I’m glad Krugman wrote this post, so I didn’t have to.

As usual, Paul Krugman gets right the the essence of the problem:

Actually, Tobin-Brainard is to many of the controversies that swirl around banks and money as IS-LM is to controversies about interest-rate determination. When we ask, “Are interest rates determined by the supply and demand of loanable funds, or are they determined by the tradeoff between liquidity and return?”, the correct answer is “Yes” “” it’s a simultaneous system.

Similarly, if we ask, “Is the volume of bank lending determined by the amount the public chooses to deposit in banks, or is the amount deposited in banks determined by the amount banks choose to lend?”, the answer is once again “Yes”; financial prices adjust to make those choices consistent.

Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio “” they’re holding fewer securities and more reserve “” and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment.

Yup, that’s all it means.  Krugman begins the post by acknowledging that there is a group with very different views:

I’m actually kind of reluctant to even get into this, because any discussion of these issue brings out the people who believe that they have discovered the hidden secrets of the monetary universe, somehow missed by generations of economists. But here goes anyway.

I get lots of commenters coming over here breathlessly telling me the wonderful news—it’s been discovered that banks don’t actually loan out reserves! How does one even respond to that sort of ferver?  Now I have a simple answer; “it’s a simultaneous system.”  I can stop wasting so much time in the comment section.


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90 Responses to “I’m glad Krugman wrote this post, so I didn’t have to.”

  1. Gravatar of Edward Edward
    17. August 2013 at 13:23

    Krugman also responded to you Scott, about interest rates as an unreliable indicator, and why IS-LM is wrong.
    http://krugman.blogs.nytimes.com/2013/08/17/inflation-nostalgia/

  2. Gravatar of W. Peden W. Peden
    17. August 2013 at 13:34

    Edward,

    I’m glad Krugman posted that graph, because it reveals the absurdity of those who claim that inflation is <7%. If inflation were really much higher than the CPI suggests, why wouldn't this affect expectations?

  3. Gravatar of Edward Edward
    17. August 2013 at 13:44

    W Peden, you’re right of course.

    Inflation only seems “high” because incomes are stagnating.

    I suspect if you talk to workers about the sticky wage hypotheses, they would STRONGLY disagree. (or they would say that their wages are “sticky upward”) They would say that they are the reasonable ones, and corporations are the ones who never lower their prices, so they are reacting only to what corporations are staring.

    As a separate issue, there WERE some cases during the Great Recession of workers accepting pay cuts and reductions in hours worked to save jobs. I know they are few and far between , but i was wondering under what specific circumstances workers might be willing to do this

  4. Gravatar of Edward Edward
    17. August 2013 at 13:47

    I suspect that its when there is a high degree of solidarity within all members of the workers in a corporation, very little tiers, infighting or divisions, and a high trust in management. (rare I know :-) )

  5. Gravatar of W. Peden W. Peden
    17. August 2013 at 14:09

    Edward,

    “I suspect if you talk to workers about the sticky wage hypotheses, they would STRONGLY disagree. (or they would say that their wages are “sticky upward”)”

    That’s a good point: we should really talk about sticky compensation, rather than sticky wages.

  6. Gravatar of W. Peden W. Peden
    17. August 2013 at 14:10

    (At least in the American context, where you have a bizarre healthcare insurance based on the incompetance of the 1940s IRS. I don’t think the point is relevant to any other country.)

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. August 2013 at 14:23

    I followed Krugman’s link to Cullen Roche and the land of the “people who believe that they have discovered the hidden secrets of the monetary universe, somehow missed by generations of economists” only to find Roche still spreading the myth that the ECB has done QE:

    http://pragcap.com/quite-the-qe-conundrum

    I responded in comments there and to his source, Scott Krisiloff.

    I don’t mind them being wrong about just about everything as much as I mind them spreading things they know are obvious falsehoods.

    P.S. Roche no longer identifies himself with MMT but with Monetary Realism (MR). But for the life of me I can’t figure out the difference.

    Have you noticed these people have knack for Orwellian names? As Brad DeLong has implied Modern Monetary Theory should really be called Ancient Fiscal Tautology, and I can’t think of anything less realistic than MR.

    P.P.S. And on Krugman’s thread I found a commenter spreading the myth that Warren Mosler anticipated the correct mechanism of the eurozone’s crisis (the lack of a true fiscal union) before anybody else in 2001. I notified him that Peter Kenen, one of the founding fathers of Optimum Currency Area Theory (OCA) beat him by 32 years.

    What’s next? MMT discovered the art of making fire and invented the wheel?

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. August 2013 at 14:49

    Oh, and I came across an MMTer recently who claimed that it was they came up with the concept of Lender of Last Resort (LOLR). Needless to say he had never heard of Henry Thornton (1802) or Walter Bagehot (1873).

    P.S. I’ve always thought it odd that MMTers regularly rant against rentier capitalism when their patron (Warren Mosler) is a rentier capitalist. However it does help explain why they worry so much about the depressing effect of QE on the interest income of rentiers.

  9. Gravatar of W. Peden W. Peden
    17. August 2013 at 14:55

    Mark Sadowski,

    Capitalists have a long record of anti-capitalism. Few people are more important figures in the history of anti-capitalism than Engels (industrial capitalist) and Marx (enjoyed a very large lifetime income directly from capitalists).

  10. Gravatar of 123 123
    17. August 2013 at 14:58

    Mark, ECB’s operating procedures are world class. VLTRO is a much better policy than QE. VLTRO picks up market knowledge to determine the size of monetary base, QE ignores it.
    The problem with the ECB is completely different. It has a wrong target (quasi price level target).

  11. Gravatar of W. Peden W. Peden
    17. August 2013 at 15:26

    Mark,

    “Have you noticed these people have knack for Orwellian names? As Brad DeLong has implied Modern Monetary Theory should really be called Ancient Fiscal Tautology, and I can’t think of anything less realistic than MR.”

