Physical cash: Cullen Roche versus Warren Mosler
Ralph Musgrave
I agree with some of the criticisms Cullen makes of MMT in his article “A critique of MMT, Modern Monetary Theory." However he goes off the rails in section 5 of that article.
First he says “In MMT all money is essentially state money.” Well that’s news to me: MMTers are well aware of the fact that commercial banks create a form of money when they extend loaans, aren’t they?
Next, Cullen criticises Warren’s ideas on the source of physical cash (dollar bills, etc.). Warren says households cannot obtain physical cash unless the state has first spent state money into the private sector with the private sector then using that state money to purchase physical cash off the Fed. Cullen disagrees: he says all that’s needed is for commercial banks to create money, which occurs when a commercial bank extends a loan.
I’ll try to sort this one out, and may fall a*se over t*t in process, but nothing venture, nothing gained. For Cullen’s argument see the paragraph starting “A good example of the erroneous MMT position…”: that’s in section 5 of the article.
Warren says in effect that when a commercial bank needs $X of dollar bills, it orders them from the Fed and the Fed debits the commercial bank’s account at the Fed by $X. Correct.
Now the credit balances that commercial banks have at the Fed must have come from somewhere: they come from the state having first spent state money in to the economy.
Of course it would be POSSIBLE to have a system where the state spends no state money into the economy, and where, when a commercial bank wants physical cash worth $X it goes into debt to the Fed. But that’s not what happens in the real world: amongst other reasons because the Fed, like other central banks, charges punitive rates of interest to any commercial bank going into debt to the Fed.
So as far as the 2013 real world is concerned, Warren is in right: physical cash is in effect money which the state has created and spent into the economy.
But against that, Cullen says, “So the cash comes from the Treasury, but not through spending, but through the desire from someone who already has an inside money account to draw that account down. Again, inside money precedes outside money.” (I.e. he is saying that commercial bank created money precedes state money - physical cash in particular).
But hang on: Cullen himself admits in section 5 of his article that about 10% of money in circulation is state money. So there is plenty of state money sloshing around which the private sector can use buy physical cash off the Fed.
But Cullen likes to concentrate on the 90% of money which is commercial bank created. He says that for the most part, when the private sector gets physical cash, that comes about as a result of households and firms depositing collateral at commercial banks, and having their accounts credited, and then using a portion of that credit balance to get hold of physical cash.
Well that’s true, but it doesn’t alter the fact that when a commercial bank wants $X of physical cash from the Fed, the Fed debits $X to the commercial bank’s account at the Fed. Hopefully that’s sorted out that argument.
Alternative banking systems.
As distinct from the banking and monetary system that actually exists in 2013, various other systems are perfectly feasible, as Cullen rightly points out. For example a system under which the only money in circulation is central bank created would be feasible: it’s called full reserve banking, and that system has plenty of advocates. And certainly, under that system, it would not be possible for anyone to obtain Fed created physical cash unless the state had first created and spent money into the private sector.
Conversely, there have been systems in the past where central banks were non-existent, yet there were thriving and efficient commercial banks, which issued their own bank notes. Those banks used gold to settle up with each other, though even precious metals aren’t essential since banks can settle up using almost anything: shares, real estate, you name it.
Those types of “central bank free” system existed in Scotland, Scandinavia and Canada between very roughly a hundred and two hundred years ago. George Selgin describes these systems in his various publications, including his book “The Theory of Free Banking”.
59 comments:
"Those types of “central bank free” system existed in Scotland"
The Bank of England was Scotland's de facto central bank during that period, as it is today.
Can we fix the formatting of this post? Looks odd compared to the rest of the posts.thanks
You can only move money from one bank to another if the other bank is prepared to take your place as a depositor in the originating bank.
Gold, etc doesn't end up on the bank's balance sheet by magic. It has to get there by being bought or earned. Moving gold around just extinguishes the liability incurred by the bank allowing the acount move or cross bank payment.
The central bank just allows the banks to trust each other better, to provide some sort of firebreak that should stop a cascade failure and to enforce the peg between bank issued liabilities in the denomination and the state issued liabilities.
Commercial banks can only issue liabilities in US dollars if they peg their liabilities to the monopoly provider of the US dollar and provide for conversion at par. Otherwise the bank's liabilities would float against the currency.
