Steve Waldman Calls For an Economic Detente

       I admit I've been urging a war between say the MMers and the MMTers. I also found the Krugman-Keen debate interesting though somewhat perplexing. Steve however was not a fan of that debate and actually even suggests there could be some peace between MMT, MM and the New Keynesians. He also mentions the sectarian struggle between MMT and MMR but no one outside MMT circles could have any idea of that.

       For my part it's been enough for me to figure out what MMT is about-a lot of it works for me. But I'm not even going to try to figure out what argument there is between MMT and the new offshoot MMR (Modern Monetary Realism).

       Of Krugman-Keen, Waldman says:

       "People I admire were calling each other nasty names last week, so I cowered in the corner, put my hands to my ears, and hummed very loudly. I’m talking about the debate over money and banking that involved Steve Keen (1, 2, 3, 4, 5), Paul Krugman (1, 2, 3, 4, 5, 6, 7), Nick Rowe (1, 2, 3), Scott Fullwiler, and Randy Wray among others. Here are some summaries by Edward Harrison, John Carney, and Unlearning Economics. Anyway, although there were some good moments, this debate just made me unhappy. The mechanics of banking are straightforward and uncontroversial, although they are widely misunderstood. [1] Yes, some misunderstandings were expressed and then glossed over rather than acknowledged when corrected. But that is to be expected in a very public conversation in which people are not behaving cordially, but are instead playing “gotcha” with one another. When a conversation is framed with one group calling the other mystics and the other shouting “Ptolemy!”, that is not a good sign."

     "I don’t mean this as criticism of anybody. Humans have egos, and I’ve certainly behaved worse. But it is terribly frustrating to me. The protagonists in this debate have much more in common than they have apart, and I think some progress could be made intellectually, and perhaps in the governance of the real world, if they’d communicate with an eye toward finding where they agree. Though I get in trouble for saying so, I think that the heterodox post-Keynesians, mainstream saltwater economists, and uncategorizable market monetarists actually agree on a lot. I think they unnecessarily pick fights with one another for reasons that are more sociological than intellectual. I don’t mean to pretend that they don’t have important theoretical differences. They do. They will probably never agree on what sort of policy would be “optimal”. But if we move the goal posts from perfection to better-than-the-status-quo, they’d find a lot of room to join forces. I do my best to understand all of their models, and as imperfectly as I may have done so, I think I’ve learned from them all."

      It's a rather surprising thought-this call for more rapprochement between these schools. He thinks there the chance for a lot of commonality.

      "When I think about these three groups, I don’t think, HIghlander-style, “There can be only one!”. I think “Cool! Let’s put these ideas together.”

      "There are lots of issues and controversies, but they strike me as far from insurmountable."

       http://www.interfluidity.com/v2/date/2012/04

       See, I admit I've sometimes felt that they are insurmountable. I mean when I first started reading the MMers-starting with Scott Sumner I was very intrigued. However what bothered me is I begun to understand that for Scott anyway it's an either/or-NGDP targeting is to take fiscal stimulus off the table. His many posts razzing Keynesians, talking how the "fiscal multiplier is roughly zero", he even had a post that uncharitably declared that Keynes was not a great investor because in the early 20s he lost money in the market and his father had to help him.

      By that standard Romney has no right to declare himself a great businessman.

      For my part I've been very vexed by this whole fiscal-monetary divide. I then came across MMT which also really intrigued me. They are closer to me on many things ideologically though I don't know that I would call myself an MMTer I do like a lot of what they say-including the JG. Indeed I myself has long thought we should bring back the PWA-but permanently.

      However, Steve's more optimistic take is very therapeutic. He is also very knowledgeable-I learn a lot every time I read one of his posts-I'm very new to his site. But it may be just the right medicine. Although I do respect a lot of MMT ideas, I do find their tone as Krugman has said somewhat carping-sometimes. Not all of them, but some of them have the unpleasant tactic of putting the choice to you as "Do you still beat your grandmother?"

      Sometimes they seem to argue in the vein of "You should agree with us and if you don't your either an idiot who doesn't understand banking or a fake liberal who doesn't want real change."

      Don't get me wrong I don't understand banking nearly as much as would be beneficial and I am trying to learn. I really do like the MMter's patron stain, Minsky a lot. While again I don't know if I would call myself an MMTer-sounds too "cutllike" to me somehow, I'm very careful about preserving my own individuality and independence of thought, I don't want the kind of sectarian struggles we saw between MMT and the offshoots in Cullen Roche's MMR; I would call myself however a Post Keynesian so I am very close to MMT.

     What I am learning from Minsky is that the banking sector is very important in modern capitalist economies. While many of the MMTers are left populists and bash banks a lot, as I read Minsky the financial sector is like what he says of the government-"both a blessing and a curse."

    While there may well be serious reforms and changes that need to be made in the financial economy there is no question of a healthy growing economy without a strong financial sector.

     The trouble is what Minsky calls the Financial Instability Hypothesis (FIH). The financial sector tends towards instability. Indeed, his point is that all capitalist orders at some point become unstable. In capitalism you can have stability for a considerably long period but it can never last forever. So while the New Deal Capitalism that emerged after WWII was very healthy at some point-due to its success, the financial sector begun to change, to expand and to take on more risk 

    Capitalism at some point always ends up being a victim of its own success. But as I read Minsky simple reflexive bashing the banks only takes you so far-it's better to talk about how you think the financial sector should be constructed than simply make the point that has been expressed a zillion times since 2008 that the banks sure are awful. Even if true we do need a healthy financial economy and we do need available credit. With no credit the economy couldn't grow.

