Yesterday, I was walking over to the library and I ran into an old colleague who has been dragooned back into teaching macroeconomics on a casual basis. The person was telling me that they were dreading taking the class next week because the topic was banking and the relationship between reserves and the money supply. Accordingly, the person said the chapter in the textbook specified by the lecturer-in-charge was about the money multiplier. The person I met is familiar and sympathetic to Modern Monetary Theory (MMT) and posed the question “how can I do it?”. My answer was that students deserved better and that the lecture should develop the multiplier from a critical perspective so that students know about it but realise how far-fetched it is as a depiction of how the banking system actually operates.

I have returned from the US after participating at the Fiscal Sustainability Teach-In and Counter Conference held in Washington D.C. last week. It was a good event and has stimulated a host of follow-up blogs from the activists who promoted the event. On the way home, I read the most recent report from Citi Group (who were saved from bankruptcy by public funds – they were among the first to have their hands out) which is predicting major sovereign defaults. It was clear that Citi Group was advocating very harsh fiscal austerity measures. How often have you heard the statement that the current economic crisis is evidence that “we are living beyond our means” and that the policy austerity that has to be introduced to “pay back the debt” is an inevitable consequence of our proliflacy – both individual and national?

The Fiscal Sustainability Teach-In and Counter-Conference was held at George Washington University in Washington D.C. today (Wednesday US time that is – April 28, 2010). It was a grass roots exercised designed to counter the conference organised by the arch deficit-terrorists at the Peter G. Peterson Foundation, which was also held today in Washington D.C. While that event will also talk about “fiscal sustainability”, the reality is that it will merely rehearse the standard and erroneous neo-liberal objections to government activity in the economy. The objections are underpinned by religious-moral constructions dressed up as economic reasoning.

Given I am currently in Washington DC, I thought a local story would be appropriate for today’s blog. In February 2010, the IMF published a Staff Paper which reversed its long-standing position on capital controls. Staring at the hard evidence that nations, which had imposed constraints on surging capital inflows to attenuate the negative economic impacts, fared better in the recent global financial crisis, the IMF has acknowledged that their previous position based on free trade back by total liberalisation of cross-border financial flows was unsustainable. They now argue that controls on capital inflows can be effective if well designed and safeguard an economy from the costs of speculative attacks. Some progressives are calling this a revolution. I am less convinced. From a Modern Monetary Theory (MMT) perspective, I would solve the problem by placing total bans on speculative flows that do not back real production (for example, that reduce foreign exchange exposure in cross-border trade). But this is another example of the zealous position that has been long-advocated and implemented by the IMF has failed to safeguard national economies from the destructive forces released by the increasing financialisation of the global economy.