MMT is Politically Open

I find it surprising that some commentators on the MMT-related blogs and elsewhere in cyberspace fear that MMT is designed to suit the political left. I disagree with this perception. The only sense in which I think MMT is helpful to the left is in the same way it is helpful to all alternative perspectives. It indicates that social possibilities are open and that there is more than one alternative. In this respect, it is more truthful than orthodox economics. This may be a negative for defenders of the status quo, but it does not mean that MMT is of any particular assistance to the left other than to make clear that its preferred social choices are in the mix along with all other social possibilities.

For example, in MMT – as with most other heterodox approaches – there is no presumption in favor of laissez-faire capitalism. This is different from orthodox economics, which presumes – on no legitimate basis whatsoever – that laissez-faire capitalism is best except in specific instances in which it can be shown otherwise. Leaving out this baseless presumption is no doubt inconvenient for those who benefit from it in the current orthodoxy, but its omission does not favor the left over any other perspective.

Not only does the MMT framework not privilege the left, but from my experience, the left is probably at least as wary of MMT as the right. The socialist left tends to resist MMT because it suggests managed capitalism can be made to work. It is not expedient for socialists to argue that capitalism could be viable but should nonetheless be overturned for reasons of social justice. It is stronger to say capitalism is unviable. End of story. This is a much simpler and – given recent economic history – readily accessible message. Most journals and newspapers of the socialist and communist left spout voodoo on fiscal and monetary matters. Their analyses of budget deficits and public debt usually accept the orthodox propaganda uncritically, because it suits them politically to do so. It suggests capitalism is “broke”. Of course they oppose austerity, but they conveniently accept that the austerity is “necessary” under capitalism and take this as evidence that capitalism must be overturned.

Often those on the liberal left don’t seem to like MMT either, because it suggests that there is no financial reason to tax the wealthy more or cut back on military expenditure. Most liberals do not seem keen to admit that their reasons for wanting these policies are other than financial. It makes it a more difficult political sell. Given the neo-liberal propaganda offensive of the past thirty-five years, it is much easier to say “the country can’t afford tax cuts for the wealthy” than to say, for instance, “tax cuts for the wealthy are inequitable”.

If anything, I think the only people with any power who have embraced elements of MMT are in the establishment, and largely on the right. In the U.S., politicians use knowledge of the implications of currency sovereignty to expand the military and cut taxes for the wealthy, then pretend not to comprehend when it comes to social expenditures. They understand the realities of currency sovereignty when it suits them. In Europe, this schizophrenic understanding is even more pronounced. The ECB kicks the can down the road by providing financial assistance to member governments (and hence the banks) on the proviso that austerity is unleashed on general communities to “pay” for the assistance. The ECB understands that such assistance can be provided indefinitely, but pretends not to understand the options available when it comes to job creation, public-sector wages, the welfare state, education, etc.

My own view is that capitalism could be managed in such a way as to deliver full employment and price stability under a renewed class compromise that distributed the benefits of economic growth more evenly, even though I am not in favor of such a preservation of capitalism. However, I do not believe capitalism will be run in this manner. My assessment of the positive possibilities under capitalism draws on my understanding of MMT, but my belief on where things are probably heading does not, since MMT is silent on such questions. Short of ending capitalism, I suspect things are only going to get worse. It seems to me that, right now, political leaders are knowingly trashing the global economy. Part of the motive is presumably to dismantle what remains of the welfare state and organized labor, particularly in Europe, which is really the last stand of anything vaguely resembling social democracy. There are presumably also other geopolitical goals behind the austerity and extreme concentration of wealth, although the motivations do not seem entirely clear. Imperialist rivalries, control of natural resources through military means, and the further curtailment of individual liberties and an encroaching surveillance state all seem to be part of the story.

In short, I think political leaders, policymakers and financial capital all understand perfectly well that austerity is based on a class-interested lie. They might not understand it as MMT, but they know the supposed need for austerity is their own concoction. The fiction is enabling a corrupt and extraordinary upward transfer of wealth along with the introduction of more draconian surveillance and police-state measures. It is general communities who do not appear to understand the true nature of the deception. They do recognize that their interests are being run roughshod over, but they buy into the lie that suggests there is no alternative to austerity. Many are also likely to go along with further infringements of liberty that occur in response to civil unrest. All this is a god-send for authoritarians on the center and right. It is not a good situation for the left, or for libertarians of the left and right.

From my perspective, the reason to disseminate MMT is not to privilege one political perspective over another. It is to empower general communities. Once we understand the possibilities (and limitations) inherent in a flexible exchange-rate fiat-currency system, we will be in a position to determine our preferred course and attempt, through collective action, to overcome the daunting political obstacles in our way. Whether that is a leftward, centrist or rightward course, it will at least be a self-determined one, and one that is actively chosen rather than passively accepted as the inevitable consequence of impersonal forces permitting no alternative.


169 thoughts on “MMT is Politically Open

  1. All this comes from a one dimensional view of politics.

    There is not just left and right, but backwards and forwards. There is at least a two dimensional view with the extra dimension being Authoritarian/Libertarian (Facism/Anarchism) as shown on the Political Compass site.

    That extra dimension explains quite a bit. The whole world’s political systems are becoming more and more authoritarian and no doubt that will continue until the next Stalin/Hitler pops up when we’ll rediscover the benefits of liberty.

  2. “from my experience, the left is probably at least as wary of MMT as the right.”

    Yes, anyone who has been privy to discussions about neo-Chartalism among Post Keynesians or heterodox economists in general would recognize this instantly.

    I might follow this up by noting Stephanie and John Henry wrote a paper 5 years or so ago arguing that MMT illlustrates how free trade could actually work as advertised. Almost nobody on the left likes that, probably even the authors themselves.

  3. And note further the resistance we get from mainstream Keynesian bloggers, New Deal 2.0, Firedoglake, Daily Kos, etc. They often generally argue against our views by noting that our perspective would enable Bush-like policies.

  4. Interesting Scott. I get exactly the same thing when arguing against the ‘tax the rich’ mob. You don’t need to tax the rich if you simply implement a system that only allows them to get rich by servicing the needs of the poor.

    I don’t give a stuff which part of the political spectrum an idea comes from. If it improves the standard of living of the majority I’ll nick it.

    I find it astonishing that so many spend so much time arguing about ‘distribution’ of the pie and take the size of the pie as a given. Why is that I wonder?

  5. Scott says in his primer:

    “At its core, there are two parts to MMT. The first is a description of how the monetary system actually works, mostly focusing upon interactions between the central bank, the treasury, and the financial system, though this part also requires a very thorough understanding of the Minskyan-related literature of many MMT’ers (I note this because so many critics of MMT ignore or not aware of the vast MMT literature on financial instability and reforming the financial system). The second is a set of policy proposals that arise from this description and is largely outside the scope of this particular post but which can be found in any number of MMT publications and blogposts (and, again, including the sizeable MMT literature on reforming the financial system).”

    Its one thing to observe that one could easily use the MMT monetary description to argue for right wing oriented military spending and tax cuts for the rich. It’s quite another to suggest that MMT’s own policy proposals or policy orientation favours this. I’d say the test of the thesis of this post is the latter rather than the former. In that regard, I’d look to the views of MMT leadership. With the possible exception of Warren Mosler, and given the assigned task of choosing between left or right, I’d say the leadership is left oriented, and this shows up “in any number of MMT publications and blogposts.” Is that not a reasonably accurate assessment?

  6. JKH, did you bring this up, in the latter thread, because you were concerned the ‘policy barrel’ of MMT exposes the ‘descriptive barrel’ of MMT to credibility risks?

  7. wh10,

    Not sure. Maybe. Haven’t thought that through. I want to tread lightly there, for now. Lavoie seems to suggest that the motivation for the form of the descriptive barrel is the policy barrel. That’s potentially incendiary I imagine.

    What I’m saying here is different. The descriptive part is adaptable. It allows options. But it seems to me the leadership group has exercised its own option with regard to policy orientation, speaking generally.

  8. I agree, generally speaking, the MMT blogosphere as a whole feels predominantly left-leaning. However, I believe the official ‘policy orientation’ of MMT is stated as full employment and price stability. If that is labeled as ‘left,’ then I don’t know what you can do about it.

    But as Fullwiler mentioned several threads back, the descriptive aspect of MMT is what it is, regardless of what motivated it. If it’s accurate, it’s accurate. If it’s not, it’s not. People have the right to be suspicious of political motivation, but a real critique should not have to invoke this, but be able to point out real flaws.

  9. “People have the right to be suspicious of political motivation, but a real critique should not have to invoke this, but be able to point out real flaws.”

    good point

  10. Brilliant post! Thanks. I plan to use this at a talk I’m giving Wednesday night. Very timely for me…

  11. I learned MMT almost exclusively from Cullen Roche who is a self professed conservative. Personally, i find his version of MMT vastly more appealing than the “core” MMTers primarily because he eliminates the politics and focuses on a more centrist approach that appeals to a broader audience.

  12. Frankly, I’m disappointed.

    “The socialist left tends to resist MMT because it suggests managed capitalism can be made to work. It is not expedient for socialists to argue that capitalism could be viable but should nonetheless be overturned for reasons of social justice. It is stronger to say capitalism is unviable. End of story. This is a much simpler and – given recent economic history – readily accessible message.”

    Consider the first sentence from the quote above: “The socialist left tends to resist MMT because it suggests managed capitalism can be made to work.”

    The first thing to note is the assumption that MMT somehow could “manage” capitalism, to make it work. I will come back to this later, but for the sake of the argument, let’s accept this assumption, for the moment.

    Who will be doing the managing? An impartial technocrat, perhaps, who is above all ideologies and human weaknesses? Something like the IMF, perhaps? A sage a la Plato? I haven’t seen this question considered, let alone answered, by any MMTer.

    And it could be made to work… but for how long? After WW2 the golden age of “enlightened capitalism” lasted for a couple of decades, in those places where “enlightened capitalism” actually took hold.

    Now, let’s see that assumption: MMT could manage capitalism and make it work, make it viable.

    In my view, what MMT has achieved on a THEORETICAL LEVEL, while still a great achievement, is much more limited than that: in or approaching the bust part of the business cycle, a fiscal expansion can avoid a recession, without needing a budget surplus on average during the business cycle. During recessions, both capitalists and working class benefit from the fiscal expansion. And after the recessions, the working class does not need to pay for it, through taxes.

    The situation is similar to a cardiac patient with a pacemaker: the pacemaker keeps the patient alive (as long as the patient does not decide to have it removed!), but her heart is still sick and it won’t be getting any better.

    In Marxian terms, the interests of capitalists as a class, and workers as a class, are not always necessarily opposed: the death of the patient would be extremely traumatic for both sides (but more so for the capitalists, as they have much more to lose).

    That is quite different from saying that MMT entirely solves the problem of class conflict or that this is a matter of expediency for socialists.

    This brings us to the next sentence: “It is not expedient for socialists to argue that capitalism could be viable but should nonetheless be overturned for reasons of social justice.”

    This is not a matter of expediency: it’s a matter of politics.

    And the proof of this is before all of us: capitalists do oppose fiscal expansion a la Keynes and MMT. And if this expansion involves unemployment benefits, health care, education, housing, forget about it.

