By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives
It has been commonplace to speak of central bank independence — as if it were both a reality and a necessity. Discussions of the Fed invariably refer to legislated independence and often to the famous 1951 Accord that apparently settled the matter. [1] While everyone recognizes the Congressionally-imposed dual mandate, the Fed has substantial discretion in its interpretation of the vague call for high employment and low inflation. For a long time economists presumed those goals to be in conflict but in recent years Chairman Greenspan seemed to have successfully argued that pursuit of low inflation rather automatically supports sustainable growth with maximum feasible employment.
In any event, nothing is more sacrosanct than the supposed independence of the central bank from the treasury, with the economics profession as well as policymakers ready to defend the prohibition of central bank “financing” of budget deficits. As in many developed nations, this prohibition was written into US law from the founding of the Fed in 1913. In practice, the prohibition is easy to evade, as we found during WWII in the US when budget deficits ran up to a quarter of GDP. If a central bank stands ready to buy government bonds in the secondary market to peg an interest rate, then private banks will buy bonds in the new issue market and sell them to the central bank at a virtually guaranteed price. Since central bank purchases of bonds supply the reserves needed by banks to buy bonds, a virtuous circle is created so that the treasury faces no financing constraint. That is what the 1951 Accord was supposedly all about—ending the cheap source of US Treasury finance.
Since the Global Financial Crisis hit in 2007 these matters have come to the fore in both the US and the European Monetary Union. In the US, discussion of “printing money” to finance burgeoning deficits was somewhat muted, in part because the Fed purportedly undertook Quantitative Easing to push banks to lend—not to provide the Treasury with cheap funding. But the impact has been the same as WWII-era finances: very low interest rates on government debt even as a large portion of the debt ended up on the books of the Fed, while bank reserves have grown to historic levels (the Fed also purchased and lent against private debt, adding to excess reserves). While hyperinflationists have been pointing to the fact that the Fed is essentially “printing money” (actually reserves) to finance the budget deficits, most other observers have endorsed the Fed’s notion that QE might allow it to “push on a string” by spurring private banks to lend—which is thought to be desirable and certainly better than “financing” budget deficits to allow government spending to grow the economy. Growth through fiscal austerity is the new motto as the Fed accumulates ever more federal government debt and suspect mortgage-backed securities.
The other case is in the EMU where the European Central Bank had long been presumed to be prohibited from buying debt of the member governments. By design, these governments were supposed to be disciplined by markets, to keep their deficits and debt within Maastricht criteria. Needless to say, things have not turned out quite as planned. The ECB’s balance sheet has blown up just as the Fed’s did—and there is no end in sight in Euroland even as the Fed has begun to taper. It would not be hyperbole to predict that the ECB will end up owning (or at least standing behind) most EMU government debt as it continues to expand its backstop.
It is, then, perhaps a good time to reexamine the thinking behind central bank independence. There are several related issues.
First, can a central bank really be independent? In what sense? Political? Operational? Policy formation?
Second, should a central bank be independent? In a democracy should monetary policy—purportedly as important as or even more important than fiscal policy—be unaccountable? Why?
Finally, what are the potential problems faced if a central bank is not independent? Inflation? Insolvency?
While this two part piece will focus on the US and the Fed, the analysis is relevant to general discussions about central bank independence. We will limit our analysis to the questions surrounding what we mean by central bank independence. We leave to other analyses the questions surrounding the wisdom of granting independence to the Fed, democratic accountability, and potential problems. We will argue here that the Fed is independent only in a very narrow sense. We have argued elsewhere that the Fed’s crisis response during the global financial crisis does raise serious issues of transparency and accountability—issues that have not been resolved with the Dodd-Frank legislation.[2] Finally, it will become apparent that we do not believe that lack of central bank independence raises significant problems with inflation or insolvency of the sovereign government.
For the US case we will draw on an excellent study of the evolution of governance of the Fed by Bernard Shull, one of the foremost authorities of the history of the Fed.[3] As we will see, the dominant argument for independence throughout the Fed’s history has been that monetary policy should be set to promote the national interest. This requires that it should be free of political influence coming from Congress. Further, it was gradually accepted that even though the Federal Open Market Committee includes participation by regional Federal Reserve banks, the members of the FOMC are to put the national interest first. Shull shows that while governance issues remain unresolved, Congress has asserted its oversight rights, especially after economic or financial crises.
I’ll also include summaries of the arguments of two insiders—one from the Treasury and the other from the Fed—that also conclude that the case of the Fed’s independence is frequently overstated. The former Treasury official argues that at least within the Treasury there is no presumption that the Fed is operationally independent. The Fed official authored a comprehensive statement on the Fed’s independence, arguing that the Fed is a creature of Congress. More recently, Chairman Bernanke has said that “of course we’ll do whatever Congress tells us to do”: if the Congress is not satisfied with the Fed’s actions, the Congress can always tell the Fed to behave differently.[4]
In the aftermath of the GFC, Congress has attempted to exert greater control with its Dodd-Frank legislation. The Fed handled most of the US policy response to the Great Recession (or, GFC). As we have documented, most of the rescue was behind closed doors and intended to remain secret. (See Felkerson 2012; and Wray 2012)[5] Much of it at least stretched the law and perhaps went beyond the now famous section 13(3) that had been invoked for “unusual and exigent” circumstances for the first time since the Great Depression. Congress has demanded greater transparency and has tightened restrictions on the Fed’s future crisis response. Paradoxically, Dodd-Frank also increased the Fed’s authority and responsibility. However, in some sense this is “deja-vu” because Congressional reaction to the Fed’s poor response to the onset of the Great Depression was similarly paradoxical as Congress simultaneously asserted more control over the Fed while broadening the scope of the Fed’s mission.
INDEPENDENT OF WHAT?
Most references to central bank independence are little more than vague hand-waves. In the US, the Fed is a “creature of Congress”, established by the Federal Reserve Act of 1913, which has been modified a number of times. Elected officials play a role in selecting top Fed officials. And while the Fed is nominally owned by share-holding banks, and while the Fed’s budget is separate, profits above 6% on equity are returned to Treasury. Congress also has asserted its authority to mandate that the Fed release detailed information on its operations and budget—and there seems to be nothing but Congressional timidity to stop it from demanding more control over the Fed (indeed, Dodd-Frank sanctions many of the actions taken by the Fed during the GFC, now requiring prior approval by the President, the Treasury Secretary, and/or Congress for various interventions). Further, as we will see, the Fed’s operations are necessarily closely coordinated with the Treasury’s; the Fed, after all, functions as the Treasury’s bank. Finally, as everyone knows, Congress has provided a dual mandate to guide Fed policy although one could easily interpret Congressional will as consisting of four (at least some of which are related) mandates: high employment, low inflation, acceptable growth, and financial stability.
Above I have argued that the Fed is a creature of Congress. MacLaury has put the relationship this way:
Ultimately the [Federal Reserve] System is accountable to congress, not the executive branch, even though Reserve Board members and the chairman are president-appointed. The authority and delegated policy powers are subject to review by the congress not the president, the Treasury Department, nor by banks or other interests. (p. 4)
While many supporters and critics alike have stressed the Fed’s nominal ownership by member banks as evidence that it is somehow independent of government, the Fed’s Bruce MacLaury interprets the independence as follows[6]:
First, let’s be clear on what independence does not mean. It does not mean decisions and actions made without accountability. By law and by established procedures, the System is clearly accountable to congress—not only for its monetary policy actions, but also for its regulatory responsibilities and for services to banks and to the public. Nor does independence mean that monetary policy actions should be free from public discussion and criticism—by members of congress, by professional economists in and out of government, by financial, business, and community leaders, and by informed citizens. Nor does it mean that the Fed is independent of the government. Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the “public interest.” It has a degree of independence within the government—which is quite different from being independent of government. Thus, the Federal Reserve System is more appropriately thought of as being “insulated” from, rather than independent of, political—government and banking—special interest pressures. Through their 14-year terms and staggered appointments, for example, members of the Board of Governors are insulated from being dependent on or beholden to the current administration or party in power. In this and in other ways, then, the monetary process is insulated—but not isolated—from these influences. In a functional sense, the insulated structure enables monetary policy makers to look beyond short-term pressures and political expedients whenever the long-term goals of sustainable growth and stable prices may require “unpopular” policy actions. Monetary judgments must be able to weigh as objectively as possible the merit of short-term expedients against long-term consequences—in the on-going public interest.
We can take that as our starting point: the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures. Let’s explore this independence in more detail, beginning with an historical perspective.
Fed Governance: Historical Perspective
Shull[7] (2014) offers a detailed history of the evolution of Fed governance. He notes that the Fed is an independent government agency like the Federal Trade Commission, the National Labor Relations Board, and the Securities and Exchange Commission. Each of these has substantial discretion in implementing laws through rules and regulations and in formulating policies. Most independent agencies have an Inspector General and are subject to Congressional oversight. The Fed is somewhat unusual in that it is self-financing and in that there is a widely held belief that if its formulation of monetary policy were not independent, the policy outcome would be worse. In other words, good monetary policy supposedly depends on independence (from Congress and the Administration).Thus, the Fed’s monetary policy is not subject to audit by the General Accountability Office—and courts have refused to hear suits that accuse the Fed of policy mistakes. In recent decades, the Administration has been reluctant even to criticize the Fed’s monetary policy. However, as we will see, that has not always been the case.
The movement to create a central bank strengthened after the Panic of 1907. Rival plans were put forward, which ranged from a bank-supported plan which would create a privately-owned central bank (like the Bank of England), to a proposal to house the US central bank within the Treasury. The Glass-Owen bill split the difference, with private ownership and a decentralized system, but with the Treasury Secretary and the Comptroller of the Currency sitting on the Board. The decentralized system was supposed to ensure “fair representation of the financial, industrial and commercial interests and geographic divisions of the country,” (quoted in Shull p. 4). The Board was to be “a distinctly nonpartisan organization and was to be wholly divorced from politics.” (ibid p. 5) According to Paul Warburg, governance was to be maintained by a “system of checks and counter-checks— a paralyzing system which gives powers with one hand and takes them away with the other.” (ibid) In other words, the idea was that by ensuring broad representation of interests, the Fed would be stymied by a “clash of interests” that would reduce the damage it might do; as Shull puts it, “The checks and balances thus constituted a form of internal governance.” (ibid p. 5) That of course sounds somewhat familiar as a typically American approach to governance.
When WWI came along, however, the Fed turned its attention to supporting the Treasury’s debt issue. In the inflationary period at the end of the war, the regional Feds raised discount rates sharply (up to 85%) and a deep retraction followed that led to deflation of farm prices. Congress revisited the governance issue as some critics wanted to force the Fed to seek Congressional approval in advance of future rate hikes. One of the Board members, Adolph Miller, understood the implication:
The American people will never stand contraction if they know it can be helped. Least of all will they stand contraction if they think it is contraction at the instance, or with the consent of an institution like the Federal Reserve System….The Reserve System cannot ‘make’ the business situation but it can do an immense deal to make its extremes less pronounced and violent….Discount policy…should always address itself to the phase of the business cycle through which the country happens to be passing. (quoted in Shull, p. 7)
As Shull argues, the governance by paralyzing checks and balances conflicted with the need to cooperate to use monetary policy to stabilize the economy. Congress tightened the reins on the Fed but also centralized decision-making at the Board in Washington. The GAO began to audit the Board and there were a number of Commissions and Committees that investigated new guidelines to control the Fed. However, the 1927 Pepper-McFadden Act replaced the Fed’s original 20 year charter with an indefinite charter, and a Congressional report at the time declared that the Fed had demonstrated its usefulness. In the end, Congressional anger dissipated and not much was done to constrain the Fed’s discretion.
Governance issues again came to the forefront during the Great Depression, with serious consideration given to government ownership of the Fed, to be housed in the Treasury. President Roosevelt (who seemed to have supported such a move) as well as many in Congress were concerned that the Fed was not sufficiently attune to the national interest. Title II of the Banking Act of 1935 was a compromise that preserved private ownership but moved to ensure the Board would be more responsive, focusing on the national interest. (Shull, p. 10) As power was further centralized in Washington, the “checks-and-balances” approach to governance continued to fade.
As in WWI, WWII saw the Fed cooperating with Treasury, in the national interest to keep rates on national debt low. That ended in the famous Accord of 1951, restoring “independence” of the Fed to formulate monetary policy. However, policy was still to be undertaken in the national interest, with the Fed keeping rates very low until the mid 1960s; the Fed mainly operated in short-term Treasury bills so as to have minimum effects on other financial markets. Monetary policy remained on the backburner until the inflation-recession cycle of the early 1970s. In 1975, Congress decided to exert greater control, in House Resolution 113.
In the Federal Reserve Reform Act of 1977, the Senate insisted on the requirement that it confirm the President’s appointment of the Fed’s chairman and vice-chairman. In addition Congress required that Class B Reserve bank directors had to be “elected to represent the public”. (Shull p. 12) The 1978 Humphrey-Hawkins full Employment and Balanced Growth Act clarified the Fed’s mandates and required semi-annual reports to both the Senate and the House. Later, after Chairman Greenspan got caught in “white lies” provided to Chairman Gonzalez, the Fed was required to release its transcripts of FOMC meetings (albeit with a five year lag).[8] The Fed also voluntarily agreed to measures designed to increase transparency (including announcing its explicit interest rate target).
The final big changes to governance occurred after the GFC, when Dodd-Frank tightened limits on what the Fed can do in response to a crisis. This was a surprising turn of events, as Chairman Greenspan had become the darling of Congress and the media and his replacement, Chairman Bernanke, had declared the era of the New Moderation in which central bankers could do nothing wrong. However, in the aftermath of the crisis, many elected representatives as well as the media and the population at large blamed the Fed for the crisis and for bungling a response that made the downturn worse than it should have been. As we’ve argued elsewhere, even many of those directly involved agreed that the Fed’s crisis response “stunk” and that it should never be repeated.[9] The Dodd-Frank legislation was designed in part to ensure it would not happen again.
