Lars P. Syll — Schumpeter–an early champion of MMT

Keeper quote from Joseph Schumpeter. He nailed endogenous money as "credit money" and observed correctly how "money" gets created by banks' extending credit — "they create deposits in their act of lending." This effect is now amplified through non-bank and quasi-bank financial institutions.

The contemporary financialized economy runs largely on privately created credit. This has an even greater effect than Schumpeter likely anticipated. Economists' ignoring this unduly limit the scope of their models by failing to include money & banking, and finance. The result is "surprise resulting from exogenous shock." In other words, the conventional economists were looking in the wrong direction owning to oversimplification of their models of an economy. 

To say that this resulted in "great embarrassment of the profession in the fallout from the global financial crisis would be an understatement. But conventional economists still have not dealt with it by including a correct approach to money & banking and finance. Nor have institutional arrangement been changed to prevent a repeat, perhaps on an even grander scale.

Hyman Minsky was a student of Schumpter at Harvard. Minsky drew out some conclusions from Schumpter's view that became the financial instability hypothesis. Randy Wray, MMT economist and perhaps the most published author on theory of money, was a student of Minsky.

Although Schumpeter eschewed being associated with any particular economic school of thought, he is often considered as belonging to the Austrian school of economics and he was an Austrian national. Hyman Minsky also eschewed association with a particular economic school, but he is often characterized as a Post Keynesian.

MMT has roots in many previous economists and economic schools, although it is usually associated with the Post Keynesian. But here is Wray associated with Schumpeter through Minsky. MMT economists also acknowledge their debt to Abba Lerner, a student of Friedrich Hayek who is generally associated with the Austrian school of economics, too.

Incidentally, the chapter in which this quote occurs is worth reading in full. Here is the citation:

Joseph Schumpeter, History of Economic Analysis, Allen & Unwin, 1954, reprinted by Tayor & Francis, 1986, p. 1080
in CHAPTER 8 Money, Credit, and Cycles, 7. BANK CREDIT AND THE ‘CREATION’ OF DEPOSITS, pp. 1076-1083.

Schumpeter doesn't take credit for originality in this, citing Keynes's Theory of Money, for example. He does criticize Keynes for again mudding the waters in the General Theory. See footnote on page 1080.

Lars P. Syll’s Blog
Schumpeter — an early champion of MMT
Lars P. Syll | Professor, Malmo University

Hans Gersbach — Sovereign money: A challenge for science

There has been an intense academic and policy debate on what monetary architecture is the most appropriate recently, but many issues are still unresolved. This column looks at the circumstances under which the current system and the sovereign money system yield the same outcomes, the core arguments in favour of the current system, and what advantages a sovereign money architecture might offer....

Vox.eu
Sovereign money: A challenge for science
Hans Gersbach | Professor at CER-ETH - Center of Economic Research at ETH Zurich and CEPR Research Fellow

Brian Romanchuk — Primer: What Limits Bank Lending?

The unfortunate fact that bank deposits are considered money has one side effect: our mysticism about money extends towards banking. The apparent ability of banks to "create money out of thin air" seems unfair, and this leads to questions about what limits their ability to lend. The answer is a lot simpler than one might suspect. For any other business (with the possible exception of the resource industry), output is largely constrained by their ability to find customers that they can sell their product to. The business of banks is lending. By analogy, the ability to find customers that they can profitably lend to limits their growth....

Bond Economics
Primer: What Limits Bank Lending?
Brian Romanchuk

Norbert Häring — Bundesbank corrects textbook mistakes on money creation, rejects 100%-money

In the April-edition of their monthly report, the Bundesbank has belatedly joined the Bank of England in explicitly stating that the treatment of banks and money creation in most textbooks is wrong: banks are not intermediaries; they create money ex-nihilo. This helps the Bundesbank to reject criticism that central banks are currently “printing” too much money. At the same time, the Bundesbank rejects the proposal of 100%-money, i.e. bank deposits fully backed by central bank money.…

Woo hoo!

