JKH says:Thursday, August 20, 2015 at 9:32
I think the deepest point underlying this sort of discussion is that the (“mainstream”) economics profession at large is disastrously ignorant on the basics of financial accounting, and how those basics are applied to an understanding of how monetary systems work and therefore of how economies work. This is bedrock analytical stuff that is simply not recognized or understood as bedrock analytical stuff by most. But it is essential in untangling the essence of questions like the one discussed here.
You folks of course understand the importance of this. You understand you can’t move on to a coherent discussion of flexibility in monetary arrangements without understanding this first. And this discussion here is about coherence in understanding and analyzing options and flexibility in monetary arrangements. People can then possibly disagree in coherent ways on the policy questions such as the wisdom of issuing bonds, but not before understanding how to get to those kinds of questions in a logical way.
It is not possible to have a broadly constructive debate on the policy issues unless these basics are absorbed seamlessly into the language and the analysis of economics. It is at this stage still a black hole omission in the standard education of the economics profession, which itself needs a great big spanking in order to get moving on what should be understood obviously as common sense in how to start to think about and analyze these things. Until then, it is mass head banging.This cuts to the core of it. If the Left is to be successful in addressing the pseudo-problems of economics and their rhetorical use by the Right, the issue need to be framed as actual problems in need of a solution and that framing presupposes using the correct language and symbology.
The problem that societies faces are chiefly social and environmental, secondarily economic and thirdly financial. The social and environmental challenges need to be addressed using available real means. The financial aspect is about mobilizing those means economically, that is, bringing real resources to bear on solutions effectively and efficiently.
In this endeavor, there is no substantial difference between "money financing" (PQE), or bond financing, or consoles. The effect is the same. Available real resources get deployed in a timely way to where they are needed.
President Lincoln chose to fund the US Civil War with direct issuance, while the US funded WWII with bonds. There was no real difference between the two methods. The difference was financial and political.
There are reasons to prefer direct issuance or "money financing" by borrowing from the central bank or issuance of bonds by the Treasury, but this has to do with financial issues and not real issues.
MMT shows that affordability is not the issue, nor is the size of the deficit or the public debt, nor the amount of interest involved in bond financing.
However, there may be financial reasons for preferring one type of funding to another. On one hand, it doesn't matter economically how resources are deployed as long as the process is effective and efficient. Otherwise, it is just a matter of record keeping.
On the other hand, finance is about risk management. There may be reasons to prefer bond financing over direct issuance with respect to risk management, for example.
The affordability of interest in "debt-free money" arises from a pseudo-problem — the need to pay interest on the debt. This is irrelevant to nations that are sovereigns in their currency, as the UK is.
The significant question is what role bond issuance may play in public purpose. MMT shows that in a floating rate regime bond issuance is not necessary operationally for currency sovereigns that don't borrow in currencies they do not issue.
On one hand, since bond issuance is not needed operationally under current conditions, then it would seem to constitute a subsidy for bond holders, who curiously get rewarded by government for saving in a default free medium that pays more interest than currency. Therefore, it would seem that if this is to be justified socially, some public purpose must be involved.
Then the question then becomes whether bond issuance is a factor in risk management that advances public purpose, for example, by increasing financial stability without creating financial unsustainability as some claim it does.
This is a debate we should be having instead of arguing over pseudo-problems that are figments of vivid imaginations uninformed by financial accounting and financial operations as they affect government finance and the financial system. They in turn affect the real economy as a means of allocating real resources to actual challenges and perceived opportunities. The accounting record provides an ex post account of how this was accomplished through monetary transactions involving the real resources brought to bear.
The transactions and the figures in accounts have no significance other than as means. Economists often confuse means with ends in the absorption with affordability, the size of fiscal deficits and the public debt. Whether this is the result of ignorance or employed to generate FUD (fear, uncertainty, and doubt) is debatable.
The political aspect is having this debate. The Left needs to insist that the debate be framed and conducted on the basis of reality rather than unrealistic assumptions that are belied by the accounting and erroneous understanding of operations.
The time to bite the bullet on this is now, both in the US and the UK, if the Left is to mount a viable assault on the bastions of neoliberalism, which are well-defended by FUD by playing on ignorance using specious reasoning and sophistical rhetoric in order to dupe the rubes into voting against their interests yet again.
