Tuesday, March 22, 2016

Warren Mosler — There is no right time for the Fed to raise rates!


With the current interest in MMT, it might be good to remind of Warren Molser post of 10.13.2014 on his proposals.

(Warren's POV on monetary policy resembles Neo-Fisherianism but the reasoning is quite different.)

The Center of the Universe
There is no right time for the Fed to raise rates!
Warren Mosler

52 comments:

Footsoldier said...

Wren Lewis has just replied directly to Bill on his blog.

And had a go at me for saying taxes do not fund government spending. I tried 2 days ago to make him admit it in public.

His reply was it was still a budget constraint and it would invite ridicule.

Now he is going to ignore me unless I provide a MMT paper.

I have Stephanie's paper 224 from the Levy institute called can taxes and bonds fund government spending.

andy blatchford said...

The always go to is Beardsley Ruml's 'taxes for revenue is obselete'

Footsoldier said...

Yes, but he wants a MMT paper.

John said...

Footsoldier,

Don't waste your time. As I said elsewhere, the likes of SWL are being intentionally obtuse. They can't be taken "seriously" if they strip Keynesian theory of its classicism and then take it to its Lernerian, Minskyan and modern freely floating exchange rate logical conclusion. That is to say, MMT. The fellows at distinguished Oxbridge colleges would disown him. No more sherry in the senior common rooms. He'll be shunned, eye contact will be avoided. No economic prizes! No honorary doctorates! No state honours to services to shamonomics The shame of it all! He may fear he'll find himself wearing jeans and t-shirts, not tweed and corduroy. It'll be the end of civilization as he knows it.

Tyler Healey said...

The low interest rate/GDP growth fallacy http://mythfighter.com/2009/09/09/low-interest-rates-do-not-help-the-economy/

Footsoldier said...

Brilliant John.

He just about admitted it.

I never went as far as you. I just accused him of being political by not saying it. Because he started a thread called It's the politics stupid.

I challenged him head on to say it. But he done his usual 12 back flips and jumped through 14 hoops to make himself look clever to hide the truth.

Tom Hickey said...

Don't waste your time.

I disagree. Reputational risks runs both ways. When the prevailing doctrine begins to change you want to be ahead of the curve instead of holding the bag.

The mainstreamers who clue into this first are going to come out ahead.

Calgacus said...

Warren Mosler — There is no right time for the Fed to raise rates!

Well, maybe when they're negative. Or when they send bankers to take away your toaster!

andy blatchford said...

Actually better off not giving him an MMT paper as he can't then just claim it's just MMT so therefore going to ignore you. The man is a central bank uber alles supporter so give him a central banker in Ruml.

Kristjan said...

And he (SWL) starts with that loanable funds theory IS-LM. You can't with these guys.

Neil Wilson said...

The man is a central bank uber alles supporter so give him a central banker in Ruml."

Given he's still a bit stuck on loanable funds, perhaps we should start with Reginald McKenna.

Here's a direct quote on the subject from The Right Honourable Reginald McKenna P.C., British, and a former Chancellor of the Exchequer (1915-16). This is taken from his book Post-War Banking. "While banks have this power of creating money it will be found that they exercise it only within the strict limits of sound banking policy."


Hmmm. Well, we might disagree there. He goes on to acknowledge the power of banks to create money is kept quiet; "I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process."

http://www.economania.co.uk/various-authors/where-money-comes-from.htm

Andrew Anderson said...

Actually, the central bank should not create fiat at all EXCEPT for the monetary sovereign.

Instead, interest rates should be lowered by equal distributions of fiat from the monetary sovereign's account at the central bank to individual adult citizen accounts at the central bank till price inflation indicates all idle resources have been put to use.

And, of course, government-provided deposit insurance should also be abolished as an unnecessary subsidy of banks since accounts at the central bank are inherently risk-free.

Nice try Warren but the time for banker fascism is ending.

Andrew Anderson said...

And, of course, the monetary sovereign's account at the central bank should be kept full via "trillion dollar coins" as necessary.

So no, there is no need at all for the central bank to lend to banks or anyone else. Instead, let the banks have to borrow new fiat from the citizens.

