Tuesday, March 6, 2012

John Carney — MMT and Austrian Economics Walk Into a Bar...


Austrians are not going to be happy with this, other than those that have realized how the modern monetary system actually works, like Edward Harrison at Credit Writedowns.

Good post — clear and concise. Sinks New Classical models based on loanable funds, too. Deft work.

Read it at CNBC NetNet
MMT and Austrian Economics Walk Into a Bar...
by John Carney | Senior Editor

15 comments:

Trixie said...

I thought this was a excellent post. Very fair. This I'll listen to. Hell, I might even agree. It's the same reason I'm drawn to heteconomist as of late.

If Carney keeps this up, he may turn me into an Austrian if Peter doesn't turn me into a Marxist first. But when anyone OCDs on the Buckaroo Program, I just can't take that seriously.

The Economic Maverick said...

Thanks for the link, I liked the post. It be nice if most of the useless business media shows had panel discussions with guys like John, Ed Harrison, Mike's crew here, Cullen Roche's crew over at MMR, Wray's crew, Yves, other people who actually know how the system actually works, and than debate preferences?

Anonymous said...

A good article by Carney. It turns out the Austrians understanding of current monetary system is wanting.
Regarding the managing part. Economy has been managed with this kind of system for a long time. You can imagine the government being a driver of a car, but the problem is the driver doesn't know that with the steering wheel you can change the direction of the car, and instead the driver thinks that car will go faster if he turns the steering wheel right.
Is this kind of driving a catastrophy? Indeed It is. MMT scholars want to point out what the steering wheel really does. Regardless of how the car is driven, It is a fact that the driver is driving the car. And if the driver knew what the steering wheel did, he would drive the car better not worse. It doesn't help the driver if we take the steering wheel off the car.

Matt Franko said...

Mav,

Mike has reported here that he is constantly pitching such a show all over NYC and the execs dont buy it.

I agree with you, that would be a great show for RIGHT NOW. Folks are way above what the mainstream media currently thinks is interesting... cable prime time is like a giant garbage Jerry Springer show...

Resp,

Matt Franko said...

Trix,

You know more than Marx did. Marxism imo looks like it was based on a false "taxpayer on the hook" paradigm.

An accurate understanding of the operational details of our US monetary economy is foundational. If you dont get that right, you dont get anything else right. Marx looks like he was wildly mistaken in this regard and it should call all things Marxian into question.

Example:

http://mikenormaneconomics.blogspot.com/2011/12/enigma-of-capital-and-money.html

Here's a guy (Harvey) who has been teaching a course on Marx's Kapital for 40 years (40 YEARS!) and this is what the guy comes up with:

"Capital is not a thing but a process in which money is perpetually sent in search of more money."

Whaaaaaaatt?

This is all he can come up with? After 40 years? His students aught to give HIM the Greg Mankiw treatment.

He is confused. This is because he doesnt understand or cant see the foundational aspects of a monetary economy.

So I dont know how useful it would be for someone already within the MMT paradigm to invest a lot of time into Marx at this point...

Resp,

mike norman said...

Economic Maverick and Matt-

I'm still pitching it and with more urgency than ever now because I'm unemployed...having quit Fox. Still no one listening. Not even an invite to come on one of the shows. :(

Tom Hickey said...

Mike, this is probably a sign of corporate running scared of the truth, just as the execs at MSNBC told Cenk to dial it down. But if there is enough demand for something, then the greed takes over. Not enough demand for MMT established yet perhaps, although that seem to be changing pretty quickly now as MMT gets exposure.

mike norman said...

You're right, Tom.

I remember the late Mark Haines of CNBC telling me back in 1998, when I pitched a commodities show, that there wasn't enough "critical mass" to be covering commodities. I was early, but what a time to get into that sector! Boy, what a time!!!

Anonymous said...

Why'd you quit Fox?

Hugo Heden said...

Interesting!

Carney finishes with:

> The ultimate divide is partly aesthetic/moral. Many Austrians see the set of MMT—or Keynesian, for that matter—solutions as a nightmare of an ever-expanding state. The MMTers aren’t as bothered by a more expansive role for the state.

> But it is also pragmatic. The Austrians just don’t believe the government is capable of adequately carrying out the economic management tasks the modern monetary system demands. This kind of heroic economic engineering is just beyond the capability of any organization. The MMTers have more confidence in the managers.

