\t\t\t\tThis is the third Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.
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\nSo in no particular order of receipt or priority.<\/p>\n
Question 1:<\/strong><\/p>\n \nDo you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes?\n<\/p><\/blockquote>\n First, no body of economic theory can specify the size of government. Even though the implication of mainstream economic theory is that small government is better none of the macroeconomic models can demonstrate the validity of that proposition.<\/p>\n Second, in that respect Modern Monetary Theory (MMT) is no different. The size of government relative to the non-government sector is essentially a matter of political choice, and historical evolution (which reflects past political choices).<\/p>\n An electorate that prefers more public goods and less private goods will support a larger government relative to one that prefers the opposite mix.<\/p>\n There is some minimum size of government beyond which an economy will not function in any sophisticated way, unless, of-course, you support the lunacy of the ultra-libertarians who think that everything can be privatised as long as property rights are well specified.<\/p>\n The question of taxes is to some extent separate from the political choices relating to the size of government in the overall economy. There are two dimensions to consider when approaching the question of the size of government: (a) the size of its discretionary involvement in economic activity; and (b) the cyclical component.<\/p>\n It is the second dimension which leads to the budget outcome being beyond the direct control of the government, even though discretionary decisions made (the first dimension) condition the extent to which the cyclical components operate. That is, if the discretionary net spending decisions are appropriate then the chances of large output gaps emerging are reduced.<\/p>\n Clearly though, the government is unable to directly control behavioural shifts in private consumption and investment spending and the vagaries of the external sector. This is why the imposition of strict fiscal rules is contrary to logic and responsible fiscal management. If the government is unable to control an outcome why would it make it a policy target?<\/p>\n Further, budget balances reflect overall economic activity. Trying to achieve fiscal outcomes which are contrary to the desires expressed by the non-government sector via its spending and saving behavior is likely to be counter-productive and oppressive. If the non-government sector desires overall to save then the government sector has to run deficits of an equal proportion of GDP or undermine economic growth and cause unemployment.<\/p>\n Please read the deficit suite of blogs – Deficit spending 101 – Part 1<\/a> – Deficit spending 101 – Part 2<\/a> – Deficit spending 101 – Part 3<\/a> – to learn the basics of that proposition.<\/p>\n The real issue is whether the net public spending balance is appropriate in relation to the output gap that emerges over time.<\/p>\n The choice of tax revenue targets is influenced by the assessment of the strength of private spending relative to the real capacity of the economy to absorb growth in aggregate demand, conditioned by overall political views about the size of government intervention (measured at full employment).<\/p>\n The calibration of the “size” of government, given the two dimensions noted above is also important. It is ridiculous to be alarmed by a government deficit that moves from 3 per cent of GDP to 6 per cent of GDP at the same time the non-government saving increases by say 6 per cent and the unemployment rate doubles. Yes, the size of government has increased significantly but that change is driven by the cyclical component – the so-called automatic stabilisers. If measured at full capacity, the size of government (presuming its discretionary policy stance is unchanged) would be unchanged (at 3 per cent).<\/p>\n Please read my blogs – Structural deficits and automatic stabilisers<\/a> and The dreaded NAIRU is still about!<\/a> – for more discussion on this point.<\/p>\n We should always recognise that a sovereign government is not taxing to raise revenue but rather condition the state of aggregate demand to ensure that price stability is maintained. This is not to discount other purposes of taxation – for example, to alter resource allocation away from or towards specific activities (such as to discourage pollution or smoking).<\/p>\n Question 2:<\/strong><\/p>\n \nIf MMT was fully implemented would it always involve some form of the Job Guarantee?\n<\/p><\/blockquote>\n While I changed the wording of this question from that provided by the reader, the confusion reflected in the original text remains.<\/p>\n It doesn’t make much sense to say that MMT is fully or not fully implemented. This is a constant source of confusion among those who start reading our work and think that we are specifying some sort of new order.