    The question is why. Why the patient insists on having the pacemaker removed? I am yet to see an MMT argument that (1) explains why capitalists as a class and as individuals in practice oppose fiscal expansion as stimulus and, much more importantly, (2) could be permanently convinced to change their minds.

    As long as these questions are not answered, it’s a non-sequitur to conclude the issue is one of social justice. It is not; it’s a very pertinent practical question and one that MMTers often overlook or at best, when they consider it, receive only a superficial treatment.

    Incidentally, this sentence misunderstands the reason some socialists actually oppose government intervention through fiscal expansion: government transfers, even if directly delivered to the unemployed or the needy, or to pay for public employment or public works, or whatever, are meant to end up in the capitalists’ pocket and only delay the inevitable.

    Make no mistake, capitalists do not oppose government transfers per se (hence, they do not oppose corporate welfare); they oppose them only when they don’t go directly to their pockets.

    And under a government that insists on imposing a budget constraint upon itself, however unnecessarily, these transfers are funded through public debt that will need to be repaid, with interests…

    Keynes did not mean to abolish capitalism, but to save it, by reforming it. That’s the real reason some socialists oppose Keynesianism and I’d say is understandable (although unfair) if they see MMT as just another name for it.

    For what’s worth, my personal position (and I don’t speak on anybody’s behalf) is that if MMT can ameliorate the situation of the majority, then welcome. It’s a valuable initial goal for a fight that could still unite the working class. And I fear this will be the last fight.

    I, unlike most Marxists, every day feel that my confidence on a happy ending for capitalism diminishes. Maybe Marx and Engels, the two prophets of doom of capitalist nightmare, were actually excessively optimistic.

    But MMT is not the revolution and will not solve all the problems of capitalism.

    I wish MMTers the best of lucks.


    By the way, I can see the point that the size of the pie is important, and that one should not lose sight of it.

    But how the pie is distributed is fundamental: inequality is not just a matter of having more money, but what one does with the money.

    Like buying politicians, academics, journalists, talking-heads and bureaucrats to make their rules for them.

    Me, I’d say tax the bastards.

  13. LVG and Magpie, I think together you illustrate the main point of my post, which is that MMT is not necessarily anathema as long as it is presented in a politically conservative “apolitical” manner – after all, it clearly can be put to conservative purposes – but that for this reason the theory does often meet with resistance from those on the left. I kid. 🙂

    Magpie, I was sloppy in the sentence you target for comment. It would be more correct to say that MMT leaves open the possibility that capitalism could be managed in a way that enables it to work on its own terms, by which I mean it is conceivable that managed capitalism could deliver full employment, price stability and a more equal distribution of income. It was inaccurate of me to write that MMT “suggests managed capitalism can be made to work” both in the choice of the words “can” and “work”. It would have been better to write “might” and “work on its own terms”. I do think MMT is open on that question, but I agree with you that the question itself leaves plenty of room for debate. After all, we have been discussing one aspect of this in the threads on Kalecki. Needless to say, even if managed capitalism did deliver ongoing full employment, price stability and income equality, this would not mean I would support the system. But others might, so I think openness in the debate is important. People need to know what might be possible under the existing system if they are to assess the desirability of reform or revolution.

    In my opinion, the socialist response to MMT is often dishonest, because it accepts uncritically (and opportunistically) the mainstream fictions surrounding budget deficits and fiscal policy in general. Such nonsense is frequently asserted, for instance, at WSWS. It is one thing to argue capitalism cannot deliver full employment for the reasons given by Kalecki. It is another to lie that the government “can’t afford” to deliver it. Kalecki was honest in his argument. He acknowledged the technical capacity to deliver full employment under capitalism, then considered some of the political obstacles. In fact, he probably did as much as anyone other than Keynes to establish the technical point. Many socialists, however, prefer to deny this point. I think they are being dishonest.

    Incidentally, I agree that Keynes wished to preserve capitalism. Personally, I don’t think I would have liked Keynes much at all. He despised Marx’s work and in my opinion did not give sufficient acknowledgment to Kalecki. But none of that has any bearing on the correctness or otherwise of his theoretical analysis.

  14. I’ve been trying to carefully craft my words in response to this all day so they make sense. I think what I essentially wish to say beyond politics being relative is, to borrow a phrase from Churchill:

    It has been said that capitalism is the worst form of economics except all the others that have been tried.

    It just needs to be adequately regulated, not over-regulated or excessively deregulated. MMT is the guide. The political choice is yours.

  15. JKH, you wrote:

    Its one thing to observe that one could easily use the MMT monetary description to argue for right wing oriented military spending and tax cuts for the rich. It’s quite another to suggest that MMT’s own policy proposals or policy orientation favours this.

    My view is that many different policy proposals are possible within the MMT framework. The job guarantee, for instance, is one policy that could be implemented in an effort to deliver full employment and price stability. But do we even want full employment? (Or low inflation?) It is not only some on the right who prefer unemployment to remain, but also some on the left who prefer a basic income guarantee to full-employment policies.

    Having said this, I don’t find it at all surprising that the leading MMTers would have looked for ways to enable full employment and price stability consistent with their analytical framework, irrespective of their personal politics or ideologies. Full employment and price stability have been two central preoccupations of macroeconomics – whether orthodox or heterodox – since its inception. The right has been no different to the left in this preoccupation. The difference has been that some on the right claimed an automatic tendency to full employment that has been shown to be invalid on logical grounds. Partly on the basis of this flawed neoclassical theory, some on the right have tended to propose policies that “free up” wages rather than stimulate demand as a means of delivering stronger employment outcomes.

    I think that even these neoclassical policy proposals, which have been based on a (flawed) theory of employment determination, could be proposed within MMT. This seems clear by considering the MMT position on unemployment. MMT says that unemployment occurs when the non-government attempts to net save more than is possible given the government’s fiscal stance. MMT suggests that the unemployment will persist until either the non-government alters its net saving behavior or the government alters its fiscal stance or some combination of the two. This raises the question of whether there are any mechanisms in a market economy to ensure the non-government will alter its non-saving behavior in such a way as to ensure full employment. MMT in itself does not answer this question. But other theories that can be made consistent with MMT do answer it, and the answer they give is no. According to these theories (e.g. of the Post Keynesians and Sraffians) there is no mechanism in a market economy that can be relied upon to render non-government net saving consistent with full employment. Still, someone else might wish to put forward a different theory. As long as this different theory was consistent with the MMT understanding of the monetary system, my view is that MMT would be silent on which of the competing theories should be preferred.

  16. Peterc,

    I think your 11:56 is quite reasonable.

    I usually avoid political or ideological analysis. It’s of secondary interest to me, and I’m not particularly good at it. That said, while I realize that the stated policy thrust of MMT is full employment and price stability, that’s not what I have in mind when referencing a left inclined policy orientation. I should have been more explicit, to avoid being misleading on it.

    I’m referring to the general attitude of condemning, punishing, and extinguishing the “rentier”. This is reflected in the objective to compress return on capital as much as possible. The idea of setting policy rates permanently at zero is a start. Eliminating bonds and associated term structure premiums accelerates it. The inclination to criminalize acts of banking and the promotion of nationalization solutions furthers it. The desire to categorize “rentier” across as broad a swath as possible, with associated aims for persecution, punishment, and destruction of same, is indicative.

    I’m far more neutral on the MMT approach to employment, although I’d prefer to see more emphasis on the analysis of the inflation issue in comparison with mainstream approaches. I’d also like to see more investigation of why MMT needs to shy away from financial planning, as if it simply isn’t tolerated in the area of deficit projections, scenarios, and management.

  17. Thanks for the clarification, JKH. Very interesting. I agree that these choices (e.g. ZIRP and euthanasia of the rentier) are also political. They are policy options that MMT indicates could be pursued (since MMT indicates that interest rates are ultimately subject to policy), but they are certainly political choices, and they are not the only policies consistent with MMT. I think Scott states this explicitly in his papers when he describes interest rates as “a matter of political economy”.

  18. I’m struggling to understand Bernanke’s example of the bank lending $1K across different time frames.

    If I borrow $1K in 2010, pay it back, and then in 2011, borrow another $1K, and pay it back, I’ve only borrowed $1K across those time periods???

  19. I get that the cash flow outcomes are the same in each scenario, but does recurrent loaning not indicate potential recurrent need in a bailout fashion?

  20. who 10,

    (Forget interest complications in the following)

    In your example, first you borrow $1K and then $1K again.

    Before repaying, your indebtedness is $2K.

    Once you pay back $1K, indebtedness is $1K .

    However your example is different from Bernanke’s

    In Bernanke’s example, you borrow $1K and repay $1K.

    Then you borrow $1K.


    Imagine a financial institution borrowing $1m overnight, everyday (i.e, rolling over its debt). Its absurd to say the Fed lent $365m to this institution.

  21. “Imagine a financial institution borrowing $1m overnight, everyday (i.e, rolling over its debt). Its absurd to say the Fed lent $365m to this institution.”

    Should add .. for a year.

  22. Wait, let’s be clear. To roll over debt means, as I understand it, is to replace old debt with new debt of the same amount. This to me indicates a need for the loan, and so I don’t see why it is absurd to say the bank extended me $365M of credit until I could finally pay back the $1M in loans.

    This to me indicates a cash flow need.

    Say I take out a $20K loan in 2010 to run a business. 2011 comes around and I don’t have the cash to pay it back, and the bank ‘rolls’ my debt over into another $20K loan. Finally in 2012 I can pay the $20K back. BS that rollover didn’t save my butt. Why shouldn’t one represent that as $40K in total credit being granted, even if I only held liabilities on my books of $20K?

  23. Though, I mean, I guess it’s the same thing if the bank just decided to loan me $20K over a 2 year maturity.

  24. “Wait, let’s be clear. To roll over debt means, as I understand it, is to replace old debt with new debt of the same amount. This to me indicates a need for the loan, and so I don’t see why it is absurd to say the bank extended me $365M of credit until I could finally pay back the $1M in loans.”

    That’s how the accounting is done … i.e, you cannot claim the bank’s total lending was $365m

    “Why shouldn’t one represent that as $40K in total credit being granted, even if I only held liabilities on my books of $20K?”


    Well you may *like* to do it that way but accountants don’t.

    This becomes important because Chartalists have made claims that the Fed was approved to give peak credit of $700B (or whatever) but the size was $29T.

    “But it is not just the size that is shocking—it is that the measly little $700 billion was subject to Congressional approval and oversight, while the Fed’s bail-out (whether $7.77 trillion or the more likely figure of $29 trillion) not only was never approved, nor overseen by Congress, but it actually took an act of Congress to get the Fed to fess up to its largess.”

  25. It’s not appropriate to say $365M was lent, but that $1M of credit was extended over a year, instead of say, a day.

  26. Ramanan:

    The distortion is an equal opportunity employer.

    You saw that Thoma, DeLong, and Salmon are on the case?


    My friend Ben.


  27. “Leaving out this baseless presumption is no doubt inconvenient for those who benefit from it in the current orthodoxy, but its omission does not favor the left over any other perspective.”

    Contradiction in terms. Don’t be fooled by what the left used to be. Omission is key to the right-wing ideology right now. It’s all based on omission.

    And yes, MMT is left-wing. It promotes government spending which would rebalance income in reals terms — if not through income then through inflation. That’s too complicated an argument to make here, but I think its intuitively obvious.

