Contributing to a Krugman Piece: Major Eco-Nerd Points For Tom Brown

     I've certainly had my Nirvana moments-for eco-nerds. Now my friend and Diary of a Republican commentator Tom Brown has a slice of eco-nerd Heaven himself. I should of course point out that he also has his own blog which is a great resource for those who really want to wrap their heads around the accounting method of banking done by endogenous money proponents.

    http://brown-blog-5.blogspot.com/

    Tom recently figured in the debate that's been going on between Krugman and Cullen Roche lately. Here is Tom in recent comments:

    Krugman responds to Roche (that's twice in one week, he's lead off with the words "Cullen Roche" and a link no less). And this time it's more conciliatory ... not fully of course: he's still saying Cullen didn't quite understand. And the best part is the article that Krugman links to.. I had a hand in that!

    "Check it out: the figures 1 and 2: When Cullen 1st posted that he had those screwed up, so I redid them for him and he just posted mine."

     "That's major eco-nerd points right there ;^) ... that plus I had multiple comments on my blog (two I think, ha!) from Nick Rowe yesterday!"

      "For someone who's crowed for almost a solid week about being liked to by Brad DeLong... I KNOW you know what I'm talking about. :D"

      "Hahaha!"

      "(Sumner must be eating his heart out... Krugman only brings him up twice a year or so by name... yet Sumner does a full 1/4 of his pieces about Krugman... plus Scott piped in agreeing w/ Krugman w/o ever mentioning Roche earlier this week... that's the one where Cullen uncharacteristically jumped into the comments on)"

       http://diaryofarepublicanhater.blogspot.com/2013/08/inflationphobia-does-president-obama.html?showComment=1377320351620#c5040076731264145652

    Oh did I crow a whole week about Delong? I'd say Touche but I'd dispute that characterization-in fact I've crowed a lot longer than that and am still doing so in fact. The only thing that will actually make me stop is an even better eco-nerd moment. Tom mentions Sumner, and he's, of course, gotten his two cents in on this debate.

    This is one time he agrees with Krugman:

    "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 commentators 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."

     http://www.themoneyillusion.com/?p=23072

     Cullen Roche argues that IS/LM id not the way to understand this recession as Krugman asserts that it is.

     "The two papers Dr. Krugman cites were written in 1963 and 1983 long before QE with IOR was implemented and during a time when policy was in fact very different.  The way monetary policy is enacted today is dramatically different than it was in 1963.  More importantly, the way policy impacts banking is dramatically different than it was in 1963.  For instance, the Tobin paper discusses in detail how reserve requirements are used as a policy tool to control reserve balances and influence the way banks lend.  But that view is entirely inapplicable to a world where the Fed is paying interest on reserves when their balance sheet has been expanded.  In other words, the cost of funding (what is traditionally thought of as the Fed Funds Rate) has become the Interest on Reserves Rate.  I.e., the IOR is a de facto FFR.  As point 1 expresses, you must account for substantial changes in the way the system is designed before you conclude that someone’s 50 year old views are a good stepping stone for understanding the current system and current policies.  I am fairly certain that James Tobin would agree that paying IOR changes the way we should view the system."

    
      http://pragcap.com/banks-and-the-monetary-base-a-friendly-response-to-paul-krugman

     So IOR is a major reason according to Roche that IS/LM no longer works, IOR is actually a very new policy-going just back to 2008. Sumner has often complained that IOR tightens monetary policy considerably.

    Roche then quotes Tobin as saying that money creation-which is 85% done by the banks, ie, endogenously-doesn't require that banks first have adequate reserves:

   "In other words, the charts above, which are quantity centric views of the monetary system don’t apply with IOR because the Fed isn’t targeting quantity, they’re targeting price!  So the charts above tells us a lot less than Dr. Krugman’s model claims because the quantity of money isn’t the determining factor of the interest rate.*

    "Second, the main point of my previous post was to highlight the fact that banks don’t make lending decisions based on the amount of reserves they hold.  And yes, James Tobin most certainly understood this point.  In  ”Commercial Banks as Creators of Money” he wrote:

“An individual bank is not constrained by any fixed quantum of reserves. It can obtain additional reserves to meet requirements by borrowing from the Federal Reserve, by buying ‘Federal Funds’ from other banks, or by selling or ‘running off’ short-term securities.”