    See also: Real World Economics Review, anybody who uses the phrase “reality-based”, and in a somewhat different context the Universal Church of Truth-

    http://en.wikipedia.org/wiki/Universal_Church_of_Truth

    Dare I suggest that some of the above mentioned terms are due to overcompensating when one is in the difficult position of being an outsider?

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. August 2013 at 15:29

    123,
    LTRO is just Credit Easing (CE), there’s no need to romanticize it. All it accomplishes is that it ensures distressed financial markets continue to function in the face of a huge deficiency in aggregate demand. The US largely brought its CE programs to an end in July 2010 mostly because they’re no longer necessary.

  13. Gravatar of ssumner ssumner
    17. August 2013 at 15:52

    Edward, I’m a bit puzzled. When I talk to average people I find that roughly 100% agree that wages are sticky.

    123, What does VLTRO stand for? I agree that having the wrong target is the big problem in Europe.

  14. Gravatar of 123 123
    17. August 2013 at 15:53

    Mark, LTRO is not credit easing. First, LTRO assets are very safe. Second, you are ignoring the fact that LTRO has increased the monetary base precisely when the money demand was elevated.

  15. Gravatar of 123 123
    17. August 2013 at 15:54

    Scott, VLTRO is very long term refinancing operation. This is how the ECB is now calling 3 year LTROs.

  16. Gravatar of Edward Edward
    17. August 2013 at 16:02

    Scott, sticky UPWARD or downward? (every worker think he or she is not getting paid enough)

    I think its also a “not me” phenomenon. Maybe the OTHER guy is greedy and irrational, and wouldn’t take a pay cut to save MY job, but Im a reasonable caring, guy or gal.

    Of course when it comes time for a pay cut, everyone says “you first” and presto, you get stickiness.

    But Scott, do you agree under the special conditions that i listed above, workers might be willing?

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. August 2013 at 16:54

    123,
    The ECB calls LTRO an “enhanced credit support programme”. In the words of Claude Trichet “enhanced credit support constitutes the special and primarily bank-based measures that are being taken to enhance the flow of credit above and beyond what could be achieved through policy interest rate reductions alone.”

    The Fed calls CPFF, MMIFF, PDCF, TALF, TSLF TAF etc. “credit and liquidity programs”. Credit and liquidity programs are “designed to support the liquidity of financial institutions and foster improved conditions in financial markets.”

    The bottom line is all of these programs are either collateralized or uncollateralized loans or are sterilized security purchases designed to enhance credit in financial markets at a time when it is needed. You can call it a “banana” if you wish but fundamentally it is all Credit Easing.

  18. Gravatar of Cullen Roche Cullen Roche
    17. August 2013 at 17:02

    Hi Scott and Mark S,

    I am working on a response to PK. He’s not asking the right questions there.

    And so we’re clear – I do not claim to have “discovered the hidden secrets of the monetary universe”. You’re confusing me with the MMT people. It’s the MMT people who believe they’ve created an entirely new “paradigm” of thought.

    MR is essentially plain vanilla Post-Keynesian Economics with some additional original insights of our own that modernize some of the thinking and apply it to the USA. It’s basically double entry bookkeeping, understanding modern banking, flow of funds analysis, sectoral balances, etc. Most of it is just a description of the system we have.

    The big different between traditional PKE and MMT is that they add on a lot of their stuff like a government managed “Job Guarantee”, Abbe Lerner’s Functional Finance and this idea that the US government has a “money monopolist” and is self funding which really results in taxes “destroying money”, etc. It’s all a bit confused if you ask me, but many economists seem to now think PKE = MMT which is totally wrong. MMT is PKE plus a bunch of baggage.

    Anyhow, I’ve talked to David B in detail about some of the overlap between MR and MM and I don’t think we’re as far off on the policy stuff as you guys might think. I’m hoping to bridge gaps where I can. No reason for these persistent pissing matches within economics. That doesn’t get us anywhere.

    Have a great weekend.

    Cullen

  19. Gravatar of 123 123
    17. August 2013 at 17:10

    Mark, I’m not surprised Trichet is creditist, but that does not mean you should become one (which would happen if you accepted his analysis without critical thinking).

    Regarding bananas, the first fundamental fact is that LTRO increases the size of monetary base, it is not sterilized. The second fundamental fact is that credit risk is very low due to aggressive haircuts, direct purchases of Eurozone government bonds (QE) would entail much higher risk. The third fundamental fact is that LTRO is a mechanism that sets the size of the monetary base that has significant market monetarist elements (suppose the ECB followed a strict Taylor rule, in that case 3 year LTRO is equivalent to Taylor-rate futures targeting).

  20. Gravatar of benjamin cole benjamin cole
    17. August 2013 at 17:35

    Krugman puzzles me. He also ridiculed the idea that the 0.25 IOER helped the banks swell their reserves. Meaning he knows they have gigantic excess reserves.

    Maybe time for MM’ers to talk about cutting IOER….

  21. Gravatar of TravisV TravisV
    17. August 2013 at 17:43

    Noah Smith wrote a phenomenal post today illustrating how chauvinist, outdated and rigid Japan’s labor market is:

    http://noahpinionblog.blogspot.com/2013/08/the-neoliberal-choice.html

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. August 2013 at 17:47

    123,

    1) “Regarding bananas, the first fundamental fact is that LTRO increases the size of monetary base, it is not sterilized.”

    That was also true of all of the Fed’s credit and liquidity programs. (That was not true of the ECB’s CBPP and SMP programs.)

    2) “The second fundamental fact is that credit risk is very low due to aggressive haircuts, direct purchases of Eurozone government bonds (QE) would entail much higher risk.”

    But the credit risk is still greater than was with the Fed’s credit and liquidity programs. Collateral need only have a single A rating from one agency, whereas the Fed’s credit and liquidity programs required a AAA rating from two agencies.

    3) “The third fundamental fact is that LTRO is a mechanism that sets the size of the monetary base that has significant market monetarist elements (suppose the ECB followed a strict Taylor rule, in that case 3 year LTRO is equivalent to Taylor-rate futures targeting).”

    In my opinion this is completely unsubstantiated falderal.

