Monday, October 10, 2016

Lars P. Syll — Loanable funds theory is inconsistent with data


Lance Tayor quote

Lars P. Syll’s Blog
Loanable funds theory is inconsistent with data
Lars P. Syll | Professor, Malmo University

31 comments:

Ralph Musgrave said...

There's probably SOMETHING in the loanable funds theory: i.e. given a recession I've no doubt interest rates drop at least a bit, which will encourage investment to at least a finite extent. But that's not to say the effect is big enough to cure recessions. A more potent effect, one that is guaranteed to work, is the so called Pigou effect.

That is, in a totally free market and given a recession, prices and wages fall, which increases the value of money (base money in particular). It also increases the value of private sector paper assets in that it increases the real value of government debt. I.e. what some MMTers call "private sector net financial assets" rises.

And that all comes to much the same thing as the cure for recessions which I think most MMTers favor: i.e. just creating fiat and spending it (and/or cutting taxes). The latter also increases private sector net financial assets.

Andrew Anderson said...

(and/or cutting taxes). Ralph

Cutting taxes is trickle down theory unless you mean sales and employment taxes since the poor don't directly pay other taxes.

MRW said...

The market doesn't set the interest rate. The central bank does.

MRW said...

Cutting taxes is not trickle down theory.

Beardsley Ruml, head of New York Fed, circa 1946: Taxes for Revenue are Obsolete.
http://home.hiwaay.net/~becraft/RUMLTAXES.html

See subhead "What Taxes Are Really For."

Andrew Anderson said...

Cutting taxes is not trickle down theory. MRW

Sure it is. Taxation by the monetary sovereign removes fiat from the economy thus reducing taxation by the monetary sovereign might be thought to be good for the economy.

MRW said...

Read the article I linked to, Andrew.

(1) It's not theory.
(2) Taxes serve a public purpose.
(3) What's "good for the economy" is correct fiscal policy; taxes are simply one way you accomplish it. Reducing taxes during full employment and a hot economy give you inflation.

Andrew Anderson said...

I didn't say I believe in trickle down; I don't.

MRW said...

TOTAL Federal Tax Recipts for 2015: the middle and lower classes pay the majority of taxes, 78.5%.

Withheld Income And Employment Taxes: $2,190,329,000,000
Individual Income Taxes: $102,810,000,000
Railrroad Retirement Taxes: $6,452,000,000
Excise Taxes: $98,802,000,000
Corporation Income Taxes: $380,731,000,000
Federal Unemployment Taxes: $9,254,000,000
Estate & Gift Taxes And Misc IRS Rcpts: $1,400,000,000

Sales taxes are STATE taxes in this country.

Andrew Anderson said...

the middle and lower classes pay the majority of taxes, 78.5%.
MRW

Fine, then cut their taxes. But then continue to finance the deficit with positive interest paying sovereign debt or interest on reserves, both of which are welfare proportional to wealth?

MRW said...

Andrew,

The deficit isn't "financed"by any anything, Andrew. The "deficit" is an accounting record of the difference between the funds Congress appropriates (legally spends)--i.e.: spending authorized in a given fiscal year--and funds collected through taxes LATER. It's just an arithmetic calculation. Nothing more.

This accounting artifact is computed after the fact. After the taxes for the fiscal year have been collected, mainly in April. We don't have crystal balls. So no one can say what the deficit will be ahead of time. Anyone guessing the deficit for 2008 and 2009 in 2006 or 2007 would have been wildly off the mark. The country was bleeding 800,000 jobs a month after Sept 2008. Tax collections went down drastically; the deficit therefore soared, and more so because the automtic stabilizers established after the Great Depression kicked in. The dumb shits at the CBO crowed at the end of Clinton's term that the US would happily have government surpluses for another 15 years !?! I mean, what fucking planet are these people on? They were dead wrong, both in their projections and the value of the surplus to the economy.

When Congress, per our constitution, "appropriates" funds for sectors of the economy, that money is going to private sector businesses and individuals, vendors that provide goods and services provisioning the federal government for the benefit of the people: fixing roads and airports, improving telecommunication lines and services, healthcare (ha!), education, social services for the poor and infirm, scientific advancement, etc., etc..

