We live in a dangerous time when the FT promotes a form of hardline, and deeply undemocratic monetarism.
It's dangerous that some on the left have bought into Positive Money's ideas.
The battle for money has begun. It is essential that it is won.Tax Research UK
The crucial fact about the vertical side is that the fact that a nation is not like a household is evident regardless of the operational details. Positive Money is wrong in their belief the current system must be changed to achieve the type of government spending they want.
However, this does not mean that Positive Money is flat out wrong. Key MMT people would be perfectly happy to spend vertically in the way Positive Money wants, which is just PQE/OMF by another name. This is especially so given that OMF procedures would be transparent and thus politically advantageous.
MMT scholars just do not believe it is remotely as urgent as Positive Money because they realize the current system is already capable of spending into the economy in the same way the PM wants to (Wray 2001, Fullwiler 2013). Also, many have rejected PM more or less out of hand because of Positive Money views or perceived views on the horizontal system [which we turn to below].
At any rate, regarding the vertical system – The crucial thing is to get the vertical system to do what is good for the economy – functional finance – regardless of the operational details.
From a political point of view it is better to have a clearer more straightforward system [PQE/OMF]. This is a substantially less fundamental problem, however, than what Positive Money thinks it is doing; in saying that, however, the practical and strategic importance of making the changes to a straightforward system perhaps should not be underestimated.
Scott Fullwiler himself has noted the fundamental agreement on vertical money issues:Clint Ballinger
“interestingly, understanding how DFM [Debt Free Money] works also illustrates the MMT view of government spending and government bond issuance. Logically we should expect that DFM supporters could join MMT in rejecting otherwise widespread concerns about government solvency, China refusing to purchase US national debt, the financial sustainability of entitlement programs, and so forth.” (Fullwiler 2014)….
Perhaps the two greatest current macroeconomic problems are
The logical approaches to these problems are functional finance in the first case and changes in and/or enforcement of regulation of the financial system in the second case.
- a failure to optimally use resources (including people)
- the design and/or manipulation of the financial system to divert real resources from producers to a financial class
Two groups that have gained visibility (academic, policy, and/or popular) on these issues are Modern Monetary Theory and Positive Money.
MMT scholars largely focused on the first problem, how functional finance can increase the public’s well being. Positive Money’s main worry has been the second and suggestions for changes that might make resource diversion more difficult.
However, the simple point I want to make is this: in recent years the two groups have moved towards each other’s positions and interests to a significant extent, probably much more than either group or the heterodox community recognizes....Clint Ballinger
... as Positive Money rightly note, neither the mechanism nor the implications are widely understood. But Positive Money do little to increase public understanding – instead of explaining the issues clearly, they imbue this money creation process with an unnecessary air of mysticism....Critical Macro Finance
So let me assure PM: I want the understanding and reform you do but please address the real concerns that many who have sympathy have with what you’re saying. We’re spending our time on this to make the process work. We’e worried you’re not delivering a workable or democratic or accountable solution, and that’s worrying.Tax Research UK
In Part 1, I briefly outlined the Sovereign Money System proposal (SMS) advanced by the Icelandic government as a way forward in banking reform. I also demonstrated that the banking collapse in Iceland in 2008 could hardly be seen as being caused by the banks having the capacity to create credit.
Much more was in play including the fact that banks had stopped behaving as banks and were serving the doubtful aspirations of their owners rather than any notion of public purpose. While the Icelandic report claims that the commercial bank lending destabilised the growth cycle in Iceland the reality is that it was other factors that led to the explosion of their balance sheets. The money supply did expand faster than “was required to support economic growth” but that is because the financial system was deregulated and the banksters and fraudsters were allowed to serve their own interests and compromise the national interest. As we will see that sort of duplicity can be reigned in with appropriate structural regulation without scrapping the capacity of the private banks to create credit.
In this Part 2, I consider some of the mechanics of the SMS and argue that essentially we cannot get away from the fact that a central bank always has to fully fund a monetary system. If it tries to restrict funds yet maintain private bank lending then recession would surely follow and interest rates would rise beyond the control of the central bank. I also provide some ideas on where more fundamental monetary system reform is currently needed.Bill Mitchell – billy blog
A recent blog by Clint Ballinger highlights some of the similarities and differences between Positive Money’s proposals and those of Modern Monetary Theory (MMT) and other Post-Keynesian types of analysis. We thought Ballinger makes some good points that are worth highlighting, before suggesting where we think his review could be improved.....Positive Money
Watch the debate and read the transcript
The debate was opened by Steve Baker at 11.18am. Shadow Treasury Minister, Catherine McKinnell, responded to the debate on behalf of the Opposition. The Economic Secretary to the Treasury, Andrea Leadsom, responded to the debate on behalf of the Government.