  23. Gravatar of ssumner ssumner
    17. August 2013 at 19:35

    Thanks 123.

    Edward, Nominal wages are sticky in both directions, and no, I don’t think there is much that can be done about it. Real wages could be made a bit more flexible with policy changes.

    Cullen, You said;

    “You’re confusing me with the MMT people.”

    Nope, I didn’t confuse you with anyone. I did not mention you in this post. It wasn’t about you. I never even read the post Krugman commented on, and thus have no opinion. I was discussing my MMT commenters. If anyone has a beef it’s them.

    Cullen, You said;

    “It’s basically double entry bookkeeping, understanding modern banking, flow of funds analysis, sectoral balances, etc. Most of it is just a description of the system we have.”

    I have no interest in banking or bookkeeping. My interest is monetary policy.

    You said;

    “I’m hoping to bridge gaps where I can. No reason for these persistent pissing matches within economics.”

    As far as I can recall I have never criticized you in my blog. I don’t think I’ve ever mentioned you. On the other hand in your blog you have accused me of being confused about the money multiplier concept. For you to come over here and accuse me of starting a “pissing contest” is pretty absurd. Take a look in the mirror.

  24. Gravatar of ssumner ssumner
    17. August 2013 at 19:42

    BTW Cullen, this is an embarrassingly bad post of yours, far worse than I would have thought from reading Krugman:

    http://pragcap.com/scott-sumner-vs-peter-schiff

  25. Gravatar of Matt Waters Matt Waters
    17. August 2013 at 19:55

    “As a separate issue, there WERE some cases during the Great Recession of workers accepting pay cuts and reductions in hours worked to save jobs. I know they are few and far between , but i was wondering under what specific circumstances workers might be willing to do this”

    Reduction in hours still has sticky wages and it’s still an unnecessary reduction in RGDP. I’ve known a number of architectural or engineering firms who did this through 2009, probably a number of manufacturing companies as well.

    Very few and far between are actual reductions in the headline wages per hour. For the reason why, it’s best to look at the incentives of managers vs. what workers want. It’s ultimately what maximizes managers’ utility which matters.

  26. Gravatar of Cullen Roche Cullen Roche
    17. August 2013 at 19:57

    Scott, you sound feisty for a Saturday night!

    1. The Krugman response was a response to me. The first two words in his post were “Cullen Roche….” I assumed you’d actually read the post you were endorsing here….

    2. You keep pointing out how you don’t care about double entry bookkeeping and banking, but only care about monetary policy. Monetary policy is the act of the monetary authority influencing the money supply. Most of the money in our monetary system is created endogenously by banks as assets for its users and liabilities for the banking system. If you don’t understand banking and bookkeeping then you don’t understand money which means you can’t possibly begin to understand monetary policy.

    Anyhow, I just looked in the mirror and realized I should probably shave so I’m gonna get on that.

    Have a great night.

    Cullen

  27. Gravatar of JoeMac JoeMac
    17. August 2013 at 20:11

    Scott,

    Let’s say the production of currency was privatized and left to commercial banks, and all Fed notes were removed from the market. In other words, currency would therefore become entirely inside money.

    Would this mean that the central bank’s influence on real activity would be ended? In other words, money would become no longer exogenous at all?

  28. Gravatar of Negation of Ideology Negation of Ideology
    17. August 2013 at 20:39

    Here’s another interesting Krugman post about how some Republicans are saying inflation is higher than the official numbers when they want to bash the Fed, and lower when they want to cut the deficit.

    http://krugman.blogs.nytimes.com/2013/08/16/schroedingers-price-index/

    This got me thinking that from a market monetarist perspective, we should all be rooting for a switch to the chain weighted CPI. It would cut the deficit and give the Fed more cover to offset the cuts. Because if reported inflation is lower, the Fed can ease more leading to higher NGDP.

  29. Gravatar of hangemhi hangemhi
    17. August 2013 at 21:04

    At 19:35 Sumner says “As far as I can recall I have never criticized you in my blog.” Then at 19:42 Sumner says. “Cullen, this is an embarrassingly bad post of yours…”

    Glad we got that out of the way. LOL

  30. Gravatar of hangemhi hangemhi
    17. August 2013 at 21:09

    Sumner “I have no interest in banking or bookkeeping. My interest is monetary policy”. Yeah, just like me – I’ve got no use for bats, balls or bases – I just want to play baseball

  31. Gravatar of Ben J Ben J
    17. August 2013 at 21:44

    Why is it that countries like Australia can have big credit cycles and still manage to maintain a inflation target if the endgeneity of credit is such an enormous part of monetary policy? I guess they don’t have double entry bookkeeping or “flow of funds analysis” over there?

  32. Gravatar of Greg Ransom Greg Ransom
    17. August 2013 at 23:05

    “That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment.”

    So who gets those loans?

    Someone does get those loans, and some others don’t get those loans — and some received the money from those getting loans, and some do not get the money — and at some point the knowledge problem swamps the non-Fama, idiots version of the EMH, and no one knows what is happening in particular cases or sector cases or in the overall system.

    And the shorthand metaphor of ‘someone gets the money first” turns — applying the same principle of charity we allow Keugman here — to be just as valid as Krugman’s “shorthand”.

  33. Gravatar of 123 123
    18. August 2013 at 00:47

    Mark,
    1. Fed’s programs were based on ad-hoc quantities, so their monetary part was not effective in correcting monetary conditions. On the other hand, LTROs are much more credible in adjusting monetary conditins.
    2. Here you ignore the effect of haircuts and mark-to-market on LTRO risk. If you take them into account, LTRO’s are much safer than QE.
    3. LTROs have full allotment. They rely on the arbitrage in determining the size of the monetary base. Monetary base increases until the prices of LTRO loans increase to the level consistent with market estimate of ECB’s reaction function.

  34. Gravatar of Tom Tom
    18. August 2013 at 01:16

    the banks lend out the newly created reserves; — but are the banks really doing this? What does the data say about loans to newly formed S corporations?

    I think the data shows the banks are NOT lending out more loans, and possibly not yet even as much as a 10 – year quarter average of “loans to new companies” or “total private sector loans”.