39 comments:
Just a few random thoughts on the accounting issues:
In order to give an account of either the net wealth of any agent at a given time, or the net income of that agent over some given period of time, it is necessary to employ some standard of measurement, and conventions for applying that standard of measurement to the quantities being measured.
Often there is no single standard that applies in any straightforward way to all of the attributes that we might want to measure. The result is that crude simplifying conventions might have to be employed in order to apply the standard across the board; and that other valuable stocks and flows might not be measured at all because there is no practical way of applying the standard to them.
In order to give a full accounting of the economic status of any agent at a given time, or the net income of that agent over some given period of time, it is necessary to measure all assets, all liabilities, all forms of revenue and all expenditures, in whatever form these attributes take. Assets, liabilities, revenues and expenses that come in monetary or other financial forms are only part of the story.
Accounting practices are governed by social and legal conventions, and serve a variety of practical purposes, some constructive, some not so constructive. In many areas the goal is to tell at least part of the truth about the wealth, income and overall economic status of the agent being measured, to the best of one's ability. But in other case the established, accepted practice might be designed to obscure the truth or propagate socially convenient or manipulative fictions. The establishment of social and legal practices always reflects power relations, and the powerful will attempt to establish practices that protect their own interests and burden the interests of the less powerful.
Even where the accounting practices aim at truth, applying them correctly is only one part of understanding the economic realities to which they are being applied. Accurate accounting can tell you what an agent's wealth position is; but they don't give you the causal story that explains how and why that agent has come to have that wealth position, and what sustains it. The accounting can tell what the agent's net income was during a given period, but not why the agent had that income. Knowledge of these crucial further items of depends on the understanding of contingent social realities that cannot be established on the basis of logic or armchair reasoning, but must be investigated observationally and scientifically.
A great deal of wealth and income comes in forms that are extremely difficult to measure, and are of uncertain ownership. The practice of economics is often to conventionally pretend that these attributes don't exist. For example, the public is in possession of a vast quantity of social institutions, human skills and material structures that constitute its legal system. These attributes are a form of publicly possessed capital that most people understand are enormously valuable, and form a foundation for the very existence of other forms of wealth and income, but which nobody has the slightest idea how to measure. Many other forms of publicly owned wealth, public income and public expenditures are like that. Social and governing capital is often left out of economic measurements, and so economists discussions of social and governmental policy are often quite crippled.
That's true, Dan. For example. the informal economy, which some estimate to be the second largest economy in the world, is off the books and unaccounted for. In a sense, accounting is itself a problem in that it creates an impetus to capitalize the informal economy by monetizing transactions and privatizing assets.
But that's not the issue at hand. The point here is that misunderstanding financial accounting and operations vitiates economic models and result in misinterpretations that give rise to pseudo-problems having adverse political implications for society as a whole and the ability of the Left to address them that can be resolved through correct understanding of operations and accounting records of stocks and flows. Conventional economic obscures this and often gets it wrong to boot. This is what is happening presently in the UK wrt to the PQE proposal, which the matter under discussion, and also in the US in trolling deficit and debt hysteria.
The point is that it is difficult to impossible to talk about this intelligently without understanding accounting as the language of business and operations wrt institutional factors governing flow of funds and how this is traceable to its origin in creation of liabilities by banks (loans create deposits), the central bank also being a bank, and issuance of Treasury debt. In money creation in nongovernment, the asset and liability created is entirely in nongovernment and nets to zero by identity, whereas when government issues money as either currency or securities, the liability is on the side of government and the asset on the side of nongovernment, which increases nongovernment net financial assets in aggregate.
My point is that PQE an attempt to avoid a political issue regarding government finance that is grounded in a pseudo-problem. The Left is not going to succeed by skirting issues, which gives just credence to the actual existence of the pseudo-problem. To succeed politically against neoliberalism, pseudo-problems need to be confronted head on and exposed for what they are — the result of ignorance or deception.
As Bill points out PQE is not QE, since is a monetary operation and the proposed PQE is fiscal. Those who understand monetary economics realize that under the existing monetary arrangements, there is no substantial different getting funds into the economy using fiscal operations whether it be through direct issuance, or money financing, or bond issuance, or consoles.
