The “Banking Camp” Vs the “Macroeconomics Camp”

There’s been some good commentary from Brad Delong and Paul Krugman in the last few days on the way many people view the role of the central bank.  The views tend to fall on one side of a fairly distinct line.  Dr Krugman explains:

Brad DeLong has an excellent piece distinguishing between two views of central banking. There’s the “banking camp,” which sees the central bank’s job as being to secure the stability of the financial system – full stop. OK, maybe also price stability. And then there’s the “macroeconomics camp,” which sees the central bank’s job as being to achieve full employment; banking stability and even price stability are basically means towards that end.”

I believe both views are basically right, but I think it’s important to understand the institutional design of the Fed in order to view this distinction properly.  The Fed is basically a big bank with some special government granted powers.  And this big special bank works its policies THROUGH the private banking system.  So, when the banking system doesn’t work the Fed is kind of broken.  And that means that the Fed has to keep the banks working smoothly if it can work smoothly.  Despite the Fed’s dual mandate, you get a weird sort of hierarchy of importance with the Fed where it’s a creature of Congress and is responsible to hitting its dual mandate, but can only really do so by hitting its primary mandate which is keeping the banking system working smoothly.  In other words, I like to say that the Fed serves two masters – the private banking system and the US taxpayer, but it serves the banking system first by necessity.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

More Posts - Website

Follow Me:

  • InvestorX

    “…but can only really do so by hitting its primary mandate which is keeping the banking system working smoothly. In other words, I like to say that the Fed serves two masters – the private banking system and the US taxpayer, but it serves the banking system first by necessity.”

    This is apologism for crony capitalism. The Fed can ensure a smooth running banking system by playing its master, not servant.

  • FXtrader

    The Fed’s real master is the banking system.

  • Greg

    I think this highlights somewhat the limitations of a bank/credit based model. All credit relationships are two sided and if one side is not healthy the entire thing isnt healthy. Its like a chain only being as strong as its weakest link. Unless there is some sort of third party that can help restore the weak half of the credit relationship it will remain broken. The fed cant really be the necessary third party cuz its a bank too!

    In our system it is the incomes of borrowers which buttress the banking system. Most loans are approved based on a certain level of income certainty of the borrower. When the level of income certainty wanes the quality of bank loans is negatively affected. In the instance of mortgages as an example, we have many who cannot service their current one and many who have no interest in taking on a larger one than they currently have. Very few want a bigger mortgage than they currently have AND those that do want the same or lower monthly payment to service the larger mortgage.

    The monetarists seem to want to simply raise prices of housing (and other assets) as if having a more valuable house will do anything to my spending decisions. So if I currently take home 3000 dollars and have a 1200 dollar mortgage and a 250,000$ home (150,000$ payoff in principle) how will a house value of 350,000$ help me? Yes my equity has been increased by 100,000$ but unless I sell the house I cant realize it additionally, in order to refi and maybe roll my car payment into a new mortgage that might have the same monthly payment I have an upfront fee usually, a three month wait and the prospect of greater total outlay if I dont pay the mortgage back early, which means taking the saved car payment and using it to service the new mortgage…… IOW its a scam. They simply want to make the rope a little longer and not quite as thick, but it will still strangle you.

  • Tom Brown

    Cullen, on a related note, Sumner explained the HPE again, and I had a question which I don’t think he addressed, so I added a few more details and asked Nick Rowe too:

    I’m wondering how the MMists will respond to that if they do. My guess is they’ll have to say my example is stupid… that it won’t have an effect on the HPE or expectations… but I’m not 100% sure. I’d love to get their reason why.

  • Geoff

    Is the Fed vault big enough to hold $1 trillion in cash? They might need to rent a storage unit like in Breaking Bad.

    Seriously, I’m afraid the Good Doctor Sumner lost me with that post on HPE. But that may be more my fault than his.

  • Tom Brown

    I re-asked the question of Sumner (but adding some of the new variations on this theme I asked of Rowe):

    Hopefully one of them will get back to me on that! If it appeared Beckworth or Glasner were looking at their blogs (which it doesn’t) I’d ask them too. Perhaps Bill Woolsey, Nunes, or Christensen… or JP Koning. I might as well make myself into as big a nuisance as possible…. or perhaps I should wait for a bit to see if these two get back to me… and tell me why I’m terribly misguided (bordering on retarded) for even asking such a bone-headed question.

    I actually think I understood Scott’s piece on HPE. I’m not sure I agree (which is what my question there points to).

    The interesting part to me, was his Case 5b and this:

    “Fiscal policy is powerful but currently inefficient, as the national debt is too small.”