    Incidentally, viva la MMT. The more redistribution the better in my opinion.

  28. Philip, you’re wrong. MMT is not not necessarily redistribution in real terms. Achieving full employment is about expanding the pie for everyone.

  29. Without wanting to put words in Philip’s mouth, i could see how a government spending policy of full employment/px stability focused on increasing the size of the pie could still be interpreted as redistributionist, if the ultimate outcome of the larger pie was that the lower class had greater relative purchasing power relative to what they have now, since it would ultimately shape future investment in favor of things that benefit the lower classes more than would otherwise have happened without the govt spending (i.e. more priuses, less mazeratis). That is to say, the relative redistribution of investment priorities in the expanded pie could end up having real redistributive effects in excess of the value gained to the rich class by the expansion of the pie. So while from a purely monetary perspective i think it’s fair to say MMT doesn’t redistribute the pie, the political economic effects seem fairly redistributionist to me. That said, the justification for such redistribution is different to me than the traditional justification (i.e. rich have greater burden to bear because they enjoy greater benefits) – instead, it’s more about the fundamental legitimacy of their benefits in the first place. That is to say, they are only rich now because of the monetary system, which should in principle provide full employment and price stability, so hence any disproportionate power they enjoy now as a result of the lack of such conditions (due to a failure to apply MMT) is illegitimate, and hence the redistribution is justified. Finally, i think the decision to set a particular level of income that constitutes a “minimum wage” in a full employment economy is also an inherently redistributionist decision – this is (i think) peterc’s point about alternative mechanisms in a free market economy. It might theoretically be possible, for example, if you were virulently opposed to government employment to eliminate the minimum wage and simply increase government spending in the form of investment/business subsidies until the private sector reached full employment. Of course, that would also be a political decision reflecting particular assumptions about the right to certain standards of living/the suitability of government-generated welfare in providing that living (as opposed to something like a basic income guarantee), however such a policy would seem to me to be far more neutral in terms of its effect on relative purchasing power of present rich vs. poor than an ELR

  30. Also, while i appreciate Ramanan’s valid point about the accounting inconsistency with claiming a $1m loan of 1-day maturity rolled over for a year constitutes a $365m investment, i think there is still an important difference between such a setup and a $1m loan with a maturity structure of a year, in that the latter may be far more forgivable than the former. If i make a $1m loan of 1-day maturity, and you promise that you will use that loan to stimulate growth in your neighborhood, and then you come back the day after having not done so (instead using it to bet at the local casino and pocket a tidy sum), and i choose to roll over the loan again (and again, and again), I am morally in a very different position than if i simply lent you the money at one year maturity in the first place (perhaps that was the shortest-term maturity i offered, or that was the minimum amount of time you told me it would take for an investment to bear returns)

  31. Ramanan,


    Good analysis by EconBr, exposing the nature of the outrageous lies spread about this stuff.

    Krugman made a directly comparable point about the deliberate distortion of TARP economics at last night’s NYT debate.

  32. @Ramanan (and JKH)

    “Imagine a financial institution borrowing $1m overnight, everyday (i.e, rolling over its debt) [for a year]. Its absurd to say the Fed lent $365m to this institution.”

    I completely agree. If you look at the Fed’s normal, pre-crisis intraday lending, it averages over $30B per minute, and peaks at about $150B each day. If we were to apply the same logic many are applying here, then you get close to 7.7T or even 29T within a few months even under normal operations.

    I think the important point is to separate out what were liquidity operatoins (aside from CB swaps, which Warren has convinced me at least could be problematic, though the larger problem there is allowing US banks to set rates based on LIBOR; absent that no need for CB swaps) and what were solvency-related (bail out) operations. The latter are the problem, not the former.

  33. Don’t like to bring this up, but for completeness, somewhere on Mike Norman’s blog there is an interpretation of deficit financing volume that is a play on this same theme. It appears that the volume entries for purchases of debt by the Social Security Trust fund are based on some very high frequency rollover basis, so that the annual “volume” of debt issuance is recorded in the hundreds of trillions or something crazy like that.

  34. I’m glad this basic point has been clarified. A few MMT enthusiasts (myself included) are members of a private message forum on a topic unrelated to economics where we have a politics page. There is an experienced bond trader, usually quite sympathetic to our MMT-related posts, who was figuratively rolling his eyes over links provided on the topic addressed here by Ramanan (for the same reason as Ramanan).

  35. JKH,

    Thanks for the link.

    One of the persons from the audience (white shirt, red tie) goes .. “spending billions on banks” and also confuses that to reserve requirement. ($700B/10% = $7T etc)

    Good reply by Krugman. Agree with him.

  36. There was a debate on this also in Italy. Some journalists say an amount of 15T, another says 29T citing this “Ford Foundation project: “A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis”. I don’t know where I can read this dcument, but Randall Wray seems to be involved (the journalist said). And when I see the document cited by the first journalist (15T. I think it was in Sanders blog, I have the same idea (JKH, Ramanan).

    So, there was the paper about QE by Fullwiler and Wray, where they say:

    “The Treasury also intervened to provide funds and guarantees to the financial (and nonfinancial) sector, in some cases working with the Fed. Some estimates place the total amount of government loans, purchases, spending, and guarantees provided during the crisis at more than $20 trillion—much greater than the value of the total annual production of the nation.”

    Scott, it’s the same error, or there was something else that I don’t know, and you are talkin about other funds?

  37. JKH,

    Delong/Rowe simply cannot think beyond IS/LM! It is so deeply ingrained in their system.

    To me, IS/LM makes no sense at all. This curve is downward sloping, that one is upward sloping. Pure fantasy.

  38. Luigi,

    We are largely talking about the guarantees there, which is a different issue since that wasn’t actually a loan. That was my understanding at least, as Randy had been writing about this for some time and I don’t think these newer figures about the lending were out yet.

    Regarding the point being brought up now by Ramanan and JKH, they are completely correct in my view, and I’ve always held that view.

  39. Why does anybody stick with IS/LM? Hicks himself rejected the model:

    “I accordingly conclude that the only way in which IS-LM analysis usefully survives – as anything more than a classroom gadget, to be superseded, later on, by something better – is in application of a particular kind of causal analysis,where the use of equilibrium methods, even a drastic us of equilibrium methods, is not inappropriate…”

    Hicks (1980) ‘IS-LM, an explanation’ Journal of Post Keynesian Economics 3(2), 139-54

    (As quoted in Steve Keen’s Debunking Economics book)

  40. The IS/LM used by DeLong or Krugman is the same taught by Mankiw? I mean the same that considers “crowding out” and fiscal policy less effective than monetary policy in the long run? The same model that evolves in AD/AS? Because in that model there isn’t a banking system and there are a lot of curves that are against reality, This is what I learn (and why i’ts so difficult to study post-keynesian economics after IS/LM)

    I don’t know, probably it’s not the same.

  41. Randy Wray writes a reponse justifying his use of $24 Trillion number to describe Fed lending:

    I don’t particularly like his shot glass analogy, because the whisky is being drunk rather than returned, but i think he is getting at the same point i made above regarding the different moral implications of a single loan of $1m (even of a long maturity structure) and recurring repeated loans over an extended period of time.

    An accounting framework is one way to view the ‘total liquidity’, but it doesn’t take into account all the details, so it’s quite reasonable in my opinion to use another framework that uses “overall level of intervention activity” as it’s main measure. It’s very important to clarify which framework is being used to avoid confusion, but i don’t think it’s outright wrong per se.

    At any rate, the forthcoming paper from Wray’s students that he mentioned in the link should provide some more context on the matter.

  42. Dreadful, politically driven, Fed hating analysis by Wray.

    First, he doesn’t appear to understand the language that normally applies to the difference between the commitment of a facility, and the drawdown of a committed facility. Bernanke is referring to drawn down commitments, and says so.

    As well, beneath the difference in truthful nominal presentation, the risk exposure for drawn and undrawn commitments is very different, and is measured differently.

    Second, nobody in the world describes a $ 1 billion loan that is outstanding for 7 days as a $ 7 billion nominal exposure. There are techniques for incorporating duration into the measurement of risk, but this sort of outrageously biased, distorted nominalism isn’t one them.

    Bernanke’s presentation is based on the maximum value of nominal stock outstanding, and he says so. That IS an acceptable form of nominalism, where it is used as a summary measure of risk exposure on drawn facilities.

    I could just as easily say that Bernanke actually exaggerated the effective level of risk in this nominal translation by pointing to the fact that the maximum nominal exposure wasn’t outstanding for the entire duration of the financial crisis. Therefore the average nominal exposure was far less.

    Relative to the previous extended discussion, this is an example of political bias (Fed relative politics) from MMT leadership.

  43. “Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank.”

    Probably I misinterpret what professor Wray wants to say, but the drunken sailors, at least in Sardinia, where I live, don’t give back the whiskey after they have drunk!

  44. Yeah, this is embarrassing, for Wray, his students, and Levy, IMO. This is not the kind of attention MMT needs, which paints it as either disingenuous or ignorant or both. Particularly when MMT tries to advertise itself as understanding banking and capital markets better than most.

    I read from a comment at Ritholtz’s blog, why not just pretend the loans were rolled over every second, and say a gazillion was lent? It’s bogus analysis.

    Wray’s analogy doesn’t apply at all. In his analogy, he is implying the sailors keep drinking the shots. What should be happening is the sailors drink the shots once, are supposed to pay, but can’t, so the bar tender gives them more time until they can pay. But the bartender doesn’t keep giving them shots. (Do I have this right?)

  45. wh10, reading comments and the old debate in Italy, I think it’s about accounting, not really about quantity. if you think about quantity the analogy could be good.
    But the analogy isn’t really serious, in my view. I doubt that sailors have the same rules about accounting.

    But I’ll wait comments by people that know that better than me.

  46. If I give you a $1K loan rolled over for 10 days, you don’t actually receive $10K to use. You just get 10 days to pay the original $1K back.

    If I give you a $10K loan, you actually receive $10K from me.

    Same with the sailors. The bartender doesn’t keep filling their shot glasses. He gives them more time to pay their shots back.

    I agree though, the analogy isn’t that serious, but even more embarrassing for Wray.

  47. “Probably I misinterpret what professor Wray wants to say, but the drunken sailors, at least in Sardinia, where I live, don’t give back the whiskey after they have drunk!”


    Neither in India. Will have to wait for others to confirm how it is like in their place.

    “Same with the sailors. The bartender doesn’t keep filling their shot glasses. He gives them more time to pay their shots back.”

    And the sailors also have to give interest whisky. i.e., more whisky back to the bartender.

    Also, the sailors have to provide rye, barley, wheat, corn, grapes, cognac, champagne to the bartender get the whiskey in the first place … to satisfy their liquidity needs 😉

  48. wh10,

    yes, but if you use the logic used by professor Wray, you have to use for all the other daily operations. I think this is the point about accounting. about quantity, yes, it is right the analogy.

  49. Ratigan said so much that I had to check the transcripts to see what he said.

    From the $29T paper:

    “We find that the total spending is actually over $29 trillion”

    This shouldn’t be happening!

  50. “I’d be really curious to learn where you learned your banking stuff from.”


    Somewhat secondary points. Bernanke hit the primary ones with his letter. This sort of blatant distortion does nothing to help solve the world’s problems.