In other words, nothing needs to change and no new operations are needed. Just issue the needed funding through appropriations in the normal way, and let the Treasury and central bank conduct the necessary operations to get the funding to where it is directed.
All the handwringing over the deficit and debt is misplaced, as is concern with the supposed IGBC. These are pseudo-problems about so-called affordability, fiscal sustainability, fiscal responsibility, and fiscal discipline that have to do with "sound finance," which doesn't apply. These are illusory obstacles.
A nation that is sovereign in its currency is not limited operationally in the amount of currency issuance. Affordability is never an issue when real resources are available and the economy can expand to meet demand, that is quantity adjust rather than price adjust.
Why put attention on arcane matters that the public doesn't understand and likely to become confused about instead of telling it like it is. Bill already went through it in his previous blog on Ruml and Lerner from the 1940's. It's not like this is even new knowledge.
Fiscal operations involve increasing nongovernment net financial assets in aggregate and it doesn't matter whether this is done through issuing Treasury or central bank liabilities. There are arguments for and against both, but that's not the major issue. The point is to get the funds into the economy where they are needed to mobilize available resources to meet present challenges.
I'll be honest I don't understand the 'risk management' argument of bond issuance.
It seems to be tied up with maintaining the current structure of banking rather than just cutting out the middleman and going straight to overdrafts at the central bank.
Bonds are loans to Treasury. Bank Reserves are loans to the central bank.
We've already got rid of 'open market operations' and gone to Interest on Reserves. And that was on mainstream theory. So why is getting rid of the bonds completely such a problem?
The only public purpose for bonds I can see at the moment is to provide secure backing for private pensions in payment. In fact that is the very reason for issuing Index Linked Bonds.
But that could all be fixed by providing a 'pension account' at National Savings which you fund with your pension pot. Treasury then pays pensioners direct and cuts out the private middleman.
I can never work out whether people believe it is the 'money changers in the temple' are the problem, or the 'academics in the clouds' - and if both what is the agreed aerial spray?
Only way out might work is 'wake the people up', but then all of the energy seems to go into the other two?
"It seems to be tied up with maintaining the current structure of banking rather than just cutting out the middleman and going straight to overdrafts at the central bank. "
I think that this is right, Neil.
Bonds function as risk management tools in the present system and the policy rate and yield curve are benchmark rates. The question is whether it is desirable to change the present system in light of the tradeoffs and if so, whether this is possible given the power structure. Recall Sen. Durbin saying, "The banks own the place." The US Congress, that is. I suspect that the City is no less powerful in the UK.
Not being an expert in this, I am open to hearing the pros and cons of the available options from those that are. It seems to me that this is what the political debate needs to be about.
"I can never work out whether people believe it is the 'money changers in the temple' are the problem, or the 'academics in the clouds' "
The difference is between finance and economics. Right now there is a disconnect so both are somewhat separate, whereas they need to be united in a comprehensive system (theory and model).
1. Milton Friedman argued against the issue of bonds in 1948. See para starting “Under the proposal…”
http://0055d26.netsolhost.com/friedman/pdfs/aea/AEA-AER.06.01.1948.pdf
2. One daft aspect of traditional fiscal stimulus, i.e. having the state borrow and spend the money borrowed is that borrowing as such is deflationary. Now what’s the point of doing something deflationary when the object of the exercise is the opposite? That’s a bit like syphoning all the fuel out of your car’s tank before filling it up.
I have a sneaking feeling that Jeffrey Lau and John Smithin are right that in order to encourage the confidence to invest in "real" production an economy needs to maintain a "positive" rate of return on savings. I think we could do this in economies by means of what could be called government issued "Savings Certificates" (not bonds) and not just for pensioners but also for businesses:-
http://cs.marlboro.edu/courses/spring2013/adams_tutorials/Munoz/Role_of_Money_in_Capitalism.pdf
Perhaps as a further development of Richard Murphy's and Jeremy Corbyn's concept of a UK National Investment Bank instead of issuing bonds or even Saving Certificates it could issue Investment Certificates which might help to get the "framing" better!
Ralph, govt spends from a buffer and refills it. So here in the UK the DMO is replacing reserves with gilts to refill the buffer, so extra reserves only appear on an intraday basis. The govt borrows AFTER.
Someone correct me if I am wrong on this.
