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MMP Blog 38: MMT for Austrians

In the past couple of weeks we turned to the question what should government do, and last week we discussed the concept of the public purpose.

Clearly, we want the economy to do a lot of things for us, and the non government sector(s)can accomplish much of that. Some of the non government provisioning is non-monetary—outside markets. For example, the unpaid work within the family.Much is provided from the “monetary production economy”—the part of the economy in which production begins with money in order to end up with more money. (Some readers will recognize the source of that—and we’ll have more to say in a few weeks.)

But while non monetary plus monetary production by the non government sector(s) can accomplish a lot, they cannot provide everything we want.

It can even be argued that as societies become richer and more developed (some even use the term “advanced” but that can be invidious) we develop “higher-order” needs and wants.

(I do not want to go into this here, but it could be argued that in moving from, say, a tribal society to a monetary capitalist society we will need much more provisioning from the center precisely because less will and can be done by kinship organizations. To put it simply, moving to a monetary economy inevitably puts more responsibility on the issuer of the money—the sovereign government.It is in a sense a two-pronged fork: monetary economies “advance”, creating more higher order wants and needs that can only be satisfied monetarily, and by the government that issues the money.)

If you look back at our discussion last week of recognized human rights it might be apparent that we need to look beyond the production within the household and the production by for-profit firms to ensure those rights. In other words, the“public purpose” may well expand.

In addition, if we take account of environmental sustainability considerations,the scope for the public purpose likely will expand. (Those familiar with the work of Karl Polanyi will recognize the relation to the argument about the“double movement”.  Capitalist development creates environmental problems that require a public response.)

Arguably the most contentious debate between left and right is over the best way to achieve the public purpose. As I admitted last week, there are some who would go so far as to deny the concept altogether and perhaps even a greater number who would deny most of the listed human rights. But let us proceed with our discussion here taking it for granted that there is some recognized public purpose. The point of contention is over the best way to provide for it.

Conservatives tend to argue that the government’s scope should be very narrow, even given agreement on the public purpose. They believe that households and firms can provide for most economic needs and wants. Government is needed in narrowly confined areas—such as police and military. There is often reference to the benefits of “free markets” and to Adam Smith’s notion of the invisible hand. Tobe very brief, this is the idea that individuals pursuing their own self-interest are guided “as if” by an invisible hand to do what is actually in the interest of society as a whole. The guiding is done by the market, and more specifically by prices that act as signals. If more lawyers are needed, their salaries are bid up in the market and students react by switching to the study of law. You all get the picture. It is a very nice metaphor.

There are two problems with the story. First, it is not really Adam Smith’s view. Second,economic theory has pretty much destroyed any hope that real world markets could possibly work that way. And I am not talking about Keynesian or other critical economic theory—I’m talking about economists who desperately wanted to“prove” that the invisible hand works in the proffered manner.

Again, I’ll be brief but let’s look at these two problems before moving on to the topic of MMT for Austrians.

Adam Smith and the Invisible Hand

One of the greatest scholars of Adam Smith, Warren J. Samuels, recently published a book on the invisible hand metaphor.  (Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics. New York: Cambridge University Press, 2011. xxviii + 329 pp. $95 (hardcover) ISBN: 978-0-521-51725-6.) It was reviewed by Gavin Kennedy (here: EH.Net (February 2012). All EH.Net reviews ar earchived at Since hand waves about the invisible hand and references to Adam Smith as the father of the notion are so commonplace, I want to quote extensively from Kennedy’s review.
Quote: “Smith did not”coin” the phrase. It was prevalent in classical times from Aeschylus through to St Augustine, and later, in numerous seventeenth- and eighteenth-century theological texts, sermons, plays (Shakespeare), poems, and novels (Defoe, Walpole), and in political rhetoric (George Washington). … Adam Smith used it only twice as a metaphor in his Theory of Moral Sentiments (1759)and Wealth of Nations (1776), and once in his History of Astronomy (1795,posthumous). After Smith, there was an absence of mentions of the invisible hand metaphor among economists to 1875 and near silence thereafter until it was rediscovered and re-invented into the “founding concept” of modern economics from the 1940s… Samuels discusses Adam Smith’s supposed use of the invisible hand in his political economy. …  Samuels’ conclusions in Essay 10 are best summarized by his question: “what is left of the invisible hand” (p.293) and by his answer: “There is no invisible hand as that term is used in economics.  Its continued use must at its base constitute an embarrassment.  Almost all uses of the term add nothing to substantive knowledge”.”

Quote: “Smith used the metaphor of “an invisible hand” to”describe in a more striking and interesting manner” their particular objects: it was the absolute mutual dependence of the “unfeeling landlord” on his serfs, servants, and tenants (‘no food, no labour’), and their mutual dependence on him (‘no labour, no food’), which mutual dependence led him to share his crops with them, unintentionally benefiting humanity through the “propagation of the species” (Theory Moral Sentiments,1759, p. 185); and it was the insecurity felt by some, but not all, merchant traders, that led them to prefer to invest in “domestick industry” (mentioned four times), rather than risk the “foreign trade of consumption”(Wealth Of Nations, 1776, p. 456), also unintentionally benefiting society by adding to domestic revenue and employment.  Smith’s use (History of Astronomy, 1795, p. 49) of the “invisible hand of Jupiter” simply states the pagan beliefs of Romans about their god, Jupiter, whom they believed (but never witnessed) cast his lightning bolts at humans.   In all three cases, it is evident that for Smith the “invisible hand” does not exist; it is an imaginary figure of speech and an imagined pagan belief.  We cannot see, but we can imagine; we may choose to believe or not to believe. The “invisible hand” “corresponds to nothing in reality,” it “contributes nothing to knowledge,” and is a “distraction and a diversion, (Samuels, p. 146).”

So what we actually see in Smith is use of the invisible hand to discuss the relation of the feudal lord to his peasants (obviously, this is pre-capitalism and hence pre-“market economy” as it is a relation based on visible force rather than the invisible hand of prices), in relation to his belief that there is a somewhat natural inclination to produce for domestic consumption, and finally to movement of heavenly bodies. None of these has anything to do with price signals and invisible hands leading to efficient allocations of scarce resources.

No wonder economists paid almost no attention to Smith’s notion of the invisible hand until after WWII!

