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Monthly Archives: October 2011
“There is no question that this economyneeds more demand. But if we want to short-circuit the forces driving long-term unemployment and unequally shared prosperity, we need to go beyond pump priming.”
The European “troika” that has been driving Greece into adeepening depression has just completed an analysis documenting the failure ofits policies. The analysis hasleaked. Here are its introductoryparagraphs.
Greece:Debt Sustainability Analysis
“Since the fourthreview, the situation in Greece has taken a turn for the worse, with the economyincreasingly adjusting through recession and related wage-price channels,rather than through structural reform driven increases in productivity. Theauthorities have also struggled to meet their policy commitments against theseheadwinds. For the purpose of the debt sustainability assessment, a revisedbaseline has been specified, which takes into account the implications of thesedevelopments for future growth and for likely policy outcomes. It has beenextended through 2030 to fully capture long term growth dynamics, and possiblefinancing implications.
The assessment showsthat debt will remain high for the entire forecast horizon. While it woulddecline at a slow rate given heavy official support at low interest rates(through the EFSF [European Financial Stability Facility] asagreed at the July 21 Summit), this trajectory is not robust to a range ofshocks. Making debt sustainable willrequire an ambitious combination of official support and private sectorinvolvement (PSI). Even with much stronger PSI, large official sector support wouldbe needed for an extended period. In this sense, ultimately sustainabilitydepends on the strength of the official sector commitment to Greece.”
The leakedmemo helps explain why the Troika always lets the periphery twist slowly in thewind even though doing so hurts everyone – if this memo is representative theTroika must be choking to death on its jargon, theoclassical economics dogma,and its propaganda. In plain English,the memo concludes:
1. Greece’seconomy is crashing
2. Ourclaim that the “reforms” we were imposing would cause productivity improvementsthat would drive a robust recovery has proven false
3. Ourprediction that the Greek economy would improve and allow Greece to repay itsdebts is inoperative
4. Ournew prediction is that Greek debt will remain dangerously high for the lengthof our prediction (through 2030)
5. If anything nasty happens to the economyduring the next 20 years Greece will be unable to repay its debt
6. Onlylong-term bail outs and requiring Greece’s creditors to take substantial lossescan make it possible for Greece to avoid collapse
Those admissions, while striking, are notthe Troika’s most important admission. Notethat the Troika’s first paragraph contains the remarkable phrase that Greece is“adjusting through recession.” Apparently,Greece is adjusting to a recession “through recession.” One assumes that under this framing Greece“adjusted” to World War II through its troops and civilians dying. What the Troika appears to be trying to sayis that Greek wages are falling as the Greek economy collapses, which causesthe collapse to accelerate. Thememorandum claimed that the Troika’s initial model was based on experience inother nations that were forced to adopt austerity during a severe recession andexperienced remarkable recoveries, but admits that the model has failed inGreece. (The reality is that it failedin the other nations as well, but the Troika is having enough trouble admittingthe truth about Greece.)
The Troika’s new, more pessimisticforecast is that Greece’s recession is mild by the start of 2012 and is over bythe end of 2012. That is an extremelyoptimistic assumption, not a pessimistic one. The odds are strong that the Troika’s austerity program will causeGreece to descend into a severe recession. If it does, the Troika’s plan blows up immediately. But the Troika recognizes that it does notrequire a recession to blow up their projections. “Stresstests to this revised baseline illuminate further the problem with sustainability,revealing that the downward debt trajectory would not be robust to shocks.” If almost anything material goes wrong – overthe next twenty years – the Troika project that the Greek economy would descendinto a debt and deficit death spiral. The odds that nothing relevant to the Greekeconomy and government will go wrong over the next two decades are tiny. The Troika is basing its new plan onassumptions that are so rosy that they could populate a large flower garden.
The Troika assumes that Greece will run avery large “primary surplus” in its budget – and maintain it for decades. The Troika recognizes that this “requiressustained and unwavering commitment to fiscal prudence by the Greek authorities.” There are two problems with thisassumption. It is imprudent to run abudgetary surplus during a collapse of private sector demand that is causing asevere recession. Doing so will make theexisting recession far worse and trying to do so for decades will cause orexacerbate future recessions. The Troikaassumes the opposite: “[S]trong growth willbe very hard to achieve unless Greece’s high debt overhang is decisively tackled.Overall, the scenario emphasizes the crucial importance of frontloadinggrowth-enhancing structural reforms for debt sustainability.” The Troika concedes that it is critical thatGreece promptly achieve substantial growth. The Troika, however, is insisting on austerity – budget surpluses –during a severe recession. That is apro-cyclical policy that makes the recession worse. The Troika is counting on magic –“growth-enhancing structural reforms” to overcome the self-destructive natureof their austerity program and produce a prompt, robust recovery from thereception.
