tag:blogger.com,1999:blog-2761684730989137546.post365802114109441635..comments2024-03-29T02:19:19.866-04:00Comments on Mike Norman Economics: Edward Harrison — Endogenous or exogenous money?mike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger26125tag:blogger.com,1999:blog-2761684730989137546.post-85594108511656017842012-04-05T13:49:41.890-04:002012-04-05T13:49:41.890-04:00Here is the nub of it:
Nick Rowe: "I disagr...Here is the nub of it: <br /><br />Nick Rowe: "I disagree there. I think it's got a lot to do with it. If the central bank held the interest rate fixed, the banks could all expand deposits and loans as much as they wanted. But if the central banks responds to their expansion by raising the interest rate sufficiently, they can't do that. In fact, if the central bank targeted inflation perfectly, keeping output always at the NAIRU, we are back in a loanable funds theory of the rate of interest."<br /><br />Note two assumptions here that are slid in as if they are uncontested truth. One, there exists a NAIRU that everyone is aware of. Two, if loans grow faster than what the Fed wants, then inflation will accelerate. Third, the presumption is that the Fed targeting happens continuously and smoothly. I think all of these are highly dubious propositions, unless you happen to come from the U of C. NAIRU, if at all it exists, is probbaly constantly evolving and, given hysteresis, path dependent. In which case, the tactics. Nick want to keep the discussion away from tactics because he has nothing other than confidence fairy (and Chuck Norris).<br /><br />In any case, we are certainly not "back in the loanable funds world." Observational equivalence is not the same as actual mechanism.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-31363014839568470022012-04-03T21:01:10.356-04:002012-04-03T21:01:10.356-04:00there was no payments crisis precisely because tha...there was no payments crisis precisely because that is the one area that the Fed already takes the activity onto its balance sheet daily. Once the Fed took short-term markets onto its balance sheet, crises were abated there, too. This just shows the importance of the CB's obligation to the payments system--things would have been a lot worse without that.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-6390564454458430432012-04-03T19:25:47.217-04:002012-04-03T19:25:47.217-04:00"No doubt a liquidity crisis can (and did) oc..."No doubt a liquidity crisis can (and did) occur. A solvency crisis (probably) occurred. There was no payment-system-based chaos."<br /><br />Agree. Fear of further insolvencies led to a drying up of short-term funding. No payment system issue.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-72150660468188433752012-04-03T18:24:12.412-04:002012-04-03T18:24:12.412-04:00Nick,
Just saw your comment at Ed's. I think...Nick,<br /><br />Just saw your comment at Ed's. I think you're getting there. I'll clarify there.<br /><br />Thanks!STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-45191119229192689692012-04-03T18:19:53.528-04:002012-04-03T18:19:53.528-04:00Helpful, clarifying comment from Fullwiler here: h...Helpful, clarifying comment from Fullwiler here: http://www.creditwritedowns.com/2012/04/endogenous-or-exogenous-money.htmlwh10noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-14742727963987300232012-04-03T18:17:11.588-04:002012-04-03T18:17:11.588-04:00Nick (yes, this is Scott--sorry),
"If the ce...Nick (yes, this is Scott--sorry),<br /><br />"If the central bank held the interest rate fixed, the banks could all expand deposits and loans as much as they wanted. But if the central banks responds to their expansion by raising the interest rate sufficiently, they can't do that"<br /><br />Yes, Nick, but for the 100th time, (a) I said that in my post, and (b) THAT MOVES US AWAY FROM UNDERSTANDING OPERATIONALLY HOW THE MONEY MULTIPLIER DOES OR DOES NOT WORK AND THUS HOW THE CB IS OR IS NOT CONSTRAINED IN DETERMINING WHICH OPERATING TARGET IT CAN USE! You are invoking another step--what banks operationally can do and thus whether the CB can directly target reserves VS. how policy should adjust an interest rate target to ensure they do the right thing. Those are totally different and you are confusing the issue by continuously raising the latter when we are talking about the former. It's not unimportant, but it is a different debate.