The Keen/Krugman Debate: A Summary

Paul Krugman and Steve Keen have been debating endogenous versus exogenous money – as well as some other issues – for the past few days. The debate appears to have drawn to close, so here I offer a summary for those who can’t see the wood for the trees.

1. Krugman reads Steve Keen’s paper and rejects it; specifically, he rejects endogenous money, asserting that banks need deposits before they can lend.

2. Keen responds, noting that banks do not require savings before they make a loan, as they can create loans and deposits simultaneously through double entry bookkeeping. The CB has to provide the reserves required for whichever loans they do make in the short term, else the economy will grind to a halt.

3. Nick Rowe weighs in, with a comment thread well worth reading. He sides with Krugman overall but appears to agree with at least some of what endogenous money proponents are claiming, including the the double entry accounting view of money creation.

4. Krugman, however, continues to deny this, claiming that CBs have monetary control, and citing a paper by James Tobin to support his point of view. He fails to note that, not only did nobody ever assert that the CB has no control whatsoever over monetary activity, but Tobin also wrote a paper called ‘Commercial Banks as Creators of ‘Money’‘, in which he agrees with the view that Krugman opposes.

5. Scott Fullwiler schools Krugman on how banking actually works in the real world.

6. Krugman makes a post where, through a sleight of hand, he seems to acknowledge that banks can create money, but goes on to straw man endogenous money proponents by saying that they claim there is no limit to this process. Of course, that’s not true – the only claim is that reserves are not the limit, the actual limitations being capital, risk and interest rates.

7. Krugman, unfortunately, goes on to make another post, one in which he effectively asserts that the Central Bank has complete control of the money supply, something completely contradictory to what he said before and blatantly falsified by the failure of monetarism in the 80s.

8. Krugman and Rowe both parade their ignorance by making it clear they have not read Keen’s latest post properly, and fall straight into his characterisation of DSGE. Keen responds. Krugman says the debate is over.

Looking over the debate, I’d score it to Keen – you might expect that, but I genuinely went through periods where I thought he might be wrong. Sadly, Krugman quite clearly moved the goalposts a couple of times, and Rowe didn’t make it exactly clear where he stands, even after I asked him. Neither of them engaged properly with Keen’s or anyone else’s arguments.

I can’t help but feel that the orthodox economists were deliberately obfuscating the debate – making it unclear exactly what they advocate, but simultaneously clinging to a core theory and asserting that its critics are attacking a straw man, ignorant of what is ‘added’ at a higher level. I’m forced to wonder if their theories are simply immune to falsification.

NB: A couple of others provide some constructive comments on Keen’s slack definitions in his most recent paper, particular with respect to units, that are worth reading in their entirety. Having said that, Keen’s accounting appears to be correct, even if it’s not the clearest.

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  1. #1 by Nick Rowe on April 3, 2012 - 5:52 am

    “….and Rowe didn’t make it exactly clear where he stands, even after I asked him.”

    Jeeez! You expect me to respond to every single comment? There were hundreds!!

    OK, here goes: (PLEASE EXCUSE MY RESPONSES IN CAPSLOCK)

    “Nick, some simple questions so I can get at the exact nature of the disagreement:

    (1) Banks create loans and deposits simultaneously through double entry bookkeeping – agree/disagree? (If d you can skip to (4)) AGREE, BUT I’M NOT GOING TO SKIP TO 4!

    (2) Banks do not need deposits or reserves prior to this, at least in the short term, so the CB has to accommodate demand, else the economy grinds to a halt – a/d? DISAGREE

    (3) This money creation adds to the total stock of money and so to nominal demand, making the rate of credit creation an important determinant of AD – a/d? DEPENDS ON WHAT THE CENTRAL BANK IS TARGETING. IF IT TARGETS INFLATION, DISAGREE, BECAUSE THE CENTRAL BANK WILL TAKE WHATEVER OFFSETTING ACTION IS NEEDED TO STOP AD INCREASING

    (4) Increasing base money does not necessarily translate into an increase in lending – a/d? DEPENDS, IF ITS TEMPORARY OR PERMANENT.

    (5) But the CB can influence behaviour by controlling interest rates, or credible commitments to controlling interest rates – a/d?” FOR EXAMPLE, AMONGST MANY OTHER THINGS, YES.

    • #2 by Unlearningecon on April 3, 2012 - 11:29 am

      I actually omitted the words ‘not that I blame him at that point’ just to trim away the fat. I accept it was a long exchange.

      Anyway, thanks for your response. I just felt that it became pretty muddy in there and it was unclear exactly what everyone disagreed about.

  2. #3 by thomps07 on April 3, 2012 - 12:24 pm

    Nick Rowe admits his mistake:

    Nick Rowe on April 3, 2012 at 4:49 am said:

    Just for the record: I did not email Paul Krugman. That’s not what “Nick Rowe sends me to…” means. Any “communication” between me and Paul Krugman is right there on the blogs.

    Yep, I learned later that Steve Keen had partly qualified what he had written a few paragraphs further down. I should probably have kept reading rather than getting mad at that point, stopped reading, and firing off my comment.

    http://rppe.org/hubris-leads-to-incompetence-the-rowe-krugman-edition/

  3. #4 by Nick Rowe on April 3, 2012 - 3:08 pm

    unlearning: “I just felt that it became pretty muddy in there and it was unclear exactly what everyone disagreed about.”

    Yep. Totally agreed!

    thomps07: Yep. But if someone writes:

    “1. DSGE modellers murder kittens

    2. DSGE modellers do DSGE modelling

    3 DSGE modellers really do murder kittens”

    and then a couple of paragraphs later on writes:

    “OK, some DSGE modellers have stopped murdering kittens, but they aren’t really any different.”

    You’ve gotta expect people might get mad and won’t read down to the end!

    I tried to leave a comment on Steve Keen’s blog, but I can’t figure out how to do it.

    • #5 by Unlearningecon on April 3, 2012 - 10:35 pm

      Nick I think Keen objects to the way the models are constructed in an ideal fantasy state and then new bits are added on when it doesn’t conform to reality.

      You might say that this is basically what happens in the ‘real’ sciences, where we start in a vacuum etc. But the nature of those simplifications is very different – they eliminate a known variable that can be added later. On the other hand, the impact of the various DSGE assumptions on the analysis isn’t entirely clear, and they certainly don’t do something as simple as eliminate a known variable.

      Furthermore, it’s debatable whether these assumptions actually ‘simplify’ given how hard it is for many students to grasp even the basic demand-supply diagram. Economists use this fact or assert that everybody who criticises them just doesn’t understand economics, which may be true in some cases. But it’s not a good thing – if you can’t communicate at least the basics of a science about ordinary people, to ordinary people, then what’s the point?

      • #6 by Nathanael on April 8, 2012 - 12:06 am

        “given how hard it is for many students to grasp even the basic demand-supply diagram”

        That’s because y’all, even the “non-mainstream” economists, DRAW YOUR GRAPHS BACKWARDS. Put the independent variable on the x-axis and students will start to understand what you’re talking about.

        I am not kidding. This is the primary problem in Econ 101 courses; the teachers never explain that HALF OF THEIR GRAPHS HAVE THE AXES REVERSED.

