Politics of PK

Business Insider believes that Goldman embraces PK in their analysis. I don't see it.

In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.

They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.

The DeLong and Summers paper, unsurprising for two Democrats, only talks about higher Government spending (G), not higher deficits (G-T).

The "higher G" argument to "prime the pump" is K, not PK.

It's also fun to see how careful the authors are to remain on the good side of Monetarists, who continue to set the orthodoxy for macro. Does any of this sound like PK to you?

In normal times the logic of Taylor (2000) that stabilization policy should be left to the monetary authority still holds.

The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government, and a spiking of interest and inflation rates to previously-unseen values.

Sovereign debt crises can be triggered by rises in spending due to expansion

All basic gold-standard stuff.

Bernanke cannot do Accounting

Bernanke demonstrates the squalid state of Economic Theory:

debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. Bernanke (1995, p. 17)

Voila -- Bernanke does not understand the difference between assets (which really is just a transfer, ie the Internet bubble) and debt.

Banks do not loan out deposits. Savings do not get given, by banks, to borrowers. Investing in a mutual fund, there the fund manager doles out your cash to a company, is nothing like putting your money in a bank, where the bank manager certainly does not dole our your money to a borrower.

Banks create loans by expanding their balance sheets. The money is created as an asset and a liability, simultaneously. Therefore, debt deflation is not a simple transfer, where balance sheets stay the same size, but a contraction, where balance sheets shrink as assets and liabilities are both written down.

We are two years into this crises, and the basic mechanism for bank lending remains opaque to the Chairman of the Federal Reserve.

Two threads -- what I learned

I strongly recommend the thread on Unqualified Reservations (not the post). Some key things I learned:

1. Even people in banking do not seem to understand how banking works. The Academy, and therefore the Fed, are most clueless though.
2. Post-Keynesians tend to focus on how loans create reserves, that then get cycled into deposits via the overnight interbank lending market. In practice, banks run a day-to-day Treasury function that tries to fund assets with liabilities other than borrowed bank reserves overnight. The degree to which banks utilize the overnight interbank market varies by bank and bank business model, but generally, they try to get deposits and other liabilities instead.

This makes sense since bank profit is generated by the spread, and the lower your cost of capital, the higher your profit margins (as lending is capital constrained).