20th Annual Hyman P. Minsky Conference: Financial Reform and the Real Economy, April 13–15, 2011.There are many talks, and I have not listened to them all yet, but this is a very valuable resource.
Thursday, November 10, 2011
Talks from the 20th Annual Hyman P. Minsky Conference
There is a great set of talks here from the 20th Annual Hyman P. Minsky Conference: Financial Reform and the Real Economy (Ford Foundation, New York City, April 13–15, 2011):
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Jan said: Thanks for this great stuff lord Keynes!My hommage!BBC got lot more great things i know.
ReplyDeleteWhy does the conference seek to answer whether financial sector growth is good for the real economy?
ReplyDeleteEvery region in the world that has high industrial output - Britain, Germany, Japan,,etc - also has a large, well-developed financial sector. Every region in the world that is poor has a nonexistent financial sector. It's why many farmers in India sit on their cash savings, and have never opened a bank account or a fixed deposit.
The answer should be obvious from a simple look at the real world. Trying to pretend there is a debate here is ideology masquerading as analysis. Bah! Just another example of anti-finance political posturing typical of journalists, politicians, and English professors leaking into the sane rational field of economics.
Prateek! I haven't listened to all of the lectures, but I got the impression that it was the proper role and scale of the financial sector, not whether it should be eliminated!
ReplyDeletehttp://en.wikipedia.org/wiki/File:NYUGDPFinancialShare.jpg
Certainly the growth path of recent decades can't be sustained indefinitely.
Did you not read the agenda which asked whether "growth of the financial sector" is good for the real economy? They are clearly saying there should be a debate on what a third party's preferred size of financial markets should be.
ReplyDeleteYOUR perspective on it may be moderate. One gets the impression, however, that theirs isn't.
Either way, I don't see how you come to that conclusion from the chart. The share of finance in the economy has risen during good times for the overall economy and fallen during bad times for the overall economy. And it is still an extremely small figure. Labour's share of national income has stayed roughly constant at a steady 55-60% in 20th century United States. https://lh6.googleusercontent.com/-0bqmJRMo4Ow/TX-P4SAZhoI/AAAAAAAAAag/EmL-c0JpUUI/s320/Labor+Share.JPG
So there's no fall in wages due to finance rising, and finance's share in national income moves closely with strong performance of the economy in general. To think that any boom in the financial sector is an attack on the real economy is pure conspiracy theory, alleging financiers to be vampires out to attack industry. Sorry, but the data doesn't match.
Prateek: How were those labor share figures determined? It's a very different result than I usually find.
ReplyDeleteI wonder if Hyman Mynsky takes into account the Federal Reserve System or fractional reserve banking in his financial instability hypothesis.
ReplyDeleteOh that's right, he doesn't.
All those trillions of newly created dollars, out of thin air, much of which flooded the housing market 2001-2007 and blew up an unsustainable bubble, had NOTHING TO DO WITH THE INSTABILITY.
Why do people take these types of people seriously? They're clueless.
Minsky's FIH can be applied with equal force to the pre-Federal Reserve days of the US economy.
ReplyDeleteEver heard of the Panic of 1857; Panic of 1873; Panic of 1884; Panic of 1890; or Panic of 1893?
No doubt you will then complain about FRB being a cause. Yes, that FRB was pro-cyclical and had a role, but it is not fraudulent, and the flow of credit and quality of the loans form banks also matters (as in the FIH), so any capitalist system is stuck with FRB:
http://socialdemocracy21stcentury.blogspot.com/2011/09/if-fractional-reserve-banking-is.html
http://socialdemocracy21stcentury.blogspot.com/2011/09/mutuum-contract-in-american-law.html
http://socialdemocracy21stcentury.blogspot.com/2011/10/rothbard-mangles-legal-history-of.html
http://socialdemocracy21stcentury.blogspot.com/2011/10/if-fractional-reserve-banking-is.html
Minsky's FIH can be applied with equal force to the pre-Federal Reserve days of the US economy.
ReplyDeleteEver heard of the Panic of 1857; Panic of 1873; Panic of 1884; Panic of 1890; or Panic of 1893?
No doubt you will then complain about FRB being a cause. Yes, that FRB was pro-cyclical and had a role, but it is not fraudulent, and the flow of credit and quality of the loans form banks also matters (as in the FIH), so any capitalist system is stuck with FRB:
Lord Keynes, if you agree that the bank panics of the 19th century were brought about by FRB (or else there wouldn't be "panicking" depositors in the first place since their money would be there as in 100% reserve), then how can you possibly also say that Minsky's theory can be applied to these 19th century episodes when his theory doesn't even take into account credit expansion and fractional reserve banking?
Minsky's hypothesis just mentions debt qua debt, in three different types or uses, but not credit expansion and fractional reserve per se.
David you clearly have not read Minsky. Furthermore, your personal incredulity against FRB will get you nowhere here - we need real arguments. Sorry.
ReplyDeleteI don't get this Austrian religion.
ReplyDeleteIn the hard money regime of the European Central Bank, Ireland still had an unsustainable property bubble. What are people going to say - the Federal Reserve caused a bubble in Ireland? This is not analysis, this is religion.
We are dreaming if we believe that a bubble can not happen in a contractionary fiscal and monetary policy regime.
"if you agree that the bank panics of the 19th century were brought about by FRB"
ReplyDeleteI said the pro-cyclical nature of FRB was one factor, not the ONLY factor (as in your Austrian religion).
FRB also great advantages: the ability to expand the money supply endogenously to meet the demand for credit for the needs of trade, commerce, industry, a process which can create fiduciary media allowing a higher level of invetsment and a faster economic rate of growth.
As for the FIH, I bet you have never read any of Minsky's writing about it. In fact, you probably know nothing much about it.
If you did, you would know that Minsky DOES discuss FRB, e.g., in Can "it" happen again?: essays on instability and finance, p. 132, 234, 244.
Turner...
ReplyDeleteDavid you clearly have not read Minsky.
Clearly you have not, because clearly Minsky does not include the Fed or FRB in his theory.
Furthermore, your personal incredulity against FRB will get you nowhere here - we need real arguments. Sorry.
What's wrong with being incredulous towards FRB? That's the right thing to do.
Lord Keynes...
ReplyDeleteI said the pro-cyclical nature of FRB was one factor, not the ONLY factor (as in your Austrian religion).
First, I'm not a follower of Austrian economics. I don't follow any economics school. I take good things from every school and reject what is bad from every school. Examples are: I reject the Austrian notion that the prices of ALL goods are determined by subjectivist supply and demand. I accept the theoretical underpinnings of the Post Keynesian school of the principle of effective demand, although I don't agree with all the conclusions made from it. I accept the classical school's understanding of the vital role of capitalists, but I reject their labor theory of value. I accept the monetarist's notion of deflation and the Keynesian notion of falling aggregate demand being capable of generating widespread unemployment. I don't agree with the Austrian school that prices rapidly adjust before or as the deflation and/or fall in demand happens. There are many more. Calling me an Austrian is silly. Just because I make arguments resembling theirs in this particular thread, that doesn't mean I accept the Austrian school as such.
Second, what else besides FRB can cause bank panics and bank runs? If every bank was 100% reserve, then bank panics and runs would not happen, because every bank would have the money for their depositors.
Bank runs and bank panics occur when word gets out that a bank doesn't have the money to meet the bank's deposit obligations. But that wouldn't even be the case if the bank HAD the money to meet its deposit obligations.
Lord Keynes...
ReplyDeleteFRB also great advantages: the ability to expand the money supply endogenously to meet the demand for credit for the needs of trade, commerce, industry, a process which can create fiduciary media allowing a higher level of invetsment and a faster economic rate of growth.
How is that an advantage? Is merely getting what you want, despite the effects, always a "great advantage"? No. You're ignoring the effects unleashed by FRB.
Your comment is a fallacy. First, the mere "desire" or "want" or "need" for more credit doesn't mean that more credit should be created out of thin air to meet that demand. By that logic, if there is a demand for other people's money, then theft/fraud should encouraged and increased to meet the additional demand for money.
