WAITING FOR THE NEXT CRASH – MINSKYAN LESSONS WE FAILED TO LEARN
Randy Wray’s latest piece at the Levy Institute is a must read:
“The conditions that held in 2007 have been replicated, and the next GFC is just waiting for a trigger. The bailout has increased the linkages among the top four or five banks, making the system even more fragile.We’ve lost eight million jobs, opening a demand gap of about $1 trillion.Although some households have defaulted on their debts, and others have repaid portions of theirs, most of the household debt held in 2007 still exists (Figure 4).”
“Against this background, there are multiple events that could trigger a new, potentially deeper crisis. Should information leak out that one of the major US banks is insolvent (a proposition believed by many analysts), another massive liquidity crisis would be likely. Alternatively, the problems could start in Europe and ripple into the United States: for example, there is a plausible path that can be traced from US money market mutual fund holdings of eurobank assets (i.e., $3 trillion of extremely short-term liabilities that are like deposits but not insured) to a new global financial shock. Last time, the US government extended its guarantee to all of them; Dodd-Frank now outlaws such intervention. So the appearance of a problem among eurobanks could bring down that whole market—which is about twice the size of the US subprime mortgage market that brought on the global financial crisis last time.Far-reaching reform along the Minskyan lines traced above will likely be conceivable only in the aftermath of the next crisis. Unfortunately, that opportunity may be right around the corner.”
Source: Levy Institute
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.
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82 Comments
There’s also the backdrop of the Occupy Wall Street movement and the upcoming 2012 elections. I would say that in the political environment, any institution is on its own for the next two years.
For me, Wray’s article comes in the nick of time, saving a vomit-induced rant that has been building for some time. Like nothing ever witnessed before. What a relief. Right now, I am very calm. And no one is more surprised about that than me.
As for the banks? Let them rot.
First you are not laughing; now you are sounding dead serious. Perhaps you should go back to ‘Trixie’, or another alias, for these posts, so we’ll know it’s not all just a bad joke.
At least Cullen is still succeeding in keeping you calm; others maybe not so much.
Convoluted, but the poster agrees with Wray, not the other way around.
Not sure what you mean; perhaps my tragi-comically intended remark was also unclear.
I know she agrees with Wray’s warning; I do too.
Sorry, missed that. Must be the language barrier.
“Perhaps you should go back to ‘Trixie’, or another alias”
Yes, I wouldn’t disagree. How’s this one? And I can certainly provide examples of my aptitude in this area, just let me know.
I meant for when you are being serious; you are truly incorrigible. Please don’t change.
As though I didn’t know what you meant. At some point, you will allow me to stop trolling you. OR? TPC could just ban me from this site once and for all and put me out of my misery.
Otherwise, I am feeling awfully creative, in a haiku-like kinda way.
And I should follow my own panacea that everyone needs to take responsibility (at least it’s better than ‘cut taxes for the wealthy’), and quit encouraging you. In the unlikely event that I mean any response to be taken seriously, I shall address you as ‘Ms. Belden’.
Sigh, wrong Trixie. Duh? Exactly who is trolling who here now? And just so you know, I was a Nancy Drew fan growing up. That and Mad magazine, which taught me everything I needed to know in life. I am not even familiar with this impostor you speak of.
Hey, turnabout is fair play, Tricksey. Anyway. we’re on the same side, I think (and I read Mad and the Hardy Boys).
Also, reply to Merouleau below is me; technology ‘disappeared’ me.
Interesting, but Im surprised you do not comment on the fact that he does not have your worldview: namely that we did not leave the (balance sheet) recession to begin with, so we cannot re-enter something we never left
I’m hurrying off to stock up on tinned goods for my cave.Alternatively,I could just say this is not 2008 and recebcy effects need to be allowed for when people start to construct their walls of worry.
Hey TPC, do you really believe the most alarming point of this article, in that US money market funds are NOT safe? So in my brokerage account even if I am holding cash and thus in some type of MM fund I will be at risk? If that’s the case how do you handle your cash positions? Short-term US Govt bond funds?
