Megan Greene on negative IOR
Tyler Cowen linked to a new Megan Greene piece in the FT:
In its efforts to get banks lending again, the ECB is looking at excess reserves — some 120 billion euros ($157 billion) the banks have been holding on deposit at the central bank for safekeeping. If the ECB were to introduce a negative interest rate on deposits, effectively charging a fee, the banks might choose to lend the money out rather than watch it lose value.
This logic is far from ironclad. Instead of lending the money to businesses and individuals, the banks could simply park it elsewhere — for example, in the sovereign bonds of Germany and other countries perceived to be financially healthy. This might benefit Germany by further pushing down its borrowing costs, but would do little to unblock credit to businesses.
This is actually an argument in favor of negative interest on reserves. One common fear expressed by monetary stimulus opponents is that the major central banks will artificially inflate another credit bubble. Thus an ideal monetary stimulus would be neutral—boosting NGDP without favoring the lending channel. I think Greene is right that the initial effect of negative IOR would be for banks to buy government bonds. This means that banks would essentially be doing “QE.” Why is that better than the ECB doing QE? It’s not clear it is, although some people worry about the bloated balance sheets of the major central banks, and negative IOR would greatly reduce that “problem.”
Of course all this is a sideshow, as what’s really needed is NGDP targeting. Here’s Greene:
Even if the ECB could encourage banks to lend, though, that doesn’t mean businesses will borrow. The primary issue in the euro area isn’t the cost of funding. The main problem is that few businesses want to borrow at any cost. According to a recent ECB study on access to financing in the euro area, “finding customers” is the No. 1 concern for businesses in the region. If businesses are worried about demand, they will not seek loans to grow.
Exactly. BTW, several commenters asked me about the Danish program of negative IOR. That was not aimed at monetary stimulus (their currency is pegged to the euro, making stimulus almost impossible), but rather at arresting an inflow of hot money. The Swiss have enacted similar policies on occasion.
If the Danes want to stimulate their economy they need to copy the Swiss, and devalue.
PS. Some have tried to make a contrarian argument that pushing IOR below zero is somehow contractionary. I’m not buying (after all, it reduces demand for the MOA), and neither are the markets:
The euro immediately slumped against the U.S. dollar after Draghi’s statement.
Tags:
8. May 2013 at 13:18
The EUR fell 1.2% as soon as he mentioned that the ECB was considering the possibility of a deposit rate cut. It’s still nowhere near teh Consensus view that they will do it. But that small shift in the probability had a big impact. Imagine what woud have happened if they cut the depo rate to -50bps as the Risksbank did in 2009.
8. May 2013 at 13:40
Antulio Bomfim, an economist with Macroeconomic Advisers, has spoken at some conferences against a negative IOR for the U.S. I didn’t completely understand the argument that he was making, but I think he had referred to some Fed arguments against it, perhaps either http://www.federalreserve.gov/pubs/ifdp/2010/996/ifdp996.pdf
or
http://www.newyorkfed.org/research/staff_reports/sr380.pdf
I might need to re-read those because I can’t see any reason why you’re wrong on this issue.
8. May 2013 at 14:06
Greogor, the Riksbank maintained a positive interest rate target (never lower than +0.25%), and the negative deposit rate was irrelevant except in that it generated a lot of misleading stories about a supposed experiment in negative rates. Here’s a table of the Riksbank targets:
http://www.riksbank.se/en/Monetary-policy/Forecasts-and-interest-rate-decisions/Repo-rate-table/
And an explanation of why the negative deposit rate is irrelevant:
http://www.riksbank.se/en/Press-and-published/Press/Notices/2009/How-does-the-Riksbank-control-interest-rates-/
“As the fine-tuning transactions are conducted at the repo rate plus/minus 0.10 percentage points, this means in practice that there is a much narrower band around the repo rate than the interest-rate corridor. Consequently, the overnight rate is kept stable and close to the repo rate.”
