply

    Tom Hickey Reply:

    @Art,

    That’s the most likely course, but if there isn’t a big Aha! moment in macro pretty soon, the world is headed toward the cliff, given the present map and trajectory.

    Reply

    Art Reply:

    @Tom Hickey,

    You could be right, but from where I sit, it seems policymakers are likely to continue bungling through. No guarantee they will, but the Ah-hah could be pretty gradual if they do.

    Look at how long it took for the Keynesian and Monetarist revolutions to become accepted mainstream policy approaches. Friedman began writing in the late 1940s but his ideas didn’t really gain traction until the 1970s, right? Likewise with Keynes, GT in 1936 but not mainstream policy until what, end of WW2? Supply siders cropped up in the early 1970s and a few of their arguments were quietly appropriated by the mid-1990s or so.

    Soft Currency Economics was published in 1993…18 years later…right on schedule?

    TC Reply:

    @Art, Yup. we’re going to be slightly better off as a result.

    I sometimes dream about having to warn about hyperinflation in when I am 70 years old.

    Reply

  7. Dan Kervick says:

    I saw Bernie speak here in NH a couple of months ago, and he was riveting. I’m glad he’s taking advantage of this political opening to offer a serious reform proposal that will be a grown up counter to the Austrian nutters.

    Reply

  8. Kristjan says:

    Warren, James Galbraith deserved to be yellow also.
    http://sanders.senate.gov/newsroom/news/?id=de4c73fb-131c-4a25-b83e-4604eaefcebb

    Reply

    WARREN MOSLER Reply:

    yes, he wasn’t on the list I got. updating now, thanks!!!

    Reply

  9. beowulf says:

    It just dawned on me, the Fed and Tsy should swap jobs.

    1. Tsy should print, on paper or virtually, its own currency (United States currency notes) for deposit into TGA a millisecond before it spends per appropriation warrants.
    http://www.law.cornell.edu/uscode/usc_sec_31_00005115—-000-.html
    and
    2. The Fed should sell its own bonds (and continue paying IOR on excess reserves) to manage interest rates.
    http://dealbook.nytimes.com/2008/12/11/bonds-a-bad-bet-for-the-federal-reserve/

    Besides taking the cost of debt service off the federal budget ($4.5T to $6T over next decade, depending on how you account for interest on govt-held debt), it would make things clear to everyone that Tsy spending is unconstrained by borrowing and that the real purpose of govt borrowing is to manage interest rates. Oh yeah, and we’d never have to raise the debt ceiling ever again, so its a victory for the tea party. :o)

    Reply

    Ralph Musgrave Reply:

    @beowulf,

    Re creating money a millisecond before it is spent, that effectively combines monetary with fiscal policy, which I agree with. That’s what Abba Lerner advocated, I think. Just one problem though: politicians more or less get control of the printing press – bad idea. So the decision as to whether government runs a surplus or deficit needs to be in the hands of some sort of independent “Fiscal responsibility committee”. While politicians and the democratic process can still decide what proportion of GDP is allocated to the public sector and how the latter money is split between education, the military, etc.

    Re your No 2, I am sceptical as to how effective interest rate adjustments are. E.g. Warren thinks low interest rates are deflationary. I’ve thrown more cold water over interest rate adjustments at the URL below. Aggregate demand can be adjusted via the above budget surplus or deficit.

    http://ralphanomics.blogspot.com/2010/12/interest-rate-adjustments-are-useless.html

    Reply

    Art Reply:

    @Ralph Musgrave,

    See my comment on thread 2 re referenda. A lot more timely and more direct control than periodic elections.

    Reply

    ESM Reply:

    @beowulf,

    Yeah, but then everybody would worry about the Fed going broke, or the hyperinflation that would result when the Treasury bailed it out.