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-31330304451893192412012-04-03T18:06:08.388-04:002012-04-03T18:06:08.388-04:00Central banks can't do shit with rates because...Central banks can't do shit with rates because its a blunt tool. Sure, you can rise rates to 10% and it will have an effect, for a starter most weak sectors (which are increasingly most of the sectors in the economy given falling profit margins and increasing competitiveness) would head straight to a recession.<br /><br />Also this would trigger asset price deflation as credit contraction cycle begins, triggering at the same time balance sheet degradation and insolvency.<br /><br />Central planning of rates = fail, always failed, always will fail. Central banks sole purpose is to save banking systems when they endogenously reach peak credit capacity of the economy (which is marked by corporate profits and household incomes, rates affect how fast you get there as financial costs are higher/lower depending on the rate of expansion, but you get there, not if, when) which is marked by credit creation, which comes from (credit) demand and economic expectations (effective demand, disposable income).Leveragenoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-91919824236849243512012-04-03T18:05:46.896-04:002012-04-03T18:05:46.896-04:00@Tom
Liquidity, solvency, and flow of payments ar...@Tom<br /><br />Liquidity, solvency, and flow of payments are all related ideas, but they are separate ideas.<br /><br />During the crisis, liquidity and solvency rose to enormous importance. Especially for investment banks.<br /><br />Payment integrity was not really a problem. Trading happened fine in the market during those periods (except for positions locked up in the Lehman bankruptcy). However, many asset prices collapsed (traded at lower values) because of liquidity issues.<br /><br />No doubt a liquidity crisis can (and did) occur. A solvency crisis (probably) occurred. There was no payment-system-based chaos.marrishttp://leavesofliberty.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-28368834908068618592012-04-03T18:04:10.142-04:002012-04-03T18:04:10.142-04:00Because we could imagine that same interest rate c...Because we could imagine that same interest rate change that Nick mentions at any quantity of reserves. It's not the qty of reserves that is driving changing credit conditions, it's prevailing interest rates. (I am assuming Nick is meaning that banks won't create as much loans since demand changes, although I don't quite understand why he thinks at a fixed rate banks can make infinite loans.)wh10noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-68504163791976755092012-04-03T17:56:15.568-04:002012-04-03T17:56:15.568-04:00Also, I think Mosler blows everyone out of the wat...Also, I think Mosler blows everyone out of the water above, until Nick convinces me otherwise :).wh10noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-1389735182971211982012-04-03T17:47:56.011-04:002012-04-03T17:47:56.011-04:00Nick, why isn't that a story about price, inst...Nick, why isn't that a story about price, instead of quantity constraint?wh10noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-18151019694240194222012-04-03T17:42:30.372-04:002012-04-03T17:42:30.372-04:00STF (Scott?): "That's all fine, Nick, but...STF (Scott?): "That's all fine, Nick, but as Neil points out, that had nothing to do with the Keen/Krugman debate about whether banks are constrained by reserve balances or monetary base."<br /><br />I disagree there. I think it's got a lot to do with it. If the central bank held the interest rate fixed, the banks could all expand deposits and loans as much as they wanted. But if the central banks responds to their expansion by raising the interest rate sufficiently, they can't do that. In fact, if the central bank targeted inflation perfectly, keeping output always at the NAIRU, we are back in a loanable funds theory of the rate of interest.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-6776796798815936332012-04-03T17:27:00.044-04:002012-04-03T17:27:00.044-04:00"How does all of this leave the zero-interest..."How does all of this leave the zero-interest rate policy advocated by Mosler and Mitchell/ i.e the infinite piling up of reserves? Could someone explain?"<br /><br />As long as the Fed is either setting the rate by paying IOR or setting the rate to zero, reserve quantity is irrelevant. Because the normal state of the economy has the government fiscal balance in deficit most of the time, there are always excess reserves. This means that the "natural" overnight rate is zero normally.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-10613983034274065952012-04-03T17:21:44.865-04:002012-04-03T17:21:44.865-04:00Dan--