8. May 2013 at 15:14
Off topic link… but it does talk about banks and interest rates and QE… sorta.
“Elizabeth Warren : Students “deserve the same break that big banks get”
“The U.S. government invests in big banks by giving them a great deal on their interest rates,” freshman Sen. Elizabeth Warren said in an interview with Salon on Wednesday afternoon (the transcript of which is below). “We should make at least the same investment in our students.”
Warren was discussing the first bill she has introduced in the Senate, a plan released on Wednesday to address the crisis of outstanding student debt – which topped $1 trillion this year, with over 37 million Americans owing thousands of dollars in higher education costs that could take decades to pay back.”…
The rest is here… http://www.salon.com/2013/05/08/elizabeth_warren_students_deserve_the_same_break_that_big_banks_get/
8. May 2013 at 15:55
How about we just go to zero interest on excess reserves. After all, that has been policy for most of my life time.
I don’t understand interest on reserves, and I don’t understand “operation twist.”
The Fed should be encouraging banks to make loans. That means a positive spread between short term rates and intermediate term rates!
8. May 2013 at 16:45
Megan Greene wrote:
“If the ECB were to introduce a negative interest rate on deposits, effectively charging a fee, the banks might choose to lend the money out rather than watch it lose value.”
I’m not very familiar with the ECB, but if someone were to say this about the Fed and the banks’ Fed deposits, I’d be very skeptical of their understanding. I’m certainly no expert, but even I know that reserves can only be “lent out” to other reserve deposit holders…. those don’t include individuals, or non-bank businesses. A small fraction of excess reserves can be converted to required reserves when loans are made (due to reserve requirements), but there are limited places reserves can go… they can go to another reserve account holder (Treasury, GSE, other banks, IMF, etc.), they can be effectively withdrawn as paper currency and coins (when non-banks with draw their deposits as currency), or they can go back to the Fed (where they are erased as a Fed liability).
If the ECB system is anything like that, then what on Earth is Megan talking about???
8. May 2013 at 16:50
@Doug M,
When there are excess reserves in the banking system, then IOR sets the federal funds rate. So if the Fed stopped paying IOR it would effectively be a FFR cut to 0%.
8. May 2013 at 18:00
Gregor, Good point.
John, Negative IOR is not going to happen, so it’s a moot point.
Bill, Noooooooo!
Doug, Yes, zero is a very good idea.
Tom, I think she is assuming it goes to currency, or perhaps that the ECB would reduce the reserve base if banks tried to get rid of ERs. I don’t believe she sees the entire picture.
8. May 2013 at 18:00
“One common fear expressed by monetary stimulus opponents is that the major central banks will artificially inflate another credit bubble. Thus an ideal monetary stimulus would be neutral””boosting NGDP without favoring the lending channel.”
As long as the central banking system is set up the way it is, whereby the overwhelming percentage of the increase in total money supply is made up of credit expansion, this so-called “fear” is perfectly justified.
NGDP targeting in the current system will still favor the lending channel.
8. May 2013 at 19:00
Excellent blogging.
The problem is weak aggregate demand.
There is no problem with inflation. It is at 1.1 percent and falling. and moderate inflation would actually be a plus, maybe as high as 5 percent to 7 percent. Pay down the national debt.
The Fed, as halfback, has a huge hole in the line, and the end zone is right there. But they dither, stutter step, run backwards then forwards, look to the sidelines and even to the grandstand for advice.
What is the hang up? Do you see inflation? It is dead. Do you see aggregate demand? It is weak.
Please Mr. Bernanke, run it into the end zone.
Instead, the
8. May 2013 at 19:06
Geoff-
I ave suggested a national lottery, more winner than losers, paid in cash. Top prize is only $200. Tickets sold at 7-11s etc. You can only buy $100 at a location per day.
So, a typical guy wagers $120 in six $20 tickets, and wins $200 at end of the week. But, no one wins without risking capital. Just like options, or derivatives, etc.