However, yet again, Congress actually extended Fed responsibility, to include authority over large, systemically important non-bank financial institutions. Still, the Act restricted application of Section 13(3) in future crises, and for some actions required approval from the Treasury. It also mandated increased transparency (including a review by the GAO of all the Fed’s emergency assistance after the GFC). Congress also created the Financial Stability Oversight Council that is chaired by the Treasury Secretary and includes heads of agencies involved in overlooking the financial sector—including the Fed. In that manner it diluted the Fed’s power somewhat. Exactly what difference all this will make for the response in the next crisis cannot be foreseen in advance.
Next time, in Part 2, we look at the Fed’s supposed independence from our elected representatives. We’ll see that that is a fabricated myth.
[1] Thorvald Moe examines the role of Marriner Eccles and the discussions and events that led up to the 1951 Accord. Eccles was a dominant figure in the transformation of the Fed from the relatively weak and decentralized institution that had been created in 1913 to the modern central bank we know now. Moe makes a strong case that the vision of Eccles was instrumental in that evolution; as we will see, modern theories of central banks, however, deviate sharply from the Eccles vision in quite illuminating ways. See: Thorvald Grung Moe “Marriner S. Eccles and the 1951 Treasury – Federal Reserve Accord: Lessons for Central Bank Independence” Working Paper No. 747, Levy Economics Institute of Bard College January 2013.
[2] See two annual reports of research conducted with the support of Ford Foundation Grant no. 1110-‐0184, administered by the University of Missouri–Kansas City. See: L. Randall Wray, 2012. “Improving Governance of the Government Safety Net in Financial Crises,” Research Project Report, April 9. http://www.levyinstitute.org/pubs/rpr_04_12_wray.pdf; and L. Randall Wray, 2013. “The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007”, Research Project Report, April http://www.levyinstitute.org/publications/?docid=1739.
[3] Bernard Shull, who made a great presentation at the annual ASSA meetings in Philadelphia. His paper, “Financial crisis resolution and Federal Reserve governance: economic thought and political realities”, Jan 4 2014, is forthcoming as Levy Institute Working Paper.
[4] See his statement here: http://www.youtube.com/watch?v=a7XV3vS1hAM.
[5] See James A. Felkerson, 2012 “A Detailed Look at the Fed’s Crisis Response by Funding Facility and Recipient.” Public Policy Brief No. 123. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. http://www.levyinstitute.org/pubs/ppb_123.pdf; and L. Randall Wray, 2012. “Improving Governance of the Government Safety Net in Financial Crises,” Research Project Report, April 9. http://www.levyinstitute.org/pubs/rpr_04_12_wray.pdf.
[6] See Bruce K. MacLaury; “Perspectives on Federal Reserve Independence – A Changing Structure for Changing Times”; Published January 1, 1977, The Federal Reserve Bank of Minneapolis, Annual Report 1976, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=690, which examines Fed independence with respect to Congress, the Executive branch (including the Treasury), member banks, and within itself (ie, for example relations between the Board of Governors in Washington and the District banks). I will use several quotes from this comprehensive survey.
[7] Bernard Shull, “Financial crisis resolution and Federal Reserve governance: economic thought and political realities”, Jan 4 2014, forthcoming as Levy Institute Working Paper.
[8] See L. Randall Wray, “The Fed and the New Monetary Consensus: The Case for Rate Hikes, Part Two”, Public Policy Brief No. 80, December 2004, p. 14 for a discussion of this episode.
[9] See Wray 2013, the second report of this Ford Foundation-funded project, cited above.
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If Wray against fed independance because if it was independant it would undermine MMT? I think it is a good idea if the fed is independant from all other arms of gov but with governers of chairmen directly elected by the public.
The “Fed” is likely the greatest 100-year scam in human history. The “Fed” is the private property of the world’s greatest banksters. The “Fed” is a monopoly owned by these banksters, who dole out vast sums of money to themselves to “buy up” their dead-in-the-water mortgate-backed and other failing bonds. “Quantitative Stealing” is the appropriate designation.
“Testimonies” before Congress, presidential and Senate approval and phony “Fed” concerns about unemployment, etc. are so much hollywoodesque hogwash.
The problem with writing in the polemical style is that thought is hindered; calling the Fed a “scam”, while it might conceivably be appropriate, doesn’t actually reveal knowledge to us and is in that sense anti-progressive and anti-intellectual.
As a result of the money earned by these supposedly dead-in-the-water securities, the Fed returned nearly $90 billion to the US Treasury last year.
Then why has the Fed’s “balance sheet” gone from $300 billion to $3 trillion in six years? Why is it remitting money to the guv at all? It should instead be unloading all the bad debt it holds. But it pretends everything is rosy by giving the guv $90 billion a YEAR while printing $80 billion a MONTH to give to the banks.
The Fed is a racket. Because of the financial crisis, the Chairman has been shown to have no clothes. That’s why Bernanke is leaving. He’s getting a little chilly and his private parts are beginning to shrivel up.
When L. Randall Wray states that this “analysis is relevant to general discussions about central bank independence,” that we “will limit our analysis to the questions surrounding what we mean by central bank independence” and “leave to other analyses the questions surrounding the wisdom of granting independence to the Fed, democratic accountability, and potential problems,” he makes it clear that this piece is not intended to be of the “prescriptive” variety, but of the “descriptive” variety.
And what a halcyon description of the Fed Wray gives us!
After quoting Bruce MacLaury, who tells us that “although closely interfaced with commercial banks” the Fed is “clearly a public institution functioning within a discipline of responsibility to the ‘pubic interest’” and that the “insulated structure” of the Fed “enables monetary policy makers to look beyond short-term pressures and political expedients whenever the long-term goals of sustainable growth and stable prices may require ‘unpopular’ policy action,” Wray concludes that
“the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures.”
I wonder, how many people share Wray’s extraordinarily charitable description of the Fed?
And perhaps a little background information on MacLaury is in order.
MacLaury was President of the Federal Reserve Bank of Minneapolis, thus making him a member of the Federal Open Market Committee, the Federal Reserve’s senior policy-making board, from 1971 – 1977.
This was during the time, as John Kennth Galbraith wrote in Money: Whence It Came, Where It Went, that “the good years of economic management in the United States came to an end.” It was also during the time that the Fed ended the five-year tradition. As Jeffrey Snider explains: “Previous Fed regimes had adhered to the five-year tradition – where full and unedited written transcripts would be released after a five-year waiting period. The delayed transparency ended in 1976,” adding that “this is a good story about Federal Reserve tendencies toward total secrecy.”
From 1977 to 1995 MacLaury served as President of The Brookings Institution, a Washington D.C. think tank.
He has also served as a director of American Express Bank, Ltd., National Steel Corporation, and The St. Paul Companies. He previously served as a director of the Dayton Hudson Corporation (Target) and The Vanguard Funds.
http://www.hitachifoundation.org/who-we-are/leadership/board-of-directors
Mexico, thanks much for this well researched comment. When I saw not a single word about the revolving door between Wall Street and the Fed I smelt a rat and this info about MacLaury is a clear sign pointing to the bias in this article. Why would NC post an article (even if it was by Wray) which grovels to the Central Bankster community is beyond me. By the way, ignore the MMT fanatics. I see slight daylight between them, the bitcoiners and the gold buggers (pun intended). All of them think they have invented some new kind of perpetual motion machine. One thing that I never see discussed in NC is how much of outsourcing and globalization has affected the inflation rate. Wages have stagnated since 1970, ergo no inflation and plenty of deflation. I am yet to read a single article at least propounding this theory. This seems absent in the postings I have seen about MMT here and elsewhere. MMT mostly seems to be about – print all the money you want, there is no problem. All you need to roaring inflation is for trade policy and tax policy to be reset. The former moving to high tariffs for MOST imports and the latter moving to severely high taxes on outsourcing and bringing in profits from abroad. Fix these two along with taxing stock options as regular income and that is all you need for Corporations to start to retool their past 30 year strategy of ‘Corporations are CEO piggy banks’ .
PaulArt said: By the way, ignore the MMT fanatics. I see slight daylight between them, the bitcoiners and the gold buggers (pun intended). All of them think they have invented some new kind of perpetual motion machine.
Yep. That’s pretty much the conclusion Joseph Hubert came to in his devastating critique of the banking school theorists, which includes MMT as well as the gold buggers. Even though they, on the surface, appear very different, when one peels away the layers of the onion what one finds is that they are very similar at the core. As he puts it,
“the belief in ‘good bills’, ‘good uses’, ‘good bankers’, ‘perfect markets’ and other features of ideal-world economics does not apply to real-world banking. To put it differently, the banking-school rationale is based on the axiomatic classical belief in the ‘invisible hand’ of markets, i.e. the medieval Scholastic theologem of God’s wise manus gubernatoris unfailingly creating a harmonia mundi unless distorted by evil machinations.”
http://static.squarespace.com/static/51ab60bee4b0361e5f3ed7fb/t/51ee76bfe4b0cc8c8b66ed72/1374582463955/MMT%20and%20NCT.pdf
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Lawrence Goodwyn in The Populist Moment also said something that is germane:
“[T]he silverite strategy unfolded in a way that must have brought great satisfaction to the American Bimetallic League…. Through ‘Coin’ Harvey, the cause of silver was penetrating Democratic ranks from below; through Herman Taubeneck and his small circle of friends, it was penetrating the ranks of the People’s Party from above. Silver mineowners directly financed both efforts….
In monetary analysis, Gold Democrats were neither better nor worse than Silver Democrats, merely their equals in hyperbole and in their misunderstanding of how monetary systems worked. Both represented the triumph of form over substance….
Indeed, one of the striking features of the 1896 campaign was the depth to which many millions of Americans came to believe that the very foundaitons of the capitlaist system were being threatened by the ‘boy orator of the Platte.’ That was hardly the case, of course — particularly when it came to the nation’s currency. A monetary system responsive to the perspectives of commercial bankers was not at issue in 1896; the relationship of the government to bankers on the matter of currency volume and interest rates was not at issue either. In view of the shared faith of both Bryan and McKinley in a redeemable currency, the entire monetary debate turned on a modest measure of hard-money inflation through silver coinage. The narrowness of the issues involved in the ‘Battle of the Standards’ should have put strong emotional responses beyond possibility — yet the autumn air fairly bristled with apocalytic moral terminology….
In a gesture that was symbolic of the business-endorsed reforms of the Progressive era, William Jennings Bryan hailed the passage of the Federal Reserve Act of 1913 as a ‘triumph for the people.’ His response provided a measure of the intellectual achievements of reformers in the Progressive period. Of longer cultural significance, it also illustrated how completely the idea of ‘reform’ had become incorporated within the new political boundaries established in Bryan’s own lifetime. The reformers of the Progressive era fit snugly within these boundaries — in Bryan’s case, without his even knowing it. Meanwhile, the idea of substantial democratic influence over the structure of the nation’s financial system, a principle that had been the operative political objective of greenbackers, quietly passed out of American political dialogue. It has remained there ever since.”
“the belief in ‘good bills’, ‘good uses’, ‘good bankers’, ‘perfect markets’ and other features of ideal-world economics does not apply to real-world banking. To put it differently, the banking-school rationale is based on the axiomatic classical belief in the ‘invisible hand’ of markets, i.e. the medieval Scholastic theologem of God’s wise manus gubernatoris unfailingly creating a harmonia mundi unless distorted by evil machinations.”
I don’t think you will find a single MMT economists who has that kind of enthusiasm for free markets and laissez faire. And you certainly won’t find any love for the efficient markets hypothesis. Please just read the actual papers by the MMTers, and not Huber’s shoehorn analysis.
That may be true, but MMT certainly seems to demonstrate an amazing fecundity when it comes to its production of true believers in “good bankers.”
Furthermore, I don’t think Huber ever says that MMTers, neoclassicists and goldbuggers agree on the nature of the “invisble hand.”
Not sure what you mean.
Gold buggers, neoclassicists and MMTers, each has its own silver bullet.
With the gold buggers it’s the gold standard.
With the neoclaccisists it’s “free markets.”
With the MMTer’s it’s “good bankers.”
Could Chris Mayer have made it any more explicit yesterday:
“Mosler himself is an interesting character. Unlike most economists, he is no armchair theorist. Mosler made a lot of money in markets. And in markets, you get paid to be right, which is where all too many economists fail.
Warren Mosler is, like me, a former banker. He began his career in banking in 1973, working to collect on bad loans. After a year of that, he became a lender. And I can tell you: This is great training for an investor. As Mosler recounts, he had ongoing discussions with his boss about the “logic of banking” and the “theory of lending.” As every lender learns, you want to make loans where the odds are heavily in your favor so that profits easily make up for small (but expected) losses. Investing is not much different.
Anyway, Mosler was a good banker with a head for the odds and the payoffs. Eventually, he would move on to manage the bank’s $10 million investment portfolio. He came up with a bunch of good, if unconventional, ideas. He made the bank a lot of money pursuing no-risk trades. Mosler had a knack for smoking out mispricing in the market for things like bonds and CDs.
He went on to join the Wall Street broker Bache & Co., followed by Bankers Trust and then the investment-banking firm of William Blair & Co. in Chicago. (In his books, he recounts his adventures at these places.) He made each firm a bunch of money with his “free lunch” trades, just as he did in his banking days.
In 1982, he co-founded his own fund, Illinois Income Investors (III). Over the next 15 years, III would rack up a remarkable record with only one losing month — and that was a 0.1% loss due to a timing issue that reversed the next month. Managed Account Reports ranked III No. 1 in the world through 1997, when Mosler left the firm.
One great story Mosler tells in both books is how he cleaned up on another free lunch in lira-denominated bonds in the early ’90s. This was before the euro and back when there was worry over a default by Italy’s government. Italy’s national debt was 110% of GDP and interest rates were high on its bonds.
But Mosler knew that it was the sole issuer of lira. Italy could not default unless it wanted to. Mosler actually met with senior officials in Rome to let them in on the “secret.” Long story short, Italy didn’t default. Mosler’s fund made over $100 million.
For an investor, macroeconomics has limited uses most of the time. Mosler’s career shows this can be otherwise. But then again, you have to study economics that actually describe the real world. And Mosler’s economics, or MMT, does that rather well.”
http://www.nakedcapitalism.com/2014/01/chris-mayer-fiat-money-works.html
And I and Hubert are both using the term “invisible hand” generically.
