Krugman being Krugman
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Date: 2014-04-20 09:38 pm (UTC)Importantly, to determine if they really do create money and so money, on a macro level is really endogenous, we have to determine whether or not their decision making is constrained by their reserve levels. If you do not do this you will make the mistake in saying that banks create money because you will not see the mechanisms by which they're ruled. Your statement is akin to saying that consumers set GDP because they can always just spend, while ignoring that their spending is limited by their income and their income is limited by their productivity(or prior capital accumulation). The power of banks to create money, just like the power of people to move GDP depends on the key binding constraint no longer being binding.
So, are banks constrained by their reserve levels? Yes, absolutely they are statutorily constrained. The reserve levels of banks consistently are near the statutory limit. The LIBOR actually has an effect on the economy because when banks are near the statutory limit they must lend between themselves (or from the BoE) just as the fed rate has the same effect. We know they do both because we observe the markets and because if it was not so then the fed rate and LIBOR would have no effects on the market at all (which we know that they do)
Making the statement then, that money is endogenous even when banks are constrained by their reserve limits and that the mechanism to create money actually lies within them, and not within the monetary authority which controls the supply and leverage limits implies that banks are not sensitive to interest rates which is the largest load of bunk to have ever bunked bunk.
no subject
Date: 2014-04-20 10:01 pm (UTC)No, I'm not.
Importantly, to determine if they really do create money and so money, on a macro level is really endogenous, we have to determine whether or not their decision making is constrained by their reserve levels.
No, we do not.
Making the statement then, that money is endogenous even when banks are constrained by their reserve limits. . . .
. . . is irrelevant and quite opposite the point. It's like the Applebee character in Catch 22 being described as "Alright, but he has flies in his eyes." In the end, the flies in the eyes is completely irrelevant, even when often repeated.
no subject
Date: 2014-04-20 10:09 pm (UTC)Krugman is right here, the endogenous money people are heterodox for a reason.
no subject
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.
no subject
Date: 2014-04-22 04:54 pm (UTC)I will give you a hint. If it were the case that a regulatory authority could control the amount of air, water, and food that everyone got, such that their selection of the air, water, and food that individuals get uniquely determined the reproduction rate then reproduction would not be endogenous. Lets make it more explicit in our example.
Women create babies. But baby making is not an endogenous system. In order to make a baby they need sperm. Even if they can decide when to have children (by finding sperm) and even if their decision to have a baby lead directly to finding the sperm, it would not be the case that the decision to have children created sperm. If there was a regulatory authority which could control how much total sperm was available and such a limit was binding then the total number of babies, being limited by the total amount of sperm, would not be endogenous. But rather it would be uniquely determined by the sperm authorities regardless of the fact that women create children and regardless of the fact that the individual women choose to have children and regardless of the fact that the choice of the individual women to have children is what acquired them the requiste sperm
In this case the regulatory authority can, and does, control the money supply in such a way that banks, despite "actually creating the money" just like women "actually create the babies" are limited by the total amount of reserves available.
As an exercise i went and examined the quote in question. Greenspan isn't saying what you think he is saying.
http://pages.stern.nyu.edu/~nroubini/articles/FedPolicyDilemmaOpEdRosettWSJ1297.htm
What he is saying is that "we aren't using a specific policy rule to handle the money supply". This is a far far far far far cry from "we can't control the money supply". Indeed Greenspans talks on this are precisely what the Fed should be saying if we expect the fed to be credible (that is, if we know it has a rule, we know what the outcome will be and so if that is different from its expressed target we believe the rule and not the target. This would actually set money supply more endogenous, because the aggregate of individual actors would be controlling it rather than the fed, and we don't want that to happen)
no subject
Date: 2014-04-23 12:20 am (UTC)Yes, and thank you for your condescension. I'm sure, though, that economics has its own special private sooper sekrit definition for the word, all the better to baffle and befuddle.
Women create babies. But baby making is not an endogenous system. In order to make a baby they need sperm.
Yes, and banks create loans. Here's where baby and loan making diverge, however. Yes, banks need borrowers who have good collateral or good credit (the sperm). And the regulatory authority can set the reserve requirements and the interest rates. All well and good.