Individuals tend to always "desire" more money than they have or are able to earn. Money is by definition the most marketable commodity. But does that mean that the Fed should start writing checks on itself and give people more and more money made out of thin air to satisfy this practically infinite desire? No? Why not? Because of the deleterious effects right? Well, the same thing is true for credit expansion. Just like printing globs of money to meet people's demand for more money won't actually raise the general standard of living, so too will credit expansion, despite people desiring to borrow more that what would exist on the basis of voluntary savings, won't raise the general standard of living either.
Creating loans out of thin air will just increase the supply of loan money and make that loan money "cheaper" than it would be through voluntary savings alone. This doesn't generate any new additional capital goods or any new additional wealth of any kind. All it does is CHANGE the allocation of real capital that has been brought into existence through real voluntary savings, abstentions from consumption, in the past.
After credit expansion has unleashed the worst economic bubble since the Great Depression, and gave fuel to the housing bubble, encouraged by the government regulators (remember the "ownership society"?), the collapse of which has since put MILLIONS of people out of work, you're actually telling me that FRB has positive economic effects? Sure, it has positive effects for the banks, who have the government privilege of creating additional money claims out of thin air that exceed the supply of money in existence and can charge and earn more interest income on top of the interest they earn through making loans using their own money.
But should we be doing what's good for bankers and bad for the individual and thus what's bad for non-bankers, or should we do what is good for the individual, and thus what's good for everyone equally?
The negative effects of FRB on the non-banker people is confirmed theoretically and explains the economy empirically.
As for the FIH, I bet you have never read any of Minsky's writing about it. In fact, you probably know nothing much about it.
If you did actually make that bet, you'd lose, because I have read FIH. Since I have read it, I can tell you that NOWHERE is there any mention of instability brought about by FRB and its building the financial system on a deck of cards, or the Federal Reserve System that encourages it and exacerbates it. That is why it should not be taken seriously. It ignores the most fundamental cause for financial instability.
Lord Keynes...
ReplyDeleteI said the pro-cyclical nature of FRB was one factor, not the ONLY factor
How can a boom cycle be put into motion without credit expansion?
"By that logic, if there is a demand for other people's money, then theft/fraud should encouraged and increased to meet the additional demand for money."
ReplyDeleteYou're just begging the question. FRB is not fraud. Your analogy is invalid.
"Just like printing globs of money to meet people's demand for more money won't actually raise the general standard of living, so too will credit expansion, despite people desiring to borrow more that what would exist on the basis of voluntary savings, won't raise the general standard of living either."
ReplyDeleteCapitalism is a system that often has idle resources, plant/factories where capacity utilization allows them to increase production without raising prices, and economies ar eopen to international trade.
Credit expansion in such circumsatnces does increase investment, employment and output, making people wealthier.
"If you did actually make that bet, you'd lose, because I have read FIH"
ReplyDeleteWhere? Wikipedia, was it?
Have you read: Can "it" happen again?: essays on instability and finance, p. 132, 234, 244.
"If every bank was 100% reserve, then bank panics and runs would not happen, because every bank would have the money for their depositors."
ReplyDeleteYou would reduce capitalism to a system of sluggish economy growth. Modern banking is essentially FRB banking.
Bank runs and panics can be stopped with fiat money, central banks as the lender of last resort and deposit insurance for commercial banks.
The problem of bank runs was fixed a long time ago.
"By that logic, if there is a demand for other people's money, then theft/fraud should encouraged and increased to meet the additional demand for money."
ReplyDeleteYou're just begging the question. FRB is not fraud. Your analogy is invalid.
False. Even if you pretend that FRB is not fraud, then that doesn't mean that the economics effects of it are any different.
"Just like printing globs of money to meet people's demand for more money won't actually raise the general standard of living, so too will credit expansion, despite people desiring to borrow more that what would exist on the basis of voluntary savings, won't raise the general standard of living either."
Capitalism is a system that often has idle resources, plant/factories where capacity utilization allows them to increase production without raising prices, and economies ar eopen to international trade.
Red herring.
You're ignoring WHY there are "idle resources" in the first place.
Credit expansion in such circumsatnces does increase investment, employment and output, making people wealthier.
False. Credit expansion only redirects existing resources into uses that are different from it would have been had there been no credit expansion.
Idle resources are either being used for future use, or they are not valuable as they are where they are.
Not all resources should always be in use no matter what they are. When mistakes are made, it means those resources should be reallocated, not put back into the same use as before. That's status quo fallacy.
"If you did actually make that bet, you'd lose, because I have read FIH"
Where? Wikipedia, was it?
You still have not answered my question on where in Minsky's theory there is analysis of the Federal Reserve System and credit expansion leading to unstable financial systems.
Have you read: Can "it" happen again?: essays on instability and finance, p. 132, 234, 244.
Yes. Those pages do not consider the validity of the reality of the Federal Reserve System and credit expansion as generators of financial instability.
"If every bank was 100% reserve, then bank panics and runs would not happen, because every bank would have the money for their depositors."
You would reduce capitalism to a system of sluggish economy growth.
False. It is not true that free market inflation and voluntary savings financed loans would cause the economy to have "sluggish growth." It would have GREATER growth than the perpetually collapsing and wasteful credit expansion economies.
Creating more money does not produce a single new capital good, so it can't possibly grow the economy, and idle resources can be signs of previous easy credit created distortions that don't match consumer preference.
Modern banking is essentially FRB banking.
Putting "modern" in front of banking doesn't make it ethically justified, nor economically beneficial.
Bank runs and panics can be stopped with fiat money, central banks as the lender of last resort and deposit insurance for commercial banks.
The problem of bank runs was fixed a long time ago.
Bank runs and panics can be stopped with fiat money
ReplyDeleteAt the expense of everyone holding dollars.
central banks as the lender of last resort and deposit insurance for commercial banks.
Those are band-aid solutions that have EXACERBATED the business cycle caused by credit expansion.
The problem of bank runs was fixed a long time ago.
And the problem of economic booms and collapses have intensified.
"And the problem of economic booms and collapses have intensified"
ReplyDeleteFalse. See above.
"Creating more money does not produce a single new capital good, so it can't possibly grow the economy, and idle resources can be signs of previous easy credit created distortions that don't match consumer preference."
ReplyDeleteYou misunderstand the process. Credit allows investment, which creates capital goods, and that allows production of commodities.
FRB facilitates investment by credit, a process which Schumpeter understood well:
http://socialdemocracy21stcentury.blogspot.com/2011/06/schumpeter-on-fractional-reserve.html
Oh jesus.
ReplyDeleteDavid - you are obviously another Austrian who will post overly verbose responses where they are not wanted, go off on various tangents, move the goalposts and present the same arguments that were refuted in the 1930s, denying that they were refuted. You are also clearly unable to separate ideology from technocratic discussion.
I honestly can't be bothered to keep up - but I will say one thing:
'What's wrong with being incredulous towards FRB? That's the right thing to do.'
Argument from personal incredulity is a formal logical fallacy. It does nothing for your position.
"Those are band-aid solutions that have EXACERBATED the business cycle caused by credit expansion."
ReplyDeleteThat is pure nonsense.
The business cycle has become less volatile since these things have been implemented.
See the data in the appendices of D. Glasner and T. F. Cooley (eds). 1997. Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York.
Expansions have become much longer, while contractions much shorter. You no idea what you're taking about
present the same arguments that were refuted in the 1930s, denying that they were refuted
ReplyDeleteDon't be ridiculous, nobody bothered to refute anything back then. "Immediately before giving his early 1931 lectures at LSE [...] Hayek gave a one-lecture to the Keynes-dominated Marshall Society at Cambridge. [...] The members of the audience—to a man—were completely bewildered."
http://socialdemocracy21stcentury.blogspot.com/2011/05/hayek-vs-keynes-round-2-amusing-rubbish.html
Erroneous economics spreads via ignorance, so Keynesianism dominated from late 30s till early 70s, before "double-digit inflationary recession of 1973-74, followed soon by the even more intense inflationary recessions of 1979-80 and 1981-82" seemed to kill it.
http://murrayrothbard.com/the-death-of-reaganomics-keynesian-redux/
But you don't resign from economy-tsar sinecure just because your theories are rubbish, so "Keynesianism has become the pure economics of power, committed only to keeping the Establishment-system going, making marginal adjustments, babying things along through yet one more election, and hoping that by tinkering with the controls, shifting rapidly back and forth between accelerator and brake, something will work, at least to preserve their cushy positions for a few more years."