Here’s how Michael Allen Gillespie in The Theological Origins of Modernity describes the emergence in the belief of the “invisble hand”:
“What actually happens in the course of modernity is thus not simply the erasure or disappearance of God but the transference of his attributes, essential powers, and caprices to other entities or realms of being. The so-called process of disenchantment is thus also a process of reenchantment in and through which both man and nature are infused with a number of attributes or powers previously ascribed to God….
Following Hobbes’ identification of mechanical causality and divine will, Spinoza developed a pantheistic account that identified God and substance. Locke believed that one could find moral imperatives sufficient to guide human life within the divinely created natural world. Newton saw time and space as the forms of divine being. After these divine capacities had been transferred to man or nature, it was easy for the Encyclopedists Diderot, D’Alembert, and Holbach to demonstrate that revealed religion was not only false but also superfluous. By the end of the Enlightenment, many thinkers treated human beings as quasi-divine. This is especially clear in someone like Kant who asserts that human beings are infinitely valuable ends in themselves. Such a view is only possible because of the transference of what hitherto were considered divine attributes to human beings. The Enlightenment (and post-Enlightenment) exaltation of human individuality is thus in fact a form of radical (although concealed) Pelagianism. Divine or at least quasi-divine powers reemerge although always in disguise. Nature is an embodied rational will; the social world is governed by an ‘invisible hand’ that almost miraculously produces a rational distribution of goods and services.”
from Mexico,
you’re just making up any old nonsense that you can and throwing it at MMT in the hope that something will stick.
From your comments it appears that you don’t really know that much about MMT, you’ve apparently just read a critique of MMT and decided that everything it says must be true.
What is your position by the way? Are you a “greenbacker”?
In my experience some Greenbackers have an initial negative response to MMT. However in reality Greenbackers and MMT are not that different, they just disagree on some points.
“MMT certainly seems to demonstrate an amazing fecundity when it comes to its production of true believers in “good bankers.”
You’re just making up any old rubbish. People often criticize MMT economists for being overly critical of bankers and the financial system. And now here you are claiming the opposite. So weird.
Thanks for the book references. Keep it coming. I am compiling a list called ‘From Mexico’s Reading List’ and every time I get some money I buy the books.
Wray has written about the revolving door elsewhere, especially about the revolving door between Goldman Sachs and the Treasury Department.
This piece is an economics article, not a polemical piece. I’m sure Randy has no illusions about the degree to which government economic policy at all levels and in all branches – Congress, the White House and the Fed – is influenced by the financial industry and the economically powerful.
The target of this piece is those people who insist that the Fed is a private enterprise independent of the government, not a part of the government. Here’s a comment from a 2008 article by Willem Buiter which makes some related points:
However, the fact that the central bank is, from a financial point of view, an integral part of the state, does not depend on the formal legal niceties of stock ownership. Even if the central bank has formal or de facto operational independence, it is an integral part of a sovereign state. Their balance sheets and profit and loss accounts should be included in the consolidated financial accounts of the nation state to which they belong.
I would say Randy is making an even stronger point here: the Fed does not really have de facto operational independence, but its actions are often coordinated with and guided by other branches of the government.
Has the Fed (and I suppose the captured govt also) failed the populace in their stated missions? Absolutely. Was the Fed held accountable in any meaningful way? No. Is the unholy alliance between Wall Street and the Fed a healthy reality? No. Will it change? Should it change? Can it change? In other words is there a much better way to construct a central banking system? If the answer is no then we are certainly screwed six ways to Sunday.
There certainly are better ways to construct a banking system and a national financial system, I think. But in my personal view, the best alternatives all will depend on having a central bank and a close integration of the system of public finance and private finance. And I also think they all depend on having a banking system of some kind, and some kind of integration of the processes of capital development and money creation.
We at least agree that the present construct is clearly dysfunctional, no? Does MMT generally support this notion of dysfunction or are these your views alone on the matter? Also, outside of academic theory, is there or has there been a real life example anywhere on Earth of the optimal banking system you’ve described above? Isn’t central banking pretty much the same everywhere? Meaningful change thus seems terribly remote.
Well they all obviously agree the current system is dysfunctional. But they differ on the solutions. I think Wray tends to emphasize the Minskyan idea of making banks smaller and more community-oriented and relationship-based. These banks handle the capital development of the country for smaller, relatively more local projects, while we then place a greater reliance on the federal government for the financing of larger projects.
http://www.levyinstitute.org/pubs/wp_612.pdf
Warren Mosler’s emphasis is, I think, more on making banks more responsible for the performance loans they actually make, and he wants to eliminate secondary markets – they should “originate to hold.”
http://www.moslereconomics.com/wp-content/pdfs/Financial%20Architecture%20Fundamentals.pdf
Both support stronger regulation of the asset side of bank balance sheets – basically more supervision of loans to make sure they aren’t generating bubbles and non-performing crap.
Bill Mitchell has endorse public banking.
And everyone thinks it does no good when fraudsters are allowed to get away with crimes.
And everyone thinks it does no good when fraudsters are allowed to get away with crimes. Dan K
How dare you speak of crime when you seek to perpetuate it!
Banking is based on this fraud: “Your deposit is available on demand even though we lent almost all of it out” and has “progressed” to nearly pure counterfeiting via government privilege.
I bought a house, and to get it I took out a mortgage. I agreed to pay the lender thousands and thousands of dollars that I didn’t have. Did I commit fraud?
Ah, you’re sharp enough so you can’t claim mental incompetence at the Last Judgement. You keep upping the ante on a losing bet.
But whether you acted fraudulently depends on whether you acted in good faith and did not, for example, endanger your ability to repay as the banks routinely do wrt to their captive depositors.
But in any case, let banks be 100% private and the rest of us should not care what gambles they take along with with their 100% voluntary depositors and other creditors.
Why do you keep resisting an ethical solution, Dan? Do you really think you are smarter than some of the most famous men in history including bankers and central bankers?
Supplementing Dan’s excellent comment: All MMTers I know of think the present system is dysfunctional.It is easy to point out a basically OK banking system: the USA for the next 30 or 40 years after 1933. Things wouldn’t have been tremendously different if the banks had been completely nationalized. And since the banks back then didn’t focus exclusively on fraud, corruption, terrorism and theft, the economy worked much better, and more and healthier growth and wealth-creation was financed.
People may not know how boring, safe and restricted banks were back then. Usury laws. Interstate banking was highly illegal and nonexistent. In some states banks could only have one physical branch!
People may not know how boring, safe and restricted banks were back then. Calgacus
But still inherently crooked if government-backed. Ask any redlined Black person.
Safe? Watts and other inner city neighborhoods burned because, on the face of it, loans to black neighborhoods were not considered “prudent.”
Can no one understand that the monetary sovereign should have NOTHING to do with borrowing, lending and usury? That to do so is inherently discriminatory?
NPR recently did a really fantastic piece on this in one of their week end editions. Although I have heard of redlining I had never really researched or read about it much. This NPR piece was a real live example – they had this AfAm guy hunting to buy houses and bumping into cases where he would simple be refused point blank and offered various excuses. It had a long piece about the history of redlining that was very interesting
Some people need assistance in developing their lives, neighborhoods and local business and non-profit communities, because they have all kinds of odds and vicissitudes of fortune stacked up against them. They need infusions of cash and other forms of extraordinary support. That’s a role for government, not for private business.
For example, a publicly run government bank could make negative interest loans: i.e, loan someone $100,000 and say they only have to pay back $90,000. That’s the same as a 0% interest loan with a $10,000 subsidy. A private business can’t be expected to carry out this particular kind of development, not in any systematic way, because they have to remain solvent. A private community banker’s job is to evaluate borrowers and their projects in the light of whether or not the borrower will be able to make a go of it, and return the capital that has been advanced to them.
If some prospective borrower is a small-time Jordan Belfort, and blew some previous business loan on booze, pills and hookers during a Carribean junket, and has done nothing worthwhile since, then future lenders will deem him not credit-worthy. That’s not discrimination – it’s financial responsibility.
So if I had a good credit score, Dan, and owned a factory and wished to automate it to eliminate all or most of the workers and could show that I could then easily repay the loan with interest then a government-backed bank should lend me the money?
There certainly are better ways to construct a banking system and a national financial system, I think. Dan K
Yeah Danny, it’s only been 320 years since the BoE was founded and people STILL cannot make central banking work properly but you will?
Keep trying to mock “Thou shall not steal” but the last laugh will not be yours.
But here’s what: Let’s have genuine liberty in private money creation and you can prove your genius by managing the money supply of a small commune somewhere.
In true sharing, there is no theft…no need to steal.
We need ultra-low interest on 50 year loans and bonds. This in conjunction with substantial and feasible 50-year planning. Just to absorb the insanity of the entire industrial revolution. Our relationship to money is just like our relationship to oil. Somehow, in the late 80s “free market capitalism” assumed the high road of authority (hubris) to guide our economic trajectory – even tho free-market capitalism is pure and momentary illusion. Never mind. We can’t go back and fix that crap. But we can go on from here and if the Fed keeps interest rates low and if congress (however unlikely) actually takes responsibility for our future – tacitly admitting that free market capitalism is nonsense – then we will make progress.
@ Dan Kervick
Well here we go boxing with that ghost again.
L. RANDALL WRAY says that the Fed “is insulated from day-to-day politics and other types of special interest pressures.”
DAN KERVICK says “I’m sure Randy has no illusions about the degree to which government economic policy at all levels and in all branches – Congress, the White House and the Fed – is influenced by the financial industry and the economically powerful.”
How does one reconcile those two diametrically opposed claims?
Can’t reconcile them short of saying Wray is dead wrong.
“How does one reconcile those two diametrically opposed claims?”
By realizing that there is a false dichotomy. Whatever one may think of quantitative easing, there is little doubt that if Congress had had its way after the 2010 elections, the Fed would have instituted austerity instead.
He’s picking that up from the McLaury piece which says: “the Federal Reserve System is more appropriately thought of as being “insulated” from, rather than independent of, political—government and banking—special interest pressures.”
“Insulated” doesn’t mean “hermetically sealed off from”. Of course the Fed is influenced by the banks. It’s the central bank and runs the whole system! Expecting the central bank to be independent of the member banks is like expecting a school district superintendent to be independent of the local schools. And of course the central bank is part of the government, just as that school superintendent is.
We have a single, heavily centralized, private-public banking system in this country. Maybe there is something in the American psyche that makes it hard to get this. Americans tend to believe America is a capitalist country, and so of course the private is completely separate from the public. Thus either the Fed is a monopolistic private company on one side of the divide or it is a government agency functionally and behaviorally independent of the private sector. But for the largest and most important institutions in our society, it never works like that: private and public are all smeared together.
Is the Pentagon independent of the government? Obviously not – it’s the Defense Department of the government. Is it independent of the private defense sector? Obviously not. It’s the apex of the military industrial complex. Is it insulated from the day-to-day business of the private defense industry? Yes, to some degree. It is not sitting in on each and every daily meeting of the key defense firms, and it makes decisions that screw some of these firms and benefit others. On the other hand there is a wide revolving door going back and forth between the defense industry.
Should we change how this leviathan works? Probably. So OK, how exactly? Same with the financial system. It obviously broke down in 2007 and 2008 and failed our society, causing massive misery. It’s obviously riddled with corruption. So what to do? What should the alternative look like?
It’s all very well for people to yell, “End the Fed!”, “End Capitalism!”, “End Hierarchy!”, “Down with the [take your pick]! But what do you get in it’s place? Bitcoins? Free banking? A gold standard? Total central planning of the financial economy? 10,000 stone age villages eating local food and using nothing but scrip to exchange their handicrafts?
Most don’t desire the cure be worse than the disease, and most don’t want draconian solutions that accomplish just that end. We aren’t even close to a consensus on what should or can be done to right the ship. There are so many competing philosophies scrambling to work their specific fixes and yet nothing meaningful gets done. I think Hugh says it best. The kleptocracy is so layered and overwhelming, permeating almost all systematic functions of our polity, such that little fixes won’t do shit. That provokes people to think big, even if utterly unrealistically (the cure worse than the disease thinking).
I can’t help but be pessimistic, yet I fight that feeling as much as I can. Sometimes I think the corruption and dysfunction it spawns is past the point of no return. I don’t think that implies imminent, all hell breaking loose, but i do think it means meaningful reform, at least in my time left on the planet, is not in the cards. That’s pretty damn depressing to contemplate.
Malmo, if you won’t see it in your time left here, it’s because it has been this way since at least 2,000, 3,000 or 4,000 BC, when borrowing came before money (but after sharing) and there was slavery as far as the eye could see.
The problem is ancient and wide.
So wide one would have to question and doubt such basic assumptions as the math, science, agriculture, etc
Basically, we ask if we keep repeatedly simulate the world after the invention of farming, do we always end up where we are today?
My guess is yes. And I look back to the world before that.
Corrections.
‘…such basic assumptions as language, math, science, agriculture, etc.’
‘…keep repeatedly simulating the world…’
Well Dan, I think your inner lawyer there is beginning to have to work overtime, making those surgical distinctions over what the meaning of the word “insulated” is. It’s almost as strained as the famous defense Clinton used over what the meaning of the word “is” is:
http://www.youtube.com/watch?v=j4XT-l-_3y0
Your comparison of the local school district superintendent doesn’t work either. Where I come from the superintendent works for the school board, which can fire him or her any time it wants to, although it may cost them some money depending on what the contract arrangements are. The school board members are in turn elected in public elections. They make decisions in public meetings, subject to open meetings laws, and are also subject to public records laws.
Almost the same goes for the Pentagon. Of course it’s operations are more secret than the Fed’s, for national security reasons. But do you remember General Shinseki? MacArthur? Also the Secretary of Defense serves at the pleasure of the President, who can fire him anytime he wants.
Can Fed board members be fired like that by an elected official? I don’t think so.
Fed meetings are completely secret. There are no open meetings requirements. There are no open records requirments. There is no comment process like other government agencies like the FCC or the Texas Public Utility Commission. Nor are there any public rule-making procedures like those commissions have. Why? No national security concerns exist as with the Pentagon. What is the reason for all the secrecy?