Ask for your brokerage sweep account to be a government only money market fund, e.g. Fidelity Govt MM fund, which only holds US T-Bills and repurchase agreements for T-Bills. Gundlach has said anyone who holds a non-Govt money market fund is taking on risk without any corresponding reward.
The Fidelity money market fund I am in for brokerage purposes specifically states that it is not FDIC insured. Also, it states that it does not guarantee to maintain the value of the unit at $1.00. In other words you can lose money in a money market fund. Recently, Fidelity got criticized for having too much exposure to the European market in their money fund. They have since changed this.
Tbills and other govy’s are safe at your brokerage. If you’re looking for a money market alternative just put it in short-term muni’s. Most brokerages do have a fdic insured money market that yields like.01% and of course that’s still good up to 250k.
Last time, the US government extended its guarantee to all of them; Dodd-Frank now outlaws such intervention.
It did? Daaang. What part of the bill?
Interesting article by Wray.
I have no idea what is going to happen in the coming months. I decided yesterday, before reading the Wray, article that it feels like it is time to prepare for an extended bank holiday.
I am assuming that all the banks that influence my life will close for one month but it could be longer. They will re-open. I further assume that cash deposits will be safe up to the FDIC limit. I need to figure out what will happen if the banks close for one month. What does it mean on a practical level.
What do I need to do to cope with this assumed situation?
Credit cards, debit cards, checks will not work so I need cash, much more than I usually carry. Hopefully, people will still see cash as something that is useful to them. There will probably be a run on the banks for cash so I need to get my cash now.
All financial transactions will stop. You will not be able to sell or buy stock, bonds, or any other financial instrument. You will not know really know what is happening to the value of your holdings.
Plane flights will stop.
Obtaining gas may become difficult or impossible, so I can stock up on gas but only so much so I reckon I will not travel anywhere unless absolutely necessary. I may not be allowed to travel by law.
I will need a stock of food and water. Can I expect electricity and gas to remain available or will it cut-off?
Could it be this frightening?
Will I need a loaded gun at every window?
Large purchases will be stymied. Flow of mony may need nationalization. Loans may stop, debt may freeze. Commodities may become scarcer as credit dries up, but doubtful it will effect any thing individually for long. Credit cards will still work as transfer mechanisms. Something will fill the void. We will transition from the capitalist economy to the knowledge economy, ala Drucker. Biggest problems will be in social institutions, like Medicare, and governments.
To Wantingtoretire:
It’s late, and I imagine you’ll probably never read this, but if so, please relax.
Crisis is to be embraced, not feared. Crisis is not the end of anything, but the beginning of something new.
I’m writing this from Argentina — where banks failed and closed and you couldn’t take more than $100 out of your bank account per month, and then they only gave you 30 cents on the dollar and confiscated the rest.
But people survive, they work to make ends meet and their lives progress. Economies are incredibly resilient because normal people (not protesters) and businesses across the world will always have one common goal: a better economy.
Ten years since 2001 the many fortunes lost here have been restored several fold.
In the USA, when your Occupy-Wall-Street crowds grow larger and their fingers become glued to those protest signs, millions of other Americans will embrace the challenge to work harder and move forward in a positive direction instead of withering away with pointless finger-pointing — thus reaping profits and building greater futures in the process.
I’m waiting for the next crisis here. It’s long overdue and I could use another windfall.
Thanks JD,
I have read your message. I would be interested in knowing how you made a windfall during or from the Argentinian crisis in 2001.
I don’t really have the 10 years to make good the losses.
I have observed in the past that countries default and that the impact on me living in another country is immeasurable. This time we a lot of countries potentially defaulting.
But my concern was solely with the banking system and the need for the banking system to shut down for a period so “things” could be sorted out. If we were to have a bank holiday for only 1 week, when people are not prepared for it, I think it will scare people to level not seen before.
At every window? That’s silly. What if you’re at the other end of the house when they break in? You’ve just given the perps a gun as they enter. “Thanks!” Come on … No, instead carry one around your belt. I mean, what if you’re on the can when someone crawls in through your bathroom window? It would be unseemly to stand up grabbing your piece. Your other piece. No, simply reach down to your hip … well, feet at this point … and blast ‘em, mid-pinch. At this point you either won’t need to use the john for at least a day, or you’ll have evacuated yourself completely. Depending on temperament.
