The following passage from the transcript of Governor Romney’s secretly videotaped May 17, 2012 fundraiser has not received any attention in the media. It is a fascinating passage, however, from the perspective of Modern Monetary Theory (MMT). Here is the full context of the passage:
MALE VOICE: One comment, Governor.
MITT ROMNEY: Yes.
MALE VOICE: The debates are gonna be coming and I hope at the right moment you can turn to President Obama, look at the American people and say, “If you vote to reelect President Obama you’re voting to bankrupt the United States.” I hope you keep that in your quiver, because that’s what’s gonna happen. And I think it’s gonna be very effective. In some (UNINTEL).
MITT ROMNEY: Yeah. Yeah. It’s– it’s interesting. There’s– the former head of– Goldman Sachs, John Whitehead– was also the former head of the New York Federal Reserve and– and I met with him and he said, “As soon as the Fed stops buying all the debt that we’re issuing–” which they’ve been doing. The Feds buy like 3/4 of the debt that America issues.
He said, “Once– once that over– that’s over,” he said, “we’re gonna have a failed Treasury option. Interest rates are gonna have to go up. You know, we’re– we’re– we’re living in this borrowed– fantasy world where– where the government keeps on borrowing money.” You know, we– we borrow this extra trillion a year. We wonder, “Well, who’s– who’s loaning against the Treasury? The Chinese aren’t loaning to us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us a trillion?”
And the answer is we’re just making it up. The Federal Reserve is– is just taking it and saying, “Here, we’re– we’re giving–” it’s just made up money. And– and this– this does not augur well– for– for our economic future. No. I mean I– you know, some of these things are– are complex enough it’s not easy for people to understand, but your– your point of saying bankruptcy usually concentrates the money. Yeah, George?
There is one important error in the transcription of Romney’s remarks, which I confirmed by listening to the videotape. Romney quotes John Whitehead as saying “we’re gonna have a failed Treasury option.” That phrase does not make any sense. What Romney actually stated when he was quoting Whitehead was “we’re gonna have a failed Treasury auction.” Romney was endorsing Whitehead’s claim that investors will stop buying Treasury bonds.
Let’s begin with who Whitehead is. He was in fact the head of Goldman Sachs before joining the Reagan administration as a senior official. He was also the Chairman of the Board of the Federal Reserve Bank of New York (FRBNY). Note that Romney considers him to have been the “head” of the FRBNY. That demonstrates why the regional Fed banks should have no governmental function – the banking interests run the regional Fed banks if Romney is correct. The regional Fed banks are the primary examiners and supervisors of the Federal Reserve System – an obvious and untenable conflict of interest.
Whitehead is also an old-fashioned “liquidator” – a not very modern incarnation of President Hoover’s Treasury Secretary, Andrew Mellon. Paul Krugman cites the key passage in Mellon’s rant.
Treasury secretary Andrew Mellon, according to Herbert Hoover:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
Whitehead believes that the budget deficit and Social Security, Medicare, and Medicaid are the great threats and that our nation could be forced to default on its debts. Hyper-inflation is just around the corner. He wants a firm regime of austerity. That should pose two insurmountable problems for Romney. First, Romney is on record stating that austerity would “throw us into recession or depression.”
Second, Whitehead says that what the nation desperately needs to avoid a debt collapse is elected officials who will champion and vote for higher taxes.
Romney is promising very large tax cuts (supposedly offset by ending a handful of tax deductions used primarily by the wealthy – a mathematical impossibility). Naturally, Romney did not tell his wealthy donors that Whitehead was warning that America’s survival depended on them paying much higher taxes. Romney did not tell his donors or voters that he rejects both of Whitehead’s primary policy recommendations despite the fact that Whitehead warns that rejection of his policies will lead to an inevitable, catastrophic U.S. economic collapse.
With the Whitehead preliminaries out of the way we can now discuss Romney’s unintentional endorsement of MMT. Let us assume for purposes of analysis that Whitehead is correct that “The Feds buy like 3/4 of the debt that America issues.” Whitehead and Romney treat this asserted fact as proof that the U.S. is about to suffer an inability to auction debt. They imply that the Fed is buying U.S. debt issuances because the rest of the world has ceased doing so. They imply that the asserted Fed purchases of “3/4” of U.S. debt issuances must be a last gasp measure that can only briefly delay an inevitable default. Whitehead and Romney have made public these asserted facts and analytics for many months. The purported Fed last gap strategy for delaying the inevitable bond default is so crude and so large that Whitehead and Romney believe it must be on the verge of collapse. The U.S. bond markets – the broadest, most efficient, and most sophisticated in the world must have reacted to this “proof” of an inevitable, near-term default by pricing this risk of inevitable, catastrophic default. After all, the presumed one-quarter of U.S. debt issuances still purchased by investors other than the Fed represents a massive amount of money and those investors would suffer catastrophic losses in the event of default so they have every financial incentive to demand a premium interest rate to compensate for that default risk.