Later you go on to say:
“Americans tend to believe America is a capitalist country, and so of course the private is completely separate from the public. Thus either the Fed is a monopolistic private company on one side of the divide or it is a government agency functionally and behaviorally independent of the private sector.”
Well it looks to me like you need to examine your own house, because the sectoral approach is part and parcel of MMT. In fact, it’s only been three days ago when J.D. Alt published a post here on NC where he made that point very explicitly with diagrams which included boxes labled public sector (PS) and federal government (FG).
http://www.nakedcapitalism.com/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html
So it looks like MMT is one of the main purveyors of the fiction that “the private is completely separate from the public.”
MCC gets into these internal inconsistencies because of its too-strict adherance to philosophical Platonic realism. Its ideology doesn’t even come close to representing the real world, but that doesn’t disabuse the MMT true believers of the delusions they labor under.
But what do you get in it’s place? Bitcoins? Free banking? A gold standard? Total central planning of the financial economy? 10,000 stone age villages eating local food and using nothing but scrip to exchange their handicrafts? Dan K
That’s a straw-man and you know it:
1) Inexpensive fiat is the ONLY ethical money form for government debts and the government should provide a risk-free storage and transaction service for it FREE to all citizens up to normal limits on account size and number of transactions. That service should make no loans and pay no interest but individual account holders including 100% private banks could do so.
2) 100% private banks are ethical and should be allowed to extend as much credit as they dare but to bear all risks and uncertainty themselves along with their 100% voluntary creditors.
3) Common stock is an ethical form of endogenous money that requires no government privileges.
4) The entire population, excluding the very rich, are entitled to restitution with new fiat. So who needs to borrow when they have plenty of real Equity? Yes, I said real because a temporary ban on new credit creation would allow a metered distribution of new fiat without increasing the money supply.
Face it Dan. You’re defending a thieving system and you’ve got no excuse.
I don’t understand. How is the system you just described going to be any better than what we have now? Private banks, right? They make loans on whatever terms they like, right?. Evaluating borrowers on the basis of their credit-worthiness as usual, right? The government operates only savings and deposit banks that pay no interest and make no loans, right?
How is this risk fee fiat issued in the first place. How do people originally get their hands on it? Is it all just given away for free? Who decides that? How much does everyone get? What is the basis for the monetary policy? How do you make sure the value of the additional money is not just inflated away be excessive issuance? What are the constraints on the program?
Maybe I should wait till you’re finally ready to listen?
But anyway, quickly, since you deserve no more:
How is this risk fee fiat issued in the first place.
Same way as it is now but without a central bank to borrow from.
How do people originally get their hands on it?
The same way they do now.
Is it all just given away for free?
Some fiat SHOULD be given away free as restitution for theft via the government-backed credit cartel.
Who decides that? How much does everyone get?
New fiat should be equally distributed at least until all until all deposits are 100% backed by reserves.
What is the basis for the monetary policy? How do you make sure the value of the additional money is not just inflated away be excessive issuance?
1) Ban fiat creation by anyone but the monetary sovereign, e.g. the US Treasury. Abolish all privileges for the banks.
2) Make fiat legal tender for government debts only after a universal bailout with new full legal tender fiat to force the banks to accept it.
3) Allow genuine private currencies for private debts only.
What are the constraints on the program?
Price inflation in fiat, of course. But that should only hurt the government and its payees since other people could use private currencies for private debts to avoid the stealth inflation tax. So the issuer and its payees would have a strong incentive for the issuer to spend wisely.
1. Only the government produces fiat.
2. End fractional reserve.
3. Fiat is based on the average of the past ten years of GDP.
4.Fiat is spent into the economy through public need.
Nationalize the banks – simple and easy as pie. Tell these fellow, no more profit to hunt here fellas, go home and they will go home and then we can start to have some sanity and common good.
No, Wray wrote “We can take that as our starting point: the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures” as a launch-point. Let’s explore this independence in more detail, beginning with an historical perspective” which he does, after which he concludes the Fed is not in fact independent.
You’ve crossed over from highly silly to dishonest. Perhaps no one has explained this to you before, but when you selectively edit quotes and lie about the context, you’re the bad guy.
Mexico, pro tip: When you distort an opponent’s words, try not to do it on a thread where your opponent actually uses those words; it’s too easy to check.
Ben: Well spotted. I’ve noticed that when you’ve got a winning hand, you don’t need to cheat. (Of course, a sociopath would cheat just for fun, but that’s a topic for another day.) Similarly, if you’ve got a winning argument, you don’t need to misquote your opponent. That’s “any stick to beat a dog” stuff, and it has no place here; it really devalues the blog, and the contributions of others.
Here is Wray’s complete paragraph, unedited and unabridged:
“We can take that as our starting point: the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures. Let’s explore this independence in more detail, beginning with an historical perspective.”
Wray was referring to MacLaury’s claims which Wray quotes beforehand and says “we can take” as “our starting point”:
“Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the ‘public interest.’… Monetary judgments must be able to weigh as objectively as possible the merit of short-term expedients against long-term consequences—in the on-going public interest.”
Wray left little doubt as to what his intended meaning was. But if there was any doubt about his opinión of the Fed, he removed it with this comment from Part II:
”Bad policy—whether monetary or fiscal—is always possible and painful. Fortunately, there is nothing in the post-Great Depression experience to warrant unduly pessimistic views of the motives of either Congress or the Fed.
[….]
Congress has since 1913 continually refined and restated its over-riding instruction to the Fed: policy is to be formulated with a view to supporting the national interest.”
Both empirical claims — the one about the Fed being insulated from special interest and the one about the Fed operating in the public interest — I believe I have overwhelmingly demonstrated to be false. And I believe I have demonstrated they are false not only as we speak, but throughout the 300+ year history of AngloAmerican banking.
One of the primary criticisms of MMT is that it remains “.functional”
Ok – it may or may not be a accurate description of the strange events which occur within the obscured monetary tabernacle but mostly they refuse to engage in any deep and meaningfull POLITICAL debate
These MMTers work along the lines of the end of history guys after the cold war.
For them its the end of the debate when it comes to money.
MMT is therefore the ultimate expression of neo liberalism in my view.
its devoid of any deep meaning.
PS
They talk little of the core capital base and think endlessly of more technological overproduction schemes which will cause depreciation of the produced stock which must be expressed somehow either as higher inflation or increased tax.(same thing really)
Full employment is a war economy.
The purpose of Industry was to reduce work was it not ? ,or was it ?
From Mexico has truly set the cat among the pigeons on this one.
In the final analysis MMT does not make any holistic physiocratic sense.
We can clearly see it as yet another bankers hamster wheel for us to run around in.
In the US, we call it the “rat-race”, since ultimately it tends to make people more rat-like.
“One of the primary criticisms of MMT is that it remains “.functional”
Ok – it may or may not be a accurate description of the strange events which occur within the obscured monetary tabernacle but mostly they refuse to engage in any deep and meaningfull POLITICAL debate“
I think most MMTers are quasi reactionary and yearn for at best the status quo ante of the New Deal. My hope is that we can do much better than that, which in part means applying all of the productive advances of technology to a living arrangement not needlessly centered around the grind of the 60 hour wage laboring week for most of our alert time spent on this orb.
Brilliant observation!
MMT is primarily descriptive economics; it’s not a comprehensive political and social ideology or a plan for the human future. People have to add that part on their own. Any plan to go to there from here needs to start with a decent understanding of what here looks like and how it functions. The contribution that MMT makes is that it deepens the understanding of the architecture of our present arrangements, and what they means for what the potentialities are. It also provides the intellectual tools to refute a lot of bad ideas that are holding us back. But different people will then have different ideas about what they want to change, and where they want to go.
I started a new blog a few months back because I wanted a personal place to develop my own social and political proposals that wouldn’t create as much confusion in people’s minds about what was part the common outlook of MMT, and what was Kervick doing his own thing. That wasn’t a criticism of MMT, but only an acknowledgement that MMT is only one part of a solid intellectual framework for social understanding. Everybody reading here should do the same thing. But it is unjust to criticize MMT for seeking to provide an accurate functional description of aspects of the existing system, and not being some kind of religion.
It’s really a political science article and an uninteresting one, because no one disagrees with him. No one argues that the Fed has complete de jure or de facto independence of the federal government. And no one argues that the Fed doesn’t have ‘a lot’ of independence. Okay, end of that debate. The interesting debate is how much independence the Fed should have. Wray ably contributes to that debate and he should stick to it.
I wonder, how many people share Wray’s extraordinarily charitable description of the Fed?
Are popularity contests now the best way of determining scholarship? Given your belief that discussing any subject you feel strongly about is an implicit endorsement of it (and itself an evil) is Wray guilty of improper political thought?
Are you suggesting that “scholarship” is devoid of “scholars” or that “scholars” are devoid of bias?
There is NOTHING that suggests that MMT is anything other than honest in their observations and efforts. However, all theories eventually have to reconcile the fact that observation is context dependent and it is impossible to make a sharp distinction between the behavior of the object and its interaction with the means of observation.
My understanding is that part 2 will present “… other analyses the questions surrounding the wisdom of granting independence to the Fed, democratic accountability, and potential problems.”
I share Professor Wray’s description of the Fed. After a while you have to lay aside phatasmagorical invective and flagrantly fallacious fantasizing and get intellectually serious. If somebody wants emotional drama, there’s always Youtube. But here we need to adopt a relentless rationality. That requires, even demands, a sober and measured use of logic and language. No making things up now, this is serious. My view is, if it wasn’t the Fed it would be called something else. whatever you call it, it’s like a central nervous system that regulates the interactions of “autonomous montetary agents” (i.e. people) as they work their id, ego and superego. Mostly id. Something fills that vacuum. Nature abors a vacuum, unless it’s outer space. They never mention that when they throw that phrase around do they? Isn’t outer space nature? I’d say so. nature would say so. So you can have a vacuum after all, but not when there’s atmosphere. QED The Fed is a modern myth, but so are lots of things. As such, it has a structure and a logic. So would whatever filled the vaccum. Professor Wray ended this article right in time. It was almost getting to the point where exhaustion set in, but not quite.
You forgot cynicism. It is the essential ingredient you take to the commons today. When a fellow blathers on about Central Banking without even a perfunctory genuflect to the ‘lapdog of Wall Street’ status the Fed has ALWAYS had then you need to sound the Klaxon. It would be better if MMTers studied successful Central Banking in places where it has worked well (India and Canada not to mention Australia) and then included that in their exhortations to the laity such as ourselves.
It might not be technically independent but it has an enormous enough leash given it that for all intents and purposes makes it independent and also for the most part unaccountable. Did the financial meltdown and attendant reforms change that dynamic? Don’t think so.
FM, what’s your point? Do you disagree that with the exception of getting plenty of pressure from the banking interests that sit on the Fed Regional Boards, and on the Board of Governors that:
“. . . . the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures.” ? If so, why? And where are your facts?
Also, why do you think that in a series whose title characterizes FED Independence as a myth that Randy Wray is in the process of providing a whitewash of the Fed. Can’t you wait for Part II before you draw that conclusion?
Where are my facts? I would suggest reading my 8:05 am and 9:19 comments below, on this thread.
And why should I have to wait for Part II until I draw my conclusion? Does what Wray says in Part I not count?
Thanks for your reply, FM. First, I asked if so, why and where are your facts? I Don’t see an answer to my “why” question, above. I also didn’t see any facts in the replies I re-read that were specifically on this point of Randy’s. I get that you think the FED is serving Wall Street interests and has done so for most of its history. I agree with that and say so frequently in my own MMT posts, as does Bill Black, as does Randy in many of his posts. But I don’t see how this contradicts the point we’re arguing about above, which is the one you’ve supposedly been criticizing.
On waiting for Part II, I thought that was a good idea because in series like this one it’s often the case that in the opening, the author sets the context and that later installments are where critique really comes in. I think it’s unlikely that Part II doesn’t contain plenty of critical material and certainly will not in any way be an apology for the FED and its behavior.
Please try to remember that most MMTers, if they had their way would prefer that the FED be re-organized under the supervision of Treasury. Many of us even feel that the FED is unconstitutional because it is clearly an Executive function, and the Constitution tells us that there can be only three branches of Government. If the FED is really independent of the Executive Branch, then it is certainly an extra-constitutional agency.
It would be wonderful if we channel all our energy into re-organizing the Fed.
Joe, Wray needs to START with how the mission of the Fed has been subverted by Wall Street. That is the MAIN plot line here. When we talk of the independence of the Fed being a myth we ARE talking about the independence of the Fed from the banksters on Wall Street. Who gives a toss about the morons on Capital Hill? Ever since the founding of this nation politicians have been an extension of either banking interests or business interests so trying to make a distinction between Capital Hill and Wall Street is splitting hairs. When Dodd Frank was written or when Glass-Steagall was being unravelled one piece at a time by Walter Wriston and his minions it was not ‘Government’ that was interfering with the Fed, the fellow pulling the strings of the elected reps was Wriston or Dimon. Today it is not Congress that writes banking regulation, it is Wall Street via their vultures on K-Street. Wray does not know this? To be even talking about Fed independence from politics is hilarious. It is more or less akin to the self righteous politicians telling us that there is no quid pro quo when they take money from Banksters.
Hi PA, don’t you see that Randy, in this Part I anyway, has chosen to write about the institutional structure and its ties to the rest of the Government, and that he has a perfect right to do that? You’re complaining that he’s chosen to write about something that you think is irrelevant.
Well, I think it is relevant because if the institutional relationships were different, then FED behavior might have been very different also. In fact, it may just be that FED behavior is so reprehensible because they are accountable to the “morons in Congress” and not to the Executive.
On Wall Street, of course it wrote much of Dodd-Frank, but that’s off the topic since it doesn’t closely relate to the FED. Look I completely agree that the Congress needs to be subject to the 99% and not to the super-rich. But I’m sure that Randy believes the same thing and that you and others here are barking up the wrong tree. I suggest you follow Randy at Economonitor. If you do, you will see plenty of anti-bankster, anti-fraudster, anti-Wall Street; and anti–globalizing elite material there.
@ Joe Fireston
Here is Wray’s paragraph which I object to in its entirely, unedited and unabridged:
“We can take that as our starting point: the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures. Let’s explore this independence in more detail, beginning with an historical perspective.”