That continues to this day. No one would ever take keynesianism seriously if it did not promise all the nice cushy government positions for the legions of educated economists. As an economist, you quickly forget about any alternatives. Alternatives were "refuted" in the 30s after all ;)
100% reserve system alter nothing - unless you close the discount window at the central bank.
ReplyDeleteIf you close the discount window then banks go bust on cash flow basis not just capital exhaustion.
What 100% reservers always seem to forget is that loans aren't always repaid and banks cheat if they can get away with it (which is how FRB came about in the first place).
It's not the reserve position that matters. The problem with banks (if there is one) is their ability to lend for pure financial purposes - including purchasing their own capital stock.
Combine that with a credit licence that is relative to their 'regulatory capital' and you have a recipe for ponzi schemes.
FRB is not the problem. The terms of the licence to create money might be. A more rational system would be to put a fixed limit on the amount a bank can lend before it becomes 'full'.
"And the problem of economic booms and collapses have intensified"
ReplyDeleteFalse. See above.
No, it's true. The collapses after 1933 have gotten worse and worse, and the collapse of 2008 was the worst since the Great Depression.
"Creating more money does not produce a single new capital good, so it can't possibly grow the economy, and idle resources can be signs of previous easy credit created distortions that don't match consumer preference."
You misunderstand the process. Credit allows investment, which creates capital goods, and that allows production of commodities.
No. Wrong. Credit expansion does not bring into existence a single capital good. More credit only REDIRECTS existing capital goods into allocations that produce different capital goods and consumer goods in type and in time. Since credit expansion generates a capital allocation not consistent with real consumer preference on the basis of voluntary savings, it follows that credit expansion consumes capital, it does not produce new capital.
FRB facilitates investment by credit, a process which Schumpeter understood well:
Fallacy of authority. Schumpeter was wrong.
FRB facilitates DIFFERENT investment and DIFFERENT consumption. It does not facilitate investment per se.
Turner...
ReplyDeleteOh jesus.
Oh Mithra.
David - you are obviously another Austrian who will post overly verbose responses where they are not wanted, go off on various tangents, move the goalposts and present the same arguments that were refuted in the 1930s, denying that they were refuted. You are also clearly unable to separate ideology from technocratic discussion.
Turner, you are obviously another [Fill in hated economics school] who will post overly verbose responses where they are not wanted, go off on various tangents, move the goalposts and present the same arguments that were refuted in the 1870s, denying that they were refuted. You are also clearly unable to separate ideology from economic principles.
I honestly can't be bothered to keep up - but I will say one thing:
'What's wrong with being incredulous towards FRB? That's the right thing to do.'
Argument from personal incredulity is a formal logical fallacy.
I didn't argue from personal incredulity. I just asked what is so wrong with being incredulous towards FRB. I did not argue that FRB is wrong because I am incredulous towards it. Wow.
"Those are band-aid solutions that have EXACERBATED the business cycle caused by credit expansion."
ReplyDeleteThat is pure nonsense.
That is utter pure unequivocal unadulterated garbage nonsense.
The business cycle has become less volatile since these things have been implemented.
Apparently you have been asleep since 2008.
Expansions have become much longer, while contractions much shorter.
You're not able to understand the empirical data because you lack a rationalist foundation for your convictions.
The reason why contractions have been shorter is because the central bank kicks the can down the road as soon as the first signs of corrections needed to fix the errors caused by credit expansion begin to appear.
You saw a good example of this in 2001 as a precipitous stock market took place, which was the first sign of a general economic correction later on, but the Fed, as usual guided by an ignorant belief of how economies worked, reinflated the money supply by flooding the banks with new reserves. This forestalled the deeper correction that would have taken place, but it only kicked the can down the road, and in the process, blew up another economic bubble, this time a housing bubble. This bubble and collapse was even worse than the nasdaq bubble and collapse.
As the first signs of another, now deeper correction occurred, the Fed reinflated yet another bubble, this time not only bailing out the banks, but also sovereign states through debt monetization.
This is not a solution, it's just another band-aid that kicks the can down the road, and again, the correction is going to be even deeper than the last collapse, because now even more corrections will be required.
If you believe that stable unemployment and stable prices and stable productivity are signs that the economy is healing, or healed, then you obviously know nothing of economics. You're the same type of sheep that believed stable prices in the 1920s meant there was no collapse coming, and the same type of sheep that thought everything was fine in the early to mid 2000s, and the same type of sheep that currently believes that the needed corrections have been made.
I see you have completely abandoned claiming that I am wrong to claim that Minsky does not take into account the Fed and credit expansion in his superficial worldview. Did you look up the pages you cited and saw that I was right? (Oops, too bad I have that book!)
You remain clueless. You do not understand economics. You're too busy trying to convince yourself and others of your garbage, rather than educating yourself.
"More credit only REDIRECTS existing capital goods into allocations that produce different capital goods and consumer goods in type and in time. Since credit expansion generates a capital allocation not consistent with real consumer preference on the basis of voluntary savings, it follows that credit expansion consumes capital, it does not produce new capital."
ReplyDeleteAh, yes, the idiocy of the Austrian business cycle theory. You're wasting your time dragging this dead theory up on my blog:
http://socialdemocracy21stcentury.blogspot.com/2011/06/abct-and-idle-resources.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/natural-rate-of-interest-wicksellian.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory-and.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/misess-evenly-rotating-economy-ere-and.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory-various.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/misess-originary-interest-rate-theory.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/differences-between-mises-and-hayek-on.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/milton-friedman-on-abct.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/hayek-on-flaws-and-irrelevance-of-his.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/abct-and-full-employment.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-pure-time-preference.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
"The reason why contractions have been shorter is because the central bank kicks the can down the road as soon as the first signs of corrections needed to fix the errors caused by credit expansion begin to appear. "
ReplyDeleteSo now you amdit that "contractions have been shorter", yet you deny that in a previous comment here:
http://socialdemocracy21stcentury.blogspot.com/2011/11/talks-from-20th-annual-hyman-p-minsky.html?showComment=1321175105981#c8404432336566849881
You now contradict yourself.
"I see you have completely abandoned claiming that I am wrong to claim that Minsky does not take into account the Fed and credit expansion in his superficial worldview. "
ReplyDeleteI have done no such thing. I have better things to do with my time than continue that pointless debate.
Furthermore, on a previous thread you said you would take my advice to find something else to do with your time than spam my blog with this nonsense. Your continuing posts suggest to me you're just another troll.
"This forestalled the deeper correction that would have taken place, but it only kicked the can down the road, and in the process, blew up another economic bubble, this time a housing bubble. "
ReplyDeleteIf you had a iota of actual knowledge about Post Keynesianism you would know:
(1) the bubble economy of the last 30 years has come about by the revived neoclassical economics (or the new consensus macroeconomics, as it is called). This is not Keynesianism.
(2) Post Keynesians would use financal regulation to stop bubbles in financial or real asset prices, nor would they allow excessive private debt to soar to disastrous levels.
(3) Keynes himself warned about the danger of asset bubbles: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.” The General Theory of Employment, Interest and Money, p. 142.
(4) Keynesianism is about using fiscal policy to achieve high employment and economic growth, not about creating asset bubbles fuelled by private debt.
(1) the bubble economy of the last 30 years has come about by the revived neoclassical economics (or the new consensus macroeconomics, as it is called). This is not Keynesianism.
ReplyDeleteAgain you're ignoring the Fed and credit expansion and kicking the can down the road.
(2) Post Keynesians would use financal regulation to stop bubbles in financial or real asset prices, nor would they allow excessive private debt to soar to disastrous levels.
Regulators wanted the housing bubble.
Regulations are not better at predicting bubbles than market actors.
