Friends, I'm concerned. I fear that too often, we on the left retreat when we should attack, surrender when we should vanquish. What do I speak of? Well, I am concerned that too many of us are willing to play in the frame, the box, the straightjacket of modern discourse about fiscal and monetary policy. Obama does it. The NDP does it. Even some of my fellow PEF bloggers do it.
And I understand why. Some haven't been exposed to theoretically, empirically and institutionally-grounded alternative ways of thinking (I'm thinking Modern Monetary Theory or MMT here) about these issues and so they do a heroic job with the tools they possess. Others have been exposed but aren't convinced. Fair enough. These things take time. Still others have been exposed, are convinced but think the whole point is moot because if you step outside of the policy box, you get ridiculed, ignored, marginalized and that can't be good for anyone, can it? I get that.
Except, except, except...here's the thing. While a great many progressive economists ignore, dismiss or downplay more radical, critical approaches to fiscal and monetary policy, people in high places are starting to come around because they are convinced by a little thing called the evidence. The unrelenting truth of the MMT propositions become increasingly obvious every day that this crisis breathes another breadth, every time inflation refuses to budge despite QE1, QE2 and stimulus, every time U.S. treasuries rally after a credit downgrade (just like they did in Japan, which, last I checked, is NOT the world's reserve currency and "suffers" from a rating below that of Botswana), every time U.S. banks reel under the weight of a seemingly endless well of outright fraudulent products, every time the economy perks up when deficit spending increases and seems to slump when austerity kicks in, every time we read about yet more fat corporate profits that stay put (or paid out as dividends, share buybacks) instead of invested, every time we hear about rising or unacceptably high levels of unemployment, and every time the Euro nations buckle under austerity.
So who are these people in high places? Consider the Bank for International Settlements (BIS), the central banks' bank (sort of). In 2010, it put out a publication that challenged the belief that banks need reserves before they'll lend, arguing (as Post Keynesians have for decades now) that banks create deposits every time they lend. Here are a few select quotations from the document:
- ... the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand for loans if it wishes to.
- "Bank lending ... involves the creation of bank deposits that are themselves the means of payment. A bank can issue credit up to a certain multiple of its own capital, which is dictated either by regulation or market discipline. Within this constraint, the growth of bank lending is determined by the demand for and willingness of banks to extend loans. More generally, all that is required for new loans is that banks are able to obtain extra funding in the market. There is no quantitative constraint as such. Confusion sometimes arises when the flow of credit is tied to the stock of savings (wealth) when the appropriate focus should in fact be on the flow."
These argument have HUGE implications for how we understand banking, fiscal and monetary policy and inflation. If you understand the above, you're halfway to understanding why QE1, 2 and maybe 3 won't lead to inflation. You're halfway towards understanding why the central bank MUST accommodate the demand for settlement balances(reserves) and is therefore a price setter, quantity taker. You're halfway towards understanding why fiscal policy can't possibly crowd out private sector borrowing. You're halfway towards discarding the whole misplaced silly debate about how we're somehow more limited in what we can do than we were at Crisis, Mark I.
Or what about the fact -- and you'll have to take my word for it because I can't name names -- that I personally know an increasing number of economists, some quite senior, in the civil service, not one of which I would call instinctively progressive, who get these ideas and more and are quietly working to change the debate from within because they can't abide the untruth of our current discussions. A tough, maybe impossible slog to be sure, but certainly not helped when the outside community is so quiet, so willing to play the game.
Can things be different? Absolutely, Bill Mitchell in Australia is probably the most forceful MMT advocate out there and he reaps considerable rewards -- the mainstream media are always after him for interviews. Or how about Randy Wray, Warren Mosler, Marshall Auerback, Mike Norman, Jamie Galbraith and others in the U.S. -- all in exceptionally high demand, being invited to share their radical ideas to a large public audience by the mainstream media, by politicians, by all kinds of groups. And in Canada, nothing. Not a peep. Not a dissenting radical voice on these issues anywhere but the isolated, crackpot Arun Dubois post. Otherwise, just more inside baseball. We can do better. No retreat, no surrender. Time to explode those deficit/monetary policy myths.
This article was first posted on The Progressive Economics Forum.
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