Thursday, February 5, 2015

alittleecon — MMTers: Does Adair Turner have a point?


There’s quite an interesting interview with Lord Adair Turner published here. This bit in particular caught my eye…

Lord Turner admits that fiat money provide extended policy space and then suggests the Positive Money control of a monetary policy committee at the politically independent central bank. These people don't trust democracy and are in love with command systems run by technocrats.

alittleecon

10 comments:

Anonymous said...

If the central bank is still determining the monetary policy targets and overseeing monetary policy, then I don't think it makes all that much difference, so long as interest on treasury securities is kept very low.

Suppose the central bank helicopter drops $10 billion into the treasury general fund: no loans or advances, no asset purchases - it simply credits the $10 billion to the general fund unconditionally.

As a result the central bank will book an additional $10 billion in liabilities on its balance sheet. That means its annual profit will be somewhere around $10 billion less than it would otherwise have been, and that means the treasury gets $10 billion less at the end of the year.

If instead the Fed uses the $10 billion to buy treasury securities at somewhere close to 0% interest, then it once again books the $10 billion liability, but this time it has a $10 billion asset in return. That means its profits aren't damaged and its end of the year distributions are unaffected.

In both cases, the central bank is effectively just loaning the money to the treasury in the ultimate effect. If Turner and others want something significantly different, then the accounting practices, methods of calculating CB "profits" and CB profit distribution rules must be changed. The central bank must be permitted to distribute money to the treasury off-book, so to speak. They would count the distribution when considering their monetary policy and inflation targeting methods, but would not count it as a balance sheet liability for the purposes of their equity position, income and profit calculations

Anonymous said...

As far as the first scenario goes, I should have noted that it makes a difference whether the debt is short-term or long term, because that determines when the Fed's income is realized.

Ralph Musgrave said...

"These people don't trust democracy and are in love with command systems run by technocrats." (according to Tom). But that's the position right now: that is central bank "technocrats" have the freedom to negate any fiscal stimulus. Almost no one over the last fifty years has objected to “technocrats” wielding that power. Then as soon as Positive Money advocates a slightly different way for technocrats to wield their power, everyone is up in arms.

peterc said...

One problem with the pious lie, apart from the obvious point that it is a lie ..., is that right now the elites do recognize the policy space when it suits them (e.g. when expanding US military expenditure). They just pretend there is a lack of policy space when it comes to things they don't like (e.g. social security).

We are meant to believe that it is safer for the general public not to know what the elites do know. But an ignorant public is a sitting duck.

Tom Hickey said...

There is no operational difference between money financing and bond issuance, and it makes no difference whether either are done by the Treasury or central bank, since both constitute government, that is, the state using its monopoly power over the currency. The financial difference is interest payment, which are fiscal additions that increase non-government net financial assets in aggregate. Since all these are just tax credits and the state is the monopoly issuer of tax credits, which it accepts alone in payment of financial obligations it imposes, there is no limit on the amount that the state can create.

At issue is how they are created in non-government.

The choices are that the people as a whole control the process, e.g., through direct democracy, or some segment of the people (class) controls the process.

For obvious reasons, interested parties don't want the people at large to control the process and therefore will establish institutions that guarantee their control of the money creation process and rationales to account for why this is optimal.
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Lord Turner is only willing to go halfway, letting the people know the truth but setting up institutional arrangements that prevent them from using this knowledge as they see fit.

So it boils down to whether one is an elitist or a populist and it doesn't matter what class to which one belongs. It is entirely possible that "the little people" would choose the option of the ruling elite running things as the optimal arrangement. But they should have the knowledge and the choice.

Unknown said...

Deficit spending always adds currency to reserve accounts at the Fed. Whether these are swapped to securities accounts is irrelevant to anything except asset prices as securities accounts are available to the public and reserve accounts are not. For the life of me I cant understand why people think the distinction is important. The recipients of Govt spending and the payers of tax are always the same, whether securities are issued does not change this at all.

And Ralph, there is no good evidence that CB's can offset fiscal policy. Interest rate change impacts are too dynamic to predict. Monetary policy directly effects fiscal policy via interest spending.

Tom Hickey said...

Ralph, I have been advocating against the present technocratic arrangement for some time, and I see the PM solution as an extension of it.

I think that in contemporary times the challenge of political economy is to navigate safely between the Scylla of corporatism and plutonomy, and the Charybdis of government technocracy and bureaucracy through institutional arrangements and policy.

Ryan Harris said...

Maybe congress should set maximum tax rates on income and then direct Treasury to adjust the rates monthly to meet economic targets laid out by fed economists. Or something.

Bond issuance should be done for monetary and banking system needs not funding, so it would be more appropriate a task assigned to the Fed. The fed could be more selective in offering durations and debt products to meet the financial needs of the population and help the private sector address specific financial risks where bonds are needed for savings or collateral.

Ralph Musgrave said...

Tom,

If you’ve been “advocating against the present technocratic arrangement for some time” then at least you’ve been consistent: more than can be said for 99% of the others involved in this argument.

I quite agree that “the challenge of political economy is to navigate safely between…”. Positive Money’s method of navigation is the best. It consists of leaving strictly POLITICAL decisions (e.g. deciding what proportion of GDP is allocated to public spending and how that should be allocated, etc) to the electorate and politicians. Quite right. As to the TECHNICAL decisions, like measuring inflation and gauging how much stimulus is suitable in the next year, that’s left to technocrats. Or do you seriously think the average politician is capable of doing the latter technical job? What about having politicians do brain surgery or design nuclear power stations?

Tom Hickey said...

The US technocrats at the Fed and CBO have been abysmal in their performance. Their record inspires zero confidence to give them more power of economic policy decisions.

The Fed and CBO should just be disbanded. The CBO does nothing useful so it should just be let go. As far as the Fed goes, I agree with Warren. Set the policy rate to zero, provide unlimited liquidity to solvent banks, and automate the payments system.

Moreover, these institutions are run by and for the elite and not the people.