    Scott, insofar as bank lending is the primary transmission mechanism of all monetary policy, there is a lot more talk about stock market prices here than loan disbursement analysis.

    Why is that?

  35. Gravatar of Mike Sax Mike Sax
    18. August 2013 at 06:32

    Regarding Krugman’s line “people who believe that they have discovered the hidden secrets of the monetary universe, somehow missed by generations of economists”, I will just observe that it is possible for generations of economists-or any kind of scientists-to be wrong.
    Believing that a signficant part of the current mainstream paradigm doesn’t make you loopy in and of itself.

    Kuehn wrote about revolutions in scientific paradigms but if no one but a crank ever questions what a mainstream school has thought for a long time how are there ever any revolutions in paradigms?

    At the end of the day this can be pretty convenient for the Neoclassical school as what they’re saying is you can question anything as long as you start from agreeing with the NC school on most of the essential questions.

  36. Gravatar of Mike Sax Mike Sax
    18. August 2013 at 06:33

    “Believing that a signficant part of the current mainstream paradigm is wrong doesn’t make you loopy in and of itself.”

    I meant to say

  37. Gravatar of Mike Sax Mike Sax
    18. August 2013 at 06:40

    I mean a good example is something you always say Scott-that interest rates don’t necessarily indicate the stance of monetary policy correctly.

    David Glasner argues that while its true that this was a new insight for Friedman-thereby arguing that generations of economists had been wrong-this focus on interest rates wasn’t invented by Keynes or even Hicks and IS-LM.

    Rather it was a relic of the old gold standard.

    http://diaryofarepublicanhater.blogspot.com/2013/08/interest-rates-arent-good-gauge-of.html

    So right there we have an example of most economists being wrong about something for many generations. Unless you believe that economics or any other science is a closed shop it’s going to sometimes happen that someone does notice an error of the mainstream school that has been made for many years.

    Simply saying that most people in the field disagree with you so you must be crazy is pretty convenient but not very compelling on a scientific basis.

  38. Gravatar of TravisV TravisV
    18. August 2013 at 07:19

    Isn’t this analysis exactly backwards?

    “Nomura’s George Goncalves says the bond weakness has to do with angst surrounding the next Fed chair, and the possibility that Larry Summers will be appointed, and take the Fed in a more hawkish direction, meaning fewer asset purchases, and a faster move away from zero interest rates.”

    Read more: http://www.businessinsider.com/nomura-bonds-fall-on-concerns-that-larry-summers-will-be-hawkish-2013-8#ixzz2cKoHvlXj

    If Summers is appointed instead of Yellen, shouldn’t we expect LOWER interest rates if anything?

  39. Gravatar of marcus nunes marcus nunes
    18. August 2013 at 07:40

    In a subsequent post PK states that over thae last 20 years interest rates has again become a good indicator of monettary policy:
    http://thefaintofheart.wordpress.com/2013/08/18/paul-krugman-thinks-interest-rates-is-a-good-indicator-of-the-stance-of-monetary-policy/

  40. Gravatar of ssumner ssumner
    18. August 2013 at 08:13

    Matt, Good point.

    Cullen. I was commenting on the specific quotation of Krugman’s that I provided. That’s how it works over here. When I quote someone, my comments refer to that quotation, not other parts of the post that I did not quote. I don’t need to read your blog post to know how I feel about the specific quotation I provided, as it doesn’t refer to anything you said. It’s a Krugman quotation. He’s merely trying to clarify his own beliefs, nothing more.

    Monetary policy is all about the Fed’s control of the supply and demand for base money. It’s true that banks hold a lot of base money, but so do drug dealers. I don’t feel I need to be an expert on drug dealers to comment on monetary policy.

    JoeMac, No, money would be the thing that backs those bank notes. They need to be backed, otherwise you’ve legalized counterfeiting. I presume you mean that bank reserves would become the medium of account.

    Negation, What we really need is a policy change that will also help in the next crisis.

    hangemhi, He went first!!

    Tom, You said;

    “Scott, insofar as bank lending is the primary transmission mechanism of all monetary policy, there is a lot more talk about stock market prices here than loan disbursement analysis.

    Why is that?”

    Because bank lending is not an important part of the monetary policy transmission mechanism. However, bank demand for reserves may be important.

    Don’t confuse money with credit.

    Mike Sax, You said;

    “Simply saying that most people in the field disagree with you so you must be crazy is pretty convenient but not very compelling on a scientific basis.”

    That’s true, but in fairness to Krugman he didn’t do that. He explained exactly why these theories are nutty.

    TravisV. I don’t have strong views on that. Sometimes tight money leads to higher rates, and sometimes it leads to lower rates. All we can really say is that over the long run it usually leads to lower rates.

  41. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. August 2013 at 12:36

    123,
    1. “Fed’s programs were based on ad-hoc quantities, so their monetary part was not effective in correcting monetary conditions. On the other hand, LTROs are much more credible in adjusting monetary conditins.”

    The announced quantities under the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSLF) were determined by the Fed Chair upon recommendation of the System Open Market Account (SOMA) Manager. If you consider that ad hoc than so be it. But the amounts lent under PDCF, AMLF, CPFF, MMIFF, TALF etc. were determined entirely by the structure of the program and the desire of the participants, exactly like LTRO.

    2. “Here you ignore the effect of haircuts and mark-to-market on LTRO risk. If you take them into account, LTRO’s are much safer than QE.”

    That’s not the point. The collateral accepted under the ECB’s enhanced credit support programmes satisfy a lower risk standard than the collateral accepted under the Fed’s credit and liquidity programs, which is the appropriate comparison.

    3. “LTROs have full allotment. They rely on the arbitrage in determining the size of the monetary base. Monetary base increases until the prices of LTRO loans increase to the level consistent with market estimate of ECB’s reaction function.”

    Absolute nonsense. The rate of interest, the term and the collateral requirements were all fixed under LTRO. Only the amount borrowed was determined by the participants, and how is that any different from PDCF, AMLF, CPFF, MMIFF, TALF etc.?

