the times we live in.The perception that return of capital is more important than return on capital.
could it be just a logistical routine to buy bonds for certain parties that would cost more to update and write exceptions to than to it would to incur the negative interest?
the times we live in.
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 cant see the wood for the trees.
1. Krugman reads Steve Keens 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 that they said there is no limit to this process. Of course, thats 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 Keens latest post properly, and falling straight into his characterisation of DSGE. Keen responds. Krugman says the debate is over.
Looking over the debate, Id 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 didnt make it exactly clear where he stands, even after I asked him. Neither of them engaged properly with Keens or anyone elses arguments.
I cant 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. Im forced to wonder if their theories are simply immune to falsification.
NB: A couple of others provide some constructive comments on Keens slack definitions in his most recent paper, particular with respect to units, that are worth reading in their entirety. Having said that, Keens accounting appears to be correct, even if its not the clearest.
http://unlearningeconomics.wordpress.com/2012/04/03/the-keenkrugman-debate-a-summary/
An Epic Blog Battle between Paul Krugman and Steve Keen! This definitely qualifies as cool and I liked this blog's summary of it. Click the link for some extra text links that my quote didn't capture.
Cutlass said:I don't see any reason, under ordinary circumstances, for the CB to give the banks what they want. Remember that the CB is following its own agenda concerning inflation and growth. If a bank cannot cover a loan it made, tough cookies. That's their problem. I cannot see any reason to assume that the CB will cover it. Because the CB is not the only place the lending bank can get the money. Force them to pay market rates for the money.
As to the point about currency withdrawal, banks are required to keep reserves equal to 10% of deposits. But they very rarely use that much of their reserves for transactions on a given day. So they have plenty of reserves to cover it. If cash is needed, it can be gotten from another bank or an armored car service within a business day.
there are two factors needed to make manipulating reserves a control mechanism over bank lending:
- Reserves themselves; and
- A mandated ratio between deposits at banks and reserves
Paul doesn’t seem to have caught up with the fact that this mandated ratio no longer exists, for all practical purposes, in the USA and much of the rest of the OECD. Six countries have no reserve requirements whatsoever; the USA still has one, but for household deposits only. Figure 3 shows the actual rules for reserves in the USA—taken from an OECD paper in 2007 (Yueh-Yun June C. O’Brien, 2007). The reserve ratio of 10% only applies to household deposits; corporate deposits have no reserve requirement. And the reserves are required with a 30 day lag after lending has occurred—by which time the deposits created by the lending are percolating through the banking system.
Debt defaults are deflationary, so the central bank can not pursue it's price stability mandate while letting the loans of the banking system go bad. I think where you have a point is in that the central bank doesn't need to accede to the demands of any single bank. It is when the system as a whole gets needy for reserves that it has little choice but to comply.
I don't think it's entirely accurate that banks keep 10% of deposits in reserve in practice these days; that's just what outdated textbooks say on the topic. The rule applies only to loans to households, not to commercial institutions. In practice the reserve ratio is much lower in the US. Closer to 0% than to 10%. Several countries such as Canada have explicitly 0% reserve banking laws. Here's Keen's take on it:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
What I'm really curious about is what the implications of endogenous money theory are on the explanation of how interest rates came down so far in the last 30 years. Does the story that it's all about emerging markets exporting and saving like mad while American borrowers couldn't soak it all up fast enough still make sense?
Or is the low interest rate the result of the high private debt load itself, i.e. if the banking system needs low interest rates to sustain high debt loads, the central bank will provide them given their price stability mandate and the effects of debt-deflation?
Another issue within this question is that of how the aggregate private debt load begins to rise in the first place. Keen likes to explain it in terms of Minsky's Financial Instability Hypothesis, which basically says it just happens because people get less conservative as positive times drag on. I see the argument for that, but I'm inclined to think that some form of government lobbying is also involved. This last thing is consistent with economic rationality where Minsky's FIH is not.
cutlass said:But money doesn't just come out of thin air. There has to be a source of the money to be loaned. It isn't fictional money.
innonimatu said:No. That was just misdirection, in order to avoid addressing the real issue.
If you take rationality to be what people do instead of shat some schizophrenic mathematician said they'd d, there would be no inconsistency!
Good times do lead to reassessments (downwards) of risk. And it'll seem perfectly rational to the people doing it. That's politics and there's plenty of empirical proof. Of course governments go along with it: it's what governments are expected to do! You don't win votes, or the backing from bankers, or whatever it takes to be in government in a competitive political scenario, by opposing the desires of your people. Only iron-handed dictators do that, and they risk ending up like, say Ceausescu. That one, for example, imposed years of recession on Romania in order to pay off the country's external debts, to be overthrown and killed in the year the payments were finished! There's irony and, I'm sure, some kind of lesson there... This is not to say that there are no remedies to financial instability. Plenty were proposed, and even now people are proposing new ones (not to mention the older one of doing away with private finance altogether, but that would be just a part of some of the proposed solutions).
Because the initial money has to come from somewhere. It may go through the system a large number of times and geat heavily multiplied, but there must be a starting point.How do you interpret the line "loans create deposits" if not as a form of private sector money creation?