Noah appeals to Goodhart's Law.
Conversely, Warren Mosler recommends that the Fed set the overnight rate at zero permanently and provide unlimited liquidity to solvent members of the payments system, while Treasury should cease issuance of securities altogether, since they are operationally unnecessary for a country that floats its currency and doesn't borrow in a currency it doesn't issue.
Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System
Wouldn't this be inflationary? Not if the government manages economic policy on MMT principles.
Seven Deadly Innocent Frauds of Monetary Policy (Link to PDF, also available at Amazon here.)
Soft Currency Economics (Link to PDF, also available at Amazon here.)
Maybe Naoh should ask Charles Goodhart what he thinks about this.
Wouldn't this be inflationary? Not if the government manages economic policy on MMT principles.
Seven Deadly Innocent Frauds of Monetary Policy (Link to PDF, also available at Amazon here.)
Soft Currency Economics (Link to PDF, also available at Amazon here.)
Maybe Naoh should ask Charles Goodhart what he thinks about this.
Bond bubbles
Noah Smith | Assistant Professor of Finance, Stony Brook University
10 comments:
I agree with Warren’s claim that the Treasury should “cease issuance of securities”. Milton Friedman thought the same. But I don’t agree with two other Mosler proposals, because both are subsidies of banks.
First, “..provide unlimited liquidity to solvent members of the payments system..”? That amount to preferential treatment for commercial banks. It equals a subsidy. If banks are entitled to public money when they’re short of cash, why not everyone else?
Second, Warren says “The FDIC should be entirely funded by the US Treasury.” That’s another subsidy of banks. The Treasury doesn’t pay my own house and car insurance, and quite right. The Treasury shouldn’t pay for banks’ deposit insurance.
No it doesn't Ralph.
Banks are marginal businesses. They mark up the cost of funding whatever it is.
If the cost of funding is zero then the cost of private borrowing is less. The banks get the same cut regardless.
The amount of private borrowing you permit vs public borrowing is a matter of policy for demand management.
The sum of private and public borrowing required is always the same for any given set of 'animal spirits'.
Under MMT you stop banks lending not by price but by restricting what they can lend for. Which is much more sensible because price will not and has not delivered the correct mix of lending.
The problem is that regulating what they can lend for seems to not work because lobbyist and wider social interests (because "everybody" loves a good ol' housing bubble while it last, including the politicians-regulators as it gives them growth and jobs).
In any case, and whichever is the solution, is a political and social problem. So we won't see any solution until the whole bubble-nomics system collapses from intoxication.
All control systems are human designed and implemented and work only as long as you have trained pilots to steer the ship.
There are no 'natural' controls that work. The best you can hope for is something that is semi-automatic (like the auto-stabilisers).
Everybody liked a polluted stream and slavery at one point.
"Second, Warren says “The FDIC should be entirely funded by the US Treasury.” That’s another subsidy of banks. The Treasury doesn’t pay my own house and car insurance, and quite right. The Treasury shouldn’t pay for banks’ deposit insurance."
It's not the banks' insurance; it's the depositors' insurance. Under the FDIC system, the FDIC pays out when it receives insolvent banks. It doesn't insure banks against losses. The funding for the FDIC comes from the banks, and much of it, then, is an indirect premium passed on to depositors as account fees on FDIC insured amounts (although, by law, they are not allowed to say it is an FDIC assessment, since the FDIC charges the bank, not the depositor). This means small depositors are paying more, proportionally, for deposit insurance than larger depositors, since amounts over $250,000 are not insured.
Shifting the insurance burden from bank depositors to Treasury and the entire tax system would make it more progressive.
"If the cost of funding is zero then the cost of private borrowing is less. The banks get the same cut regardless."
Except we are in an era now where bank and other financial sector compensation packages have been enormous. The idea of keeping overall lending rates low, so that solvent lenders (those that are accumulating productive loan assets) can both borrow and lend cheaply is good in principle, but more needs to be done to purge the wasteful rent collections from the system.
"but more needs to be done to purge the wasteful rent collections from the system."
Yes, which is why the overdraft system should be widely available to anybody prepared to underwrite loans, and with tight regulation to keep lending narrow and on target.
Plus with regulators prepared to pull plugs just as soon as there is a problem.
The main problem with the capital requirement regulations is that they raise the barrier to entry in banking. Once you accept that bankers are just agents for state money, then you can lower those entry requirements right down and allow the smaller operations to flourish again - possibly with a competitive public offering to keep the private banks on their toes.
@ Ralph
Warren's proposal eliminates monetary policy run by an unelected small group of technocrats and it also eliminates the interbank market in reserves. The central bank become a payments system that can be digitized and folded into Treasury, liberating a lot of people for more productive work and increasing democracy in the nation.
@ Neil
In the US this is the complaint of the credit unions and smaller banks, as well as larger regionals. The institutional structure favors the TBTF/TBTJ "banks." if they can be called that. They get special privileges as banks and have their finger in many financial pies that produce rents.
"The central bank become a payments system that can be digitized and folded into Treasury, liberating a lot of people for more productive work and increasing democracy in the nation."
Bingo. That would also liberate a LOT of expensive real estate, tax loopholes, limos, suits, salaries and distracting Kabuki shows.
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