<\/p>\n There is no new order. For most nations, the New World was established on August 15, 1971 when the US President Nixon went on American TV one Sunday night and announced the US government was withdrawing the gold backing (the convertibility) of the US dollar. Since the Bretton Woods conference in 1944 and up until 1971, the US government had guaranteed convertibility of the US dollar into gold at a fixed parity of US$35 per ounce of gold.<\/p>\n That system was abandoned by the US in 1971 and then variously by other governments as time ensued.<\/p>\n Please read my blog – Gold standard and fixed exchange rates – myths that still prevail<\/a> – for more discussion of this.<\/p>\n MMT is an evolved set of descriptive, accounting and theoretical propositions that deal with monetary systems where the currency unit is non-convertible and the sovereign government is thus freed from revenue constraints.<\/p>\n Once we understand that a sovereign government is not revenue constrained, then we have to revise our thinking about things like, the purpose of taxation, the issuance of public debt instruments, and the sustainability of budget deficits.<\/p>\n The US economy, the Japanese economy, the UK economy, etc already function in this way and MMT seeks to develop a body of understanding about the nature of this function.<\/p>\n It is particularly important to note that the mainstream economic theory which is taught to students around the world is essentially based on convertible currency systems.<\/p>\n In this regard, most of the essential operations of the monetary system are mis-specified by orthodox macroeconomics, which leads to erroneous conclusions about causality, poorly specified policy proposals, and fundamental confusion about just about everything else.<\/p>\n So the question that is germane is really about the place of a Job Guarantee, or more generally, the place of employment buffer stocks in MMT.<\/p>\n I recently considered that question in detail in two blogs – MMT is biased towards anti-crony<\/a> and Whatever – its either employment or unemployment buffer stocks<\/a>.<\/p>\n Those blogs were written to clarify mistakes that were appearing in the so-called MMT blogosphere about the contribution of MMT to macroeconomic theory.<\/p>\n There were those who even went as far as claiming that MMT was not theory but reality and so a “JG theory” was just the unhelpful imposition of some early (leftist) MMT writers which was undermining the validity of MMT. I won’t provide an extensive repetition of the two blogs – they speak for themselves.<\/p>\n But the point to understand is that the idea of a buffer stock approach to the maintenance of price stability is inherent in any macroeconomic theory. Mainstream macroeconomic theory doesn’t express itself in that way. It hides behind so-called “natural” aggregates which, allegedly coincide with price stability.<\/p>\n So we all know about the NAIRU (the alleged “natural” rate of unemployment). Please read the NAIRU blog links to about to learn why this concept is theoretically bereft and relatively useless as a guidance to policy.<\/p>\n The NAIRU-approach to policy, however, is a buffer stock approach – in that, it uses unemployment buffers to discipline the wage and price determination system to ensure price stability.<\/p>\n As I explained in this blog – Modern monetary theory and inflation – Part 1<\/a> – that there are two broad ways to control inflation and the use of buffer stocks are involved in each:<\/p>\n The point is that MMT allows us to understand that there is an alternative buffer stock approach to price stability. In this context, it deserves to be considered a “new” and unique development, notwithstanding the legacy it owes the past (like all “new” ideas).<\/p>\n And part of that uniqueness relates to the way it brings together characteristics of the currency with the theoretical challenge to maintain macroeconomic efficiency, which for all time has been described in terms of full employment and price stability. Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.<\/p>\n In macroeconomic theory, the so-called Phillips curve occupies a central place – it is “god-like” and represents the relationship between unemployment and inflation. Various theorists have constructed this relationship in different ways and the policy development that followed reflected these differences.<\/p>\n So “Keynesians” believed there was a stable trade-off whereby unemployment would be kept low as long as governments pursued high levels of effective demand. The “cost” would be some finite inflation rate. Economists – worked on designing the “optimal” trade-off between the twin evils – unemployment and inflation.<\/p>\n They overlaid what were called “social preference functions” designed to represent the way the citizens considered the trade-off, with the Phillips curve which was meant to illustrate the actual trade-off. The tangency of these functions became the policy goal and the tools to achieve that goal were provided by the macroeconomic theorists.