Postwar Developments in General Equilibrium Theory

o be sure there had been an attempt from the 1870s to demonstrate the idea that markets would tend to generate a “general equilibrium”—even if it did not refer to Smith or the invisible hand.

Discussion of this topic can get quite difficult, but what conservative economists wanted to show it that “demand and supply” for all produced goods and services could be brought into equilibrium by flexible prices and wages. If every market is in equilibrium, where demand equals supply, we call that a general equilibrium.

I am simplifying but this is good enough for now. In any case, it turns out to be a very difficult thing to show and believe it or not requires higher mathematics. Indeed, it is so complex that proof of the existence of general equilibrium was not accomplished until the 1950s—some 80 years after the project began. And even then the results were extremely disappointing.

First, the conditions required to demonstrate existence of equilibrium (technically a vector of relative prices that eliminate excess demand in every market) require a very simple and unrealistic world. For our purposes it is relevant to note that the hypothesized world would never use money! (Students of economics also know it requires no time, no uncertainty, a Walrasian auctioneer, and so on. Essentially, you contract at birth for all transactions you will ever make over your entire life, with perfect certainty and no regrets.)

Second, it turned out that the equilibrium is neither unique nor stable. Indeed, it turns out that there are many equilibria, perhaps an infinite number, and we cannot say that any one is better than any other. And if we do not happen to be in equilibrium, market forces will not move us to one of the equilibria.

Pretty darned disappointing since the whole claim was that “free markets” would move us to equilibrium with prices signaling how best to allocate resources.

They won’t. At least we cannot demonstrate that they will.The “invisible hand” is completely impotent. Might as well have a dictator. Or a dictatorship of the proletariat. Or a coin toss. Or winner-take-all. Or any other method of trying to allocate resources. We cannot show that markets would do a better job.

Anyone who tells you that economics shows that the invisible hand “works” is a fool or a liar or confused. Plain and simple, rigorous economic theory shows no such thing.

(In 1926 Keynes wrote a great essay on “The End of Laissez Faire”; I won’t go through it in detail but what he argued is that no economist had ever accepted the notion that the free market “works”. He said that only political ideologues pushed that idea, an idea he thoroughly destroyed in his essay. However, in the last third of the essay he tried, and failed, to produce an alternative view. It took him ten years—until 1936—to create the alternative, what became The General Theory. It wasn’t until he formulated his theory of effective demand and addressed the “special properties of money” that he could counter the free market ideology.)

Now, why did I devote so much space to a discussion of the invisible hand? Because so many “free market marketeers” rely on the notion,and on the supposed authority of Adam Smith, to push their ideological agenda.

To be clear, the inability to demonstrate that an invisible hand “works” does not settle the issue. It does not in any way “prove” that “big government” is better than “small government”. It does not “prove” that the best way to ensure the public purpose is to rely on government rather than markets. And it does not demonstrate that we should adopt an expansive, progressive view of the public purpose. But it does make one highly skeptical of “invisible” hand waves about “free markets”.

Yet, it must be admitted that in truth, economics, alone,cannot answer those questions.

Let us now return to the topic at hand: can an Austrian adopt MMT?

MMT for Austrians

I am using Austrians as an example of those who prefer a narrow view of the public purpose and who believe that “free” markets can accomplish most of the public purpose. Hence, the role for the government should be quite limited. Obviously, Austrians are not the only conservatives who adopt these views. However, they provide a reasonably consistent and coherent alternative to both orthodox and heterodox approaches to economics.

(Some include Austrians within heterodoxy, and there are some affinities—on topics like time, expectations and uncertainty. While I recognize similarities on those dimensions, most of the rest of heterodoxy accepts elements of Keynesian, institutionalist and/or Marxist thought that are anathema to Austrians. Hence I put Austrians in their own camp. For the purposes of the discussion that follows, this is not really important.)

Austrian views on government are well-known. Further, Austrians are frequent commentators on MMT blogs, and many have asked whether Austrians can accept MMT.

I would assure Austrians that MMT is not just for advocates of big government. Indeed,I have always been surprised that some of the most vehement critics of MMT are some of the libertarians and Austrians.

Relatedly, often when there is an MMT blog, the comments are dominated by conspiracy theorists, haters of government, and goldbugs who are certain that MMT-ers ar eunited in their effort to ramp up government until it consumes the entire economy. Some Austrians agree on these critiques. This section will attempt to put those fears to rest.

First, on one level, MMT is a description of the way a sovereign currency works. Love it or hate it, our sovereign government spends by crediting bank accounts. Over the past 20 years, MMT has investigated, analyzed, and documented the sordid operational details. We can lecture for hours on the balance sheet manipulations involving the Treasury, the Fed, the primary security dealers, the special depositories, and the regular private banks every time the Treasury buys a notepad from OfficeMax. We did the work, so you our Austrian colleagues do not have to do it. And believe me, you do not want to do it. You can skip directly to the conclusion: “Yes, government spends by crediting bank accounts, taxes by debiting them, and sells bonds to provide an interest-earning substitute to low-earning reserves.”

A few libertarians and Austrians now get this, although instead of thanking us for a job well done, some of them immediately attack MMT for explaining how things work. Now, why would they do that? Because they fear that if we tell policymakers and the general public how things work, democratic processes will inevitably blow up the government’s budget as everyone demands more from government—that is for precisely the reason that Samuelson advocated that “old time religion, without which off we go to Zimbabwe land, with hyperinflation that destroys the currency.

Ok, understood.

But MMT-ers fear inflation, too. Indeed, “price stability” has always been one of the two key missions of UMKC’s Center for Full Employment and Price Stability (

(I note that my friend Edward Harrison has long pushed MMT at his own blog, even as he vocally disagrees with many of us on the role of government. So there are exceptions who recognize that MMT is useful for economists of all persuasions.)
To be sure, many libertarians and Austrians believe that the only foolproof method for avoiding inflation is to go back to gold. Again, fine. But don’t criticize our labor “buffer stock” scheme for its political infeasibility! Going back to the gold standard is even less likely. (I’d place my bet on socialist sharing of undergarments as more likely than a return to gold.)

Anyway, we (also) do not want black helicopters flying around dropping bags of cash; and we (also) oppose government “pump-priming” demand stimulus—the libertarians and Austrians and even Milton Friedman are correct in their argument that this would generate inflation.