Regulators cannot know what constitutes "excessive" versus what constitutes "not excessive" credit expansion. No Post Keynesian has ever defined it.
"Soar", "disastrous", these words are hyperboles that mask the necessary fact that you are claiming that regulators can KNOW when credit expansion gets to "dangerous" levels, versus "safe" levels. But they don't know.
Regulators wanted the housing bubble! How can you say that regulators can stop it?
(3) Keynes himself warned about the danger of asset bubbles: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.”
Ooooh, "warnings" from a contradictory muddleheaded bureaucrat.
Sure, Keynes "warned" of speculators on one page of the GT, but then on another page he wrote about the central bank lowering rates every time a bust occurs after a boom, thus keeping the economy in a "quasi" boom. He wasn't worrying about speculation and bubbles then.
(4) Keynesianism is about using fiscal policy to achieve high employment and economic growth, not about creating asset bubbles fuelled by private debt.
Keynesianism is also about lowering interest rates and expanding credit and inflation.
"Regulators wanted the housing bubble! How can you say that regulators can stop it?"
ReplyDeleteThat recent regulators influenced by neoclassical economics did not intervene to stop the housing bubble of the 2000s or the tech bubble of the 1990s is no surprise and refutes nothing I have said.
More traditional regulators, say, influenced by Keynesianism (like William Black over at New Economic Perspectives) would have taken action to stop these bubbles and the collapse of lending standards, and sheer fraud that was manifest in things like Liar's loans and NINJA loans.
"Keynesianism is also about lowering interest rates and expanding credit and inflation."
ReplyDeleteCredit which must be directed to creditworthy businesses for investment in capital goods or creditworthy individuals for consumer loans, not to speculators inflating asset prices.
"Sure, Keynes "warned" of speculators on one page of the GT, but then on another page he wrote about the central bank lowering rates every time a bust occurs after a boom, thus keeping the economy in a "quasi" boom."
ReplyDeleteThat is because he wanted financial regulation to stop asset bubbles. You're talking nonsense.
David, I happen to be in the same universe as Lord K & others. In mine, Minsky has a lot to say about "fractional-reserve" banking & credit expansion.
ReplyDeleteThe collapses after 1933 have gotten worse and worse As Minsky points out, there were no collapses, no financial instability to speak of, for decades after 1933. It was by far the financially stablest period since we stole the country from the Indians. In more recent decades financial instability has grown, as Minsky predicted, and as the New Deal structures were progressively dismantled, completely contrary to Minsky's advice. A well-understood, well-regulated "FRB" system, by allowing capitalistic flexibility of credit/money creation, but central government countercyclical, anti-fraud, regulation & control makes for a more stable structure. Unfortunately economics & understanding went backwards for most of the decades after the 40s.
You seem to be opposed to the idea of money being created out of thin air. But that is how every unit of money that has been or ever will be is created. If not out of thin air, where does money come from? Was it created by God when he created the universe? - What Abba Lerner called "the immaculate conception of money" theory? Money is a relationship between two economic actors. How can a relationship be created other than "out of thin air"?
Is David Major_Freedom, by any chance?
ReplyDeleteKeynes wanted permanently low interest rates, not demand management.
David until you respond to these criticisms of ABCT, there is no point. Please respond, yourself without linking to articles from Mises.org:
- How do you deal with Pierro Sraffra's refutation of a natural rate of interest, with which I'm sure you're familiar?
- How do you explain the Melbourne Land Crisis of 1871?
- How do you explain the tulip bubble, which occurred under 100% reserve banking?
- How do you explain why no country has ever been successful by following 'free market' policies to the extreme?
"Keynes wanted permanently low interest rates, not demand management."
ReplyDeleteTurner,
As an interesting point on this subject, Keynes expressed sympathy with Abba Lerner's demand management interpretation of his theory:
http://socialdemocracy21stcentury.blogspot.com/2010/09/would-keynes-have-endorsed-modern.html
Despite intial criticism,
"... Keynes retracted his initial remarks about Functional Finance. In 1945, when Keynes again visited the United States, he repeated his praise of Lerner at another Federal Reserve Seminar. In this meeting Keynes spoke in glowing terms of Lerner’s contribution and ‘without any provocation, he held forth a panegyric on Functional Finance’"
David Colander, “Was Keynes a Keynesian or a Lernerian?” Journal of Economic Literature 22.4 (1984): p. 1574.
P.S. David, simply mimicking my response might do well at school but it will not suffice here. It says a lot about your character and, I suspect, your age.
ReplyDeleteLK,
ReplyDeleteThat is interesting. Geoff Tily argues convincingly that Keynes mostly opposed base rate manipulation - the UK rate was at 2% from the early thirties until the first post war conservative government came into power, after he died.
I will read Lerner, though.
"Regulators wanted the housing bubble! How can you say that regulators can stop it?"
ReplyDeleteThat recent regulators influenced by neoclassical economics did not intervene to stop the housing bubble of the 2000s or the tech bubble of the 1990s is no surprise and refutes nothing I have said.
Almost the entirety of the Keynesian school economists were not calling for higher interest rates or lower government spending when the housing bubble was being blown up.
More traditional regulators, say, influenced by Keynesianism (like William Black over at New Economic Perspectives) would have taken action to stop these bubbles and the collapse of lending standards, and sheer fraud that was manifest in things like Liar's loans and NINJA loans.
"Would have" is wishful thinking.
"Keynesianism is also about lowering interest rates and expanding credit and inflation."
Credit which must be directed to creditworthy businesses for investment in capital goods or creditworthy individuals for consumer loans, not to speculators inflating asset prices.
The government does not control where credit is allocated when they call for credit expansion from the banks. It's the credit expansion itself. And speculation is not inherently destructive.
"Sure, Keynes "warned" of speculators on one page of the GT, but then on another page he wrote about the central bank lowering rates every time a bust occurs after a boom, thus keeping the economy in a "quasi" boom."
That is because he wanted financial regulation to stop asset bubbles.
Regulators can't stop asset bubbles. They cannot know when credit expansion goes from not enough to just right to too much. You're talking nonsense.
Calgacus...
ReplyDeleteDavid, I happen to be in the same universe as Lord K & others. In mine, Minsky has a lot to say about "fractional-reserve" banking & credit expansion.
Too bad your universe is not this one then.
You tell me where in Minsky's financial instability hypothesis he takes into account the instability generated by the Federal Reserve System and credit expansion.
The collapses after 1933 have gotten worse and worse As Minsky points out, there were no collapses, no financial instability to speak of, for decades after 1933.
Well, the Fed was somewhat restrained all the way up until 1971, when the last ties to gold were abandoned. Financial instability has exponentially increased since then.
It was by far the financially stablest period since we stole the country from the Indians. In more recent decades financial instability has grown, as Minsky predicted, and as the New Deal structures were progressively dismantled, completely contrary to Minsky's advice.
Which New Deal structures? Glass-Steagall? LOL, most of the financial institutions that had problems during and after the collapse weren't even subject to the repeal of Glass-Steagall.
A well-understood, well-regulated "FRB" system, by allowing capitalistic flexibility of credit/money creation, but central government countercyclical, anti-fraud, regulation & control makes for a more stable structure. Unfortunately economics & understanding went backwards for most of the decades after the 40s.
Regulations cannot stop the negative effects of credit expansion. Regulators can't predict the future. Putting "well-understood" and "well-regulated" in your arguments doesn't give the government magical powers.
You seem to be opposed to the idea of money being created out of thin air.
No, it's more nuanced. I am opposed to the idea of the government enforcing a oligopoly on money production through violence, i.e. taxation in US dollars and legal tender laws.
If money production were open to competition, then I would support anyone trying to create any money out of thin air, in any amount they want. I would also be in favor of banning contractual fraud brought about by FRB, which generated more than ownership claim to the same dollars.
But that is how every unit of money that has been or ever will be is created.
False. Money hasn't always been created out of thin air.
If not out of thin air, where does money come from?