Y,
Selgin doesn’t agree with you. After a bit of searching thru his book I came across the following. “If England's was a model central banking system, then Scotland's was its antithesis. From 1792 to 1845, Scotland had no central bank, allowed unrestricted competition in the business of note issue, and imposed almost no regulations on its banking firms. Yet the Scottish system was thought to be superior by nearly everyone who was aware of it.”
Selgin is wrong.
some relevant info:
http://socialdemocracy21stcentury.blogspot.co.uk/2013/04/free-banking-in-scotland.html
"MMTers are well aware of the fact that commercial banks create a form of money when they extend loans, aren’t they?"
The money banks lend out is state money.
I originally found out about MMT because I was researching money (or credit) creation by banks. That was the first thing I read about in MMT.
Paul,
I think that is why they are termed "US Dollars".... rsp,
"all that’s needed is for commercial banks to create money, which occurs when a commercial bank extends a loan."
The logical way to frame this is that borrowers create a need for state money and banks choose who gets it.
Just as Congress creates state money when it passes spending bills, borrowers create state money when they come through the doors of the bank.
No borrowers, no state money created by banks.
When the borrower allows credit money into his/her account, that is the moment of money creation, and the borrower is the initiator.
In this relationship, banks are acting as agents of the Federal government,which is the only entity in the U.S. Constitutionally endowed with state money-creation powers.
paul, do you say banks create state money because deposits are insured by the state?
The logical way to frame this is that borrowers create a need for state money and banks choose who gets it....
In this relationship, banks are acting as agents of the Federal government,which is the only entity in the U.S. Constitutionally endowed with state money-creation powers.
The role of that banks play in the money creation system is risk management. It through underwriting loans that deposits get created. In this sense, banks are acting as agents of the government, which has chosen to contract out the creation of credit money, while reserving currency monopoly for itself.
Credit money created by banks that issue loans is denominated in the currency, which banks promise to provide as cash on demand at the window and to clear drafts on customer accounts in the government's payment system, which operates in currency created (issued) by the central bank as a settle vehicle (reserve balances).
Without cash and bank reserves, bank created money could not met the promise of being currency-good. Non-banks can create credit but not currency, which they have to get from existing government liabilities in the system, since they do not have access to the payments system and the central bank as lender of last resort.
This is what banks are "special," since currency is only created through government spending (crediting non-government accounts) and central bank lending (to member banks at the rate and conditions the cb sets).
"The role of that banks play in the money creation system is risk management." - Tom
Exactly; (although I call it underwriting, it means the same).
"paul, do you say banks create state money because deposits are insured by the state?" - y
No.
I say it's state money because it IS state money.
It can be used to pay taxes.
Look at a dollar bill from a loan you get from the bank…what is written on it?
Is that dollar different in any way from any other dollar?
Deposit insurance exists to prevent bank runs.
Anyway I don't claim to be an expert on the subject…I am merely employing logic.
Conventional wisdom (a mis-nomer) does not trump logic.
Hong Kong does not appear to have a central bank, though they do have a 'monetary authority.' Bank notes are issued by several banks and their accounts are settled with US Dollars, not gold.
Also, I think it is a mistake to think of bank notes as money, but rather, as was described in the Case of Mixt Monies (1601) as a 'symbol' of money, or, as I think it, a receipt for money. It is essentially a set of instructions to a bank that can be passed from hand to hand rather than electronically or vocally or whatever. Paper or metal is the technology or the medium, but not the money itself, which is not tangible.
"Look at a dollar bill from a loan you get from the bank"
The bank didn't create that dollar bill though.
"It can be used to pay taxes"
Bank deposits aren't really used to pay taxes. When you make a tax payment using a bank deposit you are simply instructing your bank to make the tax payment on your behalf, with reserves.
"The Hong Kong Monetary Authority is Hong Kong's currency board and central banking authority. It is a government authority founded on 1 April 1993 via the consolidation of "Office of the Exchange Fund" and the "Office of the Commissioner of Banking". The organisation reports directly to the Financial Secretary.
The HKMA issues banknotes only in the denomination of ten Hong Kong dollars. The role of issuing other banknotes is delegated to the note-issuing banks in the territory, namely the Hong Kong and Shanghai Banking Corporation, Standard Chartered Bank and the Bank of China."
http://en.wikipedia.org/wiki/Hong_Kong_Monetary_Authority
If the role of banks is risk management, then maybe we should get rid of them? They don't seem to do much of a job. And furthermore, why should banks do this job anyway?
