Thursday, November 2, 2017

Clint Ballinger — OMFG, MMT & Positive Money Get Along

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:
“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)….
Clint Ballinger
OMFG, MMT & Positive Money Get Along


Richard said...

Here's the link to Ballinger's post:

Tom Hickey said...

Thanks, Richard. Link added.

STF said...

It's simply incorrect to argue that financial regulation wasn't a significant part of MMT prior to 2007. Wray studied under Minsky in the 1980s, after all, and Minsky brought Wray/Forstater/Kregel to Levy. Literally dozens of MMT publications on financial regulation prior to 2007.

STF said...

Also, for those interested, there's a piece by Wray/Nersisyan in a recent (forthcoming?) Cambridge Journal of Economics responding to earlier criticisms by PM.

Clint Ballinger said...

Scott - I wrote in the article "(not to ignore the Minsky-Wray connection and other pre 2007 work of course)".

I was being brief, and the relative amount of MMT pre-2007 attention to bank reform is not key to the discussion anyway. The MMT bank reform proposals I cite are all post 2008 though.

I would say Mitchell has some good points here though "Minsky was not a guiding light for MMT"

At any rate, your work is excellent and I don't mean to imply otherwise anywhere in the article

Clint Ballinger said...

The Nersisyan-Wray article Scott mentions is here btw:

"Modern Money Theory and the facts of experience" 2016

Cambridge Journal of Economics, Volume 40, Issue 5, 1 September 2016, Pages 1297–1316,

Ralph Musgrave said...

I left a comment but it didn't appear. Do you have comment moderation in place, Clint?

STF said...

Hi Clint

Sorry if I sounded upset or nitpicky. That wasn't my intention. I did miss your point on Wray-Minsky, so my apologies there, and I appreciate that you did put that in.

Just a bit of background--some of which you may already know: It hasn't been uncommon to see critics in the PM and AMI movements say things like "MMT discovered bank regulation after 2007" as they cite MMT's lack of support for getting rid of banks' abilities to create deposits endogenously (obviously a core issue for them). It's ironic since neither PM or AMI have articulated alternative financial regulation proposals aside from ending endogenous bank credit, which (a) is impossible in the first place, and (b) leaves aside the issue of what principles should be used in their preferred system to ensure loans are of high quality and leverage doesn't become excessive.

Suffice it to say that from the perspective of the UMKC/Levy MMT contingent, it's impossible to argue that Minsky isn't a "guiding light" at least for them given Wray's (and Kregel's) history with Minsky and the fact that Wray/Kelton/Forstater/Kregel/Tcherneva all spent time at Levy either with or shortly following Minsky's time there, and then given the significance of those people subsequently in putting together and growing the UMKC program. By the same token, it's well known among us all that Bill and Warren do not share the UMKC/Levy MMTers deference to Minsky (just as the UMKC/Levy contingent wouldn't cite Kalecki and Marx as strongly as Bill, for instance--though, interestingly, Minsky borrowed a good deal from Kalecki in particular). (I note here also that Bill did a somewhat similar-minded post on Keynes and MMT.) Nevertheless, MMTers of all stripes have always considered regulation core to the paradigm. As I said previously, I could list dozens of publications on this from pre-2007.

That many outside MMT don't think it was core-MMT pre-2007 suggests they noticed an emphasis of what was innovative in MMT (i.e., Minsky had already "happened"--less innovation in the MMT approach there; more application) as that research program was being built (including Mosler, we're talking about about 5-8 researchers until the mid-2000s, so bandwidth was at a premium while doing this, for sure). Regardless, a cursory look at publication records of, say, Wray/Kregel/Tymoigne and a few others pre-2007 shows otherwise, while any look at the program of study at UMKC pre-2007 would find a strong focus on financial regulation; some perhaps also don't know that Bill Black joined the department pre-2007. Finally, I'd be remiss not to mention the annual Minsky conferences at Levy going back to the early 1990s and continuing to the present, that most often focus on financial instability and regulation, and feature a who's who of academics/regulators/policymakers for presentations and conversations; Wray and Kregel have always played key roles in setting up and actively taking part in these.

