Krugman being Krugman

[badlydrawnjeff.livejournal.com]

"There's the great line, of course, about how his "lived experience" (see? I told you, he's doing empirical work!) confirms that motivated cognition "is not, in fact, symmetric between liberals and conservatives.

...

That Krugman is too thick to see that one can't infer anything about the quality of partisans' reasoning from the truth or falsity of their beliefs is ... another element of Krugman's proof that ideological reasoning is symmetric across right and left!"

Comments

[goumindong.livejournal.com]

Uhhh. Speculation has nothing to do with reserve requirements. Return on investment has nothing to do with reserve requirements.

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.

[peristaltor.livejournal.com]

Uhhh. Speculation has nothing to do with reserve requirements. Return on investment has nothing to do with reserve requirements.

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.)

[peristaltor.livejournal.com]

The talk I referred to with Greenspan involved (at first) a Fed move to lower inflation with a small move in the Fed rate, a move which didn't work. Greenspan later referred to the Asian markets as the article states. As I cited, the reference I found came from the Thomas Homer-Dixon book The Ingenuity Gap. I did not copy the detail of the original missed teaching moment that affected the Fed chair, just the conclusions he later reached as mentioned in his speech. I could, if you insist, borrow that book once again from the library and check to make sure the reference was as I remember.

In short, you are proving the entire theme of Homer-Dixon's book correct. In it, he notes:

If economic experts are susceptible to fads like the rest of us, it's partly because economic theories, data, and institutions are often weak. . . . Current economic theories do not give us an accurate understanding of the non-linear and hypercomplex behavior of the international economic system. . . . In the absence of strong theories, data, and institutions, facile economic nostrums and fads become received wisdom. Confronted with rapid and confusing changes, experts and policy-makers cling to this wisdom.

(Thomas Homer-Dixon, The Ingenuity Gap, Alfred A. Knopf, 2000, p. 162.)

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.

[goumindong.livejournal.com]

OK i am going to stop you right here

"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.

[peristaltor.livejournal.com]

A gross oversimplification, but what can one expect? For a more in-depth look, let's listen to Steve Keen (http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier).

(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:

But what if Buyer Bank doesn’t have enough Reserves – if it’s at its Reserve Requirements limit already, or worse still, if its reserves are zero? Will the Central Bank refuse to transfer funds that Buyer Bank doesn’t really have?

I hope the answer to that question is now obvious: of course it won’t. The Central Bank will either give Buyer Bank time to find the Reserves, or lend them to it. To do otherwise – to refuse to transfer Reserves from Buyer Bank to Seller Bank – would void the purchase made by the Buyer from the Seller (and note that this could happen with the Cash purchase just as easily as with the Card one). The system of commerce would break down. We’d have an interesting social system the instant after the Central Bank did such a thing, but it wouldn’t be called capitalism.

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?

[goumindong.livejournal.com]

Ok so lets look at this sentence

"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

[peristaltor.livejournal.com]

No, you failed to realize that "no collateral" is "not relevant"

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.

[goumindong.livejournal.com]

the distinction between assets and speculation DOESNT MATTER. That is the point. My point was not that an unsecured loan has no collateral, but that was all that an unsecured loan was with regards to the endogeneity issue