  51. Yes, Bernanke’s one letter was enough.

    What surprises me is that the $29T paper was released (though the results were posted in blogs) after Bernanke’s letter which clearly made the distinction between “lending” and “spending” and still starts off with $29T spending!

  52. Wray: “a measure that includes only assets on the Fed’s balance sheet will miss some of the ex ante exposure to risk. We’ll ignore that here. Much like Bernanke’s claim that the lending turned out OK—because most loans got paid back—that is 20-20 hindsight and does not count when it comes to ex ante risk.”

    To me, the biggest risk to credits in the US is the risk that the government will let the fiscal deficit get too small while allowing the trade deficit to continue to remain as large as it has been. This was the case in 2007 leading up to the GFC. I remember looking at strings of months in 07 where the US treasury was in actual surplus then eventually boom.

    Would not MMT say this was the ultimate cause of the GFC and hence the true data/model to look at when assessing risk?

    So is Wray using/referring to a mainstream risk model to determine his ex ante risk that he refers to here? Once the automatic stabilizers kicked in and the deficit went over $1T, the true risk was eliminated and it was on to “muddle through”, not that Bernanke knew that though I guess. This is the same period that the Fed did it’s liquidity programs.

    Instead of this Zero hedge type stuff I’d like to see the MMT academe produce a MMT risk model that uses the sectoral balances to gauge (systemic) credit risk.

  53. R.,

    Ritholz doesn’t get it either.

    You don’t distinguish between sustained borrowing and normal overnight borrowing by putting some ridiculous nominal multiplier as a function of the rollover frequency of sustained borrowing.

    The subject is risk. You measure risk exposure on the basis of the balance sheet as it evolves over time – not on the basis of adding up the flow of funds every time there is a flow.

    Bernanke’s approach is correct.

    What a complete disaster this whole thing is.

    I’m away for several weeks so won’t be able to get into this.

  54. macro comment:

    this entire discussion is about risk, and the communication of financial system risk through such venues as varied as the banks, the Fed, MMT, and Dylan Ratigan

    MMT is NOT strong at all on either bank risk analysis or bank capital management analysis

    MMT IS strong on bank reserves and monetary operations analysis

    Something to think about

    Based on broad based push back already, the professor is in danger of becoming MMT’s first known suicide bomber

  55. JKH-

    Wray said he is not trying to claim the Fed had $29T of risk exposure.

    Is there any meaning to $29T? Or is it entirely arbitrary?

  56. Stocks and flows again.

    The $1 Trillion is the stock. The $29T is the stock turn – which is a flow – essentially $29T/(whatever time period).

    One is the value your get from static balance sheet analysis. The other is what you get from analysing dynamically over time.

    That is $29T of economic activity that would have been lost but for the Fed’s continued intervention. The pertinent question is where the profit from that activity ended up.

  57. James Hamilton:

    “My preferred measure is the outstanding loan balance. However, if you are going to add loan flows over different periods together, the only sensible way to do so is on a net rather than a gross basis. The sum of net flows between date t1 and date t2 has the interpretation as the change in the outstanding loan balance between t1 and t2. The sum of the gross flows between date t1 and date t2 has no economic meaning.”

  58. JKH,

    More on TARGET2. Looks nice.

    … “In a single country banking system, the transfer of money from one bank account to another is achieved via a deduction from one bank’s reserve account at the central bank and the crediting of the reserve account of the receiving bank. In the Eurosystem, banks maintain reserve accounts with their national country central bank, so there is an additional layer to the transaction.
    Consider a transfer from a Greek commercial bank to a German commercial bank. The additional layer is that the Bank of Greece incurs a liability to the Eurosystem (via its TARGET2 payments mechanism) and the Bundesbank receives a credit from the Eurosystem. The Bundesbank’s balance sheet shows an additional asset in the form of a TARGET2 credit and an additional liability in the form of a credit to the German commercial bank’s reserve account.
    Note that the Bundesbank is not lending money to the Bank of Greece. It is receiving a new additional asset. It is inaccurate to claim that such a transaction requires the Bundesbank to sell some of its assets to be able to deposit the funds into the Greek residents’ private Frankfurt bank account. No assets need to be sold. Once it receives the TARGET2 credit, the Bundesbank creates the money to deposit in the commercial bank’s reserve account and the Bundesbank’s accounts stay balanced.
    There is also no sense in which the TARGET2 credit associated with such a transfer is “secured by collateral” such as Greek government bonds.. This would hold even if the funds transferred to Germany were obtained via a loan from the Bank of Greece collateralised by Greek government bonds. A series of defaults by Greek banks would not change the Bundesbank’s TARGET2 credit by one iota.
    This is not to say the Bundesbank faces no risk from a Greek default. The Eurosystem as a whole incurs credit risk due to the acceptance of risky collateral. However, the risk to the Bundesbank in these operations is due to the requirement that it contributes 28% (its ECB capital share) of any funds required to recapitalise the Eurosystem after losses due to loan defaults. This risk is not measured by the Bundesbank’s TARGET2 credit.”…

  59. How does one properly answer the following?

    A lends B $300 overnight in January, and B pays it back the next day. A lends B $500 overnight in July, and B pays it back the next day. How much did A lend B during that year?

  60. Also, you will like this JKH:

    “Note also that Eurosystem policy in recent years has been to supply banks with a full allotment of funds requested in refinancing operations, so the Bundesbank has not made any conscious decision to reduce the amount of lending it has done.”

  61. “It is inaccurate to claim that such a transaction requires the Bundesbank to sell some of its assets to be able to deposit the funds into the Greek residents’ private Frankfurt bank account.”

    What’s the logic behind this idea? I mean, when Bundesbank or in general, Central Bank, “sells some of its assets” to deposits funds in a bank’s account? I don’t understand (not Whelan, but TW)

  62. Ramanan,

    Two key points from the quote:

    1. The Eurosystem as a whole incurs credit risk due to the acceptance of risky collateral. However, the risk to the Bundesbank in these operations is due to the requirement that it contributes 28% (its ECB capital share) of any funds required to recapitalise the Eurosystem after losses due to loan defaults.

    2. This risk is not measured by the Bundesbank’s TARGET2 credit.


    Credit risk induces liquidity risk. Liquidity risk is resolved automatically through TARGET. Credit risk is distributed macro pro rata, independent of the distributional patterns that reflect both credit and liquidity risk.

  63. wh10,

    With respect, the answer to the question is not the point.

    The point is the motivation in posing such a question in the first place.

    It is nonsense for anybody to suggest that the purpose of the discussion under examination is anything other than to draw attention to the risk that the Fed created in its funding programs – yet certain people are claiming that that is not the purpose of these numbers.

    If it is not the purpose, what is the purpose? What is the motivation in drawing attention to such numbers, if not to point to the risk in some way? And if the purpose is to point to the risk after all, it is a gross misrepresentation of risk.

  64. Yes, it is a complete disaster for MMT. At the very least the central bank is charged to supervise the smooth functioning of the payment system which includes inter-bank market. It is THE responsibility which ranks far above anything written in the dual mandate or whatever. You can call it bail-out. You can call it subsidy. You can call it whatever you want but this is the task of the central bank to ensure it dammit works. And once it starts working again you naturally roll your “bail-out” down.

  65. hasn’t randy traditionally supported the lender of last resort role for the fed? or is this something different

  66. I just skimmed it really fast, given the hour, and need to reread later, but seems he may be making a point similar to the one Marglin of Harvard did here.

    Marglin says that when Keynes came out with his theories, he was rejected in the same way heterodox econ is today (I noticed quite a bit of Lerner in his syllabi, btw). Change and acceptance for Keynes, however, came with the political climate and the political bent of his argument.

    Right or not, perhaps this is how the world works.

  67. R,

    Pilkington says:

    “In academic fashion Lavoie insists that we must simply describe existing institutional arrangements and we should not prescribe what we think should, in fact, be the case. And it is on this point, I think, that he is fundamentally in disagreement with the MMTers.”

    That’s not correct.

    Lavoie says the MMT writing style doesn’t distinguish properly between the two – not necessarily that it shouldn’t write clearly about the second by distinguishing it properly from the first.

  68. Btw, Marc Lavoie already has an article on how economics will be practiced in universities as people start accepting some amount of Keynesianism. So Pilkington’s argument is hardly one.

    To me Pilkington’s article sounds like this: If “we” don’t start talking like MMT, it will be difficult to win the argument.

    Btw, still haven’t found the reference I was talking of in Winterspeak. I sort of remember that there was a criticism of Chartalism by Sergio Rossi who argued that even the State has to “settle” its transactions.

    In the MMT description or prescription – whichever is the case – , the State does not settle – as in it doesn’t constitute a settlement in the legal way of defining settlement.

  69. R.,

    MMT should be explicit about institutional options that are implicit in it thinking.

    E.g. the “base case” includes overdraft potential in treasury’s account at the CB. That doesn’t require institutional consolidation, but it does require institutional change in the form of a “rules” change. To your point perhaps, it still doesn’t make the “government” the currency issuer. The central bank remains the currency issuer. Only when the government fully aborbs the banking function at the institutional level does it become the currency issuer. At that point, accounting arrangements totally change to reflect the conversion of an operational user to an operational issuer, as well as the merging of a consolidated capital position (negative equity). Currency is always an operational banking function, the primary material characteristics being the operational capacity to credit reserve accounts and to issue CB notes. (Commercial banks are closer to being currency issuers than segregated government treasury functions.)

    The Pilkington article is sort of interesting, but it misses the mark IMO.

  70. Wray lays his cards out. In his mind, he is on a mission with a greater purpose, and the ends justify the means.

    “Agree that continuous “emergency” lending is one of the things that is objectionable. And lending to real housewives. And to insolvent banks. And to shadow banks. And against trashy assets. And in secret. And it goes on and on and on.

    It is a huge scandal. And it continues. And the whole system is set to blow up again. Will Bernanke reboot and repeat? Almost certainly, if he is allowed to do so. Why publicize $29 trill? Because that gets attention. Framing matters. If you frame it as “oh, did you know the Fed lent funds for extended periods?”, you know how much attention you will get in Washington? “

  71. “l. rabble wray”


    to answer my own question:

    “As Walter Bagehot proclaimed more than a century ago, in a crisis the Fed must act as a lender of last resort, but that lending MUST be expensive and temporary.” -wray

  72. I found Pilkington’s post an interesting read, but I disagree that MMT should be packaged as a political program. I am not even sure such a packaging would have broader appeal. No doubt it would be attractive to some, but it is not clear to me that it would be preferred by most. I think for many a politically open framework would be a step forward. For example, Tom Hickey linked to a recent post entitled “Why I Became a MMTer This Year” in which the author states:

    What I love about MMT is that it’s apolitical; there is no choosing the “left” or “right”. Both sides have valid points that MMT builds on.

    We can quibble – and have – over just how true this is, but I think a politically open framework is desirable if we want to enable honest and transparent public debate from a variety of political and policy perspectives. The quality of democracy continues to be undermined the longer we allow the present mystifying framework to remain dominant.