Neil Wilson said...

"Instead, interest rates should be lowered by equal distributions of fiat from the monetary sovereign's account at the central bank to individual adult citizen accounts at the central bank till price inflation indicates all idle resources have been put to use."

Fails to deal with the matching issue, and would leave unemployment at around 5%. Still millions of people without work.

Similarly there is no issue with operating via the commercial banks under an insurance system. The two are functionally identical. There is no additional control available to the system by changing to a centralised structure and a great deal of rigidity and lack of flexibility from a centralised structure.

It's another one of those ideas like Basic Income and Debt Jubilees that fall into the category of neat, plausible and wrong.

andy blatchford said...

"What about a world where monetary policy did successfully control demand and inflation, which is the world I’m writing about"

Then it's not the world we live in anymore his assumption in his first post "lets assume real output is at it's full employment level"

Lets assume we ride around on fuckin unicorns then car emissions are not a problem.

Neil Wilson said...

"Then it's not the world we live in anymore"

Or ever. He's mistaken stability for the dynamic quietness you get just before an enormous private debt bubble hits its Minksy Moment and rips itself apart.

Andrew Anderson said...

Fails to deal with the matching issue, Neil Wilson

You mean no matching assets for the new fiat?

That's irrelevant if price inflation is not a problem since then the new fiat is creating its own goods and services if spent and/or doing no harm if hoarded.

Besides, if you need a fig leaf, fiat is backed by the taxation authority and power of government. That's the corresponding asset.

As for deposit insurance, it's a matter of equal protection under the law that citizens be allowed to deal with their Nation's fiat via inherently safe, convenient accounts at the central bank, same as depository institutions. So then what need of government-provided deposit insurance?

andy blatchford said...

"Mistaken stability"

Or Kalecki's booms will last longer point through MP leading to a bigger crash which is kinda the same.

Andrew Anderson said...

There is no additional control available to the system by changing to a centralised structure and a great deal of rigidity and lack of flexibility from a centralised structure. Neil Wilson

What rigidity? Individual, business, State and local government, etc. accounts at the central bank would be under the control of whom, do you suppose? I'd say the individuals, businesses, and State and local governments, etc. would be in control of the deposits in those accounts.

John said...

Tom: "The mainstreamers who clue into this first are going to come out ahead."

I'd have agreed with you in 2008 or 09 or 10 or 11...

Let's face facts, if they haven't come over, they're not coming over. The closest to come over are Stiglitz, SWL and Nick Rowe, and look how far away they are. Didn't I see one of them engage with MMT by using ISLM?

How many mainstreamers have ever come over to MMT or PK economics? Other than William Vickrey, and to a much lesser extent Charles Goodhart, nobody really has. Which seems to suggest that if you've not been inoculated at a young age, you'll be foaming at the mouth in due course.

Krugman, Stiglitz, SWL and Rowe aren't stupid; they're exceptionally intelligent. The reason they don't get MMT is because they're ideologically blind to anything than what they've been taught and been teaching for decades, and that's a near impossible thing to deal with.

So take the fact that a country cannot tax if it hasn't already spent the money into existence. Unless someone can explain how it can be otherwise, what is it the don't understand?

So take the BoE report last year that explained that commercial banks create money. That's horizontal money. We know that the government creates money. That's vertical money. What is it they don't understand?

So take the fact that no country with a freely floating currency with no foreign denominated has gone bust. What is it they don't understand?

The list goes on and on and on. They're ideologically committed. That's why when they take the trouble to read Wray or Mitchell or whoever they mangle the meaning. They understand the words, but they translate it back into the very framework that the MMTers have shown to be erroneous.

If SWL comes over to MMT, I'll be his butler for a year.

Andrew Anderson said...

Beside Neil, depository institutions would still exist and could still create as many liabilities as they dared. There's your flexibility. Or is is having to honestly borrow reserves from the population too inflexible for you? Is honesty and equal protection under the law too inflexible for you?

Jose Guilherme said...

How many mainstreamers have ever come over to MMT or PK economics? Other than William Vickrey, and to a much lesser extent Charles Goodhart, nobody really has

Adair Turner, Perry Mehrling, Richard Werner?