<\/p>\n This approach was clearly based on a recognition that a buffer stock was present (unemployment) and it was used to maintain price stability.<\/p>\n The NAIRU-era (following Friedman and Phelps’ “natural rate” theories) rejected the trade-off notion and instead argued that the “long-run” Phillips curve was vertical (that is, no trade-off) and governments would only generate inflation by trying to pursue low unemployment rates. This marked the rise of monetary policy and the growing passivity of fiscal policy, in practice.<\/p>\n The early developers of MMT (Wray, Mosler, Bell\/Kelton, Fullwiler, myself) – again differentiating MMT from earlier Chartalist and “theories of state money” etc – sought to challenge these natural rate theories of the Phillips curve. We had lots of discussions in the mid-1990s about this issue.<\/p>\n By more correctly specifying the way the monetary system operated post 1971 and the opportunities that currency-sovereignty provided to governments, we were seeking to advance ideas that were anathema to the NAIRU-dominated, government-budget-constraint thinking that were universally held and vigorously defended by the most powerful and leading economists of our time.<\/p>\n One of the essential theoretical components of this work – based on the fundamental understanding of how the currency was in fact a public monopoly where the monopolist could set the price – was to address the major constraints on activist fiscal policy posed by the NAIRU school. That is, we were directly challenging the dominant theoretical orthodoxy by proposing a way to achieve full employment with price stability (that is, without having to create entrenched unemployment).<\/p>\n As my colleague Randy Wray noted in a Keynote Speech<\/a> last December, our development of the theoretical analysis of employment buffers in contradistinction to unemployment buffers:<\/p>\n \n… turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.\n<\/p><\/blockquote>\n You have to understand that point to comprehend why MMT introduces the notion of a Job Guarantee as a term to describe a policy approach based on employment buffers. <\/p>\n A complete macroeconomic framework has to address issues relating to full employment and price stability. One might not be very interested in the “Phillips curve” aspects of the theory and prefer to specialise in some component of the MMT approach (perhaps even more practical elements) – such as, study how banks work etc. There is nothing wrong with that – our time and patience is limited after all.<\/p>\n But it still remains that the body of theoretical work now known as MMT does directly and intrinsically address the major macroeconomic debate about the trade-off between inflation and unemployment – which I would add – is still the dominant discussion around town anyway.<\/p>\n And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. As noted above, the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation.<\/p>\n The policy question that then arises is whether an unemployment buffer stock approach is superior to an employment buffer stock approach in controlling inflation and maintaining full employment.<\/p>\n In the two blogs I mentioned earlier, I provide chapter and verse as to why an employment buffer stock approach is superior. I won’t repeat those arguments here.<\/p>\n But don’t be misled. Those who reject the employment office stock approach recurse back into mainstream thinking, which uses unemployment as the price anchor. That is, their macroeconomic approach is neo-liberal in flavour, whether they understand how the banking system works or not.<\/p>\n Question 3:<\/strong><\/p>\n \nDoes MMT require a degree of nationalisation (that is, of banks\/ corporations) and strict regulation, or is it compatible with no nationalisation and a more hands-off approach to regulation?\n<\/p><\/blockquote>\n Once again this reflects some confusion about what MMT is. MMT is not a list of requirements but a theoretical, accounting, and descriptive framework for appreciating and explaining the way the monetary system operates.<\/p>\n It also allows us to appreciate more fully cause-and-effect in this system. For example, the mainstream macroeconomics predicted that by now inflation would be a problem and the growth of bank credit would be significant as a consequence of the large transformations in central bank balance sheets during the crisis.<\/p>\n Those who understand MMT would make no such claim because from first principles the orthodox concept of the monetary multiplier is rejected.<\/p>\n Once we understand, for example, the way in which the banking system functions relative to the central bank then we might form the view that nationalisation is a preferable way to maintain financial stability and the growth of credit to the private sector.<\/p>\n However, it is highly plausible that different people (all of whom understand MMT) would arrive at different conclusions about this question. In part, these differences will reflect different value structures (ideologies) held by the individuals. In that sense, MMT is neither left nor right of the political spectrum.