Every once in a while, a debate arises about whether or not a given government program — the Export-Import Bank, federal student loans, Quantitative Easing, or different kinds of bailouts — was profitable. These debates, unfortunately, are all basically nonsense.
Here's the thing about the federal government — it can print dollars, a highly profitable activity. You can't print dollars. I can't print dollars. Vox Media can't print dollars. The state of Tennessee can't print dollars. These are the kind of kind of entities that need to worry about whether their activities generate more dollars than they cost, because they need to worry about lack of dollars. Of course there are lots of things to worry about with loan guarantees and bailouts and other things, but profits and losses is never the issue.…VOX
It doesn't matter if government bailouts are profitable
Matthew Yglesias
I haven't heard from Matthew Yglesias in a while. It seemed like he was introduced to MMT several years ago, and understood it. But he refused to let go of his other understandings of how the economy worked. So he was quite the study in self-contradiction.
ReplyDeletePerhaps he now understands that MMT is the one true economic school?
Yglesias is wrong to say “profits and losses is never the issue..”. If government makes a LOSS from the bailout process (which it will do in the UK), that’s a subsidy of the banking industry, which does not make economic sense.
ReplyDeleteOf course a bailout plus loss is better than a total collapse of the banking industry. But better still is to impose far higher capital ratios: that way banks just won’t go insolvent.
Government 'loss' is an injection of net financial assets (aka spending) and government 'profit' is a removal of net financial assets (aka taxation).
ReplyDeleteThat's all you need to know really.
If it is the policy of the government to support bankers because they support the party in power, then they will create 'losses' that benefit bankers.
Subsidising bankers makes perfect sense if you convinced yourself that private bank lending is the only pure way to inject funds into the economy.
That's why all the politicians rant on endlessly about how banks "aren't lending". They truly believe in the concept!
He says it doesnt matter if bailouts are "profitable" and then goes on to make the point here "it can print dollars, a highly profitable activity" that the key aspect of the govts ability to issue state currency is that it is "profitable"....
ReplyDeleteSo is it a good idea to at first make the point that 'profitability' is not important and then immediately rest your case on the govt action as being 'profitable'?
the context here is govt is a firm with high 'profits' in other areas besides bailouts that can cover any losses in the bailout division...
This guy may make it to paradigm some day but it is taking an awfully loooooooonnnngg time....
That's why all the politicians rant on endlessly about how banks "aren't lending". They truly believe in the concept!
ReplyDeleteThis really grinds me specially in the current situation, stupid politicians talking over and over about how credit must grow again, how banks should increase lending and they applause when people takes on more loans.
The morons think that an already over leveraged private sector, which can't take on more debt, should take on even more debt and that will fix everything. I would just beat them each time they say the C word.
It seems to me he is running to separate issues together. The key point is made in his last paragraph. A government is not a private enterprise whose function is to accumulate its own wealth and whose real assets must exceed its real obligations, as measured by market value. It is a public enterprise whose operations are arms of the public as a whole. It can meet its real obligations or goals by taking private assets and then either redistributing them directly, converting them into some other kind of asset before redistributing them, or converting them somehow into public goods. In general, it doesn't sell its output of goods and services to the public; rather it just gives that output to the public. It is performing its function well if the total value of output to the society exceeds the total value of the inputs it commands. But when that happens, that net increase in value isn't located on the balance sheet of the government as a net increase in the wealth of the government.
ReplyDeleteIt's capital consists of all of the machinery of government that enables it to get what it needs and produce the desired services from one it gets. Those assets include the good will of the public. It never needs to have in its possession a quantity of assets whose market value exceeds its total liabilities or obligations.
Operating a monetary system is just one potential service a government can perform. For a government that does perform that service, there is no reason that it's net collections of money need to exceed its net distributions of money. But the more fundamental points I just described, also apply to state governments that do not operate their own monetary systems. Whether the government of the State of California is operating successfully or not does not depend on whether or not the wealth of that government itself is increasing, or on whether the government is showing an operating profit.
Ignacio,
ReplyDeleteAnd this is how higher education is now funded here in the US, ie student loans...
And loans from the Federal Govt no less... and the govt people argue back and forth about what should be the correct rate of interest on the govt loans to the poor students!
Its like they are 'banker wannabes'....
So it is a huge 'wages and debt' mentality over here... it dominates the whole thought process right now...
Its all 'wages & debt!'.... wages & debt!' all the time...
People seem like they are getting sick of it but slowly....
rsp
A government is not a private enterprise whose function is to accumulate its own wealth and whose real assets must exceed its real obligations, as measured by market value.
ReplyDeleteThis is like people caring for central bank balance sheets!!! "But, but, but what if the central banks get into negative equity, if those junk assets drop in value, etc." and I can only think... are you freaking stupid? Trying to explain why it doesn't matter is hopeless, you are driven mentally crazy 99.99% of the times, is like hitting a wall over and over, you can't penetrate their mental blocks and cognitive biases.
Maybe we are at the epitome of human evolution and we can't do better on aggregate level, then we are doomed, like Roger Erickson says. It doesn't matter how many articles are written or how hard you try to educate people, it's an impossible task, it simply does not work with adults, is like they have been brainwashed to not know how to conduct certain basic operations that Piaget said most normal people should have between the 2 and 7 years of life (pre-operational stage).
ISubsidising bankers makes perfect sense if you convinced yourself that private bank lending is the only pure way to inject funds into the economy.
ReplyDeleteThat's why all the politicians rant on endlessly about how banks "aren't lending". They truly believe in the concept!
Right. The general notion is banks are intermediaries in a loanable funds market that puts borrowers together with savers and the interest rate is the market price of money based on supply and demand. Which is why they also think that monetary policy works and that fiscal policy is either ineffective at stimulating the economy owing to crowding out.
This is bipartisan error, dogma on the right and promoted by the left by most economist, since they are fundamentally monetarists. Paul Krugman is a good example.
The funny thing is that America, Inc. is very "profitable" if the government balance sheet is compared with corporate balance sheets rather than income statements.
ReplyDeleteThe country is growing very nicely over the long term and it has multiple subsidiaries around the world. Investors seem to be very happy with it too, since the US has persistent capital inflows and impressive direct investment by foreigners.
Workers are literally dying to enter the US and are being turned away.
As the tax base increases revenue is growing, and being a monopolist the government is in a position to raise or lower revenue as it chooses.
Being the currency issuer, it's costs of capital is essentially zero. And as the world's banker it sets global financial policy and dictates institutional arrangements. What's not to like about that if you are a capitalist?
Good point Tom, so that's what they mean that a country should be run like a business lol.
ReplyDelete