Come to think of it, MMTers have more in common with Austerians than with “military Keynesianism” that supposes that high enough spending on the defence sector will cause full employment to“trickle down”. Most MMTers believe we’d get intolerable inflation before the jobs trickle down to Harlem.

In any case it is true that there is a second level to MMT: we use our understanding of the way money works to bring rational analysis to government policy-making. Since involuntary default is, literally, impossible for a sovereign government, we quickly move beyond fears about government deficits and debt ratios and all the other nonsense that currently grips Washington.

Can we “afford” full employment? Yes. Can we “afford” Social Security? Yes. Can we “afford” to put wine in all the drinking fountains? Yes.

The problem IS NOT, CANNOT BE about affordability. It is about resources.

Unemployment is easy: by definition, someone who is unemployed is available to hire. So government can put them to work. (See the next blog series for a plan.)

Social Security is a little more difficult: can we move enough resources to the aged (plus their dependents, and people with disabilities) so that they can enjoy a comfortable, American-style, life? On all reasonable projections of demographics and US ability to produce, the answer is yes. The projectionscould turn out to be wrong. But if they do, affordability still will not be the problem—it will be a resource problem.

Finally, wine in drinking fountains? There probably is not enough fine wine, but we could probably fill all the drinking fountains with cheap French wine. If we run out, Missouri can fill the gap (for those who do not happen to live in the US Midwest, the big MO before prohibition was second only to NY in wine production.)

Again, it is a resource problem and if we convert the American and Canadian prairies to wine production we could even resolve that one.

Perhaps the most important policy pushed by most MMT-ers is the Job Guarantee/Employer of Last Resort proposal. This provides a federal-government funded job to anyone who wants to work, at a uniform, basic compensation (wages plus benefits).

Many of our libertarian/Austrian fellow travelers seem to hate this program, again for unfathomable reasons. I suspect that they have misinterpreted this to be some kind of Big Government/Big Brother program based on a weird combination of force plus welfare.

The claim is simultaneously that it “forces” everyone to work, and that it also pays everyone for not working.
Actually, it is a purely voluntary program, only for those who want to work. Those who will not work cannot participate.

Libertarians and Austrians ought to love it. It is not Big Brother. It is not even Big Government. The jobs do not have to be provided by government at all. No one has to take a job. It is consistent with, I think, the most cherished norms of freedom-loving libertarians and Austrians.

So to sum up:

1. MMT is consistent with any size of government. It can be a small libertarian government if desired. But it issues a sovereign floating currency. It supports the currency by imposing a tax payable in that currency.

2. Job Guarantee/Employer of Last Resort is also consistent with any size of government. If you want a big private sector and small government sector, keep taxes and government spending low. That frees up resources to be used by the big private sector. But you will need the JG/ELR to take up the labor resources the private sector cannot fully employ.

3. JG/ELR can be as decentralized as desired. I think there are massive incentive problems if you have federal government pay wages of for-profit firms. So I would have federal government pay the wages in the program but have the jobs actually created and managed by: not-for-profits, local government, maybe state government, maybe only as a final last resort the federal government. Argentina experimented with cooperatives and they looked to me to be highly successful.

4. The problem with a monetary economy (you can call it capitalism if you like) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). We scale this up to our modern almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc) and we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never (never has) provide full employment. ELR/JG is a logical and empirical necessity to support the private sector. It is a complement not a substitute for private sector employment.

5. How can the belief that all ought to work, and contribute to society, rather than lay about and collect welfare be called socialism? How can the offer of paid work be called slavery or fascism? It merely offers paid work for those who want to work, to contribute to society.It enhances choice and freedom.

Trouble in Euro Zone Paradise?

By Marshall Auerback

The Europeans evidently thrive on instability and the ongoing threat of systemic risk. There is nothing else to explain the renewed hardline stance adopted by both Mario Draghi of the ECB and the German government on fiscal policy, just as the markets appeared to be calming down again.

In response to the question as to whether Greece was a “one-off”, or a deal which would presage similar claims on the part of the other Mediterranean debtor nations, there has been a growing prevailing belief that either the terms demanded of Greece would be so punitive (“pour decourager les autres”) or that, if Greece were to default, a sufficiently large firewall would be constructed by the Troika to ensure that the contagion wouldn’t extend to other countries. This is what Greek economist Yanis Varoufakis has called “cauterize and print”:

Germany’s belated epiphany is that, without a major redesign of the euro architecture, a number (>1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin’s conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system.[2] The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed.

Well, the 2nd leg of that strategy seems to be falling apart, even as Greece is slowly being severed from the euro zone (because let’s be honest: Greece has insincerely accepted yet more impossible conditions for implementing another unworkable fiscal adjustment plan, which suggests that both sides are simply playing for yet more time). 

In the meantime, the UK’s Daily Telegraph has reported that Germany’s ruling parties are to introduce a resolution in parliament blocking any further boost to the EU’s bail-out machinery, vastly complicating Greece’s rescue package and risking a major clash with the International Monetary Fund. According to Ambrose Evans-Pritchard

“European solidarity is not an end in itself and should not be a one-way street. Germany’s engagement has reached it limits,”said the text, drafted by Chancellor Angela Merkel’s Christian Democrats and Free Democrat (FDP) allies.

“Germany itself faces strict austerity to comply with the national debt brake,” said the declaration, which will go to the Bundestag next week. Lawmakers said there is no scope to boost the EU’s “firewall” to €750bn, either by increasing the new European Stability Mechanism (ESM) or by running it together with the old bail-out fund (EFSF).

In one sense, the sentiment behind the draft is right. European solidarity should not be a one-way street. But that’s exactly the nub of the issue: As with all of the “rescue plans” introduced thus far, the latest does not allow the Greek government to help its people cushion the blow from 5 years of depression, but simply provides a mechanism to bail out banks and bondholders. Invoking Aesop’s famous fable about the ants and the grasshoppers, Yanis Varoufakis describes the crux of the problem:

“The problem (for those seeking to understand a Crisis) with attractive allegories is that the latter can be as much of a help as a hindrance. In this post I wish to argue that Aesop’s timeless tale, however appropriate it may seem at first glance, contributes more to Europe’s current problems than to their solution. My reason is simple: The ants and the grasshoppers are to be found in both Greece and in Germany, in the Netherlands and in Portugal, in Austria as well as in neighbouring Italy. But when we assume that all the ants are in the north and all the grasshoppers in the south, the remedies we introduce are toxic. 

