Monday, December 05, 2011

Steve Keen on Hardtalk

I don't much like Steve Keen because, although he gets private credit creation correct ("banks create money out of thin air by making loans that then create deposits") he does not get public debt creation correct ("federal deficits create the private sector net financial assets which can then be used to "buy government debt"). How you can understand horizontal money without understanding vertical money is beyond me, but there you go.

Anyway, here is a transcript of Steve on "Hardtalk" -- so, good for Steve for getting on the BBC!

At times, it seems like the understands vertical money:
SK: I wouldn’t say it was a case of making a choice between one individual and another. It has to be a systemic process by which we reduce the level of debt-finance money in the economy and increase the amount of government-created money. Because we have two sources of money in a capitalist economy. The banks can create money by extending loans. The government creates money by running a deficit. Now back in the early 60s the ratio of government created money to the overall money supply was 15%. It’s fallen so far that we’ve got an entirely debt-based system which has driven speculation. We need to create the government money to balance out the credit. So I’d actually have a government creation of money system approach to try to rebalance the system and reduce the private debt.

HT: The government, the central bank, prints money to pay off people’s debts? What I’m wondering is, you say, “Write off debts.” And it’s basically private debt that you want written off. Mortgages, companies’ debt. How is that working?

SK: We’d have to give the money to the debtors rather than to the creditors. If you look at what’s been happening in the last three or four years, all the rescues Bernanke has done, the banks around the world have done, have been to give money, to create money and give it to the banking sector in the belief the banking sector will lend to get the economy starting again. Now that is bizarre because we know one reason they won’t lend is they’ve lent too much already. So all that money has been ineffective.
It is true that the Govt creates money by running a deficit, and that stimulus needs to focus on giving money to households. But from here, why is the solution not to have bigger deficits based on spending/taxation policy that increases household savings?

43 Comments:

Blogger Nathan Tankus said...

it's because he understands that a stock of money in a checking account can finance multiple expenditures and thus no net financial assets are needed to generate positive profits (at least in theory), just bank money creation. his understanding of changes in gross magnitudes makes him skeptical of the net arguments from Chartalists (since gross changes in debt can have profound effects on aggregate demand and the economy without necessarily creating net changes in sectoral balances). I think the Chartalist position is closer to the truth (especially for the modern world) but i understand how Keen got to where he is.

1:30 PM  
Blogger Hugo Heden said...

> "it's because he understands that a stock of money in a checking account can finance multiple expenditures and thus no net financial assets are needed to generate positive profits (at least in theory), just bank money creation."

Yes.

I wonder though, does this break down if agents start to "not-consume" a proportion of their income?

I mean, say that of all income received during a year, only 97% is re-spent. And 3% remains unspent -- accumulated -- hoarded -- saved -- "not-consumed". (Maybe income is used to pay down debt). There is a yearly 3% leakage from the circular flow of income and production.

What happens then if the government does not offset that leakage (as MMTers suggest it should) by running a corresponding deficit?

Does Keen discuss this? Can the leakage (occurring due to some agents "not-consuming" income) be offset by other means?

For example, by ever increasing debt (taken on by other agents)? Is that sustainable? Under what circumstances will that work?

2:21 PM  
Blogger Nathan Tankus said...

well that's the whole issue he's been analyzing. the fact that the acceleration of private debt is what has driven expansions and that mechanism has become dysfunctional. it's also why he's come to the debt jubilee position.

i suspect however, that he thinks the focus on sectoral balances obscures what's actually going on in the economy and is worried that policy conclusions based on them might miss very important changes and dynamics in the gross magnitudes. I think that's a defensible position although sometimes he's a bit too polemical against the Chartalist position for my tastes.

2:27 PM  
Blogger winterspeak said...

Nathan: The fact that the stock of money in checking accounts can finance multiple expenditures is just velocity.

The problem is that the net stock of money cannot increase, and that the private sector may wish (in aggregate) to increase that stock, but cannot, is missed.

The only source of this net stock of money is government deficits. If this demand is not met, then you get recessions and unemployment.

2:50 PM  
Blogger Nathan Tankus said...

winterspeak: you're preaching to the choir here. I would just like to make this simple point. no individual agent cares where their net savings comes from. they just need someone, somewhere to spend more then their income to satisfy that demand (the n-1 concept from sfc models). what's happening now is significantly different then recessions from 40 t0 50 years ago. it is different because the gross private debt magnitudes are different. these things are important to analyze in addition to the net magnitudes.

deleveraging can happen when creditors are forced to give up their contractual claims on borrowers, in addition to increased savings to pay down debt.