<\/p>\n However, an understanding of MMT will lead one to appreciate readily that the banking system is for all intents and purposes a public-private partnership. The government has to use its regulative framework to ensure that financial stability is maintained at all times.<\/p>\n That imposes responsibilities on the central bank to ensure that the payments system is viable each day and it also requires such things as deposit guarantees be put in place (among other requirements).<\/p>\n The MMT literature highlights the fact that the financial system is largely unproductive and this observation then implies that relatively tight regulation of the financial sector is required to ensure that its acts to fulfill public purpose.<\/p>\n Please read the following blogs – Operational design arising from modern monetary theory<\/a> and Asset bubbles and the conduct of banks<\/a> – for further discussion.<\/p>\n However, MMT allows us to understand what will happen if the regulatory framework is inappropriate or poorly applied.<\/p>\n Question 4:<\/strong><\/p>\n \nWould you say that MMT economists have different political and ideological positions, or are you all more or less the same?\n<\/p><\/blockquote>\n Why don’t you conduct a survey to find out, once you fully specify what a political and ideological position is (-:<\/p>\n In June 2010, Warren Mosler and myself were invited to present an MMT workshop (a “Teach-In”) in Boston. Earlier in 2010, most of the MMT developers (including myself) participated in a Teach-In (see blog – Washington Teach-In Counter Conference<\/a> – where a relatively diverse audience attended.<\/p>\n The Boston event was quite different, in that, the participants were largely drawn from the financial markets.<\/p>\n During the Q&A, I recall someone suggesting that Warren and I would have quite different political and ideological views and so how could we agree on how the economy worked. This was based on the stereotype of Warren being from an American financial market background with presumably right-wing pretensions and me being the Antipodean academic presumably with left-wing if not outright socialist leanings. Oh, how we stereotype.<\/p>\n The person who asked the question (or rather, put the proposition) was asked to give examples of how Warren and I might have different political and ideological views.<\/p>\n Each time an example was proffered, Warren and I looked at each other and indicated we each agreed with the specific proposition being offered.<\/p>\n So in terms of macroeconomics and policy I don’t detect significant differences among the so-called MMT economists. There may be some differences around the edges about how high the minimum wage should be but even then we all agree it should be set at a socially acceptable level and the private wage structure should then adjust to that and eliminate low productivity-high cost jobs that do not justify paying the going wage.<\/p>\n On matters of social policy, for example, there may be variations but again we should avoid jumping the stereotypical conclusions based upon the fact that some of us are academics and others have a background in the financial markets.<\/p>\n I know of some differences on some matters but they are really our own business and not germane to anything important being discussed in this blog.<\/p>\n Question 5:<\/strong><\/p>\n \nDo the main MMT economists have different understandings of what MMT is or of how it could be implemented?\n<\/p><\/blockquote>\n No we all understand what it is and agree on the essential elements.<\/p>\n As to implementation, this question depends on institutional structure and regional specificities which obviously lead to differences in the way policies can be best implemented.<\/p>\n There are some minor variations between the Australian camp (me) and some of the US camp about whether the Job Guarantee would be open to private sector involvement. I think there is enough unmet societal need (personal and environmental care services) that will not be provided for by the private sector to justify a 100 per cent public sector JG. But we all agree the governments should design fiscal policy to ensure that the JG pool will be small.<\/p>\n Question 6:<\/strong><\/p>\n \nWhat do you think was the primary cause of the current crisis?\n<\/p><\/blockquote>\n Please read my blog – The origins of the economic crisis<\/a> – for more discussion on this point.<\/p>\n To understand the crisis we have to go back a few decades and trace the development of economic thinking and the subsequent policy changes that have occurred since that time.<\/p>\n Up until the OPEC oil shocks which began in the mid-1970s, governments had been committed to maintaining full employment. They manipulated fiscal and monetary policy to achieve that end. There had been a fierce theoretical debate among economists during the 1950s and beyond about the effectiveness of fiscal intervention.