Regular readers will know that I have spent quite a lot of time reading the…
The divide between mainstream macro and MMT is irreconcilable – Part 1
My office was subject to a random power failure for most of today because some greedy developer broke power lines in our area. So I am way behind and what was to be a two-part blog series will now have to extend into Wednesday (as a three-part series). That allows me more time today to catch up on other writing commitments. The three-part series will consider a recent intervention that was posted on the iNET site (September 6, 2018) – Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?. At the outset, the iNET project has been very disappointing. Very little ‘new’ economic thinking comes from it – its offerings are virtually indistinguishable from the New Keynesian consensus that dominates my profession. The GFC revealed how impoverished that consensus is. It has also given space for Modern Monetary Theory (MMT) to establish itself as a credible alternative body of theory (and practice). The problem is that the iNET initiative has been captured by the mainstream. And so the Groupthink continues. The article I refer to above is very disappointing. It claims to offer a synthesis between Modern Monetary Theory (MMT) and mainstream macroeconomics by way of highlighting “what really divides” the two schools of thought. You might be surprised to know that according to these authors there is not much difference – only that mainstream economists think that monetary policy should be privileged to look after full employment and price stability and MMT economists (apparently) think fiscal policy should have that role. The authors claim that for the on-looker these minor differences are opaque in terms of outcomes (if the policies are applied properly) and suggest that there is really no reason for any debate at all. Accordingly, the New Keynesian consensus is just fine and the mainstream economists knew all the MMT stuff all along. It is an extraordinary exercise in sleight of hand engineered by constructing the comparison in terms of two ‘approaches’ that cull the main aspects of each. The real issue is why would they waste their time. Degenerative paradigms (or research programs in Imre Lakatos’ terminology) typically try to absorb challenging paradigms that, increasingly have more credibility and appeal, back into the mainstream through various dodges – ‘special case’, ‘we knew it all before’, ‘really nothing new’, etc. This is Part 1 of my response. It won’t be an easy three-part series but stick with it and I hope it gives you a lot of insights into the abysmal state of the mainstream macroeconomics profession.
I wasn’t surprised by the discussion. Resistance from the dominant paradigm is part of the evolution of a new idea.
There is the famous construction (sometimes attributed to German philosopher Arthur Schopenhauer, sometimes to Gandhi) that “All truth passes through three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
I actually think there are four stages – the first being that new ideas tend to be ignored initially.
In terms of what I might call the intrusion (or challenge) of MMT to the mainstream orthodoxy in macroeconomics, we are now well into the ridicule, opposition phase, which means we are making progress.
And a derivative of the ridicule/opposition phase is what I call the ‘absorption’ phase or the ‘we knew it all before’.
It goes like this – okay guys this MMT thing, there really isn’t much about it, nothing new, and …. and when we apply some of the policies we get inflation, rising interest rates, transfers of tax burdens to the future generations, insolvency, etc
These predictions come straight out of the mainstream macroeconomics model (see below). To compare MMT with the mainstream macroeconomics we have to consider the building blocks of each. Otherwise, the comparison will be fraught.
I considered this issue, in part, in this suite of blog posts:
1. Modern Monetary Theory – what is new about it? (August 22, 2016).
2. Modern Monetary Theory – what is new about it? – Part 2 (long) (August 23, 2016).
3. Modern Monetary Theory – what is new about it? – Part 3 (long) (August 25, 2016).
Over the 24 or so years that we have been working on the MMT project together (the core team, that is) – I have observed the process through which MMT ideas have entered the economic debate, first at conferences and in the scholastic literature, and more recently, through various Op Ed, Social Media type avenues.
At first, there was no engagement from the mainstream economists, apart from some isolated hostility, usually the manifestation of previous personal disputes anyway.
Then, over the last several years, after that even longer period of being ignored, MMT ideas have entered the popular discourse.
While many commentators are increasingly viewing the core MMT ideas as a progressive answer to fill the void created by a discredited mainstream macroeconomics, an increasing number of economists have attempted to disabuse people of the validity of MMT ideas.
Interestingly, the economists seeking to discredit MMT have not been confined to those working within the mainstream tradition (New Keynesian or otherwise). Indeed, considerable hostility has emerged from those who identify as working within the so-called Post Keynesian tradition, even if that cohort is difficult to define clearly.
Earlier criticisms by so-called Post Keynesian economists were specifically targetted at their disdain for the Job Guarantee concept and open economy issues.
Randy Wray and I wrote an article in 2005 addressing those criticisms.
[Reference: Mitchell, W.F. and Wray, L.R. (2005) ‘In Defense of Employer of Last Resort: a response to Malcolm Sawyer’, Journal of Economic Issues, XXXIX(1), 235-244].
At the outset, we consider mainstream macroeconomics to be the type of economics that is almost universally taught in undergraduate courses in universities around the world and represents the usual dialogue in the financial press.
As you will see, the iNET article has a rather bizarre redefinition of mainstream macroeconomics, which in no small part, they require to blur the differences between what they call ‘mainstream’ macroeconomics and what they, in turn, call MMT.
Neither version they present is particularly credible.
In the first blog post cited above (August 22, 2018) I document the evolution of the more recent criticisms.
They fall into two broad camps:
1. The ‘we knew it all along’, ‘there is nothing new’ in MMT camp – this is tied in with the mainstream macroeconomists trying to regain credibility after their core analytical framework (New Keynesian approach) failed dramatically in the wake of the GFC.
So, while MMT is now seen as a major challenger to the mainstream macroeconomics narrative, the ‘we knew it all along’ gang try to claim that MMT only presents, in the words of Simon Wren-Lewis what “I thought were standard bits of macroeconomics” (Source and (Source)).
2. The ‘MMT presents a fictional world’ camp – this is a more nuanced argument about whether central banks and treasuries work closely together and whether ‘taxes and bond issuance’ fund government spending.
The pedants in the second camp ignore the fact that long before they entered the fray I (for one) had written that that governments create institutional structures that impose voluntary constraints on their operational freedom and obscure the intrinsic capacities that the monopoly issuer of the fiat currency possesses.
In the same way that Marx considered the exchange relations to be an ideological veil obscuring the intrinsic value relations in capitalist production and the creation of surplus value, MMT identifies two levels of reality.
