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Monthly Archives: March 2012
By Stephanie Kelton (h/t Matthew Berg)
Federal Reserve Chairman Ben Bernanke gave his fourth lecture at George Washington University yesterday. Buried in the lecture, beginning at about 19:18 in the video, Bernanke explained where the Fed got the money to “pay for” the assets it purchased as part of its Quantitative Easing (QE) policies.
I remember when the Fed announced the first round of QE. Those who don’t understand Fed operations – think most mainstream economists – went nuts. Many worried that the Fed would be unable to “unwind” its positions (i.e. divest itself of the assets – MBS, Treasuries, etc. – it had purchased) because banks would refuse to swap their nice safe cash for riskier instruments when the economy recovered. Others insisted that QE was “stuffing the market full” of too many dollars and that this, inevitably, would result in hyperinflation.
John Carney just wrote a very nice piece, showing that not only was the Fed able to find buyers for its assets but that markets actually bought them back at a premium. Bernanke addresses the second objection in his remarks below – idle balances don’t chase any goods – but it’s the financing of the asset purchases that I want readers to understand, because this is fundamental to understanding Modern Monetary Theory (MMT).
Thanks for the comments, many of which get ahead of the story.
I’d like to remind readers that we are ADDING the JG onto the EXISTING system. So the correct comparison is NOT against some UTOPIAN IDEAL in which we all live like Wall Street’s finest in some sort of Ayn Rand blissful Fountainhead. But RATHER to compare the existing system against one in which the JG is added. I realize this is a difficult mental gymnastic. I hope this will be clear as I respond to seven comments (the others concern upcoming topics; indeed, even these really are about topics we have not explored in detail but they are worth discussing).
My blog urging readers to look at a column by David Roodman and an article by Milford Bateman and his colleagues about the microfinance meltdown in Bosnia prompted strong exchanges between David and Milford.
Their debates caused me to consider seriously the application of accounting control fraud to microfinance. I began to draft a letter to David and Milford, but it morphed into a substantive piece that I believe may be of more general interest to readers and of particular importance to the microfinance literature. Here is the hybrid letter/article.
Program Design. A JG or ELR program is one in which government promises to make a job available to any qualifying individual who is ready and willing to work. The national government provides funding for a universal program that would offer a uniform hourly wage with a package of benefits. The program could provide for part-time and seasonal work, as well as for other flexible working conditions as desired.
The plot of the movie WarGames (1983) involves a slacker hacker (played by Matthew Broderick) who starts playing the game “Global Thermonuclear War” with Joshua, a Department of Defense (DoD) supercomputer that has been given partial control by DoD of our nuclear forces. The game prompts Joshua, who has been programmed to win games, to trick DoD into authorizing Joshua to launch an attack on the Soviet Union so that Joshua can win the game. The hacker and the professor that programmed Joshua realize that the only way to prevent Joshua from attacking is to teach “him” that no one can “win” global thermonuclear war. The insanity is that the people who created the game “Global Thermonuclear War” thought it could be won. Joshua races through thousands of scenarios and ends his plan to win the “Global Thermonuclear War” game by attacking the Soviet Union when he realizes that “the only winning move is not to play.”
The JOBS Act is insane on many levels. It creates an extraordinarily criminogenic environment in which securities fraud will become even more out of control. One of the forms of insanity is the belief that one can “win” a regulatory “race to the bottom.” The only winning move is not to play in a regulatory race to the bottom. The primary rationale for the JOBS Act is the claim that we must win a regulatory race to the bottom with the City of London by adopting even weaker protections for investors from securities fraud than does the United Kingdom (UK).
The imminent passage of the fraud-friendly JOBS Act caused me to reflect on the fact that the worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support. The Garn-St Germain Act of 1982, which deregulated savings and loans (S&Ls) and helped drive the debacle, was passed with virtually no opposition. The Texas and California S&L deregulation acts – the two states that “won” the regulatory “race to the bottom” – passed with virtually no opposition. Texas S&L failures caused over 40% of total S&L losses and California failures caused roughly 25% of total losses. In 1984, a majority of the members of the House of Representatives, including Newt Gingrich and most of the leadership of both parties, co-sponsored a resolution calling on us to cease our reregulation of the S&L industry.
Thanks for all the comments and the interesting discussions. Sorry this will be late as I’m in Brazil at a couple of conferences. A number of the comments were on topics we will discuss later—especially Vincenzo’s design of his own preferred JG. I am purposely keeping it general in the beginning, and gradually we will introduce the specifics. But note that the discussion made it fairly clear that no “one size fits all” will work everywhere. The real world program will need to be carefully designed to fit “conditions on the ground” (as our Pentagon warriors love to phrase it). We need to look at the general, universal program first so I will stick to that. Later I will argue that in some circumstances it might not be practical (due to political, institutional, sovereignty, managerial capability, or productive capacity constraints) to implement the universal program from the get-go.