  42. Gravatar of 123 123
    18. August 2013 at 14:24

    Mark:
    1. SOMA manager is an impressive title, but the person with this title managed to create tightest monetary conditions since WWII.
    You confuse money and credit. PDCF had a flexible determination of credit support, but PDCF was not used to steer the monetary conditions.
    In the US, the size of monetary base was determined by FOMC, not PDCF. In the Euro area, it was the opposite – the size of monetary base was determined by 3 year LTROs, not by the governing council.
    2. You should compare the risk of assets acquired by the central banks. ECB acquires not the collateral, but the collateralized loan. ECB uses haircuts and mark-to market to equalize the risk no matter how risky the collateral is.
    3. LTRO interest payments are not fixed, but variable, forcing markets to estimate the ECB reaction function. The ECB fixes the LTRO interest rate at the average rate of the policy rate over the life of the respective LTRO.

  43. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. August 2013 at 15:40

    123,
    “PDCF had a flexible determination of credit support, but PDCF was not used to steer the monetary conditions.”

    Neither is LTRO.

    “In the US, the size of monetary base was determined by FOMC, not PDCF.”

    Wrong. PDCF added directly to the size of the monetary base. So did all of the Fed’s credit and liquidity programs.

    “In the Euro area, it was the opposite – the size of monetary base was determined by 3 year LTROs, not by the governing council.”

    Also wrong. It’s obviously determined by both.

    “You should compare the risk of assets acquired by the central banks. ECB acquires not the collateral, but the collateralized loan.”

    Again wrong. Collateral is acquired directly by the ECB by the central bank of the country of the borrowing member bank. Draghi has stated that in cases where the collateral is acquired by central bank of the the country of the borrowing member bank the “responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorizing their use.” By doing it this way the ECB reduces its risk and delegates credit authorization to the central bank of the borrower. This also widens the scope of eligible securities.

    “ECB uses haircuts and mark-to market to equalize the risk no matter how risky the collateral is.”

    Nevertheless the equalized risk is still greater than that of the risk of the collateral required under the Fed’s credit and liquidity programs.

    “LTRO interest payments are not fixed, but variable, forcing markets to estimate the ECB reaction function. The ECB fixes the LTRO interest rate at the average rate of the policy rate over the life of the respective LTRO.”

    The loan is taken out beforehand with the understanding that the interest rate charged to the borrowing bank will be equal to the average of the MRO rate during the life of the loan. Thus the interest rate variable only in the sense that the ECB has the power to change it. From the point of view of the borrowing bank the interest rate is fixed.

  44. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. August 2013 at 15:46

    “Collateral is acquired directly by the ECB by the central bank of the country of the borrowing member bank.”

    should read

    “Collateral is acquired directly by the ECB or by the central bank of the country of the borrowing member bank.”

    and

    “Thus the interest rate variable only in the sense that the ECB has the power to change it. From the point of view of the borrowing bank the interest rate is fixed.”

    should read

    “Thus the interest rate is variable only in the sense that the ECB has the power to change it. From the point of view of the borrowing bank the interest rate is fixed.”

  45. Gravatar of Bank Reserves | Monetary Realism Bank Reserves | Monetary Realism
    18. August 2013 at 19:10

    […] http://www.themoneyillusion.com/?p=23072 […]

  46. Gravatar of TallDave TallDave
    18. August 2013 at 19:58

    I get lots of commenters coming over here breathlessly telling me the wonderful news””it’s been discovered that banks don’t actually loan out reserves!

    Just steer them this way: http://en.wikipedia.org/wiki/Fractional_reserve_banking

  47. Gravatar of ssumner ssumner
    18. August 2013 at 23:15

    TallDave, Don’t tell the MMTers about that.

  48. Gravatar of 123 123
    19. August 2013 at 01:10

    Mark,
    You have started playing word games, trying to prove that black is white.
    Collateral is posted, not acquired (even though some non-native english speakers are using the word acquired).
    LTRO rate is floating, not fixed (even though some documents use the word fixed in their descriptions of the floating rate calculation formula).
    All these word games are distracting you from the fundamental fact that the Fed and the ECB are using completely different frameworks. The Fed is continually using active measures to determine the size of the monetary base, and the ECB is using a passive market-based mechanism to determine the size of the monetary base. That’s why Fed’s credit measures have only weak monetary effects, and that’s why LTRO is a primarily a monetary measure.

  49. Gravatar of Full Employment Hawk Full Employment Hawk
    19. August 2013 at 07:01

    “as IS-LM is to controversies about interest-rate determination. When we ask, “Are interest rates determined by the supply and demand of loanable funds, or are they determined by the tradeoff between liquidity and return?”, the correct answer is “Yes” “” it’s a simultaneous system.”

    Both are correct in general equilibrium, but the economy is not usually, if ever, in general equilibrium. In the IS-LM model, if the LM curve shifts to the right due to an increase in the money supply, at the new general equilibrium, where the new LM curve intersects the IS curve, both are again correct. But to get to the new general equilibrium output has to increase. So, unless output adjusts upward instantaneously in response to the increase in the money supply, there is a short-run in which the LM curve has shifted down and to the right, but output has not yet adujusted, or not yet completely adjusted. Under this situation, the two theories are not equivalent. If the interest rate is determined by “the tradeoff between liquidity and return” we are initially at the point on the new LM curve at the original level of output. This gives us the liquidity effect of the increase in the money supply. On the other hand if the interest rate is determined by “the supply and demand for loanable funds,” we are initally at a point on the IS curve at the original level of outut, so that there is no liquidity effect and the interest rate is higher. The two interest rates are clearly not equivalent until the new general equilibrium has been reached.

    The whole issue is complicated by the fact that the term “loanable funds” has come to be used to mean supply and demand for loans resulting from saving and borrowing, shown by points on the IS curve. This differs from the original “loanable funds theory of interest” as used by people like Wicksell, and even Patinkin. Under this theory the supply and demand for loanable funds not only includes these factors, but also hoarding and bank lending, that is, changes in the demand and supply of money, which has still different implications for the behavior of the interest rate out of general equilibrium. So that when the term “loanable funds” is used we need to make sure we understand in which way the term is used.

