Sumner has written quite a bit about this concept lately. He says that-it's useless but not really wrong and not at all harmful so there's no reason to keep criticizing the concept.
"David Glasner argues the money multiplier is a useless concept. I’m sympathetic to that claim, and yet I think he goes to far in his criticism of Friedman and other monetarists. Although the concept is useless, it’s not wrong, and it’s hard to see how it does much damage."
"In any case, it’s silly to focus on either B or M; focus on the goal/indicator of policy, NGDP. The multiplier doesn’t help you do that, and hence is useless. But if people want to use it, they aren’t making any sort of logical error as long as they understand how it changes in response to changes in interest rates and other variables, and the monetarists were able to do that. The Monetary Historyis a masterpiece of multiplier analysis."
http://www.themoneyillusion.com/?p=26479
Yet, of something does no good doesn't it do a certain amount of harm in terms of the opportunity cost of wasting time and misdirecting attention? Anyway, here is Cullen:
"They’ve officially hijacked the money multiplier discussion and totally misconstrued it. It was never about conversion. Conversion has nothing to do with it. This discussion was always about understanding cause and effect and how some people assume that banks “lend out” reserves. For instance, I was looking through Sumner’s site last night and saw this:
"David Glasner argues the money multiplier is a useless concept. I’m sympathetic to that claim, and yet I think he goes to far in his criticism of Friedman and other monetarists. Although the concept is useless, it’s not wrong, and it’s hard to see how it does much damage."
"In any case, it’s silly to focus on either B or M; focus on the goal/indicator of policy, NGDP. The multiplier doesn’t help you do that, and hence is useless. But if people want to use it, they aren’t making any sort of logical error as long as they understand how it changes in response to changes in interest rates and other variables, and the monetarists were able to do that. The Monetary Historyis a masterpiece of multiplier analysis."
http://www.themoneyillusion.com/?p=26479
Yet, of something does no good doesn't it do a certain amount of harm in terms of the opportunity cost of wasting time and misdirecting attention? Anyway, here is Cullen:
"They’ve officially hijacked the money multiplier discussion and totally misconstrued it. It was never about conversion. Conversion has nothing to do with it. This discussion was always about understanding cause and effect and how some people assume that banks “lend out” reserves. For instance, I was looking through Sumner’s site last night and saw this:
The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system.
"This is a total misunderstanding of how things actually work. Banks are not “sitting on” money because they’re earning IOR. That’s absurd. They’re not making loans because there’s no demand for loans. Full stop. Banks will not stop “sitting on” reserves if you charge them a fee on them. They’ll just earn less profit."
"This conversion concept is a total distraction. It has nothing to do with the operational flaw in the way people explain the money multiplier. And it’s not nearly as important as the MM guys are now making it out to be."
Read more at http://pragcap.com/crickets#uy6XkohrM2v3oLef.99
Sumner was flagging the IOR concept again today:
"Marcus Nunes sent me a post by the always excellent Joe Gagnon. I’m not sure I fully agree with Gagnon’s view of the situation, but his post does a beautiful job of explaining the issues faced by the Fed in December 2008, and how they evaluated their various policy options:
The FOMC did not discuss the possibility of a negative interest rate on bank reserves, but it is widely agreed that a significantly negative interest is not feasible because banks would convert their reserve balances to paper currency. A lingering puzzle is why the Fed never lowered interest on reserves to zero in subsequent years, when financial strains had diminished and depositors and market participants had gotten used to the low rate environment, but standard macroeconomic models imply that the benefits of such a small decline would have been correspondingly small.
"This paragraph shows that the Fed had two serious misconceptions. Vault cash is a part of bank reserves, and hence there is no reason that the negative IOR could not also be applied to vault cash. (There may be legal barriers, but laws can be changed.) In earlier posts I’ve recommended that banks be exempt from negative IOR on a “normal” level of bank reserves, perhaps required reserves plus X%. The key is to make excess reserve holding costly at the margin, so that new injections of base money go out into circulation as cash. Because cash is very costly to store, this would depress market interest below zero, if the policy failed. More likely it would succeed and dramatically boost AD, and therefore the mere threat of negative IOR would make the actual implementation of negative IOR unnecessary."
http://www.themoneyillusion.com/?p=26468#comment-326694
The MMers are certainly alone in thinking that IOR has a big impact.
Cullen's an idiot.
ReplyDeleteI like him, but if he was a friend of mine, I'd say jesus you are an idiot. ALOT.
Look dude, you gotta understand the entire MMT and their derivatives is based around the idea that banks only lend if there is a good deal on the table.
And that thinks about like you loaning me money.
But banks don't take it out and hold cash.
So they can suffer serious negative interest rates that make deals that previously not good deal, that banks say " fuck we might as well lend it".
If inflation causes people to spend, negative IOR does too.
Are bank stocks going to eat it?
yes.
Will banks not be profitable?
yes.
This has nothing to do with Cullen's point tho, he's simply wrong.
Little hard to follow your comment here Morgan. A lot of typos I think.
ReplyDelete"And that thinks about like you loaning me money."
???????????
But to your overall comment about Cullen..... I think you are dead wrong.
Your man Sumner is the idiot.
Didi you find it necessary to slam Cullen since he called out the idiocy of Scott in a couple posts over at Prag Cap btw? You running interference for Scottie?
In what way is Cullens point simply wrong?
The money multiplier, contrary to Scotts assertion, is a flawed notion the way it is taught. There is no multiplication of base money to get to the level of loans, as is almost universally posited by economists of all stripes, the level of loans created is divided into some pre-determined ratio of necessary reserves (base money). So while Scott can try to come across as someone who really has a grasp of the relationships between reserves, deposits, loans etc, he has been part of the problem talking about banks "loaning out reserves" and the such in the past.
Scott still thinks Japans prices are a hundred times higher than ours just because they add two zeros to there numeraire.
He's the fool
"So they can suffer serious negative interest rates that make deals that previously not good deal, that banks say " fuck we might as well lend it"."
ReplyDeleteAgain they will only lend it if they expect to get repaid. Otherwise its not a loan.... its a gift! So unless you think that at some interest rates banks will stop being banks and turn into charities....... you are wrong.
You always like to point out to Mike that liberals can win with Market Monetarism and NGDP targeting, in fact you suggest that its even BETTER for them, we are just too daft to realize it, it takes the deep thinkers like you and Scott to show us how to win.
I'll suggest you can trash the political theory of Market Monetarism, take a cold shower and lose your hard on for impenetrable CBs and still get policies which you can support as an anarcho-libertarian-conservative or whatever you call yourself.