EconoMonitor

Great Leap Forward

Yes, Paul, Banks Do Create Money; and Bill does TED!

Readers know that MMT-ers and Minskyans drive Paul Krugman crazy by insisting that banks really do “create money out of thin air”, and that his “deposit multiplier” story has got it all wrong. See my last post on that here: http://www.economonitor.com/lrwray/2014/02/19/minsky-on-banking-early-work-and-critiques-by-krugman-and-horizontalists-revisited/.

The Bank of England has just released a series of papers that are more-or-less on the same page with us. Here’s the link to the papers and to a nifty little video (full disclosure: I didn’t watch the video but it looks nifty): http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1prereleasearticlemoney.aspx

But I did watch this video of my colleague Bill Black doing TED. You will not see a better talk this month:

http://tedxtalks.ted.com/video/How-to-rob-a-bank-William-Black.

Finally, here’s the Obama Administration’s “antidote” to Bill. As you know, the Prez and his Attorney General have decided to turn a blind eye to all of Wall Street’s fraud. Don’t believe a word they say when they claim they are going after the criminals. Their own internal reports say that is a lie:

http://dealbook.nytimes.com/2014/03/13/u-s-overstates-efforts-to-prosecute-mortgage-fraud-watchdog-says/?ref=business

“Four years after President Obama promised to crack down on mortgage fraud, his administration has quietly made the crime its lowest priority and has closed hundreds of cases after little or no investigation, the Justice Department’s internal watchdog said on Thursday.

The report by the department’s inspector general undercuts the president’s contentions that the government is holding people responsible for the collapse of the financial and housing markets. The administration has been criticized, in particular, for not pursuing large banks and their executives.”

Read it and weep. Wall Street’s fraudsters are our government’s “lowest priority”.

 

 

 

7 Responses to “Yes, Paul, Banks Do Create Money; and Bill does TED!”

ThomasGWMarch 19th, 2014 at 3:46 am

On the other hand, MMTers (and your book Understanding Modern Money if I remember correctly) also say money is created when the government spends, destroyed when it taxes. NEP has had posts arguing the money supply equals the federal deficit.

It all boils down to "how do you want to define money".

L. Randall Wray L. Randall WrayMarch 20th, 2014 at 5:45 pm

TGW I’m not sure you read very carefully. What MMT says is that gov’t spending creates HPM and taxes “destroy” HPM (high powered money which equals bank reserves plus cash). Hence, fiscal deficits will lead to that much net creation of HPM; however, in normal times most of that will be “drained” through sales of treasury bonds and bills. (Note: Fed can also create HPM by buying up treasuries or MBS or toxic waste) I doubt anyone has ever posted anything on NEP claiming budget deficits equal money supply. There are indeed many confused and confusing definitions of “money supply” but MMTers are not the ones who are confused or confusing. Here is something to keep in mind: only Govt can create “govt money” (HPM) and only Banks can create “bank money” (deposits) and only you can create “tgw money” (your IOUs).

PZ_March 21st, 2014 at 10:24 am

Bonds and HPM are both government-issued assets. Are there any other type of asset that govt issues? Warren Mosler made the proposal to call govt. bonds "money", but it would make more sense to me call both GIA's, government-issued assets. It would be important to get rid of the "debt" terminilogy and call them assets instead. No matter how clear the issue is in scientists head, ordinary people just don't understand.

L. Randall Wray L. Randall WrayMarch 21st, 2014 at 3:43 pm

PZ: I think that is a bit confusing. Bonds+Reserves+Currency are all Govt LIABILITIES; if you hold them they are YOUR assets. I prefer to use the normal terminology, used in all textbooks: High Powered Money (or Monetary Base) = Reserves+currency. And then Bonds (or treasury securities, or “Treasuries”) are broadly defined as bills and bonds–ie any maturity. Note that with Fed paying interest on reserves, those are essentially bills. Note also that it is not uncommon for the central bank to join the treasury in issuing interest-paying bills and bonds. But that is no problem for us so long as you remember that the central bank is part of government–so these are govt liabilities.

PZ_March 25th, 2014 at 5:08 pm

When refering to half a class of water, we sometimes say class is half full and sometimes that it is half empty. When same the thing is simultaneously a liability and asset, why should we refer to it exclusively as an liability and never as an asset?

The trouble is that people do not understand. Govt liabilities are fundamentally different kind of ones from private sector liabilities. We fear debt because when a private sector entity goes into debt it has taken on set of oblications, such as paypack shedules, and runs risk to default, brake its oblications and be penalised in courts for that. Whereas government is the rule maker, not the rule follower. Its liabilites do not carry those oblications with it that private sector liabilities do.

There you have two kind of misunderstandings. 1) People do not understand that liabilities are also assets. 2) People do not understand that govt liabilities differ from private sector liabilities. Both of those issues would be adressed by talking about asset nature of these entities.

Academic economics seems to suffer from strange inability to communicate. MMT does fine job explaining monetary operations, and MMT economist then say we need to run large budged deficits.But the question that never gets answered is why? Why does the economy need this? Cant we do with smaller deficits? After all its quite intimidating think about running a trillion dollar budged deficits. Sensible budged policy really needs a reason. One would think it would not be too difficult to draw a connection from 8 trillion dollars of lost housing wealth to consumers becoming too poor to consume to the beneficial effects of fiscal policy. But this is never done.

Do I have to count the number of people who suffer from this, not just in the united states but also globally? Because information transfer from the united states to the rest of the world is a one way street. Economic dogma only comes out of the united states never comes into it, and any independet thinking outside the us has very limited time span. I dont know why this is but so it is. Therefore there is no lasting hope for the rest of the world unless the thinking inside the united states changes. We are all affected by this strange inability to communicate what are, after all, at their core, simple ideas. The world is doomed for the silliest of reasons.

L. Randall Wray L. Randall WrayMarch 26th, 2014 at 6:05 pm

PZ you have to get the things on the right side of the balance sheets, so you have to identify the perspective.

What is govt “liable for”? To accept its IOUs (debts, HPM+Bg, liabilities) in payment.

who wants huge trillion dollar deficits. Not MOI!! Obama hit a trillion only because the economy was rotten, and it was rotten only because he would not spend. With a JG/ELR in place, the deficit never would have gotten large.