  50. Gravatar of Full Employment Hawk Full Employment Hawk
    19. August 2013 at 07:04

    “there WERE some cases during the Great Recession of workers accepting pay cuts and reductions in hours worked to save jobs. I know they are few and far between”

    That is why the wages are described as being sticky, rather than fixed downwards.

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2013 at 07:15

    123,
    “Collateral is posted, not acquired (even though some non-native english speakers are using the word acquired).”

    I’m just repeating the word you used in your previous comment:

    “ECB acquires not the collateral, but the collateralized loan.”

    “Posted” is the correct term but don’t accuse me of slipping into more common language when you clearly used it first. So if anyone here is playing word games its clearly you.

    Now let’s get to the point:

    “The Fed is continually using active measures to determine the size of the monetary base, and the ECB is using a passive market-based mechanism to determine the size of the monetary base. That’s why Fed’s credit measures have only weak monetary effects, and that’s why LTRO is a primarily a monetary measure.”

    The amounts borrowed under PDCF, AMLF, CPFF, MMIFF, TALF etc. added directly to the monetary base and were determined entirely by the borrowers subject to the conditions of the loan. The only conceivable way the Fed could have impacted the amount outstanding of these loans during the life of these programs was through some sort of monetary policy action.

    The amounts borrowed under LTRO added directly to the monetary base and were determined entirely by the borrowers subject to the conditions of the loan. In the case of LTRO one of these conditions happens to be the current MRO rate. The only conceivable way the ECB can impact the amount outstanding of these loans during the life of these programs was through some sort of monetary policy action, such as changing the MRO rate.

    It seems quite obvious to me that since the LTRO rate and the MRO rate are identical, that PDCF, AMLF, CPFF, MMIFF, TALF etc. are the more “passive” policies and LTRO is the more “active” policy as the rate charged under PDCF, AMLF, CPFF, MMIFF, TALF etc. was predetermined, and rate charged under LTRO is subject to the whims of the Governing Council.

    And let me remind you the ECB itself does not consider LTRO to have any effect at all on its monetary policy stance. So you are making completely outlandish claim and so far have provided zero evidence in support of it.

  52. Gravatar of 123 123
    19. August 2013 at 10:05

    Mark,
    What matters for monetary policy is the expected future path of monetary base. While there were periods when the operation of credit programs determined the size of Fed’s monetary base, this was a short term phenomenon, and FOMC was firmly in the driver’s seat determining the expected future path of monetary base. Since FOMC determines the size of monetary base, any monetary impact of Fed’s credit programs was very weak.

    On the other hand, the ECB policy stance is described by interest rates, and during the LTRO periods, market participants determine the size of monetary base, taking into account their forecast of future ECB interest rate policy actions.

    So the Fed makes two decisions – interest rate decision and monetary base decision, and the ECB makes only one. That’s why monetary effect of LTRO is strong. And there are practical benefits – markets decide better than SOMA manager.

    “rate charged under LTRO is subject to the whims of the Governing Council”
    If you have full allotment, except for very short periods it is necessary to have a floating interest rate to prevent explosive dynamics. And of course, at the time of the auction, the floating feature is a stabilizing factor that pins down the quantity demanded at the auction. Of course, it would be better to have auctions where participants forecast NGDP, but auctions where participants forecast future policy actions are better than nothing.

  53. Gravatar of Nick Edmonds Nick Edmonds
    19. August 2013 at 10:45

    ssumner

    “Monetary policy is all about the Fed’s control of the supply and demand for base money. It’s true that banks hold a lot of base money, but so do drug dealers. I don’t feel I need to be an expert on drug dealers to comment on monetary policy.”

    I’m not that familiar with the US economy, but are you saying that drug dealers’ demand for holdings of base money is comparable to that of banks? If so, surely some knowledge of what drives that demand would help understand the relationship between the stock of base money and the wider economy, wouldn’t it?

  54. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2013 at 13:37

    123,
    “What matters for monetary policy is the expected future path of monetary base.”

    Let me put it this way. Monetary policy is any action or statement by the central bank that changes the expected size of the monetary base, or changes the real demand for the monetary base.

    “While there were periods when the operation of credit programs determined the size of Fed’s monetary base, this was a short term phenomenon, and FOMC was firmly in the driver’s seat determining the expected future path of monetary base. Since FOMC determines the size of monetary base, any monetary impact of Fed’s credit programs was very weak.”

    I totally agree.

    “On the other hand, the ECB policy stance is described by interest rates, and during the LTRO periods, market participants determine the size of monetary base, taking into account their forecast of future ECB interest rate policy actions.”

    But the key words are “during the LTRO periods”. Just like the Fed’s credit and liquidity programs, the 3-year LTROs are a short term phenomenon that come to a definitive conclusion on February 26, 2015.

    “So the Fed makes two decisions – interest rate decision and monetary base decision, and the ECB makes only one. That’s why monetary effect of LTRO is strong. And there are practical benefits – markets decide better than SOMA manager.”

    Both central banks have two decisions. With an interest on reserves system it is possible to set the policy rate independently from the size of the monetary base. With QE and ZIRP the Fed has obviously not exercised this possibility yet. But all indications are this will change when ZIRP comes to an end. The ECB by its own admission is not in ZIRP, and since LTRO obviously does not count, so far the ECB has apparently not chosen to exercise this possibility.

    LTRO has no monetary effect because it is temporary. Temporary changes in the monetary base have no effect on monetary policy precisely because they have no effect on the expected size of the monetary base or on the real demand for the monetary base.

  55. Gravatar of 123 123
    19. August 2013 at 14:33

    Mark,
    Temporary vs. permanent distinction is not very helpful with LTRO here. First, we are talking about a period with a huge but a temporary shock. Second, rates were quite close to ZLB, constraining the policy space. Third, even though the shock did not change the optimal size of monetary base in 2015 much, the shock had a huge effect on the optimal path of the monetary base. Any policy that does not accommodate the shock by temporary expanding the base and accommodating this temporary demand is contractionary.

