Lots of wonderful comments on Part 1
of my post on this topic. I want to address them and highlight some that I thought were particularly interesting and though provoking, but before that let me finish what I set out to suggest.
In part 1, I spoke about:
- How the word "intermediary" is vague, and I'm using it in a specific sense -- namely a market maker that matches buyers and sellers and therefore can be safely abstracted away when modeling the system.
- How this understanding of the word "intermediary" is a problem in the specific economic context we find ourselves in today -- 5+ years of an extended recession, which high unemployment, and a host of conventional and less conventional monetary policy responses which have not worked well and which also, frankly, seem weak on theoretical grounds.
So, Tobin, who knows that banks generate loans which in turn create desposits, does on to say that once banks have those liabilities on their balance sheet, they undertake additional steps to reconstitute that balance sheet in ways which make sense for their business and also reflect the portfolio preferences of their non-bank counterparts. For example, they may actively manage the duration of their liabilities to better match their assets. They make take an active role in managing reserve levels to avoid having to use the OIB market. And of course, they stand ready as a counter-party to the non-bank sector -- if a corporation wants to issue paper and collect cash, a bank will assist in that, moving the cash from the paper purchasers accounts to the bank's account etc.
It is this counter-party role which in turn reduces a bank's function to being a safely ignorable match-making style intermediary, and means that the overall composition of bank assets and liabilities reflects the non-bank sector's preferences. To close the argument: focus on buyers and sellers in the market and safely abstract the banks away.
I actually agree with all of the above, but I also think it begs the question and that is: what non-bank sector portfolio desire can banks not be a counter-party to? And the answer to that is: money! I'm being glib, but when most people think of money they think of what's in their savings account without a corresponding non-equity liability (or rather, what's in their savings account that they are not under any obligation to pay back). If you want to move your money from checking to savings, or savings to CDs, or CDs to stocks, the banking system stands ready to move the numbers from one cell in the spreadsheet to another. If you want to take out a loan, which will increase your bank account, and then someone else's bank account when you buy that car or house, the bank will do that as well.
But suppose you want to simply have more money? And suppose you want to have more money as a sector? Well, sector-accounting, or paradox of Thrift if you prefer, means that you cannot get it and this is a portfolio desire, the desire for a bigger portfolio, that banking cannot help with. This is why increasing "reserves" is not "printing money" in the sense that people think and it is this understanding of what banks can and cannot
do which is missing in mainstream macro.
In some comment somewhere, I think it was JKH but it may have been someone else, said: "Tobin is not to blame for Paul Krugman's misunderstandings. Krugman is to blame for Krugman's misunderstandings". I wish that were true but it is not. Krugman did not come up with his misunderstandings all by himself, he inherited it from the norms of his academic discipline, since mainstream macro is all wrong in exactly the same way. Paul points to Tobin as a reference, but seems to claim that Tobin says something different from what he actually said. So the problem is elsewhere, but it is still environmental in origin, not specific to Krugman. Nevertheless, you need to meet people half way, and if Krugman points to Tobin, but gets Tobin wrong, then we can begin there.