My opinion is that a big reason for the con...Dan--<br /><br />My opinion is that a big reason for the confusion is the IS-LM model. As Asymptosis (Steve Roth, I think) says:<br /><br /><i>Krugman assumes here that people have to save (spend less) in order for other people to borrow. It’s actually the fundamental assumption, the sine qua non, of his paper (and of Krugman’s beloved IS-LM — the linch-pin of “New” Keynesianism — created by Hicks to subsume Keynes into neoclassicism, and later disclaimed and discredited by Hicks as a “classroom gadget”; see my post, and Phillip Pilkington here).</i> <br /><br />Look at Nick Rowe's reference to IS-LM above and tell me if it clarifies or confuses. Here's what Nick said,<br /><br /><i>Suppose I believed that changes in the rate of interest had precisely zero effect on desired saving, desired investment, or anything, so that the IS curve was perfectly vertical. Then the central bank could set any interest rate it liked, forever. Sure, you could then talk about the rate of interest target being exogenous.<br /><br />Suppose I believed that the IS curve sloped the "wrong" way, as you say Warren believes. Hmmm. Then I think I would have to go back to what I originally said about the interest rate being endogenous, but I would have to change a lot of my "increases" into "decreases" and vice versa</i><br /><br />It's not helpful and trying to put stuff in that framework leads to mass confusion.<br /><br />mariss-- After the Lehman collapse the Fed realized that they could not afford to let such things happen and basically guaranteed all the other bank liabilities (including AIG!) in order to avoid a further collapse of the system. So the Lehman proves just the opposite of what you say it proved. It led to massive unemployment and widespread panic, and the Fed immediately realized that it had to backstop the financial system and not let anything like that happen again...Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-38220565629016908132012-04-03T17:18:23.128-04:002012-04-03T17:18:23.128-04:00marris, at the time of the crisis, TPTB were very ...marris, at the time of the crisis, TPTB were very afraid that a liquidity freeze would collapse the global economy sparking a global depression. Hank the Hammer Paulson, the quintessential tough guy, was so upset he got to vomiting over it. They finally did finesse it though, averting the global meltdown that the people in charge saw impending. <br /><br />As Randy Wray and team document, the cumulative liquidity provision is now ~30T and still rising. The EZ is still in the thick of it, and the UK is going into recession. While disaster was averted, this is not over yet.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-46076794703140912152012-04-03T17:07:15.037-04:002012-04-03T17:07:15.037-04:00@Neil I think there is no evidence that stopping s...@Neil I think there is no evidence that stopping some payments cause massive chaos. It can cause some runs and some bankruptcies, but come on, chaos?<br /><br />As a case in point, just look at the Lehman collapse. We had a huge institution go down. Things sucked afterwards, and the market crashed, and unemployment shot up, but we're basically OK, and lots of the remaining damage could be fixed up if anyone really cared. Most people don't care or don't know how to fix it.marrishttp://leavesofliberty.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-27108071447933333492012-04-03T17:04:45.952-04:002012-04-03T17:04:45.952-04:00sorry,
*Where* does all of this leave the zero-in...sorry,<br /><br />*Where* does all of this leave the zero-interest rate policy advocated by Mosler and Mitchell/ i.e the infinite piling up of reserves? Could someone explain?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-67004513693684543182012-04-03T17:04:00.236-04:002012-04-03T17:04:00.236-04:00How does all of this leave the zero-interest rate ...How does all of this leave the zero-interest rate policy advocated by Mosler and Mitchell/ i.e the infinite piling up of reserves? Could someone explain?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-14632724439479780522012-04-03T17:01:40.462-04:002012-04-03T17:01:40.462-04:00I believe you are all missing the point.