Wouldn't providing stipends to individuals do the same thing? Government could either set the money supply through spending on its own or spending or through direct distribution to citizens. We already have investment banks to aggregate funds and provide loans in volume.
MR places a high significance on bank money and bank-created financial assets while understating the importance credit and assets created by non banks and government. All credit, even non-bank is done in and creates state money. The only difference is the discount level. In theory banks have a zero-discount because of their backing and regulation by the state and reciprocity of their obligations but in reality. Their capital, interbank loans and deposits accounts aren't considered 'safe'. Ask anyone with a balance over the FDIC cap. Credit is more of a pyramid or continuum with real assets and individuals at the base and the treasury at the apex. Each level has very good convertibility between collateral and money all the way up to treasuries and fed accounts through industry and banking and various intermediaries and markets, all with multiples of state money and various discounts at each level.
MR's position that most money in the economy is bank credit is obviously, demonstrably false.
What are the largest sources of credit to consumers and business? It isn't banks but Government Sponsored Enterprises (FHA, VA, FNMA, FHFB, DOE, ...etc) and Bond Markets, Commercial Paper, Repo markets. Consumers and businesses use commercial banks in the same way banks use the fed for credit. Only as a last resort. Credit cards and auto loans, and commercial real estate are not a huge part of the economy. When the going gets tough businesses put their money in Treasury Direct, zero percent certificates of indebtedness to avoid the banking system altogether, so it isn't really accurate to say that banks create state money without a discount either, their 'currency'/liabilities aren't widely accepted as first-rate.
Ryan, interesting comment. You should write that comment over at pragmatic capitalism, see what they have to say.
On the other hand, banks don' create (issue) state money. They create bank liabilities (deposit entries in customer accounts) and corresponding bank assets (customer loans). The bank's deposit liabilities are payables and loans are receivables.
The bank promises to convert its own liabilities to government liabilities (currency) on demand for demand accounts and in a specified period on time accounts. After netting, banks have to get government liabilities for conversion, sine they cannot create government liabilities and final settlement after netting is in government liabilities, i.e., currency in the form of rb or cash.
Banks keep a stock of vault cash on hand for window settlement and obtain rb through the payments system, which is the only place that rb reside, i.e., on the spreadsheet of the cb.
So banks are intermediaries in the creation of state money through credit extension and their access to the cb. Banks act as agents in this respect, performing a service of risk management for a free, the spread they charge, the basis of which is the interest rate set by the cb.
Government could perform this service by lending directly, but it is thought that the profit motive is more efficient and the separation of government from credit extension would reduce cronyism and favoritism.
not the money itself, which is not tangible.
Money is an idea, and the idea is embedded institutionally, mostly legally. The tokens are the visible sign of the invisible institutional arrangements and by exchanging tokens, one gives evidence of accepting the existing institutional arrangements and agrees to abide by them. Modern money is more a legal entity than an economic one, although it is used for economic purposes.
"Bank deposits aren't really used to pay taxes. When you make a tax payment using a bank deposit you are simply instructing your bank to make the tax payment on your behalf, with reserves."
y, you are way over-thinking this.
All money in the currency of issue exists as discrete entries on non-government balance sheets. Money is numbers.
The dollar bill is a physical representation of the balance sheet entity…the balance sheet entity is, in fact, the money.
A dollar bill is a place-holder for money, just as a check is.
The money is the number.
If It can be used to extinguish taxes, it is state money. That is the necessary condition.
And the taxes are removing discrete numbers fom non-government balance sheet balances, so it is not reserves that are extinguishing taxes.
The domestic monetary is a mirrored system in that the government payments system reflects the interface between government and non-government. Only members of the payment system have access to the payments system. When they make entries in customer balances recording transactions that is reflected in the payments system, intra-bank transactions and netting excepted since they don't require settlement in rb.
There is a pretty huge amount of transacting that is intra-bank and netted, so there is a lot of bank money that gets used without using currency (rb or cash) for settlement.
A dollar bill is a place-holder for money, just as a check is.
The money is the number.
If It can be used to extinguish taxes, it is state money. That is the necessary condition.