"The difference is between finance and economics." [Tom]
I see what you mean Tom. I guess I meant the triangle then, of 'tptb' finance and economics. Sometimes I have seen you and others boil it down to 'what is a good life in a good society'? Human beings seem to pass from discontent to discontent 'on the outside'. That is 'Wall St.' If we fixed up all of the problems in the world tonight, tomorrow it would be full of them again, multiplying away. Which makes Hope an incredible thing. Did you know today is World Humanitarian Day - see it on the news anywhere?
To feel genuinely at peace with oneself, to feel the joy of being alive, to feel human enough to be able to recognise another human being and respect them, because you know without doubt what you respect inside of yourself is within them too; to live, to learn, to grow, to discover an ocean of kindness and Being inside; to understand that to feel peace is to feel human - that for me would be a good life in a good society!
Happy Humanitarian's Day Tom Hickey (et al)!!!
Random, "buffer" > good analogy imo.... rsp
There seem to be a few different policies that are being called "people's quantitative easing." The Corbyn/Murphy proposal, as I understand it is not a fiscal policy proposal. It is a central bank asset purchasing program used to support a legislatively mandated investment bank lending program. The Wren-Lewis helicopter money proposal, on the other hand, is a fiscal policy proposal that also calls for some fiscal authority to be delegated by the political branches to the central bank.
First, let's keep track of the obvious difference between central bank lending and central bank spending. If a central bank electronically "prints" money and gives it away to people, that is a kind of spending accomplished by a permanent net injection of central bank money into the economy.
If on the other hand a central bank instead electronically "prints" money and loans it to people, that is just balance sheet expansion, which is something banks do all the time. The supply of central bank money is temporarily expanded, but then that money refluxes to the central bank, with interest, as the loans are repaid. The borrowers don't become net richer when they receive the funds, because they had to give the lender their promissory note to get those funds. It's an exchange of a less liquid financial asset for a more liquid asset. They get a temporary boost to liquidity followed by, and balanced off by, a pre-scheduled reduction of liquidity as they repay the loan.
Central bank loans can certainly be stimulative, if they provide credit for useful, value-generating productive investments, credit that for various reasons the private sector isn’t providing on its own. That happens. But obviously providing money as credit is not as stimulative as providing a grant of free money, since in the latter case the recipient does not acquire a counterbalancing re-payment obligation at the same time.
When a central bank buys bonds, they are still acting as lenders, not spenders. Instead of advancing the credit directly, they assume both the liability and the asset associated with the financial instrument originated by some other credit intermediary. They "print" the money to buy the asset, and then that money refluxes to the central bank as the principal and interest carried by the asset are paid off.
If the central bank buys the bonds issued by a green investment bank, or an infrastructure bank, or a development bank or what have you, that is obviously not the same thing as the central bank spending money on infrastructure and development. Similarly, when a central bank buys mortgage backed securities that is not the same thing as the central bank buying houses. These are just cases of the central bank assuming some of both the obligations and assets of another bank that originated the credit. It accomplishes more or less the same as the central bank extending the credit directly, but in this case that happens after some agent or intermediary has originated the loan. It might stimulate more credit, since the originator is passing on the risk to another bank.
Why is a socialist like Corbyn focused on what is really just more of the same old QE, in this case applied to infrastructure lending as opposed to mortgage lending? I would think he would be more interested in having the government itself build and own some of this new infrastructure, instead of just financing the infrastructure capital accumulation of private developers. The Green Investment Bank in the UK is a classic neoliberal project to promote investment in particular areas while making sure private capital retains all of the power, and the lion’s share of the economic reward. It's not much different that the government loaning money to football stadium developers. The developer then owns the stadium, repays the loan and profits ever after. Same with the green bank: In this case, the government loans somebody the money to build - let's say - a wind farm. The developer builds the wind farm, repays the loan, and profits ever after as they collect profit-yielding monopoly fees on the wind farm. Socialists should be thinking of ways of building infrastructure that result in the public owning the infrastructure afterwards, so the capitalists can't collect their rents on it. It doesn't become something other than this if the central bank is the bank extending the credit, either directly as a public bank or indirectly by buying the loans that another bank has originated.
