Larry Summers attracted a great deal of attention with arguments that post-Keynesian theories ought to be taken into account, and the ability of central banks to stimulate the economy are limited. One could argue that the zeitgeist is shifting in the direction of Modern Monetary Theory (MMT): the role of fiscal policy may be increasingly important. However, I am unsure how far actual economics debates will shift.
One may note that Summers dodged discussing MMT in his initial tweets; in fact, he referred to Thomas Palley, whose main contributions in recent years has been his sectarian attacks on MMT. My guess is that this will be a fairly standard approach...,
One may note that Summers dodged discussing MMT in his initial tweets; in fact, he referred to Thomas Palley, whose main contributions in recent years has been his sectarian attacks on MMT. My guess is that this will be a fairly standard approach...,
I have said previous, this is about control of the Democratic Party going forward — the Democratic Establishment (the Clinton-Obama camp) versus the progressives (the Bernie-Squad camp). Stephanie Kelton has put MMT at the center of it owning to her association with Bernie and AOC's endorsement of MMT.
The former is backing way from New Keynesian but is not willing to throw in the towel and support MMT. Now the battle is engaged. So far the victories are going in the right direction if one is an MMT supporter. Monetarism is effectively dead and New Keynesian is becoming untenable as a policy position.
There has been an ongoing battle between one faction of Post Keynesians and others that support MMT. Larry Summers just cast his hat with the former.
So Are We All MMTists Now?
Brian Romanchuk
Good summary by Brian.
ReplyDelete“From a MMT perspective, rising interest rates raise the interest income received by the non-government sector, raising domestic demand. This would help sustain any inflation that manages to appear.”
ReplyDeleteDue to the current large amount of govt bonds (Tier 1 quality) the depositories have to now own to comply with the CCAR since GFC, even relatively small increases in the policy rate creates large unrealized losses on these securities and decreases leverage ratios ... so any previous price increases quickly reverse... sort of “automatic stabilizer” as we saw in 4Q 2018 quickly 50b of unrealized losses in their CCAR securities portfolio and equities prices had to be taken down 20% and then Fed stopped the increases and now has reversed 7 months later...
MMT doesn’t include CCAR in its theory.... MMT still using 20-30 year old regulatory paradigm no longer applicable....
Matt, the duration of bonds outstanding is finite. It’s basic mathematics that rising interest rates will eventually overwhelm the effect of capital losses.
ReplyDeleteYour comments about regulatory paradigms makes no sense.
Your not addressing the time domain characteristics of the regulatory functions...
ReplyDeleteThe depositories have to maintain compliance with the regulatory ratio at all times...
So prices have to be reduced BEFORE there is enough TIME for perhaps interest income to be saved by the depositories to add to regulatory capital to overcome the unrealized losses on the available for sale securities (Tier1 QUALITY but not Tier1 designated so "available for sale" in regulatory terms) they have to possess to pass the CCAR... in the mean time, risk assets prices have to be reduced in order to maintain compliance...
You look at 2018, Fed raised in iirc Dec 2017 by 1/4 then again in Jan, Mar, June, Sept, so that is about 1.25% increase and it caused a 50b loss to bank Tier1 quality assets and the indexes fell by end December (December increased also 1/4 point just to pile on)
This was enough to cause the Fed to pause... and now eventually reverse...
If they would have kept raising by that rate or faster, the equity indexes (really all prices of risk assets) would have kept falling... once they stopped raising, prices eventually recovered as the securities were redeemed or banks add retained earnings...
Look at IOR, banks have 1.5T of Reserves so if the IOR goes up 1% then that is an additional 15B IN A YEAR... so 1B per month... This caused 50B of more immediate loss on the 'available for sale' holdings... no comparison in the relevant time frame..
So it would have taken 50 months for interest payments to overcome the short term losses... the increase in interest payments are not adequate to overcome the immediate losses..
Today, due to new CCAR policy, if they increase the rate too fast they will cause 100s of $B of losses at the Depositories and make them insolvent again... crash the whole thing again like they did in 2008...
MMT does not include CCAR... its new...
ReplyDeleteIf they kept with it instead of getting into politics maybe they could keep up...
So your theory is that losses on bonds will always crush the economy? Look back to the 1970s and see how that idea worked.
ReplyDeleteTrying to micro-analyse recent moves based on bank capital ignores everything else happening in the economy.
No there was a policy change post GFC which created different regulatory conditions... ie depositories are required to possess $Ts more as % total assets of Tier1 QUALITY assets in order to comply with the CCAR... TODAY...
ReplyDeleteSo the effect of rate increases TODAY UNDER DIFFERENT REGULATORY CONDITIONS has a differing effect than under previous conditions...
Einstein: "doing the same thing and expecting a different result"
Corollary also true: "doing something different and expecting the same result.."
(I thought you had an Engineering education????)
Stop hanging around with these people...
" ignores everything else happening in the economy."
ReplyDeleteIf bank capital and resultant regulatory ratios are reduced via government policy I got news for you nobody can get financed and there isnt anything new happening in the economy until that is corrected... look at 2008...
This is Mosler's "all prices are necessarily a FUNCTION of what govt pays for things and what govt allows their banks to lend against things..."
There is a way to explain that via the abstractions of regulatory functions... which is what I'm doing here...
"So your theory"
ReplyDeleteI dont have "a theory"... I'm not primarily liberal art trained...
On the deliberate creation of institutional shitholes
ReplyDeleteComment on Brian Romanchuk/Matt Franko on ‘So Are We All MMTists Now?’
Matt Franko recaps: “No there was a policy change post GFC which created different regulatory conditions... ie depositories are required to possess $Ts more as % total assets of Tier1 QUALITY assets in order to comply with the CCAR... TODAY... So the effect of rate increases TODAY UNDER DIFFERENT REGULATORY CONDITIONS has a differing effect than under previous conditions.”
Life insurers, for example, have a demand for very long term government securities. What they have done in the past is to buy bonds and to put them with the actual purchase prices on the books and to hold them until maturity. This type of buy-and-hold investors did not up-value the bonds when the interest rate fell and accordingly needed no down-valuation in the opposite case. These corporations normally sat on a buffer of hidden reserves that could be activated in case of emergency.
The same holds for banks with a significant share of bonds in their portfolio.
Now, with the continuous decrease of interests since the Volcker heights these buy-and-hold investors were told to be a bit retarded. Why not apply mark-to-market valuation and to show the paper gains as a sign of the success of a smart investment strategy in the profit and loss account? And why not increase profit distribution to the shareholders? Quite naturally, mark-to-market was pushed by hedge funds, Wall Street, and other folks with a short time horizon and a commitment to shareholder value.
The drawback of this strategy makes itself felt if the Central Bank switches eventually to a policy of rising interest rates. In this case, paper losses show up in the profit and loss account and the structural balance relations deteriorate.
The effect is that the Central Bank is now practically locked-in at the zero interest level. Interest increases tend to automatically put the whole finance sector at risk with spill-overs to the real economy. Mark-to-market eventually shows its ugly face.
All these problems were perfectly foreseeable and could have been avoided by sticking to the tried and tested principles of prudent valuation that were and still are characteristic of an institutionally sound finance sector.
There has been a general trend in the political, social, and economic realm of throwing the principles of sound institution-building overboard with the unsurprising result that a growing number of States has finally turned into an institutional shithole.
MMT’s policy of deficit-spending/money-creation has been and still is a driver of this development.#1
Egmont Kakarot-Handtke
#1 MMT undermines democracy
https://axecorg.blogspot.com/2019/07/mmt-undermines-democracy.html