The first level defines the intrinsic characteristics of the the monopoly fiat currency issuer which clearly lead us to understand that such a government can never run out of the currency it issues and has to first spend that currency into existence before it can ever raise taxes or sell bonds to the users of the currency – the non-government sector.
There should be no question about that.
Once that level of understanding is achieved then MMT recognises the second level of reality – the voluntary institutional framework that governments have put in place to regulate their own behaviour.
These accounting frameworks and fiscal rules are designed to give the (false) impression that the government is financially constrained like a household – that is, in context, has to either raise taxes to spend or issue debt to spend more than it raises in taxes.
MMT strips way these veils of neo-liberal ideology that mainstream macroeconomists use to restrict government spending.
We learn that these constraints are purely voluntary and have no intrinsic status. This allows us to understand that governments lie when they claim they have run out of money and therefore are justified in cutting programs that advance the well-being of the general population.
By exposing the voluntary nature of these constraints, MMT pushes these austerity-type statements back into the ideological and political level and rejects them as financial verities.
Mainstream macroeconomics does no such thing. It holds these voluntary institutional structures out as intrinsic financial constraints.
The whole ‘government budget constraint’ literature which emerged in the 1960s (beginning with Carl Christ etc) was tied up in the mainstream view that macroeconomics had to recognise that just as an individual consumer makes spending choices to maximise utility (in their theory) subject to budget constraints (income and other endowments), the government must be considered to face the same spending environment.
The iNET article claims that:
Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements-in particular what kinds of errors are most likely from policymakers.
So, this is more or less the ‘we knew it all along’ defense of mainstream macroeconomics.
To which I respond, no you didn’t know it all along. And, you still don’t know it. And, you still teach ‘fake’ knowledge – it is in your textbooks, your PowerPoint slide shows that you use to indoctrinate your students, your academic papers, your Op Ed articles and your media interviews.
Within that literature and then, later, in the textbook treatment of it, students learn the following:
1. Governments are financially constrained.
2. That means to spend the government must tax, which have negative consequences on work and investment incentives.
3. Spending more than it taxes (deficits) leads to a new ‘funding’ decision.
4. They recognise that the deficit could be funded by ‘money printing’ but claim this would be inflationary.
5. So the best option (among the two evils) is to issue debt, which pushes up interest rates and crowds out private spending.
6. There is a very real possibility that any stimulus from the deficit spending will be wiped out by the crowding out.
That is mainstream macroeconomics and it is not possible to spin it any other way.
To give you are guide, the best-selling macroeconomics textbook is Macroeconomics (currently 9th edition) by Greg Mankiw.
It is hard to argue that the body of theory and policy practice that is laid out in that book does not represent what we consider to be mainstream thinking and pedagogy.
Here are some core quotes (from the 7th Edition):
1. “When a government spends more than it collects in taxes, it has a budget deficit, which it finances by borrowing from the private sector. The accumulation of past borrowing is the government debt.”
2. “government borrowing reduces national saving and crowds out capital accumulation. This view is held by most economists and has been implicit in the discussion of fiscal policy throughout this book.”
3. “When these economists conduct long-term projections of U.S. fiscal policy, they paint a troubling picture … One reason is demographic … A second, related reason for the troubling fiscal picture is the rising cost of health care … Simply increasing the budget deficit is not feasible. A budget deficit just pushes the cost of government spending onto a future generation of taxpayers. In the long run, the government needs to raise tax revenue to pay for the benefits it provides.”
4. “Some economists believe that to pay for these commitments, we will need to raise taxes substantially as a percentage of GDP … Other economists believe that such high tax rates would impose too great a cost on younger workers. They believe that policymakers should reduce the promises now being made to the elderly of the future and that, at the same time, people should be encouraged to take a greater role in providing for themselves as they age.”
5. “In this case, the “good” is loanable funds, and its ‘price’ is the interest rate. Saving is the supply of loanable funds – households lend their saving to investors or deposit their saving in a bank that then loans the funds out. Investment is the demand for loanable funds – investors borrow from the public directly by selling bonds or indirectly by borrowing from banks … The interest rate adjusts until the amount that firms want to invest equals the amount that households want to save.”
6. “Consider first the effects of an increase in government purchases … the increase in government purchases must be met by an equal decrease in investment … To induce investment to fall, the interest rate must rise. Hence, the increase in government purchases causes the interest rate to increase and investment to decrease. Government purchases are said to crowd out investment.”
7. “The government’s control over the money supply is called monetary policy … The primary way in which the Fed controls the supply of money is through open-market operations-the purchase and sale of government bonds.”
8. “the quantity theory of money states that the central bank, which controls the money supply, has ultimate control over the rate of inflation. If the central bank keeps the money supply stable, the price level will be stable. If the central bank increases the money supply rapidly, the price level will rise rapidly.”
9. “When the government prints money to finance expenditure, it increases the money supply. The increase in the money supply, in turn, causes inflation. Printing money to raise revenue is like imposing an inflation tax.”
10. “unemployment results when the real wage remains above the level that equilibrates labor supply and labor demand. Minimum-wage legislation is one cause of wage rigidity. Unions and the threat of unionization are another.”
11. “Over long periods of time, prices are flexible, the aggregate supply curve is vertical, and changes in aggregate demand affect the price level but not output. Over short periods of time, prices are sticky, the aggregate supply curve is flat, and changes in aggregate demand do affect the economy’s output of goods and services.”
12. “Large government debt or budget deficits may encourage excessive monetary expansion and, therefore, lead to greater inflation. The possibility of running budget deficits may encourage politicians to unduly burden future generations when setting government spending and taxes. A high level of government debt may increase the risk of capital flight and diminish a nation’s influence around the world.”
13. “Each dollar of the monetary base produces m dollars of money. Because the monetary base has a multiplied effect on the money supply, the monetary base is sometimes called high-powered money.”
And so on.
This is core mainstream macroeconomics and is fed into the policy-making process on a daily basis.
It drives narratives, policy choices, how government departments and central banks are run (at least at the political level) and it is fed continuously, albeit in different (more simpler) language to the general population on a daily basis.
A journey through my 14 years of blog posts will leave you with no doubt that MMT as a body of work doesn’t accept any of those propositions that are fed into the minds of economics students around the world every day.
I won’t critique each one. Go back to the – Debriefing 101 – category and trace through the blog posts there.