Ah, but when the banks can lend for speculative purchases, the returns get larger than when banks lend on traditionally "good collateral" like a crop brought in for harvest. That's akin, I guess, to couples using fertility drugs. When too many banks start lending for speculative purchases, the speculation markets themselves start to warm up (but not overheat). Interest in speculation grows. This is different than production of real assets that add value to the economy (I'm defining "real assets" as tangible items that improve productivity in the long run, not in items that merely appreciate in market value for resale). Yes, real production might improve as speculative purchases grow; the money supply is growing, after all, and money is fungible until it returns to the bank as a loan payment. But this growth is tangential and not sustainable. It can last for decades or last for months, depending upon how rapid the market distortion; but end it will, and in tears.
And here we have a situation that is not completely endogenous, as you note; but neither can it be said to be exogenous, since the regulatory authority uses too loose a definition of "asset worthy of a loan" to be of any help. When that regulator poo-poos the very idea that regulators do anything but distort markets as a philosophical maxim, the situation goes (went, actually) completely off the rails.
About the Greenspan quote. I got it from a book that notes that, before the speech described in the article, Greenspan attempted an adjustment from the Fed, but it didn't work Yes, as the article says, "as Mr. Greenspan himself admits, he's got less and less of a clue." What he should have done, instead of get all "go for it, whatever it might be", is become an authority that knew how the system being regulated worked. Without such an authority, there is no control, and no claim of exogenous can be made to stick.
As long as this hybrid endogenous/pseudo exogenous behavior is profitable and allowed, we will continue to have a wild and unpredictable financial future.
no subject
Date: 2014-04-23 04:28 am (UTC)This is a simple accounting identity wherein on one side is the deposit and on the other side is the loan. And if the sum of deposits is larger than the reserve ratio multiplied by the reserve amount (or divided whichever) then they cannot make that loan without increasing their reserves.
If the amount of reserves is limited, it doesn't matter a flying fuck what they're investing in. It doesn't matter a flying fuck what productivity growth is or what they think it is. All that matters is that they cannot make the loan because the money does not exist for them to statutorily be able to do so. In order for the money to exist they must borrow it. Borrowing in excess of the current demand raises interest rates and they only come down if the fed decides to increase the money supply and lower the interest rates. The people you're supporting are implying through this that the Fed has no power to move the money supply and because of this the interest rate and inflation, when in fact it has all the power and is using(and has used) that power to produce low and steady inflation.
The talk that you're referring to was Greenspan referring to the inability of the Asian centrals banks to fix their crisis it was not about the inability of the fed to hit their targets (which Greenspan did really well actually, though Bush hated him for it). He was talking about the failure of public policy rules(that is, rules set up that everyone knows, so everyone knows what will happen if X happens) and not the failure of what the fed was doing (which was secretive)
In short you don't have any clue what you're talking about.
no subject
Date: 2014-04-24 03:33 am (UTC)Wrong! See below.
. . . . if the sum of deposits is larger than the reserve ratio multiplied by the reserve amount (or divided whichever) then they cannot make that loan without increasing their reserves.
*Sigh* Son, I know that. I know all of this. Now then, let's think a bit. You said in there: "This is a simple accounting identity wherein on one side is the deposit and on the other side is the loan." And this turns out to be the key.
Let's go back to the Great Depression. In the Pecora Report, the authors noted that up to 2/3rds of banks in one section of the country (I could look it up in the report, if you need) went insolvent because of loans made to officers in the banks. Unsecured loans. Loans made specifically to invest in speculative ventures. This went on for years. When the crash came, the borrowers were (of course) unable to pay back those loans, leading to the insolvency of their hiring bank. In many cases, also according to the report, borrowing officers were still employed by the surviving banks, even after their personal defaults.
How could this have happened? Like I said above, in speculation "returns get larger than when banks lend on traditionally 'good collateral' like a crop brought in for harvest," especially in an overheating economy where new loans are directed to overheating elements. If the lending officers and owners have a few years where speculative investments pay off, they will back loans for future speculative investments. Here's the kicker: they don't need the fed or any other authority for permission. As long as the speculation out-performs the proscribed interest rate, the loan will be profitable . . . at least until they aren't.