And the taxes are removing discrete numbers fom non-government balance sheet balances, so it is not reserves that are extinguishing taxes.
And the government accepts only its own liabilities to extinguish liabilities to it. That is, only rb and cash (recently the US eliminated the cash option, IIRC). A bank promises to convert its own liabilities, which are entries in its books, to government liabilities (rb on the cb books), in acting as an agent for the customer. Those who don't have access to the payment system cannot pay their taxes without going through an agent with access to rb, unless the government payments offices accept cash, which, again, customers obtain from banks, which get them by exchanging rb at the cb.
Government liabilities sit at the top of the hierarchy of money in a non-convertible system. Banks have to obtain government liabilities to settle with government.
Customers can use bank money to pay taxes (take out a loan), but then the bank has to convert its liability to a government liability in the payments system. If a bank comes up short the cb lends the rb at the penalty rate.
Cullen likes to concentrate on the 90% of money which is commercial bank created. [Ralph Musgrave]
I know Cullen says this, but I believe it is wrong. See Paul Meli -- Does Credit Drive The Economy?
Excerpt: Year…Public spending…private debt…private proportion
1970…201.60…94.14…31.8%
1971…220.60…109.81…33.3%
1972…245.20…149.20…37.8%
…
…
2010…3703.40…-1883.32…N/A (can't calculate the ratio between a positive and negative number)
2011…3757.00…-69.13…N/A
2012…3757.70…203.05…5.1%
And the government accepts only its own liabilities to extinguish liabilities to it. That is, only rb and cash
Precisely - it's the hierarchy of money and credit at work.
Bank deposits are merely a promise to pay in the "real stuff" - reserves or cash, both liabilities of the Fed.
That's why, once in a while, there are bank runs. Depositors cease to take the commercial bank's promise at face value and run to the ATMs to get cash - the liability of the Fed.
At the top of the pyramid there are cash and reserves.
Bank deposits are one (significant) layer lower in the hierachy.
26 CFR 301 makes bank reserves an accepted form of payment for taxes, without ever converting to any type of government issued liability but this interchangeability is fleeting because if your check doesn't clear because a bank becomes insolvent and you had more than an FDIC insured balance, the IRS still comes after you, not the bank for the balance due.
The only exceptions are if you had a cashiers check or the bank withdrew your EFT funds and failed to credit the IRS prior to the bank going belly up. Those become civil liabilities of the bank and your taxes are paid.
Sort of brass tacks but important to be realistic and what not.
I'm with Jose. The pyramid of liabilities makes a lot more sense to me than Cullen's "inside money"...
"26 CFR 301 makes bank reserves an accepted form of payment for taxes"
Do you mean bank *deposits*?
"Those become civil liabilities of the bank and your taxes are paid"
Yes, if you make a tax payment and your bank debits your bank account then you're considered to have done your bit and 'paid your taxes'. But until the Fed debits your bank's reserve account*, the payment to the state hasn't been finalized and your bank still owes the taxes on your behalf. Basically you instruct your bank to make the payment on your behalf. If they fail to make the payment then they are liable, not you.
*reserve balances are a liability of the Fed
"The pyramid of liabilities makes a lot more sense to me than Cullen's "inside money"..."
'Inside money' is a well known term that has been in use in economics for a long time. It's not a new term invented by Cullen.
MMT sometimes uses the term "horizontal money" rather than "inside money":
"Bank money creation through the loan/deposit mechanism occurs completely within the commercial banking system, without direct participation of the central bank, and is called "horizontal". The basis for all horizontally created money is always (private) debt. Horizontal financial activity can never increase or decrease non-government net financial assets; the net is always zero."
http://mmtwiki.org/wiki/Money,_Government_and_Banking#Horizontal_Money
The tax payment to US Treasury goes to an account at the federal reserve. So presumably the bank uses one of the federal reserve payment systems (ACH? FedWire?) to mark down your account and mark up treasuries account at the federal reserve using the bank's own reserve account for clearing. So classifying at which point in the payment system your deposit transforms itself from a bank liability to a bank reserve to an entry in the treasury fed account, is a bit... tedious and accounting rich. The CFR combined with payment system docs at the Fed go into painful detail if you like that sort of thing on how exactly they maintain bank reserves relatively constant in spite of the ebb and flow of tax payments and expenditures. If you combine that with the painful detail in the fed's payment system docs you could probably define exactly when in the process it all happens so at to minimize the impact on rates. *cough* fun stuff. Not really.