The second problem is that if the Troikabelieves that the Greek government will display a “unwavering commitment” fordecades to actions that are (deservedly) extremely unpopular among theelectorate then it must have been meeting in a an Amsterdam hash house when itwrote this sentence.
Adopting these new myths about Greece’sprompt recovery from recession and maintenance of very large surpluses fordecades allowed the Troika to abandon two prior myths. The memorandum shows that the Troika hasdropped the fantasy that Greece will soon be able to borrow funds from themarkets without any guarantees from the European Central Bank (ECB). The new estimate is that it will take adecade before Greece can borrow and that it will not be able to borrowsubstantial funds “until late [in] the second decade.” Similarly, the Troika finally admits that aGreek default on its existing debt is certain. “Greece’s debt peaks at very high levels and would decline at a very slowrate pointing to the need for further debt relief to ensure sustainability.”
The Troika has not given up one of theircentral myths even though it is one of the most pernicious myths in the last 80years. It is one that Keynes (andreality) disproved long ago. The Troikabelieves that if Greece fell into a deeper recession it would recover more quickly because of the recession. The “logic” is that severe recessions lead tosharp drops in working class wages, which makes the nation far morecompetitive, which expands its exports, which accelerates Greece’s recovery under the Troika’s new model.
“Tomodel this it is assumed that through much deeper recession and deflation thecompetitiveness gap is unwound by 2017, instead of during the next decade. The headwindsfrom the deeper recession are assumed to delay the achievement of fiscal andprivatization policy targets by three years.
Asthe economy rapidly shrinks, debt would reach extremely high levels in theshort run at 208 percent of GDP. If Greece could weather the shock toconfidence this could create, the eventual more rapid recovery of the economywould help bring debt back down towards the revised baseline path….”
This passage “explains” the Troika’s useof the phrase “adjusting through recession.” We can now see what a chilling phrase it is and how little empathy theTroika has for human beings who are suffering. “The competitiveness gap” assumes that the Greek working class isseriously overpaid and that as the recession deepens and causes ever greaterunemployment it will cause Greek wages to fall sharply until it reaches thepoint that the Greeks are competitive with places like Portugal. The Troika propounds the myth that recessionsare self-correcting and that the more severe the recession the “more rapid[the] recovery.”
Greece is already a nation beset bysevere income inequality and unemployment, and the Troika claims thatincreasing the income inequality and unemployment dramatically is one of thekeys to recovery. Slashing working classwages and employment in a Great Recession, however, causes private sectordemand to fall sharply. The underemployedcut their consumption for obvious reasons, but many workers will cutconsumption because they fear that they will lose their jobs. The result of the Troika’s austerity policiesin Greece has not been a recovery, but a deepening depression, as the Troika’smemorandum admits. Greece is notrecovering under the Troika’s self-defeating austerity mandates. The Troika’s policies are analogous todoctors bleeding their patients centuries ago under the delusion that itimproved their health.
In the same quoted passage, the Troikapresents an additional myth – “deflation” causes nations in severe recessionsto recover. Deflation does the opposite,for several reasons. I will explainbriefly only one of these reasons. Whenprices are falling on major goods for which it is often possible to deferpurchases (e.g., buying a new automobile or refrigerator), consumers may defertheir purchases because deflation means that they can buy those goods at alower price in the future. One of thefundamental characteristics of severe recessions is grossly inadequate privatesector demand, so deflation exacerbates recessions by reducing private sectordemand.
The Troika’s memorandum has a revealingaside about what the ECB cares about. The context is the presentation of the necessity of Greece’s creditorsagreeing to large reductions in Greece’s debts.
“DeeperPSI,which is now being contemplated, also has a vital role in establishing thesustainability of Greece’s debt.”
That sentence ends with the followingfootnote.
1“The ECB does not agree with the inclusion of these illustrative scenariosconcerning a deeper PSI in this
The ECB has no statutory mission toprotect the interests of Greece’s creditors. Its decision to side with the interests of Greece’s creditors(overwhelmingly European banks, particularly German banks) against theinterests of a member nation makes clear why the ECB poses an enormous dangerto Europe. The ECB is dominated bytheoclassical economists who glory in their “independence” from democraticinstitutions but are slavish servants of the systemically dangerousinstitutions (SDIs) – the misnamed “too big to fail” banks.