You will see that:
1. MMT rejects the claim that currency-issuing governments fund their spending via taxation and bond-issuance.
2. MMT rejects the claim that deficits reduce national saving – it makes no sense to think of a fiscal surplus as ‘saving’. Saving is the act of foregoing current spending to increase future spending. A currency-issuing government never needs to do that. Fiscal surpluses are better seen as destroying non-government wealth.
3. The intergenerational challenge (ageing society) is not a financial one but, rather, a productivity challenge. The government will always be able to fund pensions and first-class health care providing there are adequate real resources available.
4. Current deficits carry no implications for future taxes. Every generation chooses, through the political process, the tax structure that is in place.
5. The ‘loanable funds doctrine’ has no application to a modern monetary and banking system. Investment brings forth its own saving. There is no finite level of saving that constrains investment. Banks will extend loans to any credit-worthy customer.
6. Increased government deficits do not put upward pressure on interest rates and do not starve the non-government of funds. There is no financial crowding out arising from fiscal policy in a modern monetary economy.
7. The central bank cannot control the money supply.
8. Government spending is not facilitate by ‘printing money’. And expanding the monetary base (say via QE) does not induce inflation as a matter of course.
9. Unemployment is not due to real wage rigidity but rather arises from a systemic failure to provide enough jobs. That failure arises due to inadequate spending in the economy. When the non-government sector’s spending and saving decisions are made and executed, if there is a deficiency then it means the fiscal deficit is too low. Entrenched mass unemployment is a political choice made by governments.
10. There is no short-run/long-run dichotomy. The long-run is just a series of linked short-run situations and fiscal policy is effective in each.
11. Issuing government debt does not reduce the inflation risk of spending. All spending (government or non-government) carries that risk. Issuing debt just alters the wealth portfolio of the non-government sector.
12. There is no money multiplier.
So you see that the core mainstream concepts are rejected outright by MMT.
How then could someone conclude that there is really no difference between mainstream macroeconomics and MMT?
Answer: by conducting a false comparison.
We will continue exploring that by analysing the iNET argument specifically in Part 2 tomorrow.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.
This Post Has 50 Comments
If I may introduce an ad hominem comment here, there is a way in which SWL and Mankiw have something in common and this is a rather egregious level of self-regard. Mankiw, when his class was being boycotted by the students, wrote in the NYT that he was sorry that the students didn’t feel the tremendous advantages that they would get from partaking of the wisdom he was offering them, while WL in one of his blog posts made the claim that he (and, obliquely, his colleagues) trained the elite of the nation. Krugman exhibits a bit of this, too, though perhaps less crudely. I find this degree of a sense of self-importance a tad off-putting.
Manchester University’s economics department did something similar administratively. When the students protested the neoliberal curriculum they were being fed and wanted something more relevant, the department effectively told them that if they didn’t like what they were being taught, they could go to the business school. Pretty outrageous.
I don’t know of a single MMTer in the University of Leeds economics department, where Sawyer resides.
An irritating trait of a number of these self-styled critics is that they don’t feel they need to read anything in the area they are critiquing. This appears to be a hangover from the attitudes of a number of neoclassical economists who seem to restrict their reading to a quite narrow range, ignoring sociology, social psychology, analytic philosophy, and the like. I am reminded of Sargent’s reaction to Romer’s critique of current macroeconomicss, when he wrote, in commenting on Romer’s criticism, that he hadn’t read the paper and had no intention of doing so, yet nevertheless felt that his contention that Romer clearly hadn’t done any good scientific work for 25 years should be taken seriously. Another individual with an egregious degree of self-regard.
Even Einstein didn’t hold himself in such a ridiculous degree of self-regard. If anyone could justify holding such an attitude, surely it would have been him.
The new Macroeconomics book looks scheduled for release, October 4th. on Amazon.
Looking forward to it.
As a small ‘p’ politician, I try to explain to my neighbors that Congress abuses them by not spending enough to produce full employment. Local municipalities and states in the US can no longer afford to provide adequate levels of services compared to past decades–because Congress is rendered indifferent to their financial struggles by the dominant political ideology. So I boil it all down to voting for Democrats, and rejecting Republican candidates. There is no alternative (TINA) politically speaking.
Bill states that,  “Government spending is not facilitated by ‘printing money’.” I have heard him say this before, but I don’t understand what he means by it.
My understanding is that increasing government spending, net of tax, causes an increase in financial assets held by the private sector. So, if currency is physically printed (and spent), or ‘numbers’ are transferred from the government’s Official Public Account into private bank accounts, then I would have thought that the result of these two operations would be the same. And therefore, that ‘printing money’ would facilitate government spending. But Bill says no.
Could someone please set me straight?
PhilipO, I don’t see it listed where I am. Bill has said that the new book is slated for publication in the new year.
Reuniting some of mainstream Mankiw quotes in one single post was a great ideia! It makes it easier to understand how and where he is indoctrinating students.
I would just debate the “The primary way in which the Fed controls the supply of money is through open-market operations” Mankiw’s quote, and your sentence “The central bank cannot control the money supply”.
It all depends on what you call “money supply”, of course. If you define that “money supply” means “narrow money”, then I would argue that the central bank can control either the money supply or the interest rate, but not both at the same time. When the central bank controls the interest rate, it lets the money supply float to accommodate such interest rate, which is a way of controlling the money supply nonetheless. An indirect way, but a way.
Hence, Mankiw would not be wrong at that specific point. Of course, Mankiw usually claims such things in a context of money multiplier and money velocity, which is wrong and confusing, but the specific point of money supply control does not seem wrong to me…
Yes Bill, they are trying to say that all the mainstream academics knew It all along but they don’t say anything when financial press and political press pushes around these lies. I wonder why It doesn’t happen in other areas of our lives? When newspapers are pushing some fake and dangerous medicines for example? I am sure some doctors would say something.
Bill. Not really surprising. Just what to expect. MAINSTREAM ECONOMICS HAS A JOB – PROVIDE AN IDEOLOGICAL DEFENSE FOR THE EXISTING WEALTH AND POWER STRUCTURE. Milton Friedman knew that. That’s why he had that grin of his. I know that MMT is closer to the truth and will provide a better way. It creates different winners and losers. I think the economic-ideological shift will need to be holding hands with the political shift.
If Simon Wren-Lewis claims there is nothing new in MMT and he trains the elite of the nation what text books is he using? I can’t find one of his own on Amazon UK.
