Sumner on Credit Channels and Monetary Policy

     Sumner doesn't think the credit channel matters in monetary policy-that's just another real aspect of the economy but what causes the business cycle according to him is wholly nominal-specifically sticky wages. 

     "When there is a big crop of apples, the value of apples tends to fall.  There is no need to discuss obscure “channels” such as bank lending.  Apples are worth less for “supply and demand” reasons. When there is a big crop of money, the value of money tends to fall.  Again, no need to talk about “channels.”  This post was motivated by a recent comment, which is something I see pretty often:

The CB [central bank] interacts with counterparties that have little or no propensity to spend and the lending channel is blocked.

   "That’s a fairly common view, and yet it contains no less than three serious fallacies.  This is what the commenter overlooked:

  "1.  Counterparties don’t matter.  The Fed buys assets from counterparty X, who almost always immediately cashes the check and the new base money disperses through the economy almost precisely as it would if the Fed had bought assets from counterparty Y, or counterparty Z."

   "2.  The propensity to spend doesn’t matter for the same reason.  Once counterparties get rid of the new base money, the impact on NGDP depends on the public’s propensity to hoard money, and any change in the incentive to hoard.  In the long run money is neutral and NGDP changes in proportion to the change in M, regardless of whether the person receiving the money has a marginal propensity to consume of 90% or 10%.  Either way they’ll almost always “get rid of” the new money, either by spending it or saving it.  Saving is not hoarding, it’s spending on financial assets."

   "3.  The lending channel doesn’t matter.  In the long run all nominal prices rise in proportion to the change in M.  In the short run sticky wages and prices cause the new money to have non-neutral effects.  Those non-neutral effects reflect wage and price stickiness, not “channels” of spending."

    http://www.themoneyillusion.com/?p=26213&cpage=1#comment-320198

   Partly this is another arugment over Cantillion Effects once again-does it matter where the Fed injects money on who receives it first?

     http://diaryofarepublicanhater.blogspot.com/2014/01/cantillion-effects-anyone.html

     Sumner says no as the counterparties immediately cash their checks. 

     One person who doesn't agree with Sumner here is Ben Bernanke. 

     http://web.calstatela.edu/faculty/rcastil/ECON_435/Bernanke.pdf

   There were some interesting replies to Sumner here in the comments section. Here is Gabe:

   

     "If the counterparties of QE didn’t matter then the QE mechanism would run through the bank accounts of commoners like me. Instead QE is done through the most powerful private banks in the world like JP Morgan and Goldman Sachs."

     "Sumner is trying to spread some real BS here."

    Sumner didn't answer him-he kind of disqualified himself by using profanity. Without that Sumner would have less excuse to ignore him. In fact in the first batch of comments here, Sumner only answered our friend and Diary reader-and frequent commentator, Tom Brown. 

    "Scott, in your view, would there be much difference, macroeconomically, between the Fed permanently increasing the stock of base money by $X by purchasing $X worth of Tsy bonds, and the Fed secretly condoning a cartel of counterfeiters who print up $X of super high quality money which passes every test for authenticity (and which of course gets circulated by these same counterfeiters domestically)."

    "If you say “no difference macroeconomically” then this says there’s no macroeconomic significance to the $X worth of Tsy bonds leaving the private sector in the former case, true?"

But I’m not sure what you’ll say, which is why I’m asking this question.

     Sumner's answer was very terse. 

     "Tom, It’s better to buy the bonds, counterfeiting makes the economy less efficent, as taxes must rise to cover the cost."

     Of course, Sumner ignored Major Freedom-who agreed with Gabe:

     "There is a reason the Fed deals only with specific counter-parties, the “primary dealers”. (And, off the books, specific counter-parties they don’t want the greater public to know about). It very much matters who gets the new money first. Sumner’s attempts to debunk all this a while back was a spectacular failure. He ended up making all sorts of loony claims, such as “inflation makes the counter-parties worse off.” Oh really? Then why would those counter-parties accept the funds? It was all rather embarrassing to read.

    "The first two “fallacies” Sumner “exposes”, where he simply asserts that counterparties will necessarily spend the money they receive from the Fed, is incorrect. You can give me $1 million cash, but it doesn’t necessarily mean I will spend what he expects or wants me to spend. I could very well hoard it, or, if I were a bank, lend it right back to the Fed via IOR and only spend the interest payments.

In his 2., he just claims as if it were self-evident that “counterparties get rid of the new base money”. Sure, they might spend it, by trading with another bank. And then another bank. And so on. These exchanges don’t end up on Main Street. The whole derivatives markets was formed this way. When money is sloshing around the banking and financial system, it isn’t the case that all the money makes its way to wages on Main Street."

     Finally here is the writer of the 'recent comment' Sumner was criticizing responding to Sumner's new post:

    "The base doesnt disperse much at all thats why we are getting excess reserves, increased hoarding of deposits at the commercial banks by QE counterparties and portfolio rebalancing. These counterparties are not spending they are largely just giving up the asset and just rebalancing their portfolios into similar assets to what they just gave up in QE operations."

     "The principle beneficiaries of all this asset shifting is existing asset holders through increased asset prices. Assets are very unnevenly held. For example 90% of stocks are held by the top 20% so therefore an increase in stock prices only benefits only the top 20% which also have a lower MPC limiting the effectiveness of policy."

    "If the CB would interact with people broadly they would realize greater levels of spending for every expansion of money because the average person has a higher MPC than the existing set of asset holders. Also if people receive money during expansion their net worth would improve making them more accessible to credit. Its not necesary to expand money in exchange for treasuries, money can be created safely if NGDP or inflation is monitored to regulate rate of money expansion."