In the previous two weeks we have shown that government budget deficits take the form of net credits to bank reserves at the central bank and as well to the deposit accounts of those who receive net government spending. Normally, this leads to excess reserves that are drained through the offer of government bonds, sold either by the central bank or by the Treasury. Hence, budget deficits normally result in net positive acquisition of Treasuries. But even if they do not, then on government sector ends up with net saving in the form of claims on government.
To put it as simply as possible: government deficit spending creates nongovernment sector saving in the form of domestic currency (cash, reserves, Treasuries). This is because government deficits necessarily mean the government has credited more accounts through its spending than it debited through its taxes.
Remembering the comments on Blog 20 we need to make clear that we are talking about net saving in the domestic currency. The domestic nongovernment sector can also net save in foreign currency assets. And some members of the nongovernment sector can save in the form of claims on other members of the domestic nongovernment sector—but that all nets to zero.
It is now obvious from the previous discussion that the nongovernment savings in the domestic currency cannot pre-exist the budget deficit, so we should not imagine that a government that deficit spends must first approach the nongovernment sector to borrow its savings. Rather, we should recognize that the government spending conceptually comes first–it is accomplished by credits to bank accounts. And finally we recognize that both the resulting budget deficit as well as the nongovernment’s savings of net financial assets (budget surplus)are in this sense residuals and are equal.
As a sidenote (for now) those who claim that the US government must borrow Dollars from thrifty Chinese don’t understand the most basic accounting. The Chinese do not issue Dollars—the US does. Every Dollar the Chinese “lend” to the US came from the US. In reality, the Chinese receive Dollars (reserve credits at the Fed) from their export sales to the US (mostly), then they adjust their portfolios as they buy higher earning Dollar assets (mostly, Treasuries). The US government never borrows from Chinese to “finance” its budget deficit. Actually, the US current account deficit provides Dollar claims to the Chinese, and the US budget deficit ensures these are in the form of “currency” (broadly defined to include cash,reserves, and Treasuries).
More generally, as J.M. Keynes argued, saving is actually a two-step process: given income, how much will be saved; and then given saving, in what form will it beheld. Thus, many who proffer the second objection—that nongovernment portfolio preferences can deviate from government spending plans–have in mind the portfolio preferences (that is, the second step) of the nongovernment sector.How can we be sure that the budget deficit that generates accumulation of claims on government will be consistent with portfolio preferences, even if the final saving position of the nongovernment sector is consistent with saving desires? The answer is that interest rates (and thus asset prices) adjust to ensure that the nongovernment sector is happy to hold its saving in the existing set of assets. Here we must turn to the role played by government interest-earning debt (“treasuries”, or bills and bonds) to gain an understanding.
For the purposes of this discussion, we can assume that anyone who sold goods and services to government did so voluntarily; we can also assume that any recipient of a government “transfer” payment was happy to receive the deposit. Recipients of government spending then can hold receipts in the form of a bank deposit, can withdraw cash, or can use the deposit to spend on goods, services,or assets.
In the first case, no further portfolio effects occur. In the second case, bank reserves and deposit liabilities are reduced by the same amount (this can generate further actions if it reduces aggregate banking system reserves below desired or required levels—but those are always accommodated by the central bank to the extent that attempts by banks to adjust reserve holdings cause the targeted interest rate to move away from target). In the third case, the deposits shift to the sellers (of goods,services or assets). Only cash withdrawals or repayment of loans can reduce the quantity of bank deposits—otherwise only the names of the account holders change.
Still,these processes can affect prices—of goods, services, and most importantly of assets. If deposits and reserves created by government deficit spending are greater than desired at the aggregate level, then the “shifting of pockets” bids up prices of goods and services and asset prices, lowering interest rates. Modern central banks operate with an overnight interest rate target.
When excess reserves cause banks to bid the actual overnight rate below the target, this triggers an open market sale of government bonds that drains excess reserves. (As discussed in the response to comments last week, we modify this if the target interest rate is zero; or if the central bank pays a support rate below which excess reserves cannot push market rates.)
So the answer to the second objection about inconsistency of portfolio preferences is really quite simple: asset prices/interest rates adjust to ensure that the nongovernment’s portfolio preferences are aligned with the quantity of reserves and deposits that result from government spending—and if the central bank does not want short-term interest rates to move away from its target, it intervenes in the open market.