André, I think that the objection to saying the Central Bank is able to control the money supply is also based on what is a primary function of the Central Bank- that it must always maintain the payments system and some semblance of financial stability. To do that it must be always willing to supply reserves when necessary, even if at a cost. That is pretty much the reason the US Federal Reserve was created in 1913. If the CB must supply reserves when needed then it cannot really be said to control the money supply.
Professor Mitchell, when I read the paper, I really didn’t get the impression that the authors’ intentions were to ridicule MMT in any way. Or to show disdain for the Job Guarantee or MMT analysis. Or even to say the ‘we knew this all along’ kind of thing. I kind of even thought that they were pointing out that MMT is a reasonable way to examine the economy. But they certainly did miss some very important differences between MMT and the mainstream and I was pretty sure you were not going to like the paper. Looking forward to part 2 and 3.
“I really didn’t get the impression that the authors’ intentions were to ridicule MMT in any way. Or to show disdain for the Job Guarantee or MMT analysis”
Well, I agree with you that they did not seem to be disrespectful and that they were not trying to ridicule MMT.
However, they made so many mistakes about MMT that it is astonishing. They wronged by tring to discuss a topic with no knowledge at all about it – which is not a scientific approach. It is a shame, actually. They are spreading false information about MMT.
Mainstream economics has been working? Right, I wasn’t born yesterday.
Mainstream economics = pay-go = USA won’t catch up to the rest of the world with single payer health care.
I’m sorry but nobody in mainstream has said anything remotely as instructive as MMT. I pay attention to the news when they have economists on. Looking back, none of them know whats going on or are able to illicit sectoral balance identities or the risk of government having insufficient deficit. Some of the more ethical ones just blame the rich and rent seekers, yes but thats not good enough.
Its good that they put out these articles because they are feeling the pressure. These articles are designed to gaslight people into thinking that mainstream economics is not junk economics.
In the article, they have “runaway debt ratio” and “debt stability.” These people can’t help themselves. MMT doesn’t recognize these things as important as advancing the public purpose but these people are so brainwashed, they see these terms everywhere.
Eurozone didn’t arise out of thin air. If these scumbags think they knew MMT all along, then why would the eurozone ever thought of as a great idea. COME ON!
I have never read a mainstream economics textbook. With knowing a little about MMT, what you quoted there are so wrong its hilarious. Mainstream textbook is almost an onion article making fun of capital-serving useful idiot academic. They almost get everything 180 exactly backwards. What a load of garbage economics indoctrinates children with. quote #10 is just criminal. Eliminating the minimum wage? Really?
No wonder economics students become sociopaths.
To follow up on what Yok says, Mainstream is surely a scam on the majority of us, and MMT is trying to be fair. It is a true theory in that sense; MMT is what works fairly for all of us who have money. Also MMT is incomplete without an explicit theory of what gives intrinsic value to money. That has to be stated clearly that human creativity is the only real intrinsic value behind MMT. All the time a population has a viable productive element in charge of the issue of money, money has intrinsic value. It loses value the minute too much money is issued in respect to the creative potential of that population. We see countless examples of this in Africa.
So we have to reject Mainstream on at least two counts: One is that it is not fair to everybody, and secondly that it has a false theory of intrinsic value.
@Robert Eversfield Manley Francis
“Also MMT is incomplete without an explicit theory of what gives intrinsic value to money”
Well, I may be wrong, but I think MMT is very explicit on what gives intrinsic value to money: taxes (and the punishments for those who don’t pay).
You will value currency because it will free you from current or future tax liabilities – and, hence, the penalties from not paying current or future taxes. Currency is a kind of IOU, a tax credit if you will, or a “tax pardon credit”, I don’t know. If you supply labor, goods or services to the government, it will provide you with such credits. The amount the government pays for your labor, goods and services also plays a role in the valuation of any currency, as the institutional arrangements of fiscal policy.
I agree with in some degree, though. In my opinion, MMT theory on price level and inflation is not fully complete. In my understanding, Bill and other core MMTers (like Warren Mosler and Randall Wray) have a different view on the specifics of how inflation and the price level works.
However, even though they seem to diverge on specifics, they seem to agree on broader concepts, like the claim that a JG would be able to achieve both full employment and price stability, and that excess spending can lead to inflation if the economy is already at full utilization.
Nonetheless, my perception of the lack of a convergence on the specifics amuses me. I would like to be able to forecast inflation and the price level of a country, and not just be able to claim something like “I don’t know exactly what drives price levels, but I know that, whatever it is, a JG would be able to keep both full employment and price stability” or “I don’t know exactly what drives price levels, but I know that, whatever it is, inflation occurs only if the economy is under full utilization or some political crises happens”…
REMF, MMT does say what gives money its value. It has the value that the government says it has. It has no other value. The government must act so as to support its currency system. With respect to the issuing of too much or too little money, MMT has a view on this as well. Without going into great detail, the single most important break on how much money is issued is the level of unemployment and how close it is to full employment. WW2 indicated that this was about 2%. But this would have to be assessed empirically.
The mainstream theory is false in every respect, in the assumptions it makes about the nature of the economy and the views it has of how the system works.
André, believe me I have a lot of disagreements with the paper. Here’s what I wrote to J.W. Mason on Aug. 20 about the paper when he posted an early link to it in response to my request-
“Thank you Professor. One thing I have noticed is that MMT pretty firmly rejects any kind of ‘loanable funds’ argument or thinking. Investment requiring a prior pool of savings and similar ideas. Rejects any ‘financial crowding out’ caused by deficit spending also, (or the bond issuing that may accompany it). Their understanding of banking operations also seems to differ from mainstream. Maybe that is covered under the endogenous money idea or under the idea that the central bank can set the interest rate it wants. ”
Bill hit all of those points as well as a bunch more. And still two more blog posts to come…
So yeah- I don’t agree with their paper. It had a lot of errors but mostly they are errors of omission and not tailored to disparaging MMT in any way I can see.
Like I said earlier- I think the goal was to point out that MMT is not some kind of ridiculous economics that can just be ignored. That’s my impression anyways.
The piece’s second listed author told me, on Twitter, the following:
“I co-authored a piece about the logic of a position that is often associated with MMT. I think the argument we made is *correct*, interesting and *useful*.”
If it is NOT correct, then it cannot possibly be useful. As for ‘interesting’ that’s neither here nor there.