Again, just a bit of history--not a criticism per se. Thanks for the kind words (!).

STF said...

Hi Clint and others

Actually, the piece by Wray/Nersisyan is from October 2017. It's here

The 2016 piece Clint linked to is the one that PM criticized in an article withe same issue.

Ralph Musgrave said...


Re your2nd para (starting “Just a bit…”), you say “neither PM or AMI have articulated alternative financial regulation proposals aside from ending endogenous bank credit…”. The reason for that is simple: the mere fact of ending endogenous bank credit disposes of any need for further regulation just about. I’ll explain.

The system advocated by PM (and by Milton Friedman, John Cochrane, Laurence Kotlikoff, Adam Levitin, etc etc) is sometimes called “full reserve banking”, and the basic rules are extremely simple. Rule No.1: all loans are funded by equity. That in turn means it’s impossible for bank / lenders to go bust. So why bother with any further “regulation”? Rule No.2: money which depositors want to be totally safe must be just that: i.e. totally safe. E.g. it must simply be lodged at the central bank and not loaned on. Again, no possibility of banks going bust there either, so not much need for further regulations there either. Plus money market mutual funds in the US now operate basically along those “full reserve” lines.

Having said that, if you read PM material (e.g. their book “Modernising Money”) or Kotlioff or Friedman’s material you actually see they consider a myriad of minor variations on the above theme. Thus it is not true to say they totally fail to consider sundry forms of possible regulation.

STF said...

Your comment proves my point. Even banks funded by equity only can make bad loans and the investors in that equity will lose their investment, which unlike a popping stock market bubble wont just hit wealthy investors as long as average people and business are storing short term savings in these banks.
I think the fact that you use three hyper free market economists who think unregulated capitalism is inherently stable and repeatedly demonstrate lack of understanding of the monetary system is hilarious and undermines your credibility at the very least in a heterodox forum like this.
And this is all not to mention that the world you and others imagine in a full reserve banking system simply isnt possible. Endogenous credit predates capitalism by thousands of years. It is inherent in trade and business themselves. Full reserve banking wont stop it even a little. Your proposal would be a disaster.

Ralph Musgrave said...


Re your first para, advocates of full reserve are well aware than if a lender makes silly loans then ALL THOSE who have funded that lender ("wealthy" and "short term") will lose money. But why is that a problem? People who invest in the stock market (by themselves or via mutual funds or pension funds) lose out if the underlying assets fall in value. What's the problem?

Next, where do you get the idea that all those in favour of free markets think free markets are "inherently stable". Given 1929 and numerous booms and busts in the 1800s and 1900s, I think it's blindingly obvious to everyone that free markets ARE NOT stable.

Plus, if full reserve banking "isn't possible", how come the money market mutual fund industry seems to be operating OK, despite it having switched to full reserve?

Re your claim that "endogenous credit" can't be stamped out, full reserve does not try to stamp out credit in the form of trade credit: e.g. the common practice of a firm which has sold something to another firm allowing the latter a few months to pay. It aims to largely stamp out easily transferrable debts, i.e. money. And that's easily done by making sure there are no deposits funding loans on banks' balance sheets: not something that is difficult for auditors to check up on. At least enforcing that is a thousand times easier than enforcing Dodd-Frank which stands at several thousand pages. Dealing with every single small shadow bank might be difficult, on the other hand the liabilities of unheard of small shadow banks just ain't liquid: they are not "money-like".

STF said...


"What's wrong" is that when there is a systemic issue in stocks, the economy falls. It will be worse when it happens in the PM world and it's not just wealthy individuals that lose. And the fact that it's possible for any given bank in that world to fail will lead to variability in the price of the bank's equity "deposits," which brings another set of issues altogether.

Apparently you've never read Friedman on the causes of the Great Depression.