It is best to think of the net saving of the nongovernment sector as a consequence of the government’s deficit spending—which creates income and savings. These savings cannot pre-exist the deficits, since the net credits by government create the savings. Hence, the savings do not really “finance” the deficits, but rather the deficits create an equal amount of savings.
Finally,the fear that government might “print money” if the supply of finance proves insufficient is exposed as unwarranted. All government spending generates credits to private bank accounts—which could be counted as an increase of the money supply (initially, deposits and reserves go up by an amount equal to the government’s spending).
However, the portfolio preferences of the nongovernment sector will determine how many of the created reserves will be transformed into bonds, and incremental taxes paid will determine how many of the created reserves and deposits will be destroyed.
Next week: we’ll get more deeply into bond sales by government and impacts of budget deficits on interest rates.
The new mantra of the Republican Party is the old mantra –regulation is a “job killer.” It iscertainly possible to have regulations kill jobs, and when I was a financialregulator I was a leader in cutting away many dumb requirements. Wehave just experienced the epic ability of the anti-regulators to kill well overten million jobs. Why then is there nota single word from the new House leadership about investigations to determinehow the anti-regulators did their damage? Why is there no plan to investigate the fields in which inadequateregulation most endangers jobs? Whilewe’re at it, why not investigate the areas in which inadequate regulationallows firms to maim and kill. This columnaddresses only financial regulation.
Deregulation, desupervision, and de facto decriminalization (thethree “des”) created the criminogenic environment that drove the modern U.S.financial crises. The three “des” wereessential to create the epidemics of accounting control fraud thathyper-inflated the bubble that triggered the Great Recession. “Job killing” is a combination of two factors– increased job losses and decreased job creation. I’ll focus solely on private sector jobs –but the recession has also been devastating in terms of the loss of state andlocal governmental jobs.
From 1996-2000, for example, annual private sector gross jobincreases rose from roughly 14 million to 16 million while annual privatesector gross job losses increased from 12 to 13 million. The annual net job increases in those years,therefore, rose from two million to three million. Over that five year period, the net increasein private sector jobs was over 10 million. One common rule of thumb is that the economy needs to produce an annualnet increase of about 1.5 million jobs to employ new entrants to our workforce,so the growth rate in this era was large enough to make the unemployment andpoverty rates fall significantly.
The Great Recession (which officially began in the thirdquarter of 2007) shows why the anti-regulators are the premier job killers inAmerica. Annual private sector gross joblosses rose from roughly 12.5 to a peak of 16 million and gross private sector jobgains fell from approximately 13 to 10 million. As late as March 2010, afterthe official end of the Great Recession, the annualized net job loss in theprivate sector was approximately three million (that job loss has now turnedaround, but the increases are far too small). Again, we need net gains of roughly 1.5 million jobs to accommodate newworkers, so the total net job losses plus the loss of essential job growth waswell over 10 million during the Great Recession. These numbers, again, do not include the largejob losses of state and local government workers, the dramatic rise inunderemployment, the sharp rise in far longer-term unemployment, and thesalary/wage (and job satisfaction) losses that many workers had to take to finda new, typically inferior, job after they lost their job. It also ignores the rise in poverty,particularly the scandalous increase in children living in poverty.
The Great Recession was triggered by the collapse of thereal estate bubble epidemic of mortgage fraud by lenders that hyper-inflatedthat bubble. That epidemic could nothave happened without the appointment of anti-regulators to key leadershippositions. The epidemic of mortgagefraud was centered in loans that the lending industry (behind closed doors)referred to as “liar’s” loans – so any regulatory leader who was not ananti-regulatory ideologue would (as we did in 1990-1990 during the first waveof liar’s loans in California) have ordered banks not to make these pervasivelyfraudulent loans. One of the problemswas the existence of a “regulatory black hole” – most of the nonprime loanswere made by lenders not regulated by the federal government. That black hole, however, conceals two broaderfederal anti-regulatory problems. Thefederal regulators actively made the black hole more severe by preempting stateefforts to protect the public from predatory and fraudulent loans. Greenspan and Bernanke are particularlyculpable. In addition to joining the jihad state regulation, the Fed hadunique federal regulatory authority under HOEPA (enacted in 1994) to fill theblack hole and regulate any housing lender (authority that Bernanke finallyused, after liar’s loans had ended, in response to Congressional criticism). The Fed also had direct evidence of thefrauds and abuses in nonprime lending because Congress mandated that the Fedhold hearings on predatory lending.