  73. From Wray’s “A resolution and conclusion”

    “In our work, we also report and discuss the usefulness of the Fed’s approach—which is to report the maximum peak outstanding quantity of loans—about $1.2 trillion on a day in December 2008. While that is a good measure of maximum exposure to risk, clearly it is a snapshot and doesn’t tell us much about the total effort that has continued right up to the present. It is conceivable that the Fed’s total intervention could have been for a few days in December of 2008—in which case the peak loans outstanding and the cumulative total of lending would have been close to the same size. Clearly that was not the case—the cumulative total is 25 times bigger than the peak. Why? Because the Fed’s intervention continued for months and even years. It continued to lend at very low rates and very large volumes to try to settle markets. The cumulative total is a more informative measure.”

    So he finally concedes maximum exposure as a “good” measure of risk. It’s not a great measure, but its more reasonable than anything he’s written. As far as the latter is concerned, he hints at duration as the correct point of explicit omission. But as I said before, if anything, the reasonable approach to this is some average duration associated with the maximum exposure – which would be much shorter obviously than the full duration of the financial crisis itself. One could decompose such durations across different asset categories. But what he’s done is slapped together the most meaningless sum of numbers conceivable, ignoring both maximum exposure and duration measures, for the obvious intended effect of pure political sensationalism. And all of this contradicts his own contention that he’s not trying to indicate some sense of risk in the $ 29 trillion.

    BTW, he decomposed Hamilton’s grammar incorrectly. Hamilton implied Wray was a rabble rouser, not rabble. Wray is now actively using the latter to brand his own victimology.

    But Wray definitively referred to Hamilton as a hack.

    The entire “analysis” smacks of deep political motivation. It’s the type of thing I referred to earlier, as opposed to the policy idea of ELR for example.

    This is the Niagara Falls of credibility loss for MMT in my book.

    But Bernie Sanders will love it.

  74. One more curious analytical point entailing several contradictions:

    “the Fed’s special facilities gave banks the cheapest funding available. And the Fed very nicely extended the cheapest funding to the Real Housewives of Wall Street, foreign banks and central banks, hedge fund managers, and—apparently—just about anyone among the top 1% who wanted a cheap loan.”

    Here we have Wray suggesting on the one hand that the Fed lent too cheaply, while denying that the blown up numbers are motivated by an intent to represent risk.

    And elsewhere we have Mosler complaining regularly that the evidence of the Fed’s profits means that the private sector was denied income that otherwise would have been available to it.

  75. Really interesting point JKH.

    What do they think the other MMT economists, or economists at Levy Institute?

  76. Coincidentally, here’s an interesting thing on TARGET2, which should be of interest to Ramanan (although he’s almost certainly already seen it) and maybe others.

    The interesting part:

    “First, you’ll be very hard pressed to find a real-world central banker familiar with operational issues who believes that the short-term money market rates targeted by central banks depend in some predictable way on controlling some definition of the money supply. Here and here are two good papers that discuss this issue in detail. And here and here are my own teaching notes where I discuss these issues.

    To summarise, the ECB influences money market rates in the Euro area via a “corridor system” determined by the interest rates on its range of instruments (deposit facility, marginal lending facility and refinancing operations) rather than via the quantity of money supplied.”

    This is interesting to me because it is a good example of the generic application of what I’d now call the “good” part of MMT to a number of monetary systems, including both the US and the Eurozone. It’s pure analytics, about how central banks operate with respect to price versus quantity. And that operation doesn’t depend on the standard MMT definition of “currency issuer”. It’s one reason I prefer anchoring the currency issuer definition on the central bank rather than the nature of its sovereign client(elle).

    My belief in MMT is a function of the “good” part. In the early days, my overall belief level was about 95 per cent. Then it dropped to 60, based on issues of presentation and politics. It just dropped to 20, with the recent suite of pieces under discussion.

  77. JKH,

    Fantastic find! Briefly skimming, I think some of those links may answer some questions I have had about how the CB targets interest rates.

    If a CB pays IOR, it’s easy to understand how it influences interest rates (pretty direct).

    But in a world where IOR is zero, and standing facilities pay X% above the target, how does the CB *change* (not maintain) interest rates? I know, as Fullwiler has written and you have affirmed in the blogosphere, it may operate through the ‘announcement effect,’ but what is the actual threat that causes banks to move to the new rate? Is the key the rate at which the CB is willing to conduct repos with banks?

  78. Also, JKH, thanks for sharing your thoughts on all this. It helps me sort out mine. I feel quite similarly to you on what I like about MMT (those pure analytics). Most of that I have found in Fullwiler’s writings.

    But why should Wray’s unfortunate antics, disconnected from what MMT teaches us about how monetary systems operate, influence your belief in MMT? It might affect the ‘brand’ of MMT since a developer of MMT has behaved this way, but it doesn’t change anything the developers have ever taught. I suppose it doesn’t matter, but you make it seem as if Wray’s behavior has revealed further flaws in the MMT literature.

  79. JKH,

    Yes saw it. Follow IEblog – it sometime has topics of interest.

    Fully agree with 13 December 2011 at 6:25 PM

    I also think that the State has always struggled in the past to be a currency issuer – trying various tricks such as promising to convert to gold etc. MMT says taxing powers are sufficient for acceptability but governments have always taxed haven’t they. Taxes just make the government debt the best debt out there – because there is no revenue as taxes.

  80. wh10,

    Good point. So I consider MMT as being composed of the descriptive monetary part (e.g. NFA), plus the policy part (e.g. ELR). But I would add a third piece of purely political positioning as put forward by members of the leadership group (e.g. $ 29 trillion).

    Now one doesn’t have to skew left to hate the Fed. But left skew is very easily conducive to hating the Fed IF one wants to, and this is obviously the case here. And it is also not inconsistent with the general MMT emphasis on fiscal over monetary.

    So MMT includes all three elements, and wears them as it articulates them. In this case, the $ 29 trillion in my view is a raw strategy of political shock value, at the expense of integrity of the financial analysis, including direct and indirect implications of risk assessment. The analytical methodology is dreadful in my view, and I’m not the only one who’s said so. Given the increasing weight I see being place on the political component in overall MMT mix, this is the straw that breaks the camel’s back in terms of holistic credibility, in my view. MMT now wears the $ 29 trillion analysis and what it implies.

    And while the monetary component of MMT represents value, one should not interpret that to mean that an understanding of monetary operations and accounting is unique to MMT. The fact that such understanding is rare among mainstream economics is not evidence that MMT has some sort of patent on such understanding. There are a few non-economists that had a pretty good idea of how things work years before we ever heard of MMT. And after all, Mosler himself has said on more than one occasion that MMT is just accounting. The understanding is available to those who want to learn, with or without MMT. But MMT can be very helpful in this regard.

    Still, one must still ask the following question about MMT’s particular nuances featured in its descriptive paradigm for monetary operations. The key question is not “what is MMT saying?”, but rather, “Why does MMT say what it says in the way that it says it?”

    This is the motivation that underlies the recent discussion about presentation, including consolidation et al, etc. Lavoie touched on this question, but there is more, I think. In this regard, I think one needs to be circumspect on the probability that a paradigm of monetary operations analysis can be truly neutral in the context of the natural weight of the accompanying political content in the MMT brand.

  81. Fair enough. I just wish all this didn’t happen :\. Regarding the motivation underlying the presentation, I take Fullwiler’s word that he sees it as the scientific approach of doing things (in establishing a general model etc), though I don’t know what’s behind the others’ thoughts.

    Actually more interested in you addressing my question about changing the FFR as opposed to defending it once it is there :). Assuming there was no ‘anticipatory arbitrage,’ as you once put it, and the Fed wasn’t paying IOR at the target, what would move the FFR to the target? Is it the interest rate on OMOs that the Fed would conduct?

  82. – The key question is not “what is MMT saying?”, but rather, “Why does MMT say what it says in the way that it says it?” –

    YES! This is the point! You don’t understand MMT if you don’t know anything about reserves etc. This is the key issue. Pilkington in my view is wrong when he says that with MMT you “win the argument”. No, you persuade non-academic people, but a person that repeats slogan is useless, that’s my idea.

  83. wh10,

    I have a very high regard for Scott Fullwiler’s work.

    Regarding your specific question, it’s hard to imagine a world in which there would be no “anticipatory arbitrage”. That is the world. If the fed moves the target FFR, it is committed to that target.

    The sub-world in which the Fed doesn’t pay IOR is the pre-2008 world. If a bunch of rookie bank reserve managers and primary dealers all came in at once, and didn’t know what they were doing, the Fed would adjust the excess reserve setting until the bank reserve managers priced reserves at the target rate. That would be the theoretical learning process for people who weren’t previously schooled in anticipatory arbitrage. That’s the monopoly currency issuer at work, affecting pricing.

    Worthwhile pointing out that, at the end of the day, the dealers play second fiddle to the bank reserve managers. Bank reserves are ground zero.

    But all these players typically aren’t rookies. They typically know what they’re doing. So anticipatory arbitrage rules the day.

  84. P.S.

    It’s partly OMO but not entirely OMO.

    The Fed controls excess reserves. That’s not exactly the same as OMO.

    OMO is a direct pricing signal.

    Excess reserves are a quantity signal, affecting price through bank supply and demand for reserves.

    Banks react to both.

    Dealers too, but in the case of excess reserve settings, by talking to banks about their positions, combining that info with OMO info.

    This pertains to pre-2008, as per your question.

  85. Hmm, JKH, I feel like this conflicts with the price v qty argument as set forth by Scott, but maybe I am wrong.

    Your story in the world with rookies seems to suggest that there can be a liquidity effect affecting prices. Fullwiler I believes rejects this. Yes, he says sometimes there may be a nudge, but this nudge is necessarily offset later in the period, eliminating any liquidity effect.

    There are practically no excess reserves in the system (realistically, beyond the buffer banks choose to keep). Isn’t the MMT argument that any excess reserves will eventually drive the rate to the IOR and too few will drive to the discount window? If that’s the case, I don’t understand how one can argue at the same time that OMOs acting through changing reserve qtys can fine tune a rate.

    However, as the monopoly supplier (and eliminator) of reserves, the Fed can set the rate at which it will conduct repos/reverse repos with banks. So when the Fed conducts the OMO, that will come with an implied interest rate. And is that not what ultimately drives the FFR?

    Bit confused on your excess reserves vs OMO. How else does the Fed affect excess reserves?


    BTW, my thoughts are coming from Whelan’s slides in the link you provided:

  86. In other words, you seem to be suggesting that if the world was full of dummy bankers, the Fed could set the FFR as suggested by intro text books- they adjust the supply of reserves using OMO. But is this not outright rejected by Fullwiler and the pertinent research? Again, this stuff is a bit obtuse to me, so I could be wrong.

    But again, banks have no use for excess reserves, and so will bid their price down to zero. If banks are short reserves, they absolutely need them, and so will bid their price up to the ceiling.

    By doing OMOs beyond what banks need, the Fed necessarily is putting banks in one of the above situations, and that’s not tenable for targeting an interest rate besides the floor or ceiling.

    However, does the interest rate on OMOs with the Fed not explain how the Fed can still target a specific FFR b/w the floor and ceiling?

    If banks have excess reserves, they want to get rid of them. Without the Fed, the price is bid down to zero. The Fed however can engage in a reverse repo with the bank, in which they sell and then buy back a tsy from the bank at a higher price than it was sold, which is interest earned to the bank. It’s essentially like IOR.

    Alternatively, if banks have too few reserves, the Fed can engage in a repo with the bank, buying tsys from banks by creating reserves and then selling them back, again at a higher price, which is an interest cost to the bank. This is like borrowing from the discount window.

