Ramanan — Nick ROKE, Thrift, And Hoarding

On the difference between saving and hoarding.

The Case for Concerted Action
Nick ROKE, Thrift, And Hoarding
V. Ramanan

Brian Romanchuk — Monetary Impotence And The Triumph Of The Fiscal Theory Of The Price Level

There has been an ongoing debate about how monetary policy interacts with the zero bound on interest rates. Paul Krugman has recently posted an article,"The Simple Analytics of Monetary Impotence (Wonkish)", in which he gives a simplified Dynamic Stochastic General Equilibrium (DSGE) model which he says demonstrates something about monetary policy when at the zero bound. When I look at the model, it appears that there are internal contradictions to his suggested solution. Instead, it appears that the model solution is determined by the Fiscal Theory of the Price Level (FTPL). When it comes to DSGE models, it appears that all roads lead to the FTPL….

Bond Economics
Monetary Impotence And The Triumph Of The Fiscal Theory Of The Price Level [wonkish]
Brian Romanchuk

See also, JKH, John Cochrane’s “Monetary Policy with Interest on Reserves”, at Monetary Realism

JKH — Comments on – “Modern Money Theory 101: A Reply to Critics” by Éric Tymoigne and L. Randall Wray

JKH responds to Eric and Randy's “Modern Money Theory 101: A Reply to Critics.”

Monetary Realism
Comments on – “Modern Money Theory 101: A Reply to Critics” by Éric Tymoigne and L. Randall Wray
JKH

Ramanan — Central Bank LSAP: Is The Money Stock Supply-Determined Or Demand-Determined?

Ramanan comments on circuit's On the (ir)relevance of the money multiplier model: The Fed view posted at Fictional Reserve Barking about the Fed's LSAP (large scale asset purchases). 

The Case for Concerted Action

Central Bank LSAP: Is The Money Stock Supply-Determined Or Demand-Determined?

Ramanan

Winterspeak — A Bank is still not a financial intermediary: redux

Winterspeak responds to JKH's recent elaboration of a previous discussion of Paul Krugman's assertion that banks are not special based on his reading of Tobin-Brainard 1963. That reading is contested by some.It is significant in that it reveals how Krugman's idea of endogenous money compares to heterodox views that he contests. However, in the course of it a lot of information is coming out about bank operations that is of interest, especially in the discussion in the comments.


A Bank is still not a financial intermediary: redux

Winterspeak

The question hangs on the interpretation of "intermediary." In the broad sense, an intermediary is an agent that facilitates a relationship between principles, usually for a professional fee, like a matchmaker. But this is not the only use of intermediary and banks are usually considered financial intermediaries even though they do not lend out deposit but rather fund their loans with a combination of capital and borrowing from various sources only part of which includes deposits.

The difference with banks is that their primary function is risk management rather than intermediation in the sense of savings and loan institutions and credit unions, for instance, that actually lend out deposits that they take in. The argument is not so much about this kind of intermediation, since banks are clearly special cases in that they have access to borrowing in the interbank payment system not only from other banks but also from the central bank.

Banks lend against capital and fund their assets resulting from loans by borrowing from a variety of sources, other banks, depositors and the money market. In extending credit, banks don't just receive interest as a fee for matching borrower and lender. Banks actively participate in the creation of flow, not only by arranging for existing funds to be lent, but also by adding to deposits, thereby generating a flow that increases the money stock through expansion of M1. As Neil Wilson notes in a comment at Winterspeak's, this necessitates dynamic analysis of flow rather than static analysis of stock. Other intermediaries free up existing funds to generate flow while banks create flow "out of thin air" by creating deposits and only afterward obtaining matching funding in order to balance accounts.

The question is whether this makes a difference that makes the special case of banks special economically. The fact that banks lent imprudently to borrowers who were not creditworthy based on dodgy collateral would argue that banks are indeed specially economically in generating financial instability, as Minsky hypothesized. Yet, shadow banking was also heavily involved in the crisis, which would argue against banks alone being special in this sense. However, many of the shadow banking institutions were owned and controlled by banks and were used to by banks to increase leverage beyond that which regulation allowed.