MMMF industry is backstopped, and many of them are already banks or subsidiaries of them. That's the point. And then there's the settlement of MMMF transactions that is also backstopped.

I'm not just talking about trade credit, which you would understand if you understood endogenous credit, wholesale payments clearing/settlement, and backstopping.

Full reserve banking can only take away the backstop, not stop endogenous credit, with eventual predictably disastrous results or a return to backstopping to avoid the disaster.

We've had these discussions before. No point continuing.

Clint Ballinger said...

Scott – thank you for your long and thoughtful response, and the other responses here – I am just getting to them (in Australia, so off on the time zones).
I know I read a nice piece by Wray about Minsky and MMT history with different pov than Mitchell of course, will find it and link it here.

Not directly relevant, but for the record I believe Steve Keen has done an amazing job of getting Minsky' ideas to the forefront and his work is incredibly important. Also, your detailed analysis of CB/Treasury operations is fundamental and indispensable (some of Bell/Kelton's as well).

I do believe to be fair there are some interesting responses by PM on some of these issues; I need to post links to them also to be balanced.

As far as Wray being way before 2007 (as you well know, this is for other readers), I think everything one needs to know about “Debt Free Money”, OMF/PQE operations, “Plain Vanilla Deficit Spending” etc is embodied already in his 2001 paper (although I am talking about the vertical side of my article now, not the horizontal side we were discussing).
Wray's summary (like some of yours in similar papers on helicopter drops being fiscal etc), if other's would understand it, has every aspect of the vertical side being discussed already in it, including the political considerations, interest on reserves, etc etc

Wray concluded in 2001:

“Our analysis has shown that each of the following four alternative methods of “financing” public infrastructure investment has the same impact on the Treasury:

i. BOG “loans” at zero interest to the Treasury (as in H.R. 1452);
ii. Creation of new Treasury “notes”;
iii. Treasury “overdrafts” written on accounts at the Fed; or
iv. Treasury sales of interest-earning securities to the public.

Given strong political sentiment against “printing money” and for budget surpluses, options two and four are probably not feasible. As we have seen options one and three actually amount to the same thing, economically, but it might be politically preferable to “finance” infrastructure investment on the basis of “overdrafts” (option three).”

Wray 2001


Also, had only MMT's advice on the vertical side been listened to pre 2007, the horizontal side would have been ok, since the economy wouldn't have had to rely on Keen's “credit impulse” to maintain aggregate demand; ultimately the two are connected, I just haven't gotten there yet in the blogging.
Thanks again for the detailed comments,

Clint Ballinger said...

Scott – here is the link to Wray's fascinating insider view on Minsky and MMT (to balance the Mitchell link)

MINSKY AND MODERN MONEY THEORY: Was Minsky a 'forefather'?

Also, here is a hyperlink to the paper Scott posted above:

Cranks and heretics: the importance of an analytical framework

Clint Ballinger said...

Note the link from this Mike Norman page excerpt has my (mistaken) link to "Fullwiler 2013" above (after Wray 2001). The link is corrected on the later version of my blog: It is to Fullwiler 2011 "Treasury Debt Operations"

Jerimiah said...

Ralph, the scenario where full reserve banking potentially results in lost deposits due to defaulted loans would mean that there would have to be two different kinds of banks: savings banks that don’t make loans (so there is no risk to depositors), and different banks (or account types) that disclose the fact that assets stored there are subject to losses (and gains) due to loan performance/default.

This isn’t unrealistic per se, but does represent a significant institutional change, does it not?

JustMoney said...

Yes, it was realistic enough for Glas-Steagall to have different types of financial institutions until Clinton finally put the stake in the heart. Lots of assertions and appeals to authority in the objections to sovereign money. Surprising that Wray want's to sneak in more money creation on the back of a very complex and failed FR system. You'll notice that there is no authority described to determine the amount of gov created money that is appropriate. Just let Congress spend whatever it likes into existence. Not a very well thought out position.