Money comes from the market process. Some commodities in the market process become more marketable than other commodities for indirect exchange. The most marketable commodity for this purpose is where money comes from. Historically, economically, and even electro-chemically, gold is the money of choice because it best satisfies the requirements of what makes a commodity a "good" money. Ultimately all money has to have ultimate value as a consumer good, and will eventually be priced that way, regardless of there is fiat laws or not. The market always wins in the long run.
The best money is rare, highly valued, durable, homogeneous, and able to be separated without losing value per unit.
Was it created by God when he created the universe? - What Abba Lerner called "the immaculate conception of money" theory?
Abba Lerner the socialist? LOL, he wouldn't know economics if it bit him in the ass.
Money is a relationship between two economic actors.
No, money is a universally accepted medium of exchange. It is not specific to only two parties at specific times and places.
How can a relationship be created other than "out of thin air"?
Money is not a relationship. Money is a commodity.
Turner...
ReplyDeleteKeynes wanted permanently low interest rates, not demand management.
Permanently low interest rates will eventually lead to hyperinflation, because the central brings interest rates down by inflating bank reserves.
David until you respond to these criticisms of ABCT, there is no point.
Which criticisms? The ones LK linked to? I'd rather have someone explain in their own words what these criticisms are. Anyone can hand wave and divert attention to other sources. I could just as easily link to all kinds of sources that have refuted all these alleged criticisms of ABCT.
- How do you deal with Pierro Sraffra's refutation of a natural rate of interest, with which I'm sure you're familiar?
Easy. There doesn't need to be a single natural rate of interest. There can be a spectrum of natural interest rates. Credit expansion reduces this spectrum from where it otherwise would have been.
ABCT is not refuted on the basis that there were and are many different below market mortgage rates for different borrowers, locations, and housing types. Think of a bell curve type distribution of interest rates. Credit expansion shifts the curve to the left, meaning lower rates on average.
- How do you explain the Melbourne Land Crisis of 1871?
How is a historical event a criticism of any theory, let alone Austrian theory specifically?
Why am I having to defend some of the truths of the Austrian school? What's with you people? I'd rather attack the falsehoods and defend the correct arguments for all economic schools, Austrian included.
- How do you explain the tulip bubble, which occurred under 100% reserve banking?
Read Doug French's article on the tulip bubble. The tulip bubble was not a general economic bubble. It was a sector specific bubble brought about by an influx of specie from abroad.
100% reserve doesn't stop influx of money from abroad. It just ensures that every checking account is backed by money, thus preventing multiple ownership claims to the same money, and avoids credit expansion business cycles.
- How do you explain why no country has ever been successful by following 'free market' policies to the extreme?
Same reason why no country has ever been successful under statism.
My standards of what constitutes success are higher than yours.
No country has ever had zero rape, zero murder, and zero theft as well. Does that mean that we should conclude that rape, murder and theft are required for economic growth or growing standards of living? Don't be silly.
Pleading to history for proof is false when the subject matter are beings that can choose. A being that has the capability of choosing should be treated using rationalism, not historical data of what it happened to have chosen in the past.
If the year were 1000 AD, and the world always had slavery everywhere since the dawn of man, would it make any sense to say "Why hasn't there ever been a successful country that didn't have slavery? Obviously slavery is beneficial and leads to healthy economies!"
Turner...
ReplyDeleteP.S. David, simply mimicking my response might do well at school but it will not suffice here. It says a lot about your character and, I suspect, your age.
I do that when the content of arguments are nothing but antagonisms devoid of substance, that can apply to anyone's arguments about anything. Since you are again engaging in nothing but antagonism devoid of substance of actual arguments, I will say
P.S. Turner, simply complaining about mimicking of your response might do well at school but it will not suffice here. It says a lot about your character and, I suspect, your age.
"Almost the entirety of the Keynesian school economists were not calling for higher interest rates or lower government spending when the housing bubble was being blown up. "
ReplyDeleteThat is because financial regulation and controls on the standard of bank lending can stop bubbles without having to adjust interest rates or fiscal policy, idiot.
"Regulators can't stop asset bubbles. They cannot know when credit expansion goes from not enough to just right to too much. "
It's not about the amount of credit per se. It is about the flow of credit, and the purposes credit is used for. The view that asset bubbles cannot be prevented is garbage, pure and simple.
"And speculation is not inherently destructive."
ReplyDeleteRed herring. I never said "all forms of speculation serve no useful purpose or all forms just result in asset bubbles."
'Permanently low interest rates will eventually lead to hyperinflation, because the central brings interest rates down by inflating bank reserves.'
ReplyDeleteReally? I didn't see much hyperinflation post WW2 (even if you attribute the 1970s inflation to low interest rates, it wasn't hyper).
I meant the criticisms I made that followed.
'Easy. There doesn't need to be a single natural rate of interest. There can be a spectrum of natural interest rates. Credit expansion reduces this spectrum from where it otherwise would have been.
ABCT is not refuted on the basis that there were and are many different below market mortgage rates for different borrowers, locations, and housing types. Think of a bell curve type distribution of interest rates. Credit expansion shifts the curve to the left, meaning lower rates on average.'
But you will surely nullify investments that would otherwise have been 'sound' in the process of shifting the curve to the right. There will also be misallocation in some sectors under all levels (if you assume the ABCT theory of the interest rate, of course).
'100% reserve doesn't stop influx of money from abroad. It just ensures that every checking account is backed by money, thus preventing multiple ownership claims to the same money, and avoids credit expansion business cycles.'
But if 100% reserve doesn't stop bubbles and business cycles then what is the point of it? Wasn't that the justification Rothbardians had for it?
'How is a historical event a criticism of any theory, let alone Austrian theory specifically?'
Because empirical evidence demonstrates whether or not a theory is sound? The Melbourne Land Crisis suggests Hayekian banking systems are vulnerable to severe crashes.
'No country has ever had zero rape, zero murder, and zero theft as well. Does that mean that we should conclude that rape, murder and theft are required for economic growth or growing standards of living? Don't be silly.'
This and your slavery comparison are simply false analogies. There is no causal link between these things and economic growth, where is there is a clear case that well defined property rights, limited liability laws and various other state defined institutions affect economic growth substantial.
David(?):
ReplyDeleteIf money production were open to competition, then I would support anyone trying to create any money out of thin air, in any amount they want. I would also be in favor of banning contractual fraud brought about by FRB, which generated more than ownership claim to the same dollars.
Leaving aside your willful misunderstanding of what a demand deposit is, I find it self-defeating that you would support "anyone trying to create money out of thin air, in any amount they want" but then rail on about fractional reserve banking's supposed fraud. A bank's ability to create money in any amount would permit them to fully cover all money deposited and continue to lend - which is essentially how our current system operates - without tripping the "multiple claims" alarm, even while using your preferred "safe deposit" view of demand deposits.
Money is not a relationship. Money is a commodity.
Money is not always a commodity. Capitalism tends to gravitate towards that arrangement, but money is not exclusively a capitalistic phenomenon, and history demonstrates that social arrangements of debt precede commodity money. David Graeber recently authored a book that delves into the matter in great detail.
Permanently low interest rates will eventually lead to hyperinflation, because the central brings interest rates down by inflating bank reserves.
For this to make sense, you're going to have to demonstrate a causal relationship between the rate of price inflation and the quantity of bank reserves. In reality, we can't even correlate the two effectively since QE began; we are talking an R^2 well below .1, here.
This is why it is critical to understand the endogenous nature of credit money.
Why am I having to defend some of the truths of the Austrian school? What's with you people? I'd rather attack the falsehoods and defend the correct arguments for all economic schools, Austrian included.
Wait, why are you annoyed about being asked to defend an argument if defending arguments is what you'd "rather" be doing? You are ever the riddle.
"Almost the entirety of the Keynesian school economists were not calling for higher interest rates or lower government spending when the housing bubble was being blown up."
ReplyDeleteThat is because financial regulation and controls on the standard of bank lending can stop bubbles without having to adjust interest rates or fiscal policy
False. Regulations cannot stop bubbles, not only because the problem is CAUSED by the low interest rates and credit expansion, but also because regulators do not have the requisite information to know when credit expansion goes from "not enough" to "just right" to "too much."