  4. #7 by rjw on April 3, 2012 - 10:59 pm

    Despite Nick Rowe’s protestations about the horizontalist position, my reading is that he accepts the essence of the endogeneity argument. He seemed to agree with the essence of my comments on his post “The supply of money is demand-determined” in which I summarised his position. You might find my remarks there of interest. I’ll repeat them here:

    I have to admit, I found this post pretty tricky to disentangle. I’m also not convinced that demand and supply curves easily capture the nuances. But it seems to me Nick’s argument is thus:

    - on a six week time horizon, the money stock is “demand determined”, in the sense that the BoC sets an interest rate at which it supplies reserves on demand

    - on a longer time horizon, the BoC targets inflation, and adjusts the policy rate to hit the target. The short run horizontal supply curve thus moves up/down as necessary

    - therefore, in the long run, the money stock in inflation elastic, in that the BoC is happy to let it rest at whatever level is consistent with the inflation target

    So far so good. I understand this as saying that while the money stock is endogenous, in the sense that reserves are supplied at the prevailing policy rate according to demand, the inflation target is in fact a form of meta-constraint on money growth, as too high/low a level of inflation relative to the target will induce rate changes that affect money growth. This all seems pretty straightforward, and I don’t really see a problem accepting this broad argument.

    But – I don’t see any particular reason to believe that a given inflation target implies a unique (or more weakly, a predictable) path of money growth. The inflation-consistent level of money growth could surely depend on many factors …. structural changes in the credit markets, behavioural changes that induce velocity changes, or indeed the impact on inflation of other factors such as commodity price changes, or smaller/larger fiscal impulse from government spending.

    • #8 by Unlearningecon on April 3, 2012 - 11:38 pm

      Good post and agree. But if Rowe agrees with this, why does he side with Krugman’s position that private debt is a wash macroeconomically? And seem to think that the level of reserves can influence banking activity, if only the CB made the increase credible?

      I mean, it’s obvious that the CB can affect demand using the base rate/interest rates, and therefore affect the demand for loans. But this is not consistent with a story where reserves influence lending decisions.

    • #9 by Nick Rowe on April 4, 2012 - 11:05 pm

      rjw: You said I said: “- therefore, in the long run, the money stock in inflation elastic,….”

      Not quite right, even allowing for the typo.

      It should be: in the long run, the money supply function is perfectly *negatively* elastic with respect to the rate of inflation.”

      In other words, the elasticity of the supply of money with respect to the rate of inflation is minus infinity in the long run.

    • #10 by Nick Rowe on April 4, 2012 - 11:14 pm

      rjw: “The inflation-consistent level of money growth could surely depend on many factors …. structural changes in the credit markets, behavioural changes that induce velocity changes, or indeed the impact on inflation of other factors such as commodity price changes, or smaller/larger fiscal impulse from government spending.”

      I agree, of course.

      Unlearning: “But if Rowe agrees with this, why does he side with Krugman’s position that private debt is a wash macroeconomically?”

      I don’t remember saying anything about Paul Krugman’s position on private debt. Actually, from having read Eggertsson (spelling?) and Krugman’s recent paper, I would say that Krugman’s position (at least in that paper) was exactly the opposite. The whole point of the Eggertsson/Krugman paper was to show (one way in which) private debt really matters macroeconomically.

      • #11 by Unlearningecon on April 4, 2012 - 11:23 pm

        Sorry Nick, that was an assumption on my part, but I’m pretty sure it’s right.

        What I meant by ‘doesn’t matter’ is the ‘patient’ versus ‘impatient’ agent view you espouse above. Krugman does indeed attempt to ad-hoc the crisis in that paper and it’s a sight to behold.

        Keen’s view, on the other hand, is that private debt – all others things constant – adds to nominal AD as it comes from nowhere. If you follow this logically you will see that private debt growth has to accelerate year on year in nominal terms to keep AD growing. Debt paid back goes into the banking system and disappears from circulation.

      • #12 by Nathanael on April 8, 2012 - 12:09 am

        Of course private debt growth doesn’t have to accelerate to keep AD growing if the private debt is replaced by effectively printed (zero-interest) money. (Right?) This is why generous bankruptcy laws and direct government printed-money spending directed to debtors get you out of the “private debt trap”. Right?

    • #13 by Oliver on April 5, 2012 - 7:06 am

      So far so good. I understand this as saying that while the money stock is endogenous, in the sense that reserves are supplied at the prevailing policy rate according to demand, the inflation target is in fact a form of meta-constraint on money growth, as too high/low a level of inflation relative to the target will induce rate changes that affect money growth. This all seems pretty straightforward…

      So far so circular, in my opinion. It’s putting the cart before the horse. It confuses what some people think ought to be (a particular level of inflation or NGDP growth) with what must be. A sneaky way of building an opinion into a base model in order to ‘prove’ that there is no alternative (neither to the method (monetary policy), nor to the goal (target)). Alternatives may only be suggested by the root users – i.e. those who built the model in the first place.

  5. #14 by Marbleone on April 4, 2012 - 7:55 am

    You wrote: “I’m forced to wonder if their theories are simply immune to falsification.”
    Reminded me of Karl Popper: A theory – e.g. Freud’s psychoanalysis – that is immune to falsification is no science. Think of Einstein: He himself formulated a couple of hypotheses which can be examined physically and hence may be used to falsify his relativity theory. That is science.

    Keynes doesn’t seem dead – as seem true for Hayek – or anybody else in that field. Has there ever been a theory of economics which was clearly and truly falsified? I mean in a sense that all reputable economists agree on? If not (and endogenously so) then you would have a wonderful proof that economics isn’t science. It may only be a spin, some propaganda. There’s nothing intellectually more embarrassing than a dispute among economists because it almost always leads to nowhere and only ends if someone declares so.

    • #15 by Unlearningecon on April 4, 2012 - 1:00 pm

      Very true. I can think of a few things that mainstream economics appears to be in agreement on:

      - The Labour Theory of Value is incorrect;

      - ‘Hard’ monetarism is incorrect (although Krugman seems to be advocating it in his second to last post!);

      - Wages and prices are sticky

      Quite an achievement for a 250 year old ‘science’, ey?

      • #16 by Guillermo on April 5, 2012 - 8:36 pm

        As Andrew Lo said, physics has 3 laws that explain 99% of all physical phenomena, economics has 99 laws that explain 3% of all economic phenomena :).

      • #17 by Unlearningecon on April 7, 2012 - 2:33 pm

        Andrew Lo was a generous man.

      • #18 by Nathanael on April 8, 2012 - 12:10 am

        Hmm. Say’s Law was well and truly falsified, though apparently there are still so-called economists spouting it….

  6. #19 by rjw on April 4, 2012 - 8:28 am

    Well, he will have to explain his own views. But I suppose one issue is that monetary policy is not just about mechanically raising and lowering rates, but also signalling the likely path of rates, or signalling changes in the CB reaction function. If the authorities were to push reserves in the system beyond the minimum required by banks to satisfy their prudential ratios, through open market operations, one might see this as indicating a committment to a prolonged perid of loose policy. This would influence the commercial banks’ views about how much credit they can profitably offer at a given policy rate, and affect their lending standards at the margin. Of course, here we also get into all sorts of nitty gritty issues, such as whether the CB pays interest on reserves and so on, and what difference this makes.