    Does this make sense as the way to target an interest rate without respect to adjusting reserves and thereby affecting price?

  87. JKH and Ramanan: These are just a few personal reflections from a non-professional and non-academic dabbler in economic theory. If I try to think about macroeconomics and monetary analysis from your standpoints, I think your way forward is just to take whatever makes sense from the MMT understanding of monetary operations and accounting, modified by your own insights and framing preferences, and then build from there in whatever direction makes most sense to you. If the result is something other than MMT, so be it.

    For what it’s worth, if MMT is defined to include a prescription of managed capitalism under some kind of new New Deal, I guess I would not be an MMTer either. However, I have found the insights MMTers have developed or integrated from other theoretical approaches very useful and foundational. They have definitely altered the basis of my own understanding of economics quite a lot. I take the point that others working in policy or the markets may have possessed a similar understanding earlier. I have no personal experience of that.

    The normative use to which I want to take the understanding no doubt differs from the uses others have in mind. Above all, I am interested in the potential in a truly democratized money as a pathway to a better (and ultimately non-monetary) economy, which is no doubt a more radical-left perspective again than that of the new New Dealers. I am also interested in re-examining Marx and various Marx and Keynes influenced economists in light of the additional understanding I have gleaned from MMT. The Marx-Kalecki tradition has been the one I am most interested in. Also, unlike Ramanan, I find the Chartalist explanation of money very convincing, so for me that is not a sticking point when it comes to MMT.

    By the way, I have found this whole discussion very interesting and informative. Thanks to all who have been involved.

  88. wh10

    The indicative question is how the Fed can change the target funds rate and have the actual rate follow the target without a significant, systematic pattern change in the system excess reserve position.

    And this is a pre-2008 question for the most relevant part.

    My explanation doesn’t contradict SF at all, because bank reserve managers are experienced and know what to anticipate. Think of my example above as the Rabble Wray counterfactual, where all bankers are morons, including bank reserve managers. There is no such counterfactual potential in the real world.

    Second point is that OMOs are not necessarily required to change the system excess in all cases. The Fed can adjust by coordinating Treasury transfers between TTL and the general account as well.

    Third point is that OMOs are reinforcement for the target rate. Think of them as an extension of the target rate.

    Fourth point is that the Fed can do OMOs to change the system excess at any time, but not necessarily as a requirement to effect a given change in the target rate. Around an existing target (before or after a given change) the banking system may behave differently in terms of supply and demand for reserves, depending on a given distribution of reserves. The Fed can do OMOs to adjust the trading rate to follow the target, depending on that distribution. But that is neither unique to or necessarily required at the point of a given target rate change.

    Fifth point is that this is all relative. The idea that the Fed doesn’t necessarily need to do major OMOs around a given target rate change doesn’t necessarily mean that it won’t do OMOs in connection with such a change. Just that it doesn’t necessarily need to do them as a systemic requirement for effecting changes, and the amount it does would do if it happened to do them typically be quite marginal rather than material.

    The proof of all of this is in the historic time series of excess reserves. You won’t see any big swings pre-2008 in either tightening or easing cycles. It is a very stable series.

    None of this contradicts SF in my view.

  89. wh10,

    As an example of the “counterfactual” above, suppose a fool reserve manager starts lending fed funds following a target increase, but at the old rate. Other experienced reserve managers will be takers of funds at the old rate, stockpiling their reserve positions for future lending. The Fed may do OMOs (and it may draw down system excess by encouraging net Treasury transfers from TTL into the general account as well.) The fool’s reserve position by end of day or at least by next day will likely be much lower than what he anticipated (if he has the mental power to anticipate anything in the counterfactual), because the existing system excess (or deficiency) distribution will be skewed in favour of those who have stockpiled. The latter group will then screw that manager when he goes to make up his position, and lend funds to him at their profit and his loss, at what will probably be a rate that temporarily exceeds the target. And the fool will be fired.

    But there are no such fool reserve managers, to that degree.

  90. wh10,

    There is a general tendency by authors (like the link you gave) to compare Fed’s Open Market Operations done via repurchase agreements to the Eurosystem’s MROs and LTROs (also done via repos) and also known as Open Market Operations.

    It is not completely right in my view. The Fed’s repos should be compared to the Eurosystem’s “Fine-tuning operations”

  91. Peterc,

    Didn’t notice your comment was addressed to me. Will think about your comment and say something if I come up with something.

    Don’t know if you already know this – Marc Lavoie once proposed renaming Post Keynesian to Post Kaleckian. He wrote that his 1992 book was a mix of Kaleckian and Kaldorian economics.

  92. Ramanan, thanks for the info regarding Lavoie’s book. I wasn’t aware of that comment. I am pretty interested in most heterodox approaches. It’s really only the neoclassicals that I mostly try to ignore. That’s what I was primarily trained in. I want those seven years of my life back. 🙂

  93. Ramanan,


    Replied there after about 5 minutes thought on it. Not certain. I don’t venture much into potential break up scenarios, given the complexity and the ever changing and evolving status quo of considerations currently on the table.

  94. JKH,

    I too made more comments.

    My point was more about whether it makes sense to look at central bank’s external assets as a part of a nation’s wealth.

    The reason I linked is that such things are important when discussing and understanding “what is money”.

    Understand your point about not venturing into potential break-up scenario. Irrespective of what one comes up with (UBS has done the most “detailed” analysis) it is really incalculable.

  95. moi aussi

    but still off the top; not certain what I wrote makes complete sense

    interesting though

  96. R.,

    Geez. This guy’s prickly as hell.


    And, speaking of anonymous aspersions, I recall some of his stuff around the Sinn discussions, and wasn’t terribly impressed, certainly not enough to remember his name.

    That said, in this case, given the complexity of the issue, I spent virtually zero time thinking through what I wrote. But what you and Rebel wrote also looks fine to me.

  97. Ramanan, while I agree that the argument that Germany will not lose is somewhat fishy I also think that your NIIP argument is fishy as well 🙂 To be short … The asset side of the central bank balance sheet matters only when there is a pressure to devalue which central bank tries to resist. That is clearly not the case for Germany. That is why I can hardly see how German_s_ are going to lose what they have already gained. At the very best Germans lose the subsidy they have been receiving during the last decade but to call it a loss is beyond my political persuasions 🙂

  98. Sergei,

    Yes. Both claims are fishy to some extent. However, in my comment I made it clear that it doesn’t lead to a loss in demand immediately (as long as the German government doesn’t change its fiscal stance)

    Here’s the hypothetical scenario I created.

    “Let us assume that for some reason Germany has to pay a fine as decided by international courts for some reason which has nothing to do with a breakup. It is decided Bundesbank foots the bill (€500bn) and the German government is supposed to pay this back over time to Bundesbank. The fine is paid equally to all governments except the German.

    Initially Buba’s TARGET2 assets is reduced by €500bn

    Nothing much happens to Germany’s demand here. No recession.

    It can lead to an increase in demand in the rest of the Euro Area since it will increase demand there (if the foreign governments decide to relax their fiscal stance as a result of gaining from this huge inflow) and can be beneficial to demand in Germany since its exports increase.

    At any rate, it is misleading to suggest that Germany did not lose anything.

    What is hidden in my scenario is that the German public debt increases and it reduces the “fiscal space” Germany’s government has.”

    Back to this comment: The German central bank’s “assets held abroad” (even though it is paper wealth held in Frankfurt ;-)) decreases. Germany as a nation suffers a loss.

    That is completely different from a stand I may take for the idea of what if good for Germany and the Euro Area. Germans should do a fiscal expansion and increase domestic demand (as a result) – which means higher imports and consequently less claims on the rest of the Euro Area.
    Yes, Germans have received a subsidy in the sense you mean, but that is a slightly different point.

    A nation’s wealth is it’s net asset position plus the value of its real assets. Debts to each other cancel out.

    If you want to really see that this item is included in German’s national wealth, check page 137, 138 and page page 136,135 for the breakdown. For translation of these items in English, see page 36 and 35.

    €465bn is not a small amount. Imagine if someone steals a few million! Like doing some hacking and changing some numbers here and there.

    What you say assumes that Mercantalism has no meaning and existence at all. In a world where Mercantalism doesn’t exist, you are right.

  99. Perhaps Karl Whelan’s argument can be reformulated as follows:

    If Buba’s TARGET2 assets vanish in thin air, it does nothing to the assets of the household sector.

    While that is true, it is misleading because it assumes that it does not matter for the future.

  100. Ramanan, yes but Germany is a special position. It is like saying that if we cross out 1 trln of Chinese reserves then China will lose. Well, in a strict accounting sense it will. But in a strict accounting sense China is well beyond any meaningful measure of fx reserves. I believe reserves are not part of any economic decision making in China.

    But, and it is a big but which pretty much kills your argument, if euro collapses then Germany is free to fix DM to Drachma and lose nothing 🙂

  101. Sergei,

    You are assuming China’s fiscal policy is independent of its net exports. (It’s true during the crisis, it did a fiscal expansion but generally speaking it is not).

    China’s government fiscal policy is a response to how much it has exported and hence how much foreign reserves it has accumulated.

    It is very careful about its USD reserves.

    China’s reserves whatever the amount is is sufficient only for a few years of imports (not counting exports), as emerging market economists put it. Its Q1 imports (current account debits) was $467bn as per

    It is risky for China if the world takes protectionist measures or pressure China to revalue its currency.

    China’s fx reserves are a huge asset to the nation. Look at how much power China exerts on international matters. Do you think it could, if its reserves were zero?

    I am not sure is anyone in Germany thinks it will be wise to fix the DM to the Drachma.

    Your argument is like if I take out $1bn of Soros’s assets he won’t mind.

  102. Ramaman, your Soros analogy is like household finance vs public finance 🙂

    What I am trying to say is that while your NIIP argument is technically correct, it is too technical. The goal of economic policy in Germany is NOT the asset side of the central bank balance sheet. It is a by-product of its policy and even more so than in China. Therefore any loss on the asset side is likely to have very little effect on the economic policy in Germany. Everything that euro crisis “achieved” is that public sector (BuBa) took over the toxic claims on foreigners from the private sector. If anything this looks good for Germans.

    “I am not sure is anyone in Germany thinks it will be wise to fix the DM to the Drachma.”

    But this is what they have been doing during the whole decade 🙂

  103. Sergei,

    China needs Oil and their citizens want foreign cars.

    “Therefore any loss on the asset side is likely to have very little effect on the economic policy in Germany. ”

    If you read my comment @10:17, I said the same.

    On the other hand, if you assume the truthness about this statement forever, then you run into inconsistencies.

    “But this is what they have been doing during the whole decade”

    Well, it is true that Greek’s “exchange rate” was at an appreciated level etc etc .. but Germany is not going to peg its exchange rate to Drachma. 🙂

    “The goal of economic policy in Germany is NOT the asset side of the central bank balance sheet. It is a by-product of its policy and even more so than in China.”

    Asset side of its sectors’ balance sheets, not just central bank. In the case of Germany, it turned out, that because of capital flight out of periphery regions, Bundesbank acquired the claims.

    Even the German government holds foreign assets.

    In many countries, central banks force exporters to surrender their foreign currency. I am not sure if it is easy for residents to hold assets in foreign currency so easily in China. The central bank buys them from exporters via banks.