This will flood cash into people who will likely spend it, not bank it.
But, we live in deeply conventional times. Whether or not a program will work is not the point. It is whether or not a program fits a favored ideology, agenda, politics, or economist interests.
So, no national lottery. Or even juicing winning payouts at racetracks, another idea I like.
9. May 2013 at 00:52
“Instead of lending the money to businesses and individuals, the banks could simply park it elsewhere “” for example, in the sovereign bonds of Germany and other countries perceived to be financially healthy.”
As Tom remarked, this is nonsense. Money can be “parked” only on reserve accounts or as cash. Alternatively, money can be sterilized by CB – which is actually something I can imagine ECB in its state of madness doing. So they could cut IOR and simultaneously counteract its potential impact by sterilization defended by some wise sounding magical formula like “we did it to keep medium to long term inflation expectations well anchored” (yeah, 0.5% is still “bellow and close to 2%” so mission accomplished) or whatever.
And then you could have all kind of experts writing about how commercial banks did nothing in reaction to “highly accomodative policy of cutting IOR by CB” and how they only “parked reserves in bonds” in response (of course they did, CB sold it to them) and how they don’t want to lend etc. Then you will have Keynesians babbling about liquidity traps where job of CB is to keep inflation under 2% and other nonsense. In short, we will have the retarded discussion that we had for last 5 years.
Geoff: “Monetary policy does not work by increasing actual borrowing. That is not the causal channel of the monetary policy transmission mechanism. Monetary policy works by increasing spending, not borrowing. And one person’s spending is another person’s income, so people in aggregate do not need to borrow more in order to spend more. Their increased spending finances itself.”
Go read more in this article by Nick Rowe: http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/05/monetary-stimulus-vs-financial-stability-is-a-false-trade-off.html
9. May 2013 at 03:11
Geoff:
Dubois quotation of Rowe is to the point, however, consider the impact of reduced lending. Lower interest rates reduce the quantity of credit supplied. If you assume that money not lent it held, then a reduction in the quantity of credit supplied is an increase in the demand to hold money. But the assumption is much too strong. Households that reduce lending can increase purchases of consumer goods and services and firms that reduce lending can increase purchases capital goods.
9. May 2013 at 03:37
I think your mate Lars Christensen could tell you what would happen if the Danes broke the peg. Long-term maybe a good idea but would have some, erm, unintended effects in the financial (and pension) system.
9. May 2013 at 04:10
Ben, Yes, where IS the inflation the conservatives have warned us about.
JV, I also wondered if she understood that. I gave her the benefit of the doubt.
Bob, That’s why Latvia held back from devaluing.
9. May 2013 at 05:56
@J.V. Dubois,
Good points. You of course you are talking in an aggregate sense. Individual banks can conceivably “park” their excess reserves in bonds, purchasing them from any seller, but unless that seller is a bond issuing nation or the central bank, the reserves don’t leave the banks in aggregate… and in the case of the bond issuer, those central bank deposits will likely go right back to banks when the bond proceeds are spent anyway (presumably the bond issuing nation sold the bonds in order to spend the proceeds). Central bank deposits could also be accumulated in the treasuries of nations running surpluses, but is that really happening?
So yes, the only real likely “escape route” for excess reserves is right back to the central bank when it sells bonds to the banks. It seems unlikely to me that paper currency holdings amongst non-bank businesses and individuals would be significantly affected (which is the only other “escape route” I can imagine). Individuals and businesses (I would think!) don’t change the amount of cash they wish to hold based on excess reserve balances at the banks! That seems preposterous. I would think that holding currency is purely a matter of convenience, since it simply represents (in the vast majority of cases) withdrawn bank deposits. When the amount of cash individuals and businesses are holding becomes inconvenient, they simply re-deposit it. Unless of course the banks are passing along negative IOR costs (should negative IOR be implemented) to their customers and this is significantly painful enough to customers to induce them to give up the convenience of having bank deposits.