I agree that many on the left have a very murky understanding of all this because they are dazzled and confused by the whole idea of mysterious central bank "money printing", and what quantitative easing actually consists of. I talk to people every day who still can't seem to get it through their heads that quantitative easing programs are asset purchasing programs by which the central bank ultimately extracts even more money than they have injected. They seem to think that because the central bank doesn't have to "get" the money they issue to purchase the assets from some other source, this means they are engaged in some kind of easy helicopter money injections.
Do you want to know the simplest way of doing an actual helicopter drop? Here's how: The central bank simply puts free money in a government spending account - no loans made, no government bonds purchased, just free money. It says, "Hey government, go buy some schools and bridges and stuff with this free money; or give it to cities, town and states so they can buy schools and bridges and stuff. Knock yourself out."
Socialists should be focused on either redistributive of helicopter-assisted spending, not just more credit. People already have plenty of debt, thank you!
Bill here: "These conservatives know that if the government just spent (as it can any time it likes given it issues the currency) and didn’t match that spending with any debt issuance or tax revenue increase, then it would be harder to mount a case against the fiscal intervention."
There is no evidence of this.
Bill says: "if the government just spent" this is where the problem is, and its not "conservatives" that take issue with this proposition, it is libertarians... BOTH left and right....
It is the libertarian philosophy that cannot accept the proposition that this absolute authority can be imposed via the govt institution ... not any conservative philosophy...
"I have a sneaking feeling that Jeffrey Lau and John Smithin are right that in order to encourage the confidence to invest in "real" production an economy needs to maintain a "positive" rate of return on savings"
I don't buy that argument. What is their alternative at that point?
"The Corbyn/Murphy proposal, as I understand it is not a fiscal policy proposal."
You understand it incorrectly. The 'investment bank' will provide funds to local authorities and other quango bodies to enable works to go ahead.
Richard has already said that it is a workaround for a central bank overdraft at HM Treasury.
"Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools."
The main limit is that it is on the capital budget rather than the current budget, so development of education and training ends up out of scope. I've still to see a good argument as to why there has to be a restriction to the capital budget.
JKH: "economics profession at large is disastrously ignorant on the basics of financial accounting, and how those basics are applied to an understanding of how monetary systems work and therefore of how economies work. This is bedrock analytical stuff that is simply not recognized or understood as bedrock analytical stuff"
Amen to that... from an electrical theory perspective, its like economists are trying to derive the Thenevin Equivalent circuit BEFORE doing the detailed circuit design.... it doesnt work that way... not in normal people's brains...
Matt, right and it is arbitrary. The buffer is essentially infinite in a government that issues its own currency. It doesn't make sense to have an account with your own IOUs. What number is in the govts account? Who cares?
jrbarch said: "I can never work out whether people believe it is the 'money changers in the temple' are the problem, or the 'academics in the clouds' - and if both what is the agreed aerial spray?
Only way out might work is 'wake the people up', but then all of the energy seems to go into the other two?"
LOL! Thanks, JRB. Couldn't agree more. Both are just artifices of the times & aggregate habits.
Going beyond finance vs economics, I'd say it's the difference between evolving culture & current habits/taboos. Both finance & economics are merely levels of current popular delusions.
To reform finance & economics, I'd hire these consultants, in this order
linguists (just to map the semantic drift)
anthropologists (to link basic capabilities to basic needs)
sociologists (to refine capabilities)
(then the public at large, to judge whether to keep any financiers or economists).
To me, financiers & economists are just noisy proto-components, found half way through the process of evolving a cultural-Krebs-cycle.
https://en.wikipedia.org/wiki/Citric_acid_cycle
Seriously, how hard is it for an aggregate to allocate resources?
set Desired Outcomes (the ONE thing we as a country don't do; which is exactly why everything else in the practiced cascade is random, meaningless bullshit);
get quick consensus on Milestone Goals;
get distributed consensus on key Policies;
set tolerance limits on diverse strategies in diverse subcontexts;
set tolerance limits on highly distributed, highly diverse tactics.
Anything less gets real boring, real fast.
case in point
CounterPunch @NatCounterPunch
While war crimes go unprosecuted, conscious, calculating ignorance reigns.
http://www.counterpunch.org/2015/08/19/the-return-of-british-social-democracy-jeremy-corbyn-and-the-revolt-of-the-excluded/ …
pretty similar here in the states
You understand it incorrectly. The 'investment bank' will provide funds to local authorities and other quango bodies to enable works to go ahead.