    Your argument is still sounding like Mercantalism doesn’t exist.

    Look at it this way if you find central bank’s assets vanishing in thin air harmless. Let’s say the central bank doesn’t manage foreign assets but instead the arrangement is that a fund manages it (like in some countries). In that case, according to your “intuition” it appears more lossy if loses all money doesn’t it?

    How about this. You live in China and suddenly you find that an article appears in the newspaper that the manager of the fund managing foreign reserves blew all the money by taking huge bets in the markets. No reaction from you? No loss for the nation? Really?

    Or how about a realistic scenario: There is an estimate that around $1T of “black money” of Indians is in Swiss banks. You think politicians who are chasing it are just wasting their time?

    “public sector (BuBa) took over the toxic claims on foreigners from the private sector. If anything this looks good for Germans.”

    its a bit like socializing the losses.

    “your Soros analogy is like household finance vs public finance”

    Not at all. Just like an individual, a nation’s net asset position is important.

  104. R.,

    On reflection, Whelan is wrong on many levels, and you are right.

    First, his accounting fix is nonsense. A central bank can’t create a net asset by writing a cheque to itself. Even if interpreted as a contingent or potential asset, there is an offsetting contingent liability. The cheque issuer creates a liability. There is only a contingent asset swap, so the net effect is zero.

    The correct accounting is that the write-off of the asset creates a loss which drives capital negative. The fix is that the German treasury issues bonds to the central bank in exchange for recapitalizing the bank. The net asset effect is zero, but capital is driven back to positive, and the “hole” left by the loss of the TARGET balance is filled by the bonds.

    In practice, the net asset write-off wouldn’t be the full amount of the TARGET balance, since the central bank could claim a recovery of value from Treasury, due to the level of German participation in the ECB capital position. But that’s a detail. Most of the TARGET value is a net loss.

    Even with his accounting corrected, KW would still be wrong thinking that this constituted any kind of economic fix. He seems to think that the central bank can generate seigniorage of some sort to replace the economic effect of losing the TARGET asset. This is wrong on many levels.

    First, the correct accounting as described consists exclusively of entries between the central bank and treasury. Such entries lead to a net fiscal effect of zero – now and foreover. The reason of course is that any profit result from the CB ends up being for the account of Treasury, whether remitted or retained. So any seigniorage earned has no net fiscal effect.

    Second, even if the central bank acquired additional German private sector assets beyond this, any associated seigniorage or profit impact would be neutral for the German economy as a whole, since private sector revenue would merely be shifted from the books of the private sector to the books of the CB.

    Third, the only way the value could be recovered in this way is if the CB acquired some kind of foreign asset and earned a similar profit margin on that as to what the Bundesbank was earning in respect of the TARGET asset as funded by its liabilities.

    Beyond these permutations, KW’s entire logic regarding the potential recovery of value by a central bank is flawed. The loss of the TARGET asset represents a permanant loss of value. The idea that this value can be recovered by some kind of incremental profit or seigniorage operation is nonsense, to the degree that the CB always has such incremental operations available to it, and would have had them if it had not lost the value of the TARGET asset in the first place. The TARGET value is gone foreover in the circumstances.

    Your analysis of the NIIP perspective is correct and consistent with this. As was my comparison with the hypothetical default on US treasuries held by China. The position of the Bundesbank, post-Euro, holding an TARGET balance that was denominated in Euros but has now defaulted is exactly the same as PBOC holding a defaulted Treasury bond. Both types of assets are considered foreign in context.

    What do you think?

  105. above,

    “The reason of course is that any profit result from the CB ends up being for the account of Treasury, whether remitted or retained. So any seigniorage earned has no net fiscal effect.”

    i.e. its Treasury’s liability in the form of the bonds that’s contributing to any associated CB interest margin and profit result for Treasury’s ultimate account, so the Treasury is just paying itself in effect; therefore no net fiscal effect

  106. R.,

    I know now why my recollection is that I wasn’t impressed by KW’s original analyses of Sinn.

    My general impression back then was that Sinn was overcriticized by nearly all pundits. He had a few things that were wrong, but quite a bit right. I recall most of the pundits using questionable logic to try and debunk him.

  107. R.,

    I just read that Bloomberg article for the first time.

    Don’t see anything horribly wrong with it. Did you?

  108. P.S.

    I use profits and seigniorage pretty much interchangeably above. I think it’s a waste of time to get too cute about the definition of seigniorage. It’s a word that should be relegated to the ash can.

  109. “Your argument is still sounding like Mercantalism doesn’t exist.”

    That is not my argument. And I do not even think it is relevant to the discussion.

    “suddenly you find that an article appears in the newspaper”

    And what if you miss that issue of newspaper? What will change for your life?

    “its a bit like socializing the losses.”

    Exactly. Instead of banking sector engaging into unsecured lending, BuBa is doing it. Even more, BuBa’s claims on other NCBs are still secured by other NCBs’ assets while interbank assets of German banks are completely unsecured. So BuBa is actually leveraging the German position vis-a-vis the rest of eurozone. Quite a rational national policy.

    I do not say that your argument is wrong. I just say the argument while technically correct is fishy from economic point of view. And it is even more fishy from *my* global political views. And in fact you agreed 🙂

    But I really like this discussion. It opened a new page for me about eurozone mess. I do think that eventually it will be Target2 what will be responsible for the collapse of eurozone.

  110. Interesting discussion.

    Ramanan, re German Target claims, are you saying that some real resources are redistributed? If so, from who to whom?

    If not, are you saying that there is a second order effect which effectively redistributes wealth or causes it to be less than it otherwise would be in the no claims counterfactual?

  111. JKH,

    Yes didn’t see anything horribly wrong with Bloomberg’s article.

    I didn’t follow the counterattack on Sinn closely but I do remember some arguments given against Sinn which weren’t fully right. I wrote a post
    in which I argued that it incorrect to quibble that TARGET2 flows doesn’t finance current account deficits. This is because it replaces one flow in financial flow with another (TARGET2) and in fact appears in the accounts.

    I will read your comment at 11:25AM.

  112. JKH,

    “The loss of the TARGET asset represents a permanant loss of value. The idea that this value can be recovered by some kind of incremental profit or seigniorage operation is nonsense, to the degree that the CB always has such incremental operations available to it, and would have had them if it had not lost the value of the TARGET asset in the first place.”

    Very good point.

    “First, the correct accounting as described consists exclusively of entries between the central bank and treasury. Such entries lead to a net fiscal effect of zero – now and foreover. The reason of course is that any profit result from the CB ends up being for the account of Treasury, whether remitted or retained. So any seigniorage earned has no net fiscal effect”

    Yes, agree. And also with China being defaulted on.

    I think what Sinn and others are trying to say that in a crisis like situation which eventually results in a capital flight into Germany (such as financial markets institutions selling funds and shifting it inside German banks) not only will be damaging to a slowdown in Germany’s economy, it will lead to Germany becoming a large debtor nation. Not only domestic institutions but foreign (third country) can sell off assets and shift funds to Germany.

    At the time of shifting, Germany’s Net Asset Position doesn’t change but as soon as it loses a much higher amount of TARGET2 assets, it’s Net Asset Position goes hugely negative – working against Germany’s philosophy of being a net creditor of the rest of the world.

    Germany’s TARGET2 balance is around €465bn and can potentially become large if everyone starts shifting funds into German banks.

  113. Sergei,

    “And what if you miss that issue of newspaper? What will change for your life?”

    No I don’t miss such news!. Frequently central banks are criticized for not managing their foreign reserves and not intervening well. Let’s not behave as if foreign assets are worthless.

    “I just say the argument while technically correct is fishy from economic point of view. ”

    Not at all. And when I say agreed I meant, it’s effects may not be immediate. Both technically and economically correct. Foreign assets are a part of a nation’s wealth.

    “I do think that eventually it will be Target2 what will be responsible for the collapse of eurozone.”

    Not suggesting that TARGET2 will be responsible. Suggesting TARGET2 setup will make Germany’s position post crisis worse.

    Think about this – when there is a “flight to quality”, the (re)patriation of funds leads to an exchange rate appreciation. Here Germany is unwittingly promising an undervalued exchange rate till financial institutions are able to shift funds.

    Anyway, I too am enjoying.

  114. Vimothy,

    I guess what you are asking is that if there is no transfer of real resources involved, what is the problem?

    I don’t know how to answer that except saying that I think in terms of flows, assets and liabilities. So I guess a reduction of foreign assets leads to a reduction of claims on future resources?

  115. JKH,

    There is something about interest on TARGET2 balances of NCBs at the ECB.

    The Eurosystem does a pooling of “monetary income” and this is distributed across NCBs as a proportion of their capital key, I think.

  116. R.,


    “Proportion” is the operative concept.


    (I think) Bundesbank net credit risk on its own TARGET2 surplus balance is in some sense its TARGET2 nominal balance minus Bundesbank’s own proportion or capital key share of liability for credit risk for the system as a whole as applied to that balance. I.e. it won’t net lose what it is itself net liable for.

    Or maybe I misinterpreted your point.

  117. R.,

    Probably ignore what I wrote.

    These break up scenarios are very assumption specific.

    Not easy to generalize.

  118. JKH,

    I was talking of something slightly different.

    Actually I thought Bundesbank’s balance at ECB was earning interest which will be distributed to the German government but I guess it’s not the case. This is because this is pooled and the whole €465bn or whatever earns nothing!

    Is that right?

  119. You should also check the same post at IEblog – the guy has become more prickly. Trying to show off blog commenting cannot match up to academia.

  120. Ramanan,

    I haven’t checked the detail.

    But I would have thought that in the normal course of a functioning Euro system, surplus TARGET balances should earn something around the policy rate and deficit balances pay similar. It’s supposed to be a “neutral” clearing system for inter-NCB reserve balance mismatches in that sense. And I would have thought that the interest margin effect on the ECB books as the clearing point for TARGET would be pretty much a wash in that sense. (Not sure about bid/offer differences, etc.) That’s with a normal functioning system.

    It sounds like what you’re saying is that the payment of interest on the TARGET balance is not explicit. But it seems to me there must be some allowance in order for the Bundesbank to make up the interest revenue it has lost by unwinding refinancing assets it previously held as lending to the German banks, pre the development of TARGET imbalances.

    But then maybe you’re saying that first order NCB interest margins aren’t even a concern in the EZ system, because everything is done at a higher level. Yet in a balanced system with no TARGET imbalances, doesn’t the Bundesbank earn revenue directly on its refinancing assets?

    You’ve looked into this more than I have.

    In the event of a break-up of the Euro, I would think credit risk for TARGET surpluses would be on the table and all bets are off.

  121. R.,

    Holy smokes. Still going on there.

    From the comments there, an ECB document quote:

    “A daily net balance vis-à-vis the ECB is derived from the TARGET2 settlement balances between the central banks of the ESCB. This balance is generally remunerated at the respective interest rate for the main refinancing operations.”

    Seems straight forward enough.

    Looks like a terribly convoluted discussion continuing there though.

    RE says:

    “As you say, Germany might lose its TARGET2 claim if the eurosystem vanished, but note that it would also lose according to its capital key if just Greece defaulted on its debt to the eurosystem. If Germany left the eurosystem, then presumably the eurosystem’s other members would have to either pay Germany off, or negotiate gradual repayment of its TARGET2 claim.”

