Among the Post-Keynesian groups concerned with understanding and fixing problems that lead to the 2007/8 Global Financial Crisis (GFC) and other ongoing economic problems there are different areas of focus by circuit theorists, Modern Monetary Theory (MMT), Steve Keen’s approach to private debt, and other Post-Keynesians. (MMT, while often with a focus on other aspects of the economy [as L. Randall Wray writes, leading from neo-Chartalist and functional finance insights to fiscal policy] is nevertheless firmly grounded in endogenous money theory). Despite these various approaches having important disagreements and areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.
There is another perhaps small but dedicated and often visible group of reformers that focus on the monetary system. Broadly these are the various groups that want to change the monetary system such as The American Monetary Institute (AMI), Positive Money (PM), economists associated with the New Chicago Plan and others. Their relation with the Post-Keynesian groups mentioned above is somewhat complicated, and the key reason involves endogenous money. Before continuing, it helps to divide these diverse money reforming groups into two broad categories:Clint Balinger
Endogenous money, MMT, Positive Money, & financial reform
25 comments:
Normally I agree with Clint Balinger, but I found his article a bit of an incoherent ramble. He should concentrate on just one simple point at a time.
Hey Ralph - what is confusing about it?
Some more feedback would be great :) "Both MMT and PM-type proposals are to use state money for public purpose. The real contention between MMT and PM lies in whether or not endogenous private credit-money creation also serves the public purpose."
Hi Clint,
I'll try to "feedback" some more. I agree that MMTers and PM attach a lot of importance to state money. PM goes a bit further and says "ban privately created money altogether". That's standard full reserve banking thinking which I agree with, as did Milton Friedman, Laurence Kotlikoff and a a couple of economics Nobel Laureates. So at the very least it's not a totally stupid idea.
Ralph - it's not standard full reserve banking. Full reserves would not stop private credit money - the PM proposal is for a _no reserves_ loanable funds system.
This is not the key point of what I wrote - but it is important. Talking about "full reserves" makes Post-Keynesians disengage automatically, and for good reason.
The PM proposal is completely misguided - and is an example of the triumph of PR and marketing over solid system engineering.
Anybody who actually believes you can create a loanable funds system in a monetary economy simply doesn't understand how a monetary economy and banking actually works in practice, or how 'loanable funds' actually is supposed to control an economy.
There isn't anything put forward by any of these proposals that cannot be implemented in the current insured system, and none of them fundamentally change the way things work from what we have at present (because current banks are actually 'fully funded' - contrary to beliefs).
It's smoke and mirrors. A conjuring trick. It doesn't work and it won't work. I'm amazed people are still enamoured with it all.
Neil - you always bang on about the funding/backers of PM with absolutely no evidence - (http://www.positivemoney.org/2012/10/does-full-reserve-banking-equal-monetarism/ and other places). Would love to see some actual evidence.
On the link I just posted - some more on that in a future post. For the moment - Fine to be against a loanable funds model (like Francis Coppola in comments here http://www.positivemoney.org/2012/10/does-full-reserve-banking-equal-monetarism/ - whose very good comments also merit a good reply, which is sort of the point of my post) - but honestly, I have never seen anything by you that suggests you have actually read the PM proposals in any detail.
The "analysis" you have in the past given seems to be stuck in a weird world where you say PM proposals are impossible and then give reasons why that would only apply to the existing system, not after the proposed changes. A bit like someone criticizing transatlantic flight because those newfangled airliners don't have a plan for avoiding icebergs.
I want honest debate on the pros and cons of endogenous private credit-money.
Not dogma.
(Clarification - I refer to Neil's comment on that first link I mention - it is the first comment on a Heteconomist post http://heteconomist.com/remarks-on-positive-money/comment-page-1/#comment-121621. There are others in which he alludes to nefarious funding of PM more directly - I don't have time to find them now)
Clint,
You're an acolyte, and always have been. Fine if that's what you want to believe. I can't really help you there.
When I first saw the so called legislation put forward by PM it was as clear as day that systemically they haven't got a clue what they are doing. Everything else they've ever done has been marketing and PR and politics - which is actually all they are good at.
Nothing I write is going to change the minds of the acolytes. And frankly I can't be bothered - because this is never a matter of technical debate. I've got lots of other things at the moment that are more pressing.
The belief in the restoration of loanable funds is the same belief that you get in the magic of fixed exchange rates, or 'free markets'.
But believing hard doesn't make a system work.
Current banks are actually fully funded and National Savings acts as the deposit drain which they have to counteract. Hence why the banks moan about it so much.
If you can't see the actual dynamic system effects from that, then you are caught in a groupthink.
I'm not getting into an argument with you again, and I will take this no further at this stage. Because it is a waste of time. Core belief is a high resistance to change and generally has to be worked around rather than altered.