9. May 2013 at 06:39
I am really confused by the idea that negative IOER would cause banks to “lend out” the money. Reserves are a closed system. In the US, the level of reserves is determined by the Fed, and in particular the Fed’s purchases of securities. In the Eurozone, reserves are provided elastically to banks in regular refinancing operations will full allotment (i.e. without limit).
So what would happen if IOER went negative? Presumably, looking at it on a system-wide basis, there would be less demand for reserves, and hence less demand for refinancing operations. Banks would have to find a different kind of safe asset to hold — assuming that they could, given the safe asset shortage. So the result would likely be either a bidding up of safe assets and a reduction in the ECB’s balance sheet OR a damaging hit to bank profits if banks cannot find a good alternative to reserves. I suspect a bit of both would happen.
Isn’t this right?
9. May 2013 at 06:52
John Butters is on the right track.
Negative IOR is just a tax on bank capital.
Sure, one bank that tries to avoid said tax by “lending it out”, would be able to avoid this tax…but not the banking system as a whole. For as soon as it is lent out, it will soon get redeposited into another bank, and that other bank will have to pay the tax.
Taken the banking system as a whole, there will be an actual taxation on bank reserves no matter what.
This taxation on capital will constrain the banking system’s ability to issue new credit going forward.
So there is a trade off to NGDP. The rise in “lending” MAY increase NGDP (if the additional lending increases spending on that which NGDP tracks specifically), but the taxation on bank reserves will put a dampening effect on lending.
The only way the CB can remove any doubt as to which force is empirically greater, would be to increase reserves even more.
9. May 2013 at 06:54
Or have the tax so low that existing inflation of reserves can still overpower the tax dampening, for the CB to make prices rise the way it wants.
9. May 2013 at 07:23
The non-bank public can only take money out of the CB system by hoarding currency. Likewise, money flowing thru the SBs & NBs never leaves the CB system, as anyone who has applied double-entry bookkeeping on a national scale should know. I.e., the source of all time/savings deposits to the CB system are other bank deposits, directly or indirectly via the currency route, or thru the bank’s undivided profits accounts. I.e., the shadow banks & non-banks are not now, nor have ever been (in any macro-economic way), in competition with the CBs.
However, the monetary authority can prevent monetary savings from flowing thru the intermediaries (the conduits between savers & borrowers). If the monetary authority provides a rate advantage “differential” to the CBs (by paying interest on excess reserve balances), the flow of monetary savings (wholesale short-term borrowing), will be arrested (just as it was before the FHLBB & FDIC established Reg Q ceilings for the thrifts in Sept. 1966).
9. May 2013 at 07:33
Between 1933 & 1942 Fed policy was likened to “pushing on a string”. It wasn’t until 1942 that the CBs remained fully “lent-up”, i.e., they held no excessive amount of excess legal lending capacity to finance business (or consumers).
Between 1942 & Oct 9th 2008 excess reserves were used to acquire a piece of the national debt or other creditor ship obligations that are eligible for bank investment. I.e., the CBs finding themselves with excess reserves (unused legal lending capacity), immediately bought liquid short-term obligations, pending a longer term, & presumably more profitable disposition of their funds.
Then came the IOeR policy which induced dis-intermediation (like during the 1966 S&L crisis), where the size of the NBs shrink, but the size of the CB system remains the same.
The IOeR policy doesn’t “divorce money from monetary policy”, it emasculates the Fed’s “open market power”. Whereas an injection of reserves (open market operations of the buying type by the FRB-NY’s “trading desk”), formally resulted in an immediate expansion of the CB’s investment or loan portfolios, nowadays it results in the mal-distribution (re-concentration) of excess reserves.
9. May 2013 at 07:57
Anyways, maybe it was lost in my first post, I had wanted to make some other point. It is important to say that payments on reserves is not bug but feature of Eurosystem. It was introduced to sterilize purchases of sovereign bonds as part of the LTRO so that LTRO is NOT actually QE. It was a sacrifice to appease to german leaders of weird post-calvinist curch of Frankfurt Confession obsessed by inflation.
