I read an article in the Financial Times earlier this week (September 23, 2023) -…
Remember on February 3, 2021, when the RBA governor Philip Lowe spoke at the National Press Club in Australia and told the audience that the Reserve Bank of Australia is not funding the federal government deficit, either in part, or, in full. This was in response to being asked whether the current situation that sees the RBA buying large swathes of government bonds are in any way consistent with Modern Monetary Theory (MMT). Well, since he gave that speech and answered questions from Australia’s journalists, a very interesting session was held by the – Economic Affairs Committee (House of Lords) – in London as part of the Committee’s investigation into the ins-and-outs of Quantitative Easing (QE). And some very revealing statements were made in those hearings which the RBA governor might reflect on. They rather directly challenge the veracity of his public statements about MMT in recent years. They also expose the way in which public officials tell the public they are not doing A but B, while doing exactly A. The cat is progressively getting out of the bag.! This is Part 1 of a two-part series explaining how the cat is escaping.
Setting the scene
The famous economist – Frank H. Knight – wrote an article – ‘What is Truth’ in Economics, which was published in the Journal of Political Economy (Vol XLVIII, No.1). He was a University of Chicago professor.
He stated (pp.7-8):
Without a sense of honor (as well as special competence) among scientists – if, say, they were all charlatans-there could be no science. And if ordinary normal human beings habitually and systematically lied, or talked dream talk (or reported free association), there would be no possibility of any knowledge, or of the existence of minds or intelligence. There could be no “feeling” of truth or of reality; we could never form these notions, or have any communicable, and hence any intellectual, experience …
Charles Ferguson’s 2011 investigative movie – Inside Job – revealed, academic economists had become corrupted through engagement with the corporate world.
We learned how a bunch of mainstream and very notable economists had been paid significant sums of money by the financial sector to write reports, parading as independent academic research, which stated that the deregulated financial markets were performing well and there was no risk of a collapse.
The classic case was the report by Columbia University professor (Frederick Mishkin) on Iceland. Charles Ferguson (the film’s director) wrote that Mishkin “was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks’ Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.”
Mishkin later altered the report’s title from ‘Financial Stability in Iceland’ to ‘Financial Instability in Iceland’ when his role was exposed and claimed that the original reference to ‘stability’ was a typographical error in his CV. I haven’t met anyone yet who believes that story.
Please read my blog – Wrong is still wrong and should be disregarded (December 26, 2011) – for more discussion on this point.
I have previously cited the famous US economist Paul Samuelson who gave an interview with Mark Blaug in 1988 film – John Maynard Keynes – Life – ideas – Legacy – and said:
I think there is an element of truth in the view that the superstition that the budget must be balanced at all times … Once it is debunked takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have … anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that long-run civilised life requires.
A ready admission that economists think that lies are better than truth when advancing a particular agenda and putting a brake on political volition.
Now, think about the so-called – Banking and Finance Oath (BFO) – introduced by The Ethics Centre in Australia in order “to expand and enrich conversations within the banking and finance industry on ethical issues”.
The Oath goes like this:
Trust is the foundation of my profession.
I will serve all interests in good faith.
I will compete with honour.
I will pursue my ends with ethical restraint.
I will help create a sustainable future.
I will help create a more just society.
I will speak out against wrongdoing and support others who do the same.
I will accept responsibility for my actions.
In these and all other matters;
My word is my bond.
One would imagine that if a person signed the Oath that they would be truthful in what they did. They wouldn’t deliberately set out to deny a reality for political or ideological purposes.
The RBA Governor Philip Lowe is a signatory to The Banking and Finance Oath.
This was the full interchange during the – Q&A Session – that followed Lowe’s formal speech to the National Press Club.
At the 1:00:08 mark, Tom Connell from Sky News asked:
Governor, I thought I better throw in about the old Modern Monetary Theory debate, because it rages on. We’ve got this huge amount at the moment, obviously, of bonds being bought last time around during the GFC, perhaps the inflation a lot of people predicted didn’t come, but if it does at some point, obviously a massive or a spike in inflation is a pretty bad thing for an economy. Are you looking at any other warning signs aside from just inflation itself as to whether that’s a threat in the future, given all the government bond buying at the moment?
The RBA Governor responded (at 1:00:42):
Well, just for clarity, we’re not involved in Modern Monetary Theory, which is the central bank directly financing the government. We don’t do that. We will not do that, it’s not on my radar screen. So you may have heard me before say Modern Monetary Theory – there’s not much monetary, not much modern, not much theory in it.
Okay, apparently his word is his bond.
So what do some other former central bankers and senior financial market players think about this – truth or denial?
Fast track to London – March 16, 2021
The ‘Select Committee on Economic Affairs’ of the British House of Lords held its “fifth set of evidence sessions on its Quantitative Easing Inquiry on March 16, 2021.