  7. #20 by docrichard on April 4, 2012 - 11:56 am

    If the exogenous theory were right, there would – would there not – be daily accounts passed between the High St banks and the BoE, detailing the amounts lent out that day, and in response, the BoE would have accounts reflecting these same amounts passing from the BoE to the High St banks. So all the exogenists have to do to prove their case is to turn up these records.

    But even if they did, it would prove little, since if the BoE passively follows the commercial banks, supplying their daily needs without let or hindrance, it is the same as if the commercial banks themselves made the supply. If the BoE did put the brakes on in any way, we can be sure that the banks would tell us “We would love to give you a loan, but the BoE says we cannot have any money today”.

    That there should be confusion and doubt over this point is evidence of how sketchy is the claim of economics to be a “science”.

    Keep up the good work.

  8. #22 by Blue Aurora on April 5, 2012 - 4:29 am

    One question – if the money multiplier becomes definitively falsified, what about the rest of the Keynes’s multiplier effect?

    • #23 by Unlearningecon on April 5, 2012 - 10:01 am

      I’m sure Keynes supported endogenous money by the time his theory was fully developed?

      (I’m aware it isn’t explicitly in TGT)

      • #24 by Blue Aurora on April 5, 2012 - 10:05 am

        You’re not answering the question. And whether Keynes supported endogenous money is another debate.

        There are other applications of the multiplier besides the fiscal multiplier, like to foreign trade multiplier, to name one example.

        Do you think it’s possible for the multiplier effect to be falsified?

      • #25 by Unlearningecon on April 5, 2012 - 10:11 am

        Ah, sorry, misinterpreted the question.

        Maybe I’m just being dense, but I don’t see how the money multiplier is related to other Keynesian multipliers? I presume they will be unaffected?

      • #26 by Blue Aurora on April 5, 2012 - 10:20 am

        According to this document, a leading Post-Keynesian economist by the name of Basil Moore has questioned the legitimacy of the Keynesian multiplier. It’s a review of the literature and an internal debate for Post Keynesians.

        http://researcharchive.lincoln.ac.nz/dspace/bitstream/10182/1039/3/cd_dp_8.pdf

    • #27 by Roman on April 5, 2012 - 7:17 pm

      Um, they are not the same thing.
      As I was taught, the Keynes’s multiplier effect just means that changes in spending (say, delta G) lead to more than proportional changes in the output (Y, GDP). I don’t remember if Keynes himself used this exact term, but I believe that this does capture the spirit of his theory.

  9. #28 by papero on April 5, 2012 - 10:16 pm

    I think Krugman wins at point 7 though. The Keen argument seems to be that the Fed in practice supplies money at will at a given constraint and hence doesn’t “control” the stock of base money. But I think I am with Krugman- surely the central bank issues whatever base money is necessary to hit the target interest rate.

    If it’s worried about say inflation, or credit growth it can adjust its policy rate- i.e. the target rate.

    I slightly lost Keen after this, his riposte about DSGE models didn’t seem to respond to Krugman;s point. I didn’t quite follow your riposte either- Krugman is not saying that the Fed can control the money supply. He is saying the Fed can control the supply of base money [or to be precise, it can either control the amount of base money, or fix the s/t interest rate- i.e slide up and down the money demand function].

    ***

    • #29 by Unlearningecon on April 6, 2012 - 2:07 pm

      Krugman suggests that the CB could target either a quantity of base money or the interest rate and get the same effect. The former was tried in the 1980s and did not work.

  10. #30 by Mike Alexander on April 6, 2012 - 2:58 pm

    Economics is clearly not a science as it still has different schools of thought on fundamental issues.

    Where economics got into trouble was their decision to try to emulate physics, a study that initially dealt with simple systems (e.g. Galileo, Kepler, Newton) which it allowed it to become the first branch of natural philosphy to make the transition to science. Simple systems have few things to explain and so allow the elucidation of valid organizing principles referred to as “laws”. Once well-established they can be applied to systems of increasing complexity, which is in itself a very difficult thing to do as the uncertainies in climate science attest, where despite having complete knowledge of all relevant physical laws it has still not been possible to obtain an accurate predictive model.

    Economics deals with systems of irreducible complexity, making it more like biology or ecology and less like physics. Economists would have been wise to emulate biology or better still, ecology. Both deal with systems of complex actors that are capable of a wide range of behaviors, but under certain conditions will behave in more or less agreement with reasonably simple empirically-derived rules.

    That they did not so is understandable as biology was not yet a science in the late19th century (and ecology did not even exist as a study), when economists first looked at natural science as a model.

    • #31 by Unlearningecon on April 6, 2012 - 7:29 pm

      The applied mathematician David Orrell’s book, Economyths, is a good example of complex science being applied to economics. You also may or may not have read Blue Aurora’s recent guest posts on Econophysics.

      It’s all very interesting. Having said that, I’m not one for disowning absolutely everything currently taught on undergraduate courses.

    • #32 by Nathanael on April 8, 2012 - 12:12 am

      Biology and ecology took a long time to become sciences, and had to make some genuinely brilliant leaps along the way. The most brilliant of those, Darwin’s theory of evolution by means of natural selection, *still* confuses people, even those who “believe” in it.

  11. #33 by Tom on April 6, 2012 - 5:48 pm

    Interesting post but I agree with Krugman. Banks can create demand out of thin air only because CB lets them do it by providing reserves at the prevailing rate. But it can always change it to stimulate banks to create more or less demand. So in the end all these MMT assertions bring nothing new or important.

    • #34 by Unlearningecon on April 6, 2012 - 6:38 pm

      (1) Endogenous money is not necessarily MMT.

      (2) When Krugman espoused that view in (7), he was backtracking. He previously asserted that banks need deposits before they can lend. If he wishes to disown this view then he must also abandon his characterisation of banks as intermediaries as expressed in Eggertson and Krugman (2010).

      (3) The overwhelming majority of economics textbooks also contradict that view.

      (4) Nobody ever asserted that the CB has no control over what happens; merely that adjusting the monetary base manually will do nothing.

  12. #35 by Tom on April 6, 2012 - 9:31 pm

    If CB can control banks and loan demand then they are not autonomous but act just like intermediaries so Krugman is correct. The only exception is liquidity trap where even zero interests rates cant stimulate loan demand.

    • #36 by Unlearningecon on April 6, 2012 - 9:59 pm

      I’m afraid I don’t follow your logic:

      A: Banks need deposits before they can lend

      B: No they don’t

      A: (After much grumbling) OK, they don’t, but it doesn’t matter

      If banks create purchasing power out of nothing, rather than distributing it from savers to borrowers, it quite clearly affects the mechanics of the situation. This is why Keen’s models can model the crisis effectively and Krugman’s have to resort to after-the-fact ad hocery.

      • #37 by Tom on April 6, 2012 - 10:28 pm

        I think it’s not that complicated. On micro level banks dont need deposits before lending but they want them. That’s Krugman’s position: every responsible bank first acquire deposits and then lend them. On the macro level it doesnt matter what drives what because loans are financed both by deposits and cash. And cash is contolled by CB directly or indirectly by interest rates it doesnt matter. It is only a technical detail. Even Mervyn King who considered money as endogenous admitted that there are different views on this matter but he emphasized direct influence of interest rates policy on both: loan demand and money supply.