2:57 PM  
Blogger winterspeak said...

nathan: I agree that no individual agent cares where their net savings comes from. My point is that, when there is an aggregate desire for more net savings, those desired net savings *cannot come from anywhere* in Steve's world.

This is just simply not true in our world. Not only can those desired savings come from somewhere, but they can, in fact, only come from that somewhere and they have only come from that somewhere historically.

So, if debt/savings is too high, then yes, default can get to a "correct" debt/savings level, but you can also (in a fiat system) increase savings.

This is true regardless of the magnitude of gross private debt.

3:14 PM  
Blogger Nathan Tankus said...

I don't know why i do this to myself. I ultimately agree with you. I just understand his position. Also I think Chartalism (at least in it's mathematical modeling and blogging) has lost some very key insights from Minsky (eg unproductive labor). that's a whole other story though...

3:18 PM  
Blogger Dan Kervick said...

There are probably different equally good ways of defining "money". But why not say that private sector bank lending by itself can increase the net stock of money? I think understand that the expansion of deposits might just represent a velocity effect based on a constant supply of money. But why not say that it could also represent a net growth in money?

I wonder whether there is, in the end, a definite answer to the question, "how much money is there in existence?"

6:53 PM  
Blogger winterspeak said...

Dan: because private sector lending CANNOT impact the NET stock of money, only the gross

that's the whole point.

7:41 PM  
Blogger Dan Kervick said...

winterspeak, isn't that just asserting one side of the debate between Keen and the chartalists, without arguing for it?

I don't really have an informed opinion on this issue, and it seems to me that whatever side one takes, one can still say government has a monopoly on money creation - since the state determines the rules governing which lending operations banks can and cannot engage in, and under what conditions. Government is the franchise owner in the money creation game, farming some of that activity out to banks which act as its chartered or licensed agents, and reserving some of it for itself. It could at any time pull it all back to its direct operational control by changing the banking rules.

But one theoretical possibility, it seems to me, is to say that although banks and borrowers are permitted only to create liabilities for money, and not money itself, still once those liabilities are exchanged in the market like money, they can eventually become money. So there is no solid boundary between liabilities for money and money itself.

I'm just throwing this out there as a hypothesis for discussion.

8:52 PM  
Blogger Ralph Musgrave said...

I agree with Winter. When I first saw that Steve Keen interview several days ago, I was baffled by it.

9:20 PM  
Blogger peterc said...

Writing down private debt is one policy solution under capitalism to the current situation, the other being deficit expenditure. Or some combination of the two policies could be used.

The preferred policy approach is really a political choice. If somebody prefers economic recovery to be driven by the private sector, writing down private debt makes sense to the extent that it reduces the non-government's desire to net save and enables this choice without immediately proving unsustainable (given the household sector is currently seriously indebted).

I have seen comments by Steve Keen in which he expresses the view that an economy driven by deficit expenditure is "zombie capitalism". He is left leaning, but there is a Schumpeter influence in his thinking.

In one sense it is a little surprising that right-leaning proponents of small government don't push more for private debt write down. Presumably it is because they want debtors to pay for the risks taken by creditors while exploiting mainstream fallacies over budget deficits to justify cutbacks on social expenditures, disassembling of the welfare state, etc.

The preferred policy approach is largely a political question, as are the motives behind the alternative policy approaches.

6:20 AM  
Blogger Neil Wilson said...

"The problem is that the net stock of money cannot increase, and that the private sector may wish (in aggregate) to increase that stock, but cannot, is missed."

I wouldn't say it is missed. He just hasn't done that bit yet with his modelling approach. The government is either not there in the models or it is a over-simplification (like a simple counterbalance for unemployment).

7:17 AM  
Blogger JKH said...

WSP,

I think you’re a little hard on him.

Your closing criticism is contradicted in the first quote; i.e. he does indeed understand that deficits should be bigger:

“It has to be a systemic process by which we reduce the level of debt-finance money in the economy and increase the amount of government-created money ... the government creates money by running a deficit ...”

He happens not to phrase it in the sense of a national accounting increase in household saving, but that’s an MMT language nitpick more than an issue of substance. If deficits are bigger, then saving increases, ceteris paribus. It need not be stated as a separate objective.

