Bank of England on Monetary Policy: Sumner Reads it and Weeps

     You know with all the peevish gloating of Sumner lately, it still is beginning to look like maybe the future won't be Market Monetarist after all. I mean we have the fact that even Sumner has to admit the existence of the huge debt overhang that stymies growth. He recently actually argued for MM as it would bring down the amount of debt owed. 

      http://diaryofarepublicanhater.blogspot.com/2014/03/scott-sumner-im-no-expert-on-financial.html

      Now there's this great paper by the Bank of England. I'll let Marko tell you about it first:

     "An interesting new paper from the Bank of England :

     "Money creation in the modern economy"

 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

     "I wonder if Mark Carney signed off on it. It seems a little blunt to me :

   "This article explains how the majority of money in the modern economy is created by commercial banks making loans."

    "Under the ZLB :

    "QE is intended to boost the amount of money in the economy directly by purchasing assets of the rich.........raising the price of those assets and stimulating spending by the rich in the economy."

   "Marko"

   "( OK , I sneaked in the bits about "the rich" , but we all know that's what they're talking about. )"

          http://diaryofarepublicanhater.blogspot.com/2014/03/sumner-on-japan-abenomics-will-reduce.html?showComment=1394657417031#c224877747564783312

        Ok. Now let's here Sumner play his usual game of hand waving which he wishes were magic hand waves:

     "The Bank of England was kind enough to send me a new report explaining monetary policy.  Unfortunately I think the report is way off target. On the other hand if they knew anything about my blog they would have known that would be my reaction.  Let’s start here:

This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation.

     "I hate the term ‘modern.’  The money directly produced or “printed” by the central bank is called base money. I don’t know about Britain, but in America the share of total money that is base money is actually higher than 100 years ago.  So there is nothing “modern” about our current system.  And the BoE does directly control the amount of base money, at least in the sense of “directly control” that the BoE uses when they describe direct control of short term interest rates.  Yes, if you set an interest rate target then the base becomes endogenous. But it’s equally true that if you set an inflation target then interest rates become endogenous.  However changes in the supply and demand for base money remain the lever of monetary policy.  And notice the BoE implies that once they stopped targeting interest rates they were no longer even doing monetary policy (or perhaps it’s just misleading language.) The BoE controls the base in such a way as to target interest rates in such a way as target total spending in such as way as to produce 2% inflation.  And yet in that long chain interest rates are singled out as “monetary policy."

     http://www.themoneyillusion.com/?p=26355

    Of course, he hates the word modern as it calls to mind Modern Monetary Theory (MMT). Yet the BOE seems to basically accept this phrase from the MMTers whole cloth. I don't really see what it matters if the share of base money is higher than 100 years ago. That wasn't why it's called modern monetary theory but rather modern goes back to the Nixon Surprise-closing the gold window. What makes our monetary system modern is that it is no longer commodity backed but a pure fiat money based system. This is truly unprecedented on this scale. I'm not saying fiat money never exitsted in any economy before-so don't bother to breathlessly give me a list of governments which have used it before.

   Still for it to be the only money internationally is new. Anyway this is why it's called modern. As you read on the piece you see that Sumner is truly getting desperate because he keeps on qualifiying claims by pointing out KRugman once said something similar a sure sign he's squirming. Utlimately he seems to think that simply supply and demand theory will save him-the MMT descriptions are technically true but they just don't matter because supply and demand and equilibrium. 

     "I recall that Paul Krugman was once criticized for saying banks can “lend out” reserves.  I generally don’t say things like that because I ignore banks.  But there was nothing wrong with Krugman’s claim.  Yes, it’s true that when money is lent out and the borrower withdraws the loan as cash, the borrower does not literally “hold reserves.”  So the BoE is technically correct. But that’s a meaningless distinction, as it’s all base money, and reserves are just the name given to base money when held by banks, and cash is the name given to base money held by non-banks."

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

     "I recall that once when Krugman was faced with this sort of argument he said something to the effect of “it’s a simultaneous system.” Banking is an industry that provides intermediation services.  Banks have balance sheets with assets and liabilities. It makes no sense to say that one side of the balance sheet causes the other.  If people want to borrow more, then bank interest rates on loans and deposits adjust in such a way as to provide a new equilibrium, probably with a larger balance sheet.  But that’s equally true of the situation where people want to hold larger amounts of bank deposits.  It’s completely symmetrical. Consider the real estate broker industry.  Does more people buying houses cause more people selling houses, or vice versa."

     So he wants to claim that banks do lend out deposits that are placed with them and the act of lending creates deposits at the same time. In other words he's claiming that it's one transaction being looked at in both the seller and buyer's checkbook. 

      It is amazing who's writing this-not Warren Mosler or Billy Mitchell but Mark Carney's BOE-which has been believed to be as sympathetic to MM as any central bank in the world. Yet it sounds more MMT than MM.