Now, after the Bank of England paper, Neoclassical economists are trying to work out the importance of credit in macroeconomics, using their conventional tools. I'm glad they're doing it, but I wish they'd also question whether their tools played any role in them not anticipating the crisis of 2007. Maybe different tools be better, and maybe the results they get be a product of the tools themselves, and not the real-world phenomena they're attempting to understand using them?
Secondly, David didn't cite Michael Kumhof's work—probably because he wasn't aware of it (I've let him know). Michael Kumhof is a Senior Research Advisor to the Bank of England, and previously he was Deputy Division Chief of the Economic Modelling Division of the IMF.
Michael is a first-rate DSGE model builder, who also knew that banks create money long before that Bank of England paper came out, because he was a banker before he became an academic, and he understood what he did then (this is not something that can be said of many bankers). Michael also finds, in contrast to David, that bank creation of money results in a very different macroeconomy to one in which banks are just intermediaries. Michael's paper "Banks are not intermediaries of loanable funds - and why this matters" is the only Neoclassical paper to date to argue that the fact that banks create money does indeed matter in macroeconomics.
In the context of this debate, Michael's work is more significant than mine, because his work shows, using a Neoclassical methodology, that bank-created-money matters a great deal. So David's draft paper, which shows that it doesn't matter all that much, may say more about the techniques David employed (and the assumptions he made), rather than the issue itself.
Thirdly, while David's characterisation of the heterodox view is pretty accurate, there is one error when he states that "Banks do not in fact lend reserves–they lend their deposit liabilities (which are incidentally made redeemable for cash)". The first half of that sentence is correct; the latter is a statement of Loanable Funds, not the Bank created money approach. A better statement would be that:
"Banks do not in fact lend reserves–their lending creates their deposit liabilities (which are incidentally made redeemable for cash)".
Fourthly, my modelling of money has moved on since the paper that David cites, which pre-dates my debate with Krugman ( you can find a good overview of that debate, with links to the papers, on the Unlearning Economics blog at The Keen/Krugman Debate: A Summary). In particular, after that rather acrimonious exchange, I realised that the best way to show why the bank creation of money matters was to build a model of Loanable Funds which can be quickly converted into a model of Bank Created Money. In the former, not amazingly, bank lending has little macroeconomic impact. In the latter, its impact is huge.
My results are consistent with Kumhof's using a DSGE framework, but contrast with both David's, and also Faure and Gersbach's "Loanable funds vs money creation in banking: A benchmark result" where they both conclude that Loanable Funds versus Bank Money Creation is no big deal.
Not coincidentally, both David and Faure and Gersbach use the very peculiar (in both senses of the word) "Overlapping Generations" (OLG) approach. They also make assumptions that pretty much guarantee their conclusions, as David admits early on in his paper:
11 comments:
I realised that the best way to show why the bank creation of money matters was to build a model of Loanable Funds which can be quickly converted into a model of Bank Created Money. In the former, not amazingly, bank lending has little macroeconomic impact. Steve Keen
"Bank Created Money" is predicated on expensive fiat, i.e. the Gold Standard, and relies on government privilege to function, such as it does function.
But guess what? We no longer have expensive fiat so the current banking model, besides being inherently unjust, is also OBSOLETE.
Where then is the call by MMT advocates such as Warren Mosler, Randy Wray, Calgacus, Neil Wilson, Stephanie Kelton, etc. to replace the current banking model with a just banking model based on the actual lending of inexpensive fiat?
Andrew,
Why is bank created money "predicated on Gold? Bank created money has been working very nicely (at least from banksters' point of view) ever since the gold standard was abandonned which is several decades ago now.
Re your question as to why Mosler, Wray etc do not advocate full reserve banking, I don't see there's a big OBLIGATION on them to do so. Neil Wilson SPECIFICALLY OPPOSES full reserve. The various reasons he has given in the past (on MNE and elsewhere) have always struck me as pseudo technial nonsense. (BTW what's happened to Neil - is he still alive? I haven't heard anything from him for about a year.)
Re Warren Mosler, he has never written an article on the subject far as I know, but I did ask him to his face once why he thought commercial bank created money was OK and his response was along the lines that once such money is created, banks compete for it (i.e. compete for depositors and their money), so that makes bank created money OK in his view.
I said "predicated on expensive fiat".
In other words, expensive or scarce fiat leaves a deflationary vacuum that banks fill with bank deposits and the boom-bust cycle.
In other other words, if the monetary sovereign does not fulfill its inherent duty to create sufficient amounts of fiat in a just manner then it leaves the population to the mercy of banks.
Likewise, the failure of the monetary sovereign to provide accounting services in fiat to all citizens leaves them at the mercy of banks.
and his [Warren Mosler's] response was along the lines that once such money is created, banks compete for it (i.e. compete for depositors and their money), so that makes bank created money OK in his view. Ralph Musgrave
So competition among privateers* justifies piracy?
Too bad Mosler doesn't apply his brain a bit more than that to matters of ethics.