We could juice that up a bit by adding MacLaury’s claims which Wray quotes and says “we can take” as “our starting point”:
Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the ‘public interest.’… Monetary judgments must be able to weigh as objectively as possible the merit of short-term expedients against long-term consequences—in the on-going public interest.
Both claims — the one about the Fed being insulated from special interest and the one about the Fed operating in the public interest — I believe I have overwhelmingly demonstrated to be false. And I believe I have demonstrated they are false not only as we speak, but throughout the 300+ year history of AngloAmerican banking.
You then go on to assert that “most MMTers, if they had their way would prefer that the FED be re-organized under the supervision of Treasury.” But I just don’t think that will cut it.
My question is, “would that make the Fed more democratic,” still having the non-elected technocrats at Treasury serve as yet one additional buffer between me and the Fed?
I think the FED is insulated from day-to-day pressures from special interests. That is part of the problem with it. It is insulated from Labor, the unemployed, those who are victimized by the system, pretty much from everyone except the banksters, fraudsters, and Wall Street and globalizing elites. On the other hand, it is embedded in that fraudster culture, so that day-to-day pressures don’t matter because the FED is already oriented toward the social ecology and culture of the FIRE sector, undisturbed by other interests. I don’t think you’ve shown that what I just said isn’t true and, on the other hand, I think what I just said is perfectly compatible with Randy’s account.
On this:
“My question is, “would that make the Fed more democratic,” still having the non-elected technocrats at Treasury serve as yet one additional buffer between me and the Fed?”
My answer is yes it would. Presidents of the United States have escaped a great deal of the responsibility for the economy since the FED/Treasury accord in the 1950s. It would have been far better to have them under the President where he could have reviewed FED decisions to raise interest rates every time wages began to rise to give wage earners a fairer shake. And it would have been far better if the power to create reserves was under the Executive Branch since then there would be no debt ceiling crises because there would be no debt instruments issued by the Treasury. We would cease to hear about “teh debt,” and the debt-to-GDP ratio whenever people proposed Medicare for All, increasing safety net benefits, or creating a Job Guarantee program at a living wage and full fringe benefits in order to implement the right to a decent job and a decent living.
I think From Mexico asked a reasonable question, given what was written and he quoted, independent of what is to come in Part II.
I also agree with his earlier characterization in his question that those 2 statements he quoted were diametrically opposed claims, and moving it from ‘insulated’ to ‘not hermetically sealed off from’ did not invalidate that question.
You mean this question:
“I wonder, how many people share Wray’s extraordinarily charitable description of the Fed?” referring to this description:
“. . . . the Fed is part of government–a public institution–but is insulated from day-to-day politics and other types of special interest pressures.”
If so, I agree that the question is “reasonable,” but I also think it is irrelevant. Randy provided a factual claim. It’s relevant to raise the question of whether it is true or false. It’s relevant to ask whether the FED is a public institution or not, especially since the regional FEDs are privately owned. It’s relevant to ask whether the FED is insulated from day-to-day politics. It’s relevant to ask whether the FED is insulated from political interests other than Wall Street and the Banks? But, it isn’t relevant to Randy’s factual claim to ask how many people would describe the FED in the same way.
Why not because there are many ways to describe the FED. No description will be complete. Descriptions will vary in how the FED is characterized. Many description will be false. Others will be true. But since no description is complete it follows that there are likely to be many true descriptions of differing aspects of the Fed. So, given that Randy chose to describe the FED in the way he did, why should we wait and see where he goes with this description in Part II?
Sorry I meant to say: “why should we not wait and see where he goes with this description in Part II?”
It’s a reasonable way to ask, or frame, a relevant question.
I think many would agree with me.
What’s it relevant for? Not for evaluating the truth or falsity of Randy’s statement!
JOE FIRESTONE said:
“But, it isn’t relevant to Randy’s factual claim to ask how many people would describe the FED in the same way.
Why not because there are many ways to describe the FED. No description will be complete. Descriptions will vary in how the FED is characterized. Many description will be false. Others will be true. But since no description is complete it follows that there are likely to be many true descriptions of differing aspects of the Fed. So, given that Randy chose to describe the FED in the way he did, why should we wait and see where he goes with this description in Part II?”
I think you’re letting your inner lawyer show there. This is another one of those defenses that comes dangerously close to Clinton’s “it depends on what the meanining of is is.”
If you think that, then you don’t know the difference between constructvism and realism. I am a realist and I am asking you to refute Randy’s statement and show that it is not true. That is something you have yet to accomplish and no amount of mere “argy-bargy” is going to get you there, FM.
“Inner lawyer” was cute once. I’m not sure it’s quite as cute twice. Though it is a nice example of poisoning the well — “Anyone bold enough to enter a debate which begins with a well-poisoning either steps into an insult, or an attack upon one’s personal integrity” — in that anybody capable of constructing a cogent argument that refutes your points shows “their inner lawyer.” Well played!
* * *
To be fair, the definition says that “poisoning the well” takes place at the start of an argument. So perhaps I’ve miscategorized Mexico’s fallacy. However, “inner lawyer” certainly poisons the well for downthread responses, so perhaps not.
A fine example of a loaded question, indeed: “I wonder, how many people share Wray’s extraordinarily charitable description of the Fed?” Obviously, one is meant to answer, very few, but oddly, or not, Mexico provides no evidence of this. And were he to do so, are we then to assume that a claim is false because few believe it? Surely not.
* * *
Note that the “research” provided downthread on McClaury — that he’s is a DC type and bad things happened on his watch — has nothing whatever to do with the use Wray makes of McClaury, which is to illustrate how the Fed views its own institutional position, so we have a fine example of a red herring.
This is an unimpeachable history of Fed legislation and doubletalk for public consumption, but the real story is Fed operations in support of big bank lending and casino operations. Essentially, the Fed is the enabler of big finance, having now reached the extreme of gobbling up toxic bank assets and paying 3% interest on bank reserves, while money in the hands of citizens earns nothing and bank lending is concentrated on stock and commodities and real estate speculators. I hope this is detailed in part 2.
3% interest on bank reserves?
December 23, 2013: banksters celebrate 100 years of absolute sovereignty!
http://failedevolution.blogspot.gr/2013/12/december-23-2013-banksters-celebrate_23.html
… and Part 2 won’t change things …
On the matter of the “stock” owned by the member banks in the Federal Reserve banks, it’s a peculiar type of stock. It can’t be sold. It can’t be pledged as security on a loan, and the amount that the member bank must subscribe to is determined by law, not market decisions. I think a good way to look at it is that the subscription to stock is the up-front membership fee for membership in the Fed system, and the annual 6% dividend payout is a membership benefit.
Thanks for clearing that up. What would be your thoughts on the rationale behind equipping a creation of Congress that needs to function in public interest with private owners?
“He notes that the Fed is an independent government agency like the Federal Trade Commission, the National Labor Relations Board, and the Securities and Exchange Commission.” -Wray
When reading this I was surprised Wray did not touch upon the issue that it would make no sense if any of these agencies would be privately owned, since he indicates the similarities in degree of independence of this government agencies. Perhaps you have some thoughts on this?
Why isn’t that 6% going to the public commons?
Why is the stock not owned by the public commons?
When are the adults going to talk about ongoing accumulation of private ownership of property and inheritance? And its effects on social organization…..i.e the social economy?
Oh, thats right…….TINA!!!!!!!!!!!!!!!!!!!!!!!!!!!
It goes to the private because MMTers don’t yet have enough influence to change the Fed. So you should sign on and give them a hand.
The order is wrong.
It’s not be a MMTer and then we can change the Fed.
It’s Let’s change the Fed first, and then we worry about how wrong MMT is.
Great. Change it to what exactly?
Change it to a completely sovereign utility of all the people instead of mostly just an inherited few.
It is not like I am suggesting getting rid of sewage treatment plants. I want to change the incentives from total competition and inheritance to a combination of sharing, cooperation and regulated competition within an overall inheritance structure that eliminates the ongoing top end. I want more diversity and less class structure.
I believe I am not alone.
Sorry, I don’t understand what “completely sovereign utility of all the people” means. Surely the people are sovereign, not the utilities.
and the annual 6% dividend payout is a membership benefit. danny k
Defend fascism will you? But yesterday you thought you were a communist?
You’re seeking to be a press secretary for the Fed? Right? And now you’re demonstrating your ethical flexibility?
@ F. Beard
MMT is a veritably messianic political program which has succumbed to the utopian temptation.
You and I, on the other hand, worship at a very different kind of church, even though your chuch is quite different from mine.
I don’t know about you, but I resent being pressured to attend chapel and told what it is proper to think, to feel, and to believe. And I find the banker worship to be completely contrary to my beliefs.
It’s the concept of government backed/enabled credit creation they worship. But government should be for the general welfare and not for the purpose of allowing some, the so-called “creditworthy”, to steal purchasing power and ultimately wealth from everyone else.
Your only message is ban inheritance. By the grace of God, I’ve said enough on the subject of ethical money creation to fill a book.
You should read the Bible too and hope you can develop some faith. Then you’ll have more to say.
Jesus was mild with sexual sinners but He gave the money worshippers a piece of His mind, so much so that they plotted to kill Him for it.
This is utterly ridiculous. As you can see from the above discussion, most people criticize MMT for not offering enough of a positive agenda for change – just the job guarantee idea and a few proposals for banking reform. That’s a pretty weird type of messianism or utopianism.
And some crack on about totalitarianism Dan.
“MMT is a veritably messianic political program which has succumbed to the utopian temptation. ”
A word salad, tossed together from reflexive animus, easily summarized as “MMT is bad, bad, and bad.”
Childishly sloppy taken as analysis too, if we dignify the comment with that term. Where, for example, is the MMT Messiah? MMT, to those who actually follow its advocates, seems to act much more like a “thought collective” than a religious movement headed by a charismatic figure. Further, if MMT its a utopia, it’s one where proponents disagree on significant issues, rather odd for a visionary system.
Oh well, throw enough mud and something will stick, I suppose. Mexico should retract this, if evidence or reasoning were involved, but the claim is so laughably false it’s not worth requesting one.
NOTE Religious trolling touched off, no doubt accidentally, by “Messianic,” deleted.
There it is again. Nothing other than unremitting hostility is acceptable to the Beard/Malmo/Mexico nexus. Factual information itself is a form of improper political thought and making an effort to acquire knowledge is evidence of guilt.
It’s not factual to lump Malmo and FromMexico with Beard.
The commonality which Beard and I share is that we both have some awareness of the assumptions we opérate under. They are very different assumptions, but we at least are not completely oblivious to them as the MMT faithful is. He believes in his Christian faith, and I believe in my skepticism.
I have yet to see anyone who is part of the MMT ministry who is even remotely aware of the assumptions under which they opérate, much less to admit them. This ministry, made up of people who are convinced that they are waging the good fight on behalf of virtue, is an ideological instrument whose effectiveness lies precisely in its ability to appear to be the opposite of what it actually is. It is an ardently advocated, veritably messianic political program, and, like most political programs that have succumbed to the utopian temptation, it does not take kindly to true difference.
And of course neither Beard or I worship at the altar of U.S. banking as it currently exists either, as the MMT true believers so obviously do.
Different and yet have something in common – that’s what I meant by not lumping everything together.
from Mexico,
please stop spouting complete bullshit.
MMT apologists are utterly rude to anyone who doesn’t desire to carry water for them. They are also extremely hyper-sensitive and insulting to those who disagree, even to the many on the left who disagree with them on various matters. If you can’t even convince the majority on the left of your program, how much less the other half of the populace? Better manners and greater patience would go a long way to furthering the goals of the MMTers. Try it.
Try looking at it from the opposite direction, its you and the mythological mob making the pejorative distinctions here.
skippy… sling shit at others and then point at it.
True academics don’t sling mud in return to so called mud slinging at them.
Malmo: True academics don’t sling mud in return to so called mud slinging at them.
Your statement is a prima facie case in point Malmo. Look its only the fundamentalists- doctrinaires that are engaging in rending tooth and claw pulling hair antics. Yet when anyone not sharing your mythology based world view gets jack of it and clips your ears for it, you all stand around howling about being abused.
Skippy… it truly saddens me that I have to reevaluate a whole bunch of NC commenters. Their true selves emerging in the heat of battle. Epic sigh….
Oh please. We’re not criminals because we don’t curtsey at your economic alter.
You don’t care for me, then fine. A lot of pompous rear ends don’t like me. It isn’t a MMT thang. No biggie.
“We’re not criminals because”
“You don’t care for me, then fine.”
More prima facie case in points – you pull the trigger on the gun and then blame others for loading it and pulling the trigger.
Skippy… I care more for humanity – and this planet than myself or mine. Tho from your quarter, I see something completely different.
You dish it out but can’t take it? So you disparage me because I take issue with MMT? That’s not fair. I disagree with you on this issue but I don’t think you are a bad person because we differ here. I don’t even know you outside of this matter. I wouldn’t think to judge you solely on such thin knowledge of you.
…And I believe most if not all MMTers here and elsewhere are fundamentally decent people too, including you.
The reason I was rude to ‘from Mexico’ and asked him to stop spouting bullshit is because he has been incessantly rude about MMTers in this and the previous comment thread. Despite all attempts to respond to him calmly and rationally he continues to throw out ridiculous and nonsensical insults based on nothing more than his own fevered imagination.
Calling MMT “veritably messianic” is, in fact, complete bullshit within the meaning o the act (see Harry Frankfurt for the definition here). So, point to PJames for being correct.
Nice slant with “apologist,” as opposed to, say, “advocate.”
Speaking of hostility, which MMT advocate has ever supported Steve Keen’s “A modern debt jubilee”?
Bingo!
Except for our friend here who intends to use it as a way to introduce his common-stock backed money.
The MMT crowd insists that endogenous money creation is necessary so I helpfully point out that common stock is an ethical means of doing so and so we can dispense with government-backed banks.
But do they rush to embrace the concept of honest sharing instead of sneaky theft? Not so far they haven’t.