Watch Parliament TV: MPs debate money creation and society, Thursday 20 November 2014
Read the debate in Hansard.
Read Commons Hansard: MPs debate money creation and society, Thursday 20 November 2014www.parliament.uk
Among the Post-Keynesian groups concerned with understanding and fixing problems that lead to the 2007/8 Global Financial Crisis (GFC) and other ongoing economic problems there are different areas of focus by circuit theorists, Modern Monetary Theory (MMT), Steve Keen’s approach to private debt, and other Post-Keynesians. (MMT, while often with a focus on other aspects of the economy [as L. Randall Wray writes, leading from neo-Chartalist and functional finance insights to fiscal policy] is nevertheless firmly grounded in endogenous money theory). Despite these various approaches having important disagreements and areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.
There is another perhaps small but dedicated and often visible group of reformers that focus on the monetary system. Broadly these are the various groups that want to change the monetary system such as The American Monetary Institute (AMI), Positive Money (PM), economists associated with the New Chicago Plan and others. Their relation with the Post-Keynesian groups mentioned above is somewhat complicated, and the key reason involves endogenous money. Before continuing, it helps to divide these diverse money reforming groups into two broad categories:Clint Balinger
In yesterday’s post – Money and the magical mathematics of Brahmagupta – I tried to explain the instability of our monetary system with some simple analogies. In this post I am going to offer a few thoughts on one proposed way to deal with this instability. The proposal in question is that of the campaign group Positive Money which is arguing for what it calls a Sovereign Monetary system.Applying Minsky's analysis to the Positive Money proposal. Cooper is also concerned that the monetary authority proposed would result in a command economy.
I find myself in an odd position with respect to the arguments of Positive Money. As far I can tell their analysis of the causes of financial instability are in complete agreement with my own thinking (see yesterday’s post or The Origin of Financial Crises). On the other hand, when it comes to their proposed remedy for this instability I find myself disagreeing with both the details of their proposed solution and its objectives....
If the main fallacy of Positive Money is based on the little known truth that banks can indeed create a form of money out of thin air, the next fallacy of PM ( and it is probably debatable which is the greater) is that money can be issued on a debt free basis. This fallacy is in fact based on the much better known truth that if governments create money they are creating their own debt or a liability for themselves.Modern Monetary Theory: Real Economics
Firstly, we need to take the power to create money away from the banks and return it to a democratic, accountable and transparent process.
History has shown that when banks have the power to create money, they create too much in the good times, causing financial crises, and too little in the bad times, making recessions and unemployment even worse.
They put most of the money that they create into house price bubbles and financial speculation, and only a small amount into businesses outside the financial sector. We simply don’t think that we can trust banks, who are hardwired to chase short-term profits, with something as powerful as the ability to create money.
And it’s not enough to regulate them; regulators have repeatedly failed to keep banks under control. There’s no reason why they should get it right this time around.
But we can’t trust politicians with the keys to the printing press any more than we can trust the big banks.
Instead, we need a new committee that decides whether and when to create new money.
This committee would need to be accountable to Parliament and sheltered from vested interests.
They would ensure the right amount of money is created – not enough to cause bubbles and a financial crisis, but not so little that it causes a recession.
This proposal for reform of the banking system explains, in plain English, how we can prevent commercial banks from being able to create money, and move this power to create money into the hands of a transparent and accountable body.
It is based on the proposals outlined in Modernising Money (2013) by Andrew Jackson and Ben Dyson, which in turn builds on the work of Irving Fisher in the 1930s, James Robertson and Joseph Huber in Creating New Money (2000), and a submission made to the Independent Commission on Banking by Positive Money, New Economics Foundation and Professor Richard Werner (2010).Positive Money
The fourth of a series of posts on MMT, ‘The Chicago Plan Revisited’, and related issues...
There are actually two concerns most advocates of Full Reserves have:
1. Solvency – there are few solvency issues with full reserves; not surprisingly a major concern in the 1930s for Simons, Fisher, The Chicago Plan etc.
2. (Endogenous) money creation
The second is much the more important, but the two are often confusingly conflated. Partly this is because the significance of the fact that the loanable funds model is wrong and there is no money multiplier is not always fully appreciated by Full Reservers.
Banks do not make loans based on reserves or loanable funds but based on demand, perceived profitability, and the capital they hold. The government covers reserve requirements later. Raising reserve requirements can raise costs but does not stop money creation. Even the focus on sight deposits (i.e., PositiveMoney) misses the point – not only do reserve requirements not stop money creation, neither does stopping lending based on sight deposits. Banks loans pull money from the central bank, with the limit being the ratio of capital to risk-weighted assets.
So, unless Full Reservers are only worried about bank solvency, which is doubtful, they are really addressing concerns that have their root in endogenous money.Clint Ballinger