  56. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. August 2013 at 01:37

    123,
    1) The Fed’s credit and liquidity programs were also in response to a huge shock.
    2) A moment ago you were emphasizing how the ECB policy stance is “described by interest rates”. Now you’re pointing out they have no policy space. Which is it?
    3) The purpose of LTRO is to enhance credit in distressed financial markets. It has no monetary policy role beyond that.

  57. Gravatar of 123 123
    20. August 2013 at 04:24

    Mark,

    1) Fed’s response in terms of total quantity of monetary base was driven by FOMC decisions except for very short term.
    2) There was not a lot of room to cut rates
    3) If that was the purpose, why was LTRO not sterilized?

  58. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. August 2013 at 10:22

    123,
    1) The Fed’s credit and liquidity programs started on December 12, 2007 with the Term Auction Facility (TAF) and the dollar swap lines. Maiden Lane I, II and III are still ongoing. Counting only programs benefiting domestic institutions, without “ad hoc” amounts and designed to benefit individual institutions, the Fed’s credit and liqudity programs ran from March 16, 2008 (the Primary Dealer Credit Facility) to June 30, 2010 (Term Asset-Backed Securities) or a period of over 21 months. Granted that’s not as long as the 36 month LTROs but then the Fed didn’t stab itself in the foot by raising its policy rate twice (April and July 2011) in the middle of a sovereign debt crisis.
    2) Nonsense. LTRO1 was announced on October 6, 2011. At that time the MRO was 1.5% which was ridiculous.
    3) Use your head. None of the Fed’s credit and liquidity programs were sterilized either. The peak stock amount under the credit and liquidity programs was $1,067 billion on December 18th, 2008, at which time the monetary base $1,671 billion. Can you imagine the contractionary effect that would have occured if the Fed had sterilized its credit and liquidity programs?

  59. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. August 2013 at 13:32

    “…and designed to benefit individual institutions…”

    should read

    “…and not designed to benefit individual institutions…”

  60. Gravatar of 123 123
    20. August 2013 at 14:32

    Mark,
    we look at the same facts, but see the opposite things:

    1) “Fed’s credit and liqudity programs ran from March 16, 2008 (the Primary Dealer Credit Facility)…”
    The Fed was sterilizing everything before Lehman, so these programs had no impact on monetary base before then.

    2) Mark, 3 year LTRO’s were announced on December 2011. At the same meeting the deposit rate was reduced to 0.25 – that is to Bernanke’s ZLB line.

    3) “Can you imagine the contractionary effect that would have occured if the Fed had sterilized its credit and liquidity programs”
    Yes, I can imagine, as the contractionary effect was really strong during the period the Fed was sterilizing these programs (Mar – Sep 2008). The contractionary effect continued after the Fed stopped sterilizing them after Lehman, as until March 2009 monetary effect of extra base money was impaired as there was no medium-term guidance after the future stock of base money.

  61. Gravatar of apt apt
    20. August 2013 at 17:20

    I guess if people actually remembered (or even knew, at all) the basic, undergraduate-level, probably illusive Money Multiplier, they would do a lot better at this.

  62. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. August 2013 at 17:56

    123,
    1) You’re right, the Fed’s credit and liquidity programs were sterilized until the week Lehmans filed for bankruptcy (September 15, 20008). This actually underscores how badly monetary policy was conducted in the months preceding Lehmans. Over a third of the monetary base was devoted to the credit and liquidity programs from April 2008 onward, peaking at 39% in mid-August.

    In any case not counting those months still makes it over 21 months as evidently I said 21 before when I should have said 27 months.

    2) Again, you’re right, LTRO wasn’t announced until December 8, 2011, by which point the MRO rate had fallen to 1.25% which nevertheless is still ridiculous.

    On the other hand the deposit rate is the rate that banks are paid for keeping reserves at the deposit facility, not the rate banks have to pay for funds, so it is totally irrelevant. You can make the case that some banks are getting unsecured overnight funds at the EONIA rate, which was about 0.75% at the time of the LTRO announcement, but many banks, especially banks on the periphery, which is about a third of the eurozone by NGDP, are partially or totally cut out of the unsecured interbank market and can only finance themselves through the ECB’s operations at the MRO rate, and this was especially true in late 2011.

  63. Gravatar of 123 123
    21. August 2013 at 04:17

    Mark,
    1) Here ex-ante vs. ex-post distinction is important. At the time monetary base was injected, there was no expectation that it would last for 21 months.

    2) I am focusing on deposit rate, as it is the deposit rate that regulates the demand for reserves during the LTRO period.

  64. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. August 2013 at 05:47

    123,
    1) True, but that could go either way, that is to say, the Fed’s credit and liquidity programs could have lasted longer than 21 months. They lasted as long as they did because that’s how long the financial markets emergency lasted. Similarly banks are free to pay back LTRO early if they choose. Should the sovereign debt crisis be resolved they may find it is in their interest to do just that.
    2) Your original claim concerned “policy space”. The policy rate is the MRO rate, not the deposit rate. In my opinion loans issued under credit easing policies are contractionary if they are sterilized, so it really doesn’t matter how much policy space there is.

  65. Gravatar of ssumner ssumner
    21. August 2013 at 12:32

    Nick, Prior to 2008 much more base money was in the underground economy than in the banks. The Fed should target NGDP, and let the banks and drug dealers determine how much base money they want to hold when expected NGDP growth is on target.

  66. Gravatar of 123 123
    22. August 2013 at 00:18

    Mark,
    1) 3year LTRO’s are incentive-compatible auctions that determine the medium term path of monetary base. Fed’s credit programs did not determine the medium term path of monetary base, the medium term path of monetary base is determined by FOMC.
    By the way, many banks have repaid three year LTRO’s.
    2) All three ECB rates are policy rates.

