Krugman remains wrong. LJ ate my earlier comment, so I'll be brief.
Declaring that money creation through loans isn't "endogenous" simply because there is a monetary authority guiding the overall supply is silly. It's akin to saying that people aren't individuals simply because they are restricted in their ability to reproduce by the facts that they require air, food and water.
I have no problem seeing that regulatory authorities restrict credit issuance through interest rate adjustments for the same reason that I can see a monetary system that has no restrictions would quickly overheat, inflate and crash, and that therefore such a system would be scrapped. Duh. That does not mean that the endogenous process isn't valid.
Why? What happens when lenders, say, get the rules changed that restrict credit issue? If that happens, nothing the regulatory authorities do will have much difference. That's why I quoted Greenspan above, because EXACTLY THIS happened. He raised rates, they failed to have the desired effect, and therefore, instead of looking into why they failed and finding banks were able to circumvent Fed rate changes with more "profitable" (and destabilizing) practices, he decided to let it ride and let "policy making, seeing no alternative, turned more eclectic and discretionary." He totally dropped the ball, blinded (as he later admitted) by his personal biases.
If the Fed chair at the time couldn't exert authority over credit issue, how can the money system be considered "exogenous?"
Just as people can briefly overwhelm their environments with too many people, banks can flood the economy with too much money. Both increases are beneficial to those that create, at least in the short term. In the longer term, though, both practices lead to crashes.
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timeasmymeasure
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Date: 2014-04-22 01:39 am (UTC)Declaring that money creation through loans isn't "endogenous" simply because there is a monetary authority guiding the overall supply is silly. It's akin to saying that people aren't individuals simply because they are restricted in their ability to reproduce by the facts that they require air, food and water.
I have no problem seeing that regulatory authorities restrict credit issuance through interest rate adjustments for the same reason that I can see a monetary system that has no restrictions would quickly overheat, inflate and crash, and that therefore such a system would be scrapped. Duh. That does not mean that the endogenous process isn't valid.
Why? What happens when lenders, say, get the rules changed that restrict credit issue? If that happens, nothing the regulatory authorities do will have much difference. That's why I quoted Greenspan above, because EXACTLY THIS happened. He raised rates, they failed to have the desired effect, and therefore, instead of looking into why they failed and finding banks were able to circumvent Fed rate changes with more "profitable" (and destabilizing) practices, he decided to let it ride and let "policy making, seeing no alternative, turned more eclectic and discretionary." He totally dropped the ball, blinded (as he later admitted) by his personal biases.
If the Fed chair at the time couldn't exert authority over credit issue, how can the money system be considered "exogenous?"
Just as people can briefly overwhelm their environments with too many people, banks can flood the economy with too much money. Both increases are beneficial to those that create, at least in the short term. In the longer term, though, both practices lead to crashes.