What does "provide funds" mean, Neil? It's a bank, right? It is going to provide those funds in the form of loans. The infrastructure investment bank is just a bank with a special public mission to direct its lending into certain politically targeted areas. That's great, but it is not a spending program.
Big deal if it's an operational workaround for an overdraft at the central bank. An overdraft is just a loan. Even if I have a direct account at the central bank against which I am entitled to make payments up to and including some overdraft ceiling, the amount of overdraft is then just money I owe the central bank.
Don't get me wrong: A public bank can be useful because, in principle, it is not constrained to make an income statement profit and doesn't even need to maintain positive equity. It can sustain balance sheet losses which are effectively government subsidies to its borrowers; perhaps even by charging negative interest on the original loans. But my guess, unfortunately, is that the politicians will use the profitability of the investment bank as a metric by which to measure its effectiveness. After all, it's natural to think that the projects that are most worth investing in are the ones that succeed in generating returns that enable the borrowers to re-pay the loans, and that projects that don't generate such returns are failures, and bad public investments.
Anyway, let's not confuse lending with spending.
Dan AFAIK those funds will end up in public institutions managing them.
> But my guess, unfortunately, is that the politicians will use the profitability of the investment bank as a metric by which to measure its effectiveness.
that's a fair guess, probably true, but the way to change this is challenge the orthodoxy and their ineffective metrics. This is independent of the 'funding' problem aka getting things to work.
> Anyway, let's not confuse lending with spending.
All this are (IMO) workarounds against this confusion, to fix the confusion you have to change the meta-narrative. Changing the meta-narrative takes years, it cannot be challenged in a few weeks or months (this is what Syriza tried and failed miserably ofc).
Meanwhile if you have to deform language just to do things right, just do it. Who cares, at the end of the day we know that the state is paying for it just printing money, getting from the right pocket and putting it in the left pocket. We buy time, show those policies work, and work on re-framing the language and narratives while people is not starving.
"Dan AFAIK those funds will end up in public institutions managing them."
I'm not sure what that means. Don't Murphy's proposals just boil down to having the central bank buy the loans issued by either the already-existing Green Investment Bank, along with new loans issued by some new public investment banks? (It's no different if the investment bank issues bonds first that the central bank buys, and then disburses the funds. The investment bank has to pay the central bank back by paying off the bonds, which means its disbursements have to be in the form of investments (loans, equity purchases, whatever) that generate an income stream.
This is just more QE. Instead of buying mortgage backed securities, the central bank would be buying "infrastructure-backed securities." That's not spending; it's just a way of supporting lending and low interest rates in a specific credit market.
"Managing funds" is an ambiguous concept. If a public institution manages the funds that it has borrowed from the central bank, that is a very different animal from one that manages a spending budget that comes from a government appropriation.
Sorry, I meant is that any assets product of that investment are going to be publicly owned (if that was your concern), not privately owned and exploited (ofc what sort of private-public partnerships when managing those assets is going to be used is probably an other question). But I may be completely wrong here, if anybody else can clarify...
The borrowing-investment is doing internally by public institutions (the govt getting from the right pocket and putting it in the left pocket), is a machination to bypass budgetary limits, but in the end any income will end up in public institution accounts.
Is not ideal, but is a workaround in the current framing, if it works it can be evolved and challenge the current framework ("why do we need to borrow at all!? why issue bonds of any sort if it's intragovt transactions in the end?"), but in the short term it will help quickstart the economy, and won't add to PRIVATE debt.
"Anyway, let's not confuse lending with spending."
Government Bonds are loans too technically. So I'd suggest you're getting a bit carried away with your distinction.
The infrastructure bank 'lends' to the public authority and refinances ad infinite, because of course the authority can always pay the interest since the owner of the bank is the funder of the authority. A perfect funding circle without any private leakage other than salaries of those maintaining the illusion.
The central government spend on an overdraft is also getting an infinite loan where the interest can always be paid because it gets the bank dividend back.
The public authorities are given money to spend on infrastructure projects on the never, never via an elaborate wheeze to make spending look like lending.
That's how it works.
