Dan Kervick's picture

    Bring Back Fiscal Policy

    The recent exchange on the nature of banking among Paul Krugman, Scott Fullwiler, Steve Keen and others has been feisty and instructive.  But some readers might be left wondering whether the whole exercise is too wonky by half.   The anatomical details of banking systems might be juicy and interesting for the academics who like to dissect those systems and dig deep into their entrails.  But how significant are the details for practical questions of public policy?  They are in fact very significant.

    The functional details of institutions matter, and without understanding how the banking system actually works it is impossible to distinguish causes from effects in our attempts to guide that system toward the service of the public good.  Conventional textbook models of banking and monetary systems are responsible for widespread commitment to the money multiplier and loanable funds models of the relationship between central bank reserves and the volume of bank lending.  Relying on these models, some prominent economists and pundits have been telling us throughout our recent economic crisis that we can address the problems of a stagnating economy and persistently high unemployment with the reserve management tools of monetary policy alone.

    Read the rest at New Economic Perspectives


    Great essay, Dan.  This:

    "The problem in America is not bankers who won’t lend.   Corporations are already sitting on record-setting amounts of profits and cash, but production and hiring are not booming.  The problem is that ordinary people at the foundation of our economy, the people whose desires for goods and services drive the production that employs our resources, are lacking income.  They do not want more credit and more debt.  They want more income."

    Appealed most to me.  Thing is, I'm pretty sure that Ben Bernanke, who I actually do hold in high regard, would agree with you.  The purpose of the Fed's fiscal support of the banks is to prevent a fire sale of dodgy assets still on their books.  The no cost overnight lending and the payouts on reserves kept at the Fed are meant to keep the banks well capitalized enough to withstand any further mark to market losses on the paper they hold.  This means that the banks can be patient.  They can hold paper to maturity or sell at more attractive prices.  They will not all flood the market at once, bringing the prices for all credits tumbling back down.  Bernanke could never have really expected that the banks would take their free money and then turn around and lend it.  Not all of it, anyway.  Certainly not enough of it to restore lost economic activity and replace lost jobs quickly.

    Bernanke has repeatedly warned the government not to abandon its responsibilities to the real economy too quickly.  While I do think that Bernanke could have done more, included explicitly targeting higher inflation, there are limits.  The Fed cannot build a coast to coast Wi-Fi system as part of a jobs program.  That's what the government is for.

    I agree that Bernanke understands this stuff a lot better than a lot of Fed watchers and monetarists do, destor, and he knows there is not much the Fed can do at this point.  But I also don't think it matters much what quantity of reserves banks have.  Banks don't need reserves in order to make loans.  They can acquire the reserves after the fact if more are needed to meet their reserve requirements.  The only thing that matters is the price of the reserves, not the quantity.  The Fed can't induce banks to lend by shoving reserves into their reserve accounts.  Demand for loans from qualified borrowers at the prevailing rate are what really matters.  The Fed always accommodates additional lending by supplying additional reserves in order to guarantee the integrity of the payments system.  The supply or reserves is almost infinitely elastic, since the monopoly producer of reserves - the Fed/governemnt - can produce them at virtually zero cost.


    See the Fullwiler post I linked to for more on this.

    > build a coast to coast Wi-Fi system as part of a jobs program. 

    >That's what the government is for.


    Not according to the Koch Bros!  They think superior people like themselves should naturally rule.  After all, a Pope once said so, ~300 AD.  It's called Divine RIGHT (to personally hoard, at expense of group intelligence).   Who says propaganda was invented by Bernays?

    To be fair, Plato invented the concept of philosopher kings well before any pope was born.

    Latest Comments