“Economists Call For Massive Debt Relief To Jumpstart Economy
“More than three years after the financial crisis struck, the economy remains stuck in a consumer debt trap. It’s a situation that could take years to correct itself. That’s why some economists are calling for a radical step: massive debt relief…
“We’ve put this off for too long,” said L. Randall Wray, a professor of economics at the University of Missouri-Kansas City. “We need debt relief and jobs and until we get these two things, I think recovery is impossible.”
http://www.huffingtonpost.com/2011/10/03/debt-relief-haircut-economists_n_991909.html
http://www.huffingtonpost.com/2011/10/03/debt-relief-haircut-economists_n_991909.html
Wray ignores that government-backed credit creation cheats non-debtors too (via negative real interest rates, especially in housing, land and other assets). So nearly the entire population deserves restitution.
And one should not have to work for restitution. Nor are jobs necessary to restore aggregate demand; income is. Nor is make-work anti -inflationary anymore than any other waste of time.
F.Beard, each of your comments is just a sequence of dumb assertions.
“Wray ignores that government-backed credit creation cheats non-debtors too”
Wray advocates complete reform of banking and finance. Please bother to read his papers.
“And one should not have to work for restitution.”
If people are unemployed and looking for a job they should be able to find a job. At present many can’t and so they are involuntarily unemployed. Wray advocates creating jobs so people can find jobs if they want jobs.
“Nor is make-work anti -inflationary anymore than any other waste of time.”
Wray doesn’t advocate “make-work” or “wasting time”.
Stop being so ignorant.
Stop being so dogmatic.
Stop assuming that you know everything.
Stop assuming that everyone who disagrees with you is evil.
Central Banking cannot be reformed else it should work perfectly now after centuries of practice.
So banking should be 100% private with 100% voluntary depositors and other creditors.
There’s your reform, Wray, the ONLY ethical one.
A great deal of thought and philosophical consistency is behind my dogmatism starting with “Thou shall not steal” which I assumed (incorrectly, it seems) to be widely accepted.
“Central Banking cannot be reformed else it should work perfectly now after centuries of practice.” – berado
skippy… Well, you have over 5000 years of epic fail and whilst were at it what has been the predominate force behind all of it.
F. Beard,
I don’t support stealing, but I also don’t agree with your facile opinions on economics.
In your such a combination is impossible, because you have created your own circular definitions whereby anyone who disagrees with you necessarily supports stealing.
It’s not possible to have a reasonable debate with you because you don’t think like a reasonable person. You think like a religious zealot: you have the absolute truth and everyone who disagrees with you is evil. The possibility that other people might have a valid point of view never enters into your mind.
F. Beard,
I don’t support stealing, but I also don’t agree with your facile opinions on economics.
In your mind such a combination is impossible, because you have created your own circular definitions whereby anyone who disagrees with you necessarily supports stealing.
It’s not possible to have a reasonable debate with you because you don’t think like a reasonable person. You think like a religious zealot: you have the absolute truth and everyone who disagrees with you is evil. The possibility that other people might have a valid point of view never enters into your mind.
The possibility that other people might have a valid point of view never enters into your mind. PJ
Let’s hear those views then. If you can refute me then do so.
Iron sharpens iron,
So one man sharpens another. Proverbs 27:17
New American Standard Bible (NASB)
Why, for pity’s sake? Because Wray doesn’t support a policy, the thesis of his article is wrong?
It’s not enough just to yell “Bingo!” You’ve got to mark off the numbers on the card.
Think Michael Hudson has.
Here’s a question BJ:
Since the monetary sovereign has an inherent right to create fiat for the general welfare why should a central bank be allowed to create fiat for the sake of banks? When such fiat creation reduces the policy space of the monetary sovereign to create new fiat without price inflation?
In other words. why is the banking system allowed to “crowd-out” fiat creation by the monetary sovereign?
Let the banks create their own money if they can find people to accept it. But people generally won’t UNLESS they are offered a share in the profits and thus the concept of common stock as private money.
They don’t crowd it out. As private banks grow their own balance sheets that increases the demand for the government’s money, since bank money is just a derivative instrument redeemable on demand into the government’s money.
Wrong. The Fed provides any needed reserves, depositors are not needed.
But, abolish the Fed and what you say would be correct and would drive interest rates to the correct balance between saving and borrowing.
“and would drive interest rates to the correct balance between saving and borrowing.”
That is meaningless. You’re just defining “correct” interest rates as whatever interest rates happen to exist in the absence of the Fed.
You’re just defining “correct” interest rates as whatever interest rates happen to exist in the absence of the Fed. P J
Duh! Correct!
The Fed is a legal counterfeiter so of course it distorts interest rates.
But here’s how to have the lowest real interest rates in fiat. Abolish the Fed and privileges for the banks and let the US Treasury freely spend until people start to choose private currencies for private debts. That is literally creating as much fiat as the market will bear so real interest rates for it should be at a minimum.
“The Fed is a legal counterfeiter so of course it distorts interest rates.”
That is another meaningless statement.
“legal counterfeiter” is a contradiction in terms.
“so of course it distorts interest rates.”
Argument by assertion, yet again. To justify your assertion that the Fed “distorts” interest rates away from their “correct” level, you simply assert that the Fed “distorts” interest rates. No argument involved, just pure assertion.
I see you ignore the recipe for the lowest real interest rates in favor of some sophistry. So much for your acting in good faith. Or at least that’s strike two.
And yes the Fed is a legal counterfeiter since fiat should ONLY be created for the general welfare, not for the rich and banks.
“I see you ignore the recipe for the lowest real interest rates”
Another meaningless statement.
More hair splitting. Who cares what stock is owned where? Once a club is formed of Central Bankers and Wall Street Bankers then what it does it matter who owns which stocks? This was a malformed fetus right from inception. The 1913 Fed bill should have outright BANNED any Wall Street banker from serving on ANY of the Fed boards to start with. We should have completely excised private bankers from any association with the Fed in any form. We should have stipulated that if you ever served in Wall Street then you can NEVER work for the Fed. That would have been a start although privatizing ALL banking would have been the best thing to do.
The stock is preferred stock.
Preferred stock conveys no rights as to governance. Preferred stock holders to not get to vote on board members, fire the CEO if need be, sit on audit committees, etc.
You just get dividends when there are enough earnings to pay them.
It is worthwhile to juxtapose Wray’s exhaltation of the Federal Reserve to the much less flattering evaluation John Kenneth Galbraith gave it.
But before the Fed came its predecessor, the “pioneer” of central banking, Galbraith explains in Money: Whence It Came, Where It Went. It was born in 1694. “The Bank of England was the instrument of a ruling class,” he charges. “Among the powers the Bank derived from that ruling class was that of inflicting hardship. It could lower prices and wages, increase unemployment.” He concludes that in “England the triumph of Ricardo’s monied class was complete or nearly so.”
Then Galbraith moves on to the history of U.S. Federal Reserve System. Galbraith observes that
”The most widely read account of the genesis of the System tells glowingly of its birth in the closing weeks of 1913 when the Federal Reserve Act was passed by Congress and signed by President Wilson. “It sprang from the panic of 1907, with its alarming epidemic of bank failures: the country was fed up once and for all with the anarchy of unstable private banking.” Professor Samuelson, the author of the foregoing summary, adds that the System is referred to by economists as “The Fed” and that this affectionate, if repellent, contraction carries no connotation of disrespect. He observes that the effect of the decisions of the principal policy-making authority of the System, the Open Market Committee, makes its members, with “pardonable exaggeration,” perhaps “the most powerful group of private citizens in America.”
That there is conflict here with circumstance, even the minimally alert will have sensed. As an answer to the great panics, the System was notably defective. In 1920-1921, seven years after the System was established, there was a severe one, and this was followed ten years later by the worst depression of all time. There is much evidence, which orthodox professional opinion does not reject, that Federal Reserve policy made all worse — that it helped finance the antecedent speculation and helped intensify the ensuing contraction in both 1920-1921 and 1929. Nor was it better as an antidote for an alarming epidemic of bank failures. In the twenty years before the founding of the System there were 1748 bank suspensions; in the twenty years after it ended the anarchy of unstable private banking, there were 15,502.
As restraint on bank lending during the boom is a basic central-bank function, so serving as a lender of last resort is its main task in the ensuing depression. However, during the Great Depression not the Federal Reserve but the Reconstruction Finance Corporation, newly created for the purpose, served this function. And when unstable banking was finally brought to an end in 1933 — when all banks were made subject to effective supervision and depositors were assured, in consequence, that when they came for their money they could have it — it was not the Federal Reserve System but the Federal Deposit Insurance Corporation, a relatively anonymous and wholly unprestigious institution, which did the job. In the 1930s, it was learned that an abundant supply of funds for lending by the banks did not ensure their use. In consequence, it became necessary for the government to make spending not permissive but assured. This it did by borrowing and spending itself—by fiscal as opposed to monetary policy. A depression, when bad, was shown to be beyond the reach of the Federal Reserve.
Finally there is inflation. In 1963, to celebrate the fiftieth anniversary of the founding of the System, the Board of Governors (as it is now styled) published (more precisely, republished) a small volume on its purposes. “Today,” it said, “it is generally understood that the primary purpose of the System is to foster growth at high levels of employment, with a stable dollar . . .” In the next decade there occurred the most severe inflation ever in peacetime. The Open Market Committee, still presumably the most powerful group of private citizens in America, met repeatedly on the problem. The inflation continued. When it slowed, unemployment grew grievously instead. Power is as power does….
Almost every aspect of its history must be approached with a discriminating disregard for what is commonly taught or believed.
[….]
The management of money is no longer a policy but an occupation. Though it rewards those so occupied, its record of achievement in this century has been patently disastrous. It worsened both the boom and the depression after World War I. It facilitated the great bull market of the 1920s. It failed as an instrument for expanding the economy during the Great Depression. When it was relegated to a minor role during World War II and the good years thereafter, economic performance was, by common consent, much better. Its revival as a major instrument of economic management in the late ’60s and early ’70s served to combine massive inflation with serious recession. And it operated with discriminatory and punishing effect against, not surprisingly, those industries that depend on borrowed money, of which housing is the leading case. To argue that it was a success may well be beyond even the considerable skills of its defenders. Only the enemies of capitalism will hope that, in the future, this small, perverse and unpredictable lever will be a major instrument in economic management.”
https://anonfiles.com/file/7401950f3b2717503553dcfb8b51d10a
It is worthwhile to juxtapose Wray’s exhaltation of the Federal Reserve . . .
Just more silly talk. Nowhere did Wray write any such thing, as all reasonable people can see for themselves. You’re getting desperate.
Mere juxtaposition is not argument. Please don’t clutter the threads with lengthy quotations if you can’t relate them to the topic at hand.
The Fed is independent of the Treasury in the way that the GOP and Dems are independent parties. There are key functional aspects of being separate, and yet, they are clearly operating under the same governance philosophy that public policy should be used for concentration of wealth and power.
Until we have a political answer to the governing philosophy of inequality, discussions about monetary policy amount to little more than make work programs for academia (which, after all, depends heavily upon the USFG in general and the Fed in particular).
Your conclusions pretty much mirror those Lawrence Goodwyn came to in The Populist Moment. Here’s how he explains it:
”The foundations of modern America were constructed out of the cultural materials in the Gilded Age. The economic, political, and moral authority that ‘concentrated capital’ was able to mobilize in 1896 generated a cultural momentum that gathered in intensity until it created new political guidelines for the entire society in twentieth-century America. Not only was previously unconsolidated high ground captured in behalf of the temporary needs of the election of 1896, these patterns became fully consolidated within the next generation of the Progressive era and proved adequate during a brief time of further testing during the New Deal. They have remained substantially unquestioned since, and broadly describe the limits of national politics in the second half of the twentieth century….
[T]he power of hegemony achieved in 1896 was perhaps most clearly illustrated through the banishment of the one clear issue that animated Populsim throughout its history – the greenback critique of American finance capitalism. The ‘money question’ passed out of American politics essentially through self-censorship. This result, quite simply, was a product of cultural intimidation. In its broader implications, however, the silencing of debate about ‘concentrated capital’ betrayed a fatal loss of nerve on the part of those Americans who, during Populism, dared to speak in the name of authentic democracy…..
Though the gold standard was formerly legislated into law in 1901 over scattered and desultory opposition, the financial panic of 1907 convinced the Eastern banking community of the need for a more flexible currency…
The demand for a more flexible currency that issued from the banking community following the panic of 1907 was oriented not to the needs of agriculture, however, but rather to the requirements of the banking community itself. Thus, while the 1912 report of the blue-ribbon National Monetary Commission recommended new legislation establishing adequate credit for the nations farmers, the Federal Reserve Act written by Laughlin and his associates failed to follow through. Though proponents of the Federal Reserve System often described the twelve regional banks established by the act as ‘cooperative banks’ specifically designed to meet the impasse in agricultural credit – a description particularly prominent during public discussion of the enacting legislation – they were not, in fact, so designed. The Act provided easier access to funds only for the nation’s most affluent farming interests.
The Federal Reserve System worked well enough for bankers in the ensuing years, but its failure to address the underlying problems of agricultural credit became obvious to all during its first decade of operation…. [T]he system of New Deal government loans operated wholly through commercial banks. It thus served as an artificial prop for the prevailing system. In any event, by the time of the New Deal legislation, literally half the farmers in the cotton belt and the Western granary had long since been forced into landless peonage and were effectively beyond help.
A final irony was implicit in these developments – and had they lived to see it, it was one that might have proved too much for old-time greenbackers to bear. The collective effect of twentieth-century agricultural legislation – from the Federal Reserve Act of 1913 to the abrupt ending of the Farm Security Administration’s land relocation program in 1943 – was to assist in the centralization of American agriculture at the expense of the great mass of the nation’s farmers. The process of extending credit, first to the nation’s most affluent large-scale farming interests, and then in the 1920s and to the sectors of the agricultural middle class – while at the same time denying it to the ‘whole class’ of Americans who worked the land – had the effect of assisting large-unit farming interests to acquire title to still more land at the expense of smallholders. Purely in terms of land-ownership patterns, ‘agri-business’ began to emerge in rural America as early as the 1920s, not, as some have suggested, because large-scale farming proved its ‘efficiency’ in the period 1940 to 1970. In essence, ‘agri-business’ came into existence before it even had the opportunity to prove or disprove its ‘efficiency.’ In many ways, land centralization in American agriculture was a decades-long product of farm credit policies acceptable to the American banking community….. The end result was a loss of autonomy by millions of Americans on the land….