Real-World Economics Review Blog
Bundesbank corrects textbook mistakes on money creation, rejects 100%-money

Norbert Häring

Ramanan — Francis Cripps And Marc Lavoie’s Biography Of Wynne Godley

There’s a new book, The Palgrave Companion To Cambridge Economics which features among other things biographies of Wynne Godley, Joan Robinson and Nicholas Kaldor and other notable Cambridge economists. Wynne Godley’s biography—Wynne Godley (1926-2010)—is by his closest collaborators – Francis Cripps and Marc Lavoie (pp. 929-953)….

The Case for Concerted Action
Francis Cripps And Marc Lavoie’s Biography Of Wynne Godley
V. Ramanan

Philip Pilkington — A New Era of Central Banking?

As I noted in my last post the Bank of England have released an official policy document that concedes that much of Post-Keynesian endoegnous money theory is indeed correct. Interestingly, they have also released some Youtube clips with the authors where they expound on their work in more details. You can watch these videos at the BoE website here.

The videos are fascinating. The language the authors use — which contains references to ‘fiat money creation’ and money as IOUs — is straight out of either David Graeber’s book Debt: The First 5000 Years or MMT. If I were to guess I would say that it is some combination of both.

This is an enormous step forward. But I found it particularly interesting how young the authors in the videos were. One of them must be in his early 30s or so. It seems that the younger folks in the BoE are finally starting to ‘get it’.

Now, the question is where this might take the BoE if it begins to spread. There are two paths that can be taken now that they’ve gotten the basic mechanics of money creation correct.

Econintersect
A New Era of Central Banking?
Philip Pilkington

ht Lambert Strether at Naked Capitalism

Jo Mitchell — Full Reserve Banking: The Wrong Cure for the Wrong Disease

... as Positive Money rightly note, neither the mechanism nor the implications are widely understood. But Positive Money do little to increase public understanding – instead of explaining the issues clearly, they imbue this money creation process with an unnecessary air of mysticism....

Critical Macro Finance

Jo Mitchell | Senior Lecturer, University of the West of England, Bristol

Full Reserve Banking: The Wrong Cure for the Wrong Disease
Jo Mitchell | Senior Lecturer, University of the West of England, Bristol

J. W. Mason — What Does Crowding Out Even Mean?

In terms of a model, "crowding out" means that increasing the value of one variable diminishes the value of another or other variables.

This occurs in a model of an idealized or stylized world. If the claim is the the ideal or stylized world corresponds to the real world with respect to the factors involved, then it becomes an empirical question that requires examination of data and measurement.

So the first questions are about the model. What assumptions does it depend on?

The next question is whether the assumptions apply to the real world that the model putatively represents. Do the functions adequately represent actual transmission mechanisms?

The question after than is whether is too simplistic to be useful in assessing the real world situation(s) involved in the debate that are in question, e.g., relating to policy formulation or decision making.

This involves distinguishing between general case and specific cases. A general case model may not hold locally owing to institutional arrangements, for example, voluntary political imposition of a debt ceiling limits the general case based on operational analysis of a general system by limiting fiscal space arbitrarily.

Below, I run through six possible meanings of crowding out, and then ask if any of them gives us a reason, even in principle, to worry about over-expansionary policy today. (Another possibility, suggested by Jared Bernstein, is that while we don’t need to worry about supply constraints for the economy as a whole, tax cuts could crowd out useful spending due to some unspecified financial constraint on the federal government. I don’t address that here.) Needless to say, doubts about the economic case for crowding-out are in no way an argument for the specific deficit-boosting policies favored by the new administration.

This is definitely a should-read for people interested in MMT and policy.

I don't want to provide a spoiler — the points are summarized after the explanation — but it may be easier to grasp the points by knowing them beforehand.

So now we have six forms of crowding out:
1. Government competes with business for fixed saving.
2. Government competes with business for scarce liquidity.
3. Increased spending would lead to higher inflation.
4. Increased spending would cause the central bank to raise interest rates.
5. Overfull employment would lead to overfast wage increases.
6. Increased spending would lead to a higher trade deficit.

