Scott Fullwiler spent part of the afternoon reading (and reacting to) a paper that John Cochrane just gave at a conference on central banking in Stanford, CA. I haven’t read the paper yet, but judging byScott’s reaction on Twitter, there’s lots to like about it. (Mostly because it appears to draw heavily from a broad swath of at least a decade of published work from MMTers.)New Economic Perspectives
Seeping into the Mainstream?
Stephanie Kelton
16 comments:
I don't seem to see any references to the MMT literature in the bibliography
Cochrane, p.3:
“There is no reason that the central bank must transform the liquidity of government debt, as the treasury can itself issue debt as liquid as reserves, or even more so, since only banks can hold reserves and anyone can hold treasury debt.”
http://media.hoover.org/sites/default/files/documents/2014CochraneMonetaryPolicywithInterestonReserves.pdf
Right, not a single mention of MMT or MMT authors.
If this is a "victory" then one should wonder how "defeat" sounds like.
have you read the paper? It's full of interesting bits.. I'm still reading.
Cochrane has been writing about 'the fiscal theory of the price level' for years, without any reference to MMT, even though there are lots of similarities.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.308.6832&rep=rep1&type=pdf
http://en.wikipedia.org/wiki/Fiscal_theory_of_the_price_level
This latest paper by Cochrane seems to be getting even closer to MMT, though there are still differences..
See p. 3 of the paper.
He gets a lot of the MMT operational description, but his stance is quite different from MMT and PKE wrt to policy. He's an advocate of "narrow banking" aka "full reserve."
But coincident with McCulley's being recalled to Pimco to rescue Gross, I'd say that we are seeing something of a capitulation to what Warren and MMT have been saying for two decades. I have added emphasis to the points of agreement with MMT. So while John Cochrane is not about to jump on board with MMT, he is moving the universe of discourse in the direction of what MMT has been saying by confirming some of the operational principles.
Now, unlike in the gold standard era, we have a more elastic supply [policy space]. In our crisis, the Fed tried to help, buying or lending against many of the dodgy assets that banks and shadow-banks were trying to sell. But there are limits to what the Fed can do. So, we had a classic systemic run; a failure of fractional-reserve shadow-banking.
Narrow banking is the natural cure: we can hold reserves directly, we can hold similar fixed-value floating-rate electronically transferable Treasury debt, or we hold interest-paying money issued by intermediaries such as banks or money market funds that are 100% backed by interest paying reserves or very short-term treasury debt.
Another technological change: There is no real reason that the central bank must transform the liquidity of government debt, as the treasury can itself issue debt as liquid as reserves, or even more so, since only banks can hold reserves and anyone can hold treasury debt.) Fractional-reserve banking cannot collectively deliver all the promised money, unless the Fed agrees to buy every asset used as backing in a crisis, transforming inside money into outside money. If inside money depends on the right to convert the whole stock to outside money in a crisis, we might as well start there in the first place.
As the Federal Government displaced private note issue in the 19th century, so it can displace private interest-paying money in the 21st, with similar benefits to financial stability. The government does a few things well, and has a few national monopolies. Money is one of them, and now interest-paying electronic money. Fiat currency is not without its occasional inflations and crises either. But ultimately, the government can always avoid explicit default by printing money — government debt only promises more government debt. Ultimately, government debt is valued because you need maturing government debt to pay taxes, so government debt is backed by the present value of the government's ability and willingness to soak up money by taxing its citizens in excess of spending. That backing and ability to avoid default is better than backing by assets such as houses, and a plan to avoid default by selling assets.
That’s all a long way away. But in a first step, before we get grandiose and think about forcing narrow banking through regulation, before we think about regulating away the shadow-banking money-provision that failed, we can at least put a heavy emphasis on allowing narrow banking, and letting government-provided interest-bearing money compete and contribute to financial stability.
So this is fundamentally why a large balance sheet and interest-paying reserves are beneficial. A Federal Reserve with $2.6 Trillion of interest-paying excess reserves outstanding is a financial system with $2.6 trillion of narrow-banking deposits outstanding, a great advance in financial stability!,
"... though there are still differences.."
AND those differences are significant.
Tom
"...so government debt is backed by the present value of the government's ability and willingness to soak up money by taxing its citizens in excess of spending."
This is the main point. He still argues that current deficits should be 'paid for' with future surpluses.
That may be his view but what he says can be interpreted as saying that even if government "prints" to avoid default or a liquidity crisis, it can always correct for inflationary consequences that might later arise by raising taxes.
Under narrow banking money would be exogenous and government would be in control the amount of inside money for credit extension by regulating the amount of outside money, since only outside money can be lent out by depository institutions.
Then it would be up to government to provide enough outside money for growth while maintaining price stability using fiscal policy to adjust the amount of outside money available for spending and lending.
Shadow banking would be dependent on loaning its own IOU's without backing and would have to take the lumps in case of a crisis. Apparently, Cochrane thinks that a collapse of shadow banking would not create a systemic crisis, although I am not aware of his account of this if he provides one.
"Historically, inflation is always and everywhere a fiscal problem."
p.36
I'm reading Cochrane's paper and I'm not impressed. I'll explain the flaws in it on my own blog shortly.
"Friedman (1968) wrote that central banks can determine the price level, and their primary mandate should be to determine the price level. Plosser (2013 p. 6) echoes this view: “..in a regime with fiat currency, only the central bank can ensure price stability. Indeed, it is the one goal that the central bank can achieve over the longer run.” My analysis, following in the footsteps of Sargent and Wallace (1981), denies this claim. As Sargent and Wallace wrote, “Friedman’s list of the things that monetary policy cannot permanently control may have to be expanded to include inflation” (as well as output and unemployment). Perhaps they should have said “monetary policy alone cannot permanently control,” for the central point is that once monetary frictions recede — and even before they recede in Sargent and Wallace’s analysis — monetary policy cannot control the price level without fiscal backing. And as monetary frictions vanish, like the Cheshire cat, only the fiscal backing remains.
This is not heresy. Friedman’s view, though we accept it as gospel now, was novel and revolutionary at the time. In the preceding Keynesian heyday, inflation was held to come from bargaining or wages price spirals, or other somewhat mysterious forces, but not, centrally, from actions of the central bank. Monetary policy was considered extremely weak, either to do good or (Friedman’s view) to do much bad either. Under the gold standard, the price level was determined by that standard, operated primarily by the Treasury, and as we have seen really part of fiscal policy. The central bank had some short term role, manipulating interest rates to manage gold flows, but nobody would have thought the central bank necessary or even primarily important for price-level determination. The US didn’t even have a central bank or a monetary policy through much of the 19th century, yet we did have a price level!
... As I have analyzed it, the role of the central bank will revert to something like what it was under the gold standard. Long-run price stability is a function of the structure of government debt, fiscal promises, and fiscal commitments. The central bank has only a short-run smoothing role, as it did under the gold standard."
p.43-44
e-mail to Warren Mosler on this -Cochrane Monetary Policy with Interest on Reserves
"Historically, inflation is always and everywhere a fiscal problem."
Wouldn't functional finance agree in the case of demand side inflation?
I would think so, Tom. Has anybody come up with a good analysis of US inflation from 1900 on?
I'm withdrawing my critical remarks above about Cochrane's paper. I've now got further into it. There is some thoughtful stuff there.
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