Wednesday, December 28, 2011

The Economist on MMT


The crisis and the blogosphere have opened mainstream economics up to new attack
Read it at The Economist
Heterodox economics - Marginal revolutionaries

MMT goes mainstream.

UPDATE: Here is my comment at The Economist:

MMT proponents argue is that there is a difference between money created by fiscal deficits and money created by bank lending. When the government issues currency into non-government it does so through the Treasury directing its bank, the Fed, to credit non-government deposit accounts, e. g., to pay for fighter planes or to pay grannie's social security. The transmission from reserves to bank deposits is direct and does not depend on bank lending. Moreover, since there is no liability corresponding to the assets created in non-government in crediting these bank accounts, deficit disbursements inject net financial assets into non-government. Conversely, bank lending nets to zero since each asset has a corresponding liability, so non-government net financial assets remain unchanged no matter how much banks lend.

The reason that NGDP targeting will not work is the flawed notion of the transmission mechanism from reserves to spendable bank deposits. When the Fed buys financial assets of whatever type, it simply increases bank reserves. The erroneous presumption about transmission is that that banks lend against reserves or lend out reserves. Neither is the case, as MMT points out. Rather, bank lend against capital based on demand from creditworthy borrowers willing to pay a rate that is profitable enough for the bank to risk it's capital against. Increasing bank reserves does not spur banking lending and it does not affect the factors banks take into consideration in lending.

From this is simple to see why NDGP through increasing bank reserves, e.g., via QE, will not increase effective demand and spur increased investment to meet it. The transmission mechanism is bank lending, which is in abeyance, and increasing reserves will not increase it as the failure of QE has shown. Unless the Fed would buy real assets like houses instead of financial assets like MBS, it cannot not inject net financial assets into non-government, and there is no reason to expect an increase in effective demand due to increased bank reserves.The US is already at ZIRP and has been for some time. That has done nothing either. MMT predicted the failure of monetary policy — QE1 and QE2, as well as ZIRP, and QE3 will also fail unless the Fed would purchase real assets, which it is not permitted to do under current statute even under emergency powers, at least as I understand it. Time for fiscal policy to step up to the plate. [link]


9 comments:

Matt Franko said...

Even The Queen (who doesn't know who Eric Clapton is) knows the mainstream are FOS.

this is the best news in this regard I have got today... Thanks Tom!

TomatoBasil said...

=) When you guys make it into the Economist, you have made it.

Detroit Dan said...

I skimmed the article. It seems reasonable with regard to MMT, but damns us by also being reasonable to "market monetarists" (Scott Sumner) and Austrians. I consider these latter two to be just as idiotic as the mainstream -- probably moreso.

If my skimming was decent, it seems that The Economist didn't bother to separate the nonsense from the substance. Still, it's good to have them join the conversation...

Mike Norman said...

I am so proud of Warren. He is awesome! What a guy!!

Tom Hickey said...

I reposted my comment at The Economist as an update to the original post.

Kudos to Warren. Making The Economist is a big deal. We are now officially on the map, and the finish line is in sight.

Payam said...

My biggest beef with the article is it's claim that market monetarism is a heterodox school of thought...and that is damaging to MMT because it throws us in with a hodgepodge of other theories and confuses potential converts. The last thing MMT needs is some theory called "market monetarism" competing with it....not to mention that the two have funky names and can be summarily dismissed by those with dismissive attitudes.

Mike Norman said...

Agreed on the Monetarist comments.

Ralph Musgrave said...

Another weakness in the NGDP argument is that it is not new. That is, contrary to the claims of NGDP enthusiasts, central banks (CBs) do not target JUST inflation. If they did, then as NGDP enthusiasts rightly point out, CBs would pitch demand too low when inflation is cost push. Well not all CBs make this mistake.

The Bank of England has tumbled to the fact that the UK’s 5% inflation is to significant extent cost push (and temporary), so it is not doing much to reduce this inflation. I.e. the BoE is a closet NGDP targeter.

Dan Kervick said...

I agree on the market monetarism comments. All the theory seems to comes down to is mainstream monetarism plus the claim that money is currently too "tight". They are just monetarists who have a disagreement with the current Fed about the appropriate policy direction, and what quantity should be employed as the main target quantity.

Despite their zeal in defending their policy prescriptions, they are just like other monetarists in never coming up with clear notions of how the policy tools of the Fed are transmitted to the real economy. They are just absolutely convinced that the Fed, through some combination of open market operations and psychological expectations setting can *somehow* achieve whatever level of aggregate demand they want.