Yes, it is true, the Crisis has placed a disproportionate share of the burden on the back of Europe’s ants. Only Europe’s ants are not exclusively German or Dutch or Austrian; and nor are the grasshoppers exclusively Greek, Iberian or Sicilian. Some ants are German and some are Greek. What unites Europe’s ants, north and south, east and west, is that they struggled to make ends meet during the good times and they are struggling even more now during the bad times. Meanwhile, the grasshoppers, both in the north and in the south of Europe, lived the good life before the Crisis and are doing fairly well now, keen as always to privatise the gains and distribute the pain (to the ants).”

That message evidently has not got through to either the Merkel government or the Bundesbank. The proposed draft of Merkel’s government is a political response to mounting German frustration at the current direction of European Union economic policy. There is, however, no corresponding appreciation that her coalition is fomenting this very anger through the ongoing perpetuation of a failed fiscal policy response which, as Varoufakis notes, continues to rewards lazy grasshoppers in both Germany and the south, whilst making all of Europe’s ants work harder and harder for less and less. It is perfectly understandable as to why ordinary German citizens, as well as those in other parts of the EU, should question why all of their hard work is not translating into a better life, when “their money” is actually going down a sinkhole to fund insolvent countries given no means of growing themselves out of debt trap dynamics.

By the same token, left without the lever of a countercyclical fiscal growth policy, the ECB has responded somewhat grudgingly with an escalating and rapidly expanding balance sheet, which has the Weimar hyperinflationistas up in arms, but at least has prevented the whole system from blowing up. Even Germany’s erstwhile allies, the Finns and the Dutch, are prepared to countenance an increase in the EU firewall to €750bn as they are beginning to appreciate the dangers of heading non-stop toward the iceberg.

But while Germany’s erstwhile allies are backing off their hardline fiscal austerity somewhat, the IMF has hinted that it may cut its share of Greece’s €130bn (£110bn) package and warned that its members will not commit more in funds to ring fence Italy and Spain unless Europe itself beefs up its rescue scheme. The Fund has argued (rightly) that the Europeans have more than adequate resources to create a sufficiently large firewall, and that further recourse to the IMF is, in fact, totally unnecessary.

The US Treasury seems to agree with the IMF’s assessment, already indicating that it is unprepared to contribute more to the Fund’s resources. The Treasury is also right, given that the ECB has the capacity to create infinite euros to deal with any looming solvency issues. 

We therefore have the makings of a giant game of chicken: The IMF is nervous about its share of Greek bailout and its broader EU exposure And the Germans won’t expand the firewall without a bigger IMF contribution because they want the IMF as their prime counterparty risk, NOT the ECB. This looming impasse probably also explains why ECB President Mario Draghi is starting tosound so Prussian again by pushing the line that the Mediterranean periphery has to cut living standards because it has been living beyond its means. While acknowledging that “there has been greater stability in financial markets” over the past several weeks, Draghi completely ignores the constructive role played by the ECB in creating this stability and instead ascribes it all to renewed commitments of fiscal discipline on the part of all of the euro zone’s members:

“Many governments have taken decisions on both fiscal consolidation and structural reforms. We have a fiscal compact where the European governments are starting to release national sovereignty for the common intent of being together. The banking system seems less fragile than it was a year ago. Some bond markets have reopened.”

The new head of the ECB is, we presume, an intelligent man, so one can only assume that he is being disingenuous in the extreme here. The renewed stability in the financial markets has NOTHING to do with fiscal consolidation and everything to do with the expansion of the ECB’s balance sheet. The consolidated assets of the European system of Central Banks are now 4.4 billion euros or $5.7 billion. In effect, the consolidated ESCB balance sheet has grown exponentially, and its increase over the last 6 months is almost equal to the entire increase in the Fed’s balance sheet over the last several years.

In contrast to his public statements suggesting institutional and legal limits in terms of what the ECB cannot do, Draghi has been using the bank’s balance sheet far more aggressively in order to prevent a banking meltdown and combat the EMU’s ongoing solvency crisis (a product, as we have indicated many times before, of the euro zone’s flawed financial architecture). And he has done so whilst (until this point) keeping Germany onside. Of course, one could argue that in reality all the ECB is doing is providing lending to the likes of Italian (or Greek, or Spanish) banks so they can pay German exporters and transfer deposits fleeing to Germany (or Switzerland)!

That perverse effect aside, Draghi has hitherto been able to carry out his operations with the quiescence of the Germans, who have presumably remained relatively quiet, whilst the Greek negotiations were being conducted (although that didn’t stop Finance Minister Wolfgang Schauble from lobbing a few rhetorical grenades via the press, hinting that it might be better if Greece were to default outright rather than take the deal on offer). But nobody else has said anything for fear of jeopardizing the deal on the table (which will almost certainly become a source of fresh contention for the other Mediterranean periphery countries, as they will almost certainly begin to ask for comparable haircuts on their own debts).

What is the source of this German angst? They worry, particularly the Bundesbank, that they have a credit with the ECB, not with the PIIGS countries. But they are concerned that the ECB now has low-quality collateral so this is risky if the ECB ceases operations (although why this should happen is unclear as the ECB can never run out of euros).

Hence the BUBA desire for the IMF, as a counterparty, even though the IMF itself is a political fig-leaf, given that the Fund’s “special drawing rights” are drawn directly from each of the central banks. In other words, the IMF gets its euros from the ECB, although by standing in the middle of the transaction, Germans can happily pretend that their counterparty risk lies with the IMF, and that they will therefore get repaid (and if this means involving the Fed, the Bank of Japan, Bank of China and Bank of England, so much the better).

The IMF, under Christine Lagarde, is evidently getting tired of playing this game, so it has refused to ask for more funding to deal with the euro zone’s ongoing crisis, in effect putting the ball back into Mr. Draghi’s court, who in turn has to deal with the Bundesbank. Hence, the renewed public relations campaign on behalf of “responsible” fiscal policy and the “new and improved” Stability and Growth Pact:

[I]t is encouraging to see that important steps have recently been taken … strengthens both the preventive and the corrective arm of the Stability and Growth Pact and establishes minimum requirements for national budgetary frameworks … a new ‘fiscal compact’ with a view to achieving a more effective disciplining of fiscal policies. Major elements of the fiscal compact are the strengthening of the role of the balanced budget rule and a further tightening of the excessive deficit procedure. It is of utmost importance, that the rules are now fully implemented in the spirit of this agreement. All these measures aim to ensure that individual countries live up to their responsibilities to bring their public finances in order.