    
    "One nice thing about a monetarist / saltwater / post-Keynesian synthesis, the thing that has me most excited, is that it would be perfectly possible to give our nouveau central bank a mandate that explicitly includes restraint of private-sector leverage in addition to an NGDP target. I think that the post-Keynesians are right to identify financial fragility as a first-order macro concern. On its own, NGDP path targeting would help “mop up” after financial fragility and collapse, because it weds depressions to inflations, engineering wealth transfers from creditors to debtors when things go wrong. But we’d rather avoid the whole cycle of fragility, insolvency, and inflation, if we can. Monetarist David Beckworth has pointed out that stimulative monetary policy need not expand bank-mediated imbalances between creditors and debtors. Proper expectations could encourage creditors to spend (and, implicitly, debtors to save), reducing overall indebtedness. That could happen! But it has not been our experience with expansionary monetary policy in the recent past. Over the Great Moderation, wealth inequality and the indebtedness continually expanded while interest rates were pushed towards zero in order to sustain the pace of debt-funded expenditure. Under an NGDP-targeting regime, however, Beckworth’s view might be vindicated. NGDP-targeting would dramatically increase the vulnerability of creditors to inflation compared to the status quo price-stability commitment. Creditors might become less willing to accumulate large stocks of fixed-income assets, especially as indebtedness and perceived financial instability grows, for fear that a “Minsky moment” will require a path-targeting central bank to engineer a burst of inflation. In my view, nothing has distorted financial market behavior more egregiously than taking inflation risk off the table, which has guaranteed real rents to default-free debt holders, financed if necessary by the taxation of workers and the nonconsumption of the unemployed. Restoring inflation risk to its proper place (a bad economy means crappy real returns even to fixed-coupon debt) may be enough to shift private sector incentives and prevent unwanted accumulations of financial leverage. The market monetarists could be right, full stop."

    
     "But the post-Keynesians might be right that treating financial fragility as an afterthought is never sufficient, that the dynamics of endogenous instability identified by Minsky will not be thwarted by vague fears of inflation among creditors. If macro policy were to include a leverage cap as well as an NGDP path target, and if the central bank were empowered with a broadly targeted fiscal instrument, an unwelcome expansion in private sector leverage could be opposed with a shift towards tighter money but looser fiscal. This would reduce the pace of new borrowing, and accelerate repayment of existing private-sector debt, shifting creditors’ claims from fragile private-sector balance sheets to an expanded public sector debt stock. The NGDP path (with the occasional inflations it imposes) and the leverage cap (with the occasional deficits it engenders) would combine to shape the budget constraint faced by the political branches of government. Loose bank regulation would be paid for with automatic fiscal outflows to constrain leverage rather than via occasional crises and bailouts. The cost of borrowing would be related to the level of aggregate leverage and the government’s consolidated fiscal stance, and would be set reactively rather than actively by the central bank to maintain the
NGDP path subject to an aggregate leverage constraint."

     "Maybe this is a terrible idea. I’m intrigued, but I’m kind of an idiot. The rest of you are very nice and smart and reasonable. You should talk with one another and stop picking fights over how many straw men can dance on the head of a DSGE model. Please."

       My though on the fiscal-monetary divide is largely this. There is a place for both fiscal and monetary stimulus. While I think the MMers go to far in rejecting fiscal stimulus, I do think some MMTers go too far the other way. The real difference between fiscal and monetary stimulus as I'm coming to see it it that they are different types of medicine so neither one can be used mutually exclusively. I came to this view largely by Minsky's analysis of the policy response to the 1974-75 recession. According to Minsky this could have been a depression, even a worldwide one without the strong government response.

     Fiscal policy increased government transfer payments exponentially. Particularly UI increased by a factor of 4 in 1975. The other part was the Fed's assistance to the banks. It must be remembered that the reason for being for the Fed is to ensure the stability of the financial system. And whatever justified criticism the Fed deserves-for my part it's it's "independence" that is most problematic, I think that reforms in the form of people like Barney Frank, and the late Henry Gonzalez would improve the concern over "regulatory capture."-it has overall been a very successful system. Prior to the Federal Reserve Act in 1913 we had a recession about one out of every two years in the previous 40 years-the age of the classical gold standard. We also of course had a bank panic about once every 3 or 4 years. There is no way to deny the dramatically improved post-Fed performance.

    It's interesting that in Britian the BOE is directly answerable to the fiscal authorities-they can literally instruct the BOE to do NGDP or inflation targeting or whatever else.

    In any case this strong government response both at the fiscal and monetary level worked. It was the first recession that saw national income increase. To be sure Minsky does say that in the long run this made the system more fragile. Still I don't see how we can't think that 1975 was a much better policy response than 2008.

    If there is anyone thing that Steve says I agree with it is this:

      "In my view, nothing has distorted financial market behavior more egregiously than taking inflation risk off the table, which has guaranteed real rents to default-free debt holders, financed if necessary by the taxation of workers and the nonconsumption of the unemployed. Restoring inflation risk to its proper place (a bad economy means crappy real returns even to fixed-coupon debt) may be enough to shift private sector incentives and prevent unwanted accumulations of financial leverage. The market monetarists could be right, full stop."

     Absolutely that has been a problem and it's a large part of why I far from see the Great Moderation as an entirely unproblematically good period of US monetary history

     While I may disagree with Scott Sumner on many things one thing I will agree with is his comments about Steve:

       "No time to comment on his new post, however I never get depressed reading Steve Waldman. But I do strongly disagree with this:

I’m intrigued, but I’m kind of an idiot. The rest of you are very nice and smart and reasonable.

Steve’s so nice and smart and reasonable that reading his posts makes me realize that I need to try harder.

        http://www.themoneyillusion.com/?m=201204&paged=5