PM and full reserve is a dead end diversion that achieves nothing at all. Most of the supposed magic is simply more government spending and/or tax cuts and you try and make space for that by putting the price of loans up.
We can do that tomorrow without changing anything.
The MMT difference is that they don't put the price of loans up to restrict demand. They propose restricting what loans can be issued for.
And that is the fundamental difference in approach - addressing what is a 'creditworthy borrower' rather than just pretending price will sort everything out.
!) Once again - zero evidence for Neil's claims that PM is nefariously funded.
2) Neil says "restoration of loanable funds".
Neil - can you tell me ONE time in human history when loanable funds existed?
If you think think it is being "restored" - then you know far less about banking than I thought.
(PS - True no reserves loanable funds _systems_, not the giro banks scattered here and there at some times)
Seems to me that the argument going on now with various alternatives proposed is fundamentally between an exogenous and endogenous monetary system.
There are various ways to structure both, but the two systems are fundamentally different.
In an exogenous money system, the government controls the money supply through its control of currency issuance and in an endogenous system the banking system controls the money supply by forcing government to create the amount of currency demanded.
In a strictly exogenous system, currency is the sole money used on bank lending. Banks cannot extend credit separately from savings, and savings are exclusively currency issued only by government. Government determines the stock of currency available in the economy, and the private sector determines the balance of consumption and saving based on preferences, and saving determines investment based on "loanable funds."
This is banking through intermediating the lending of savings in currency for a fee, which is the spread between the rate the banks' pay to attract deposits and the rate they charge on loans.
The assumption is that in a strictly exogenous system the government determines the amount of loanable funds through issuance and taxation relative to private saving desire. So functional finance applies.
This also assumes that the private sector will not figure out how to expand purchasing power through credit in other ways that traditional bank lending in an endogenous system. On the other hand that could be regulated or prohibited.
The narrowest way to set up an exogenous system is by equating money with the money thing, so that all transactions are mediated using the money thing issued by the government. There are more abstract ways, but the idea is the same, namely, mimicking a bullion system.
The "reserves" in such as system are bullion or the bullion substitute like paper that is 100% backed by bullion and is convertible into bullion on demand. This, btw, was the way international trade was carried out previous to the termination of Bretton Woods. Each country had a separate vault in the gold vault deep beneath the NY Fed building on Liberty Street, and the balance of payments was settled daily by transferring gold bars among the cell iaw the daily manifest. I was able to see it in operation in 1960 before it was open to the public, but they give tours of it now.
Of course, an exogenous money system can be run more abstractly, but the fundamental principle is the same. Government runs the show.
Endogenous money recognizes that historically endogenous money has existed in parallel with exogenous money through private credit creation, and even precedes exogenous money in the mists of time. In a modern endogenous system, a banking system is created under the legal auspices of government as an interface between governments' currency issuance and private sector credit creation.
continued
continuation
While this allows the private sector a role in money creation it also allows for regulation in the interest of safety, at least in principle if not in practice, since financial innovation has cleverly found ways around those limitations and politically powerful financial institutions have captured the regulatory process. This has engendered the issues that are now prompting discussion of reform.
Another alternative now being proposed by some is an exogenous system that is not controlled by government, which is what digital currencies are supposed to do by mimicking a bullion system abstractly. While Bitcoin gets mosts of the attention, there are others that are lesser known, like Faircoin.
Yet another alternative or set of alternatives is narrow banking, which was the basis of traditional banking. In narrow banking, loans were backed by "real bills." There are various ways to structure such systems as the article just cited shows. Narrow banking is more flexible than a strictly exogenous system controlled directly by government but considerably more secure than existing banking arrangements that enable excessive risk taking that can lead to systemic financial crises.
Then there is free banking, proposed by Libertarians, in which the "currency" is real value typified by gold and banks are free to conduct business as they wish in order to compete in unregulated markets. There are various versions of this system, too.
All systems have advantages and disadvantages, so the argument is really over different system designs and tradeoffs. Systems design is essentially about solving design problems. The question then is defining these problems, which are often emergent challenges, proposing alternatives, and assessing tradeoffs, e.g., in terms of opportunity cost.
I would say that the overarching design problem now is the emergent challenge of systemic financial crisis that has the potential to implode the global economy resulting in real economic crisis and consequent social disorder.
The principle tradeoff seems to be between growth and safety, the design problem being how to strike a balance.
So systems design in relation to a (complex) design problem seems to be to be the place to begin. It seems to me that a lot of solutions are solutions to one or only a few issues among many. The debate is to put all relevant issues on the table and examine proposed design solutions in terms of tradeoffs. This involves some prioritization of objectives that are taken as the criteria of effectiveness.
Given Neil's strongly anti-PM stance and given his claims about PM being nefariously funded there is a brilliantly simple and blindingly obvious way he can totally bu*ger up PM: take his evidence to the relevant UK authorities (tax authorities, police, etc).