The formal oral sessions) were titled – Quantitative Easing: Committee to examine whether inflationary fears justified, the future of QE, and the merits of ‘helicopter money’ approaches.
At 15:00, the Committee interviewed Adam Posen (President of the Peterson Institute for International Economics) and Kenneth Rogoff (he of the ridiculous spreadsheet fame).
You can read the full – Transcript – if you are interested.
Rogoff made some interesting comments including:
1. “quantitative easing has been very important in the middle of crises where the central bank acts as an agent for the Government and is able to shore up markets and prevent long-term scarring, but a point that a lot of people do not understand is that the central bank is a 100% subsidiary of the Government” – which has always been the Modern Monetary Theory (MMT) position despite the constant carping that central banks are independent of government.
Try seeking that sort of understanding in a mainstream macroeconomics or monetary economics course or textbook. Only our textbook – Macroeconomics – provides that understanding.
2. “you really have to look at them integratively” (that is, the treasury and central bank). Core MMT.
3. “the central bank would do more, as opposed to understanding that it is an agent of the fiscal authority”. Core MMT.
4. The central bank “does not have its own independent balance sheet”. Core MMT.
5. Later he contradicted himself “I am a huge believer in central bank independence.”
Well A is A until we call it B.
The second session was at 16:00 and the Committee interviewed Adair Turner (former head of the Financial Services Authority) and Charles Goodhart (a banking academic and former Bank of England Monetary Policy Committee member).
You can read the full – Transcript – if you are interested.
At the outset, they talked about the way “the large-scale purchase of government bonds lowers the interest rates or yields on those bonds and … because it pushes down the interest rate on loans it stimulates the economy.”
Which wasn’t the way mainstream economists constructed QE in the early days of the GFC (they claimed it was giving the banks money to loan out).
MMT economists exposed the errors in that construction and now the Adair Turner construction above is becoming broadly understood. So there has been progress.
But then they cut to the chase.
Adair Turner said:
Instead, what QE is doing now is what it has been doing for many years in Japan. It is lubricating a fiscal expansion and making it easy for the Government to run large fiscal deficits without the danger of setting a rise in interest rates. The direct impetus to stimulating the economy is coming through the fiscal deficit and QE is lubricating it.
It is essentially doing what the monetary policy of the Fed did between 1942 and 1951. The commitment of the Federal Reserve to buy whatever level of bonds was needed to fund the fiscal deficit required for war enabled those fiscal deficits to occur without a rise in bond yields.
That is effectively the transmission mechanism today, and it is certainly different from what is described on the Bank of England’s website and is somewhat clearer in that form than when it was initially introduced and there were higher bond yields.
But I liked how he exposed the official denial from the Bank of England.
Central bankers all around the world are declining to tell the public the truth as to their actions.
They are doing on thing (that was previously considered to be taboo) but still saying that they are operating in the world of mainstream economics (which they are not).
What would the RBA governor say about that?
He also made the interesting observation:
There is a separate issue about whether you should ever say that that purchase is permanent. The dividing line between an accommodation of a fiscal deficit and overt long-term monetary finance is whether you ever say that bond purchases are permanent and for ever, rather than an exercise that you intend to reverse at some time.
In other words, in the first case, the central bank would be intending to sell the bonds they bought back to the non-government sector when the crisis and the need for “large fiscal deficits” passes.
I think that is an unrealistic distinction in practice. The Bank of Japan will not liquidate its stock of government bonds in any significant way.
Perhaps the distinction is that on the one hand, the central bank pretends it holdings of government bonds will be temporary, while it knows full well that is not a realistic pretense; and, on the other hand, it just comes clean that as an agent of government it is essentially the government buying its own debt and permanently taking the debt out of the non-government sector.
Which would, of course, then lead to questions as to why the charade, which would focus renewed light on the whole corporate welfare function of government bond issuance, when the fact that the left pocket is buying the right pocket of government’s debt clearly shows the issuance to be unnecessary.
Charles Goodhart noted that:
My expectation is that central bankers will go on saying that at some time they will reverse QE – but when? On the likelihood that it will be done, an overt sale rather than allowing a run-off of the existing portfolio would do enormous reputational and market damage …
In other words, central bankers will not be selling their portfolio of government debt back to the non-government sector. They will just allow the debt to mature and accounting transactions within the government sector will be done to record that.
What would be better would be to just write all the debt off.
What would be even better is not to issue the debt in the first place.
Then things got interesting.
And that is where we will leave Part 1 – all great series have to have cliff-hangers, n’est-ce pas?
Anyway in Part 2, we will see what Adair Turner and Charles Goodhart have to say about MMT.
Part 2 will follow tomorrow.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.