    Reply

    beowulf Reply:

    Ralph,
    Just to be clear, the Fed could still print federal reserve notes and credit or debit reserve accounts. Tsy issuing US Notes (Lincoln’s greenbacks) is about making concrete that spending create money (but Tsy spends only what Congress appropriates) while Fed issuing Fed bonds is about making concrete that borrowing is simply to manage interest rates. Call it policy by allegory. :o)

    ESM,
    Unlike Tsy, the Fed doesn’t have a debt ceiling. What’s more, contra to what NY Times article says, the Fed does have a revenue source (other than just “printing” it) with which to pay interest on F-bonds, the Fed governors’ authority to levy and adjust transaction fees on any payment that goes through the FRS (Fedwire payments alone are more than $900B, total annual volume of FRS payment base is easily north of $1 quadrillion).
    If the Fed raised interest rates, its own bond debt service obligation would get larger. If the Fed, in turn, increased its transaction fee revenue to cover the larger debt service, it would convert monetary policy into fiscal policy a lot more efficiently than its current fiscal tool of inflating or crashing the real estate market with large enough interest rate changes. Or, if FFR is locked at 0.25%, the Fed could mark up fee schedule to tighten fiscal stance and mark down fees to loosen.
    http://www.federalreserve.gov/paymentsystems/pfs_feeschedules.htm

    Reply

    Rodger Malcolm Mitchell Reply:

    @beowulf, Or just stop selling bonds and manage interest rates by fiat.

    Reply

  10. MamMoTh says:

    Why aren’t you in his team Warren?

    Reply

    beowulf Reply:

    @MamMoTh,
    Chuck Norris doesn’t do committees, neither does Warren. :o)

    Tim Canova is a solid pick, definitely an MMT ally. Tim’s a former Senate aide who’s now a law school professor in California. I’m glad there’s someone on the committee who can take whatever castle in the air the economists build and turn into a legislative blueprint that Senator Sanders can introduce as a bill.

    Reply

    WARREN MOSLER Reply:

    yes, went over it all with Tim many years back.

    ‘Hi’ if he’s reading this!

    Reply

    WARREN MOSLER Reply:

    wasn’t asked

    Reply

    beowulf Reply:

    @WARREN MOSLER,
    That’s too bad. I guess Randy Wray wasn’t asked either.
    Randy had a very good idea that should be in a Fed reform bill but, I fear, it would cause Stiglitz and Sachs to stroke out:
    I propose that Congress mandate the Fed set the overnight rate at 25 basis points (0.25%) and leave it there. Forever. That would be the extent of monetary policy in the US. A very simple robot would replace the FOMC, programmed to pay 25 basis points on reserves, and charge 50 basis points on loans of reserves to chartered banks
    http://www.newdeal20.org/2010/05/06/interview-with-randall-wray-truths-and-myths-of-the-federal-reserve-10452/

    Call it the “anti-uncertainty clause”. :o)

    Reply

    WARREN MOSLER Reply:

    just heard Randy is on too.

    ESM Reply:

    @beowulf,

    Although I am dubious about the efficacy of small changes in the Fed Funds rate, I would be leery of tying the Fed’s hands without stronger automatic stabilizers in fiscal policy, preferably some sort of formula based tax rates which depend on macroeconomic variables (something which you have proposed in the past). Changes in fiscal policy through legislation take a long time, and a big interest rate move can get aggregate demand moving in the right direction during the delay.

    WARREN MOSLER Reply:

    the jury is at least still out as to whether rate cuts add to agg demand or reduce it.

    Art Reply:

    @beowulf,

    Why not set major policy targets like FFR, federal deficit, an EOLR min wage, whatever, by periodic (and frequent) referenda? One voter, one vote. No more pay to play BS, a lot less agency risk, and presumably better outcomes.

    http://symmetrycapital.net/index.php/blog/2006/12/committees-vs-markets/

    Rodger Malcolm Mitchell Reply:

    @beowulf, But some (me) believe interest rates have been an effective inflation-fighting tool — much faster, much less political and far less apt to cause recessions — in short better than deficit cutting.

    Also, low rates punish savers, while high rates stimulate the economy.

    Rodger Malcolm Mitchell

  11. Peter D says:

    Awesome! I guess Stephanie and Dean Baker made up after all :)

    Reply

    Robert Kelly Reply:

    @Peter D,
    I don’t know? Dean Baker did not get a yellow highlight for a reason.

    Reply

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