A new style of democratic poltics had become institutionalized, and its cultural boundaries were so adequately fortified that the new forms gradually described the Democratic Party of opposition as well as the Republican Party of power. A critical cultural battle had been lost by those who cherished the democratic ethos….
When thye long Republican reign came to an end in 1932, the alternatives envisioned by the Democrats of the New Deal unconsciously reflected the shrunken vistas that remained culturally permissible. Aspirations for financial reform on a scale imagined by greenbackers had expired, even among those who thought of themselves as reformers. Inevitably, such reformers had lost the possibility of understanding how the system worked. Structural reform of American banking no longer existed as an issue in America. The ultimate cultural victory being not merely to win an argument but to remove the subject from the agenda of future contention, the consolidation of values that so successfully submerged the ‘financial question’ beyond the purview of succeeding generations was self-sustaining and largely invisible.
That’s a great excerpt. I think it might capture what is changing, too. The cultural fortifications are crumbling. What we find beyond the wall might surprise us all.
The way that Wray dances around the philosophical and practical objections to JG fit right in with this:
“I’m not going to say more about these final two arguments against full employment as I’m convinced both are fallacious, and because neither of these critiques offers a price-stabilizing anchor for the currency in place of the JG/ELR.”
http://www.economonitor.com/lrwray/2013/12/28/bop-a-mole-1-does-modern-money-theory-need-a-job-guarantee/
That’s beautiful semantics. Define acceptible solutions as those that are built around a price anchor in monetary policy and then simply dismiss criticism that either disputes the necessity of such an anchor or points out that if you are going to have such an anchor, it must be accompanied by a political mechanism to fundamentally reform the monetary system.
A man writes a book about penguins, and the review complains he didn’t include a chapter on icebergs.
An article has to be focused on something. You need to explain why the material you demand to be included isn’t extraneous before you make a claim of “dancing around.”
That’s a pretty high standard. I wonder how anyone can possibly comment (succinctly) on anything with that bar?
I guess my best stab would be that what I find interesting about the quote from Mexico produced is the attention it pays to how possibilities are constricted. That is precisely what Wray does with his version of money. He defines the terms of the discussion in such a way that philosophical and practical critiques of his preferred policy tool, JG, are thrown out.
I think that’s exactly what the imagery of dancing around something is designed to capture.
Perhaps I should use different imagery. I would suggest that JG assumes the proverbial can opener. In fact, it goes further than that, assuming not only the existence of the can opener, but also that what’s inside the can is desirable to eat.
I don’t deny the appeal of JG; some people love cream of mushroom soup. What I deny is the claim by some of the people who take Wray’s preferences and assert that those preferences are not preferences at all, but rather factual statements. As if it is impossible to desire a different system. That is pretty much exactly what the imagery of fortified cultural barriers is describing – the mistaking of political preferences for immutable laws of nature.
“In many ways, land centralization in American agriculture was a decades-long product of farm credit policies acceptable to the American banking community…..”
Brilliant! The Wall Street Banker is a particularly potent poison that needs an antidote. The only problem is, this type of flesh eating virus is now spread all over the world and in due course will devour central banking everywhere. It is now happening in full force in the EU.
The term fed independence is an oxymoron like military intelligence, jumbo shrimp etc.
It’s a term that in fact is used to cloud real meaning. Along the lines of stable prices (inflation targeted at 2% is by definition not stable pricies). The term in effect propganda that is sold to the masses..
An independent Fed would of course independent of doing things for the pure purpose of baking interests as well. Yest we can see that the very structure of fed governance legislates a disproportion of decisions will be made by bankers for the public’s interest.
There already is a division to protect consumers in the fed, the people running that division are picked by bankers. The number of bankers of the fed boards. The Saunders report on conflicts of interest at the federal reserve ( http://www.sanders.senate.gov/imo/media/doc/101911%20-%20THE%20SANDERS%20REPORT%20ON%20THE%20GAO%20AUDIT%20ON%20MAJOR%20CONFLICTS%20OF%20INTEREST%20AT%20THE%20FEDERAL%20RESERVE.pdf ) makes it very clear the fed is in fact not independent.
Hence the term fed independence is really a screen/ cover for establishing and maintaining a federal reserve behoden to banking interests. I’d actually like to see a more independeent fed, one that isn’t captured by banking interests. So, henceforth, when people talk an independent fed, they should in fact include bankers in the discussion, not just congress, and use the term the way it should be used
‘During WWII in the US budget deficits ran up to a quarter of GDP. Since central bank purchases of bonds supply the reserves needed by banks to buy bonds, a virtuous circle is created so that the treasury faces no financing constraint.’
Virtuous circle? Many Boomers’ parents didn’t perceive it that way at all in March 1947, when the annual rate of change in CPI-U hit 19.7%. Plenty of folks blamed their distress on the little haberdasher from Kansas City. But this monetary pathology was the work of the Federal Reserve and its campaign of financial repression.
Abolish the freaking Fed.
American prosperity increased enormously during the period from 1940 to 1970, despite the brief contraction that resulted from the demobilization after WWII.
It did. But that’s another subject.
Over the period you mentioned, 1940 to 1970, 10-year T-notes returned an annually compounded 2.25%, while inflation (as measured by CPI-U) climbed at 3.35% annually.
That is, thanks to the relentlessly rising inflation accommodated by such central banker superstars as Arthur Burns and G. William Miller, fixed income investors lost 1.1% of their purchasing power annually, for three bloody decades. This spelled Friskies and Meow Mix for many people living on fixed incomes (what’s your favorite brand?).
Umm, no. “Financial repression”, low interest rates, “printing money” instead of “printing bonds” tends to be anti-inflationary – which is what common sense says – and it certainly was then. The reason for the severe postwar inflation – much worse than during the war – was too quickly removing price controls. It is not difficult, but it takes time to change to a peacetime economy, to convert factories from making bombers and tanks to cars etc. And of course combining the war, the immediate postwar inflation – caused by going against Keynes’s & Keynesian recommendations – and the subsequent worldwide Keynesian golden age into one era is not very useful.
There is an excellent contemporary account in Dudley Dillard’s book on Keynes, who attributes the ultimate cause to people immaturely believing in the magical thinking now called mainstream or neoclassical economics, that “the free market” will magically solve all problems. Inflation, by definition is always about monetary/financial interacting with fiscal/real and that was the cause then. To think that major inflation can have much to do with minor interest rate monkeying is to believe in magic.
“Many Boomers’ parents didn’t perceive it that way at all in March 1947, when the annual rate of change in CPI-U hit 19.7%. Plenty of folks blamed their distress on the little haberdasher from Kansas City.”
Aye, Haygood. You and your selective history!
Those people to whom you refer (anecdotally? Can you have anecdotal evidence from a dead person?) would have been ignoring a very obvious cause for inflation to spike in 1947: the expiration of the Emergency Price Control Act and the abolishment of the Office of Price Administration in, you guessed it, March of 1947!
http://www.archives.gov/research/guide-fed-records/groups/188.html#188.1.
CPI-U decreased to -2.1 two years later, and even including the hangover year of 1948 (8.8%) and the spike created in the first two years of the Korean War, averaged 2.62 from 1948 until 1970.
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
If you aren’t careful, you may be asked to show your work from now on!
I think from an operational standpoint most MMTers think of the Fed/Treasury as essentially a single entity…
http://neweconomicperspectives.org/2013/12/krugman-helicopters-consolidation.html
Krugman, Helicopters, and Consolidation
December 11, 2013
By Scott Fullwiler and Stephanie Kelton
“”Thankfully, Krugman is helping clear through decades of confused teachings in macroeconomics textbooks. While the U. S. Treasury and the Federal Reserve are obviously separate institutions within the government, Krugman’s analysis shows that it can be quite illuminating to look at the effects their operations using a consolidated balance sheet. For example, we see the case for helicopter financing of government deficits has been much ado about nothing. Indeed, the main advantage of Case 2 is not that it provides a greater boost to the monetary base but that it would relieve the government from the practice of selling bonds altogether. In other words, the main advantages of direct money creation are political rather than economic.””
————–
The Fed getting involved in setting money market fund interest rates could actually be a stabilizing feature. Money market funds now invest in tri-party repo to try and get positive returns. This feeds into the unregulated derivatives industry. If they can get a safe low interest rate from the Fed this would prevent them from ‘breaking the buck’. I think it’s important to view the Fed as a combined Fed/Treasury operation so this is essentially giving strong backing to a large amount of funds (money markets) and limiting their involvement in destructive financial leveraging.
http://blogs.wsj.com/economics/2014/01/08/fed-discusses-tool-that-may-eventually-help-it-set-rates/
“”Under the program, the Fed is essentially offers an investment opportunity to money-market mutual funds, banks, securities dealers, government sponsored enterprises and others. These counterparties invest cash with the Fed, and in exchange receive a fixed interest rate and collateral in the form of securities from the central bank’s massive portfolio accumulated through its bond-buying programs. “”
————–
And Mosler also gives us some interesting insights into how the Fed can be used..
Good article on how the Fed could actually do something to improve stability rather than playing guessing games with us and using the confidence fairy..
http://www.economonitor.com/lrwray/2013/12/20/the-fed-can-set-mortgage-rates-guest-post-by-warren-mosler/
“”First, they can simply announce that they are buyers of 10 year treasury notes at, say, a yield of 2%, in unlimited quantities.
This would immediately bring the 10 year yield down from 2.92% to no more than 2%, and most likely the Fed would buy few if any at that price. That’s because when people know the Fed will buy at a price, they know they can then buy at a slightly lower interest rate, knowing that ‘worst case’ they can always sell to the Fed at a very small loss.””
“”Second, the Fed (or Treasury or the Federal Financing Bank) could lend directly to the housing agencies at a fixed rate of say, 3% for the further purpose of funding their mortgage portfolio of newly originated agency mortgages. The agencies would then pass along this fixed rate, with some permitted ‘markup’ and fees to the borrowers. The Fed would then be repaid by the pass through of the monthly payments including prepayments made by the new mortgages. This would target mortgage rates directly and, as these mortgages would be held by the agencies and not sold in the market place, dramatically reduce what I call parasitic secondary market activity.””
This is an interesting backgrounder but I’m looking forward to Part II where, I presume, the Wray will focus on today’s Fed.
There has been a qualitative change that makes most of Fed history less relevant: the financialization of the economy means the Fed is more powerful than ever. This is reflected in the media where the only person more glorified than the Fed Chair is the President.
I take issue with this:
Exactly what difference all this will make for the response in the next crisis cannot be foreseen in advance.
It is very clear to me what difference it makes. the FSOC has the specific power to allow systemically important institutions to raise additional funds from their customers.
Never again will the industry and politicians suffer the embarrassment of going hat-in-hand to Congress for a bailout. And never again will banking
demi-godsceo’s be hauled before Congress to explain themselves.I find it strange, I might add, that media and pundits virtually ignore the powers of FSOC.
The notion of institutional independence was a reformist proposal of the progressive movement of a century ago that aimed at eliminating the political patronage and spoils system in politics. You thus got a proliferation if independent boards for various pieces of the government-run infrastructure, including the monetary system. The Fed was supposed to be a fairly complicated checks-and-balances system. Each reserve bank had a tri-partite structure in which its board was compose one-third each of national banks, community banks, and industrial borrowers. In principle, those were to balance out the monetary interests of a regional economy. And then the representatives of each of the regional reserve banks were the board of the Federal Reserve Bank. This checked and balanced regional preferences in policy so that one region did not dominate policy as New York or Chicago interests had dominated the monetary system in the nineteenth century. And the private interests of the central bank were to be counter-balanced by the public interest as express through Congressional oversight and the appointment of officials by the President.
All systems eventually get gamed. And the idea of political independence has been gamed through the revolving door–not only in the Fed but also in municipal commissions, state agency boards, and in Congress itself.
But the failure of the independence of the Fed does not explain why the Fed cannot deal effectively with unemployment. It is fair to say at this point that the idea that monetary policy could increase employment was an illusion of the past 35 years, wishful thinking by folks that disliked fiscal policy and government programs that placed the government essentially as the employer of last resort. Today, the employer of last resort is the United States military. And the political incentives are to create wars in order to justify such a large pool of labor.
So there are two issues here. (1) How to get public agencies to serve the public. (2) Effective policies for dealing with unemployment. Wray is arguing that supposed central bank independence is irrelevant to both of these purposes — in principle as well as in fact.
Is the next step to argue that central banks are unnecessary as long as there is some mechanism for avoiding frequent bank panics, which are the collapse of trust in the existing monetary conventions. And that is an admission that a totally private financial system cannot guarantee stability; its gaming the system no matter what the system eventually catches up to it. Ed Schultz and other radio talk show hosts game gold. Bitcoins, which are likely stable as long as they remain bitcoins, get gamed in the exchange markets for other currencies.
There was also a big global push for institutional independence of central banks since the 80’s as part of the still ongoing neoliberal movement, and the Washington Consensus. I think the idea among the neoliberals was that the money supply, and attendant inflation or hyperinflation risks, had to be kept out of the hands of politicians and kept in the hands of “prudent” private sector money managers who didn’t have constituents to suck up to.
And the private sector money managers don’t have a constituency to suck up to?
Give me the delusion of money going to the public commons any day over the fact of money going to very few private individuals who do nothing to deserve it.
Clearly this is a timely topic as I just published a piece on the “Myths of central banking” earlier today. I look at two myths, central bank independence and inflation targeting as the sole correct policy goal, starting from the Canadian context but applicable more generally. I don’t share Wray’s optimism about central banks as insulated, public institutions. Indeed, I end with some thoughts on banking in general as a public utility that would truly make it accountable.
So how do we interpret Stanley Fischer’s nomination as No. 2 at the Fed? I have read that Mr. Fischer is a citizen of another country.