      • #38 by Unlearningecon on April 6, 2012 - 10:56 pm

        ‘That’s Krugman’s position: every responsible bank first acquire deposits and then lend them.’

        ‘Responsible’? I don’t understand why you used that word. Loans and deposits occur simultaneously.

        And nobody is denying that interest rates have an impact on the money supply and loan demand. What we are denying is that banks simply take saved money and lend it out. You can’t simply hand wave this problem away: it is EXACTLY why neoclassical economists didn’t see the crisis coming.

  13. #39 by Tom on April 6, 2012 - 11:24 pm

    Loans and demands occur simultaneously but they dont change over time simultaneously. And because of that banks first acquire stable deposit base to finance loans. Do you really believe that all deposits are loan driven? Dont you put your money (at least part of it) to bank to earn some interests on it? I think it’s quite common among ordinary people and they are not inluenced by loan demand. And the last thing: if loans and deposits occur simultaneously doesnt it imply that we actually cant determine what drives what?

    • #40 by Unlearningecon on April 6, 2012 - 11:32 pm

      ‘And because of that banks first acquire stable deposit base to finance loans.’

      No they don’t! They simply issue a loan and this creates a deposit at the same time, balancing the books (this also answers your last question about where the casual link lies). If they find themselves short of reserves they simply borrow from the overnight market; should the banking system as a whole find itself constrained, the CB will supply reserves, else it will violate its legal mandate for economic stability.

      ‘Do you really believe that all deposits are loan driven?’

      No!

      I’m forced to ask if you paid much to attention to the debate. You don’t seem to be that informed about the endogenous money position.

      • #41 by Tom on April 6, 2012 - 11:48 pm

        I understand endogenous money theory at least on the level of Krugman Keen debate. But you can explain how the fact that not all deposits are loan driven influence this debate.
        And if that was that simple banks with similar capital base would have similar loan/deposit ratios and that is not true if you know anything about real functioning banks.

      • #42 by Unlearningecon on April 6, 2012 - 11:54 pm

        The amount of deposits a bank has does not affect its ability to make loans – I see standard customer deposits as more or less irrelevant to the debate.

        ‘And if that was that simple banks with similar capital base would have similar loan/deposit ratios and that is not true if you know anything about real functioning banks.’

        Capital is not the only factor. Interest rates and the banks own decisions about lending also affect it.

    • #43 by Tom on April 6, 2012 - 11:36 pm

      In the first sentence I meant deposits not demands of course.

  14. #44 by Tom on April 7, 2012 - 12:07 am

    I’m not sure you ever analyzed real banks because you would knew that banks with strong depository base have better loan growth ratios. And it’s not about banks decisions about lending but about its abilities. For example banks with better and broader branches or more stable client base have better loan/deposit ratios (i.e. lower).

    • #45 by Nathanael on April 8, 2012 - 12:13 am

      More deposits == *higher profits*. Higher profits == more loans in the distant future.

      However, in the near term, *loans come first* and *deposits come second*.

  15. #46 by Tom on April 7, 2012 - 8:31 am

    If you admit that not all deposits are loan driven then it implies that sometimes deposits create loans because bank have to do something with them. On the other hand loans can also create deposits no one is questioning it. So we have situation where causation goes in both directions (loans to deposits and deposits to loans). The only institution that can create demand out of thin air is CB by the power of setting interest rates target. Banks are merely intermediaries which match savers and borrower (it doesnt matter what comes first) so Krugman is 100% correct.

    • #47 by docrichard on April 9, 2012 - 11:38 am

      As has happened so many times in this “where does money come from?” debate, we have a mass (78) of comments galloping off in all directions, with no conclusion in sight, at least as far as I can see.

      i would like to re-iterate the point i put at #20: “If the exogenous theory were right, there would be accounts passed daily between the High St banks and the BoE, detailing the amounts lent out that day, and in response, the BoE would have accounts reflecting these same amounts passing from the BoE to the High St banks.

      So all the exogenists have to do to prove their case is to turn up these records.

      But even if they did, it would prove little, since if the BoE passively follows the commercial banks, supplying their daily needs without let or hindrance, it is the same as if the commercial banks themselves made the supply. If the BoE did put the brakes on in any way, we can be sure that the banks would tell us “We would love to give you a loan, but the BoE says we cannot have any money today”.

      So – do these precise accounts exist? If not, can we agree that it is the high st banks that create new money in the act of issuing loans?

  16. #48 by Tom on April 7, 2012 - 8:50 am

    Also even if all deposits were loan driven it wouldnt change anything. If we start with the economy in equilibrium then for every one dollar of loan bank need to find one dollar of deposit (directly or through other banks) otherwise CB would need to print new money. That would be inflationary if economy is at full employment (equilibrium) so CB would decide to increase interest rates to prevent this loan/deposit increase. So how exactly banks are demand creators?

    • #49 by Nathanael on April 8, 2012 - 12:14 am

      The economy is never in equilibrium. Try again.

  17. #50 by Unlearningecon on April 7, 2012 - 9:37 am

    If you admit that not all deposits are loan driven then it implies that sometimes deposits create loans because bank have to do something with them.

    Why do they have to do something with them? They can just hold them as capital (which answers your question about why banks with more deposits lend more out).

    And banks aren’t mere intermediaries. John wants a loan. Bank deposits loan in John’s account (liability) and notes that he owes them the same amount (asset). The books are balanced. No saver is matched to a borrower; John is matched to his loan. New money enters the economy – presuming, of course, John spends it, which you’d expect him to.

    I don’t understand why you insist on clinging to a falsified theory. The theory says one thing (money multiplier) reality says the other; you start by denying reality then proceed to accept the theory in abstract but insist that it does not matter. It reminds me of JBS Haldane’s “there are four stages of acceptance of a new theory”:

    1) This is worthless nonsense;
    2) This is an interesting, but perverse, point of view;
    3) This is true, but quite unimportant;
    4) I always said so.

    You also appear to be doing something Scott Fullwiler picked up on: namely, confusing tactics, strategy. and policy. Sure: the CB might increase interest rates to curtail loan demand. But that doesn’t change the reality of endogenous money.

    Krugman is, of course, not correct which is why his money multiplier, banking intermediary models did not see the crisis coming and Keen’s endogenous, private debt focused ones did.

    • #51 by Tom on April 7, 2012 - 10:16 am

      Banks cant keep deposits as capital because they have to earn some money to pay interests on deposits (if interests are positive and/or they are not capital constrained). And to fully understand your example you have to first assume if economy is in equilibrium or not. If yes then saver has to be matched to borrower (directly or through other bank). If not then banks create purchasing power but only because CB wants them to do so by keeping low interest rates. And money multiplier had nothing to do with the crisis because debt level per se doesnt matter only distribution of debt. If marginal propensity to consume differs between borrowers who are capital constrained and who are not then this distribution is important. But Bernanke and Krugman wrote about it many years ago (Bernanke at least twenty).

