I'm glad he said this as it's something I've often thought myself-that this is kind of like a new Salon Era of economic discourse. As he notes, contra fuddy duddies like Robert Samuelson, a big part of this is the rise of the Internet.
"Pundits like Samuelson seem to long for an age when wise men, from their platforms at major news orgs, sifted truth from falsehood and delivered sound judgment to the masses. The trouble is, that age never existed. I read a lot of economics reporting in the pre-Internet era, and by and large it was terrible. In part this was because the reporters and pundits often knew little economics — in fact, there was a sort of bias against having reporters with too much expertise, on the grounds that they wouldn’t be able to relate to the readership. In part it was because there wasn’t an effective mechanism for checking facts and interpretations: a reporter or pundit could say something that everyone who knew anything about the subject realized was all wrong, but those with better knowledge had no way of getting that knowledge out in real time."
"Pundits like Samuelson seem to long for an age when wise men, from their platforms at major news orgs, sifted truth from falsehood and delivered sound judgment to the masses. The trouble is, that age never existed. I read a lot of economics reporting in the pre-Internet era, and by and large it was terrible. In part this was because the reporters and pundits often knew little economics — in fact, there was a sort of bias against having reporters with too much expertise, on the grounds that they wouldn’t be able to relate to the readership. In part it was because there wasn’t an effective mechanism for checking facts and interpretations: a reporter or pundit could say something that everyone who knew anything about the subject realized was all wrong, but those with better knowledge had no way of getting that knowledge out in real time."
"Let me give an example. A couple of years ago Samuelson dismissed the relevance of Keynes, because conditions have changed; these days we have lots of debt, whereas
When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest.
"My guess is that in the pre-Internet era, an assertion like that would simply have sat there; economists would complain about it in the coffee room, but that would be it. In this case, however, the whole econoblogosphere immediately pounced, pointing out that Britain’s debt/GDP ratio in the 30s was actually much higher than it is today. (Times policy, by the way, would have called for a formal correction. Oh well.)"
He's absolutely right. In the pre-Internet age we were so often the victims of misinformation that continued to be repeated as no one was able to call the errors out. Even if you personally knew it was false it was cold comfort as you had to be subjected to such falsehoods again and again without any correction.
I also think that rise of the blogosphere has on balance helped liberals a lot-in the 90s-yes the Internet was out but still in its relative infancy; after all, AOL was the leading search engine; in any case, not so many had it then-we were subjected to the lies and distortions of Right wing radio with no one in much of a position to call out the falsehoods. While conservatives can use the Internet too, it has overall had the effect of greatly equalizing the media for liberals.
Krugman then talks about a Golden Age of economic discourse on the Internet. I couldn't agree more. Economic issues and theory are now something that the man in the street can engage in on a daily basis. I also have to give Sumner a lot of credit for that-who more than he has made monetary issues accessible and of interest to laymen?
Funny he didn't mention this when his editors ordered him to apologize to Thomas White over the Enron stock manipulation charge.
ReplyDeleteNor do I remember him heaping praise on Tom Maguire (another blogger Brad DeLong used to like);
ReplyDeletehttp://justoneminute.typepad.com/main/2013/08/truthiness-indeed.html
Patrick I'm shocked to see you're playing gotcha or not so much as it's your whole game.
DeleteMike, Krugman addresses Cullen Roche today:
ReplyDeletehttp://krugman.blogs.nytimes.com/2013/08/16/banks-and-the-monetary-base-wonkish/
I contributed in the comments
TK Tom. I found your comments intereting too. If banks don't need reserves to lend what is their role?
ReplyDeleteFellas, 'reserves' are, by definition, what is not lent.
ReplyDeleteSure, that is technically true, but Sumner hate's hearing people say "Banks don't lend out reserves!" because it's possible that they can lend out cash. Now I could hit him with the same technicality that you bring up ... i.e. that as soon as cash leaves the door it's no longer "vault cash" and thus no longer reserves. But I wouldn't do that, because he'd probably say that was just semantics, and I'd have to agree with him there. So if we don't get picky about definitions, it's true that banks can lend out cash, and thus cash does represent one of three places reserves can go:
Deletehttp://brown-blog-5.blogspot.com/2013/04/the-three-places-reserves-can-go.html
However, I like to think of lending out cash as a two step process:
1. The bank loans and a deposit is created
2. The depositor exchanges their deposit for cash
Thus I argue that what's really important about the statement "Banks lend out reserves" is not the "reserves" part: in terms of the stock of money in the non-bank private sector's hands, the only thing in that sentence that matters is "Banks lend."
Mike, as you know reserves consist of both Fed deposits and cash held by the banks. Of course the "vault cash" component is for customer convenience only. I'm sure if the banks had their way, we'd get rid of that.