The next question is: Is there any reason, even in principle, to worry about any of these outcomes in the US today? We can decisively set aside the first, which is logically incoherent, and confidently set aside the second, which doesn’t fit a credit-money economy in which government liabilities are the most liquid asset. But the other four certainly could, in principle, reflect real limits on expansionary policy. The question is: In the US in 2017, are higher inflation, higher interest rates, higher wages or a weaker balance of payments position problems we need to worry about? Are they even problems at all?

J. W. Mason's Blog
What Does Crowding Out Even Mean?
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Brian Romanchuk — Primer: Endogenous Versus Exogenous Money

One of the long-running debates within economics is the question whether money is endogenous or exogenous. Those who follow internet economic debates can expect this argument to flare up periodically. This debate should largely be considered dead and buried; and abolishing money from economic theory would put the final nail in the coffin…

Bond Economics
Primer: Endogenous Versus Exogenous Money
Brian Romanchuk

Marilyn Tolle — Central bank digital currency: the end of monetary policy as we know it?

Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?

Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct

I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.…

Bank of England — Bank Underground
Central bank digital currency: the end of monetary policy as we know it?

Marilyne Tolle

John Barrdear and Michael Kumhof — The macroeconomics of central bank issued digital currencies

Abstract

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Key words: Distributed ledgers, blockchain, banks, financial intermediation, bank lending, money creation, money demand, endogenous money, countercyclical policy. 

  Bank of England
Staff Working Paper No. 605: The macroeconomics of central bank issued digital currencies
John Barrdear and Michael Kumhof

Merijn Knibbe — Cecchetti and Kharroubi on the non-neutrality of money

Is money ‘neutral’? Is it just a veil over ‘real’ transactions? Or does it affect the level and composition of ‘real’ expenditure? Stephen Cecchetti and Enisse Kharroubi recently published an article which in a very net way shows that money is non-neutral (as it is closely related to credit). It’s not a veil. It’s part of the essence of our economy. The abstract:….

Real-World Economics Review Blog
Cecchetti and Kharroubi on the non-neutrality of money

Merijn Knibbe

Eric Tymoigne — Money and Banking-Part 10: Monetary Creation by Banks

The last three posts have explained how the operations of banks are constrained by profitability and regulatory concerns, and how banks operate to bypass these constraints. It is now time to go into the details of how banks get involved into providing credit and payment services to the rest of the economy.…

New Economic Perspectives
Money and Banking-Part 10: Monetary Creation by Banks
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College

Eric Tymoigne — Money and Banking-Part 8: The Private Banking Business

The US financial system is extremely complicated and this series shades light only on some corners of that system by focusing on the banking sector. Here is a broad picture of the US financial system (some things have changed since the time I made this). Since the beginning of this M&B series, posts have emphasized the importance of balance sheet to get a solid understanding the mechanics at play in the financial sector. This post continues that trend.…

New Economic Perspectives
Money and Banking-Part 8: The Private Banking Business
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College

Bill Mitchell — The reality of Germany and the buffoons in Brussels intervenes …

This week, I seem to have been focused on central banking this week, which is not my favourite topic, but is all the rage over the last several days given the decision of the Bank of Japan to use negative interest rates on any new bank reserves and then continue to pump reserves into the system via its so-called QQE policy (swapping public and corporate bonds for bank reserves), and then imposing a tax on the reserves so created. Crazy is just one euphemism which comes to mind. So still on that theme and remembering that the Bank of Japan explicitly stated that the combination of QQE and the tax on reserves (they call it a negative interest rate – same thing) was introduced to increase the inflation rate back up towards its target of 2 per cent per annum, I thought the following paper was interesting. The paper from the Research Division of the Federal Reserve Bank of St Louis (published July 2015) – Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay – considers the unconventional monetary monetary policy interventions taken by the US Federal Reserve Bank between 2007 and 2009 and comes to the conclusion that “there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity”. Maybe the Bank of Japan and the ECB bosses should sent this researcher an E-mail and request his evidence. They don’t seem to have been able to escape from the straitjacket of their neo-liberal Groupthink.…

This is much more about central banking, QE, and economists' erroneous understanding of this than specifically about Japan or the EZ.