Regulators are not Gods.
"Regulators can't stop asset bubbles. They cannot know when credit expansion goes from not enough to just right to too much. "
It's not about the amount of credit per se.
You just contradicted yourself.
It is about the flow of credit, and the purposes credit is used for.
That's socialism. LOL, if it's about uses only, then credit expansion is not even needed. Low interest rates are not needed. The government can just borrow and spend into whatever pet projects they want.
Oh, but that would raise interest rates in the absence of credit expansion wouldn't it? That's why you want credit expansion? To enable the state to keep borrowing at low rates?
The view that asset bubbles cannot be prevented is garbage, pure and simple.
I didn't say that asset bubbles cannot be prevented. They can be prevented, by ending credit expansion.
I said that REGULATORS cannot prevent bubbles, as long as credit expansion takes place, for they cannot know what the true consumer intertemporal preferences are either, since regulators also cannot observe market interest rates. They are just as blind as investors.
"And speculation is not inherently destructive."
Red herring. I never said "all forms of speculation serve no useful purpose or all forms just result in asset bubbles."
Red herring. I never said you said all forms of speculation serve no useful purpose.
I said that speculation is not inherently destructive, which means ANY AND ALL forms of speculation are not inherently destructive, contrary to your claim that SOME speculation is destructive.
You believe regulators are all knowing Gods, yet they are the same mortal humans that make up the population of economic actors that you claim cannot help but engage in destructive behavior. Well, if they are so subject, then so are regulators.
"I said that REGULATORS cannot prevent bubbles, as long as credit expansion takes place, for they cannot know what the true consumer intertemporal preferences are either, since regulators also cannot observe market interest rates."
ReplyDeleteThe idea of a "natural interest rate" is nonsense. There is no such thing. As for "market interest rates" (which presumably means interest rates in a totally unregulated 100% reserve banking system), such rates would not prevent bubbles at all. Money could flood in via a nation's capital account and be used for speculative purposes to bid up asset prices.
The "true" consumer preferences of a large number of people might be to borrow money and inflate the prices of houses, causing a bubble. That doesn't mean it should happen at all. Your point is invalid.
Turner...
ReplyDeleteReally? I didn't see much hyperinflation post WW2 (even if you attribute the 1970s inflation to low interest rates, it wasn't hyper).
I said permanently low interest rates. I didn't say post world war 2 interest rates.
ABCT is not refuted on the basis that there were and are many different below market mortgage rates for different borrowers, locations, and housing types. Think of a bell curve type distribution of interest rates. Credit expansion shifts the curve to the left, meaning lower rates on average.'
But you will surely nullify investments that would otherwise have been 'sound' in the process of shifting the curve to the right.
Exactly, which is why I say don't use controls to shift the curve at all. Let the individuals using the market process decide what rates should be. That way, you're not killing legitimate investments by forcing the curve right, and you're not generating malinvestments by forcing the curve left.
Don't use force. Let all individuals produce, coin, distribute, and use whatever money they want.
There will also be misallocation in some sectors under all levels (if you assume the ABCT theory of the interest rate, of course).
I don't know what you mean by "assume the ABCT theory of the interest rate." I can assume anything I want regarding natural interest rates, and still let others determine what interest rates should be for themselves using the market process, and I will not bring into existence any "misallocation".
But if 100% reserve doesn't stop bubbles and business cycles then what is the point of it?
It will stop the credit expansion business cycle.
The fact that laws against murder can't stop all murder 100% of the time, doesn't mean that there is "no point" of laws against murder.
Your standard should be what's relevant to mankind, not Gods.
Turner...
ReplyDeleteWasn't that the justification Rothbardians had for it?
No. Rothbardians do not hold that 100% reserve will eliminate money influxes and consequent temporary booms. They hold that 100% reserve will eliminate credit expansion business cycles, and minimize money influx booms.
Because empirical evidence demonstrates whether or not a theory is sound?
But you're already using a theory when you interpret the data of Melbourne 1871. You're not taking that data as somehow manifesting a theory on its own, which supposedly proves the theory you are attaching to it.
It is impossible to analyze any historical data without a pre-existing theory.
So when you say "Because empirical evidence demonstrates whether or not a theory is sound" what you are really saying is "I believe my theory is correct for reason X, AND I believe my theory is consistent with the historical data."
Economics is not an historical, science like chemistry or physics. The subject matter thinks and acts. You cannot find any constancies using history for a thinking entity.
Economics is like math and logic. They are not justified or refuted empirically by history either.
So I would like for you to show how the data of Melbourne 1871 show anything for or against anything about ABCT.
The Melbourne Land Crisis suggests Hayekian banking systems are vulnerable to severe crashes.
How so?
This and your slavery comparison are simply false analogies.
How are they false? They use the same logic as you used!
There is no causal link between these things and economic growth
But that is the exact same argument I am making about countries not on a free market! There is no causal link between anti-free market economies and prosperity. There are no empirical examples in the world of a free market, so asking me to justify my argument by showing you an example of a free market, is JUST LIKE you asking me to show you an example of a murder free society if I think no murder is so beneficial.
, where is there is a clear case that well defined property rights, limited liability laws and various other state defined institutions affect economic growth substantial.
And what case is that? Suppose that we lived in a world where history was no well defined property rights, no limited liability laws, and there were different states that imposed different institutions.
Would you say that we could not know that establishing just property rights, limited liability, etc, would maximize economic growth?
"I said permanently low interest rates. I didn't say post world war 2 interest rates."
ReplyDeleteGive one example of a country with "permanently low interest rates" that had hyperinflation. And don't refer to countries where budget deficits were monetized, because that was not your claim above.
Give us one shred of empirical evidence for your claims.
"Economics is like math and logic. They are not justified or refuted empirically by history either."
ReplyDeleteYour comments on this blog are packed with empirical examples of past economic events. You're crashing and burning.
"That way, you're not killing legitimate investments by forcing the curve right, and you're not generating malinvestments by forcing the curve left."
ReplyDeleteThis is derived from the absurd attempt to analyse interest rates in natura (as if loans were conducted solely in commodities without money). It's the same nonsensical approach of ABCT.
Once money is used for loans there is no necessary connection between money/credit available for loans and whatever real commodities are available for investment purposes in the community. There is no guarantee that borrowers will have the necessary real goods at all for investment purposes in a non-inflationary manner.
"Real" theories of interest rates are palpable nonsense.
Dennis...
ReplyDeleteIf money production were open to competition, then I would support anyone trying to create any money out of thin air, in any amount they want. I would also be in favor of banning contractual fraud brought about by FRB, which generated more than ownership claim to the same dollars.
Leaving aside your willful misunderstanding of what a demand deposit is
You mean ignoring the fact that you have not actually shown how I am wilfully misunderstanding what a demand deposit is...
I find it self-defeating that you would support "anyone trying to create money out of thin air, in any amount they want" but then rail on about fractional reserve banking's supposed fraud.
Fractional reserve banking is the creation of money claims out of thin air, after which those claims circulate as money due to legal tender laws and taxation.
I adhere to the famous dictum where everyone should be able to produce paper money, that way, nobody will accept it as money any longer.
A bank's ability to create money in any amount would permit them to fully cover all money deposited and continue to lend - which is essentially how our current system operates - without tripping the "multiple claims" alarm, even while using your preferred "safe deposit" view of demand deposits.
No, banks cannot create money for themselves. Only the Fed can do that. Banks can only create new loans based on fiduciary trust, and new claims to money.
Money is not always a commodity. Capitalism tends to gravitate towards that arrangement, but money is not exclusively a capitalistic phenomenon, and history demonstrates that social arrangements of debt precede commodity money.
You misunderstand the meaning of commodity. Social arrangements of debt are social arrangements of exchanging tangible things, which are what I am referring to when I say commodities.
Dennis...
ReplyDeleteDavid Graeber recently authored a book that delves into the matter in great detail.
David Graber didn't prove what he thinks the data proves.
Permanently low interest rates will eventually lead to hyperinflation, because the central brings interest rates down by inflating bank reserves.