After Congress appropriates, the US Treasury tells the Fed to mark up the amount of spending Congress authorized in its General Account, which the Fed does with keystrokes. Out of thin air. Kaboom.

The US Treasury instructs the Fed to pay the amount of approved spending to the various vendors’ banks at the Fed for onward-forwarding by the bank to the individual vendor’s account.

These payments empty the US Treasury General Account, BUT they now increase the money supply in the real economy because now the vendors’ accounts are bursting and the money supply in the real economy increases.

Then. To be contd.

MRW said...

Andrew, part 2 contd.

Because of some arcane laws that I don’t have the time to explain the history of to you, the US Treasury must replenish its General Account. It cannot have an overdraft. It can’t be empty. Against the law. So two weeks to a month later it uses the pre-1933 process of creating treasury securities and selling them to the public at auction. In the exact same amount as the congressional appropriation. Did you get that?

The treasury securities are auctioned off to the world. Everyone wants them because they pay interest, they're risk-free…again: another pre-1933 enticement to buy them, and they are guaranteed 100%. You can’t lose your money the way people lost theirs if they had more than the insured limit of $250,000 in their retirement accounts at their local commercial bank and it went under, which happened a lot in 2008 and 2009.

University trusts, pension funds, businesses, rich individuals, ordinary folk via treasurydirect.gov, US banks, foreign governments, foreign investors, foreign banks can exchange their cash sitting in their commercial bank savings account for the absolutely risk-free treasury securities that pay interest—which gold doesn’t—although not as much as commercial bonds, which do have a risk. And the money supply is restored to balance.

The interest on reserves was only introduced in 2008, courtesy of Warren Mosler, I might add. It’s what 25 basis points (0.25%)? 50 basis points (0.50%)? Piddling. But it helps keep the Fed’s interest rate, or Fed Funds Rate, above zero.

Whatever all this transactional explanation, the fact remains that the deficit is not financed by anything. It’s an arithmetical difference between two numbers. Further, when Congress “appropriates” it does not call up the IRS and ask, Gee how much money do we have in the kitty? It doesn’t have to. The Congress creates money by spending.

Andrew Anderson said...
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Andrew Anderson said...

The deficit isn't "financed"by any anything, Andrew. MRW

Correct. Me bad and I knew you would say this; sovereign debt is used to drain reserves from the banking system. But so does Federal taxation.

The interest on reserves was only introduced in 2008, courtesy of Warren Mosler, I might add. It’s what 25 basis points (0.25%)? 50 basis points (0.50%)? Piddling. But it helps keep the Fed’s interest rate, or Fed Funds Rate, above zero. MRW

It's still welfare for the banks and the rich and Federal taxation on the rich would serve the same purpose without denting the economy. Or let the Fed Funds rate fall to zero. Or increase the demand for "reserves" by allowing citizens to have accounts at the Federal Reserve and by abolishing government-provided deposit insurance.

So, you see, there's really no need for welfare for the banks and the rich.

ordinary folk MRW

Ah, yes. Hide behind widows and orphans, an old tactic. If widows and orphans need welfare we should just give it to them, not via disguised welfare for the banks and the rich.

MRW said...

sovereign debt is used to drain reserves from the banking system. But so does Federal taxation.

You're mixing apples and oranges here. You're confusing the machination of managing base money, which happens between the US Treasury and its banker, the Fed, and using fiscal policy to manage the real economy, taxes. Two different things.

First, sovereign debt doesn’t drain reserves. The phrase is "Reserve add before reserve drain." Congress spends. Reserve add. The US Treasury issues treasury securities. Reserve drain. And what it "drains" is dough parked in bank checking accounts by putting it into the same bank's savings account at the Fed. Technically, affecting the money supply because treasury securities are not calculated as part of the money supply. It would be like you moving money from your left pocket to your right pocket. That's all. They do this byzantine thing because there's been a law on the books that the US Treasury can't have zero or an overdraft in its General Account since pre-1933.