After all, PM has to publish accounts, which it does, and if those accounts are misleading, then PM has broken the law.
But of course Neil won't do that because he's making it up as he goes along: i.e. he doesn't have any evidence on "nefarious funding".
Clint,
Re your claim that PM does not advocate full reserve banking, that depends on your definition of full reserve. What PM means by the phrase is the same as what Milton Friedman meant by "100% reserve" which in turn is what Laurence Kotlikoff means by "limited purpose banking".
It's a system under which the banking industry is split in two. One half is totally safe and is full reserve: depositors' money is imply lodged at the central bank, i.e. backed by base money, and possibly also invested in short term government debt. But apart from possibly lending to government, that half does not lend.
The second half lends to mortgagors and businesses etc, but it is funded entirely by shareholders or at least by creditors who stand to lose everything if things go seriously wrong.
One merit of that system is that it's virtually impossible for either half of the industry to fail. Thus it will never need trillions of dollars worth of bail-out gratis the taxpayer.
"One half is totally safe and is full reserve: depositors' money is imply lodged at the central bank, i.e. backed by base money, and possibly also invested in short term government debt. But apart from possibly lending to government, that half does not lend." (safe store of saving)
"The second half lends to mortgagors and businesses etc, but it is funded entirely by shareholders or at least by creditors who stand to lose everything if things go seriously wrong." (safe lending of stored savings)
Where do the savings come from?
The question is how money is created if all lending is intermediated in the strict sense and government alone is authorized to create new money.
A lot people would see that as either as socialism based on a command system, or else a system run by politicians subject to the criticism about corruption, which is why politicians are not trusted with total control of the purse strings in most democracies.
So out of the frying pan into the fire?
Ralph - yes except the money is not "backed" by anything. It is just (mostly digital) tokens - the digital tokens at the reserve bank are just yours - not backed by anything. If/when you loan them to someone - they transfer to them. So it is a "no reserves" system, not a "full" reserves system.
I can't find it now - but there is a great MMT explanation (by Mosler?) using NYC subway tokens as an example - anyway - all money just becomes zero interest infinite maturity treasury tokens (like Greenbacks) that can be transferred around.
Tom - you write "Where do the savings come from?" in response to Ralph's comment.
Just like MMT says - from the gov spending into the economy for public purpose for infrastructure, social security, veterans benefits, education, research, military, etc.
This alone is creates a massive money base if done well - the American Society of Engineers estimates that the USA needs to invest 3.6 Trillion Dollars into US infrastructure alone over the next 6 years (http://www.infrastructurereportcard.org/). Ideally this money would also be injected through universal Medicare and a job guarantee.
In addition to that - taxes can be decreased to "inject" money into the economy, and if needed, citizen's dividends of any size (not far from what Bush did in 2008) can be given out.
Plenty of gov spending to create NFA can & should happen.
My point to Neil (about transatlantic flights and icebergs) is that he and others always analyze the system as if all else is ceteris paribus. It won't be. 1) It should be much easier to control inflation as something like the Friedman rule would actually work in a true loanable funds system, and 2) there would not be NEARLY as much asset inflation if there were not private credit money bubbles (this is why Steve Keen's work is so important - it shows this).
The average citizen would be much better off in many ways, and we would not as a society need to resort to private credit (and thus private credit money, and vice versa) to sustain effective demand. (see Keen on this for more detail). Basically - things would be more stable and many important things (such as housing) would be less expensive. The availability of loans would be less important for the well-being of most people. (and the availability of loans for businesses was the one legitimate question about the new system I put in my original post).
Tom writes "A lot people would see that as either as socialism based on a command system, or else a system run by politicians subject to the criticism about corruption, which is why politicians are not trusted with total control of the purse strings in most democracies."
Tom - everything about the business side of the economy would run exactly as now, as hyper-capitalist as we want it (although w/a smaller FIRE sector). On the purse strings - PM is quite clear on this question.
The quantity, and the quantity alone, would be decided based on inflation (which, btw, would be much easier to calculate taking out the massive x-variable that is endogenous private credit-money). How it is spent would the same as now, decided by Congress/Parliament etc.
Basically, things would run the same as now regarding commerce etc. Not socialist in the least, and certainly not "command".
And with a _substantially_ smaller FIRE sector - pretty much which makes up for most of the cronyism now - Cronyism would be greatly reduced, not increased.
"Tom - you write "Where do the savings come from?" in response to Ralph's comment.
Just like MMT says - from the gov spending into the economy for public purpose for infrastructure, social security, veterans benefits, education, research, military, etc.
This alone is creates a massive money base if done well - the American Society of Engineers estimates that the USA needs to invest 3.6 Trillion Dollars into US infrastructure alone over the next 6 years (http://www.infrastructurereportcard.org/). Ideally this money would also be injected through universal Medicare and a job guarantee.