ReplyDeleteRegarding the electronic reserves, those are used to clear payments and deposit transfers. They also come into play regarding the movement of funds between other Fed deposit holders (like Tsy, GSEs, foreign central banks, etc): For instance, when Tsy collects taxes, sells bonds or pays gov contractors, it uses its Fed deposit (Treasury General Account, or TGA). If the counterparty (hope I'm using that word correctly!) is a non-bank private entity (i.e. a non-bank business, individual or organization) then the Tsy uses banks as intermediaries, and this is accomplished by transferring reserves from or to that banks. For instance, if Tsy paid me, I'd deposit their check, the bank would credit my deposit, and the Fed would debit the TGA and credit the bank's reserves.
Of course they also allow the banks to meet their reserve requirements, but personally I think reserve requirements are useless since the Fed will provide them anyway (through loans, repos, OMOs, etc). Canada, the UK, and Australia get along nicely w/o them, ... and probably many other countries too.
In Canada, the banks don't really need to carry much of a reserve balance overnight: most of the payment clearing happens during the day and thus most of the reserves required disappear again overnight. The banks do hold small buffer amounts though.
Here's a simple example I put together to illustrate payment clearing in a system w/o reserve requirements:
http://brown-blog-5.blogspot.com/2013/03/banking-example-11.html
This next example is almost the same but uses a deposit transfer rather than a sale (one less person), but I post it to demonstrate the value of aggregating the banks together for analysis purposes (the last bit at the very bottom):
http://brown-blog-5.blogspot.com/2013/02/banking-example-1.html
But then, maybe that was all old news to you (I'm pretty sure it was, but whenever I see someone ask a question like "what are reserves for?" ... that's when I pounce!) :D.
So aggregated banks (equivalent to just one big commercial bank) in a system RR = 0%... don't have much use for reserves in everyday transactions in the private sector: it all amounts to crediting and debiting bank accounts. The only exception being those who want to exchange their bank deposits for cash or vice versa. Eliminate cash too, and the private economy runs off bank deposits w/o any reserves at all: they'd only come into play in interfacing w/ Tsy, etc.
BTW, I updated my post that I linked to in the comments in Krugman's post: I cleaned it up a bit and added a new variable:
Ut = unspent balance in Tsy's TGA.
Not super useful (the Ut), but it allows me to drop one of my simplifying assumptions.
TK Tom. I do appreciate it as it helps me conceptualize this-it's not really old news to me. I've seen a decent amount of the literature but am not at the point yet of it being entirely old hat for me. I'm hoping to get there which is why I appreciate folks like you who do have this part of it down pretty well.
DeleteYou touched on what I was getting at-why do we need reserves at all?
The fact that Canada, the UK, Australia, etc. get along without them strongly suggests that we don't need them. Are they basically a kind of 'necessary illusion' of the US government except the illusion is not at all necessary?
Now, wait Mike! ... you might want to re-read my comment above. I didn't say that Canada, etc. don't need reserves AT ALL! ... or did you mean to say "reserve requirements?"
DeleteI do believe that we don't need reserve requirements (RRs). I think it's just a historical hold-over from the gold standard days. Back when "bank reserves" meant a pile of gold somewhere. Those were the days when fractional reserve lending (FRL) and the so-called "money multiplier" actually meant something, which is no longer the case:
http://econospeak.blogspot.com.au/2013/02/the-myth-of-money-multiplier.html
Some Austrians like Mish Shedlock and Murray Rothbard think that FRL is the devil's business and want to see a 100% RR, but I think they are deluded to imagine that this would put much of a clamp on private lending. I make that argument here a the bottom of my post on reserve requirements (I have a simple sub-example of what 100% RR would look like on balance sheets (BSs)):
http://brown-blog-5.blogspot.com/2013/02/banking-example-2.html
David Glasner also has some good articles about why the money multiplier is dead (just use his search engine).
But regardless of how wrong the Austrians might be, I have never seen anyone as wrong as this guy:
http://www.forbes.com/sites/johntamny/2012/07/29/ron-paul-fractional-reserve-banking-and-the-money-multiplier-myth/
Read the two paragraphs there on page 1 starting with "About Rothbard’s assertion." (That assertion, BTW, is that FRL is "legalized counterfeiting").