The S&L debacle, the Enron era frauds, and the currentcrisis were all driven by accounting control fraud. The three “des” are critical factors increating the criminogenic environments that drive these epidemics of accountingcontrol fraud. The regulators are the“cops on the beat” when it comes to stopping accounting control fraud. If they are made ineffective by the three“des” then cheaters gain a competitive advantage over honest firms. This makes markets perverse and causesrecurrent crises.
From roughly 1999 to the present, three administrations havedisplayed hostility to vigorous regulation and have appointed regulatoryleaders largely on the basis of their opposition to vigorous regulation. When these administrations occasionallyblundered and appointed, or inherited, regulatory leaders that believed inregulating the administration attacked the regulators. In the financial regulatory sphere, recentexamples include Arthur Levitt and William Donaldson (SEC), Brooksley Born(CFTC), and Sheila Bair (FDIC). Similarly,the bankers used Congress to extort the Financial Accounting Standards Board(FASB) into trashing the accounting rules so that the banks no longer had torecognize their losses. The twinpurposes of that bit of successful thuggery were to evade the mandate of thePrompt Corrective Action (PCA) law and to allow banks to pretend that they weresolvent and profitable so that they could continue to pay enormous bonuses totheir senior officials based on the fictional “income” and “net worth” producedby the scam accounting. (Not recognizingone’s losses increases dollar-for-dollar reported, but fictional, net worth andgross income.) When members of Congress(mostly Democrats) sought to intimidate us into not taking enforcement actionsagainst the fraudulent S&Ls we blew the whistle. Congress investigated Speaker Wright and the“Keating Five” in response. I testifiedin both investigations. Why is the new Houseleadership announcing its intent to give a free pass to the accounting controlfrauds, their political patrons, and the anti-regulators that created thecriminogenic environment that hyper-inflated the financial bubble thattriggered the Great Recession and caused such a loss of integrity? The anti-regulators subverted the rule of lawand allowed elite frauds to loot with impunity. Why isn’t the new House leadership investigating that disgrace as one oftheir top priorities? Why is the new Houseleadership so eager to repeat the job killing mistakes of taking the regulatorycops off their beat?
Bill Black is an Associate Professor of Economics and Law atthe University of Missouri-Kansas City. He is also a white-collar criminologist, a former senior financialregulator, a serial whistleblower, and the author of The Best Way to Rob a Bank is to Own One.
WASHINGTON, Oct. 20 – Nobel Prize-winning economist Joseph Stiglitz and other nationally-renowned economists agreed today to serve on a panel of experts to help Sen. Bernie Sanders (I-Vt.) draft legislation to reform the Federal Reserve.
Sanders announced formation of his expert advisory panel in the wake of a damning report that faulted apparent conflicts of interest by bank-picked board members at the 12 regional Fed banks.
Top executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank’s policies during the financial crisis, the Government Accountability Office investigation found. The dual roles created an appearance of a conflict of interest, according to the GAO.
Warren Buffet told CNBC reporter Becky Quick that he could fix our nation’s deficit problem real quick — in precisely five minutes. Problem is, the US doesn’t have a deficit problem. We do, however, have an aggregate demand problem, as MMTers have been arguing for more than two years. And we could fix that in five minutes too, if we could just circumvent Congress.
The Occupy Wall Street Protestors have announced that Nov. 5th is “Move Your Money Day.” A few folks started early and discovered an unusual new penalty for “early withdrawal.” You have to see it to believe it.
Prior to Sept. 17, 2011, no one would blink (or cringe) at a photo like this. But with the Occupy Wall Street movement drawing so much attention to the cosy relationship between Wall Street and the politicians who serve them, this photo of Mitt Romney and his colleagues at Bain Capital just doesn’t seem very funny.
In this private letter from Charles Koch to Fredrich Von Hayek, Koch urges the grand poobah of free-market economics to be sure to take advantage of the benefits he is entitled to under Social Security.
Until today, the bloggers at New Economic Perspectives had ever heard of Ben Strubel. But he’s definitely got our attention (and our respect) now. He posted a very nice summary of our macro approach — often dubbed MMT — and made a strong case for increased deficit spending. Maybe it’s just easier for people like this (practitioners/traders who haven’t had their heads fuddled with mainstream economic theory) to grasp how the modern monetary system actually works.
Here’s a terrific parable on de-leveraging from an anonymous author. We recommend using it the next time someone takes out a chart of outstanding debt (public, private, or both) and the money stock (monetary base, M1, M2, MZM) and tries to make the asinine point that we don’t have enough money to pay off all the debt.