For this to make sense, you're going to have to demonstrate a causal relationship between the rate of price inflation and the quantity of bank reserves. In reality, we can't even correlate the two effectively since QE began; we are talking an R^2 well below .1, here.
No, that is not necessary. By increasing bank reserves in order to hold down interest rates, at some point, those reserves will be used as a pyramid for creating new loans. Before you start talking about the fact that banks have high reserves that are not being translated into loans, it's because the Fed is now giving bank interest to keep those reserves at the Fed, whereas before they didn't. So if BANKS had reserves in their possession, then loans would rise. This rise in loans would increase aggregate spending, and hence aggregate revenues. This will then increase aggregate profitability, which will then put forces on interest rates to rise.
To combat this rise, as is necessary in our example of the Fed seeking to hold interest rates low permanently, the Fed is going to have to increase bank reserves EVEN MORE so, exponentially more so, to keep rates down.
But that will only result in higher aggregate spending once more, and will therefore set into motion even higher market interest rates, which means the Fed will now have to increase bank reserves exponentially more once again to pull the rates back down.
As should be clearly understood by now, a policy of PERMANENTLY low interest rates will eventually result in skyrocketing aggregate spending, and eventually hyperinflation.
This is why it is critical to understand the endogenous nature of credit money.
It is precisely an understanding of it that enables one to understand how a FULLY endogenous monetary system would make hyperinflation impossible.
Wait, why are you annoyed about being asked to defend an argument if defending arguments is what you'd "rather" be doing?
I said I'd rather be attack the falsehoods and defend the truths of all economics schools, Austrian included, rather than just defend the particular truths of the Austrian school, which is what other posters here seem to want to do with me.
Lord Keynes...
ReplyDelete"I said that REGULATORS cannot prevent bubbles, as long as credit expansion takes place, for they cannot know what the true consumer intertemporal preferences are either, since regulators also cannot observe market interest rates."
The idea of a "natural interest rate" is nonsense.
How about natural interest rates with an s? Is that nonsense too?
As for "market interest rates" (which presumably means interest rates in a totally unregulated 100% reserve banking system), such rates would not prevent bubbles at all.
Money could flood in via a nation's capital account and be used for speculative purposes to bid up asset prices.
Nobody Austrian, as far as I am aware, claimed that 100% reserve would end influxes of new money and all the results of that.
They only said that it would end credit expansion business cycles.
The tulip craze wasn't an economy wide bubble, the way credit expansion generates economy wide bubbles and busts.
The influx of new money is dependent on economic productivity, if the market for money production is free.
If there is a relatively large money production cycle, then it does not follow that ONLY asset prices will be bid up, or bid up by more than consumer goods.
Inflation bids up the prices of assets relatively more than consumer goods when inflation enters the loan market first. But if money production were open to competition, there would be no necessity of this.
Money production could enter any part of the market. You'd be wrong IF you claim that influxes of money would only affect asset prices.
As new money enters the economy, once prices are bid up, there is no further fuel to bid prices up. Prices would just stabilize at higher levels than would otherwise have been the case.
Lord Keynes...
ReplyDeleteThe "true" consumer preferences of a large number of people might be to borrow money and inflate the prices of houses, causing a bubble.
No, that wouldn't cause a bubble. If real consumer demand for homes relative to other goods rises, then that will set into motion temporary profitability differences.
The demand and hence profitability of housing will rise, and the demand and hence profitability of other goods will fall (since we're holding credit expansion constant in order to understand the actual effects of changes in consumer preferences).
As the profitability of housing rises, and as the profitability of others goods falls, capital will be redirected away from other goods and towards housing (since capital is scarce as well and is a function of savings). That will reduce relative investment, and hence relative production, and thus supply, of other sectors of the economy, and increase relative investment, and hence relative production, and thus supply, of housing.
As this happens, as supply of houses rises in relative terms, the prices of houses will fall, and as the supply of other goods falls in relative terms, the prices of other goods will rise.
This will then change the relative profit rates back from the rates that existed with the original change in demands. Profits will rise back up in other sectors of the economy, and profits will fall back down in housing.
There cannot be a bubble in housing generated by real consumer demand changes, because the profitability of housing cannot keep rising and the profitability of other areas of the economy cannot also keep rising, if credit expansion is zero. Investors chase profits and avoid losses. Housing production could not keep rising the way it can with credit expansion, where a rise in the demand for housing is not offset by a fall in demand for other goods.
The demand for housing can keep rising, and the profitability in other sectors will not fall, thus leading investors to investing more and more into housing and still earn nominal profits, despite the fact that real consumer demand has not risen for houses relative to other goods.
You're conflating a change in relative demands as generating bubbles. That's silly. If consumers abstained from demanding other goods, in order to demand more housing, then that will affect the relative profits between housing and other goods, which will lead to a redirection of scarce capital away from other sectors and towards housing. But this is what the real consumer demand is, so it won't cause a bubble in housing that collapses. The demand for housing is just higher, the supply ends up higher, and the prices end up lower.
By your logic, any relative change in consumer demands causes bubbles in wherever real demand rises. That's silly. We're supposed to believe that the fall in demands for horses and buggies and the rise in demands for cars, created a car bubble that was awaiting collapse? Give me a break. You have no clue how the market works.
Lord Keynes...
ReplyDelete"I said permanently low interest rates. I didn't say post world war 2 interest rates."
Give one example of a country with "permanently low interest rates" that had hyperinflation.
Why?
And don't refer to countries where budget deficits were monetized, because that was not your claim above.
Give us one shred of empirical evidence for your claims.
Historical data does not constitute evidence for the validity of economic principles.
I don't need to have historical data on the effects of universal socialism to know that there cannot be a price system for the means of production. I don't need to have historical data on the effects on employment if the government raised the minimum wage to $10,000 an hour tomorrow.
Economic principles are justified using logic, not historical data. The only propositions that are justified or refuted based on empirical data, are empirical propositions.
As for historical examples of central banks actually holding down low interest rates until hyperinflation, just look to any example where central banks monetized government debt in order to HOLD DOWN interest rates on government debt, so that the government can borrow at cheaper rates. I am sure you can find some examples.
"Economics is like math and logic. They are not justified or refuted empirically by history either."
ReplyDeleteYour comments on this blog are packed with empirical examples of past economic events.
So what? Just because I have spoken about empirical events, that doesn't mean that I am claiming my non-empirical, economic arguments are justified or not justified on the basis of those events.
Economic theories are used to interpret past events. Past events do not produce economic theories on their own. They only produce history of what people thought and what people did at the time.
You're treating economics in a way it shouldn't be treated.
If I say that math is not empirical sciences, does that mean that I cannot refer to past historical examples of quantities? No. If I say that logic is not an empirical science, does that mean that I cannot refer to past historical examples of identification? No.
You're crashing and burning.
LOL, no, you're confusing your own inability to understand economics and your own crashing and burning as if it says anything about what I am arguing.
Lord Keynes...
ReplyDelete"That way, you're not killing legitimate investments by forcing the curve right, and you're not generating malinvestments by forcing the curve left."
This is derived from the absurd attempt to analyse interest rates in natura (as if loans were conducted solely in commodities without money).
No, it's not necessary that loans consist of barter commodities only. It is true for barter commodities, and it is also true for barter commodities that for various subjective value reasons become the most highly marketable mediums of exchange, i.e. money, as well. It's true for ALL commodities.
Once money is used for loans there is no necessary connection between money/credit available for loans and whatever real commodities are available for investment purposes in the community.
False. Real commodities available for investment are a function of real savings, that is, abstaining from consuming commodities and instead putting them to use in the production of commodities in the future.
With the introduction of money, which is just the most marketable commodity for use in indirect exchange, economic actors can calculate, and abstain from consuming, and demand commodities for indirect use, for use in producing future consumer goods, at a profit. It is that search for profit that makes lending in money then worthwhile.
The more people abstain from spending money on goods for consumption, and the more people instead demand goods for producing future consumption, the lower the rates of profit, and hence the lower the rates of interest on loans, will be.