Tom Hickey said...

A number of people have moved away from where they were not all that long ago. One by one the shibboleths are dropping off.

Andrew Anderson said...

If physical fiat, aka "cash", is abolished, Neil, will you try to defend the proposition that citizens should not be able to use their Nation's fiat AT ALL since the only other form of fiat is account balances at the central bank, which you oppose for citizens?

That should be fun reading.

Andrew Anderson said...

One by one the shibboleths are dropping off. Tom

The one that only depository institutions in the private sector, aka "banks", may have inherently risk-free accounts at the central bank is the prime one and will drag down government-provided deposit insurance and other bank privileges along with it.


Kiss banking as you know it good-by, Neil.

Brian Romanchuk said...

I would point out that antagonizing people is probably not going to help them come over to your side...

SWL's first article was somewhat over-the-top, and so a certain amount of pushback was inevitable. I was impressed at the number of his tweets. If it were me, I would have turned off notifications, and gone to the Senior Combination Room for some sherry...

This second article seems much closer to reasonable. If someone has spent some time (no idea how old he is) teaching economics a certain way, I doubt he is going to drop all of his existing terminology and modes of thought. What matters is discussion of substantive issues, not debating the nature of money. If you use different definitions of terms than the person you are talking to, you are never going to have a constructive debate about foundational issues. If you cannot agree on a policy, what is the exact reason -- for example, bond vigilantes? You can then ask -- when have bond vigilantes forced a change of policy? Etc.

I have no idea whether SWL will ever be on the same page as MMT, but it does not hurt to practice constructive dialogue.

When the political winds blow the right way, the "mainstream" could easily discover that things like MMT were right all along. (Obviously, not the libertarian fringe, but they are a minority.) After all, Keynesianism was the "mainstream" up until the 1970s.

andy blatchford said...

"I'd say the individuals, businesses, and State and local governments, etc. would be in control of the deposits in those accounts"

Oh gawd neoliberalism, cos everyone has nothing better to do than keep a check on their accounts and what they are used for all the time. It's pretty much like the energy market in the UK you have 'choice' to change provider around etc. Life is too short for that sort of mucking about, reality is not very many people bother.
People not bothering is the flaw, great if you can bothered to check every minute of every day but I have better things to do, will take govt provided deposit insurance and get on with my life thanks.

Andrew Anderson said...

Oh gawd neoliberalism, cos everyone has nothing better to do than keep a check on their accounts and what they are used for all the time.

What in blue blazes are you talking about?

An account at the central bank requires no more attention than an insured account needs now and arguably less since it is inherently risk-free and cannot fail due to bank illiquidity or insolvency while a regular commercial bank failure would require at least SOME time for the deposit insurance to be paid.

andy blatchford said...

Who the 'reserves' are lent by, you want the banks to borrow from the general public...Sorry can't be bothered with all that will again as said take deposit insurance and whatever little interest can get in savings accounts with commercial banks instead of zero at the CB. You can whinge all you like that it ain't fair, tough.

John said...

Jose, I think Perry Mehrling and Richard Werner were never in the mainstream camp. Mehrling cannot possibly have ever been mainstream: he's always considered himself within the Banking School of economics and later within PK. Werner does say some very mainstream stuff about loanable funds, but as far as I can gather he's always been a very vehement critic.

You're right on Adair Turner, though. He's come a very long way. Hopefully he can go the whole way. Mervyn King and Martin Wolf have said some good stuff in the last few years, but they never really follow it up or start rowing back.

Paul McCulley once said something along the lines that he isn't "high MMT", which suggests he broadly agrees with it.

The chief economist at Goldman Sachs is supposedly a devotee of Wynne Godley's sectoral balances modelling, but has he come out as an MMTer? He must accept the basics to be true because of his views on Godley. But then again didn't Warren Mosler once claim that every major trading desk in the world accepts MMT. Perhaps they don't understand it, but they accept it. Which does then bring up the question of why it is they bankrupted their own firms? Or did Warren only mean the bond desks understand it?

Andrew Anderson said...