It is not correct. It is surprising incorrect; moreover, it is incorrect in very specific ways. Therefore, whether intentionally or not, this is not merely “ignorance and/or error”, as such. It is “ignorance and error” in a specific direction, one that buttresses and supports orthodoxy and puts limits on the debate.
“I think the goal was to point out that MMT is not some kind of ridiculous economics that can just be ignored”
Well, maybe that indeed was the case, I don’t know. But if that was the case, I guess it backfired, because MMT is very distinct from mainstream economics. The path of “look, MMT is not ridiculous economics, because it is similar to mainstream after all” is not an adequate one, because it is not true!
MMT is not similar to mainstream economics, and I guess it should be obvious to anyone. If people find MMT ridiculous because it is different from mainstream theory, well, what can we do? Maybe we could try to explain why it is a superior theory, maybe with empirical evidence, point out where mainstream is wrong etc, but we should never try to make a connection with the mainstream theory that doesn’t exist.
I understand that a respectful yet ignorant debate is superior to a non-respectful ignorant debate. However, a respectful intelligent debate would be even better. And making big, obvious mistakes is what makes the paper an ignorant one, in my opinion. The author is clearing claiming that MMT theory says things it doesn’t actually say!
So here are the final two paragraphs of the Jayadev/Mason paper.
“We have two concluding thoughts. In our view, it is a mistake for those on the mainstream side of the debate to dismiss MMT supporters as radicals or holders of outré beliefs. They should recognize that MMT is making unconventional policy arguments in a framework of conventional economic analysis. Moreover, the experience of the last decade during which higher levels of debt did not lead to runaway inflation or other obvious costs, and during which conventional monetary policy failed to quickly and reliably close output gaps, should make policy-oriented macroeconomists open to revising their views on the merits of the conventional instrument assignment.”
[That seems like a scolding to mainstream economics to me]
“For MMT by contrast, the challenge is to clarify the conditions that make it reasonable to expect a government unconcerned with financial constraints will consistently pursue a fiscal balance consistent with a zero output gap. In order to persuade people in the policy mainstream, MMT must address the real source of their objections, which is, we believe, found not in finance but in political economy. What reason do we have to believe that an elected government that is free to set the budget balance at whatever level is consistent with price stability and full employment would actually do so? This is where the real resistance lies.”
Notice that there is no challenge to the ‘economic’ theory of MMT in that request. And it is not a completely unreasonable request even if it makes me wonder what country JW Mason has been living in for the last ten years.
“So I boil it all down to voting for Democrats, and rejecting Republican candidates.”
Unfortunately, the vast majority of Democrats believe the 13 core quotes from Mankiew’s textbook, so voting for them isn’t going to change economic policy other than raising taxes on the rich, maybe, if they have it in them to fight for it.
Democrats officially support “Pay Go”.
So to get anything done, they will have to fight on two fronts instead of one…the policy itself and the raising of taxes to “pay for it”.
The reason Democrats have been losing for so long on virtually every front is they are perceived to be unwilling to fight for anything.
They are being paid to lose by their donors.
At this late stage I’m afraid change cannot and will not come through electoral politics. The only effective means available to push back is through movement activism.
Pelosi’s pay-go is asinine political suicide/shooting yourself in the foot.
Trump sucks so much that even zero effort from the democrats may somehow get them elected.
On second viewing, my previous comment was a bit aggressive (i.e calling people scumbags).
Still economics needs to fix its face though.
When people used to say (and still do) that the Democrats are paid to lose, I didn’t believe them. Of course, I can clearly see that now.
Let me wade into this debate. I would attempt to partially explain what prof Mason wrote by his peculiar understanding of social accounting. If there is “nothing to see here”, he can’t see the difference. He wrote a Working Paper no. 901 published by Levy Economics Institute, “Income Distribution, Household Debt, and Aggregate Demand: A Critical Assessment”. Unfortunately prof Mason’s idea about the relationship between spending, saving and borrowing is based on the theory of loanable funds.
“It is still true that higher household consumption spending reduces saving and raises aggregate demand, and contributes to lower saving and higher borrowing, which in turn contributes to lower net wealth and an increase in the debt ratio. ” (Also see Figure 4 and Figue 5 in the paper)
What about a social accounting identity that the net flow of borrowing must be equal to the net flow of saving in deposits? (This is obviously just one form of saving – in liquid assets). Which way does the causation go – from saving to borrowing or from borrowing to saving? I would link the opinion quoted above with what I have found in the iNET article. The authors stated that
“Economy-wide spending (aggregate demand) depends on, among other things, the interest rate set by the central bank and the budget position of the central government. Lower interest rates and larger fiscal deficits (or smaller surpluses) are associated with higher levels of demand and therefore of output, while higher interest rates and smaller deficits are associated with lower levels of demand and output. Note that while MMT and mainstream economists share this premise, they may have different priors about the relative size of the parameters involved.”.
I would argue that it is because of “peculiar understanding” of social accounting stemming from the loanable funds theory, the authors have overlooked the danger of using monetary policy as the predominant tool to control the business cycle. Monetary policy is supposed to be working by affecting the size of the revolving fund of liquid finance (using a Keynesian term). When real interests are low, entrepreneurs are more willing to borrow money, spend it on investment and after a certain period of time pay back the debt out of the profits. This is OK but there are side effects of using the monetary policy. Because of the lack of constraints on lending, (the state should not interfere with the markets), agents have kept borrowing (and spending) more and more money – and not repaying the debt. That money was then saved as deposits by other agents. Net borrowing has created extra spending power – this was stimulating the economy in the same way a fiscal policy would do. Monetary policy was a kind-of fiscal policy in disguise – the spenders were households borrowing freshly created bank money. (This explanation is consistent with the Sraffian Supermultiplier theory, promoted by Marc Lavoie and supported by econometric work of Brett Fiebiger). Unfortunately households have to pay back the debt, unlike monetary sovereign governments which also can create spending power “ex-nihilo” but without having to pay back the debt. Prof Mason argued in his Levy Institute paper that the rise of the ratio of debt to GDP was mainly caused by higher real interest rates accruing on a pre-existing stock of debt. I disagree. I think that the marginal propensity to save out of income defined for individuals averaged over all income groups (this has to be a weighted average due to income distribution), did not change dramatically (it obviously changes over time but not that much). It can be shown on NIPA accounts how much fresh spending has been injected into the economy due to rising household debt – both mortgage and consumer. The personal saving rate is defined as 1 – spending/income but spending can be financed by net borrowing or out of income (I am simplifying this but I can’t get deeper into this topic here). It is possible for the spending to exceed income. This suggests that very low personal saving rate is to an extent an artefact of massive borrowing by the private sector. Anyway I think that there is a lot to be seen here and we haven’t even started talking about income distributional issues which are driving the bias point of the private economy in the long term.