    I suspected he meant “deficit” in my prior question, which I think he confirmed:

    My question: “Are you saying that fiscal policy would be powerful AND efficient if the “national debt” were larger?”

    Scott: ” Fiscal policy can move NGDP, but the current stance is too contractionary–the government is leaving $100 bills on the sidewalk, and should run bigger deficits.”

    “deficits” … NOW it makes sense. Still a little surprising from Scott though.

  • Johnny Evers

    What is the point to raising NGDP? (If indeed that can be done.)
    I see that idea thrown around a lot but without an explanation for why it would be helpful.

  • Geoff

    If somebody gives me, say, $500 in cash but my wallet is already full, then I’m going to do something else with it. I might spend the cash on real stuff or convert it to another kind of financial asset like a bond or stock. That’s the HPE in action, right?

    But there is only one problem. The Fed can’t just give me $500 in cash. All they can do is buy an existing financial asset from me (aka an asset swap).

    I know Dr. SS understands this. So what am I missing?

    PS I agree with your post, Cullen. Sorry for going O/T :)

  • Tom Brown

    OK, I’m plunging into an area I don’t understand very well at all, but I think that NGDP = aggregate demand (AD). Am I wrong? Anybody?

    Either case, the idea is that (I think!) it makes a bit of an end run around “sticky prices” and “stick wages” … for example, if stick wages don’t allow movement in the downward direction… and instead people get fired and then productivity drops and then you get into a vicious circle… why not instead pump in more money which either:

    1. Raises inflation
    2. Raises real GDP

    Or some combo of both, since

    NGDP growth = inflation + GDP growth

    1. by itself doesn’t sound great, but perhaps it helps get you on the road to 2 in the loan run? I think that’s kind of the idea. Sumner doesn’t really touch on NGDP here, but the story he tells kind of gives you the idea of what I’m talking about:

    Check out his cases 4 – 7 especially.

    Again, I’m not endorsing the views there! I’m just trying to provide an explanation.

  • Tom Brown

    “…in the loan run?”

    should be

    “…in the long run?”

  • Tom Brown

    Geoff, I threw up the following “blog” solely for the purpose of taking discussions O/T:

    (I feel guilty since I’m the one that started it here!)

  • Greg

    Yes I think NGDP can be thought of as AD, since it represents the price of all new production that gets sold, but Scotts plans dont seem to address the volume of sales. Just the total product of volume x price. In Scotts world, it seems to me, as long as the volume x price is rising the goal is met. The rest will take care of itself. If we sold half the number of units at 3x the price we would have NGDP growth and as long as we stayed on that path we would reach the goal Scott wants.

    Trouble is Scott has no credible way for his policy suggestions to lead where he wants AND where he wants to go does nothing for employment levels and real wages.

  • Tom Brown

    Greg, I have problems with it too… which is why I’m asking questions there.

  • Johnny Evers

    Reading between the lines, I think he’s saying that if you raise inflation that you’ll get everybody spending furiously and that will raise growth.
    And, if you trigger inflation hen everybody will run out and borrow money because they’ll know they can pay it back in inflated dollars.

  • Greg

    I think you are right about some of SS thinking but the amount I can borrow will still be determined by what my income is. If my income doesnt rise first I wont go and borrow more

  • Mr. Market

    The FED is the “lender of last resort” for the banking system and by extension for the benefit for all americans. But the ULTIMATE goal of the FED is th preserve the credibilty of the US financial system and the USD.

    In an attempt to retain the credibility of the USD and the US government it could sacrifice the banks in order to recuse the USD.

  • Oilfield Trash


    I have read much of Sumner work, but IMO the only way he can argue a HPE with monetary policy is through the Real Interest rate, which he refuses to consider.

    Ashwin Parameswaran a ex banker makes a very good argument link below

    Some critical Points he makes in the post.

    “Interest-bearing money cannot be a hot potato in the monetarist sense, the quantity of base money in the system is irrelevant, but if interest rates are 5% and inflation is 15% then interest-bearing money will act as a hot potato and fuel inflation.

    There is no reason to get rid of interest-bearing money balances and interest-bearing money holdings only need to be minimised if the interest rate is insufficient relative to the ‘natural’ real rates and safety premium implied in holding money.”

    But inflation IMO is a function of economic activity determined in Q and P, which drives some combination of M and V. All MMist see the causation running the other way.

    There are also a lot of holes in his HPE transmission arguement I have yet found anyone explain how you target NGPD using this theory. Unless of course your trying to hit a target the size of Texas,

  • InvestorX

    Because the Congress allows it. What about you “democracy” in the U.S.? At least Cullen here pretends to live in one (I would say – people should try to wake up and move back power more towards themselves).

  • Rodsteel14

    It did sacrifice 3 banks bear,Merrill,and lehman