As Bill Mitchell wryly observed: “The EMU is in the worst downturn for 80 years and its only ‘response’ is to make it worse because it has introduced voluntary rules that require nations in deep aggregate demand shocks to inflict further spending cuts.” Austerity in the euro zone has consisted of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination has resulted in a decline in sales, which translates into fewer jobs and reduced private sector income, which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.

My bet is the IMF ultimately folds and commits more, because even the Fund recognizes the stupidity of imposing pro-cyclical fiscal policy in the midst of a recession, but not until the European markets begin to fail again and systemic pressures become more acute. Either way you have to congratulate the Germans for an exceptional game…with a weak hand they have everyone running around while they” mercant” their way to growth and others support the casualties they throw on the fire….

Responses to Comments MMP Blog 37: The Public Purpose

This week we’re looking at the public purpose. Clearly, liberals and conservatives (used in the American sense of those terms) disagree on what government ought to do. Still, most people do see a substantial role for government to play. And most democratic nations have signed on to the UN Charter on Human Rights. At least one commentator rejected most of the rights I listed on Monday. And one presumes that many of the supporters of the most conservative Republican candidates campaigning in the US would join in bashing the UN Charter. Heck, one of the candidates seems to suggest that just knowing a foreign language makes one unfit to run for US President! Many Americans think that anything that comes from the UN is suspect.

Warren Mosler: Because We Think We Can Be the Next Greece, We’re Turning Ourselves Into the Next Japan

Why MMT is Like an Autostereogram

By Isabella Kaminska
(Cross-posted from FT Alphaville)

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.

And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.

This one view makes all the difference. Unlike the first viewpoint, which assumes that debt and money came out of trade, MMT believes debt, or more specifically monetary credit, pre-dates trade. Coinage and all forms of monetary token are thus just a physical representation of what is actually an innate credit system. In and of itself, money — the token — has no value. And this is largely why a fiat monetary system can work. The monetary unit doesn’t need to be a ‘valuable’ piece of metal. It’s who guarantees the token that matters. In modern times, that means the state.

What’s more, suppress the credit system (which in the case of the United States is represented by the government’s debt) and inevitably you suppress an economy’s ability to trade. And this, by the way, is why MMTers believe government debt can never really constrain an economy whose government controls the official currency. Furthermore, this is also why in a time of crisis they believe you need moregovernment guarantees, not less — hence their support of higher debt limits.

If one chart sums up the theory best we think it’s this one from Stephanie Kelton:

What the chart demonstrates beautifully is the symmetry that applies to the balances of a centrally controlled credit system.

That’s to say, for the US domestic private sector to carry a positive balance, the government must in effect carry a negative balance.

This makes a lot of sense if you think of the United States as representing a completely self-contained credit system, where only one official government controlled currency is allowed (and no foreigners can buy US debt). If the economy is to be kept well lubricated and functioning, the government must be willing to take on more debt on behalf of its citizens when the situation calls for it. Think of it as the private sector positve balances (or savings) representing claims on goods and services which haven’t as yet been redeemed. If not for the government’s negative balance, these claims would be represented by billions of private negative balances instead — representations of debts/credits between individuals. Money earned, and taxed, but not yet redeemed. Everything from your right to redeem a dozen baked rolls from your baker one day in the future, to your right to claim 10 days worth of medical services from your local doctor.

Allowing the government to take on those debts/credits (and really we’re talking more about credits) in place of your counterparties allows for claim standardisation. This not only ensures claims can be redeemed more quickly, having a greater wealth effect on the economy, they can also penetrate the system more completely. Furthermore, they are given a state guarantee in place of a private guarantee.

No more is there a risk that the doctor’s services you earned (by fixing the boiler at the medical centre) are lost because the doctor in question has passed away. You will still be able to redeem the services due to the intermediary role played by the government. Your claim is now against the government, not the doctor. You can thus redeem it with anyone who feels inclined to settle transactions with government paper instead of private paper. And why wouldn’t they? Everyone, after all, has a use for official government currency since it’s the only payment unit which will be accepted for the settlement of tax bills — a.k.a the government’s redemption of the claims it has against you.

In a way, the government, via its debt issuance and willingness to take on negative balances, acts as the ultimate central counterparty, clearer and intermediary to the trillions of transactions and trades that take place in its economy every day. The system’s claims against counterparties (of lesser credit quality than the government) are transformed via the financial framework into claims against the state. This is achieved either by convincing those with positive claim balances into signing them over to the state (via debt auctions) or by having the government “spend” on services directly, creating entirely new claims in the process that then circulate through the system.

Taxes, meanwhile, reflect the government’s own ability to redeem the claims it holds against you, generated in the first place by spending on your behalf.

The budget surplus issue

Of course, if the government runs a budget surplus, and receives more tax receipts than it spends — things can get tricky. Some believe surpluses are actually the equivalent of eating away at the stock of wealth in the system. That’s to say, worse than mere monetary tightening.

That’s largely because there are limits to what the government can do with the surpluses. For example, it can use them to pay down existing government debt (by buying back securities), or to borrow less in the new budget year. Alternatively it can offer more tax cuts, or deploy the surpluses into foreign or private investment securities (a la China).

This, though, is dangerous territory for an economy which is already suffering from ashortage of safe assets already (safe stores of value). That is to say, an economy which has generated more claims than it is currently prepared to redeem.

John Carney at CNBC’s Net Net, for example, has explained the problem as follows :

More importantly, even when it isn’t wasted on stupid government projects, the surplus itself is a waste. If it bothers you that the government spends tax money on bridges to nowhere, you should apoplectic when the government takes tax money and spends it on nothing at all. That, of course, is exactly what happens when our federal government taxes more than it spends. The financial assets of the people are simply confiscated.

But more to the point, if the government runs a surplus, it stands to reason that the private sector has to take on a negative balance in exchange, (see Kelton’s chart once again).