Since an increased demand for capital goods relative to consumer goods in the present will increase the production of capital goods relative to consumer goods in the present, after which the production of both capital goods and consumer goods increases on the basis of more physical capital with which to use in production of all things, and since there is a direct causal link between higher savings, higher investment, lower profits, and thus lower interest rates, it means that you are utterly wrong to claim that free market money interest rates say nothing about the quantities of real commodities available for investment.
The truth is that money interest rates MEAN SOMETHING in the economy. They are not burdens to overcome by force.
If you don't know how profit comes into being, and if you don't know that profit determines interest, and if you don't know that the more buying for the sake of selling, i.e. investment, takes place the lower the average rate of profit will be and thus the lower interest will be, then you will not understand the causal link between interest and real capital available.
There is no guarantee that borrowers will have the necessary real goods at all for investment purposes in a non-inflationary manner.
It's not necessary that there is a future guarantee of income. The future is uncertain.
Borrowers can however observe market prices, and make decisions to borrow based on those market prices.
"Real" theories of interest rates are palpable nonsense.
No, they are not nonsense. They follow ineluctably from the fact that humans must make choices, and that we prefer goods sooner over goods later. The introduction of money doesn't change this fact. It actually means that this preference can be calculated using a common medium of exchange.
"No, that wouldn't cause a bubble. If real consumer demand for homes relative to other goods rises, then that will set into motion temporary profitability differences."
ReplyDeleteIt's isn't "real" demand I was talking about: it could nothing more than a house flipping craze, as in fact was part of the recent bubbles, where people buy houses for speculative purposes.
"that doesn't mean that I am claiming my non-empirical, economic arguments are justified or not justified on the basis of those events.
ReplyDelete"
Right. In future, do not appeal to any past economic data to prove your points, or even as if it proves your points.
Your statement above:
ReplyDelete"Permanently low interest rates will eventually lead to hyperinflation, because the central brings interest rates down by inflating bank reserves."
Not a word about central banks "monetizing government debt" there, just ignorant inability to understand the endogenous nature of money supply and that the money multiplier is a myth.
And how do you know that "Permanently low interest rates will eventually lead to hyperinflation, because the central [bank] brings interest rates down by inflating bank reserves," if you have no empirical evidence for it, not even one real world exmaple - indeed when you don't even believe empirical evidence can prove your theories.
You know this a priori do you?? Yet there is no a priori reason why permanently low interest rates must necessarily lead to hyperinflation. And you require empircal evidence to understand why that is so, evidence relating to the endogenous money supply dynamics of modern capitalist economies, and how fiscal policy could be used to control aggregate demand, and financial regulation to control the flow of credit.
This is the worst example of aprioristic muddle-headed nonsense I have seen for ages in the comments here. Worst garbage since Pete's ramblings.
"As for historical examples of central banks actually holding down low interest rates until hyperinflation, just look to any example where central banks monetized government debt in order to HOLD DOWN interest rates on government debt, so that the government can borrow at cheaper rate"
In other words, you have now just changed your earlier comment, and done precisely what I told you not to do: retreat into talking about "monetizing government debt", to dodge the issue.
"Real commodities available for investment are a function of real savings, that is, abstaining from consuming commodities and instead putting them to use in the production of commodities in the future."
ReplyDeleteLOL.. We are not talking about real savings, but credit created by a banking system. Whether there are real comodities available for investment purposes in an economy at any one time in a non-inflationary manner when that eocnomy has a FR banking system is an empircal matter. They may be available, they may not be.
"With the introduction of money, which is just the most marketable commodity for use in indirect exchange, economic actors can calculate, and abstain from consuming, and demand commodities for indirect use, for use in producing future consumer goods, at a profit" etc.
ReplyDeleteAn assumption requiring an economy at full employment, no idle resources, full capacity utailization and not open to international trade.
Real world capitalism in fact has many periods of idle resources (including labour), low capacity utilization, and access to goods from overseas by trade.
"No, that wouldn't cause a bubble. If real consumer demand for homes relative to other goods rises, then that will set into motion temporary profitability differences."
ReplyDeleteIt's isn't "real" demand I was talking about:
But that's what I was talking about. The law of relative marginal utility between goods.
it could nothing more than a house flipping craze, as in fact was part of the recent bubbles, where people buy houses for speculative purposes.
LOL, you're only making my point for me.
The "house flipping craze" was a part of the recent housing bubble precisely because of credit expansion, not because of a sudden increase in preference for houses relative to other things such that people abstained from purchasing other goods, so that they have more money to spend on housing. The credit expansion poured into the housing market, and this did not make the profitability of things non-housing fall. The profitability of everything was rising, so investors could not know how much of the rise in demand for housing was due to real consumer relative marginal utility changes, and how much was due to simple credit expansion and inflation.
You have the same data as me. We all have the same data. There is no disputing the historical events. Where you are going wrong is the theory you are trying to shoehorn into your understanding of historical events.
"The truth is that money interest rates MEAN SOMETHING in the economy." etc
ReplyDeleteYes, they certainly mean something. But they still cannot be analysed in real terms, the in natura fantasy of real theories of interest rates.
"Since an increased demand for capital goods relative to consumer goods in the present will increase the production of capital goods relative to consumer goods in the present," ... etc
Ah, yes, Hayek's ABCT. A theory derived from unrealistic neoclassical assuptions of full employment equilibrium theory, and neglect of imporant issues like subjective expectations and uncertainty.
http://socialdemocracy21stcentury.blogspot.com/2011/09/hayek-and-equilibrium-as-starting-point.html
I think it's fairly clear at this point that David is trolling.
ReplyDeleteNo, banks cannot create money for themselves. Only the Fed can do that. Banks can only create new loans based on fiduciary trust, and new claims to money.
ReplyDeleteI never said they create money for themselves; only that they do create it. Reserves are not an issue - the FRB's role as lender of last resort ensures that if necessary reserves cannot be acquired by any other means, it will supply them.
Social arrangements of debt are social arrangements of exchanging tangible things, which are what I am referring to when I say commodities.
So if I hire a carpet cleaner to steam my carpets, have I not paid for a commodity? The only difference between a service and a tangible good is that one satisfies needs at the time of purchase, while the other can satisfy needs in a deferred fashion. I would say that both examples describe a commodity.
Either way, to say that commodities are that which is exchanged says nothing about the medium thereof or my statement regarding it.
David Graber didn't prove what he thinks the data proves.
It is said that when a swordsman achieves a certain degree of proficiency, the sword becomes an extension of his body. However, when he achieves the highest degree of proficiency, the sword exists first and foremost in his mind, and no such physical complement is necessary.
I imagine you've achieved a similar state vis-a-vis economics, yes? You are so proficient, an argument no longer even becomes necessary; bare assertion will do.
"Ok, sure. Why not, you seem to know what you're talking about."
No, that is not necessary. By increasing bank reserves in order to hold down interest rates, at some point, those reserves will be used as a pyramid for creating new loans.
What point, exactly?
Before you start talking about the fact that banks have high reserves that are not being translated into loans, it's because the Fed is now giving bank interest to keep those reserves at the Fed, whereas before they didn't.
The alternative to an interest-earning overnight deposit with the fed is the interbank market, since reserves aren't loaned as money.
So if BANKS had reserves in their possession, then loans would rise.
Counterpoint: Japan's QE. For reference, Japan didn't start paying interest on reserves until 2008.
As should be clearly understood by now, a policy of PERMANENTLY low interest rates will eventually result in skyrocketing aggregate spending, and eventually hyperinflation.
I have yet to find a point where your argument connects to observed data. So, I guess I'll take that chance and believe it when I see it!
It is precisely an understanding of it that enables one to understand how a FULLY endogenous monetary system would make hyperinflation impossible.
Yes, we are in agreement. The only point at which our system is not endogenous is fiscal policy, but I'd say we're in no danger of abusing that right now; deficit reduction is the current stated goal of most politicians.
I said I'd rather be attack the falsehoods and defend the truths of all economics schools, Austrian included, rather than just defend the particular truths of the Austrian school, which is what other posters here seem to want to do with me.
Well, that does seem to be the point of view you're principally espousing. What other schools have positions you'd defend?