Dear Jerry Brown (at 2018/09/11 at 3:51 am)
Referring to me as “Professor Mitchell” on my own blog is unnecessary. Hardly anyone would call me that in an informal setting such as this.
About three years ago I got up early every morning and read Mankiw’s textbook cover to cover to supposedly “finally learn some economics” so as to be better able to tackle neoliberalism with my long suffering friends – I read all about the multiplier and the twin deficits hypothesis and crowding out….
Then I discovered MMT and realised I had been led up the garden path… no point taking a university economics course if that is your textbook. Better to read this blog.
“They should recognize that MMT is making unconventional policy arguments in a framework of conventional economic analysis.”
Nope. MMT is *not* making unconventional policy arguments *in a framework of conventional economic analysis*.
MTTists do not operate in a framework of conventional economic analysis when they make policy arguments or recommendations.
My experience has been that MMTists are much better at “translating” from MMT to “orthodoxese” than the orthodox.
This process reminds me of the resistance to heliocentrism, and further supports my impression that mainstream economics operates more like a religion than a science.
All the more reason to applaud MMT’s commitment to empiricism.
I appreciate that Bill. But over years of commenting on different economics blogs, I have found that it pays to be polite when expressing even slight disagreement with the author, as in this case. So I generally use the more respectful title when doing that. That was one of your points in a recent post. Politeness pays.
That being said, I think you are exceptionally tolerant and always polite when responding to comments. The most painful reply I ever got from you was something like ‘Dear Jerry Brown, with all due respect- you don’t know what you are talking about’. Which, while I disagreed, is still a whole lot better than being called an ignoramus or idiot. Or having your motives questioned.
And so along that line, I think it might be reasonable to not consider the Jayadev/Mason paper as an attack on MMT ideas. By all means point out where they went wrong there (I tried to), but maybe not question their motives for writing it. I stated my opinion of what the paper attempts to do and it is not a negative thing as I read it.
When a government spends more than it collects in taxes, it has a budget deficit, which it finances by borrowing from the private sector. The accumulation of past borrowing is the government debt.
As an excercie in framing I tried to state the private sector dual of this moralistic bombast.
When the private sector earns more than it pays in taxes, it has a private surplus, which it saves through the purchase of government bonds. The accumulation of past savings is called the private [????].
Interesting there is actually no good value word to use here. The borrower has a morally bad “debt”, the lender/saver simply has a financial asset.
Intrinsic worth of $. In my view creativity is a type of labour. You have to do labour to get your $ in most cases to pay your taxes. I believe this goes without saying.
‘Private Piggy Bank’? 🙂
Good work Bill.
Yes these sorts of ‘sort-of’ progressive places (iNET) that advocate a fundamental change in thinking.
Instead they re-assert the status quo.
A body of thought which entirely concerns itself with advocating the worst possible solutions, constructed using the worst possible tools, backed by the worst possible data, put into practice with a deliberate non-knowledge of how the real system works. This ideology is designed to thwart solutions not create them.
Its the body of knowledge that politicians use to do the exact opposite policy response to what’s needed.
iNET: just add it to the list of organisations which is deaf, dumb, blind. The assertions it makes here come about every 12-18 months in these ‘sort-of’ progressive forums/news sites. This has been happening since i was aware of parts of MMT (thats since 2003) The usual aspects of MMT are attacked in the same way all the time.
These organisations always market themselves as scientific, ground breaking, though-full debate whatever etc. (all bull**t) They cant even come up with a sound critique of MMT its all recycled /already debunked critiques from the void pulled out like a lucky dip every couple of years. They are not cross-referntially sound if they are supposed to be marketed at their audience who would appreciate the scientific method.
Hi Andre, I think that is incorrect. My understanding is that the central bank neither controls the size of the monetary base (currency-issuer IOUs/ reserves / tax credits / high-powered money) nor the size of the money supply (which comprises the monetary base plus retail bank IOUs / demand deposits). If the central bank didn’t try to maintain an interest rate above zero, the rate would naturally fall to zero under the current monetary system.
My understanding is that the central bank makes an ongoing commitment to ensure that the banking system as a whole has sufficient reserves for payments to clear. That is the case regardless of whether the central bank is trying to hit a target interest rate or not.
It is the amount of retail bank lending to credit-worthy borrowers that determines the total money supply and therefore also the amount of reserves. If the amount of demand deposits increases, the central bank automatically increases the supply of reserves to ensure that the demand deposits can always be exchanged on demand for reserves at a one to one ratio. The term “demand deposit” refers to the fact that it’s a monetary instrument that can be converted into reserves on demand.
I think that is what “endogenous money creation” means. The money supply and the monetary base are both determined by the internal dynamics of the private sector (how much credit-worthy demand for loans exists in the private sector). The central bank controls neither the money supply nor the monetary base and that isn’t a problem.
But I’m not absolutely sure.
Bill, I have wrestled both mainstream economists and a disbelieving proletariat and to a fault, your narrative is accurate..
The mainstream, neoliberal narrative is overwhelming to take on. The amount of mindless regurgitation of Milton Friedman boogeymen about inflation and the more ridiculous claims of “Weinar Republic”, “Zimbabwe” and “Venezuela” come like a zombie horde throwing themselves at a wall and climbing over the bodies to scale the summit. Drones of mindless rebuttals and non-refutatations…
But this “assimilation” to the mainstream is appalling. It is beneath contempt because even if done in “good faith” which it most CERTAINLY was not, it was NEVER done in consultation with the actual development team and that is damnable. Thanks for the tireless work. You are my hero and hero to many economic justice advocates as well. Your work will save lives.
GreekStav, re your comment on Mason’s tweet, I wholeheartedly agree with what you say. Well put.
[ … ] And therefore, that ‘printing money’ would facilitate government spending. But Bill says no.
Could someone please set me straight?