In addition to that - taxes can be decreased to "inject" money into the economy, and if needed, citizen's dividends of any size (not far from what Bush did in 2008) can be given out.
Plenty of gov spending to create NFA can & should happen.
Those are exactly my points, Clint.
1. New money comes only from government, which would make a lot of people very uncomfortable since they would see it as either socialistic or subject to political corruption.
2. When government can't get the approripriate amount of funding needed with the present system, why expect that government will get it right when they are the only source of money supply? It's not plausible.
3. In a pluralistic liberal society all interests have to be served sufficiently or there will be political jockeying to change the system permanently in one direction, leaving other factions dissatisfied and they will continually try to break the system.
I agree in that in principle a government controlled system could work under MMT principles, but in practice I don't see it working very well, especially under oligarchic democracy in which the state is effectively captured by oligarchs who run it in their interests.
Tom - the amount of money each year would be separately decided according to inflation expectations, which would be much- vastly - more straightforward w/out all the complexities of bank created private credit money.
PM has a good explanation of this.Note, though, this puts gov spending the highest it could go save for inflation automatically - which in effect MMT would as well - the PM system more or less guarantees MMT suggested fiscal policy levels would be the norm.
_Funding_ is a different story - funding of gov programs. Congress?Parliament etc would still have to decide who gets to use that money (just like now).
Of course there will still be jockeying etc. But the proposed system is much more transparent and straightforward than the current one, which we _know_ is leads to cronyism etc. It seems like it is worth a try at least. I mentioned in comment to Neil - there has never really been an exclusively loanable funds banking system in history, and there have always been severe problems with banking. Maybe organizational technology can finally catch up with those problems.
That should read "Congress/Parliament", no question mark! :)
As far as I am concerned, a government run exogenous money is a non-starter as long as oligarchic democracy persists. It would not materially improve the current system, since both are controlled by oligarchs. At best, there would be different oligarchs in control. As the Vietnames say, The dung heap remains the same, only the flies change.
The fundamental issues are social and political rather than economic. The economic is just a manifestation of the social and political institutional arrangements.
The political challenge is to change the social and political institutional arrangements and then the economics will change, too.
The key variables are class structure and power relationships that convey privilege. Under a feudal system the power rests with the titled nobility and landed gentry and under capitalism with an oligarchy. In both system, politics is essentially factions at the top competing for greater control.
With the present system is a bit more difficult for any set of oligarchs to exert complete control, but that would be possible under a system in which government has more power than it does presently.
A "free" private sector exerts checks and balances more efficiently and effectively than in a government controlled system. Then the political action becomes which oligarchic faction can gain and maintain control of government. That's bad enough now. With more government involvement, it would be worse in the absence of government of the people, by the people and for the people, which remains an unrealized ideal as long as oligarchy remains institutionalized.
"The political challenge is to change the social and political institutional arrangements and then the economics will change, too". [TomH]
From where I am standing, the basis of this has always been kindness in a partnership with intelligence; being human.
(... thinking out loud) - Which is the whole point of being human. We get to choose.
If we choose to allow greed and every man for himself to prevail, we end up with the world as it is today. There is no intelligence in that because as 'Monkey' used to say - 'when darkness overpowers light, there is nothing left to feed on'. So intelligence chooses light!
[by Email from Andrew Jackson]
Neil Wilson knows how Positive Money are financed as I posted a link to Positive Money's accounts in the comments section of the article that claimed we were run by the 1%. You won't find this comment now as it was promptly deleted! However for the relevant information is here: http://www.positivemoney.org/about/finances-funding/
The only thing i would say about the article is that PM aren't really about restoring loanable funds, rather they are about returning macroeconomic control to the government. All the money could be lent in endogenously in the PM system if desired, by banks having unlimited overdrafts at the central bank. The point is in the PM system this is a choice for the Gov, and they can switch the tap off if desired (unlike in the current system). What we actually propose for dealing with potential shortage of credit for businesses lending is that the central bank stands ready to lend to banks on the condition that they on lend to businesses. This lending could even be endogenized - i.e. banks could have overdrafts at the central bank. In this system there would be loanable funds for non-productive types of lending, and endogenous money for productive types of lending. This would be very similar type of system, at least in terms of economic effects, to what Warren Mosler proposes (i.e there would be plenty of money for productive purposes, but not much for speculative activities).
Finally, I think Neil is probably wrong about the deposit drain through national savings. This used to be the case, but since the Debt Management Office took over the running of the national debt any money raised but not spent by the government is automatically lent back to the markets to prevent shortages of reserves. But this only happened in 1997 so its understandable he hasn't caught up yet!
Cheers, and sorry for the late reply again.
(PS I couldn't post this to the website for some reason so feel free to post it if you like)
Thanks,
Andrew
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