<\/p>\n Emerging monetarists such as Milton Friedman were largely opposed to discretionary fiscal policy but their views constituted the minority.<\/p>\n The inflation shock that followed the oil price hikes allowed the monetarist viewpoint to gain ascendancy in the public debate and led to the rejection of activist fiscal policy as the primary policy tool to stabilise spending over the business cycle.<\/p>\n As discussed above, the NAIRU liturgy became the norm with inflation being promoted as the primary evil and unemployment the tool to discipline it. Prior to that, unemployment had been a primary policy target to be minimised.<\/p>\n Governments were also pressured to introduce widespread deregulation of the labour and financial markets and to privatise public enterprises and other activities. This was justified by an appeal to textbook economic models which purported to demonstrate that private markets would self-regulate and optimise wealth accumulation for all of us. So all these terms such as “trickle down”, “The Great Moderation”, “the business cycle is dead”, etc became the nomenclature of the era.<\/p>\n One of the main characteristic manifestations of the deregulation was the suppression of real wages growth and a rising gap between labour productivity and real wages. The gap represents profits and so during the neo-liberal years there was a dramatic redistribution of national income towards capital. The problem then was that if the output per unit of labour input (labour productivity) was rising so strongly yet the capacity to purchase (the real wage) was lagging badly behind – how does economic growth which relies on growth in spending sustain itself? <\/p>\n This is especially significant in the context of the increasing fiscal drag coming from the public surpluses which squeezed purchasing power in the private sector since around the mid-1990s in several nations.<\/p>\n In the past, the dilemma of capitalism was that the firms had to keep real wages growing in line with productivity to ensure that the consumptions goods produced were sold. But in the recent period, capital found a new way to accomplish this which allowed for the suppression of real wages and increasing shares of the national income produced to emerge as profits.<\/p>\n Along the way, this munificence also manifested as the ridiculous executive pay deals (especially in the financial sector) that we have read about constantly over the last decade or so.<\/p>\n The trick was found in the rise of “financial engineering” which pushed ever increasing debt onto the household sector. The capitalists found that they could sustain purchasing power and receive a bonus along the way in the form of interest payments. This seemed to be a much better strategy than paying higher real wages.<\/p>\n The household sector, already squeezed for liquidity by the move to build increasing budget surpluses were enticed by the lower interest rates and the vehement marketing strategies of the financial engineers.<\/p>\n The financial planning industry fell prey to the urgency of capital to push as much debt as possible to as many people as possible to ensure the “profit gap” grew and the output was sold. And greed got the better of the industry as they sought to broaden the debt base.<\/p>\n Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit. This is the origins of the sub-prime crisis. <\/p>\n The neo-liberal rhetoric pressured governments to turn a blind eye to the fact that large proportions of the domestic mortgage markets were being financed in foreign currencies, thus exposing householders to exchange rate risk. In some countries this has been catastrophic.<\/p>\n Further, the financial markets lost the capacity to correctly price the risk of the products they were creating and fraudulently entered into agreements with ratings agencies to deceive their clients. So the combination of greed and fraud produce a time bomb.<\/p>\n The combination of a hollowing out of the state, an out of control deregulated financial sector, and the rising fragility of non-government balance sheets thus set up the world economy for the crisis.<\/p>\n The Eurozone countries interpreted the neo-liberal charter in even more extreme ways. They stripped member nations of their currency sovereignty and for ideological reasons (desire to minimise the state) deliberately chose not to create the necessary federal fiscal capacity capable of dealing with asymmetric aggregate demand shocks. They also placed severe restrictions on the fiscal latitude of each of the member states (that is, the Stability and Growth Pact).<\/p>\n The trigger then was the American real estate collapse. What followed was entirely predictable and governments failed to insulate the real economies from the financial disaster that unfolded.<\/p>\n The ideological preference towards monetary policy (a characteristic of the neo-liberal rejection of fiscal activism) meant that even though governments, largely, adopted pragmatic positions as aggregate demand collapsed, they were still unwilling to expand fiscal policy appropriately.