An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Tuesday, October 23, 2012
Marshall Auerback — ‘The Chicago Plan’ does not deserve to be revisited
Marshall Auerback sets forth an MMT-based viewpoint.
Great piece by Marshall. I have been having a lot of the same thoughts, but Marshall really articulates them well.
People seem to forget that we didn't have a run on commercial banks in this recession. FDIC did its job in reassuring depositors that their deposits were safe. We didn't get a financial crisis because commercial banks were somehow caught short of needed reserves. The run was not at the consumer level, but at the higher level of major investment banks and insurance corporations trading in much larger and more complex debt products.
Still, while 100% reserves seems draconian and deflationary to me, I do think we have to do more to put restrictions on lenders. And we need to boost public investment to compensate for whatever growth we lose by having less debt-financed spending.
And finally, we have to address some of the forces that were driving the growth of credit in the fist place - the sluggish growth of middle class and working class incomes and increased inequality. These gaps lead to higher demand for borrowing as people struggle to keep up with both their own accustomed lifestyle, and the lavish ways of the rich which they try to emulate.
but you need a fiscal policy which promotes jobs and income growth so that people never have to resort to credit
Maybe people shouldn't have to resort to credit to manage the basic necessities of life. MMT needs the fiscal component in order to work as well. The problem is that as long as banks have virtually unlimited credit creation powers they will be able to dictate any regulatory policy to their liking. It took the banks a while to overturn the post- Great Depression regulatory environment, but they've done it. 2008 presented a unique opportunity to re-regulate the financial system. The government whiffed on it.
I saw Michael Hudson joking with Stephen Zarlenga (AMI) that the current policy of 100% government backing of big banks was "kind of like 100% reserve." As Hudson well knows this is only true if you accept that the parasite has taken over the brain of the host, a metaphor he uses often.
I see your point I liked some of the paper too especially the 'history of money' part, which I have some quibbles with but at least some others are looking back... and A del Mar gets a mention... (still no mention of 'nomisma' though per se which I think is interesting...)
But there was a bit of an underlying taint of Monetarism throughout imo...
Agree it was a "stimulating" paper but caveat emptor on everything outside MMT imo...
MMT's a bit vague on the whole banking side. If you set the interest rate at zero how do you control credit growth? MMT solution: raise taxes/cut spending when it gets to large. It's highly questionable how practical or effective this is as an option.
y If you set the interest rate at zero how do you control credit growth?
You are assuming that control of the overnight rate enables the cb to control credit growth. MMT economists dispute that. Generally, people to asset that positon hold that money is exogenous and believe in some from of QTM, Taylor-type rules, etc.
I thought that the MMT position was "it's about price, not quantity". Contrary to the money multiplier view, bank lending is not stimulated or inhibited by changes in the mere quantity of reserves if that change has no impact on the price of reserves. It is only the spread between the price of obtaining additional reserves and the expected return on additional loans that can have an impact. And of course, if banks are already swimming in excess reserves, central bank influence is neutralized.
You know, its not like the IMF paper is only available in a Tibetan monastery's reading room, thee Telegraph helpfully provided a link. Clearly Auerback didn't read it ("a new IMF proposal which allegedly suggests..."). If he had, he might have found himself "in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement." http://odetocapitalism.com/2011/10/11/keynes-the-road-to-serfdom/
Auerback--- Sounds good, except that in the world we live in, we don’t really have a “fractional reserve lending model” IMF Paper-- "The deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth."
Auerback-- "loans create deposits and are made without reference to the reserve positions of the banks. The bank then ensures its reserve positions are legally compliant as a separate process knowing that it can always get the reserves from the central bank." IMF Paper-- "In other words, at all times, when banks ask for reserves, the central bank obliges. Reserves therefore impose no constraint."
Auerback--- "But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes..." IMF Paper-- "switching to full government funding of credit can maximize the fiscal benefits of the Chicago Plan. This gives the government budgetary space to reduce tax distortions, which stimulates the economy..."
do you want to 'control credit growth' or seek to maintain stable prices?
I believe the mandate is for the latter... we may actually need high credit growth in the economy depending on conditions...
but controlling credit growth is not the same thing as maintaining stable prices... and there is MMT information out on "inflation" and stable prices: "ALL prices are necessarily a function of what price the govt is willing to pay for things and what prices the govt allows the banks to use for collateral..." this doesnt have anything to do with "credit growth"....
If the govt started paying $1M for mobile homes for military use and allowed banks to start lending $1M against mobile homes here in the US, the price of mobile homes would go directly to $1M... rsp,
"If the govt started paying $1M for mobile homes for military use and allowed banks to start lending $1M against mobile homes here in the US, the price of mobile homes would go directly to $1M"
That's a bit different. If the govt says 'you can only lend this much' then credit growth is controlled by law rather than interest rates (i.e. the price of borrowing).
But then the government would have to set lending limits on everything. i.e. direct price controls, rather than a single price control on credit.
Great piece by Marshall. I have been having a lot of the same thoughts, but Marshall really articulates them well.
ReplyDeletePeople seem to forget that we didn't have a run on commercial banks in this recession. FDIC did its job in reassuring depositors that their deposits were safe. We didn't get a financial crisis because commercial banks were somehow caught short of needed reserves. The run was not at the consumer level, but at the higher level of major investment banks and insurance corporations trading in much larger and more complex debt products.
