Last week (September 17, 2015), the US Federal Reserve Bank took the sensible decision to leave the US policy interest rate unchanged. Nine of the ten Federal Open Market Committee (FOMC) voted accordingly. One dissenter wanted rates to rise by 25 basis points. The central bank made the correct decision, even if you might like to question their reasoning. The decision has not pleased the financial markets who have been baying under the moon for months if not years for interest rates to return to higher and more stable levels. There is no surprise in that. They make more profits under those conditions and when there are low rates and higher uncertainty about their direction (and adjustment speed), profits come less easily. Further, they long for what they call “normal levels” of interest rates despite the fact that reality changed with the GFC and we now know that monetary policy is relatively ineffective as a policy tool for controlling or influencing aggregate spending. And it is typical that they ignore the millions of people who remain idle in one way or another and are enduring flat real wages and rising poverty rates. There is no old “normal’ now. Things have changed.
Greetings from London in the early morning! If we went back a few years and dug out all the predictions and scare campaigns that were being issued by mainstream economists and their conservative ‘think tank’ conduits about the impending disaster that would accompany the near zero interest rate regimes that the US Federal Reserve Bank had implemented it would make a great comedy sketch. There should be no surprise with the massive predictive failures of the mainstream economists in this regard. They clearly did not understand the underlying dynamics that govern the way the central bank interacts with the commercial banks. The problem is that these conservative forces are so dumb they don’t have adaptive learning mechanisms and so even in the fact of evidence contrary to their Groupthink they keep pumping out the same nonsense. The other problem is that they tend to be well funded by the right-wing establishment that they exhibit disproportionate influence on the public policy debate. That influence has turned to demands that the US Federal Reserve Bank (the central bank) increase interest rates and reverse its quantitative easing – apparently because hyperinflation is just around the corner. Nothing could be further from the truth. At present the US economy is some way into a very slow and relatively tepid recovery. But it has still some way to go and while interest rate changes have a relatively weak impact on overall growth any anti-growth noise is undesirable. It is also not justifiable given the central bank’s own logic.
I have received a lot of E-mails over the weekend about a paper released by the CEPR Policy Portal VOX (June 20, 2015) – Can central banks avoid sovereign debt crises? – which purports to provide “new evidence” to support the conclusion that “the ability of the central bank to avert a debt self-fulfilling debt crisis is limited”. It is another one of those mainstream attempts to brush away reality and draw logical conclusions from a flawed analytical framework. When one digs a bit the conclusion withers on the vine of a stylised economic model that leaves out significant features of the monetary system – such as for starters, a currency-issuing government can never go broke in terms of the liabilities its issues in its own currency. All the smoke and mirrors of stylised New Keynesian mathematical models cannot render that reality false.In other words, the paper and the lineage of papers it draws upon should be disregarded by anyone who desires to understand how the monetary system operates and the capacity and opportunities that the currency-issuing government (including its central bank) has within that system.
Its my Friday lay day blog and today a brief discussion about property price bubbles and how the Reserve Bank of Australia (our central bank) has fallen out with the Australian government. This week, the simmering tension between the Governor of the RBA and the Conservative Australian government more or less came out into the open when the Governor told the nation that the fiscal strategy of the Government was failing and a higher deficit was required given the circumstances. The RBA Governor has also come clean on the issue of house prices in Australia which he said he was “acutely concerned” about and called them “crazy” again, a direct contradiction of the claims by the Government that there is no problem and people should just “get a better paying job” if they wanted to buy a home. It is rare for a central banker to be so pointed about the failure of Government policy.
The Bank of England released a new working paper on Friday (May 29, 2015) – Banks are not intermediaries of loanable funds – – facts, theory and evidence (updated June 2019) – which further brings the Bank’s public research evidence base into line with Modern Monetary Theory (MMT) and, thus, further distances itself from the myths that are taught by mainstream economists in university courses on money and banking. The paper tells us that the information that students glean from monetary economics courses with respect to the operations of banks and their role in the economy is not knowledge at all but fantasy. They emphatically state that the real world doesn’t operate in the way the textbooks construe it to operate and, that as a consequence, economists have been ill-prepared to make meaningful contributions to the debates about macroeconomic policy.