You keep writing things like this: Or increase the demand for "reserves" by allowing citizens to have accounts at the Federal Reserve. The demand for reserves, as you call it, is achieved by the Fed moving funds from savings to checking...or by banks doing interbank trades. Reserves cannot be loaned out. They are used as a monetary policy tool. However, any citizen can have a savings account at the Fed. Go to treasurydirect.gov right now and get one. I think the minimum is $100. Maybe its $1,000. But there's nothing preventing it. When those savings are moved back to checkin--when the citizen wants access to his money tout suite it's moved (with any interest earned) back to the citizen's checking account at his local bank.

We don't have "government-provided deposit insurance" in the US. We have bank-provided deposit insurance. Commercial banks pay for that insurance, which is why it's limited to $250,000 per account. Mosler thinks it should be "government-provided," and cover all USD accounts limitlessly.

MRW said...

to clarify: And what it "drains" is dough parked in bank checking accounts by putting it . . .

Should read And what it "drains" is dough parked in bank checking accounts AT THE FED by putting it

Andrew Anderson said...

Commercial banks pay for that insurance, MRW

Obviously not or a private insurer would be credible. Besides, systemic risk* is uninsurable except by the monetary sovereign.

[More latter]


*Largely created by government subsidies for the banks in the first place.



Andrew Anderson said...

Mosler thinks it should be "government-provided," and cover all USD accounts limitlessly. MRW

Then Mosler should admit he's a fascist since the fix for an unstable, thieving fiat and credit system isn't to make it more stable.

And who the hell are banks that they should be able to create liabilities for fiat that the government then stands behind?

Andrew Anderson said...

However, any citizen can have a savings account at the Fed. Go to treasurydirect.gov right now and get one. I think the minimum is $100. Maybe its $1,000. But there's nothing preventing it. MRW

I tried once but I was informed I needed some form filled out by my bank. WTF?

Besides who'll do that when they can have a government insured account at a private bank for which they can get interest?

Andrew Anderson said...

The demand for reserves, as you call it, is achieved by the Fed moving funds from savings to checking...or by banks doing interbank trades. Reserves cannot be loaned out. MRW

Reserves are just another name for fiat account balances at the central bank when banks are the account holders. The only reason they can't be lent outside the banking system is that only depository institutions in the private sector may even have accounts at the central bank - part of an obviously rigged system since all citizens should be able to use their nation's fiat in the form of convenient account balances at the central bank.

The system you defend is fascist; you have to be blind to not see it.

MRW said...

I tried once but I was informed I needed some form filled out by my bank. WTF?

That's all that stupid money laundering and drug-money horseshit, and the crap they're trying to scarify us with post 9/11. I had to put cash into my sister's account yesterday to cover a check because she was out of town. Wasn't my bank. I had to produce ID! For dropping cash in her account! I asked why. Clerk said money-laundering rules. I said it's only $900. She said even if it's a penny. We have to do it. We have to identify both sides of a transaction.

Besides who'll do that when they can have a government insured account at a private bank for which they can get interest?

You're right as long as it's under $250Gs. But retirees put their money in their local bank: CDs, various investment and savings things that get them higher interest (income to live off) than a treasury security. 365+ banks failed in the six months following Sept 17, 2008. Millions of retirees lost everything above $250,000. I can't tell you how many stories I heard about JOINT retirement accounts vaporizing. If the couple had maintained two separate accounts they would have had double their money. Obama moved the upper limit to $250Gs when he got into office, although he signaled beforehand, like in November after the was elected, that he was going to do it. Before Sept/2008 is was $125Gs.

There was a bank here called WAMU, Washington Mutual. According to Bill Black it led in the mortgage fraud biz. It was my bank. I knew something was up when it started offering CDs in late August 2008 for 5%, waaay waaay above the going rate. It went under two months later. Chase bought it. But it only made accounts whole up to $250,000. The lack of oversight and regulation was the federal government's goddam fault. They should have made these people whole for their negligence.

MRW said...

part of an obviously rigged system since all citizens should be able to use their nation's fiat in the form of convenient account balances at the central bank.

The system you defend is fascist; you have to be blind to not see it.


It's not convenient for a central bank to offer depository accounts for ordinary citizens. That's adding a load of trillions of daily transactions that is completely unnecessary. Not to mention obviating the need for local banks. How would an ordinary citizen get a loan from the Federal Reserve? Who would do the underwriting? Banks, until Clinton blew them up, were dull, local establishments that knew their customers, and could tell who was a good customer, a good risk, and who wasn't. The Federal Reserve can't know that without increasing staff and real estate to an ungodly amount in every community in America. It's completely unworkable...AND it places control far from the customer. Don't you live in England? You have a tiny country. Ours is huge.