'Inside money' is a well known term that has been in use in economics for a long time. It's not a new term invented by Cullen.
MMT sometimes uses the term "horizontal money" rather than "inside money" [y]
Thanks, y. I majored in Economics at the University of Michigan, and read a lot of Economics blogs and such, but I don't recall seeing the term 'inside money' used outside of Cullen's blog. I'm sure you're right though.
Anyway, the concept of 'horizontal money' makes more intuitive sense to me, in that the private sector money creation is offset by a private sector liability. 'Inside', on the other hand, implies that the government is on the outside looking in at banks which are at the heart of the monetary system. That's like saying the 'inside' judges are those in the circuit courts (with the Supreme Court presumably being outside)...
"So classifying at which point in the payment system your deposit transforms itself from a bank liability to a bank reserve to an entry in the treasury fed account, is a bit... tedious and accounting rich"
Your deposit doesn't transform itself from a bank liability to a bank reserve.
It's simple. Bank deposits are bank liabilities, and reserves are bank assets. When you pay taxes from your bank account, your bank debits your account, thus reducing its liabilities, and the Fed debits your bank's reserve account, thus reducing your bank's assets. The Fed then credits the Treasury's account. There is no 'transformation' of deposits into reserves.
Dan,
http://en.wikipedia.org/wiki/Inside_money
(see the link to the Ricardo Lagos paper at the bottom)
Thanks again, y. Good to know!
I guess after reading that, I've come full circle and again realize I prefer the terms horizontal and vertical and opposed to inside and outside. "Inside" is private-sector centric, which doesn't make sense for a fiat currency. On the other hand, "pyramid of liabilities" provides a perfect description of the monetary system...
Ryan, was that a response to my comment? If it was, I didn't mean to imply that people don't have access to bank reserves. The point is that the term 'bank deposit' refers specifically to the bank's liability to the depositor, and not to the cash or reserves that are owed to the depositor by the bank. If you own a bank deposit, that means the bank owes you money. It doesn't mean that there is a pile of cash sitting in the bank with your name on it.
Dan, I don't have a problem with the terms 'inside money' and 'outside money' in themselves. Say for example you and me enter into debt/credit arrangement, so for example I buy some goods from you on credit by giving you my IOU. You could say that IOU is a sort of 'inside money' (more so if you could then pass it on to someone else). It's 'inside' in the sense that that it's just a debt from me to you, and not something that comes from an 'outside' third party. However, the money I then use to settle my debt to you comes from 'outside' our arrangement - it's issued by a third party (i.e. the government in the case of the private sector as a whole). That's the way I understand it.
Actually, one can pay taxes with bank deposits without the rb being extinguished at once due to the use of TT&L accounts to manage rb in the interest rate setting process when the cb is not paying IOR or and doesn't set the rate to zero. But eventually, what is taxed is transferred out of non-government accounts when the TT&L account is drawn upon, in effect "destroying" non-government net financial assets by withdrawing them.
right, I was simplifying. It's also possible that your bank doesn't have a reserve account at the central bank, in which case the final settlement with the govt isn't made by your bank, but by another bank (that does have a reserve account).
Another possibility is for the bank that lacks reserves to borrow at the Fed discount window.
In that case the taxes will be paid in new money created by an expansion of the Fed's balance sheet.
TIP: Perhaps stop using metonymy ("money") at all in a discussion that looks like is about what proper terminology should be....
rsp,
y-
I see what you're saying about use of the terms "inside" and "outside" money. It seems like they may appropriate for certain restricted discussions, but if you're talking macroeconomics (big picture), they're counterintuitive as far as I'm concerned. Perhaps the terms have been inappropriately transferred from one niche to the larger discussion of the monetary system. It's a matter of perspective, I guess.
Mr Musgrave,
Thanks VERY much for this posting. I had the same reaction as you did to section 5 in Mr Roche's article.
In particular, the idea that the government can - through mere delegation - become a currency USER of bank-issued money is absurd on it's face. The United States uses one unit of account, not two.