    Something along the lines of what I said. The credit risk outcome depends on the particular scenario – e.g. Greek default versus full Euro system collapse.

    This guy Karl Whelan is unbelievable. It’s not atypical or even unreasonable for bloggers to repel commenters who disagree with them, but his style is very poor. I think both you and RE were quite courteous in your initial engagement. If he’s going to post on technical issues, he should be prepared for people who’ve done their technical homework. Quite insecure on his part, I’d say, and perhaps with good reason.

  122. BTW, his hangup with whether TARGET balances are classified as loans or not is quite immaterial; they’re credit and debit balances with similar money characteristics to revolving lines of credit for an indefinite duration – and they definitely take on the risk characteristics of loans if you start analyzing credit risk contingencies under various Euro default or break up scenarios

  123. JKH,

    I think the TARGET balances are paid at the main refinancing rate and opposite for negative balances. So Bundesbank is earning on them. However, there is a pooling of income and then this is distributed to all the NCBs. So Bundesbank is not really making all the interest, because some of it is given back .. or most – questions along those lines.

    Of course, this is of minor concern to me (more of a digression) because the asset itself is lost even if it making low returns in the scenarios in my thoughts.

  124. “BTW, his hangup with whether TARGET balances are classified as loans or not is quite immaterial; they’re credit and debit balances with similar money characteristics to revolving lines of credit for an indefinite duration – and they definitely take on the risk characteristics of loans if you start analyzing credit risk contingencies under various Euro default or break up scenarios”


    Yes, we were all making technical arguments and he simply couldn’t handle the arguments.

    He called me an “an arrogant anonymous poster” privately!

  125. R–It seemed to me that Whelan was saying that those flows do not correspond to any underlying resources (e.g. his comment on CB assets not being a good way to think about national wealth).

    But if they in fact represent (some part of) an EZ current account deficit with respect to Germany, then that statement is surely unambiguously wrong (although I’m very rusty on this sort of stuff).

    I was going to say that it’s a pity that Whelan never addressed this argument explicitly, but then Nick Rowe appeared in the comments and asked him.

  126. Scott,

    Yes, one of those cases where manners are so bad, it almost obscures the more terrifying possibility that he really doesn’t know what he’s talking about, at least to the degree the manner strongly implies about self-regard for total mastery of the subject matter.

  127. Ramanan,

    Good report by Goldman.

    Although I think the way they’ve said this at the end is actually wrong:

    “By increasing its liquidity provision to Euro-zone banks, the European System of Central Banks (ECB plus national central banks) also inevitably increased the credit risk it faces, despite the various haircuts the ESCB applies to the collateral that is pledged. As the ECB has increased its funding to peripheral banks in particular, the risks the ESCB faces is also more concentrated in that region.The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not. The rise in TARGET2 imbalances has increased the risk for core central banks only to the extent that without these imbalances the liquidity provision of peripheral banks would have been smaller. But it is not clear to what extent the liquidity provision to peripheral banks would have been any smaller without the TARGET2 imbalances. After all, it is the repo operations (whether full allotment or not) and the collateral regime that decide on the size of the liquidity provision.Put differently, it was the decision to replace private funding through central bank liquidity that increased the risk the ESCB faces and not the fact that TARGET2 facilitated transfers from peripheral countries to the core. As long as peripheral central banks are able to replace private funding—and the limiting factor here is the amount of collateral that can be pledged—there is no additional risk due to TARGET2 imbalances.However, central banks in the core countries face one specific risk that can be traced back to the TARGET2 imbalances, and this refers to the possibility that a country might decide to leave the Euro area. In such a scenario, the net claims the remaining central banks have acquired vis-à-vis that country reflect a genuine risk that would not exist without these imbalances. This could in the extreme case of a total break-up of the Euro area, and assuming that the peripheral central banks could not repay their liabilities, mean that the losses would materialise on the Bundesbank’s balance sheet.Overall, barring any collapse of the Euro-zone, TARGET2 imbalances do not reflect an additional risk for core central banks. It is only if one or several countries were to decide to leave the Euro area that the imbalances would lead to potentially significant losses beyond the risk already reflected in the current generous liquidity provision through the ECB.”

    They seem to be saying there’s a counterfactual whereby peripheral banks could have relieved their liquidity pressures by other forms of central bank borrowng. But that’s incorrect. Given net capital flows, the central banks themselves must also adjust their relative reserve positions, and that requires a mechanism to resolve inter-CB reserve imbalances. And that requires a specific clearing system to do that. And that system is TARGET. It can’t be done without such a system if there is a net capital flow imbalance. If what he’s saying is that the same credit risk could have built up without net capital flow dislocation, that’s OK. But I’m not sure that’s what he’s saying. TARGET is required for the reserve dislocation that results from net private capital flows.

    Also, there’s a general false meme about TARGET that is common to both Goldman here as well as critics of Sinn. The false idea is that “there’s no risk unless there is risk”. That’s a redundant expression of risk logic, of course. Its the incipient privately unfunded net capital flows that reflect emerging pressures in credit risk maldistribution. I.e. net capital flows that can’t be financed privately are a sign of creeping risk even in the first instance. That’s in the nature of continous risk measurement. As it builds from the outset, the risk increases, based on EZ default and break up scenarios that are associated with that risk. There is no binary break point where risk “suddenly” appears due to TARGET imbalances. It’s a continous function. That’s possibly nit picky on my part, but its an important principle of risk measurement.

    (A minor point is that these reports tend to attribute TARGET imbalances to the failure of core commercial banks to finance their peripheral counterparts in the interbank market. That’s true to a degree, but the net position also reflects the failure of significant non-bank private sector players to continue to fund the periphery – e.g. core pension funds who pull back. The net reserve effect etc. is the same. For some reason, people tend to attribute reserve affecting activity to banks only – we’ve seen that in standard MMT descriptions, quite apart from the TARGET issue, as well.)

  128. JKH,

    I liked it and in fact wrote to the author to get the original and he was generous.

    Having said that, I fully agree with your point about non-private banking unable to fund themselves causing banks themselves to be in the position they are in now.

    The governments themselves saw losing foreign creditors losing interest. Recently I saw a graph on holding of government bonds by foreigners (which would comprise mostly foreigners inside the Euro Area, my judgement) and how it has shifted downward during the crisis. And of course private sector securities would also have suffered similar fate. Will try to find the graph. (But shouldn’t be surprising to you, given what you wrote)

    Before the crisis, home bias in portfolio preference went down as financial markets started investing outside their homes and when crisis hit, they moved funds back home.

    And I would read your comment from down to up and say that this caused the central banks to accommodate the needs of banks because in “good times” banks wouldn’t need to borrow much from other banks outside the country but since crisis hit coupled with the fact that banks have counterparty limits (which would have tightened during the crisis), the Eurosystem necessarily had to step in.

    However I think GS does go into that a bit not in the ending part, though

    GS: “Another possible scenario leading to funding strains for
    bank periphery is if deposits are withdrawn and
    transferred to bank core as depositors question the
    solvency of bank periphery. The underlying flows in this
    ‘capital flight’ scenario are identical to what is displayed
    in Table 3, and central bank core again acquires in that
    scenario a claim on central bank periphery, i.e., a
    TARGET2 imbalance opens up.”

    Overall, I would say that this one was better than other Sinn bashers and the author correctly avoids referring to anyone and simply states his views.

    Also better than Buiter who wasted a lot of ink with painful notations/unnecessary formulae.

  129. More thoughts:

    I guess what you are saying is that most of the analysis indirectly blame the banks for the TARGET imbalances rather than blaming the cross-border flow of funds which actually led to the imbalances.


    “GS: “Another possible scenario leading to funding strains for …”

    is still weak because it included capital flight only for “deposit flows”, not for transactions involving pension funds selling assets (non-bank marketable securities) and shifting them back home.

  130. Sergei,

    Yeah GS chief economist Jan Hatzius is well aware of sectoral balances and imbalances. He had an article titled “The Un-Godley Private Sector deficit” once (early-2000s) and very well forecasted the coming recession around 2007, when the private sector expenditure was falling relative to income as the private sector debt started becoming unsustainable.

  131. Ramanan,

    Goldman does note net private capital flight on gross capital account as a distinct contributor to the problem, separate from current account imbalances. No problem there.

    From Goldman:

    “The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not.”

    That is correct insofar as the Eurosystem is designed such that the distribution of loss absorption in the normal course is independent of the distribution of loss origination. E.g. it’s designed such that losses on the books of the Greek NCB get allocated out pro rata regardless of the fact that they originated in Greece.

    But the fact of increasing net private capital flight is symptomatic of increasing risk in the very structural sustainability of the zone itself, specifically reflecting increasing risk origination in those parts from which capital is fleeing – e.g. Greece. TARGET imbalances are a direct manifestation of that net capital flight from more risky to less risky parts of the zone. As that risk distribution becomes increasingly skewed, it is indicative of the condition that the sustainability of the Eurozone itself has become more at risk – the pronounced risk skew is increasingly incompatible with the idea of intended risk sharing across the zone and the survival of that core idea of a currency union.

    And because of that increased existential risk, the normal formulaic distribution of losses itself becomes at risk. And to the degree that TARGET imbalances indicate all of that risk, including the risk to the normal loss sharing formula, there is an accompanying risk to Germany that the normal formula distribution of losses will collapse, and Germany will be on the hook for the huge build up of risk in its own TARGET balance – something that isn’t an issue in the normal course, but is an issue when capital flight and TARGET imblances reflect structural pressures on the very existence of the Eurozone.

    What Goldman is saying is true if your compare two cases – each with the same credit risk on the balance sheets of the peripheral commercial banks – but one with zero TARGET imbalances and the other with TARGET imbalances as they now exist. It is true that in the first case the system can fund the risk without resort to TARGET funding, by construction as a case of inter-NCB balance.

    But such a comparison itself is extremely unlikely in the first place. TARGET imbalances reflect capital flight that results from increasing concern about total risk build-up in the periphery.

    So TARGET imbalances are a meaningful indicator of risk in and of themselves, because of the heightened risk scenario they naturally imply, compared to a system that is still in balance from a TARGET perspective. It is reasonable to infer that the resulting maldistribution of risk indicates heightened perception of total risk. Goldman sort of recognizes this point but not in a way that acknowledges TARGET imbalances as part of the natural incremental development of overall risk in a system that might eventually collapse.

  132. JKH,

    “From Goldman:

    “The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not.””

    Yes, it is misleading to state it like the way GS did. The same was also done by the Bundesbank report on this.

    “Goldman sort of recognizes this point but not in a way that acknowledges TARGET imbalances as part of the natural incremental development of overall risk in a system that might eventually collapse.”

    Yes true. And the title of the ending you quoted originally “A genuine TARGET2 risk only in the event of a Euro area break-up” itself is kind of incorrect because the TARGET2 imbalance itself indicates a possibility of a breakup build up due to risk inherent in the whole system.

    “the pronounced risk skew is increasingly incompatible with the idea of intended risk sharing across the zone and the survival of that core idea of a currency union.

    And because of that increased existential risk, the normal formulaic distribution of losses itself becomes at risk.”

    Yes understand now better thanks to your point. When I saw Bundesbank’s analysis of the risk sharing and underplaying it by saying that it is shared etc, it confused me a bit. And almost everyone seems to be using this.

Comments are closed.