Still, while 100% reserves seems draconian and deflationary to me, I do think we have to do more to put restrictions on lenders. And we need to boost public investment to compensate for whatever growth we lose by having less debt-financed spending.
And finally, we have to address some of the forces that were driving the growth of credit in the fist place - the sluggish growth of middle class and working class incomes and increased inequality. These gaps lead to higher demand for borrowing as people struggle to keep up with both their own accustomed lifestyle, and the lavish ways of the rich which they try to emulate.
Dan,
ReplyDeletethis might interest you:
Michael Kumhof: inequality and macroeconomic dynamics
https://www.youtube.com/watch?v=LW5iyC29qzU&playnext=1&list=PL6380884C0F0C996E&feature=results_main
I don't think Auerback has actually read the paper.
ReplyDeleteDan, if you haven't read it yet, you should - it's very good.
but you need a fiscal policy which promotes jobs and income growth so that people never have to resort to credit
ReplyDeleteMaybe people shouldn't have to resort to credit to manage the basic necessities of life. MMT needs the fiscal component in order to work as well. The problem is that as long as banks have virtually unlimited credit creation powers they will be able to dictate any regulatory policy to their liking. It took the banks a while to overturn the post- Great Depression regulatory environment, but they've done it. 2008 presented a unique opportunity to re-regulate the financial system. The government whiffed on it.
I saw Michael Hudson joking with Stephen Zarlenga (AMI) that the current policy of 100% government backing of big banks was "kind of like 100% reserve." As Hudson well knows this is only true if you accept that the parasite has taken over the brain of the host, a metaphor he uses often.
y,
ReplyDeleteI see your point I liked some of the paper too especially the 'history of money' part, which I have some quibbles with but at least some others are looking back... and A del Mar gets a mention... (still no mention of 'nomisma' though per se which I think is interesting...)
But there was a bit of an underlying taint of Monetarism throughout imo...
Agree it was a "stimulating" paper but caveat emptor on everything outside MMT imo...
rsp,
Dan, this is the paper:
ReplyDeletehttp://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
Matt,
ReplyDeleteMMT's a bit vague on the whole banking side. If you set the interest rate at zero how do you control credit growth? MMT solution: raise taxes/cut spending when it gets to large. It's highly questionable how practical or effective this is as an option.
y If you set the interest rate at zero how do you control credit growth?
ReplyDeleteYou are assuming that control of the overnight rate enables the cb to control credit growth. MMT economists dispute that. Generally, people to asset that positon hold that money is exogenous and believe in some from of QTM, Taylor-type rules, etc.
I thought that the MMT position was "it's about price, not quantity". Contrary to the money multiplier view, bank lending is not stimulated or inhibited by changes in the mere quantity of reserves if that change has no impact on the price of reserves. It is only the spread between the price of obtaining additional reserves and the expected return on additional loans that can have an impact. And of course, if banks are already swimming in excess reserves, central bank influence is neutralized.
ReplyDeleteYou know, its not like the IMF paper is only available in a Tibetan monastery's reading room, thee Telegraph helpfully provided a link. Clearly Auerback didn't read it ("a new IMF proposal which allegedly suggests..."). If he had, he might have found himself "in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement."
ReplyDeletehttp://odetocapitalism.com/2011/10/11/keynes-the-road-to-serfdom/
Auerback---
Sounds good, except that in the world we live in, we don’t really have a “fractional reserve lending model”
IMF Paper--
"The deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth."
Auerback--
"loans create deposits and are made without reference to the reserve positions of the banks. The bank then ensures its reserve positions are legally compliant as a separate process knowing that it can always get the reserves from the central bank."
IMF Paper--
"In other words, at all times, when banks ask for reserves, the central bank obliges. Reserves therefore impose no constraint."
Auerback---
"But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes..."
IMF Paper--
"switching to full government funding of credit can maximize the fiscal benefits of the Chicago Plan. This gives the government budgetary space to reduce tax distortions, which stimulates the economy..."
y,
ReplyDeletedo you want to 'control credit growth' or seek to maintain stable prices?
I believe the mandate is for the latter... we may actually need high credit growth in the economy depending on conditions...
but controlling credit growth is not the same thing as maintaining stable prices... and there is MMT information out on "inflation" and stable prices: "ALL prices are necessarily a function of what price the govt is willing to pay for things and what prices the govt allows the banks to use for collateral..." this doesnt have anything to do with "credit growth"....
rsp,
y,
ReplyDeleteIf the govt started paying $1M for mobile homes for military use and allowed banks to start lending $1M against mobile homes here in the US, the price of mobile homes would go directly to $1M... rsp,
"but you need a fiscal policy which promotes jobs and income growth so that people never have to resort to credit"
ReplyDeleteGee, that looks familiar. Where have I seen that before?
"If the govt started paying $1M for mobile homes for military use and allowed banks to start lending $1M against mobile homes here in the US, the price of mobile homes would go directly to $1M"
ReplyDeleteThat's a bit different. If the govt says 'you can only lend this much' then credit growth is controlled by law rather than interest rates (i.e. the price of borrowing).
But then the government would have to set lending limits on everything. i.e. direct price controls, rather than a single price control on credit.