There has been some rush to defend this article’s amnesia about the revolving door between Wall Street and the Fed by terming it ‘not a polemical’ piece. Such a great man as Wray himself is devoid of the fundamental concept of leitmotif in ANY writing? C’mon guys this is not that hard. You read this and you almost get a sense of Wray tying himself into knots to avoid the revolving door. I actually dived into this article thinking that the lie of independence was about how the Fed was TOTALLY tied at the hip to the Wall Street cartel. How many times has Congress and Senate interfered with the Fed? Even if this piece purports to be information or history it seems to get it totally backwards. From the start there was ALWAYS the presence of Wall Street. Wall Street was present at the creation and the whole damned edifice was created with allowing Wall Street multifarious ways to influence Central Banking. I wonder if Wray thinks that Morgan invited everyone to Jekyll Island out of sheer sincerity and altruism and patriotism? I would think that the only time legislation interfered into Central Banking’s duties was via Glass-Steagall. If you look at this from that perspective then the reason we had stability for so long was not that Central Bankers were all wise Gandalfs but that Glass-Steagall put Wall Street into an Iron Maiden and there was little ‘regulating’ to do in terms of putting bit and bridle into the mouths of greedy bankers. I really think that Yves should get someone to write a well researched piece into Central Banking in India and Canada. These were the only two countries that survived the 2007 crash well and per my info, India’s Central Banker Y.V.Reddy was invited to lectures in the USA to share his information on how India weathered the 2007 crash so well. I think the main reason for this at least in India is that there is NO revolving door in Indian central banking and MOST banks are nationalized. Central Bankers there do not operate motivated purely through profit motive but are well educated and trained on social objectives and holistic growth. They are also truly independent from politics but with Raghuram Rajan now taking the helm at the Reserve Bank of India one wonders what will happen. I am fairly convinced that he is a neoliberal who is biding his time. In India there is a huge Wall Street educated parasite looter crowd that moved there in the last 15 years and they are all educating the investor class there in Mumbai and Delhi along the very same lines that happened in US since the 1980s. I would hazard a guess that Looting 2.0 will happen in India also in another 10 years.
Wray is discussing the myth that our central bank is independent from the political branches. It’s fascinating the only objection anyone can come up with is, “He didn’t attack Wall Street, so he must love them!!!!!!” Of course asking the willfully ignorant to actually consult Wray’s past writings is beyond the pale. Asking them to understand how scholarship is supposed to work is an outrage. The disinterested pursuit of knowledge is an evil to them.
It’s another example of the the armchair revolutionaries swinging away at anything in range whether they understand it or not.
You shouldn’t dismiss the idea that pursuing knowledge with a passion can be good. Being disinterested or indifferent is not necessarily good.
Moreover, it’s more important to stay the course on what is self-evidently wise than the mere pursuit of technical knowledge. Here, we are talking about sharing. If we share what we have, it matters not what banking system is.
It does matter when you attempt to alter it or replace it, just as it matters how well one understands an engine when rebuilding it. Knowledge must always guide and inform political action or we risk compounding the problem, as should be obvious from the disastrous policies wrought by people who do not know what they are doing.
I’m all for the pursuit of knowledge. That’s why I’m pointing out fallacies as I go, to clear the underbrush of bad faith argumentation and bullshit so that the actual pursuit of knowledge can begin.
There are important underlying philosophical and political tensions within these debates on the nature, structure and functioning of our monetary system (which have been ongoing on this blog for a least 6 years).
On a philosophical level many of the MMT theorists appear to firmly believe in the independent existence of the “is” statement or pure description. Consequently they have difficulty accepting or explaining the fact that there will always be competing conceptual frameworks for understanding our monetary system since all “is” statements are actually disguised “ought” statements and that pure empiricism is pure nonsense.
Others, like myself, critics of MMT on multiple levels, believe that all “is” statements are indeed disguised “ought” statements, which in political philosophy translates into the perspective that it is really our feelings and political sympathies which determine our premises and conclusions and that for all monetary theorists there is a hidden choice on where to begin an analysis (for example, with the vertical sovereign state and fiat money or the horizontal private banking system and loans and deposits),– depending on ones political sympathies.
In the months ahead as NC likely begins to formalize its 2nd New Deal political vision which incorporates the more state-centric MMT perspective, these philosophic and political divisions will become more pronounced. Centralization vs. decentralization and populism vs progressivism may again be on the political agenda as they were in 1896.
My mechanic informed me he was receiving an EGR-valve error code (P0401) when he connected my vehicle to a diagnostic computer.
What sort of “ought” statement does that translate into? Obviously he has some sort of political agenda, given what you’ve just written.
I don’t trust regulation to overcome the susceptibility of MMT to be gamed. A good monetary system is one that would seek to eliminate the ability to game the system, and we’ve seen that regulation doesn’t work against that. I don’t believe the leverage that MMT permits can be regulated, even with a decent regulatory system, and the resultant systemic risk will continue to lead to financial crises.
I like the appeal of the Chicago Plan’s debt free fiat and full reserve banking, and thought Kucinich’s NEED Act was a pretty fair stab at designing a monetary system that the would be difficult to game. As a bonus, it addressed social needs and would help to reverse some of the growing inequality.
You are seeking a theory of anything that can’t be gamed? Good luck with that. It’s not MMT’s job to fix the regulatory system or elimate systemic risk, any more than (say) it’s the building code’s job to make sure that code enforcement officers are never corrupt; that’s a category error.
Central banks are fascist institutions in so far they have a window on both credit banks / corporations and the government
There is no getting around this very plain fact of present monetary life.
Saying that this abomination is real does not make our life on Earth any better.
Its a mere statement on our horrid life which so happens to be devoid of any meaning…,……it seems the purpose of MMT propaganda is to subtract politics from the debate.
Its quite a show ………but it is merely another banking circus.
When dealing with what you were being informed of by your mechanic when you were told he was “receiving and EGR-valve error we are no longer in the world of political philosophy (and monetary theory) and our usually unacknowledged sympathies as determinate in our conceptual choices.
But you example raises another interesting question about empiricism. It sounds as if your mechanic is certainly comfortable with the word EGR and what it means. Certainly within the profession of auto mechanics there has probably developed the custom of applying the word EGR-valve to a certain configuration of elements. Could it be that custom arbitrarily seals of multiple definitions of the word EGR valve and helps to close off confusion about its meaning. And could it also be that custom like political sympathies has little to do with sense impressions and more to do with the tradition of naming–of knowing how to use the word.
Good nite all. My much more pleasant life in dreamland awaits.
[Obvious and successful religious flame bait and subsequent flame war ripped out. Sadly, some collateral damage to good faith comments, but the healthy twigs had to go with the rotten branch. Moral: Don’t get involved in flame wars or trolling episodes. –lambert]
And so an off topic comment begets… and begets… and begets. And some beknighted admin is going to have spend time that would otherwise be spent delivering actual value to NC readers ripping it all out. You wanna argue religion, the door to 4chan is that way. Sheesh.
When people quantify the definition of reality and the meaning of words and thoughts, by some religious – fundamentalism, should it not be unpacked. Especially when the whole notion of classical economics is based on opinions from 5000 years ago – for a short list. And as MMT is a descriptive operational theory, constantly attacked by classical’s, trying to force their agency on it, how else do you think it would proceed. Hell between the wIngers, neolibreals, 3rd rail democrats, corporatists, all pulling their hair out, finding wedges to insert for advantage, concocting their own private meanings of stuff.
Hay who was the bright bulbs that hyper politicized religion for fun and profit in the first place? Counterfeiting, theft, stealing, restitution, justice, natural thingy, et al, seriously as most asset prices over the last few decades is a factor of fraud (the fact that some are even employed is a factor of fraud), where do you bloody start. Maybe it would behoove some to stop with the moralizing and focus more on how to firstly stabilize this mess and then work out a path to a future for everyone with out blowing up the joint.
Skippy… methinks some should put down their staffs and stop hitting every thing with it – like water will flow – when all they get is chips in their eyes.
This post is confused. Wray makes no attempt to distinguish between any thoughts he might have on the Fed as opposed to the fairly standard exposition of the Fed he gives. His thesis is that Fed independence is a myth, but his presentation seems to argue the contrary point. Indeed if we were to substitute the word “autonomous” for “independent”, it would seem, at least from what Wray has written so far, that this would be a formulation he could accept.
The problem is that many of us here have a much more negative view of the Fed. I see the Fed as a primary tool of kleptocracy. Monetary policy is the goose that can keep laying trillion dollar golden eggs. It allows the rich and elites to loot directly from the money spigot. The Fed’s relationship with the banks, Congress, and the Executive is the same as the one between sockpuppets. It’s not important which face is on the sockpuppet. It’s whose hand is in the sock directing it. So like others here, I don’t see the distinctions Wray is making. They exist for me only at the level of kabuki. Arguing, and, as I said, not arguing very clearly, over whether the Fed is an independent sockpuppet makes no sense to me.
God, the obfuscation and plain idiocy exhibited in this entire thread has made me come out of the shadows (never mind this being my first visit to reading the comments again in more than a year). Let me explain something for both you and the others that posted here: Wray makes it a point to note that the Fed is not indeed independent BECAUSE people give the institution too much focus. The ultimate reason behind his post is to say that we need to stop focusing so much on an organization who ultimately can do little more than control the discount rate and fed funds rate (they can regulate too, but that is not important here). He thinks that if he picks at the foundations of this false belief that the Fed has so much power (including the fact that the Fed is controlled by bankers, which can be true but again IS NOT IMPORTANT IF WE UNDERSTAND WHAT THE FED ACTUALLY DOES), then we can actually start focusing on fiscal policy. One way to get beyond simply arguing the policy tools the Fed has at it’s disposal is to argue that it’s not really independent like we think it is. He’s simply laying out the facts, and almost all of the worthless comments made by a bunch of amateurs who simply don’t get it doesn’t change that.
Even the supposed obfuscation that MMT throws out with respect to their insistence that they are simply describing what *is* rather than what *ought*…in some sense they’re right, because they don’t actually refer to human beings as this is purely a macro analysis of money, etc. The things they describe are ultimately social, but the social is taken out of the theory itself. Which is why MMT is not really a mass-movement sort of philosophy, because it’s not philosophy at all. The problem, instead, is that we accept the *is* without the *ought* when we theorize (and whether we call it science or not), so in this respect MMT should be attacked for repeatedly insisting that they’re only describing what is. (all this is not to say that the distinction between is-ought is a poor one, I agree there, but on some very tiny level there are “positive” statements that simply describe something as it is, but this isn’t necessarily a strength, as I’m arguing. tighten up on that Philosophy, Jim!)
There certainly does seem to be a lot of “any stick to be a dog” on this thread. Well stated.
Other than being completely wrong you make many fine points. The Fed is the ultimate source of the dollars that run the private banking system. These banks, especially the big ones, dictate Fed policy through the revolving door like placing Goldman alum William Dudley as president of the NY Fed and by controlling the Congress and President, and so whom they nominate to head the Fed. The Fed rendered aid to the banks after the meltdown to the tune of $16 trillion according to Bernie Sanders. The GAO audit showed about $28 trillion in activity in the Fed’s emergency programs. The Fed bailed out AIG without any real legal authority to do so. It just made permanent a dollar swaps program which can be used to provide backdoor bailouts in the future. And it has been running its version of QE, the latest one injecting a trillion a year into the Wall Street casino.
On this last one, MMTers have tried to portray it as essentially a neutral swap. But the Fed creates the money to buy the QE MBS ex nihilo. And it converts an illiquid asset into a liquid one. There is also a price mismatch in what the Fed pays for this MBS. Indeed it is a self-licking cone because it is precisely the Fed buying program which supports the prices of the MBS. And the Fed does other deals where for instance it lends to banks at ZIRP, the banks deposit these loans as deposits at the Fed and the Fed pays interest on them to the tune of billions a year.
The economy is not like physics. It is a human activity based on supplying what people want. Anyone who studies the economy brings with them what they want. So there is no “is”. That is objectivity, pure description with regard to the economy are just poses, fictions, lies. Some of us realize this to be the case and make this the starting point of how we view the economy. Almost no economists, classical or MMT, do this however. They continue the pretense of objectivity and discredit themselves and their views in the process. Well, that’s their choice. However, don’t blame us, but them, or yourself, for it.
Can i ask some questions without being guillotineded by the Jacobites from either side. Obviously along with every other facet of our financial system the FED is not serving us. I have been looking into MMT trying understand what they are saying. I like some of what I heard, don’t understand some, and don’t buy some. First, my first understanding was that an issuer of sovereign currency would not have to borrow or tax, taxing was to be used just to conrol inflation. And yet I hear a host of refrences to borrowing, what gives? Further some NC sharers have aluded to the FED giving over their power of money creation to the major banks. Was there a new ruling, a response to a changing culture, and haven’t banks always had the power to create money? Now as for stimulating the economy by issuing more dollars, isn’t one of the problems that when we gave the banksters all of that money, they either parked right back in the FED vaults or gambled in their Wall Street casino, thus wouldn’t the US spending money in the real economy go a long way to relieving some of the hell me and my fellow working poor are going through? I have to find out more about those greenbackers.
First, my first understanding was that an issuer of sovereign currency would not have to borrow or tax, taxing was to be used just to control inflation. Right.
And yet I hear a host of references to borrowing, what gives?
“Borrowing” is a misnomer when used for a government exchanging the currency it issues for the bonds it issues. That is just not the same transaction that is called “borrowing” in any other context, but is more properly called an asset swap (or liability swap).
However, the word “borrowing” is used by almost everyone for this transaction without the consciousness that it is a different meaning for the word. Currency issuance, printing and spending dollars is much more like usual “borrowing”, as that is when the state enters into a credit/debt relationship with the private sector, but the word is not used for this. Thus confusion reigns.
haven’t banks always had the power to create money?
Yes. In fact everyone has the power to “create money”. As Minsky said, everyone can create money, the problem is to get people to accept it. Minsky analyzed everybody as a bank. What governments, the Treasury and the Fed may do is back in various ways bank issued money – which is most of the money in our economy. This makes it almost as accepted as state money, which is the still the king of the hill in modern societies.
Now as for stimulating the economy by issuing more dollars,… thus wouldn’t the US spending money in the real economy go a long way to relieving some of the hell me and my fellow working poor are going through? Yes, that is the basic MMT proposal. Give state money to poor people for doing something for the general welfare. As opposed to the usual method of economic management: give (rather more) money to rich people for doing destructive things or at best, nothing.
I have to find out more about those greenbackers.
The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America is a good place to start.