*Government licensed pirates.
Andrew, how familiar are you with the excellent writing in this area by Ben Dyson, Graham Hodgson, Frank van Lerven etc over at PM? (I imagine quiet familiar but I think a review could be useful in allowing you to articulate your views more clearly). They do an excellent job of clarifying the issues you speak of and laying out possibilities. They want to limit private credit-money more than Mosler/Mitchell, although less so than is popularly believed. They have a narrower focus than MMT, but nevertheless are thorough, balanced, and well-informed on how “money” works and how the private system might be tamed.
PM stuff worth checking out
If Mosler's recommendations were followed, most of the private sector problems would be resolved.
Proposals for the Banking System, Treasury, Fed, and FDIC (draft)
(to everyone...)
Basically, the problem is no longer one of discussion of what to do. It is rather a question of implementation.
Again - the Mosler plan would resolve most of the problems with private banking -- MMT has the private banking problem “solved”. As always, however, the public and politicians must now be persuaded. Simple (yet almost impossible) as that.
In all these discussions, I don't know why Mosler's plan gets so little attention. Many “MMTers”, PM people, followers of Keen, etc etc, everyone just blabs on asking “what to do”. We KNOW what needs to be done. Mosler gets it right. We need to keep pressing his proposal and get it done. If, later, PM sympathizers want to tamp down still further on any private sector lending, fine. If his proposals were carried out, MMT people etc would be happy to have that discussion I am sure. But FIRST, get Mosler's plan done.
Any continued discussion of “what to do” is a waste of time, the answers are in his post, clear as day. Advocate that they are carried out. Anything else (regarding private sector banking) is a waste of breath.
Mosler would increase privileges for the banks to infinity by, for example:
1) Allowing unlimited unsecured borrowing by the banks from the Central Bank at 0%.
2) removing the insured deposit limit.
Mosler would make an inherently unjust system more stable.
And you call that THE SOLUTION?!
Mosler says that banks can't be disciplined on the liability side but "the hard lesson of history" is that banks have NEVER been 100% private with 100% voluntary depositors so his assertion is worthless.
Moreover, we should not care if banks can be disciplined or not since we can have an inherently risk-free, always liquid payment system that need not work through banks but through individual, business, State and local government, etc. debt/checking accounts at the Central Bank or Treasury itself.
Andrew - your goal would be immensely closer if the following were achieved:
Banks should not be allowed to sell loans or other financial assets to third parties
Banks should not be allowed to have subsidiaries of any kind
Banks should not be allowed to accept financial assets as collateral for loans
Banks should not be allowed to lend off shore
Banks should not be allowed to buy or sell credit default insurance
Banks should not be allowed to engage in proprietary trading or any profit making ventures beyond basic lending
Additionally:
The current zero interest rate policy would be permanent
All issuance of Treasury securities would be stopped
Anyone serious about reform would support all of the above. You should read the links I posted more carefully and understand how the Mosler MMT plan wold be immensely useful.
Again, if after these reforms you want still tighter control, fine. But until these first steps are taken, discussion of anything else is literally a waste of breath.
Again, if after these reforms you want still tighter control, fine. Clint Ballinger
You miss the point entirely which is that 100% private banks with 100% voluntary depositors would pose no threat to the economy and thus would need no more regulation than gambling - which borrowing short to lend long is.
But until these first steps are taken, discussion of anything else is literally a waste of breath. Clint Ballinger
I should think that attempting to regulate - and thus perpetuate - systematic theft from and oppression of the poor is a waste of human blood - as was World War II, another war caused by government-privileged banks.
Additionally:
The current zero interest rate policy would be permanent
All issuance of Treasury securities would be stopped
Clint Ballinger
In reverse order:
Treasury securities at negative yields are fine. Why throw away a revenue option for the monetary sovereign?
As for bank reserves and other large account balances at the Central Bank, since these are also risk-free but with ZERO maturity wait, they should be charged even higher negative interest* to:
1) Penalize fiat hoarding. With the banks, this would have the additional advantage of raising the cost of creating and accepting deposits thus encouraging banks to move to a "loanable funds model" between individual, business, State and local government, etc. accounts at the Central Bank itself.
2) Finance a Citizen's Dividend by taxing those who misuse fiat to distribute to all citizens equally.
*with an individual citizen exemption up to a reasonable account limit such as $250,000, the current insured deposit limit.
"Why throw away a revenue option for the monetary sovereign?"
Currency issuers do not need "revenue"
Currency issuers do not need "revenue" Clint Ballinger
Nevertheless, deficits financed with self-financing/self-extinguishing sovereign debt, including negative interest on bank reserves and other large fiat accounts at the Central Bank, makes more sense from an accounting perspective than Overt Monetary Finance. And politically, who can object to deficits that pay for themselves?
And philosophically, MMT does the cause of monetary sovereignty a disservice by stopping short of negative interest/yields on the inherently risk-free debt of monetary sovereigns.
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