    • #52 by Tom on April 7, 2012 - 11:00 am

      And to further explore your example: if Joan wants to transfer money outside the bank then bank has to find financing from depositor in another bank. And this is exactly matching of borrower and depositor. If economy is not in equilibrium than purchasing power will be created because CB will print new money. And because banks are not autonomous they are just intermediaries.

      • #53 by Unlearningecon on April 7, 2012 - 1:01 pm

        And money multiplier had nothing to do with the crisis because debt level per se doesnt matter only distribution of debt. If marginal propensity to consume differs between borrowers who are capital constrained and who are not then this distribution is important.

        I’m forced to conclude that you haven’t researched what this debate is about in depth. In Keen’s models the level of debt matters, not just the distribution. This corroborates well with the empirical evidence, and is why he saw the crisis coming. Standard neoclassical models did not ergo they are worthless.

        Yet again, you are replying ‘that’s OK in practice, but what about in theory?’ The bank does not have to find a saver: John is both the saver AND the borrower. The CB has control over interest rates and regulation, sure, nobody is denying that. But the money multiplier model remains incorrect: the CB cannot control the money supply, only the rate of interest.

        You keep glossing over the fact that Keen’s model corroborates better with the empirical evidence.

  18. #54 by Tom on April 7, 2012 - 1:33 pm

    If you have checked history of UK’s debt you would find that it is not high in relation to past. So why keep insisting that it played any role in the last crisis? And if bank doesnt have to find a saver then what happens when John transfers his money outside of bank? The last thing: CB can control money supply but chooses not to do so because interest rates would fluctuate too much. It’s a diiferent thing than saying that it cannot do it.

    • #55 by Unlearningecon on April 7, 2012 - 1:48 pm

      If you have checked history of UK’s debt you would find that it is not high in relation to past.

      OK well this simply is not true. You obviously haven’t read Keen’s work – that’s fine if you want to close your mind to new ideas, but not if you’re trying to debate about him! See here for the UK private debt level. Massive.

      If John tries to transfer his money then it’s all done a screen to another bank – nothing is required. If he tries to take it out in cash the bank will have to find the reserves via the mechanisms that have been described. And the CB can control the monetary base, but it does not have full control over higher order money, which is affected by various endogenous factors.

  19. #56 by Tom on April 7, 2012 - 2:29 pm

    Actually you are proving my point that what matters is the distribution of debt not debt per se. Here’s a graph of UK’s national debt. http://www.ukpublicspending.co.uk/uk_national_debt
    It is clear that it is not that high by historical standards. So what caused crisis was that private sector was indebted too much in relation to their capital (especially when home prices began to fall) and government didnt increase spendind high enough. This explanation is from Krugman and I agree with it.
    Now back to our John example. Your explanation is too simple because it will increase liabilities to other banks so it will change its balance sheet structure. And because banks dont want it they will seek savers to fill this hole. You clearly have no idea how banks really operate because you would knew that banks advertise not only loans but also deposits.

    • #57 by Unlearningecon on April 7, 2012 - 2:45 pm

      OK I literally have no idea where you’re coming from with this debt thing. How does anything you’ve said corroborate with the fact that the distribution of the debt is what matters? Keen has assembled a lot of evidence that suggests the rate of increase in the level of private debt is what drives growth. I can’t help but feel you’re simply not engaging this debate: you’ve simply come here to repeat econ101 talking points.

      On John: bank B finds the money for his loan via the reserve mechanisms outlined many times. This is all in Scott Fullwiler. You haven’t read any of this debate, have you?

      • #58 by Tom on April 7, 2012 - 3:42 pm

        You pretendent to behave very dense but it is simple. The distribution of debt matters beacuse one’s debt is another’s asset. So the more debt we have the more assets we own. The problem arises when owners of these assets dont want to spend when borrowers cant borrow and spend more because of capital constraints (because of for example falling house prices). So this is the situation where their MPCs differ (to use Bernanke’s terminlogy). In this situation government should spend more to prevent the fall of AD (it’s debt is not high by historical standards).
        I cant restrain from saying that if Scott Fulwiller is an expert for you on how banks really operate you dont know anything. Just try to think about it. You cant assume that reserve constraint is
        always independent from balance sheet structure constraint. And you are doing it by assuming that bank can only rely on financing from other banks (including CB).

      • #59 by Unlearningecon on April 7, 2012 - 4:25 pm

        I’m all for the government spending more, but not because of the distribution of debt, because of the level. You’re refusing to listen to opposing arguments and MASSES of evidence on private debt, simply repeating the standard ‘banks as intermediaries between savers and borrowers’ line. You can repeat it all you want but it will never corroborate with the evidence.

        And I agree that cash deposits can contribute towards a bank’s balances, sure. But they aren’t a requirement.

    • #60 by Oliver on April 7, 2012 - 6:21 pm

      Nobody is talking about government debt as per your link…

      And the two of you are talking past each other. The question is whether an increase in private debt causes aggregate demand to increase. This has nothing to do with MPC at first. The two are completely separate matters and must be treated as such. Discussion here:

      http://www.asymptosis.com/lending-velocity-and-aggregate-demand.html#comments

      • #61 by Tom on April 7, 2012 - 9:31 pm

        This has a lot to do with MPC. Increase in private debt will inrease AD only when MPC of debtors is greater than MPC of lenders. Remember that debt is someone’s asset as I have explained thoroughly.

      • #62 by Nathanael on April 8, 2012 - 12:25 am

        I’ve been thinking that increased private debt practically always causes a change in wealth distribution, for the worse.

        Whenever there are a small number of lenders (who are essentially people — bank execs or stockholders) and a large number of borrowers, it certainly does.

        I’ve been trying to figure out if there are other scenarios. The scenario of huge numbers of people lending money to one big debtor seems bizarre and would lead to the debtor declaring bankruptcy, walking off scot-free, and hurting all the little lenders, so it would again lead to profit for the few, loss for the many, reinforcing the concentration of wealth.

        Direct government lending to many many people would seem like it could play out differently, if the government didn’t manage the loans for maximum profit to a small group, but instead as an instrument of government policy. In other words, this would be fiscal policy….

      • #63 by Nathanael on April 8, 2012 - 12:27 am

        In this context, I’m trying to point out high private debt, with the possible exception of government-issued “sweetheart” loans to the poor, always transfers money from high-MPC persons to low-MPC persons.

      • #64 by Oliver on April 8, 2012 - 7:09 am

        Tom, your choice of link above shows why you’re not seeing any of this. The GROSS level of private debt does not even figure in your world. And, staying in your bizarre universe for a moment, what does the MPC of a lender even mean? You can’t lend AND consume. The act of lending, if indeed it works the way you say it does (which it doesn’t) assumes non- consumption for that $ you lent, i.e. MPC of 0. That of borrowers is necessarily 1, btw. (why else would they borrow?). Now, one could argue that lenders also borrow NEW money, just not enough to offset their NET lending position, but that doesn’t compute in your closed world. Where does new credit come from? How does the gross level of private debt expand? Through Bernanke’s dictum? By fiat from Mars?

      • #65 by Oliver on April 8, 2012 - 7:13 am

        actually, I take that back. MPC of borrowers can be anywhere between 0 and 1. But it’s greater than 0 in any case.