     So he argues that IS-LM can't get the bottom of what happens when the money supply increases because it is just another version of the QTM. At this point Roche argues that the if the Fed wants to tighten money it need not increase the money supply by simply raise IOR.

      For his part, Krugman argues that there is not much at stake at all in these debates and the two sides are basically talking past each other.

      "Cullen Roche weighs in on my arguments about the usefulness of IS-LM — and I think we’ve reached a moment of impressive clarity. Basically, we aren’t having a real argument about the economic substance, on which we appear to agree. Instead, Roche and others are misunderstanding both what I mean by IS-LM and my reasons for invoking it in our current predicament. And much of the blame probably rests with yours truly: I probably haven’t been explicit enough about what I’m doing and why."

       "But still, why use any kind of “quantity-centric” approach at all? The answer is, to refute the bad guys! Remember, in 2009-2010 there were a lot of people pointing to the rapid rise in the monetary base and declaring that massive inflation was coming any day now; some of them are still waiting. So I rolled out good old IS-LM to show that in a liquidity trap they were all wrong, that even a huge increase in the base would go nowhere."

       "This conclusion, by the way, did not depend on interest on excess reserves. As I’ve pointed out in the past, Japan did a massive quantitative easing without IOER, and the results were basically the same — nothing much — as QE here. Of course IOER offers a new tool of monetary control — Woodford talked all about that in the 12-year-old paper cited above. But the fundamentals haven’t changed."

     http://krugman.blogs.nytimes.com/2013/08/23/the-monetary-base-is-lm-and-all-that-very-nerdy/?_r=1&

     Sumner has argued against Post Keynesian type models that argue for endogenous money that only QTM can explain the price level.

   
    "This is sort of a response to some Keynesian/fiscal theory/Post Keynesian/MMT theories I’ve seen floating around on the internet.  Theories that deny open market purchases are inflationary, because you are just exchanging one form of government debt for another.  But first a few qualifiers:

 1.  If the new base money is interest-bearing reserves, I fully agree that OMOs may not be inflationary.  That’s exchanging one type of debt for another.  If it does raise inflation expectations (as QE2 did) it’s probably because it changed expectations of future monetary policy.

2.  If nominal rates are near zero, the situation is complex–I’ll return to that case later.

     "So let’s start with an economy that has “normal” (i.e. non-zero) interest rates, and non-interest-bearing base money.  How does the price level get determined in that case?  I’m told there are some theories of fiat money that suggest it must evolve from commodity money.  I don’t agree.  I think the quantity theory of money is all we need.  Suppose you dump 300,000 Europeans on an uninhabited island—call it Iceland.  The ship also drops off some crates of Monopoly money, and they’re told to use it as currency.  Assume no growth for simplicity.  Also assume no government and no banking system.  It’s likely that NGDP will end up being roughly 15 to 50 times the value of the stock of currency.  Once you pin down NGDP, then you figure out RGDP using real growth theories, and voila, you’ve got the price level.  At this point you might be thinking; “you consider ’15 to 50 times the currency stock’ to be a precise scientific solution?”  No, but it gets us in the ball park.  It tells us why prices are not 100 times higher than they are, or 1000 times higher.   BTW, prices in Japan are 100 times higher than in the US, and Korean prices are 1000 times higher.  I don’t see how other theories can even get us into the right ball park."

     http://www.themoneyillusion.com/?p=10116

      So here-he wrote this in July 2011 but I don't believe he's significantly changed his views on the subject since then- Sumner in this post that the supply of money does money does matter-if there is no IOR, no government, and no banking. It would seem this is the entire point of the Post Keynesians.