There are certainly other weaknesses. I thought the interviewer was extraordinarily good, pinning him down on the fact that he hasn’t thought through his jubilee type plan at a reasonably detailed level. And he is wobbly around some stuff that is routine to MMM. He doesn’t seem to appreciate that his idea of paying the debtors is equivalent to a tax cut. Accounting is not his strong suit, which we already knew. Nor is his understanding of the dynamics of bank capital. (It’s interesting that just as people make the mistake of assuming that reserves are lent out, they make a similar mistake about capital. The purpose of capital is to act as insurance for losses. The actual flow of funds associated with capital and lending is more complex. Lending out capital doesn’t describe it properly. People misinterpreted TARP in this sense.) He seems to merge some combination of debt repayments with write-offs of debt in his “plan”, without specifying the nature of the mix. And he seems not to appreciate the fact that both debt repayments and debt write-offs shrink bank balance sheets; they destroy money and equity respectively.

7:52 AM  
Blogger winterspeak said...

peterc: it is a political choice, I agree. But Steve does not present it that way. Thus my issue with him.

neil: when he does that bit in his modeling approach, then I will say he has no longer missed it.

jkh: LOL! I looked over all the weaknesses in private sector credit expansion and focused just on his vertical failings. You zapped him on the horizontal aspect as well.

If that's being soft on him, I'd scared to see what you think being tough is ; )

8:48 AM  
Blogger Neil Wilson said...

WSP,

You have to remember that increasing net savings is not a given. Refuse to supply those into an economy and the economy will eliminate them quite nicely - along with a load of other real stuff we all might value.

The dampening mechanisms in the current automatic stabilisers are again a political choice.

9:03 AM  
Blogger Neil Wilson said...

"He doesn’t seem to appreciate that his idea of paying the debtors is equivalent to a tax cut. "

I'm not sure about that. I think he's spinning a line in interviews.

The line he's running is that it is a payment from the fiat issuer that has to be used to pay down debt if you have any.

So more conditional benefit payment than tax cut.

Still unnecessarily complex when you can just eliminating the payroll tax instead.

9:07 AM  
Blogger JKH said...

Neil,

"So more conditional benefit payment than tax cut"

you're right

9:12 AM  
Blogger winterspeak said...

neil: an economy (by which I assume you mean the private sector) cannot change the quantity of net savings it has by itself. It cannot impact this number at all.

9:17 AM  
Blogger Oliver said...

Just to play the devil's advocate for a second, I find that MMT wording wrt horizontal money often gives the impression, even if unintentional, that because the privates sector's books balance to 0, the economic effect of credit is also 0, which is obviously rubbish. In this respect, Keen's omittance of the vertical channel is actually helpful even if his analysis isn't correct in accounting terms.

9:25 AM  
Blogger Neil Wilson said...

"neil: an economy (by which I assume you mean the private sector) cannot change the quantity of net savings it has by itself. It cannot impact this number at all."

No it can't. But it can be zero.

Which is the default case in a purely private banking system.

9:54 AM  
Blogger dave said...

WSP:

Sorry to be dull. What is the issue with the quote in the 1st paragraph: "federal deficits create the private sector net financial assets which can then be used to 'buy government debt'"

11:17 AM  
Blogger dave said...

Also, it seems to me he proposes exactly what you suggest he should propose but doesn't:

WSP: why is the solution not to have bigger deficits based on spending/taxation policy that increases household savings?

SK: So I’d actually have a government creation of money system approach to try to rebalance the system and reduce the private debt.

11:22 AM  
Blogger JKH said...

Bernanke tees off about lies being perpetrated about the Fed:

http://www.federalreserve.gov/generalinfo/foia/emergency-lending-financial-crisis-20111206.pdf

interesting, and good for him

12:22 PM  
Blogger Ramanan said...

JKH,

Even worse than Sinn:

http://www.irisheconomy.ie/index.php/2011/12/06/worse-than-sinn/

Voxeu paper refered there.

Also, can't make any sense of this

http://ineteconomics.org/blog/money-view/first-ecb-then-imf

3:37 PM  
Blogger Ramanan said...

Sorry last line got cut out.

Thoughts?

3:47 PM  
Blogger wh10 said...

Ramanan, is that not how you and Lavoie would describe the accounting? Seems like a roundabout way to be a lender of LOLR?

