Some good news coming from Pedro da Costa at the WSJ today. Apparently the Fed is now saying publicly that they prefer using their regulatory and supervisory tools to control bank lending than the traditional interest rate/monetary policy tools.
This is something that WM/MMT has been advocating for a while, since monetary policy can wreak enormous collateral damage on the economy. Capital regulation and supervision on the other hand, are much more precise tools that central banks can use to control lending, so its good to see the Fed moving in this direction.
From the article:
“Efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment,” Fed Chairwoman Janet Yellen said in a July speech. “As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role.”
If I'm reading this correctly, this statement could hint at a paradigm shift at the Federal Reserve Board. For the past several decades we've been stuck in the Miltie Freidman QTM world where interest rate management is a panacea. I've always thought that trying to control bank lending via interest rates is like trying to weed your lawn with a machine gun. So hearing the Fed chair describe supervision and regulation as a new "primary" tool is a welcome sign that the QTM era may be finally coming to an end in the US.
The article also revealed the cluelessness of the BIS. According to their Chief Economist (and Princeton econ prof):
"Monetary policy works by either bringing spending forward, deferring spending—and you can bring spending forward by taking on more credit. So expansive monetary policy is pretty much synonymous” with looser financial conditions."
Its good to see that our central bank is at least marginally more intelligent than the BIS!
Comment by BIS guy is silly--as if there's a contradiction b/n promoting sound lending for capital expansion and discouraging excessive risk taking. But that's what you get with neoclassical economists that mostly don't understand banking in the first place and don't have financial systems in their models.
ReplyDeleteYellen gets closer to MMT (low rates + regulation) but is off a bit, too--actually has it a bit backward. She writes:
“Efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment,”
MMT would instead say that efforts to manage inflation and employment through short-term interest rate adjustments increase financial fragility.
ReplyDeleteScott, it seems the WSJ retracted the original quote by Shin because it contained a mistake.
I think the revised quote by Shin is much more nuanced.
BTW, I strongly recommend this paper by Joelle Leclaire. It contains an excellent analysis of financial fragility from a MMT perspective:
http://142.51.79.168/NR/rdonlyres/F796039D-9A57-48F1-95C4-BD7FE99D726D/0/HouseholdDebtandtheRiseofFinancialFragility.pdf
I'm sticking to my guns on Shin. He thinks there's only "loose" vs. "tight," and that "loose for good credit risks while tight for bad credit risks" isn't possible.
ReplyDeleteDon't know why we would ever want to be loose in regard to bad credit risks , and I can't see why we would ever want to be very tight for good credit risks. The key is being able to tell one from the other over the business cycle--but if you have a theory that assumes business cycles come from "shocks," then you don't really know how to look at those. Minsky said a lot about how to tell the difference--MMTers and others in PKE were yelling and screaming about it for years prior to 2008.
http://www.levyinstitute.org/publications/us-household-deficit-spending
https://ideas.repec.org/a/mes/challe/v50y2007i4p88-111.html
Thanks for the link to Joelle's paper.
I figured you knew about Joelle's paper. I thought MNE readers may find it interesting! It contains a good sectoral balance analysis and a nice history of some of the (de-)regulatory changes during the decades preceding the crisis.
ReplyDeleteThese publications seem mostly if not completely qualitative.... Im not sure how helpful they are in predicting some sort of critical quantitative thresholds. ... the reasoning is not much different than R&R making assertions based on their so called debt to gdp ratios. .. "there will be a problem. .. some day!"
ReplyDeleteIs this helpful?
And where does "its about price not quantity" ever come in to these types of analysis?
What happens when the prices the govt ratifies for financed assets is reduced and there are previously issued loans still working against collateral that is thus falling in value?
We just shut our brains down at that point and claim it was all fraud?
So if we go to Mike's "full Europe" in March and govt refuses to raise the "debt ceiling" and has to immediately cut leading USD flows by 100s of $B and probably half the outstanding loans in the US proceed to default, are we going to say that the problem was that the non-govt was doing too much "deficit spending" (whatever THAT is...) before this crisis?
ReplyDeleteOr just punt it over to "control fraud" because we cant explain it otherwise in scientific terms ?