<\/p>\n So we saw a lot of activity under the guise of quantitative easing, which has had very little stimulatory impact.<\/p>\n The crisis has endured in many countries, and is now getting worse again, because governments have been pressured into introducing pro-cyclical fiscal policies – that is, fiscal austerity.<\/p>\n They are being beguiled by mainstream economists who claim, in the face of overwhelming evidence to the contrary, that the private sector (heavily indebted) would suddenly increases spending to offset the decline in public spending.<\/p>\n That hasn’t happened and will not happen.<\/p>\n The crisis represents a fundamental rejection of the neo-liberal vision that self-regulating markets will operate to advance the best interests of all of us. The neo-liberal paradigm fails on every dimension.<\/p>\n Question 6:<\/strong><\/p>\n \nWhy did so many economists and politicians not see the crisis coming? Was it predictable?\n<\/p><\/blockquote>\n The crisis was entirely predictable although the timing of the collapse was less certain. If you go back into the 1990s and read some of the early MMT literature you will see that we were predicting a financial collapse would occur. At one stage around 2001, I wrote that when the collapse comes it would be a big one.<\/p>\n Some other economists, working in a different theoretical space, also were successful in predicting the crisis.<\/p>\n But the overwhelming majority of my profession were blind to the events that led up to the crisis (as explained above) and were in denial once it became obvious. They also pressured governments to introduce policy changes which ensured that the destructive dynamics of capitalism (noted above) would be magnified and eventually lead to collapse as private balance sheets became untenable.<\/p>\n The reasons are clear – the mainstream macroeconomics teaching programme provides no insights to the dynamics that were emerging as labour and financial markets were being deregulated. <\/p>\n Most of the New Keynesian models didn’t even have a financial sector included. The overwhelming body of theory that students are exposed to in our university systems around the world provides an erroneous representation of our modern monetary system.<\/p>\n Students are taught that self-regulating markets are optimal. These students become policymakers and carry their erroneous learning into their professional lives.<\/p>\n It is no wonder that under the neo-liberal onslaught, government departments and central banks became full of economists who failed to understand how budgets work and how the central bank and the private banking sector interacts. And the rest of it.<\/p>\n Question 7:<\/strong><\/p>\n \nAt first, the banks were bailed out by governments in one way or another. Was that decision correct?\n<\/p><\/blockquote>\n The collapse of the bank, especially a large bank with a diverse deposit base, threatens the stability of the financial system.<\/p>\n MMT considers financial stability to be a public good. The financial system is linked to the real economy via its credit provision role. Both households and business firms benefit from stable access to credit.<\/p>\n An economy’s financial system is stable if its key financial institutions and markets function ‘normally’. To achieve financial stability: (a) the key financial institutions must be stable and engender confidence that they can meet their contractual obligations without interruption or external assistance; and (b) the key markets are stable and support transactions at prices that reflect fundamental forces. There should be no major short-term fluctuations when there have been no change in fundamentals.<\/p>\n So financial stability requires that financial institutions do not face stresses that might impose economic lossses wider than their own customers and counterparties. Financial stability does not mean that financial institutions cannot fail. Clearly private enterprise carries the risk of insolvency and business failure is part and parcel of the ‘normal’ functioning of the financial system.<\/p>\n Financial stability requires levels of price movement volatility that do not cause widespread economic damage. Prices can and should move to reflect changes in economic fundamentals. Financial instability arises when asset prices significantly depart from levels dictated by economic fundamentals and damage the real sector. Collapses brought on by injudicious speculation that do not affect the real sector or that can be insulated from the real sector by appropriate liquidity provisions are not problematic.<\/p>\n The essential requirements of a stable financial system are:<\/p>\n Some of these requirements can be provided by private institutions but they fall in the domain of government and its designated agents.