  20. #66 by Nathanael on April 8, 2012 - 12:02 am

    I’d like to point out that in a GOOD physics textbook, friction (one of those “complications”) is introduced IMMEDIATELY, in the earliest models.

    Nobody came up with a “frictionless physics” model and then “added friction”. That just didn’t happen historically, because frictionless models are useless in the real world. Friction was right there in Newton’s earliest solid dynamics models.

    This is a large contrast to the history of DGSE.

  21. #67 by rf on April 8, 2012 - 1:40 am

    If I may, I will now mischaracterize endogenous money by shoehorning it into an IS/LM model. Hopefully this way Tom can better understand what is at stake and contribute constructively instead of parroting the Econ 101 view.

    Private debt matters because the ultimate source of “deposits” which are lent out is the Central Bank, which has infinite cash but an MPC of exactly 0. The CB supplies cash at a target interest rate (a “price rule”) – rather than a target quantity – so the money supply curve is horizontal. Therefore, the quantity of money supplied in the short run is determined by the money demand curve, rather than the CB.

    You may protest that this is true in the short run, but doesn’t matter in the medium run because of inflation targetting: we can model the money supply curve as vertical because shifts in the demand for money cause the CB to adjust its target interest rate. However, 1) IS/LM is a model of the (very) short run, as argued by John Hicks himself in “IS-LM: an explanation” (1981) and 2) very few (if any) endogenous money proponents would agree with the overly simple view that inflation is caused by an increase in the stock of money, so modelling the effect of inflation targetting as a vertical money supply curve would be inappropriate.

    • #68 by Tom on April 8, 2012 - 7:09 am

      I understand you points but it doesnt change anything :
      1) Banks are not autonomous in creating purchasing power
      2) Debt level doesnt matter as long as MPCs of lenders and borrowers are equal.

  22. #69 by Tom on April 8, 2012 - 7:44 am

    Oliver, MPC tells us about bevaving at the margins. It doesnt mean that MPC of lenders is zero and borrowers one. If you are net lender you still spend money on different things. But I agree that borrowers usually have greater MPC by the fact that they are poorer so have to spend more. So I agree with the fact that private debt is too high just dont think that it was banks fault that it grew so much. Everyone is responsible for its one actions and banks just help to match lenders and borrowers. Of course monetary policy which allowed this was too loose but it was justified by the savings glut of asian world (at least so it seemed back in the days).

    • #70 by Oliver on April 8, 2012 - 9:19 am

      Look at the money, not the people. The propensity to consume with a $ one no longer has, is 0 – period. And if the system is such that for everyone who borrows a dollar someone else gives up the possibility of consumption, you haven’t explained where new dollars come from and all activity hinges on velocity of the existing dollars. Two separate concepts.

  23. #71 by Tom on April 8, 2012 - 9:40 am

    MPC relates to people not money. I have explained that saving glut of Asian world faciliated consumption binge of the west. New dollars come from Fed but that is a secondary thing. Fed didnt want to tighten because it was afraid of disinflation trends and uneployment. And high saving rates and appetite for dollars of chinese helped to create this bubble.

    • #72 by Oliver on April 8, 2012 - 12:48 pm

      which is probably why yo’re missing the point?

    • #73 by Oliver on April 8, 2012 - 12:51 pm

      and new dollars don’t come from the fed. new reserves do…

    • #74 by Oliver on April 8, 2012 - 12:52 pm

      …in response to demand by banks, that is :-)

    • #75 by Unlearningecon on April 9, 2012 - 12:15 pm

      The ‘savings glut’ story simply does not corroborate with the evidence:

      First, the average global savings rate over the 24 years ending in 2008 was 23%. It rose in 2004 to 24.9%. and fell to 23% the following year. It seems a bit of a stretch to call a one-year blip a “global savings glut”. Second, credit growth in the US was well out of proportion to what can be explained even by the massive growth of foreign exchange reserves in China and other Asian trade partners.

      via naked capitalism.

      • #76 by Tom on April 9, 2012 - 9:40 pm

        Savings glut doesnt imply that global savings rise but that distrubution changes e.g. US savings rate fall and chinese rise.
        It’s still the best explanation of all possible stories:
        http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/?pagination=false

      • #77 by Unlearningecon on April 9, 2012 - 9:55 pm

        That article doesn’t really explain the causal link between low long term interest rates and the asset bubble.

        Keen’s private debt story also corroborates far better with the evidence. And as we’ve discussed, private debt does not require savings to back it.

        To the extent I agree with that article, it appears to present a case for capital controls and regulation of speculation.

  24. #78 by Unlearningecon on April 8, 2012 - 2:01 pm

    Assets = liabilities is, of course, true by construction. But when money is paid back it goes into banking assets and is taken out of circulation. You could argue that the bank is a ‘patient’ agent but it makes more sense to model it differently.

    • #79 by Tom on April 8, 2012 - 2:17 pm

      I’m not saying that banks are patient. Of course they are active but they are constrained by CB policy. And it has nothing to do what comes first (loans or deposits). Banks can be very active even when deposits comes first.

      • #80 by Unlearningecon on April 9, 2012 - 11:06 am

        They are constrained, just not by the fictional money multiplier.

  25. #81 by rf on April 9, 2012 - 1:34 am

    Tom, suppose I’m a borrower who goes into a bank for a loan. If I’m creditworthy, the bank will want to grant me a loan – say at 5%.

    1) Now suppose the bank doesn’t have enough “deposits” (which, I take it, you use to mean reserves (cash + settlement balances) rather than callable bank liabilities). For simplicity, lets say this is because the bank would not be able to meet its required reserve ratio (ignoring the fact that most countries do not have de facto reserve requirements). Though this ratio could be anything, suppose it is 100% to get a pure patient/impatient story where MB = M1 = M2 etc.

    2) Would the bank grant me the loan? Yes – banks do not refuse loan applications because they don’t have the “deposits”.

    3) Why? Because the bank can go to the overnight money market to borrow the reserves – at 1% – in order to meet its requirements. Notice that the bank is making a 4% spread.

    So far none of this contradicts the patient/impatient story and is also completely autonomous of the central bank. However, point 2 – which tells us that private debt is demand driven – rests on the assumption in 3 that the bank can in fact borrow in the overnight market. What happens when this is not true?

    5) Suppose a bank cannot borrow in the overnight market because there are no patient lenders. What happens? The bank still needs those reserves because they are legally required and it has already granted the loan. Now there is excess demand in the money market, so the price on reserves rises.

    6) The Central Bank targets this rate in the short run. It is forced to intervene and lend the reserves (out of money it created from nothing) in order to hit its target of 1%.

    So the act of me taking out a loan forces the central bank to increase the money supply. This is where the patient/impatient model fundamentally breaks down. By taking on debt, I have increased my (nominal) purchasing power. Whose purchasing power is diminsihed? Nobody’s.

    Also, for good measure:

    7) The CB is always ready to exchange cash for settlement balances 1:1, so the composition of reserves (“deposits”) is irrelevant to the debate.

    Which point do you disagree with? If (and only if) none, then which caveats do you think make endogenous money theory incorrect?