Though, if non-domestic claims against the government enter the frame things get even more complicated still. The debt which was originally intended to help mediate the credit transactions of its own citizens is sucked out of the system entirely, forcing the private sector to mediate transactions with non-government securities (and thus more risky guarantees) instead.

The more demand there is for US government securities from abroad, especially in an environment where the government is not willing to generate additional debt, the more the private sector’s negative balance is forced to rise to compensate.

This, by the way, is a situation we are now arguably seeing in Australia.

The MMT response, of course, would be simple. Issue more government debt and let the government take the negative balance, not the private sector.

That’s not to say, however, that there is never a constraint to debt.

It is possible that the state ends up guaranteeing many more claims than are actually possible to redeem — like with our doctor’s example above, because the counterparties who issued the credits are no longer around to make good on them. In that sense a fair share of the claims circulating through the system routinely represent a surplus. As that share rises, the purchasing power of active claims is reduced, since there are more claims than available redemption options. This will naturally be inflationary, and calls for the government to limit the amount of credit stock in the system, which can be achieved by taxation.

So the question is, which situation are we in now? One where there are more claims than redemption options (capacity to satisfy claims) — thus the rush for safe stores of value, of which there are not enough to guarantee everyone’s claims — or one where there is enough capacity to match claims, but not enough government credit to lubricate the system?

Hard to say, really (presuming you buy the MMT view in the first place).

The Amazing Vanishing Act: Accounting Control Fraud Disappears from the Regulatory Lexicon

Criminologists know that accounting control fraud causes greater financial losses than all other forms of property crime – combined.  Some of the world’s best economists, George Akerlof and Paul Romer, praised the S&L regulators’ early recognition of these frauds and set out a formal economic theory of accounting control fraud (“Looting: the Economic Underworld of Bankruptcy for Profit”).  They ended their 1993 article with this paragraph, in order to emphasize its importance.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself.”

The primary reasons that accounting control fraud can produce catastrophic losses are the seeming legitimacy of the firm, the supreme status and respectability of the CEO leading the fraud, the fact that accounting control fraud is a “sure thing” (Akerlof & Romer 1993), the ability of control fraud to hyper-inflate bubbles, allowing the fraud to persist for years and magnify losses, and the paradox that the optimal means for a fraudulent CEO to loot “his” bank is to cause the bank to make exceptionally bad loans. 

The last element is so counter-intuitive that despite the accounting control frauds’ dominant role in driving the S&L debacle and the Enron-era accounting control frauds many people cannot really believe that elite CEOs would loot “their” banks despite the many felony convictions of the elite CEOs that drove the two predecessor crises.  

“Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.”

Wagner is so befuddled that he thinks that he cannot keep his pronouns straight in the same sentence.  “They” is the fraudulent CEO.  The fraudulent CEO loots “his” bank.  The bank is “themselves” in Wagner’s bewildered sentence.  The CEO is not looting himself when he loots the bank.  Wagner is so confused that he assumes away the existence of insider fraud.  Sacramento is one of the epicenters of mortgage fraud by some of the largest accounting control frauds, and it is no surprise that they have been able to commit their frauds with impunity.

The national commission that investigated the causes of the S&L debacle found:

“The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures…. [E]very accounting trick available was used…. Evidence of fraud was invariably present as was the ability of the operators to “milk” the organization” (NCFIRRE 1993).

The fraud “recipe” for a lender engaged in accounting control fraud has four ingredients:
  1. Grow like crazy by
  2. Making bad loans at a premium yield while
  3. Employing extreme leverage, and
  4. Providing grossly inadequate allowances for loan and lease losses (ALLL)
Understanding the second element is essential to effective financial regulation and prosecution.  Requiring sound underwriting is the best, no cost means of preventing the worst bank frauds.   Making enormous numbers of bad loans requires fraudulent banks to suborn internal controls and underwriting.  The bank operates in a manner that makes no sense for an honest lender.  (See my earlier writings on “adverse selection” and the resultant “negative expected value.”)  Understanding why the recipe is a “sure thing” (the bank will report superb, albeit fictional, income and the controlling officers will, promptly, be made wealthy) is essential to effective regulation because the regulator must treat the fiction as real.  

If there was one agency that should have understood the fraud recipe, it was the Office of Thrift Supervision (OTS).  The Federal Home Loan Bank Board (OTS’ predecessor) first identified it, wrote about it, trained its staff, trained the FBI and the Justice Department, and used our understanding of the recipe to identify, close, sue, sanction, and convict the frauds. 
By August 1983, the Bank Board had detailed written examination manuals that explained much of the accounting control fraud dynamic.

Regulatory Concerns
In summary, incentives to report higher earnings, the nature of assumptions used in certain transactions, like securitizations, and improper reporting in general may affect reported earnings.  Examiners should be alert to the regulatory concerns cited throughout this section, and to the following additional regulatory concerns as well:

• Management may use gains to further leverage the balance sheet. You should consider the quality of capital supporting asset growth to the extent that management based gains on optimistic assumptions or that the value of the retained interest is highly sensitive to accelerating prepayments or declining asset quality.

• Management compensation or dividend payouts may be excessive, and dependent on earnings.  Associations often tie compensation and dividends to reported profits. To the extent that reported profits are overstated, these payouts can dissipate assets and capital.

• Management may ignore credit quality. The incentive for profits can override attention to quality of earnings. The potentially significant profit that management can generate by gain-on sale accounting creates a strong incentive to produce originations, often with little attention to credit quality.

Remember, this was written nearly 30 years ago.  We have known for a very long time that modern executive compensation plus deregulation created an intensely criminogenic environment that could lead bank CEOs leading accounting control frauds to make epic amounts of bad loans in order to optimize fictional reported income and the CEO’s compensation. 

Unfortunately, OTS retreated to the dark ages as it came under the sway of anti-regulators influenced by theoclassical economists who were ignorant of the criminology, regulatory, and economics literature about control fraud.  These economists were unaware of how central underwriting is to lenders’ success.

Clinton administration economists “knew” that a lender would never deliberately make a bad loan.  They knew that accounting control fraud did not exist – even though it had so recently devastated the S&L industry.  The June 20, 2000 HUD/Treasury report on lending abuses made explicit this claim, which ignored Akerlof & Romer, criminologists, and OTS’s (a bureau of Treasury) contrary findings,.