For the record, MMT got into a little discussion with Mehrling over there once, where he was doing a bit of funny accounting in his own way to describe US govt deficits. He was doing it as if the Tsy had direct access to the Fed though, so it was a little inaccurate.

4:20 PM  
Blogger JKH said...

Ramanan,

The Bundesbank is using the multi-lateral netting facility of TARGET to deploy a net surplus reserve liability position that it gained through net capital inflows. The Greek and Irish central banks are among those on the other side of TARGET with the opposite direction position.

At the same time, the Bundesbank drained its gross reserve liabilities down to appropriate levels by unwinding refinancing assets.

The net result is that its balance sheet is back to desired size (ceteris paribus), with TARGET balances replacing previous refinancing assets. At the same time, the German banks have all the reserves they need, and with increased deposit liabilities having replaced reduced refinancing liabilities.

That’s my view of how I’d describe the base case for the entire dynamic.

Then I’d interpret anything else that’s happening on bank balance sheets, central or commercial, as a possible non ceteris paribus adjustment separate from the base case TARGET flows.

Now I’ll read the link when I get the time to test my thesis.

:)

4:46 PM  
Blogger JKH said...

or not

that post is a dog's breakfast on first skim

I'll stick with my base case though

4:49 PM  
Blogger JKH said...

Ramanan,

It’s conceivable in THEORY that the net capital flight into Germany could be large enough to dominate the Bundesbank balance sheet, causing them to have to blow it up on the asset side with a bloated TARGET asset. In that case, they have to start issuing sterilized liabilities of some sort to keep reserves when they want them.

4:54 PM  
Blogger JKH said...

meant:

"to keep reserves where (at the level) they want them"

4:56 PM  
Blogger JKH said...

Ramanan,

My first read of the Mehrling article is that it’s wrong.

TARGET is a clearing system for the NCB reserve distribution effect of net capital flows between EZ countries.

Whatever the ECB intervention is or will be, it’s executed on the balance sheets of the NCB’s. That doesn’t affect inter-NCB reserve distribution.

(The credit risk that results from ECB intervention is for the account of the Euro system as a whole, through capital keys etc., regardless of particular NCB domicile exposure.)

5:09 PM  
Blogger Ramanan said...

JKH,

Yes I understand all that and the capital flow to Germany has been so much that Bundesbank's claims on the domestic banking system will effectively go to zilch. After that banks will have more and more reserves but this can be taken care of by issuing bills, or using the term deposit facility.

However, what beats me is the way these articles go around making a big issue out of this! .. as in it is a indication that there are problems but ...

"Because the German Bundesbank is about to exhaust its capacity to lend more funds to strapped governments." (Voxeu link) ... beats me...

5:17 PM  
Blogger Ramanan said...

wh10,

Only superficially similar. I won't make a fuss similar to the voxeu authors.

5:21 PM  
Blogger wh10 said...

You guys should question him at his forum.

5:29 PM  
Blogger JKH said...

Didn't see the Vox article before.

It's the best written of the three.

It's a reasonable point, in that the TARGET system isn't supposed to facilitate the movement of the entire EZ non-German bank deposit base into German banks. So articles like that will draw attention to thresholds of optically disturbing balance sheet structure.

The only technocratic limit on Buba is the ability to issue sterilization liabilities, and they should be able to do that.

It's not a good situation in that the capital flight indicates steadily deteriorating credit risk perceptions in the TARGET liability countries. That credit risk becomes for the account of the EZ as a whole as the ECB builds up its TARGET surplus balance.

The issue is less the technocratic ability of Buba and the ECB to handle the flows through TARGET, than it is about what those flows indicate about what's going on beneath them.

5:46 PM  
Blogger Oliver said...

JKH:

He seems to merge some combination of debt repayments with write-offs of debt in his “plan”, without specifying the nature of the mix. And he seems not to appreciate the fact that both debt repayments and debt write-offs shrink bank balance sheets; they destroy money and equity respectively.


I think you've misinterpreted what he's trying to say. To me, Keen does not acknowledge the possibility of a write-off or downpayment in the sense of a purely balance sheet reducing horizontal operation. He uses both terms interchangedly to describe the replacement of a horizontally created gross asset with a vertically created net asset. Thus, only the liability changes from the private to the goverment with the effect of robbing the banks of their income stream, as he describes it. The original assumption may not be correct, but to the extent that credit is payed down with deficits, the rest of his reasoning is correct, imo.