<\/p>\n Private goods are traded in markets where buyers and sellers exchange at prices that reflect the margin of their respective interests. At the agreed price, ownership of the good or service transfers from the seller to the buyer. A private good is ‘excludable’ (others cannot enjoy the consumption of it without being party to the transaction) and ‘rival’ (consuming the good or service specific to the transaction, denies other potential consumers its use).<\/p>\n Alternatively, a public good is non-excludable and non-rival in consumption. Private markets fail to provide socially optimal quantities of public goods because there is no private incentive to produce or to purchase them (the free rider problem). To ensure socially optimal provision, public goods must be produced or arranged by collective action or by government.<\/p>\n Financial system stability meets the definition of a public good and is the legitimate responsibility of government.<\/p>\n Please read my blog – The central bank must treat financial stability as a public good<\/a> – for more discussion on this point.<\/p>\n So in that context, it was legitimate for government to ensure that the bank’s did not collapse by which I largely mean the deposit base. I also distinguish banks from the hedge fund operations.<\/p>\n However, the way that the government intervention was implemented during the crisis was not optimal. I would have allowed all the private banks to collapse and immediately assume public responsibility for their deposit base and ensure the payments system was viable. I would not have allowed the private operators to continue – thus privatising the gains and socialising the losses.<\/p>\n I would have installed new management under public control which would have prevented the resumption of all the high salaries etc.<\/p>\n Question 8:<\/strong><\/p>\n \nAfter the bailout, some Keynesian policies were applied in several countries, was that decision correct? Did it work?\n<\/p><\/blockquote>\n The governments acted responsibly by introducing stimulus packages early in the recession. The major problem was that the size of the stimulus packages in almost all nations was too small relative to the real output gap that had emerged as private spending collapsed.<\/p>\n The governments were pressured by a growing chorus of economists (who crawled back out of their hidey hole after going silent at the onset of the crisis) who claimed we were facing a sovereign debt rather than a private debt crisis. They were just re-asserting the ideological viewpoint that were dominant and caused the crisis in the first place.<\/p>\n Unfortunately, governments fell prey to the large-scale media onslaught of the neo-liberals and withdrew their already inadequate stimulus packages too early.<\/p>\n As to whether the interventions were effective, as the crisis unfolded I tracked the data to see what impacts we could observe. Here is a sequence of blogs that include my assessment. The overwhelming conclusion is that the fiscal policy was very effective contrary to the views of the mainstream macroeconomic models (and their proponents).<\/p>\n Monetary policy was relatively ineffective, while fiscal policy saved the world. Now, with fiscal austerity being the norm, fiscal policy is destroying the world. That is because it is being imposed in a pro-cyclical way and reinforcing the private spending collapse rather than supporting the non-government desire to reduce debt and increase saving.<\/p>\n 1. Fiscal stimulus effects …<\/a> – February 5th, 2009.<\/p>\n 2. What else but a fiscal stimulus?<\/a> – July 1st, 2009.<\/p>\n 3. How fiscal policy saved the world<\/a> – October 9th, 2009.<\/p>\n 4. Fiscal policy worked – evidence<\/a> – May 27th, 2010.<\/p>\n 5. Fiscal stimulus and the construction sector<\/a> – August 25th, 2010.<\/p>\n 6. The fiscal stimulus worked but was captured by profits<\/a> – October 14th, 2010.<\/p>\n 7. Tick tock tick tock – the evidence mounts<\/a> – February 24th, 2011.<\/p>\n 8. US fiscal stimulus worked – more evidence<\/a> – February 28th, 2011<\/p>\n 9. Australian industry employment trends and fiscal stimulus<\/a> – December 16th, 2011.<\/p>\n 10. The US is not an example of a fiscal contraction expansion<\/a> – January 27th, 2012.<\/p>\n 11. The lesson for the Europeans is that the US fiscal stimulus worked<\/a> – February 24th, 2012.<\/p>\n Please read my blogs – Fiscal sustainability 101 – Part 1<\/a> – Fiscal sustainability 101 – Part 2<\/a> – Fiscal sustainability 101 – Part 3<\/a> – for more discussion of responsible fiscal behaviour.<\/p>\n Conclusion<\/strong><\/p>\n That is all I have time for.<\/p>\n Sorry if your specific question hasn’t been answered yet. I was intending to make this a regular blog and may go back to that plan.<\/p>\n Personal Note<\/strong><\/p>\n Today, I received a surprise book in the University post – Patty Smith – Just Kids (which I had read on my Kindle) but now have the hard-copy with pictures.<\/p>\n\n
\nGovernments around the world helped this process in a number of ways: privatisation; outsourcing; pernicious welfare-to-work and attacks on trade unions etc.<\/p>\n\n