So now Draghi brags about how he considers lowering these rates. Wow. All I see is yet another step on the long path of confusions, claims and claim revoking. Maybe it is part of some internal political dynamics of the horrible institution that ECB is nowadays, I do not know. But we were there several times. Like here: http://blogs.wsj.com/marketbeat/2012/08/02/ecbs-draghi-doesnt-back-up-talk-with-action-markets-slide/ or after his famous “whatever it takes*” (* except doing such a basin things as cutting already “record” low interest rates).
ECB and its communication is a mess. Nobody knows if Dragi speaks truth or if it is some kind of testing PR ballon or what. And even if he speaks with some power, nobody still knows what is the goal behind it. Will IOR cuts be sterilizes – for instance by sales of bonds, gold or foreigne reserves? We cannot know, because we do not know what is actually ECB goal. It is all talking about instruments, which helps only so far as it sheds some light on the tought process involved – and potential shifts in overall monetary policy. And the situation is that we simply don’t know when it comes to ECB
9. May 2013 at 09:37
John, The standard argument is that banks would lower the rate on deposits to below zero (service charges) and depositors would hold cash instead of bank deposits.
JV, I certainly don’t know what the ECB’s goal is, or what they are trying to accomplish.
9. May 2013 at 09:42
“The standard argument is that banks would lower the rate on deposits to below zero (service charges) and depositors would hold cash instead of bank deposits.”
Why would a depositor choose to hold more cash and less in deposit, if banks are suddenly charged a tax on their reserves?
What’s the link?
9. May 2013 at 12:20
@Geoff, keep in mind that reserves can only go three places:
1. To an entity with a central bank deposit account (thus they cannot go to individual or non-bank business deposit accounts, because those are NOT central bank deposits… those are commercial bank deposits. Two entirely different things.
2. Withdrawn as cash by a non-bank bank deposit holder. When this happens the bank must purchase the cash with reserves from the central bank (from its reserve deposit) and then provide its customers with the cash. The reverse happens when cash is re-deposited at the bank.
3. Back to the central bank where the reserves are annihilated (i.e. erased from the liabilities side of the central bank’s spreadsheet). Same thing happens with cash sold back to the central bank, but the cash may not actually be destroyed, but simply stored until it again is sold to a bank and thus becomes again a Fed liability.
If banks are charged to hold a central bank deposit (i.e. negative IOR), then since all banking is a game of spreads, they will likely have customer deposit liabilities matching those reserves. Thus when the rate is lowered to negative on the asset side of their balance sheet, then must make the liability side of their balance sheet even MORE negative to maintain a profitable spread. Customers are then being charged a fee (interest) for the privilege of maintaining a deposit at the bank… so the theory is that they would then withdraw their deposits as cash, which are at least free (minus the new home safe they’ll have to buy!). Alternatively, the customers, desperate to use their deposit to purchase something which doesn’t charge them a fee, will instead buy CDs or time deposits, or move into some other kind of low risk asset. It’s that or, put it in the safe, or put up with fees from the bank! It’s all a matter of how much the convenience of a bank deposit is worth it to bank customers. If they actually DO withdraw physical cash (I don’t know about you, but that would be my LAST choice… only if there was ABSOLUTELY no other safe asset to buy and the bank fees were just too painful), the this does represent an escape route for excess reserves… since the bank has to buy the cash from the central bank with those reserves.
