Tuesday, 10 June 2014

Summers stumbles towards Positive Money / MMT ideas.

Lawrence Summers reviews Atif Mian and Amir Sufi’s book, House of Debt here, and Marshall Auerback reviews it here.
According to the above two reviewers, Mian and Sufi’s central point is that household debt was the cause of the crisis, rather than banks as such. As Marshall puts it, “They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households.”
Now there is a bit of a tautology there. In other words banks were in trouble (as is invariably the case when banks are in trouble) because they made silly loans. And who were the main recipients of those loans: households! So far so tautological and not very interesting.

Mian and Sufi’s solution.
Of more interest, is the question as to how to stop the above charade occurring again. First, let’s take Mian and Sufi’s solution which Lawrence Summers rightly criticises, and that is some sort of debt jubilee for underwater households.
Debt jubilees are a straightforward subsidy of debtors by creditors, as Summers points out. And there is no excuse for that.
If someone gets badly into debt, both debtor and creditor suffer. It’s their fault. They can live with the consequences.  Moreover, debt jubilees only encourage irresponsible borrowing and lending in the future.
As to how to deal with the drop in aggregate demand (AD) that results from underwater households not spending, MMTers have been screaming the solution to that problem from the rooftops for years. The solution is spelled out at the top of Warren Mosler’s site in yellow. It’s “Mosler’s law” which states “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”
Positive Money advocates much the same solution to inadequate AD.

Decent order books cause investment.
It’s also nice to see Summers tumbling to the point that MMTers have been making for years, namely that businesses do not invest when interest rates are low: they invest in reaction to customers coming thru the door. As Summers puts it, “Additionally, the authors observe that when asked why they were not borrowing more, even small businesses, the sector most dependent on banks, more often than not blamed a lack of customers rather than banks’ unwillingness to lend.”
Jamie Galbraith (an MMTer) got there long ago when he said, “firms borrow when they can make money and not because interest rates are low”.
To summarise so far, dealing with the AD reducing effect of excessive numbers of underwater households is easy.

Reducing silly lending.
But clearly it would be better if there weren’t an excessive numbers of underwater households. So how is that problem to be solved? Well Positive Money and other advocates of full reserve banking have solved it. The solution is full reserve banking.
Under full reserve, banks are very definitely not given the impression that they can make silly loans and then rely on taxpayers to bail them out. Rather, depositors who want their money loaned on by a bank carry the full risks involved, plus those depositors CHOSE WHAT THEY FUND. That is, if they want to fund just safe mortgages, they can. And if they really want to fund NINJA mortgages, they can. But if the latter goes wrong, those depositor / investors carry the can, not taxpayers.
That would concentrate the minds of depositors and banks, and would reduce the amount of irresponsible lending.
Doubtless interest rates would rise from their current record low levels as a result of the latter policy. And doubtless that would reduce demand. But that is easily countered by Mosler’s Law (which is actually Keynsianism writ large).

1 comment:

  1. Another excellent post.

    However, the heading "Summers stumbles towards Positive Money / MMT ideas" is misleading and incorrect.

    1. Summers' review is good. He isn't "stumbling".

    2. Summers never mentions any Full Reserve banking ideas, let alone Positive Money.

    3. Summers mention any uniquely MMT ideas.
    Yes, he does summarize the argument that the root cause of the financial crisis was falling demand due to excessive household debts. However, this is Mian & Sufi 's view rather than Summers' own view.
    Moreover, it is simply "Keynesian writ large". It may well be consistent with MMT, but it isn't MMT.
    MMT and Positive Money sometimes re-invent or plagiarize old-Keynesian ideas as their own.

    In short, Summers is not stumbling in this review, and he indicates nothing regarding Positive Money or MMT.


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