    • #82 by Tom on April 9, 2012 - 7:10 am

      I’m not saying that endogenous money theory is incorrect. Of course deposits can be loan driven but causution can also go in the opposite direction. I think what dominates depends on how deep are financial markets. Because you cant ommit the balance sheet structure constraint. And it is very often related with reserve constraint. For example if someone transfers money outside of the bank then bank will increase its liabilities to other banks. And this may change its risk profile.
      But i think that discussion about endogeneity of money is pointless. The question should be what drives demand for bank loans? Are bank autonomous in creating this demand? If the answer is no then this whole discussion doesnt make sense because we come to the conclussion that it’s CB who creates this demand by targeting interest rates. The only exception is liquidity trap where zero interest rates can not do anything to stimulate demand.
      I would also not agree that increasing bank reserves by QE is worthless. If you agree that causation can sometimes come from deposits to loans (as UE did) then it becomes clear that this policy can also have some positive influance.

      • #83 by rf on April 9, 2012 - 10:45 am

        I think you should be very careful with the meaning of the word “deposits.” It isn’t very clear to me whether you mean “reserves”, “money deposited in the bank”, or “bank liabilities taking the form of callable loans, such as chequing accounts held by bank customers.” Endogenous money theorists usually only use the third meaning, and certainly not the first.

        I do not agree that deposits (in any sense of the word) cause loans. If you mean that the composition of bank funding (through depositors, money markets, corporate paper, equity, etc.) can influence the decisions of banks regarding what level of risk they want to take on, then I agree. But I don’t think this is a terribly important factor (hence QE being largely ineffective) and certainly not important enough to say that deposits can cause lending.

        The reason that endogenous money is important is that it fundamentally changes how a very large number of models function. The usual story you hear is that real savings causes investment (like, say, in the Solow growth model). Endogenous money flips this on its head – if impatient investors can get funding without the need for patient nominal savers, then investment can cause the necessary real savings by crowding out consumption (or, more realistically, by using idle resources). IS/LM, for example, completely falls apart.

        The question of what determines demand for bank loans is significant, I agree, though I’m not sure what you mean by banks being “autonomous in creating this demand.” Demand for loans is influenced by the interest rate (among many other factors) but it wouldn’t be right to say that the CB “creates” demand. The reaction to changes in the interest rate is likely to be very complex, but the point is in the end the demand for cerdit creates its own supply.

        Nice to see this discussion moving forward. I suspect the ultimate disagreement will be over which effects are actually important (an empirical question).

    • #84 by Tom on April 9, 2012 - 8:09 am

      Also take into account that responsible proponents of money endogeneity (for example Mervyn King in UK or economist Seth Carpenter from Fed) dont claim that this endogeneity comes from monetary system (i.e. CB as the only issuer) but rather that it is just an empirical thing. And it may be true that in deep financial markets this endogeneity dominates. But it is not merely a matter of monopoly of CB as MMT followers believe.

      • #85 by Oliver on April 9, 2012 - 5:44 pm

        The currency monopoly applies to the ability of the combined forces of government to set the base price of credit as well as the fiscal stance (among other things). Put differently, the interest rate on credit is exogenous to the non-government sector, as it is set by the CB. What is endogenous to the non-government sector is the amount of credit that is created under those conditions. You seems to confuse the two. The causation goes from customers to banks to the central banks, where banks’ willingness to lend is the hardest constraint within that chain of operations and thus determines the quantity.

  26. #86 by Tom on April 9, 2012 - 12:11 pm

    Endogenous money dont flips Solow or any other neoclassical model on its head if savings crowd out consumption. These models dont assume idle resources so this also cant be a reason to decide that they are inconsistent. If you dont agree that loans can be driven by deposits then think about a situation where bank receives money as deposit from someone and has to pay interests on it. Dont you think that it will try to increase its loans to earn for these interests? For the same reason the more excessive reserves bank keeps the less profitable it is. So why not to try increase lending growth? I understand that demand may be weak but that is another thing. If you were a widget seller wouldnt you try to sell them if you had plenty of them?

    • #87 by Unlearningecon on April 9, 2012 - 3:56 pm

      I think the bank will make loans on the basis of:

      (a) Risk perception;

      (b) The rate at which it would have to borrow the reserves;

      (c) Its capital holdings.

      It will do this regardless of its level of deposits. Should it find its deposits costing too much then it will increase its interest rate – if it is unable to do that then it has managed risk badly and will go bankrupt (in theory, of course in practice it will be bailed out).

      Banks currently have excess reserves and are not lending (if you think 0.25% IoR is the reason then there’s no hope).

      • #88 by Tom on April 9, 2012 - 4:34 pm

        Dont you think that b) is related to level deposits? I mean the more stable and cheap deposits base it has the more indifferent and independent it is to the rate at which it would have borrowed reserves. Banks are not lending because demand is weak and they are capital constrained ( they have to repair their balance sheet). Why cant you admit that production can be also supply driven is beyond me.
        And banks sometimes go bankrupt: in the last four years more than 300 banks failed. For the contrast in the five years beforre 2008 only 11 banks went down.

      • #89 by Tom on April 9, 2012 - 10:20 pm

        Look as far I can accept irrational explanations I think it’s still better to assume rational explanations if facts dont condradict them. So In my opinion it’s better to think that someone could spend more because someone else restrained from spending than to say that spending can go on without any funding. Even if loans went first they still had to be funded by someone who didnt want to spend because otherwise CB would rise interest rates. And because of high savings rates in Asia it didnt have to or even couldnt do it without the risk of deflation and higher unemployment.

      • #90 by Unlearningecon on April 9, 2012 - 10:44 pm

        ‘ if facts dont condradict them’

        But the facts do contradict your position. You’re just being an economist and valuing theory over evidence.

        ‘Even if loans went first they still had to be funded by someone who didnt want to spend because otherwise CB would rise interest rates.’

        You are aware the CB can create money right?

  27. #91 by Tom on April 9, 2012 - 9:00 pm

    Olver the causation is an empirical thing not a direct consequence of currency monopoly. Read economists I have mentioned before trying to school me.

    • #92 by Oliver on April 10, 2012 - 6:42 am

      Nobody says it is. What we’re saysing is causal direction may change if there is a harder constraint in a different part of the operational chain. Governments are still currency monopolists under a gold standard, but they voluntarily render part of the control over the currency to a detached commodity market, which imposes a harder quantity constraint. Look up discussions about self-imposed constraints for more details.

      You may also want to soften your tone about the relation between theory and empricism. MMT is an attempt to build a theory around current monetary arrangements, and specifically not about inventing new natural laws.

      http://understandingsociety.blogspot.com/2012/04/causal-realism-and-historical.html

    • #93 by Oliver on April 10, 2012 - 7:26 am

      I’m not the one trolling forums criticising paradigms I’m not informed about…

  28. #94 by Tom on April 9, 2012 - 11:00 pm

    Ok this is my last answer and I give up. CB did create a lot of money by not rising rates. And why? Two twin answers:
    1) to not cause deflation and higher unemployment
    2) Because there was big demand for this money caused by high asian savings rates.
    Why you cant accept this explanation ?