The Federal Reserve system was designed to avoid panics that a lack of a central bank caused for over a century up to 1913. Great Britain, France, Germany, and Canada all had central banks decades before the USA and they never had panics. That's what the architect of the Federal Reserve discovered in 1899-1900 when he spent two years and his own money to find out why they never experienced panics when the US was crippled by them.

The system is hierarchical. Commerical banks are part of the central bank. Central banks are part of BIS in Switzerland. There's nothing fascist about it at all.

Andrew Anderson said...

How would an ordinary citizen get a loan from the Federal Reserve? MRW

Who says a central bank should even create fiat except for its monetary sovereign? It shouldn't since that is bound to violate equal protection under the law in favor of asset owners and the most so-called credit worthy, which always includes the rich.

Besides, 100% private banks with 100% voluntary depositors would still exist.

Andrew Anderson said...

Not to mention obviating the need for local banks. MRW

100% private banks with 100% voluntary depositors would still exist and could create as many deposits/liabilities for fiat as they dared.



Andrew Anderson said...

The system is hierarchical. Commerical banks are part of the central bank. ... There's nothing fascist about it at all. MRW

Indeed it is fascist since government privileges for depository institutions violate equal protection under the law in favor of the banks themselves and, by extension, in favor of the most so-called creditworthy, the rich.

Andrew Anderson said...

The system is hierarchical. MRW

Indeed it is. Ignoring physical fiat*, the banks may use a nation's fiat but its citizens MAY NOT! Instead, the citizens must make do with bank liabilities for fiat that are largely a sham and which will be entirely a sham if physical fiat is ever abolished.


*Unsafe, inconvenient and likely to be abolished anyway.

Andrew Anderson said...

Instead, the citizens must make do with bank liabilities for fiat that are largely a sham aa

That is wrt the general public; of course liabilities BETWEEN banks are very real.

MRW said...

Whatever, Andrew. You are not making logical sense, making up equivalencies that are bizarre. Believe what you want to.

Andrew Anderson said...

making up equivalencies that are bizarre. MWR

What's bizarre is your insistence that depository institutions should be privileged by government - in our supposedly free market system.

How do you live with yourself? Supporting government privileges for banks?

MRW said...

Again, you confuse the government and private sectors. The "free market" has nothing to do with managing the nation's payment system.

Depository institutions are public/private entities. They are formed under the federal banking charter and regulated by the Federal Reserve, an agent of the US Treasury. There are other federal agencies that regulate them. Whether these agencies do their goddam job is another issue. The American people absolutely would not accept national banks in 1913. They had a deep fear of socialism, and wanted their bankers to live in their town, and be members of their community. So our system was designed to have an appearance that banks were privately-owned and independent. They're not.

The utter corruption of our government by the financial system is the result of lobbyists, campaign donors, stupid congressmen, and a dumb President...and the blurring between the purpose of government and the private sectors. Read this disgrace:
WikiLeaks Bombshell: Emails Show Citigroup Had Major Role in Shaping and Staffing Obama’s First Term
http://wallstreetonparade.com/2016/10/wikileaks-bombshell-emails-show-citigroup-had-major-role-in-shaping-and-staffing-obamas-first-term/

Andrew Anderson said...

The "free market" has nothing to do with managing the nation's payment system. MRW

Actually, it does since the payment system MUST work through the banks since citizens are not allowed to use their nation's fiat except in the form of unsafe, inconvenient physical fiat, aka "cash".

IF all citizens, their businesses, State and local governments, etc. were allowed accounts at the central banks and IF government provided deposit insurance were abolished THEN we would have TWO payment systems - an at-risk payment system that worked through depository institutions and a risk-free payment system that did not.

As for historical excuses for the present system those are interesting but not compelling since the issue at hand should be how to reform the system - not perpetuate an inherently unjust one - that has now bitten the hand of its supposed masters and beneficiaries.

Andrew Anderson said...
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