Probably true. However - minor note, MMT seems highly critical of traditional Keynesianism. MMT prefers *automatic* stabilizers. K-ism on the other hand has used/proposed *discretionary* spending/non-spending ("pump priming", military K-ism, fiscal "fine tuning"). To this, MMT is critical.

Such measures won't achieve full employment without also inducing inflation. MMT prefers *automatic* tools where the economy is stimulated from the "bottom" (where the unemployed are), with spending decisions *locally* - de-centralized (although the actual financing comes from the government).

The Austrian may be more sympathetic to this approach than to traditional K-ism..?

The Economic Maverick said...

How about prototyping a show on the internet/youtube? Could just use the blog as a base and try to scale with the available tools. Use Kick-starter to see if seed funding is possible, though not sure how much funding it may yield...

Adam1 said...

“The ultimate divide is partly aesthetic/moral. Many Austrians see the set of MMT—or Keynesian, for that matter—solutions as a nightmare of an ever-expanding state. The MMTers aren’t as bothered by a more expansive role for the state.”

No, MMT’ers are generally not as worried about a well regulated fractional reserve banking system. If John and or the Austrians want to go back to lending out savings then they are fundamentally asking us to throw out the entire existing banking system.

Fractional reserve banking has been around since the early 1700’s, does not require a central bank (CB), it doesn’t require legal/specific/agreed upon “reserve” requirements and the interest rate of its reserves are not tied to savings rates.

Fractional reserve banks existed in the USA prior to the FED’s establishment (1913) and prior to any legally binding reserve requirements. The first legally binding reserve requirements were placed on commercial banks holding deposits of the US Treasury in the 1830, but most banks weren’t banking with US Treasury. State laws didn’t start to appear until the 1840’s.

So how does a fractional reserve bank work and how does the cost of funds (reserves) get determined? First let’s start with reserves; reserves are a classification of “money” or asset which a bank uses to settle payments with other banks. It also keeps vault cash on hand to meet day to day cash withdrawals of its customers. A bank only needs to use reserves or vault cash when “money” is leaving the bank’s balance sheet. In the case of reserves it means it is moving off one bank’s balance sheet and onto another bank’s. Why does this happen? Well if a bank’s customer writes a check to another banks customer (who deposits that check) it will need to settle up that payment. Likewise if a customer receives a loan from the bank and his purchase ends up as a deposit at another bank the originating bank will have to settle up that payment as well. The point is that reserves are used to settle payments between banks regardless of what is driving the transactions (a movement of deposits or a loan). So it is inter-bank payments that drive the demand for reserves.

On the supply of reserves, well in the central bank world they are basically infinite or at least on demand as needed by the banking system. In a non-central bank world it depends on where the supply of reserves comes from. In the gold standard era they came from the rate at which gold was mined and deposited at a bank. In NEITHER case was it tied to anyone “saving” money.

A specific bank may acquire reserve by acquiring deposits, but that acquisition did not change the overall supply of reserves (unless it came from a gold deposit from a mining company or its customers in the pre-central bank gold standard era) because it was really just a settlement usage of reserves between two banks. It is the volume of those transactions plus the rate of overall reserve growth that determines the inter-bank interest rate on reserves. In the CB era, that interest rate is typically the target rate and the CB adds and removes the supply of those reserves to maintain its target rate.

But overall savings is not tied to the demand for reserves nor the supply of reserves. Savings has no barring on the interest rate of those reserves. Nor has it for nearly 300 years! If John, or any Austrian wants to talk about returning banking to lending out savings we’re talking about abandoning the entire current banking system for something that hasn’t been used (for the most part) in over 300 years – lets be clear about.

Ken said...

Adam1 .... great summary. Also ... has there ever been a 100 percent hard money system with no fractional reserve or other means of flexibly expanding credit ever? If so where, and how did it work out? I read David Graeber's book and don't recall any evidence of such a thing.t

Adam1 said...

Ken,

I can't say I'm a bank history expert. I work for a bank and have become very intersted in the operational structure of fractional reserve banking because of where I work and because of MMT. You might find a Bill Mitchel blog post on some options of interest...

http://bilbo.economicoutlook.net/blog/?p=7299

I belive he talks about giro banking which is a non-fractional reserve bank and there are I believe a few in existance still today.

Trixie said...

Yeah, I hear ya Matt. Larger point is that I am looking for an honest analysis and presentation when engaging MMT. Not caricatures and "spin". And I don't care which school of economic thought that comes from.

Although, admittedly, I'd love to be able to align myself with Marx. For the same reason I drink Bud Light. It just pisses everyone off.