As far as I know, you’re right. It would. The only thing is that they don’t do it that way. The great flows of money are electronic, Money leaves and rejoins the flow as physical cash as people find it convenient, but that’s a feature on the side.
And they won’t print new physical cash if they still have a stock of old cash they can use.
I tried to take economics in college (1972) but when I realized that the text was misleading and that the instructor would not respond as to why there was no empirical hard science supporting their claims I wrote it off as a religion perpetrated by the elite. Even though my math background was/is weak economics would have been a great field to participate in if there were instructors and texts available like you and yours. Thank you Bill, Randy and all.
“If the amount of demand deposits increases, the central bank automatically increases the supply of reserves to ensure that the demand deposits can always be exchanged on demand for reserves at a one to one ratio. The term “demand deposit” refers to the fact that it’s a monetary instrument that can be converted into reserves on demand.”
If I understood it right (and I’m not sure about that), that is not how the system works.
In my understanding, the central bank does not automatically increases the supply of reserves to ensure that the demand deposits can always be exchanged on demand for reserves at a one to one ratio. Actually, I think demand deposits are not guaranteed that way, and, if banks get irresponsible, deposit holders may lose their money.
As I see it, the central bank provides what is in practice a risk-free interest bearing account or similar (called short-term government bonds, open market operations, repurchase agreements or interest bearing reserve account, depending on the country and its institutional arrangements) to banks, and those banks always have the opportunity to deposit reserves there (and I will call it “risk-free liquidity”, in an attempt to make it more universal). Other than that, the central bank does not automatically do anything.
The banks then freely choose what kind of investments and operations they are going to do depending on profitability and risk.
If the base interest rate (Fed Funds Rate, Bank of England Base Rate, RBA Official Cash Rate or whatever) is low, banks will try to work with less risk-free liquidity, to avoid holding an asset that is not profitable. They will hold just enough risk-free liquidity to service their operations, and they will try to employ the remaining resources into more profitable (and probably riskier) assets, like long-term government bonds and loans. Of course, banks may go broke if they don’t manage the liquidity well, and the central bank cannot do much about it. In some countries, banks are readily bailed out, in others they are not, but I believe that is another subject entirely (I may be wrong here).
So, when interest rate is low, banks try to hold less risk-free liquidity and more kinds of other stuff, maybe just swapping one kind of government asset for a riskier and more profitable government asset, or maybe swapping a risk-free liquid government asset for a loan (private financial instrument).
The government can either control the base interest rate or the level of risk-free liquidity, but not both at the same time. If it controls the level of risk-free liquidity, then the interest rate will have to float, and vice-versa.
All I’m saying is that Mankiw is not wrong when he claims that there is an inverse relationship between base interest rates and risk-free liquidity, all other factors being equal. Mankiw is wrong in almost everything, but not on that one, in my mind. And it all depends on the definition of “money supply”.
There may be some flaws on my reasoning though.
André, Bill says in this post https://billmitchell.org/blog/?p=38964
” 3. Central banks are monopoly creators of “central bank money”, while commercial banks create “bank money” out of thin air – through “balance sheet extension”.
Central banks set the interest rate but cannot control the broad money supply or the volume of “central bank money” in circulation.
This might seem a little confused. On the one hand, the government is a monopoly issuer of its own currency but then cannot control the volume in circulation.
The way to understand it is to realise that the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability.
If cheques start bouncing because of a shortage of reserves then financial panic would follow.”
Jerry, the reason that the government can’t fundamentally control the amount of money in circulation is that they have very little control over the retail banks’ issuing of credit and thereby loans. These loans must be covered by the central bank, for the most part.
I suppose that governments could impose some limit on broad money in circulation by taxing (some of) it away? And also imposing direct credit limits on commercial banks. This has certainly been attempted in post-war Britain, albeit probably with only limited success. If they go too far along this road, I suppose that recession can result. (Hence the “stop – go” policies that we used to hear about so much in the 1950s, 60s, and possibly beyond).
@Jerry, @Bill, could a compromise between respect and a relaxed approach be achieved by “Professor Bill”? (My father used to work for a fairly authoritarian (no comparison intended here 😉 ), but privately very humane (possible comparison there 🙂 ) man who was known universally around the firm as “Mr Bill”, to distinguish him from his brother, “Mr Tom”, also on the firm. A family firm, of course, founded by their father.
I guess that there is some confusion about the term “money supply”. It is ambiguous.
“Money supply” may mean central bank money (or narrow money), which includes dollar coins, dollar notes and bank reserves only. Or it may mean central bank money plus short term government bonds and repos. Or it may include private bank deposits. Or it can have any meaning you want, which is a problem.
Nonetheless, if the government chooses, it can control the level of central bank money instead of the interest rate – and it has been done in the past, although today central banks usually do the opposite and control the interest rate instead. In my view, there is an relationship between interest rates and the level of central bank money.
I agree that controlling bank deposits is much more challenging (or maybe impossible) but that was not my point.
I don’t know exactly what Bill meant when he said “the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability”. I think the following text (from Warren Mosler) is another way of expressing what Bill wanted to say (but I’m just guessing here, I may be wrong):
“As long as the Fed has a mandate to maintain a target Fed funds rate, the size of its purchases and sales of government debt are not discretionary.”
If a private bank is mismanaged and grants loans to bad customers who never pay back principal or interest, it will go bankrupt, and the central bank is not obligated to save it. The central bank is not obligated to loan cb money to the troubled bank or anything. If the central bank has any obligation at all, it is to guarantee a swift and less disruptive ending of activities of that bank.
Of course, governments may choose to bail out banks, and at some times they did (and some others they did not), but it is not an inherent task of the central bank to save banks…
“the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability”
I take it to mean that, on a day-to-day basis, a bank’s reserves are used to fund the clearing balance between money coming in from the bank’s depositors, and money going out when account holders (including borrowers) write checks. If a bank truly runs out of reserves, then all the customers’ checks will bounce and their financial lives will be destroyed. That’s the “financial stability” that has to be maintained.
So the consequences of not lending to top up a bank’s reserves can be dire. I assume that it’s not just the central bank involved here; an illiquid bank can borrow from the CB (the policies under which they *will* lend are spelled out at the FED website), or other banks, or could sell some loans at a discount to other banks that are not reserve-strapped, or I don’t know what else.