Winterspeak— Intentionality and Accounting

Some weeks ago I had a good back-and-forth with the indomitable JKH in the forums about how useful Mosler's "paradigm shift" approach was vs JKHs "strictly the accounting" strategy. Mosler plays fast and loose with the language a little at time to better get his point across, and my position was (and remains) that if your goal is to knock people out of one way of thinking and into another, then sometimes you need to hit them over the head. But I don't think anyone has quite cracked that nut (no pun intended).

And yes, the term "paradigm shift" is grotesquely over and mis-used, but I think in term of MMT/PK vs standard academic economics, it is the correct term as we really are talking about taking an entire worldview, not just an isolated theory, and all of the implications that come with it; and jettisoning it for something else. This is a multiple-organ transplant procedure here, not a buttock lift, so roll up your sleeves.

Conceptualization counts when one is bucking the mainstream model.

Winterspeak
Intentionality and Accounting

Steve Roth — Okay Fine, Let’s Call Investment “Saving.” Or…Not

The discussion of saving and investment continues in the comments there. Please comment there to keep the record in one place.

Asymptosis
Okay Fine, Let’s Call Investment “Saving.” Or…Not
Steve Roth

JKH — Krugman on Say’s Law

JKH explains the financial accounting behind why Say's "law" is wrong and shows how many economists fail to understand this because they are not looking in the right place.

Monetary Realism
Krugman on Say’s Law
JKH

Clint Ballinger — Post Keynesianism, MMT, & 100% Reserves Project: Question #1

[This is part of an ongoing effort to understand and explain differences and points of agreement between Modern Monetary Theory, Full Reserve Banking, Post Keynesianism, Steve Keen’s work, and related approaches in as simple of terms as possible (difficult, as the debates hinge on complex and subtle concepts at times, but I will try). The goal is to create a resource for the general public to better understand these areas of study and why neoclassical economics fails, and to foster clearer communication between MMT, FRB, and PK proponents.]

If this is of interest, check out the comments over there, too. CB clarifies in light of some off-blog responses.

Clint Ballinger — On good urbanism, sane economics, & problems in the social sciences
Post Keynesianism, MMT, & 100% Reserves Project: Question #1
Clint Ballinger
(h/t Matt Franko in the comments)

JKH — Banking in the Abstract – The ‘Chicago Plan'

JKH analyzes Jaromir Benes and Michael Kumhof's "The Chicago Plan Revisited." JKH also compares and contrasts Benes-Kumhof (BK) with Warren Mosler's MMT-based plan.

Monetary Realism
Banking in the Abstract – The ‘Chicago Plan'
JKH

Nick Rowe — Why does repo exist?

Nick theorizes about repos. Sergei and JKH provide the operational answers in the comments. See below.

Read it at Worthwhile Canadian Initiative
Why does repo exist?
Nick Rowe | Associate Professor of Economics, Carleton Univeristy

Hm, you think too theoretically about the "problem". Repos exist because there are normally balance sheet and/or accounting constraints which do not allow for outright selling of assets. If you take liquidity book of a bank it is 99.9% booked as HtM and not 0% as you hypothesize. HtM means hold to maturity and this accounting treatment allows banks to avoid mark-to-market volatility of their holdings in the p&l statement (also on sales you do not want to show p&l). However it is still a liquidity book and therefore should be able to provide liquidity. This is where repo comes in because it is a secured lending from those who is long liquidity to those who is short liquidity, it does not require balance sheet sales of assets, can be used to liquidity management operations and allows to eliminate counterparty credit risk because lending is secured and assets are therefore ring-fenced.Posted by: Sergei | August 07, 2012 at 02:52 PM