Last month, the Schweizerische Nationalbank (SNB), the nation’s central bank recorded some large ‘book’ losses after it had abandoned its attempt to stop the Swiss franc (CHF) from appreciating against the euro. It started trying … as a way of protecting its manufacturing sector but abandoned the strategy on January 15, 2015. It had been buying euro in large quantities with francs and on April 30, 2015 the SNB released the – Interim results of the Swiss National Bank as at 31 March 2015 – which showed that its first-quarter 2015 losses were 30 billion CHF or around 29 billion euros. They lost CHF 29.3 billion on its “foreign currency positions” and CHF 1 billion on its gold holdings. This has raised the question, once again, whether central bank losses matter. The answer is always that they do not matter at all given the central bank can never become illiquid as it issues the currency (under some arrangement or another). So the commentators who whip up a lather about impending doom arising from central bank bankruptcies are to be ignored. But central bank officials also publicly express concern about their capital holdings. Why would they introduce that concern into the public domain when they know full well that they cannot go broke. The answer is that they are politicians themselves except they evade democratic scrutiny and election.
There was an article in Bloomberg Op Ed yesterday (May 19, 2015) – U.S. Workers Brought the ‘Great Reset’ on Themselves – which argues that those who bemoan the falling standards of living for workers in terms of job stability, real wages growth etc have only themselves to blame because as workers they demand conditions that they are not prepared to sustain as consumers and taxpayers (higher prices, higher taxes). It is an extraordinary argument not because there are not elements of truth in it, but, rather, because it ignores other realities such as the rising income inequalities and the on-going redistribution of national income to profits. It also tallies with what is going on in Australia at present, which is a specific form of the on-going attack on real standards of living for workers and their families through poorly crafted government policy. The policy design reflects ideology rather than any appreciation of what is required to maintain living standards.
In Part 1, I briefly outlined the Sovereign Money System proposal (SMS) advanced by the Icelandic government as a way forward in banking reform. I also demonstrated that the banking collapse in Iceland in 2008 could hardly be seen as being caused by the banks having the capacity to create credit. Much more was in play including the fact that banks had stopped behaving as banks and were serving the doubtful aspirations of their owners rather than any notion of public purpose. While the Icelandic report claims that the commercial bank lending destabilised the growth cycle in Iceland the reality is that it was other factors that led to the explosion of their balance sheets. The money supply did expand faster than “was required to support economic growth” but that is because the financial system was deregulated and the banksters and fraudsters were allowed to serve their own interests and compromise the national interest. As we will see that sort of duplicity can be reigned in with appropriate structural regulation without scrapping the capacity of the private banks to create credit. In this Part 2, I consider some of the mechanics of the SMS and argue that essentially we cannot get away from the fact that a central bank always has to fully fund a monetary system. If it tries to restrict funds yet maintain private bank lending then recession would surely follow and interest rates would rise beyond the control of the central bank. I also provide some ideas on where more fundamental monetary system reform is currently needed.
In a way this blog is being written to stop the relentless onslaught of E-mails coming, which seek to promote so-called positive money. I am regularly told that I need to forget Modern Monetary Theory (MMT) and instead see the benefits of this alleged revelationary approach to running the economy. Other E-mailers are less complimentary but just as insistent. Then there are the numerous E-mails recently with the following document attached – Monetary Reform: A Better Monetary System for Iceland – which I am repeatedly told is the progressive solution to bank fraud and, just about all the other ills of the monetary system. The Iceland Report was commissioned by the Icelandic Prime Minister and is being held out as the solution to economic and financial instability because it would wipe out the credit-creating capacity of banks. It has been endorsed by the British conservative Adair Turner, who formerly was the chairman of the UK Financial Services Authority and who recently advocated so-called overt monetary financing (OMF) as a way to resolve the Eurozone crisis. I agree with OMF but disagree with his view that it is the credit-creation capacity of banks that caused the crisis. The crisis was caused by banks becoming non-banks and engaging in non-bank behaviour rather than their intrinsic capacity to create loans out of thin air. A properly regulated banking system does not need to abandon credit-creation. Further, I am aware that in holding this view, I and other Modern Monetary Theory (MMT) proponents are accused of being lackeys to the crooked financial cabals that hold governments to ransom and brought the world economy to its knees. Let me state my position clearly: I am against private banking per se but consider a properly regulated and managed public banking system with credit-creation capacities would be entirely reliable and would advance public purpose. I also consider a tightly regulated private banking system with credit-creation capacities would also still be workable but less desirable.
Its my Friday lay day blog where I just wander around in the time I allocate to writing this blog. The venality of neo-liberal governments is never far from the surface. The more successful ones manage to mostly hide the nasty stuff they get up to from the general public or assuage public concern via their spin doctors. Sometimes, an outrageous decision breaks out of the cocoon of spin and demonstrates the sheer bastardry of the political elites. That happened in Australia over the last week when it was announced that the Australian government was providing $A4 million to the University of Western Australia to set up a new think tank under the influence of a Dane Bjørn Lomborg – who has been described as a “sceptical environmentalist” (Source). Our Prime Minister has favourably quoted Lomborg’s work in his own work and is the Australian leader who abandoned the carbon tax and thinks continued use of “coal is good for humanity” (Source).