Ignacio, I don't think that's the plan, although I have yet to see the specifics. Corbyn's National Investment Bank would be a bank. He would re-allocate some current government expenditures on tax breaks and other corporate subsidies to capitalize the bank. But then the bank would invest in a lot of small business development, infrastructure development, green industries, innovative projects, etc. It would do this by making loans, but I suppose could employ other more creative financing techniques.
It's always possible that some of the loan recipients will be public agencies or public-private partnerships; but that hasn't been specified. And it's not the way the project is being sold. It is being sold as support for "small businesses, independent entrepreneurs, and the growing number of enterprises that want to cooperate and innovate for the public good." It sounds like the idea is to lend to the private sector:
http://www.cityam.com/222367/corbyn-business-heres-what-labour-leader-hopefuls-pledging-corporation-tax-clampdown-support
Again, don't get me wrong. Both the US and the UK need a higher level of investment in long-term public needs, and less mis-allocation of resources going into investments sustaining dinosaur 20th century industries, or supporting the consumption patterns and foreign investment schemes of the wealthy, and this is one way to help do that. A bank that is set up for a public purpose has the ability to choose projects on the basis of an enlightened view of the long-term public good, rather than a view based on what will be most profitable in conventional market terms.
I just wish people would avoid all of the confused and jumbled side-rhetoric about "quantitative" operations, money-printing, "easing" etc.
I talk to people all the time who are convinced that if a commercial bank gives a business a loan at 2% interest, or buys up a private bond issue with a 2% yield, that is hugely different from a central bank giving a commercial bank a loan at 2% interest, or buying private bonds held by that bank that have a 2% yield. They think the commercial bank has to "get" the money from somewhere else, so the commercial bank operations don't effect the "money supply" or something; but that the central banks just "print" the money, so that their operations represent some high-powered intervention of "monetary policy".
But there is really no fundamental difference. If the central bank is following standard policies of managing its balance sheet to maintain positive equity, then the only difference between the two operations is the number of middle men involved. That's because the central bank has thus imposed the same kind of capital requirement restrictions on itself that a commercial bank faces.
Corbyn and Murphy should focus on what these banks are actually going to do and what their public mandate will be, and not convey they misleading impression that they are going to be powered by some special central bank money-printing magic that is qualitatively different from the everyday money-printing magic practiced by other banks.
"Corbyn and Murphy should focus on what these banks are actually going to do and what their public mandate will be, and not convey they misleading impression that they are going to be powered by some special central bank money-printing magic "
Hey Dan you sound just like Roger! ; )
Well, this is the way Murphy characterizes the proposal:
We suggest that this new programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools. This QE programme could do this just as readily as the previous programme bought central government bonds. And the result would be, in exactly the same way as government bonds were effectively cancelled by the previous QE programme the moment that they were bought by the Bank of England, that these new bonds would also effectively be cancelled as each of the bodies issuing them is part of government, and the government cannot owe itself money, as previously noted.
http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/
So the BOE would be buying the bonds issued by the Green Investment Bank and by local governments. That means it is just lending them money. This isn't some kind of "money-financed spending" program.
Neil is suggesting that, at least where the public agencies are involved, what we get is effectively just print-to-spend dressed up to look like loans, because the central bank can always lend those agencies everything they need to pay of the previous rounds of loans plus finance the spending the program is supposed to be supporting. So the agencies have a gradually accumulating debt to the central bank which is never actually paid and is just rolled over with ever increasing loan quantities.
I find it hard to believe that is how the program will actually be administered in practice. As Murphy says, "We stress, this whole programme can only be undertaken until such time as either the UK economy is functioning at full capacity, or there is genuine full employment or there is real risk of significant wage inflation." The BOE will continue to monitor its balance sheet as a tool of inflation control, and will not allow local agencies to blow up their debt loads indefinitely.
And that is certainly not how the Green Investment Bank functions. Its reports on its operations involve standard balance sheet and P&L statements. It states, "our mission is to invest in projects which are both green and profitable this is our double bottom line." It aims at a positive financial return, and does not aim at allowing long-term balance sheet losses as a mechanism for providing subsidies to its financing recipients.
http://www.greeninvestmentbank.com/media/44802/gib_annual_report_2015_aw_web.pdf
"I see what you mean Tom. I guess I meant the triangle then, of 'tptb' finance and economics. Sometimes I have seen you and others boil it down to 'what is a good life in a good society'? Human beings seem to pass from discontent to discontent 'on the outside'. That is 'Wall St.' If we fixed up all of the problems in the world tonight, tomorrow it would be full of them again, multiplying away. Which makes Hope an incredible thing. Did you know today is World Humanitarian Day - see it on the news anywhere?