Nick, sorry, it is a puzzle for you and other people because you are more interested in abstract theory than in real world. So what I said is not a theory. It is real world. And it is not about fooling accountants because accountants created these rules because accountants are interested in the real world. You can theoretically out-think yourself but the point of repos is not to opportunistically trade assets but to reduce unnecessary volatility of p&l statements. And volatility of p&l statements is BAD. There is no theory about it, it is just for all practical purposes BAD. If you sell an asset, you have to book a p&l gain on it. Full point. But repos are not about trading, they are about short term liquidity management. Liquidity has a price and this price is different from prices and their changes of any other asset in the world be it financial or real.Posted by: Sergei | August 07, 2012 at 05:37 PM

***
It’s about trading, mostly, and financing trading inventory.
And it’s about risk management, which means hedging costs as you go along. You know the original cost of the bonds, and the repo cost, so you know what your accrued cost will be at your chosen point in the future (repo maturity). You pick the future point that you want to free up your flexibility (often just overnight) to make a decision to sell outright rather than repo again.“The future is uncertain. We usually wait to get as much information as possible before deciding what to do.”I’ve seen that before here. That’s wrong. That’s not how risk management works. You don’t wait. You make term financing decisions now. If the world worked as you describe, there’s be no bonds or no term structure on anything in finance. Everybody would “wait” and never decide, while all interest rates clocked in continuous time.Posted by: JKH | August 07, 2012 at 08:27 P 

Bob Smith,Supply and demand.The counterparty to the repo has the reverse repo.There's all sorts of institutional demand for outlets through which to invest cash on a short term basis. It's part of institutional liquidity management. Reverses are very liquid because they can be contracted to as short maturity as desired - overnight is most common. And reverse repos pay a contracted interest rate for a contracted term, so interest rate risk is taken out of the equation.A lot of it is about the most efficient way of managing liquidity risk and interest rate risk together.The repo borrower just has to come up with the collateral to satisfy the credit risk - but in a way that's secondary to the main purpose from either a supply or demand perspective.The repo borrower is motivated to finance inventory.The reverse repo lender is motivated to deploy liquidity.Both are interested in hedging interest rate risk for those two different purposes.Posted by: JKH | August 07, 2012 at 08:58 PM

Ramanan — Is Intra-Eurosystem Debt Unconstitutional?

There’s an interesting conversation between JKH and Marshall Auerback here on the constitutionality of TARGET2 balances of the NCBs of the Euro Area.

Read it at The Case for Concerted Action
Is Intra-Eurosystem Debt Unconstitutional?
by Ramanan

JKH's back ground is in finance. Marshall has a law degree and he is a global investment manager.

JKH — Saving, Stock/Flow Consistency, and Kalecki

JKH takes on Bill Mitchell and MMT terminology.

Read it at Modern Monetary Realism
Saving, Stock/Flow Consistency, and Kalecki
by JKH

MMR is directly engaging MMT, which is the first coordinated instance of debate and therefore an encouraging sign of progress. While there have been other debate between economists and MMT, they have not be coordinated and sustained, and many have been rather superficial, since the opposing party was ill-informed about MMT. That seems to be changing.

It's always good to have a nemesis, or as the Native Americans termed it, a "tormentor." Keeps warriors sharp.

The overall issue here is twofold. First, it is getting the professional presentation correct. Secondly, it is about translating the professional presentation into terms that non-professionals can understand, so they can get some insight into the issues and how professionals deal with them.

For example, there are a great many books explaining quantum mechanics to non-physicists, but without the math one simply cannot understand QM. Most fields are like that. One needs the background and tools to grasp them, and simplified explanations are necessarily imperfect compromises. But they should be as accurate as possible without overly complicated matters to the degree that non-professionals cannot grasp them.

This is the different between blogs and introductory courses, and graduate study and professional work.

Joseph Laliberté and circuit — Careful with the saving terminology: a reply to JKH

The debate over saving continues to rage unabated.

Read it at Fictional Reserve Banking
Careful with the saving terminology: a reply to JKH
By Joseph Laliberté and circuit.
(The authors reside in Canada and come from two different heterodox backgrounds, namely, MMT and the post-Keynesian/circuitist tradition.)