    • #95 by Oliver on April 10, 2012 - 6:58 am

      The CB did not create money by lowering rates, but it may have prevented a more rapid decline of credit, all other things equal. In any case, the two are very different! It’s all in the causation. And the Asian saving rate is fully compatible with the endogenous money story, in fact it’s a large part of it – but the MMT focus is not on interest rates but rather on monetary aggregates. Specifically the relation between government deficits/surpluses and other sector surpluses/deficits. Read before you critique…

      • #96 by Tom on April 10, 2012 - 7:48 am

        What decline of credit are you talking about?

      • #97 by Oliver on April 10, 2012 - 10:08 am

        Does ‘credit crunch’ ring a bell?

      • #98 by Tom on April 10, 2012 - 10:39 am

        Oliver we are talking about lowering rates after the technology bubble of the late 1990s burst. Fed cut interests from 6.5 percent at the beginning of 2000 to just 1 percent in 2003, and kept the rate very low into 2004. So what credit crunch do you mean?

    • #99 by Tom on April 10, 2012 - 7:47 am

      Oliver so if you agree that causal direction can change and it depends on how deep are financial markets then what’s big fuss about MMT?

      • #100 by Unlearningecon on April 10, 2012 - 7:48 am

        (1) Endogenous money =/= MMT

        (2) Endogenous money changes the role for private debt in the economy

        (3) Endogenous money implies interest rates are exogenous, ignoring the foreign component

      • #101 by Oliver on April 10, 2012 - 9:55 am

        I’ll have to qualify my comment from above a little. Scarcity of reserves will impose a harder constraint to the extent that normal economic fluctuations will cause interest rates to fluctuate, all other things equal. Larger fluctuations will cause a currency crisis. Endogeneity still holds, but it runs less smoothely, so to say (correct me if I’m wrong here, unlearning). After all, these theories are older than Nixon. CBs cannot impose quantity of credit. Under current arrangements they have full control over interest rates, though.

  29. #102 by Tom on April 9, 2012 - 11:41 pm

    Or to put it in another way: if Asians didnt want to save so much CB would rise interest rates and consumption binge of the West would not be possible even if people wanted to spend there completely irresponsibly.

    • #103 by Tom on April 10, 2012 - 6:26 am

      And why did they want to save so much? In order to have stable currencies in relation to dollar. Because they had in memory 1997 asian crisis of countries with appreciating currencies and current account deficit. And why this stable currencies and loose Fed policies not caused massive inflation on their domestic market? Because of huge labor supply reserves. So in my opinion this crisis was a direct result of globalisation and was quite difficult to prevent.

    • #104 by Oliver on April 10, 2012 - 7:25 am

      If asians didn’t want to save so much, the western consumption binge wouldn’t be, pretty much independent of interest rates. And the question whether interest rates WOULD rise does not answer whether they MUST rise and also not, what effect such a rise would have. Post Keynesians have EMPIRICALLY shown a week link between interest rates and useful economic activity and do not accept the existence of a ‘natural rate’.

    • #105 by rf on April 10, 2012 - 11:46 am

      Why would the CB be forced to raise interest rates? I suspect you are thinking in terms of loanable funds supply/demand here where less funds available in the financial system from Asian foreign investment (anyone have a good link to the numbers on this?) in the counterfactual case would drive up market rates. Where does the CB come in and, importantly, in your model is it targetting interest rates or money supply growth or something else?

      As Nick Rowe points out, the CB interest rate is (in part) a reaction to inflation. Perhaps it’s important to have a theory of inflation stated up front when we move past the tactical level of CB operations.

    • #106 by Tom on April 10, 2012 - 12:56 pm

      rf I’m not saying the CB would be forced to raise interest rates only that it was restrained from doing it for the reasons I have explained.

  30. #107 by Unlearningecon on April 10, 2012 - 7:47 am

    I’m not sure there’s any hope for progress in this debate. Tom, you need to go over the evidence Keen has presented on private debt. Ultimately in a science, evidence has the final say and Keen’s fits the endogenous story, not the intermediary one.

    • #108 by Tom on April 10, 2012 - 7:55 am

      Ok I’m fine with that. I have enjoyed this debate but dont want to prolong it if you dont wish it.

      • #109 by Unlearningecon on April 10, 2012 - 8:23 am

        It’s just that we seem to be going in circles and I don’t see how anybody could look at Keen’s charts and dismiss them on the basis of a certain theory of the banking system.

        Of course, feel free to carry on debating others.

      • #110 by Tom on April 10, 2012 - 8:54 am

        Ok I have just watched it

        and I dont find him very convinving or even honest.
        He misrepresents Krugman and is quite dishonest. Bernanke 20 years ago wrote about debt distribution and MPCs of borrowers and lenders so it’s ignorant to claim that they dont care about debt.
        Look it’s just like investing in stocks: just because you make mistakes in picking the right ones doesnt mean that the theory of valuation is wrong. The same is with economic policy: you may make mistakes related to timings of different events or actions or be influnenced by politics. But this doesnt negate the whole theory on which you are relying.

      • #111 by Oliver on April 10, 2012 - 10:17 am

        That’s not what he’s on about. His view is specifically on the gross level of private credit. One has nothing to do with the other. It’s rather one sided and spurious to discuss something that one of the parties refuses to acknowledge the existence of.

      • #112 by Tom on April 10, 2012 - 10:50 am

        No one is questoning that private debt level may be too high. The question is whether it could have emerged without any funding as UE claims. Mainstream view is that it was facilitated by the high savings rates in asian countries (whether they were completely voluntarily is another thing). Without them this rise in private debt would not be possible.

      • #113 by Oliver on April 10, 2012 - 11:29 am

        I see, it’s the evil slant eyes. Japan had a current account surplus, low gvt deficits and a humungous real estate bubble. Who funded that?

      • #114 by Tom on April 10, 2012 - 12:34 pm

        They also had high savings rate so they could afford it and their current private non financial debt is not high by historical standards: http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Debt_and_deleveraging_The_global_credit_bubble_Update

        And I dont understand why bubbles should have something to do with the direction of causation between loans and deposits. We had many bubbles under gold standard in the past (the most famous one was tulipomania).

  31. #115 by Unlearningecon on April 10, 2012 - 12:57 pm

    I’m talking about Keen’s articles, not that video which, being on RT, is a bit of a parody. You’re making it quite clear you don’t wish to engage with the endogenous money literature…

    It’s pretty heavily empirically documented that banks create loans, then deposits, then the CB expands the monetary base, in that order. Savings are not required. Bubbles result when the debt does not go into productive activities. Speculation is still possible under a gold standard so the Dutch Tulip Mania doesn’t conflict with that hypothesis.

    • #116 by Tom on April 10, 2012 - 1:57 pm

      Look I’m not against the view that loans can create deposits if financial markets are deep (actually Bernanke and Blinder stated that in 1988).
      I just dont find it very useful in analyzing current crisis. I maybe be wrong and you may be right time will tell. Nevertheless it was enjoyable debate.

      • #117 by rf on April 10, 2012 - 2:12 pm

        I think you are missing the point about central bank interest rate targetting: financial markets (at least the interbank money market) are infinitely deep – the Central Bank makes them so. No amount of buying or selling in these markets is going to change the rate. That’s what it means to have an interest rate target.

      • #118 by Tom on April 10, 2012 - 2:50 pm

        It may be true in US and other developed countries but certainly not in all developing countries which have nonconvertible and floating exchange rates.

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