4:38 AM  
Blogger Oliver said...

Either that, or I'm making the same mistake he is :-).

4:43 AM  
Blogger Ramanan said...

JKH,

Agree with everything you said above on TARGET.

However, I still don't get what the voxeu authors are trying to say. (though they seem to have reasonable knowledge of TARGET)

Maybe from a payments and settlements system perspective, what they are saying is that if a capital flight arises very fast such as during a day, the Eurosystem would need to assume the liabilities of the countries from which capital flies without the NCBs being able to check on collateral from the originating bank on an intraday basis.

So I can imagine a situation in which a flight of €100b happens intraday, from a country X and the NCBs are programmed to allow everything to go. At the end of the day, the NCB of the nation X checks its banks have no collateral and ELA has to be used. Even after ELA is used, more capital flight can happen.

Now, it so happens that country X's existence in the Euro Area is being questioned and may be forced to leave. In that case, ECB's (rather than Bundesbank's) claims on NCB of country X will be worthless, because country X will likely default on all its debts.

Of course, ECB's losses will be shared by the whole Eurosystem and not by Bundesbank alone.

I guess that is what they are trying to say in the end of the article:

"In principle, a speculative attack could occur within a day"

5:07 AM  
Blogger JKH said...

Oliver,

I'm reading stuff too quickly lately, but here's what threw me:

SK:

“We’d have to give the money to the debtors rather than to the creditors … But the idea would be, you would give the money to the public and if the person who received it was in debt, the first thing they would have to do is pay their debt level down … ”

That’s money for a loan repayment, with no bank capital hit.

SK:

“One of my colleagues Michael Hudson puts it beautifully. “Debts that can’t be repaid won’t be repaid.” You simply have to work out how you don’t repay them.”

If it’s not repaid, it’s a write-off, with a bank capital hit.

So there is some confusion, although on re-reading probably less than I originally thought, so thanks for making the point.

Still, the initial impression of confusion is captured in the interviewer’s wonderful phrase, which she repeats several times, “How is that working?”

5:43 AM  
Blogger JKH said...

R,

They do say some things that are questionable if not wrong.

This seems outright wrong:

"Before long, however, the Bundesbank’s stock of domestic assets is going to hit zero, and it is highly unlikely that it will agree to sell its gold or borrow more in private capital markets. At that point, the Bundesbank will not be able to lend more funds to the Eurozone TARGET mechanism."

The TARGET balance is determined as a result of the capital inflow. The Bundesbank has no direct control over whether it accumulates a huge TARGET surplus - not unless it starts to buy assets directly from another NCB or that NCB's banks or their customers.

TARGET forces the flows. If collateral starts drying up, they'll have to change collateral eligibility again to adjust for the flows that are already determined.

Operationally, capital flight panics would cause big TARGET changes, which is upsetting. But they can't do anything about it unless they shut down the capital flows as a pre-emptive strike.

BTW, in that NYT debate, Nocera made the point that he's very surprised somebody in Europe hasn't already done something by way of capital controls.

6:04 AM  
Blogger Oliver said...

Yes, on 3rd reading, I think I'll take that back about him conflating writing down and paying back. It's just pure confusion. Strange...

6:08 AM  
Blogger Ramanan said...

JKH,

It's takes some effort to read some neoclassical descriptions such as voxeu :).

Yes, the funds flows are initiated by the private sector and the TARGET just accommodates all the flows. It has been designed very very carefully. Of course, the whole Euro Area setup is flawed but its a slightly different point. It was formed under the assumption that imbalances will be temporary and wages and prices will adjust to remove the imbalances.

Rare are people who get the TARGET flows and the changes and balance sheet changes right and its not surprising that the voxeu authors sneak in something wrong.

I don't think the Europeans could have implemented capital controls because that would have led the financial markets pressing the panic button. Of course there is already a lot of volatility there but a capital control kind of measure will send really bad signals to the markets.

They may do it if some nation decides to leave. They will first put banks on a holiday and remove all wires which connect the banks and the Eurosystem!

The Europeans are doing a lot of wishful thinking and more wishful thinking and praying the problems go away.

6:46 AM  

Post a Comment

Subscribe to Post Comments [Atom]

Links to this post:

Create a Link

<< Home