Speaking of that interest rate, banks that are well-capitalized don't need to worry about borrowing from the Fed. They are under no obligation to even listen to the Fed rate if they can lend profitably. So as long as the inflation rate seems to match the rate of economic activity and employment, the Fed itself (especially under an idiot-savant ideologue like Greenspan, who was also clueless about what the rescinding of Glass-Steagall had wrought), there is no reason for the Fed to crank up the interest or reserve requirements.
How about what happened more recently? Backing lending were assets. I'm sure you know that assets as well as hard currency can back lending, right? Provided they were highly rated—easy, since the ratings agencies were, as Michael Lewis mentioned, just about clueless as to what was happening and thus easily manipulated, never mind the conflict of interest inherent between an agency paid by the entity needing a good rating—assets on the bank books promising the steady return of hard currency to the vaults was as good as gold, literally, for the balance sheets to accept increasing the loan exposure. And among those triple-A rated "assets" were derivative contracts, literally bets placed on completely different assets succeeding. Sometimes, as we learned in the wave of crashes and closures, these derivatives were multi-leveled, meaning they were bets on the success of bets betting on the success of bets placed on a hard asset like a loan. One loan, paying off (again, according to the reporting) up to nines times on a single asset, basically multiplying that asset's value nine fricking times with no underlying change to the wealth of the economy!
(cont.)
no subject
Date: 2014-04-24 03:33 am (UTC)In short, you are proving the entire theme of Homer-Dixon's book correct. In it, he notes:
Continue to cling to the nostrum that words like "endogenous" and "exogenous" apply to our current banking system absolutely (as you were no doubt taught), and that whipping out such a non sequitur is tantamount to victory, and you will be wrong.
Sorry. Life's a bitch that way.
no subject
Date: 2014-04-24 10:21 pm (UTC)"Let's go back to the Great Depression. In the Pecora Report, the authors noted that up to 2/3rds of banks in one section of the country (I could look it up in the report, if you need) went insolvent because of loans made to officers in the banks. Unsecured loans. Loans made specifically to invest in speculative ventures. This went on for years. When the crash came, the borrowers were (of course) unable to pay back those loans, leading to the insolvency of their hiring bank. In many cases, also according to the report, borrowing officers were still employed by the surviving banks, even after their personal defaults."
1) Unsecured does not mean "loans made with no reserves to accompany them" it means that they did not acquire collateral for the loans.
2) Bank insolvency has nothing to do with whether or not banks can lend in excess of the statutory limit.
The question of whether or not the money supply is endogenous is amazingly simple. Can banks borrow in excess of their reserves multiplied by the statutory limit?
A: No they cannot
If they are prevented from making a loan because they do not have the requisite reserves how can they acquire the reserves?
A: They need cash
How do they get the cash
A: They get a loan
Does the person they're borrowing from have to have reserves?
A: Yes.
OK if that is the case, how can they get the money
A: The loan must prevent someone else from getting a loan or the fed must create more money
If the first then then the situation is a wash there is no increased cash (because +1 loan -1 Loan = net 0 loans). If its the second then the fed must choose to create more money.
"Ahh but they can just use assets" you say. Yes but assets are similarly limited.
no subject
Date: 2014-04-25 12:15 am (UTC)(I know, I know, Krugman won a Fauxbel and therefore is higher on the scrotum pole than Keen, so why do I bother? Because Keen's theories better describe the empirical reality. That's all. Darn that heterodoxy and its reality-based bias!)
To Keen, with a focus on a rebuttal to your first question:
The grace period given the banks is (according to what I remember from Keen's book) two weeks from over-draw of reserves to requirement to make reserves (or borrow them).
Yes but assets are similarly limited.
Assets are used to back lending, you'll agree? They may be limited in the bank's allowed ratio of cash to non-cash assets, but they are used. My point in pointing out assets was to note the uselessness of assets not tethered to actual value, not to deny that they are but a part of a bank's reserves.