9. May 2013 at 12:35
I put this list up here with a bit of additional information:
http://brown-blog-5.blogspot.com/2013/04/the-three-places-reserves-can-go.html
I also made a related list (longer) of all the possible ways in which reserves can leave the banking system:
http://brown-blog-5.blogspot.com/2013/03/list-of-ways-reserves-leave-banking.html
The reason the 2nd list is longer is because just as reserves lose their “reserve” status (bank vault cash is considered “reserves”) when non-bank customers make cash withdrawals, so to do reserves lose their reserve status when Fed deposits are transferred from banks to certain other Fed deposit holders. For example, Treasury’s TGA is a Fed deposit, but the balance in it is not defined as “reserves” and thus lies outside the banking system. The deposit regains its reserve status when transferred back to a commercial bank (e.g. when Treasury pays a government contractor… the TGA balance is decreased, the contractor’s bank deposit is increased, and the contractor’s bank’s Fed deposit is also increased (the payment does not increase the equity of the bank, since both its assets (reserves) and liabilities (contractor deposit), are increased equally.
9. May 2013 at 12:44
Tom:
“If banks are charged to hold a central bank deposit (i.e. negative IOR), then since all banking is a game of spreads, they will likely have customer deposit liabilities matching those reserves. Thus when the rate is lowered to negative on the asset side of their balance sheet, then must make the liability side of their balance sheet even MORE negative to maintain a profitable spread.”
This assumes the only assets banks have are reserves.
“Customers are then being charged a fee (interest) for the privilege of maintaining a deposit at the bank… so the theory is that they would then withdraw their deposits as cash, which are at least free (minus the new home safe they’ll have to buy!). Alternatively, the customers, desperate to use their deposit to purchase something which doesn’t charge them a fee, will instead buy CDs or time deposits, or move into some other kind of low risk asset. It’s that or, put it in the safe, or put up with fees from the bank! It’s all a matter of how much the convenience of a bank deposit is worth it to bank customers. If they actually DO withdraw physical cash (I don’t know about you, but that would be my LAST choice… only if there was ABSOLUTELY no other safe asset to buy and the bank fees were just too painful), the this does represent an escape route for excess reserves… since the bank has to buy the cash from the central bank with those reserves.”
You will likely not see a significant increase in cash withdrawn by depositors, but rather, there will be no fee to hold your money in a regular checking account, but various “fees” will likely rise to offset the tax on bank capital (just like a lot of companies pass higher costs of business onto the customers). Transaction fees, ATM fees, trade fees, management fees, overdraft fees, and so on.
Another way is charging higher interest rates on loans.
All of these will reduce the spending capacity of depositors, lenders and traders.
9. May 2013 at 13:37
Geoff, you write
“You will likely not see a significant increase in cash withdrawn by depositors”
Actually I agree with you there! And yes, as you write, there are a number of ways banks could try to maintain their spreads.
The reason I directed my comment to you specifically was because of this statement you made:
“Sure, one bank that tries to avoid said tax by “lending it out”, would be able to avoid this tax…but not the banking system as a whole. For as soon as it is lent out, it will soon get redeposited into another bank, and that other bank will have to pay the tax.”
I see now that you have “lending it out” in quotes… I didn’t notice that at first. I actually agree w/ what you state here in general, but I just wanted to clarify that banks don’t lend out reserves to non-banks.
9. May 2013 at 23:27
Scott,
You said;
“Thus an ideal monetary stimulus would be neutral””boosting NGDP without favoring the lending channel. I think Greene is right that the initial effect of negative IOR would be for banks to buy government bonds. This means that banks would essentially be doing “QE.” Why is that better than the ECB doing QE? It’s not clear it is, although some people worry about the bloated balance sheets of the major central banks, and negative IOR would greatly reduce that “problem.””
As you may recall, I had submitted many comments in the past suggesting you could accomplish the same thing by have the CB set minimum asset to equity ratios… essentially forcing the banks to lend more (or buy more government securities).
Is this functionally any different?
9. May 2013 at 23:42
dtoh,
Minimum asset to equity ratio? Reserves count as assets… as do loans. I don’t see what that would accomplish. In fact the minimum ratio is the other way around now: there’s a minimum capital to risk weighted assets: the capital adequacy ratio (CAR) = (Tier 1 + Tier 2 capital) / (sum of risk weighted assetse) > 10%
10. May 2013 at 02:16
@ssumner
Thanks. That still isn’t banks “lending out” the reserves, as MG says, which was what confused me.