CNBCs John Carney says that “very few people understand how the modern banking system really works.” He praises MMT for its more accurate depiction of finance and banking.
Here’s an incredible statistic on the FIRE economy: Interest on mortgages is now over 20% of personal consumption expenditure vs. 5% in 1980. And this is in spite of the fact that 60% of the housing stock is owned outright.
Q1: Andy. What does”wonky” mean?
A: Think “policy wonk” someone who gets all data-heavy andinto the deep technical details to do policy analysis. So it is used to warnthe reader that only those really interested in details needs to read on.
Q2: Ryan. Let’s assume the economy already works with fullcapacity, and the government would like to maintain it without any furtherinflation or deflation. Does the government now have to make an educated guess(regarding the exogenous part of gov. deficit) what the nongovernment savingdesire might be, so that it (government) fulfills its goal (full employment andprice stability). Kind of trying to hit moving target? And in this regard, isthe ELR governmental program kind of “shoot and forget” mechanism,which automatically, always finds, or helps to find the moving target(nongov. saving desire)?
A: No, not really. Let us say government puts in place theELR and 20 million show up for work. Before the program was in place, everyonewas worried about the future—paying bills, losing jobs, etc. Net privatefinancial saving desires were, say, $1 trillion. No one wanted to spend. Nowwith 20 million new jobs and the certainty that you can find one reduces thesesaving desires. You go shopping. You feed your family. The private sectorstarts hiring, producing. GDP starts growing. You get recruited out of the ELRprogram into a hiring paying private sector job. You pay more taxes. Federalgovernment spending on ELR falls, its budget deficit falls into line with thelower net financial saving desires. The only planning you need by government isthe “real stuff”—create jobs. Govt does not need to try to hit the net savingdesires—that is done automatically.
Q3: Paolo. “thisalso means it is impossible for the aggregate saving of the nongovernmentsector to be less than (or greater than) the budget deficit”Take the”greater than” option. What about a nongovt. sector export surplus?Wouldn’t that add net financial assets to the nongovt. sector aggregate savingsabove the amount generated by govt deficits?
A: Yes, Americans might also save in foreign currencydenominated assets—ie UK pounds. Those can come from export surpluses. I was talkingabout domestic currency. But you are correct, in some countries the net savingdesire could largely take the form of foreign currency (ie in places where USDollars are desired).
Q4. Guest. Prof. Wray, On page 7 of “Waiting for the Next Crach: The Minskyan Lessons Wefailed to Learn”(http://www.levyinstitute.org/p…, you said Goldman Sachslet hedge fund manage Henry Paulson design sure-to-fail synthetic CDO’s. Didyou mean John Paulson? If I’m not mistaken, Henry Paulson was Sec of treasuryduring the GFC… Just checking, causeI’m sure John Paulson wants his credit for being one of the world’s premier**s****s.
A: Yes a helpful editor added the wrong first name. I thinkit is now corrected.
Q5: MamMoth, Dale, Neil, Samuel. Many questions and comments on exogenous vsendogenous.
A: In economics the distinction between endogand exog is used in three different senses: control, theoretical, andstatistical. Only the econometricians reading this care about the last one soI’ll leave it. In the control sense it means the govt can “control” thevariable: ie control the money supply, control the interest rate, control theprice level. MMT shares with the “endogenous money” or “horizontalist”approaches the view that the CB cannot control the money supply or bankreserves. Instead the CB must accommodate the demand for reserves. HOWEVER thesetheories were formulated back when the interest rate paid on reserves was zerobut the Fed’s target overnight interest rate was nonzero. Excess reserves drovethe market (fed funds) rate below zero so the Fed would have to drain reservesby selling Treasuries. But now the Fed has a near zero interest rate target(like Japan) and so can leave excess reserves in the system and pay 25 basispoints on them and the market rate remains near 25 basis points. So you could say that with QE the Fed“exogenously” increases bank reserves. There is an asymmetry, though, becausethe Fed can leave banks full of excess reserves but cannot leave them shortreserves—which would drive the market rate above the target. On the other hand,the CB’s target interest rate is clearly exog in the control sense: the Fed canset its target at 25 bp, or raise it at the next meeting to 150 bp. Finally,the control sense and the theoretical sense are related but not identical. Letus say the US had a fixed exchange rate and used the interest rate policy tohit the peg. We can say the interest rate is exogenously controlled (set by theFed) but it is not theoretically exog because the overriding policy is to pegthe exchange rate.