Tamny is so wrong that he's actually RIGHT about the money multiplier being a myth! If you think about his argument, it's clear that he conceives of money as a physical object ONLY! ...and that if I deposit a $ in the bank, and the bank "loans it out" to someone else, well then I have to wait around until someone ends up putting it back in the bank before I can use it! Hahahaha! And Tamny is presumably PAID for those articles! Can you believe it? It's so outlandish that even a Rothbardesque Austrian was confounded by his reasoning and wrote a post about it:
http://www.foreignpolicyjournal.com/2012/08/04/yes-virginia-banks-really-do-create-money-out-of-thin-air/
BTW, if you find that you just can't get enough of this kind of thing, I can recommend some good comments. I encountered a hyperinflationist with much the same argument as Tamny's on his blog (he keeps trying to get Cullen to read his "Hyperinflation FAQ"). Actually, he's a very nice guy and is pretty fair minded, but nonetheless convinced that hyperinflation will happen. I tried to pawn "phil" (one of the regular commentators on my site) off on him. I think they'd be perfect for each other! (phil is a committed MMTer... and is always ready to poke holes in my arguments... which is good! It keeps me on my toes!).
Deletehttp://brown-blog-5.blogspot.com/2013/08/banking-example-11-all-possible-balance.html?showComment=1376710893155#c5744779735207681442
Anyway, another pragcap regular, greg, and I took Vincent on, and had some fun, but it was a real time suck. Actually, I think "greg" might be the same greg that comments here... but I'm not sure.
In summary: Main reason why we'd need reserves even if RR = 0%: because we have multiple banks (payment clearing, etc.). The non-banks dealings with the Fed & Tsy (taxes, T-bonds, etc) are important reasons though too.
DeleteYes I meant to say reserve requirements. I was wondering if that's the same Greg. I'd almost think it is the same one-how many progressives named Greg always ready to get the truth out in the comments are there... LOL
DeleteThe Rothbardians are so far out there it's comic relief. Do you remember Major Freedom? He use to comment a lot over at Money Illusion but has stopped. Guess he gave up ever trying to covert the demon inflationists.
I'm sure he'd agree with Tammy-who as you say somehow is so wrong that he actually gets it right.
Yes, I remember Major_Freedom... he still comments on Robert Murphy's site, doesn't he?
DeleteYou really think he'd agree w/ Tamny? Tamny himself is completely rejecting the Rothbardian view, which itself is wrong, but is closer to being right than Tamny. That guy I linked to above, Jeremy Hammond, who wrote the "Yes Virginia..." classic Rothbardian piece in response to Tamny I think did so because of the exasperation he felt in debating one of Tamny's commentators ("Viking" I think he went by) whom I suspect of being Tamny himself!
See the thing is that even though the Rothbardians are wrong about FRL and about the money multiplier (those are both outdated concepts with fiat money and FFR targeting), they AT LEAST recognize that bank created money is ACTUALLY money (even though they hate this fact, and call it "legalized counterfeiting"). Tamny never acknowledges this! There are layers of wrongness there and Tamny wraps himself up in every one of them.
The only other person I've seen take Tamny's view (other than his loyal "commentator") is Vincent Cate, the hyperinflationist. Now I wouldn't say Vincent is full-on Tamny, but his view started out being Tamny-esque. I think he's slowly changing it a bit though. He acknowledges now that bank created money is real money, but still thinks only one person can use it at a time (like Tamny) ... at least when there are more than one banks involved... he did seem to come around to the view that bank money can be used freely between customers of a single bank. Fun stuff!
I'm going to dub Tamny's view of money the "library book" view. Only one person can check that $ out of the bank (library) and use it at a time! If they've got two copies, then two people can, but NO MORE! ha!
DeleteYes I'd say I can't get enough of this type of thing! Seriously
ReplyDelete"Anyway, another pragcap regular, greg, and I took Vincent on, and had some fun, but it was a real time suck. Actually, I think "greg" might be the same greg that comments here... but I'm not sure."
ReplyDeleteIts MEEEEE!
Hi Greg! Did you see Vincent's "Honest Banking" post? It's a real hoot to read. It's longish and filled to the brim with misconceptions. There were so many errors in the 1st paragraph, that's basically all I got to... after 40 some comments exchanged (mostly mine) between Vince and I.
DeleteAmazingly enough, I don't think he gets everything wrong though, and delivers a good description of interest rate risk. And in a testament to what I believe is his inherent fairness and genuine desire to understand, he's tried to summarized the criticisms of his views at the bottom of the post... a section he kept adding to as the debate progressed.
Yeah Greg I thought it very unlikely that it wasn't-LOL!
DeleteYeah Tom I saw that post.
DeleteHonestly I cannot read the entirety of posts like that though. They become too tedious and when I see things like the opening paragraph I just kind of go "Uh oh here we go again"
You're right though that Vincent is an intellectually honest guy, just trying to learn and he never gets ugly in his posts or responses. Which is more than I can say for most (myself included.... Ive certainly been rude in discussions before).
It does seem you are starting to turn him a few degrees. Good work