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. August 2013 at 08:25

    123,
    1) The amounts lent under PDCF, AMLF, CPFF, MMIFF, TALF etc. were determined entirely by the structure of the program and the desire of the participants, exactly like LTRO. For 21 months these programs were unsterilized exactly like the 36 month LTROs.
    2) This is purely semantics. All central banks that pay interest on reserves have three policy rates. But only one of those rates always matters.

  68. Gravatar of 123 123
    23. August 2013 at 05:07

    Mark,
    1. In 2008 here was no commitment that monetary base will remain unsterilized over the medium term. It was only after such commitment was given the policy got better.
    2. Most ECB watchers focus on deposit rate when liquidity is ample

  69. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. August 2013 at 05:22

    123,
    1) Obviously.
    2) The rate banks borrow at is the one that matters.

  70. Gravatar of 123 123
    23. August 2013 at 13:02

    Mark: “obviously”
    That’s why LTRO is better – it is a medium term commitment.

  71. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. August 2013 at 13:58

    123,
    “That’s why LTRO is better – it is a medium term commitment.”

    Yes, it’s better than the Fed’s credit and liquidity programs before they made a medium term commitment in mid-September 2008 as you note. But that doesn’t make it significantly different from the Fed’s credit aand liquidity prograams after mid-September 2008, does it?

  72. Gravatar of 123 123
    25. August 2013 at 06:17

    Mark, medium term commitment regarding the monetary base was made only in 2009, and the commitment was done separately from these credit programs.

  73. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. August 2013 at 08:20

    123,
    The Fed’s credit and liquidity programs became unsterilized in mid-September 2008.

  74. Gravatar of 123 123
    25. August 2013 at 08:41

    Mark, but until 2009 there was no commitment that monetary base will not be reduced over the medium term.

  75. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. August 2013 at 12:01

    123,
    To what are you referring?

  76. Gravatar of 123 123
    25. August 2013 at 23:46

    Mark, here are the dates of the relevant FOMC guidance:

    December 16, 2008 “The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.”

    January 28, 2009 “The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level.”

    March 18, 2009 “To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.”

    Dec 2008 guidance sounds good, but there was a softening on Jan 2009. Only on Mar 2009 there was a firm decision.

  77. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. August 2013 at 04:03

    123,
    The original QE1 announcement was on November 25, 2008:

    “Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters.”

    Nothing much happened in December and January concerning QE1. The March announcement was the major expansion announcement.

    What does any of this have to do with the Fed’s credit and liquidity programs?

  78. Gravatar of 123 123
    26. August 2013 at 06:31

    Mark – that’s the point – Fed’s credit and liquidity programs had little to do with market expectations of medium-term path of monetary base. On the other hand, 3 year LTRO is a mechanism to set the medium-term path of monetary base.

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. August 2013 at 09:00

    123,
    To reiterate…

    The Fed calls PDCF, AMLF, CPFF, MMIFF, TALF, TSLF, TAF etc. “credit and liquidity programs”. Credit and liquidity programs are “designed to support the liquidity of financial institutions and foster improved conditions in financial markets.”

    The amounts borrowed under PDCF, AMLF, CPFF, MMIFF, TALF etc. added directly to the monetary base after 9/15/2008 and were determined entirely by the borrowers subject to the conditions of the loan. The only conceivable way the Fed could have impacted the amount outstanding of these loans during the life of these programs was through some sort of monetary policy action.

    The ECB calls LTRO an “enhanced credit support programme”. In the words of Claude Trichet “enhanced credit support constitutes the special and primarily bank-based measures that are being taken to enhance the flow of credit above and beyond what could be achieved through policy interest rate reductions alone.”

    The amounts borrowed under LTRO added directly to the monetary base and were determined entirely by the borrowers subject to the conditions of the loan. In the case of LTRO one of these conditions happens to be the current MRO rate. The only conceivable way the ECB can impact the amount outstanding of these loans during the life of these programs was through some sort of monetary policy action, such as changing the MRO rate.

    In short, LTRO is virtually identical in terms of purpose, structure, and effect as most of the Fed’s credit and liquidity programs after subsequent to mid-September 2008.

  80. Gravatar of 123 123
    26. August 2013 at 10:20

    Mark, you forget the short term vs. medium term distinction. LTRO, like QE, determined the size of the monetary base over the medium term.

  81. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. August 2013 at 10:28

    123,
    There is no date set for selling securities bought under QE, and based on statements by Bernanke and Yellen earlier this year none will ever be sold.

  82. Gravatar of 123 123
    27. August 2013 at 05:53

    Mark, again money vs. credit. While none of securities will be sold, there are other tools to sterilize the monetary base.

  83. Gravatar of Angry Bear » Why Banks are “Special”: The Short Story Angry Bear » Why Banks are “Special”: The Short Story
    27. August 2013 at 07:36

    […] Paul Krugman, Scott Sumner (seemingly unlikely bedfellows, but…), and most other mainstream economists want to argue that banks are not special — that there’s no reason for economists to understand and analyze their operations in detail, or incorporate those understandings in their (mental and formal) economic models. […]

  84. Gravatar of Asymptosis » Why Banks are “Special”: The Short Story Asymptosis » Why Banks are “Special”: The Short Story
    27. August 2013 at 07:37

    […] Paul Krugman, Scott Sumner (seemingly unlikely bedfellows, but…), and most other mainstream economists want to argue that banks are not special — that there’s no reason for economists to understand and analyze their operations in detail, or incorporate those understandings in their (mental and formal) economic models. […]

  85. Gravatar of Why Banks are “Special”: The Short Story | Symposium Magazine Why Banks are “Special”: The Short Story | Symposium Magazine
    27. August 2013 at 07:47

    […] Paul Krugman, Scott Sumner (seemingly unlikely bedfellows, but…), and most other mainstream economists want to argue that banks are not special — that there’s no reason for economists to understand and analyze their operations in detail, or incorporate those understandings in their (mental and formal) economic models. […]

  86. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. August 2013 at 12:23

    123,
    We have been discussing this for over a week now and in my opinion you are now throwing anything and everything and hoping that something sticks. This was an interesting discussion, but now it’s becoming much less so as a result.

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