“In most respects, lending in the subprime mortgage market follows the same principles as lending in other markets.  Basic economic theory, not to mention common sense, tells us that a lender will only lend money to a borrower if the lender expects to be repaid. That repayment has two components: the return of the original amount lent (the principal), and compensation for the opportunity cost of lending the money and for taking the risk that the loan is not repaid as promised (the interest rate charged).  While a lender will not make a loan unless he or she expects to be repaid, clearly not all borrowers present a lender with the same risk of default.”

On January 17, 1996, OTS’ Notice of Proposed Rulemaking proposed to eliminate its rule requiring effective underwriting on the grounds that such rules were peripheral to bank safety.

“The OTS believes that regulations should be reserved for core safety and soundness requirements.  Details on prudent operating practices should be relegated to guidance.
Otherwise, regulated entities can find themselves unable to respond to market innovations because they are trapped in a rigid regulatory framework developed in accordance with conditions prevailing at an earlier time.”

This passage is delusional.  Underwriting is the core function of a mortgage lender.  Not underwriting mortgage loans is not an “innovation” – it is a “marker” of accounting control fraud.  The OTS press release dismissed the agency’s most important and useful rule as an archaic relic of a failed philosophy.

“By getting away from ‘cookie cutter’ and ‘one size fits all’ regulations, we’re giving thrifts more flexibility to tailor their operations to better meet the needs of their customers,” said John Downey, executive director, Supervision. “Enhancing flexibility and reducing paperwork will hopefully make the lending process easier for both savings institutions and their customers,” he noted.

“We believe we can simplify our rules and give thrift management more flexibility without jeopardizing the safety and soundness of thrifts’ lending and investing operations,” said Carolyn Buck, OTS chief counsel. “We are eliminating numerous picky details from the regulations, while leaving fundamental safety and soundness constraints in place,” she said.

The OTS underwriting rules imposed the minimum, not the optimal, underwriting processes that a prudent lender would follow.  It imposed no costs on honest lenders.  Any prudent lender should have done considerably more than was required under the rules. 

OTS was not unique.  The Clinton administration was in thrall to the “Reinventing Government” movement, which asserted that government was largely a failure and needed to be radically altered to embrace purportedly superior private sector practices.  Vice President Gore’s passion was pushing the reinvention of government.  (Then Texas Governor Bush was shared Gore’s passion.)  The scholars pushing reinvention claimed that their approach would invigorate regulation.  Their assumption was that CEOs were good people who wanted to do the right thing but were driven to despair and rebellion against bureaucratic restrictions that prevented them from doing the right thing and demonized them as bad guys.  The scholars wanted dramatically reduced regulation, regulations devised with the active participation of industry partners, greatly increased privatization, far less enforcement and fewer sanctions (which were said to only build a climate of business resistance), and a service mentality for the regulators (we were ordered to refer to the S&L as our “clients” and directed to always think of them as clients).   

The Clinton administration thought so little of the OTS that he left an economist in charge of it on an “acting” basis for many years.  The economist was not evil, but he inherited an industry that had been scoured of its control frauds and an economy that had swung into recession.  The Clinton administration wanted vastly less regulation of lenders and OTS Acting Director Fiechter was happy to deliver an anti-regulatory policy that he substantively supported.

“In summary, after the lifting of statutory requirements for mortgage loans in 1982, regulatory requirements were lifted as well.  The federal regulators relied on bank management to ensure sound operations, and on consumers to protect themselves against abusive loan practices [p. 161].

Regulators expected that market-­based decisions would lead to innovative loan products, which would maximize availability of credit and which practices.  Lender self-­interest, bounded by the legal mandate of “safety and soundness,” was relied upon to ensure safe offerings.  Consumer self-­interest was also relied upon to weed out unsafe products and practices [p. 163, footnotes omitted].”  

Di Lorenzo, Vincent, “Unsafe Loans in a Deregulated U.S. Mortgage Market” (2009). Pace Law Review. Paper 633.

Di Lorenzo misses the period in which OTS and its predecessor agency the Federal Home Loan Bank Board, rejection of this theoclassical dogma allowed us to prevent the debacle from becoming a national financial crisis and allowed us to prosecute the elite frauds.  He is, however, certainly correct about the overall triumph of theoclassical dogma (and the Reinventing Government movement, which he does not discuss). 

The single most destructive deregulatory act, ironically, was contemporaneous with Akerlof and Romer’s hopeful conclusion in 1993:  “now we know better” – and can use that knowledge to prevent future crises.  The 1993 deregulation was “bound to produce looting,” which demonstrated that economists never “knew better” and our successors as regulatory leaders no longer “knew better.”  In 1993, the federal financial regulatory agencies adopted an interagency rule junking their loan underwriting rules and substituting deliberately unenforceable guidelines.  This is the rule change that allowed fraudulent liar’s loans.  It was adopted only two years after we (OTS West Region) forced the end of S&Ls making liar’s loans.  I do not want to overstate the impact of the rule change.  Liar’s loans were overwhelmingly made by uninsured lenders.  OTS, however, was supposed to regulate several of the largest originators of liar’s loans – Countrywide, WaMu, and IndyMac.  The Federal Reserve’s anti-regulatory dogma was far more destructive because only the Fed had statutory authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to stop all lenders from making liar’s loans.

OTS was the last of the federal regulators to fully drink the anti-regulatory Kool-aid in October 2006.  It junked its underwriting rules, claiming that it was doing so to comply with the Reinventing Government initiatives and laws.  OTS explained how its policy process relied on input that came exclusively from the industry, without even feeling the need to defend it.

“OTS also sought industry input regarding staff’s initial recommendations through an industry focus group meeting among seven thrift representatives, an industry trade association and OTS staff.”

When the S&Ls, rather than the people, are your “client”, it makes sense to meet only with the industry so that one can fulfill their desires. 

“OTS’s objective in removing the detail from some regulations and relying on a more general set of regulations and safety and soundness standards is to allow institutions greater flexibility in their lending and investment operations.” 

Banks gain exceptional “flexibility” when a regulator junks enforceable rules and replaces them with unenforceable guidelines. The industry, however, had a practical concern. OTS still had many examiners who knew that the guidelines were “bound to produce looting.” The danger was that the examiners would try to make the guidelines effective. The OTS, therefore, assured the industry that it would make sure it would not allow such an act. 