Ramanan posts on JKH's post on saving

The Case for Concerted Action (short)
Saving Versus Saving Net Of Investment
by Ramanan

Steve Roth adds his take on JKH's post

JKH has magisterial post up on the recent dust-up over Saving as perceived in various sectoral models — one-sector (global, for instance, or government- and trade-balanced domestic private sector); two-sector (government and private including international); the most common MMT construct, the three-sector model (government, domestic private, and international); the rather uncommon four-sector model (government, international, domestic household, and domestic business); or even a seven-billion-plus-sector model, in which each individual (and business, and government) is represented as a sector.

His key point, I think — one I agree with profoundly — is that people need to be very clear on which model they’re assuming when they use the word Saving, or the construct “S.” (People sometimes use those two differently, with different implied sectoral models, sometimes within a single discussion or even a single sentence.) In most cases the different constructs of saving and S that people throw around are absolutely valid within their (implicit) sectoral models. The problem arises when people are talking about different sectoral consolidations within the same discussion, without themselves and/or their interlocutors being (fully) aware of it.

I’ve left a few glancing comments over there, but it’s prompted me to write up some thinking here that’s conceptually related.

Read it at Asymptosis

Thinking About the Fed

by Steve Roth

Crossposted at Angry Bear

Steve reflects cursorily about the nature of the Fed and its relation ship to the federal government, the Treasury specifically, and the private banking system, proposing four different ways of thinking about this, and invites others to specify this more rigorously in terms of current institutional arrangements and operations.

I my view this kind of articulation is needed, since all these views, and probably some more are currently being either advanced or presumed. This is an area of significant contention, and it comes up as soon as I start discussing MMT with many people who are a particular conception of this, usually different from the way MMT frames it. As usual, the framing of the matter is crucial to discussion of related issues.

John Carney comments on JKH's post on saving

The great debate over savings has come to a head over at the Monetary Realism blog. The pseudonymous writer JKH has an extraordinarily detailed presentation at Monetary Realism of the debate over the correct way to view the concepts of saving and investment.

It’s very long, very wonkish and full of accounting equations. If that sort of thing gets you going on a Tuesday afternoon, by all means please read the whole thing.

For those of you looking for a cheat-sheet, here’s a quick breakdown about what’s going on in this debate.

Read it at CNBC NetNet

The Great Debt/Savings Throwdown: A Cheat Sheet

by John Carney

Alert — Warren Mosler joins discussion in comment on S=I+(S-I) at Winterspeak's

Lots of good comments.

Warren: Comes down to further purpose.



If the purpose is simply to show that one sector's increase in net financial assets have to come from another's decrease, 2 sectors are fine, and maybe 3 to further make the point and show the possibilities. 



If you are trying to determine if the household sector is getting over leveraged, or is under leveraged and might be ready for a credit boom, you want to further subdivide the domestic sector into households and businesses, etc.



So subdividing sectors can be a tool of discovery. 



And when looking at the euro, turns out the high deficit member nations have high household savings of net financial assets with a very low leveraged consumer, whatever that might mean. Again, it's all about your further purpose of analysis. 



So I'd ask JHK, why do you care about 'savings per se' whatever that is? and 'what do you mean by 'the underlying savings dynamic' and why do you care about it?' 

and yes, corp savings can be 'condensed' to households, which is the argument for many things (including eliminating all corporate taxes) but what specifically are you trying to get at here? that is, what's the further purpose of you're inquiry? And high corporate liquidity probably isn't going to help someone make his mtg payment even though he is a shareholder via his pension plan, etc. 



that is, JHK is stating a few things, obvious to some of us, not so obvious to others, but without some further purpose expressed it's not all that interesting and I don't see much to comment on?12:19 PM

Winterspeak.com
Confused about MMR
by Winterspeak

John Carney — More on Saving (Note: This Gets Wonkish)

Read it at CNBC NetNet
More on Saving (Note: This Gets Wonkish)

by John Carney | Senior Editor

Winterspeak — Confused about MMR

Read it at Winterspeak.com
Confused about MMR

by Winterspeak