On your point about holding cash: would the central bank accommodate the greater demand for paper currency? It would not be willing to print enough for people to make a major switch from cash to deposits. Would bad money drive out good — i.e., would people make less use of cash for transactions and more use of bank deposits, and vice versa for saving? I suppose the latter could be a mechanism to allow people to hoard cash in a small way, but paper money is a fraction of the total money supply this so wouldn’t really allow widespread cash hoarding.
I see negative short-term rates as being about pushing savers up the yield curve: depositors into time deposits, investors into longer-dated government bonds. That should, at the margin, cause the yield curve to flatten (and, given the anchor to central bank rates at very short maturities, to fall), which should be stimulative to the economy. It would also, as a happy side-effect, increase the stickiness of bank funding.
10. May 2013 at 02:19
… but as some of your other commentators say, there is reason for scepticism about whether this positive effect would outweigh the effective tax on the banking system. Banks can’t switch out of reserves to move up the yield curve.
It strikes me that, if you want to flatten the yield curve, the right way is forward guidance. That is what really worked in the US.
10. May 2013 at 05:46
Geoff, I agree with Tom’s reply.
dtoh, I agree with Tom’s reply.
John, I don’t know if central banks would print a lot more currency. I’d guess they would only print enough for 2% inflation; if inflation began rising higher the central bank would not fully accommodate the shift from reserves into currency.
It’s best not to debate the question of whether banks can “lend out” reserves, or else you might slide in MMTism. 🙂
10. May 2013 at 10:41
@Scott
MMT! No… that’s not where I’m coming from! I just think that people, especially economists, shouldn’t say things (perhaps inadvertently) in popular media that reinforce extremely damaging and perhaps even dangerous false ideas about how the monetary system actually works (I’m talking about low level fundamental ideas here). Case in point: Rick Perry’s famous “threat” against Ben Bernanke:
“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.”
Or what about Peter Schiff telling people (for at least half a decade now) that Bernanke’s “massive money printing” will surely lead to hyperinflation (any day now!!!) and the ruination of America!! Or Ron Paul or Jim Rogers, etc. etc. etc.
There’s enough false beliefs out there (about the fundamental mechanics)!… no need to cause more harm. If you don’t think it’s harmful, I think you are mistaken. Remember all those people that believe in false ideas of fundamental monetary mechanics can vote… do vote, do read ZeroHedge, do write their congressman, etc. So good luck getting MM ideas into play if you’re fighting that kind of popular and sensationalized misunderstanding! I think that’s something that almost every economist should be able to agree on… MMers, Monetarists, new Keynesians, austerians… and even a few Austrians. I’m all for a good policy debate, but the low level fundamental mechanics should be something all sides can agree on. No matter their other disagreements, you don’t see physicists saying things in public that could accidentally lend credence to false popular theories about “telekinesis” or “paranormal activity” (our society is scientifically illiterate enough as it is!). No need to make that mistake in economics either!
10. May 2013 at 10:48
@Scott, sorry, the above comes off a little preachy. I didn’t mean to pick on you, but that “money printing” and “lending out reserves” thing is a bit of a bug-a-boo with me. It’s like I’ve just heard someone claim that electromagnetic waves travel through “Ether” (an idea put to rest in the 19th century!). It makes me jump out of my chair and say “No!”
Thanks for the good discussion!
😉
10. May 2013 at 16:20
Tom, I agree. I’ve also criticized the “money printing” phrase, and I’ve frequently pointed out that the purpose of negative IOR is not to lend out reserves but rather to reduce bank demand for ERs.
My point is that the MMTers who insist that banks never lend out reserves are being misleading, in two different ways. Once and a great while they do lend cash, and even when they don’t they may behave in such a way as to push some of the base from reserves to cash.