That's why I mentioned the unsecured loans from the bank employees. I did it not to seemingly fail to see that these were loans made without collateral requirements as you seem to imply (duh), but to note that the assets were in reality quite empty of real value when the crash came. Likewise, derivatives are great as long as no event (or, more likely, chain of events) shows many derivatives to be just empty promises of money, not legally-binding stores of value as everyone hoped.
I point these things out to note that non-cash assets on the balance sheets allow banks to lend real money in (as Keen points out) their endogenous manner: ". . . 'endogenous money': bank lending creates deposits, so the decisions of banks to provide loans determine the level of money, and reserves are largely irrelevant." That word "largely" might help you save some face in this disagreement, since eventually the reserve requirements might make the bank slow spurious lending down a tad, especially if the Fed gets a bit uppity.
Exogenous seems to imply that a central authority holds the leash. I disagree. Right now, from everything I see the banks doing and the Fed doing, it looks quite clear that the Fed is but the banksters' bitch.
I have a question: Yes, you are pursuing an advanced degree in econ, and you seem quite well versed in its dogma. Given your insistence on being right here, have you considered a non-econ perspective, perhaps by taking a course in actual finance?
no subject
Date: 2014-04-25 05:57 pm (UTC)"I did it not to seemingly fail to see that these were loans made without collateral requirements as you seem to imply (duh), but to note that the assets were in reality quite empty of real value when the crash came."
No, you failed to realize that "no collateral" is "not relevant"
Loans are not assets qualified to be reserves for banks even though, yes, they are assets. You should know this if you've taken any finance or accounting classes (or worked in any finance or accounting firm)
The quality of the loans that bank make (unsecured, poor return, high risk) doesn't matter when discussing the endogeneity/exogeneity of money. That was my point. Stability of banks? Doesn't matter. Talking about crashes? Doesn't matter. Not with regards to the endogeneity/exogeneity of money.
All that matters is whether or not banks are constrained by their reserve requirements (and they are)
We even have pretty clear evidence of this. If it is the case that money supply is endogenous then we should see that the money supply is pro cyclical. That is, money supply follows the business cycle. This is because when things are good banks loan more and leverage higher and when things are bad, banks loan less and leverage lower. But when the fed is taking action the money supply is counter-cyclical. That cannot happen under endogenous money.
That isn't to say that there haven't been times when money supply is endogenous(Free Banking Period) or when monetary policy had been pro cyclical (the Great Depression is a good example) but neither of these mean that money supply is now endogenous.
Talking about Keen (and where he goes wrong from Minksy) is a whole other discussion. I don't want to get into it because I've had this discussion with you already. I know its not productive
no subject
Date: 2014-04-25 07:34 pm (UTC)No. I. Didn't. Now you're just putting words in my mouth to make claims with no standing.
Waaay up in this thread, I said that I make the distinction between assets and speculation. Assets are things of value that can produce value of themselves; speculative purchases depend upon the market for that commodity rising for their value.
An unsecured loan has no collateral. Duh. However, when a bank issues an unsecured loan to an unqualified borrower because that borrower happens to work at the bank and has an investment idea that has worked for other investors in the past, the loan is doomed to failure once the speculative asset loses its price momentum. I was not referring to reserve assets there, I was referring to the purchase being an asset that could, if collapse came, be liquidated by the borrower to help pay the loan. This type of loan would be a Ponzi type in Minski's three tiered quality index, the lowest type.
Talking about Keen (and where he goes wrong from Minksy) is a whole other discussion. I don't want to get into it because I've had this discussion with you already. I know its not productive.
I would have to agree, if only because every time I link to a specific Keen quote with a specific refutation of something you say, you ignore it entirely rather than point out what you feel to be the failings in his argument. That way, I learn nothing new, you consider nothing new, and no one gets to progress one inch beyond his own preconceptions. Progress!
Given that the last time you dismissed Keen, rather than type one word (as you state above) about "where he goes wrong from Minsky"—which you never did, by the way—you railed on about his lack of an ooga-booga prize and his ickiness in general, so I'm going to close here and assume more of the same.
It's been fun. Until next time.
no subject
Date: 2014-04-25 07:53 pm (UTC)