Sorry can't be bothered with all that will again as said take deposit insurance and whatever little interest can get in savings accounts with commercial banks instead of zero at the CB.

So you can't be bothered with equal fiat distributions to your account at the central bank either? That you can either save, spend, or lend as you choose?

Do you think many others will mind those equal fiat distributions to their accounts even if they pay 0% interest?

Jose Guilherme said...

Right, Mehrling and Werner aren't mainstream but they do teach in university departments dominated by mainstream thought and they've been tolerated there for quite a long time. Maybe others will follow their example, now that MMT is being acknowledged and discussed by "Very Serious People".

And I don't think Werner believes in loanable funds. After all, he claims to be the first author who took care to demonstrate empirically that a single bank does create deposits (money) when it grants a loan.

andy blatchford said...

"0% interest"

Good luck with that one.

John said...

Jose: "And I don't think Werner believes in loanable funds."

It's in his book Princes of the Yen on page 7: "When the [Japanese] ministry increased fiscal spending, the central bank failed to fund it with new money creation. So it was funded by bond issuance to private investors, which merely crowded out private demand."

Can you have crowding out without loanable funds? If he doesn't believe in loanable funds, how can there be crowding out?

Unless I'm missing something here, I don't understand how someone as expert on banking as Werner clearly is, so close to MMT as he is, and as brilliant an economist as he undoubtedly is, as can say something like this?

Alexander X. Douglas wrote an excellent blog post on a comment I made about Frank Newman. Newman made the elementary statement that since the banking sector is a closed loop there can't be crowding out. Even if the government did decide to finance its fiscal spending by issuing bonds (although we know it doesn't do this), the money just goes right back into the banking system for the private sector to access. Where else can it go? It borrows. It spends. It ends up back in the banking system to be borrowed by the private sector. How can Richard Werner not understand something so simple?

John said...

Jose, I think Mehrling was tolerated because he specialised as a historian of financial and economic thought, thereby not having to show his real PK colours, or maybe these PK colours developed later as a result of his academic research in the Banking School of finance and economics. He wouldn't be so tolerated now.

Werner's a different character altogether. He hasn't been an academic long, and I think he holds a professorship at a business school. And he did invent QE! The phrase more than and all the "bastard" QEs that masquerade as the QE he developed but was never put into action. He does say that the nearest anybody got to the QE he envisioned was the Federal Reserve under Bernanke.

Ignacio said...

I think everything that ahs to be said to/about new-keynesians and monetarists was said by Michal Kalecki's "Political Aspects of Full Employment".

They have systematically ignored to engage with it because it does not fit their agenda. As Bill Mitchell said: it's a waste of time.

There is a lot of literature that critiques neoclassical economics premises. it's not even wrong. They actually don't want to engage on it.

SWL may have had a faith crisis, there may be hope for him, he only has to drop assumptions about neutrality of money and blind faith in CBs and go from there. But trying to rescue mainstream is a massive waste of time. In SWL words: "every economist knows the money multiplier is wrong, i don't know why it's still in textbooks".

IN WHAT SCIENCE DO SCIENTISTS KNOW SOME THEORY IS WRONG AND STILL TEACH IT TO THEIR ALUMS IN TEXTBOOKS. How can anyone say that with a straight face and still defend their own dishonest school of thought.

Come on...

John said...

Ignacio: "IN WHAT SCIENCE DO SCIENTISTS KNOW SOME THEORY IS WRONG AND STILL TEACH IT TO THEIR ALUMS IN TEXTBOOKS. How can anyone say that with a straight face and still defend their own dishonest school of thought."

Superb! I wish I'd thought of that. I wonder what SWL would even say if you asked him? It doesn't make any sense for him to argue this position. It's so embarrassing I couldn't possibly imagine anybody saying it. I was wrong! It would make more sense and be less embarrassing for him to argue that it isn't wrong and defend it to the bitter end.

Now, of course, we know creationism is wrong, but in this course on advanced evolutionary biology we will assume a man in the sky created all living things in an impossibly strange order over a period of a few days...

As we all know - after all we are not cretins - the phlogiston theory is absurd. However, in this course on statistical thermodynamics, we will take it to be the most accurate theory yet devised, on pain of death.