Bill Mitchell – billy blog
The reality of Germany and the buffoons in Brussels intervenes …
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

The Arthurian — How does this work out on a balance sheet?

Oh my.

The New Arthurian
How does this work out on a balance sheet?
The Arthurian

Bank of England video — Money in the modern economy: an introduction - Quarterly Bulletin article

Bank of England

Money in the modern economy: an introduction - Quarterly Bulletin article

The next thing you know the Establishment will be saying that the Bank of England is hotbed of money cranks.

Martin Sandbu — A licence to print e-money for private banks

Letting the cat out of the bag about money creation and endogenous money. 

As this catches on, it's going to be a game changer.

FT
A licence to print e-money for private banks
Martin Sandbu

Michael Pettis — Thin Air’s money isn’t created out of thin air

A recurring conversation I have with clients concerns the ability of banks to create credit, and of governments to monetize debt, and whether this ability is the solution to or the cause of financial instability and economic crisis. Monetarists and structuralists (to use Michael Hudson’s names for the two sides, whose centuries-long debate pretty, exemplified by Thomas Malthus and David Ricardo during the Bullionist Controversy, dominates the history of economic thinking) have very different answers to that question, but I will suggest that each side disagrees because it implicitly assumes an idealized version of an economy.

We are normally taught that banks allocate credit by lending the money that savers have deposited in the banking system, but in fact banks create deposits in the banking system by creating credit, so it seems to many as if they can create demand out of nothing. Similarly, if governments are able to create money, and if they can borrow in their own currency, they can easily monetize debt, seemingly at no cost, by “printing” the money they need to repay the debt (actually by crediting bank accounts, which amounts to the same thing). This means that when they borrow, rather than repay by raising taxes in the future, all they have to do is monetize the debt by printing the money needed to repay the debt. It seems that governments too can create demand out of nothing, simply by deficit spending.

There is a rising consensus – correct, I think – that the misuse of these two processes – which together are, I think, what we mean by “endogenous money” – were at the heart of the debt surge that was mischaracterized as “the great Moderation”. For example in a book published earlier this month, Between Debt and the Devil, in which he provides a description of the rise of debt financing in the four decades before the 2008-09 crisis, along with the economic risks that this has created, Adair Turner specifies these two as fundamental to the rising role of finance in the global economy. He writes:
…in modern economics we have essentially two ways to produce permanent increases in nominal demand: either government fiat money creation or private credit money creation.

I am less than half-way through this very interesting book, so I am not sure how he addresses the main characteristics of debt, nor whether he is able to explain how much debt is excessive, or identify the main ways in which the liability side of the macroeconomic balance sheet intermediates behavior on the asset side to determine the growth and volatility of an economy. He invokes the work of Hyman Minsky often enough, however, to suggest that unlike traditional economists he fully recognizes the importance of debt.

And it is because of this importance that the tremendous confusion about what it means to create demand out of nothing is dangerous. When banks or governments create demand “out of this air”, either by creating bank loans, or by deficit spending, they are always doing one or some combination of two things, as I will show. In some easily specified cases they are simply transferring demand from one sector of the economy to themselves. In other equally easily specified cases they are creating demand for goods and services by simultaneously creating the production of those goods and services. They never simply create demand “out of thin air”, as many analysts seem to think, and doing so would violate the basic accounting identity that equates total savings in a closed system with total investment.…

Endogenous money, Minsky, Steve Keen, MMT, I-S, and balance of payments.

China Financial Markets
Thin Air’s money isn’t created out of thin air
Michael Pettis | Professor of Finance at Peking University’s Guanghua School of Management

Peter Cooper — Money Interpreted as an IOU

Chartalism for dummies. Endogenous money, too. Covers the bases in simple terms. Pass it on to your friends.

heteconomist
Money Interpreted as an IOU
Peter Cooper