Yesterday Yves Smith posted a few paragraphs explaining the mechanism of the 2008 implosion. If I understand it right, a lot of “AAA” tranches of Credit Default Swaps lost all value, and banks were using these as collateral in the “repo” markets in which they funded each other (again, if I understand it right) and the banks’ own machinery for evening-out their liquidity needs stopped, and mayhem ensued.
André, one of the primary reasons that the central bank in the US was created by the US Congress was to provide liquidity to banks in times of bank panics. Even a completely well run solvent bank with the safest loan portfolio in the world could experience a liquidity disaster if its short term liabilities (deposits) were all demanded at once. A bank in that situation would have to try and sell its assets at once to meet its obligations. In a situation where the CB was attempting to limit the money supply, there might not even be enough excess reserves in the system for those assets to be sold at any reasonable price and the bank would become insolvent as a result and fail. Many of the depositors would lose their money as would all of the creditors of the bank. This could quickly affect other banks and then you have a full scale banking crisis. Very bad situation.
But the Fed was created so that situation can be avoided. The solvent bank experiencing the deposit run can borrow from the Fed to meet its liquidity crisis. And the Fed is pretty much obligated by the laws that created it to provide the reserves. That is an expansion of the money supply that the Fed has no choice but to allow- no matter which money supply you are talking about. Therefore it would be inaccurate to claim that the central bank can always control the money supply.
What would we do with 7 billion people without developers? Have you met this person? Aren’t you forever going on about the benefits of true investment? What else could they be doing? Perhaps they are not greedy, but working on a good sound project to feed their family and house some people with smart infrastructure? Sorry to inconvenience you by cutting your internet cord but how else would you get your message out without greedy internet developers?
Perhaps automatic is not the correct word.
My point is that the central bank makes an ongoing commitment (and always has the capacity) to accommodate the banking system’s demand for reserves.
What that means is that if the amount of demand deposits in the total banking system increases (because the banks have decided that there are enough credit-worthy borrowers to justify this increase) then the central bank will increase the supply of reserves.
This commitment doesn’t mean that all retail banks will survive. Whether a particular bank will survive or not is a discretionary decision for the government.
My point was about the banking system as a whole. As demand deposits increase, so too do reserves in the proportion that is needed for the banking system to meet the reserve requirements imposed on it by the central bank.
This leads me to ask this question:
What is the difference between reserve requirements and capital adequacy requirements?
What counts as capital in this context?
“What that means is that if the amount of demand deposits in the total banking system increases (because the banks have decided that there are enough credit-worthy borrowers to justify this increase) then the central bank will increase the supply of reserves”
Well, I may be understanding wrong what you said, but I don’t think that things work like this.
Central bank monetary policy cannot change the total amount of bank reserves + government bonds (or repos) held by the private market participants. Monetary policy can swap one for another (bank reserves to government bonds and vice-versa) but it cannot change the total balance. Fiscal policy is what creates currency, via public budget and etc.
The central bank cannot and will not increase the total amount of bank reserves + gov bonds (or repos), not even if the amount of bank deposit increases.
However, usually the thing is that there are always a lot of outstanding currency in the private market, and investors and their banks are always trying to find the best way to invest them. No matter what their investment decision is, currency will always end up at some bank reserves account or government bond (or repo). The only way currency enters the private market is through government spending, and the only way it exists is through taxation.
“What is the difference between reserve requirements and capital adequacy requirements?”
Can’t understand the doubt here. Equity is the residual claim that shareholders have in the assets of their company after liabilities have been paid. Bank reserves are currency (an type of asset, an IOU that is a tax credit).
Capital requirements demand that banks hold a minimum amount of equity (proportinal to assets) – it is a kind of guarantee that shareholders will have some skin in the game and also that debtholders are paid in case of bank failure. If banks leverage too much on debt, shareholders may be more prone to risk taking decisions, as good outcomes would come back as dividends, and bad outcomes would be losses to debtholders.
Bank reserves requirement rules demand that banks hold some bank reserves proportionally to deposits. Some countries do not have it anymore, and it is actually a relic from that past that will end when policy makers realize that monetary systems don’t work as they thing it does (which may be never)…
Andre and Nicholas, the rules by which the central bank operates, and the rules it makes for commercial banks, are going to be different in different countries. But MMT makes the point that those rules are determined by the governments of those countries. And that is one of the reasons we should consider the central bank to be ‘consolidated’ with the currency issuing government. The central bank is really best considered as a part of the government.
In the US, the government has allowed the central bank to pay interest on ‘excess’ bank reserves that are on deposit with it. And it currently does so. That fact alone shows that a central bank absolutely can change the ‘total amount of bank reserves + government bonds held by the private sector’ if government policy allows that. Also in the US, the central bank is allowed to lend to banks and that is not limited by the bank’s holdings of government bonds. The Fed can loan against other bank assets as long as the Fed believes they are credible. Any loan made by the central bank that uses private liabilities as collateral also increases the total amount of bank reserves + government bonds.
And then there is the thing I continue to be upset about- the Fed purchases of mortgage backed securities. I believe it paid (created) over $2 trillion to various banks for those private sector ‘assets’. That is a 2 trillion dollar increase in ‘reserves + government bonds’.
“In the US, the government has allowed the central bank to pay interest on ‘excess’ bank reserves that are on deposit with it. And it currently does so. That fact alone shows that a central bank absolutely can change the ‘total amount of bank reserves + government bonds held by the private sector'”
Yes, you are right. Central Bank issues currency out of thin air to pay the interest on reserves (and repos). Hence it can change the total amount of bank reserves + government bonds by that interest amount. By ignoring that I was not being precise.
“Also in the US, the central bank is allowed to lend to banks”
Yes, that is also true, so I was not being precise also. In some countries, a bank can “swap” long term credit portfolio, for example, to bank reserves, through central bank borrowing, if the Central Bank believes that such portfolio is good quality collateral.
However, my point was that the Central Bank does not simply issue bank reserves proportionally to the bank deposits balance. That is not how it works. If a bank is issuing too much bank deposits, it may go broke, and the Central Bank will not simply issue bank reserves to support this bank – unless such bank has government bonds or good collateral to give to the Central Bank.
I also find it intriguing the fact that Fed is allowed to buy credit portfolios. It seems that it is one more evidence yet that the bank lobbying is too powerful, but I guess that this entirely another discussion…