Now, really, what the fuck?

Neil Wilson said...

"Beside Neil, depository institutions would still exist and could still create as many liabilities as they dared. There's your flexibility. Or is is having to honestly borrow reserves from the population too inflexible for you?

Nobody borrows reserves. Reserves are a bank asset - like a loan. If you want to put up the price of lending there are already mechanisms for doing that. But stealing interest from individuals, and charging them for banking when they don't get charged already is a backward step.

The commercial banks are simply agents of the government and the central bank. It's just simple outsourcing. If the banks are behaving badly then oversee them properly - just as you do with any other outsourcer. Or nationalise them as they are.

I've already dealt with the rest of the sovereign money illusion before

It is dangerously anti-democratic and is not something I would support for structural power reasons let alone the simple fact that it *does not work*.

Neil Wilson said...

"Adair Turner, Perry Mehrling, Richard Werner?"

All of those are about the central bank taking *more* power, not less and there being less involvement by government in the stabilisation process.

It's the same approach as SWL - fiscal policy by the technocrats until they can get back to pushing the private sector hegemony again.

All of them would say, like Business Insider, that the UK is 'approaching full employment' when there are 5 million people without work.

Neil Wilson said...

"I have no idea whether SWL will ever be on the same page as MMT, but it does not hurt to practice constructive dialogue."

Brian,

I agree it is worth a try however the conversation generally goes like this:

- "please explain how the man can reach the apple"
- "first you take the straitjacket off and then they can reach it easily with their arms"
- "no, explain how a main in a straitjacket can reach the apple".
- "actually you need to take the straitjacket off to get anywhere"
- "So there is no way for the man to reach the apple. I told you there was nothing new here"

Now that is a form of Psychological Game as described in Eric Berne's "Games People Play"

which he defines as

“A game is an ongoing series of complementary ulterior transactions progressing to a well-defined, predictable outcome. Descriptively, it is a recurring set of transactions… with a concealed motivation… or gimmick.”

The concealed motivation is to reinforce, politically, the superiority of his viewpoint amongst his follower.

nivekvb said...

Maybe is why MMT is resisted so much, because it would let the public know how money is made. When I told my friend how banks do it be looked at me as if I was mad. He argued with me when I first told him but now he says nothing when I mention it. I think he still doesn't believe me. But I said to him when you get a loan from a bank, who's to know that the bank has no money. When you go to the car salesman and write a check and the digits go minus your account and increase in his, who knows that there is no cash at the bank to back it up, at least not on almost all the loans that are made. The bank holds a tiny bit of cash as reserves.

Oh, by the way, my brother would have none of it, and argued with me for days about until he gave up. He never agreed with me, though, he just stopped arguing as I was so adamant. But I had the facts facing him in the face but he still would not believe me.

Would the public be outraged if they were to find out that although their mortgage had cost the bank almost nothing to produce, and yet a £100,000 loan will cost them over £200,000 to pay back?

Or do banks make virtually no money out of mortgages and personal loans after paying for outgoings?

nivekvb said...

Good point. I looked into changing my bank account but i backed off as I thought it could be more hassle than it's worth. It's meant to be easier nowadays but I am too busy to find out.

I went to change my energy supplier recently but I had a dual meter although I'm only only on one tariff. Because of this I can't change my suppler until my meter is changed. I sort of petered out at that point.

Chewitup said...

McCulley likes to say he goes to the same church but sits in a different pew.

andy blatchford said...

 "I looked into changing my bank account but i backed off as I thought it could be more hassle than it's worth. It's meant to be easier nowadays but I am too busy to find out."

Exactly Kev and why I accuse Positive Money of being neoliberal,and it says so in their literature.
"In a system without deposit insurance, depositors would have a strong incentive to monitor their bank’s behaviour"

Lets all run around being good little utility maximisers. Now that's fine if you are a hedge fund, institutional investor etc...The rest of us have day jobs, kids etc.

Andrew Anderson said...

Nobody borrows reserves. Neil Wilson

Banks borrow reserves all the time; it's called inter-bank lending.

But if by "body" you mean an individual that's because individuals aren't allowed to have accounts at the central bank - a clear violation of equal protection under the law.