To feel genuinely at peace with oneself, to feel the joy of being alive, to feel human enough to be able to recognise another human being and respect them, because you know without doubt what you respect inside of yourself is within them too; to live, to learn, to grow, to discover an ocean of kindness and Being inside; to understand that to feel peace is to feel human - that for me would be a good life in a good society!
Happy Humanitarian's Day Tom Hickey (et al)!!!"
Right. As I have been saying the bottom line of living a good life in a good society is the level of collective consciousness and that is the effect of individual consciousness and resonance effects. This is the basis of the perennial wisdom of the sages from time immemorial, oral and written.
Happy Humanitarian's Day back to you, jr, and to all.
> We stress, this whole programme can only be undertaken until such time as either the UK economy is functioning at full capacity, or there is genuine full employment ...
But isn't that what MMT says? Basically the program can only run as long as there are no constraints in the real resources and there is involuntary unemployment.
> ... or there is real risk of significant wage inflation.
Although "significant wage inflation" is a loaded phrase that could mean anything and should not be mentioned at all. The program should be run as long as the economy is not at full capacity and is unable to provide jobs to the people so they don't starve. Full stop.
The question is if this policy would be a gamble, to be incorporated eventually as an automatic stabilizer, so a sort of JG by other name. My take is that this would be Corbyn plan, first 'foot in the door', then steep in. Is political IMO, although it sounds like the Green investment Back would indeed loan more to private enterprises, instead of allowing public institutions to do more public spending to bypass budgetary constraints...
The devil is the details, but I'm afraid a lot of the framing is due to political reasons, and certain outcomes are expected out of it. You would have to talk with Corbyn team or himself to really know what's going on or what's their plan.
Green JG?
"President Lincoln chose to fund the US Civil War with direct issuance, while the US funded WWII with bonds. There was no real difference between the two methods. The difference was financial and political."
Is that true? Wouldn't the issuing of bonds in WWII, along with people thinking they were funding the war effort, have the effect of reducing consumption on other goods?
So instead of buying a new washing machine, people bought war bonds. Now the washing machine factory wasn't selling washing machines so factory production could be converted to war time production. So instead of the dollars shifting pockets until they reached someone wanting to purchase a safe asset, they went directly to bonds due to peoples' patriotism thinking they were funding the war effort.
Had the govt done direct issuance during WWII, wouldn't the govt dollars then be competing with existing dollars for goods? (plus weren't we basically at max productive capacity during the war?)
China has already mastered this, much to the consternation of Western observers.
But the point of the post is that as long as the Left resorts to such workarounds, the public will never become educated and the neoliberal myth will be prolonged.
Someone has to bite the bullet and call BS, and set the record straight on what is actually happening under the current monetary arrangements. Now we are pretending the we are still on a gold standard to impose "sound finance," the Treasury view, fiscal responsibility and discipline and the rest of the nonsense that didn't work at the time of the Great Depression. It wasn't until people like Keynes and Eccles were listened to that the situation began to reverse. Then it began to collapse again in the US in 1937 when FDR was persuaded by the sound finance people to retrench.
John Kenneth Galbraith administered the government economic program to control inflation. At the time progressive taxation was steep, but neither tsys issuance nor war bonds were key in preventing inflation, as I understand it. War bonds were chiefly put in place to give the populace the feeling of doing something contributory. Tsys markets were open and so the issuance of tsys did not sterilized money as commonly believed. The major tools were rationing and wage-price controls. During wartime, people were OK with that.
See this comment by Some Guy at bill's place on biting the bullet and calling a spade a spade.
http://bilbo.economicoutlook.net/blog/?p=31626&cpage=1#comment-40803
Just read this good article by M sankowski about Germany, exports and the eurozone. He nails it:
http://monetaryrealism.com/?p=3419
"I find it hard to believe that is how the program will actually be administered in practice. "
It's exactly how Gilts are administered in practice. And I can assure you that is the intention of how this works. It is merely a mechanism to get around Article 123 of the EU treaty.
Operationally its an overdraft with the central bank.
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