We can examine Whitehead and Romney’s analytics by observing the surging interest rates on U.S. debt issuances, which should be extremely high given Whitehead’s claims about the near inevitability of a U.S. default. It was with the greatest trepidation that I just looked up that raging rate. The two-year U.S. note has reached the perilous yield of 0.274 and the 10-year note has skyrocketed to 1.658. Clearly, professional investors believe that we have already passed the precipice and have only delayed briefly our plunge into the bottomless pit of default by a fingernail grip on the lip of that pit.
Several other important points about MMT also arise from Whitehead’s and Romney’s claims about money. First, the whole “the U.S. deficit is a disaster because we owe a debt to China” blows up. We’re now supposed to panic because we “owe” “ourselves” an “extra trillion dollars.”
Second, if the Fed is buying our debt, then it is not in fact debt. It is simply an accounting game. If Division A of Corporation Z “sells” bonds to Division B of Corporation Z there is no change in Corporation Z’s debt levels. That fact should have led Whitehead and Romney to ask why Treasury was bothering to “sell” U.S. debt to the Fed. The Fed’s surplus goes to the Treasury, so the Whitehead and Romney theory cannot be that Treasury has “run out of money” and the Fed has a trillion dollars in “extra” “money” that it is lending to the Treasury as a last gap effort to delay the inevitable default on U.S. bonds. The Fed could simply send its hypothetical $1 trillion in “extra” “money” to the Treasury as a component of its annual “distribution” to the Treasury.
There is also the small matter that on any accounting basis the Fed does not have remotely a trillion dollars of “capital.” If Whitehead and Romney think that the Fed is “buying” a trillion dollars in Treasury bonds how do they think the Fed got the money to buy the bonds? It is in attempting to answer this question that Whitehead and Romney began to stumble unintentionally into how money is actually often created by a nation with a sovereign currency. Their problem is that they cannot believe the truth. Indeed, they boggle at the very concept. You can see it in the transcript of Romney’s meeting with his donors.
And the answer is we’re just making it up. The Federal Reserve is– is just taking it and saying, “Here, we’re– we’re giving–” it’s just made up money. And– and this– this does not augur well– for– for our economic future.
Yes, the Federal Reserve “just made up money” by making keystrokes on a computer. Romney thinks this is unheard of and unimaginable. In reality, it is the day-to-day reality in central banks around the world. Whitehead has to know this. None of this means that the world is about to end; it in fact does “augur well … for our economic future.” Banks created money long before computers were invented. Sovereign, freely-floating currencies are the norm in much of the world because they have proven superior. The gold standard was a superb device for producing periodic depressions.
Note that financial markets understand these facts. That is why they price the credit (as opposed to interest rate) risk of purchasing U.S. debt as essentially zero. They price the interest rate risk as minimal. What alternative would Romney prefer? He told Time magazine in an interview showing the date of May 23, 2012 that austerity would “throw us into recession or depression. So I’m not going to do that, of course.”
Romney’s secretly videotaped meeting with his donors occurred on May 17, 2012 – six days before the interview with Time in which he explained that austerity would cause a disaster and he would not embrace austerity by trying to balance the budget during a recovery from the Great Recession. Recall that the question from the unidentified donor that sparked the entire discussion was the donor urging Romney to attack Obama because he had not embraced austerity and tried to balance the budget in response to the Great Recession. If Romney were honest, he would have explained to the donor what he explained contemporaneously to Time – Obama was doing the right thing and Romney would follow the same strategy. Of course, that kind of honesty would have terminated Romney’s campaign.
Similarly, if Romney really believed Whitehead’s analysis he should have told his donors that the situation was hopeless, which was Whitehead’s conclusion: “I don’t see a solution here.”
Whitehead claimed that the survival of the nation was dependent on substantially increasing taxes in order to reduce dramatically the budget deficit – yet Romney knew that such a program of austerity would be insane because it would “throw us into recession or depression.” Throwing us into recession or depression would cause the budget deficit to grow enormously. If Whitehead were right, whatever policy we followed, including Whitehead’s proposed policies, was sure to produce a disaster. A stimulus program, if appropriately large and well-structured, could speed recovery and eventually reduce the deficit. The irony is that MMT explains why Whitehead’s analysis was wrong, there are viable alternatives employing stimulus that will speed recovery and will not cause a bond default or even materially higher interest rates. Unfortunately, Romney’s economic advisors have never explained how money works to their candidate. The result is that Romney cannot tell the truth about either our economic problems or their solutions.