Reserves are a bank asset - like a loan. Neil Wilson

The lack of individual citizen accounts at the US central bank (the Federal Reserve), for example, means that Social Security recipients, the US Military, US Federal employees, etc. are forced to lend (a deposit is legally a loan) the fiat they would ordinarily receive from the US Treasury, if they had such accounts, to depository institutions who alone in the private sector are allowed to have accounts at the central bank. What do you call a forced loan? I call it theft.

If you want to put up the price of lending there are already mechanisms for doing that. Neil Wilson

You mean like paying interest on reserves or issuing interest paying sovereign debt, both of which are welfare proportional to wealth and not need?

But stealing interest from individuals, Neil Wilson

Say what? People could still deposit at commercial banks, etc. and because those deposits would be uninsured by government the banks would have to pay higher interest.

and charging them for banking when they don't get charged already is a backward step.
Neil Wilson

Who said anything about charging people for accounts at the central bank? Those accounts should be a normal service provided by a monetary sovereign and should normally be free of charge. Besides, the banks DO charge depositors, via negative real interest rates, especially in housing. And via social injustice. And via economic instability.

The commercial banks are simply agents of the government and the central bank. Neil Wilson

Commercial banks would still exist but as 100% private businesses with 100% voluntary depositors.


It's just simple outsourcing.

No it's not. It's simply a government-subsidized/enabled/enforced usury cartel that systematically loots the poor, the least so-called credit worthy for the sake of the banks and the rich, the most so-called credit worthy.

If the banks are behaving badly then oversee them properly - just as you do with any other outsourcer. Neil Wilson

Government subsidies for private credit creation are inherently bad; there is NO way to oversee government-privileged banks properly.

Or nationalise them as they are. Neil Wilson

That simply replaces government-subsidized private credit creation with private credit creation by the government. That's no improvement. Government credit creation should be for the general welfare only.

I've already dealt with the rest of the sovereign money illusion before

The authority and power to tax, the backing for fiat, is no illusion.

It is dangerously anti-democratic Neil Wilson

What is? Equal protection under the law wrt money is undemocratic?

and is not something I would support for structural power reasons

While supporting the power of the rich, the most so-called credit worthy, to steal purchasing power and opportunity from the poor, the least so-called credit worthy? And you dare talk about theft when the system you defend is designed or has evolved to steal from the poor? For the benefit of embezzlers and the rich?


let alone the simple fact that it *does not work*. Neil Wilson

What doesn't work? Equal protection under the law wrt money? When have individuals, businesses, State and local governments, etc. ever been allowed to have inherently risk-free accounts at the central bank?

Matt Franko said...

"You mean like paying interest on reserves or issuing interest paying sovereign debt, both of which are welfare proportional to wealth and not need?"

False. Sophomoric.

Andrew Anderson said...

Professor Bill Mitchell calls interest paying sovereign debt "corporate welfare" and IOR is equivalent.

So take your pick "welfare proportional to wealth and not need?" or "corporate welfare."

Either is detestable.

Matt Franko said...

What about middle class people who have saved (US ERISA accts have $18T in assets...) planning on getting some sort of return on the financial assets in their actuarial/fiduciary "models"?

$18T... ignore that?

Andrew they are getting NOWHERE for 20 years... why?

Now Bill is writing a history book.... like that is going to help...



Matt Franko said...

What is he going back thru the history to try to figure out which "butterfly flap" caused the problems?

Matt Franko said...

https://en.wikipedia.org/wiki/Butterfly_effect

Simsalablunder said...

Yeah, Bill is to blame for that and now he's digging into history for a book. He must be a moron…

Ralph Musgrave said...

I agree with Warren's permanent zero interest idea. So did Milton Friedman.

Bit off topic this, but Warren will be in the UK in mid-April, UK readers might like to know. I'm trying to organise a get together which will be in Milton Keynes (nothing to do with the two great economists!!!). It'll be 13th April, 5-8pm. Tickets (£27.57, which includes light dinner / supper) are available here:

https://www.eventbrite.co.uk/e/audience-with-warren-mosler-tickets-23899462937