Friday, 6 January 2012

The cure for excessive and irresponsible lending is to encourage more lending (ha ha).

Let’s celebrate the New Year with a good laugh at the imbecility of those in high places.

We have a credit crunch caused by excessive and irresponsible borrowing and lending, and the response of the authorities is – roll of drums – to cut interest rates and implement QE so as to encourage more borrowing and lending.

You couldn’t make it up. I’ve said that before. But I intend saying it again . . . and again . . . . and again.

Economics is complicated, and it’s easy to get bogged down in the details and lose sight of the bigger (and hilarious) picture.

If the cure for imbibing a poison is to take more of the poison, how about forcing those with lung cancer to smoke 50 cigarettes a day? Please leave more suggestions along these lines in the comments section. I like a few laughs every day.

Note that Modern Monetary Theory (MMT) would not have made the above mistake. That is, in a recession, MMT advocates simply creating new money and spending it into the economy (and/or cutting taxes). MMT, far as I can see, has little to say about interest rates.

Abba Lerner, often seen as the founding father of MMT, certainly advocated the above “create money and spend it” policy. Unfortunately he also advocated tinkering with interest rates, NOT as a means of influencing demand, but on the grounds that the authorities have a better idea as to what the optimum rate of interest is than the market. I think he was wrong there.

Politicians and bureaucrats know better than the market as to what the optimum rate of interest is? I’d love to see the evidence. I think Lerner went wrong there.



  1. with fiat currency being a public monopoly and floating exchange rates, there is o option but for the govt. to set the rate. It's a simple case of the monopolist being price setter.

    Warren Mosler

  2. Message to the centre of the universe:

    Haven’t got this 100% sorted out in my own brain yet, but what I’m saying is roughly speaking this. I agree with you and Friedman* that the natural rate of interest is zero and that it should stay there. Though of course the various spreads relative to the central bank zero rate will vary over time.

    Given a recession, I don’t think central banks should alter that zero rate. Instead, the government / central bank machine should just spend more into the economy (and/or cut taxes). That will doubtless influence the spreads, but that’s unimportant.

    Put another way, the basic purpose of the economy is to produce what consumers want. So given excess unemployment, consumers should be given more of the stuff that enables them to purchase more of what they want – and that “stuff” is money.

    Moreover, given that the economy prior the crunch was based far too much on irresponsible lending, it is silly to try to re-float the economy by encouraging lending: it should be re-floated by increasing NON LENDING BASED economic activity, that is activity based on increasing household’s net financial assets (i.e. money).

    The above is very much what Abba Lerner advocated.

    * Friedman: see 2nd para under the heading “Operating the proposal” (p.250) here:


Post a comment.