Friday, July 13, 2012

NGDP Futures: Fairies helping Goldman Sachs

I've written in the past about how the Monetarist idea of NGDP futures is lousy. Monetary policy in general has no mechanism to clearly stimulate (or dampen) economic activity, therefore Monetarist are reduced to talking about magic (the Confidence Fairy) or dressing up fiscal policy and calling it monetary policy. NGDP Futures fits firmly within this established tradition but is also too-clever-by-half, so you can see it getting traction amongst academics. This is how academia works. There's a great post by Michael Sankowski, who seems to have some experience in this area, about why, if this thing were implemented, it would simply generate a giant pay day for Goldman Sachs.
NGDP level futures would almost certainly hand Goldman Sachs and hedge funds a payday worth over $500bn, while giving almost nothing else to the rest of the economy. Either that, or NGDP level futures would never be traded by anyone. There are no other outcomes for NGDP level futures. It’s between some dude pulling down a multi-billion dollar bonus, or nobody trades them. There is no in between. NGDP level futures are such a bad idea I can’t even stand to hear about them – they are offensive to everything I know about how futures markets work. I’ll show NGDP level futures have a host of extremely serious problems, and even worse, one of these serious problems cannot be overcome by any possible futures contract design.
Read the whole thing.


Blogger JW Mason said...

Monetary policy in general has no mechanism to clearly stimulate (or dampen) economic activity, therefore Monetarist are reduced to talking about magic (the Confidence Fairy) or dressing up fiscal policy and calling it monetary policy.

I agree with the spirit of this 100% — I’ve been blogging about the limits to monetary policy myself lately. But this is too general. It really depends on the institutional and regulatory specifics of the financial system. When you have binding reserve requirements, as was true through much of the mid-20th century, central banks do have pretty strong tools to control the general pace of credit creation. Where you have speculative asset positions financed by short-term borrowing, as in the early 20th century and again recently, monetary policy can have a big effect on asset prices. Etc. What is true is that monetarists almost always ignore the actual transmission mechanisms of monetary policy, and only talk about the Expectations Fairy (a relative or colleague of the Confidence Fairy, but not quite the same.)

Also, you know that “monetary policy doesn’t work” was the mainstream Keynesian position in the immediate post-WWII period, right? I have no problem with reviving the orthodoxy of 50 years ago — so much better than the orthodoxy of today — but I wish that MMTers would acknowledge that that’s what they’re doing.

11:04 AM  
Blogger winterspeak said...

JW Mason

How do "binding reserve requirements" limit credit creation?

4:16 PM  
Blogger JW Mason said...


This is a trick question, I guess?

If the creation of a loan (bank asset) always involves the simultaneous creation of a deposit (bank liability); and if there is a statutory requirement that the ratio of a bank's deposits to its reserve holdings cannot exceed a certain value; and if this limit is effectively enforced; and if the central bank controls the stock of reserves; then the central bank can control the overall volume of lending in the economy.

I don't claim this is a good description of the world we live in today. Not at all! But I think it might not be a terrible description of the world of the 1950s and 1960s.

6:23 PM  
Blogger JW Mason said...

Oh, I know what you're going to say! You're going to say that the central bank targets an interest rate, and that it therefore must supply whatever quantity of reserves banks demand to maintain the overnight lending rate at the target level. And so it is never the case that the central bank sets the quantity of resevres in a meaningful way.

This is all true...

And yet I still think reserve requirements are important, because they create a link between the overnight rate set by the central bank and the long rates set in the market, which are what actually matter.

8:16 PM  
Blogger winterspeak said...

Yes, but the impact of long rates on credit creation is mixed.

On the one hand, low rates make it cheaper to take out loans.

On the other hand, low rates reduce interest income to the private sector, reducing demand, reducing the demand for credit expansion in general.

So, reserve requirements have no immediate impact on credit extension at the bank level, and mixed impact at the long term rate level.

7:59 AM  
Blogger Unknown said...

Obama Monetary Policy has a bad effect in the economic condition. You should read an article written by Ed Butowsky posted in Fox Business entitled, "Obama Chose Monetary Policy - And You're Feeling It"

1:54 AM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home