In order to highlight a sovereign government’s ability to create fiat currency, Monopoly (the game) is a popular metaphor to use for a sovereign government’s ability to always create new currency. In Monopoly, players know that for the game to continue to be played, the rules allow for new pieces of paper to be created with whatever denominations are required if the game’s preprinted currency runs out.
As part of the game, there is always someone among all the players present who gets assigned the role of banker for the game. In essence, the banker is just a player with an additional responsibility apart from playing the game. It is always important to make sure that whoever is chosen as the banker is an honest broker or that all the players keep a sharp eye out if not. If dishonest and has no oversight, the banker will always get richer than the other players and win the game by slipping himself an extra $100 whenever passing “Go” or creating extra money pieces that he alone keeps. The dishonest banker becomes a sure thing to win.
In a sovereign country’s economic system a cheating banker, creating money is just inviting trouble. Just like the cheating Monopoly banker also would do. Either banker then chalks up his or her success to a masterfully derived straw man argument on their great wisdom, importance, and skill when in reality they are cheating with their monetary powers.
I understand the MMR position on inside money as the great driver of the economy. However, even if you give that position the benefit of the doubt and say that it is realty, how can anything other than mass economic and social inequality be the inevitable outcome? Why would a sovereign country be willing to turn 90% of its (inside) money creation over to bankers who only want to win no matter how unfairly? It would seem inevitable that non-inside money citizens (players) would always lose and the banker looked at as the gifted winner.
It is why MMT (outside money creation) with sovereign government (that would be us as citizens) at its center makes more sense and may be the more ethical way to approach an understanding of monetary operations. If MMR (inside money creation) by some chance is truly monetary reality, than it is critically important that MMT (outside money creation) becomes the reality that drives national fiscal policy.
For my understanding of the relationship between horizontal (or inside) and vertical (or outside) I always reach back to Matt and Warren's comments about how the currency issuer ratifies higher prices in the economy.
Private credit expansion creates provisional growth which then must be ratified with government injection of net financial assets or it will be repealed with debt-deflation.
Which is really just another way of talking about how the private sector leverages NFA, an idea that MR reacts violently to because they seem to read it as suggesting a prior constraint but that's not the point at all. Leverage, like the money multiplier, is just an ex post observation. A snapshot.
Leverage is important not because the private sector requires NFA in order to expand credit (which it does not) but because NFA is the foundation of equity upon which private sector credit rests and if that foundation is insufficient, we get instability and eventual collapse as the pyramid of liabilities come tumbling down.
I agree with the excellent recent comments from Tofu, Sapient, and Gee (although it should be noted that Cullen is way off with his comment about 90% of money being inside money -- it's more like 35% as far as I can tell).
With regard to MMR (or MR as they now call themselves), only Cullen Roche seems to be emphasizing "inside money".
"If MMR (inside money creation) by some chance is truly monetary reality, than it is critically important that MMT (outside money creation) becomes the reality that drives national fiscal policy."
False dichotomy. MMT clearly explains how banks in particular create credit money ("inside money") and how this fits into the overall monetary system. MMR adds nothing to the MMT explanation other than vague and illogical statements that just express Cullen's feelings about stuff.
"It is why MMT (outside money creation) with sovereign government (that would be us as citizens) at its center makes more sense and may be the more ethical way to approach an understanding of monetary operations. If MMR (inside money creation) by some chance is truly monetary reality, than it is critically important that MMT (outside money creation) becomes the reality that drives national fiscal policy."
NOW WE'RE TALKING!
First of all, good day to everyone and thanks for the cordial discussion. I know these are contentious debates, but they're important.
Anyhow, the purpose of MR and the inside money view is to properly portray the power structure within the monetary system. The govt has essentially given this power away by making banks the primary issuers of money and allowing them to reap massive profits in the process. You might think the govt is in control, but I don't see it that way. I see the banks as having the govt over a barrel. And every time they f&ck up the govt must come in and clean up the mess they made.
So, by supporting the current hybrid inside/outside money system MMTers are IMPLICITLY supporting a system that diverts a huge amount of resources towards private bankers via loan profits, various support systems and the inevitable trillions in bailouts.
This the key question at hand for MMT. Do you support a pure outside money system? Or do you support the hybrid system we have today? Bear in mind, they are NOT the same thing and MMT's "general" and "specific" cases are not the same thing either. You might think that you can have both a hybrid system AND a monetary system that serves public purpose, but I flatly disagree.