“OTS is also sensitive to commenters’ concerns regarding the potential for examiners to treat guidelines as binding regulations. OTS will emphasize the proper interpretation of supervisory guidance in its examiner training programs to ensure that guidance is not treated in the same manner as binding regulations.” 

The industry demanded even greater protection from regulation, raising the fear that the states might fill the regulatory gap left by the OTS and regulate federally chartered S&Ls. The OTS was happy to allay that fear, by making explicit its intent to preempt any protective state rule: “the agency still intends to occupy the entire field of lending regulation for federal savings associations.”

As late as 2004, the OTS examination guide provided this warning and mandate about inadequate records. Of course, the agency’s leadership no longer supported the guidance. Given what we know about the endemic nature of record deficiencies in the loan origination and foreclosure contexts, consider how harmful anti-regulatory leaders are.

Incomplete or Inaccurate Records
Regions should immediately take enforcement action if an association’s books and records are incomplete to make an examination impossible or if they do not provide complete and accurate details on all business transactions. The caseload manager (or equivalent) should promptly meet with the association’s board of directors, discuss the problem, and require prompt corrective action. If the association does not correct the deficiency, the caseload manager should refer the matter to OTS’s Regional Counsel for initiation of cease-and-desist proceedings.

You should be particularly alert to violations of Part 562 and § 563.170(c), as the presence of incomplete and inaccurate records historically is evidence of severely deficient operating standards and a resultant deteriorating financial condition. 

The federal banking agencies’ anti-regulatory leaders and economists drummed into their staff the fictional claim that “basic economic theory” and “common sense” proved that the CEO would never lead an accounting control fraud. The regulatory agencies, therefore, made zero criminal referrals against the massive frauds that specialized in making liar’s loans – loans that the lenders’ CEOs did not expect to be repaid. We are left with the myth of the Virgin Crisis, conceived without sin.

Bill Black is the author of The Best Way to Rob a Bank is to Own One (now translated into French as Une fraude presque parfaite : Le pillage des caisses d’épargne américaines par leurs dirigeants with a new preface from the French Jurist Jean de Maillard and a new chapter on the ongoing financial crisis. Paris, France: Charles Léopold Mayer. (January 2012)). Bill is an associate professor of economics and law at the University of Missouri-Kansas City. 

He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @WilliamKBlack

MMT Had a Banner Day

By Mitch Green

Via Animals Explain Economics

MMT received some love from the mainstream press today.  WashPo ran a story titled, “You know the deficit hawks.  Now meet the deficit owls.” via Ezra Klein’s Wonkblog.  Jared Bernstein, Dean Baker and Kevin Drum have each responded with a few words regarding their take on MMT.  For the initiated, this comes as a welcome surprise:  First they ignore you, then they ridicule you, then they run a story about you in the Washington Post.

Every now and again the planets align, and we are presented with an opportunity to do what just moments earlier seemed out of grasp.  There is now space for MMT to influence policy debates beyond the fringes of the blogosphere.  The time is ripe to clarify and strengthen MMT, especially given that as it spreads through new channels we are bound to encounter misinterpretations of our central positions.

It is also important to bear in mind that as MMT spreads beyond the confines of its corner of the blogosphere, we are likely to encounter hostile or opposing views.  Remember to be patient:  you’ve studied this stuff for awhile now; stay classy and offer resources where appropriate.  It’s easy to lose our sense of civility when we forget that at the end of a long chain of cables, routers and wireless cards are two human beings trying to have a conversation.


Via WaPo

MMP Blog #37: The Public Purpose

By L. Randall Wray

The households and business firms in a modern capitalist economy make many of the important economic decisions that contribute to determination of the level of employment and output, the composition of that output, the distribution of income, and the prices at which output is sold.

Continue reading

Reply to Comments on MMP Blog #36 What Governments Ought to Do

You might want to see my NEP front page piece: Mine’s BiggerThan Yours, which deals with various misunderstandings on size of government.It isn’t size that matters (beyond some minimum size—probably 15-20% of GDP),rather it’s what you do with it that counts. It is all about what governmentought to do, in other words. Ok so here are comments and my responses.
Neil: Is it worth mentioning that economic policy is aboutbeing largely right rather than precisely wrong?
A: I like it. But of course even “right” depends on “ought”.
Philip: Yes, the exchange rate is a bit of a mysteryalright. Any advice on a good book that tries to deal with these issues from aPK perspective. Preferably one that looks at the empirical evidence to somedegree. I seem to remember that John Harvey did something on this…
A: Truthfully, no one knows. No one has much of a clue,really. I like Harvey’s two JPKE papers and they might be as good as anythingout there. Add in Keynes’s interest rate parity theorem and Sraffa’s commoditypricing and I don’t think economists have much else to say. Since daily tradein financial assets exceeds annual trade in goods and services, it is clearthat whatever theory you have it must treat exchange rates in the context of atheory of asset pricing.
Dario: I am confused. Are you moving toward an Austrianapproach? May I ask you why? What’s your purpose?
A: Yes you are. Confused. My purpose is to talk about what government ought to do. What is yours? To make unfounded accusations?
Golfer: Why Crony capitalism? Because government is so bigthat the profits to be had by controlling it are irresistible. in former times,when government in the US was les than 10% of GDP, there were more profitsto be made in private enterprise. 
A: Oh really. And who is the richest man in the world? Hint:Mexican. Government much smaller relative to GDP than the US government; andthe US government is (next to Japan’s) the smallest of the big economies. Lookslike more ideology than content to me. And if you really believe the USgovernment in the time of the robber barons was less crony than today’s, youlive in la-la land.
Neil: No matter how small the government gets the profits tobe had by controlling it are always irresistible. It’s the flipping currencyissuer!
A: Yep. Give me a printing press and I can move the world.
Hewer: it may be worth adding that the impetus to controlgovernment is not entirely down to the notion that profits from being acurrency issuer are irresistible.  Of course that is true, but it is notsomething that those who seek to control the political process necessarilyunderstand, nor necessarily their first concern if they do.  The mainbenefit to controlling government does not come from the “profits”that can be made, but rather from the control over real resources thatpolitical dominance provides. 
A: Mr. Slim has got a real resource (phone monopoly) but USbanksters do OK, too.