First,...I believe you are all missing the point. <br /><br />First, there is a distinction between fixed fx policy and floating fx policy.<br /><br />With fixed fx lending is continuously reserve constrained and the interest rate is endogenous via competition for reserves.<br /><br />With floating lending is never reserve constrained, as this particular institutional structure allows banks to create their own reserves.<br /><br />that is, with floating fx/non convertible currency,<br />loans create deposits and reserves as a matter of accounting <br /><br />any 'needed' reserves are, functionally, overdrafts in fed reserve accounts, and overdrafts are loans. so when the 'need' arises the deed is done. CB choice never enters into it. For the CB, it's necessarily about price, and never quantity. I call it hard endogeneity and have been pointing this out for going on 20 years. <br /><br /><br />Warren Mosler<br />www.moslereconomics.comWarren Moslerhttps://www.blogger.com/profile/10482768786644478587noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-12352828564093650652012-04-03T16:57:56.459-04:002012-04-03T16:57:56.459-04:00"So far a lot of what has gone down is people..."So far a lot of what has gone down is people talking past each other. It was probably necessary to lay down the groundwork first, however. Hopefully, this discussion will now move forward to zero in on key issues."<br /><br />Agree. Speaking as a casual follower of economics, not an academic, I've been turned off by the arguing over semantics and the exchanges of personal insults. I'm much more interested in policy implications.<br /><br />Seems to me there is more agreement than disagreement on fiscal policy ? That the disagreement is largely about monetary policy and banking ? <br /><br />PK believes that low interest rates and QE might help a little, and couldn't possibly hurt. WM likens low interest rates to a tax. But both agree that we need more fiscal stimulus, rather than relying solely on monetary policy. <br /><br />MMT is concerned that the US is relying far too much on a monetary policy that is at best, impotent, and possibly even harmful ? That we are headed down the same path as Japan ? <br /><br />So we need more fiscal stimulus . . . and MMT's view of banking and fiat money tells us that we don't need to be afraid of deficit spending. The non-MMTer's have various degrees of apprehension about deficit spending, because they don't understand the post-1971 monetary and banking system -- which brings us back to Krugman's debate. :-/Dan Lynchhttps://www.blogger.com/profile/11189866002273597534noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-90384424373573766452012-04-03T16:05:06.373-04:002012-04-03T16:05:06.373-04:00"Scott Fullwiler’s view is reasonably clear a..."Scott Fullwiler’s view is reasonably clear and straightforward in his view that central monetary policy is exogenous but that it only matters over a short-term time horizon because central bank interest rate policy adjusts endogenously over the medium-term to commercial bank and other economic variables such that it is really endogenous rather than exogenous."<br /><br />OK. I can live with that as an interpretation, but I don't like the "short" or "medium" horizon distinction. The distinction is between strategy and tactics. the CB could choose to change its target every day strategically, but it would also need to defend it everyday tactically.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-36586248059665698212012-04-03T15:54:06.134-04:002012-04-03T15:54:06.134-04:00Right, Peter. Apparently nobody bothered to read ...Right, Peter. Apparently nobody bothered to read the update I posted.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-47664528972303923442012-04-03T15:53:24.600-04:002012-04-03T15:53:24.600-04:00That's all fine, Nick, but as Neil points out,...That's all fine, Nick, but as Neil points out, that had nothing to do with the Keen/Krugman debate about whether banks are constrained by reserve balances or monetary base. That just added a layer of confusion and, on Krugman's part, obfuscation.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-31443559023483010302012-04-03T15:53:21.410-04:002012-04-03T15:53:21.410-04:00There are at least two separate questions here. On...There are at least two separate questions here. One is whether the rate of interest is a policy variable or ultimately endogenous due to the existence of a natural rate. Another is what effect a change in the rate of interest has on the macroeconomy. There is disagreement on both these questions.<br /><br />But Krugman has also disagreed with more basic things. For example, initially he claimed banks could not create money out of thin air. He fudged later with his straw-man characterization of Keen's argument, but never actually conceded that his initial statement was incorrect.peterchttps://www.blogger.com/profile/01617954484867427637noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-66451119064924318332012-04-03T15:44:25.298-04:002012-04-03T15:44:25.298-04:00Tom: "Monetarists [and I would add New Keynes...Tom: "Monetarists [and I would add New Keynesians] make certain assumptions about the interest rate and inflation that PKE and and MMT economists challenge."<br /><br />Bingo!<br /><br />Suppose I believed that changes in the rate of interest had precisely zero effect on desired saving, desired investment, or anything, so that the IS curve was perfectly vertical. Then the central bank could set any interest rate it liked, forever. Sure, you could then talk about the rate of interest target being exogenous.<br /><br />Suppose I believed that the IS curve sloped the "wrong" way, as you say Warren believes. Hmmm. Then I think I would have to go back to what I originally said about the interest rate being endogenous, but I would have to change a lot of my "increases" into "decreases" and vice versa. And I would then tell the Bank of Canada "Watch out! You are turning the steering wheel the wrong way, and it's only a miracle that by sheer fluke you have managed to keep inflation roughly at the 2% target over the last 20 years despite doing everything totally wrong!"Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com