Anyhow, that's where I stand. Who the eff knows if I am right or wrong. Probably wrong, but it's worth some serious thought in either case.
Take care!
MMT clearly explains how banks in particular create credit money ("inside money") and how this fits into the overall monetary system. MMR adds nothing to the MMT explanation other than vague and illogical statements that just express Cullen's feelings about stuff.
I agree for the most part. There is certainly room for MR (formerly MMR) as a political (or apolitical) alternative to MMT, but I don't see much difference with regard to the economic substance. Thus, for example, the policy recommendation for a government job guarantee is in a different category than the basic description of how the economy works, which both camps agree on...
Having said that, JKH's stuff is worthwhile, though I don't agree with everything he writes.
Hi Cullen! Thanks for chiming in. Good to see more areas of agreement...
"Anyhow, the purpose of MR and the inside money view is to properly portray the power structure within the monetary system."
You get everything confused. There is a logical hierarchy of money. The state can't run out of dollars because it manufactures dollars. Banks, on the other hand can run out of dollars.
The fact that Wall Street tries to buy politicians or make the system work in their favour doesn't change the logical hierarchy of the monetary system.
"So, by supporting the current hybrid inside/outside money system MMTers are IMPLICITLY supporting a system that diverts a huge amount of resources towards private bankers via loan profits, various support systems and the inevitable trillions in bailouts."
That's complete bullshit. No MMTer supports a system of "trillions in bailouts" for corrupt and dysfunctional "too big to fail" banks. On the other hand, you seem to be the one that actually supports such things.
y, I agree it is a false dichotomy to compare MMT and MR (h/t Detroit Dan). MR at best is a subset of MMT, imho. It is just that all the back and forth over the past couple of years between the two camps has implied an either or choice by the MR camp, again imho. The MR position is extremely hard to follow logically. The MMT position is an elegant, logically supported, more easily followed, description of monetary operational facts. The more one understands it, the more one would believe there is potential to use that understanding to make a world with far less inequality.
@ Cullen
Well, I don't know that there is a single MMT position on inside v. outside money as a policy prescription.
Bill Mitchell is on record as in leaning strongly toward nationalizing the banking system. He feels, as you suggest, that it is not only impractical to rein in the banks using legislation and regulation but also likely impossible, since they will do everything in their power to skirt regulation, change legislation, and in the end the big banks will do what they please and challenge the authorities to do anything about it by threatening to crash the system (go Galt).
As you know, Warren disagrees and thinks that better legislation, regulation and oversight is sufficient, and he has put forward a plan to that effect.
I don't know where the other MMT economists stand wrt policy prescriptions on this. However, I think that they all agree that if existing law and regulation were followed, oversight was up to par, and accountability imposed, most of the egregious excesses could be eliminated.
In this view, the problem is not so much economic or financial as it is political. As Sen Durbin famously said, "The banks own the place (Congress). A look at presidential appointments generally reveals the same wrt the executive, with some many bankers serving in high places and the revolving door wide open.
Can this be surmounted? So far, no, even though the need for it has been recognized at the highest levels. The big banks still have too much clout politically and they are not reticent about throwing their weight around.
Randy analyzes the problem in terms of managerialism and Bill Black in terms of control fraud. This arises from the corporate model of banking with limited liability and perverse incentives for top management that replaced the partnership model. It could be reversed by going back to the partnership model with unlimited personal liability for the partners. I would favor this approach, at least as a start.
Here at MNE, Ralph Musgrave prefers a full reserve banking system in which only outside money is lent, e.g, Laurence Kotlikoff's mutual fund banking model.
"MMT claims to support a system of money for public purpose, but the current money system is specifically designed around entities who siphon trillions of dollars (that could otherwise go towards other resources) off in the means of generating a profit. You claim you don't support it, but as long as the payments system is centered around private profit generating banks then you support that system (unless you explicitly call for change)."
No. Here's an analogy to help clear up your confusion: MMT describes what a car is and how cars work in general. It also describes how different cars work in practice, and how different cars worked in the past. It also gives advice on how best to operate and maintain your car to achieve your desired goals, and what not to do if you want to avoid breakdowns and crashes. It also offers different ideas on how car designs could be improved in future so that they function better and generate less negative externalities, such as greenhouse gases.
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