I seriously doubt there will be bank holidays. If the (speaking of which) SHTF there will be another panic meeting with the PTB and Frank-Dodd will have about as much effect as a ‘Protected By’ sticker during a Greek riot. The Fed will bail out the world (again) because there simply won’t be any other real options. Oh, they’ll coo and cluck that it’ll never happen again, but when the abyss approaches, print they will, and in quantity. The almighty dollar will come to the ‘rescue’ once more. By rescue I mean the banks will be rescued. Depositors, too. Mostly. Jobs, well, let’s not get crazy here. But the system isn’t going to allow itself to go under like that. The last US bank holiday happened during the metallic standard, when the establishment didn’t have the sorts of options they do today (like printing an infinite amount of gold in the cellar). Don’t fall for the hype. Massive shifts may indeed occur, but not of that variety. The banks will make it. Average taxpayers … well … let’s not get crazy here.
(Giggles).
Thanks for the additional tips Oroboros. I will revise my survival plan. There will be two of us, so can visits will need to be coordinated. Our bathrooms do not have windows so we are lucky there. I don’t have sufficient guns at present, so I need to buy. Hope the ammunition is not running short like it did when Obama was elected. Also, need to learn to shoot. Just hope there is enough time. Trouble is ordinary day to day life keeps getting in the way of the preparations.
Actually, ammo prices are falling, from what I’ve noticed. Given that commodity prices have fallen, makes sense.
Definitely need to learn to shoot, if you’ve going to have one. Better to not have one if you don’t know what to do with it. Have and learn, or don’t have at all.
In terms of background, understand that Argentina, for example, owed debts in foreign currencies, and thus could not ‘print their way out’ of their problems. They also tried to maintain a peg with the dollar, which limited their options. When they did break the peg, the value of the peso plummeted. Other latin american countries also broke currency pegs, and monetary chaos ensued. The IMF, World Bank, et al, were also involved. So understand that the Argentina situation was quite different than our current situation. If the Fed has to open nearly unlimited Eurodollar swaps, they will. In fact, they basically did in 2008. They can do it again, Dodd-Frank be damned.
So bank holidays I wouldn’t worry about. Maybe have a thousand in cash squirreled away in a sock someplace, just in case, for your own piece of mind, but otherwise … Debt write-offs from bad loans leading to lack of demand leading to recessions around the world, this on the other hand is far more likely. I’d say at best we have Cullen’s scenario, slow growth, at worst … well, depending on political action, could be bad. Put it to you this way, the money you have saved will not disappear. Whether you can use it to make more money via investments, or whether you can earn any new money via employment, is the real question going forward. It’s growth that’s under pressure. The currency will almost undoubtedly be saved. The ability of average people to make more currency, that’s a little lower on the priority list.
Hey, but the US consumer is going to be done with the B/S recession and is going to recover in 2013. All is well, Randy Wray is just stirring up the pot, move on. Cullen thinks we are just fine…slow growth with some problems in Europe but the US consumer will come to the rescue by 2013 because everything would be resolved by then for them.
Where in the world did I say “we are just fine”. I am not in the world is ending camp. But I am in the stagnant economy camp. Well done Haris. In just two comments you’ve proven that you’re just another lowly internet troll. It’s pathetic that I have to teach grown men how to behave on the internet. If you think I am wrong then build an argument rather than this garbage which adds nothing to the site.
If I was a professor and one of my students responded to me with a comment like this, I would literally tell them to pick up their bag and get the fuck out of my classroom. Better yet, I’d tell them to sit in the corner for the remainder of class and stare at the wall. You know, the way you would treat a small child until they learn how to behave like a reasonable human being. Same would go for any sort of public debate forum. If you have nothing to contribute then don’t be weak and resort to this sort of commentary which proves that you have nothing to add. You make yourself look bad and you insult everyone else around you by forcing us to waste our time listening to your incoherent angry rants. No one here will put up with this sort of commentary. You insult the intelligence and time of everyone here when you do this and I won’t put up with it.
Got a real argument based on facts? Let’s hear it. Otherwise, don’t bother. It’s not my job to make grown men act like they’re adults on the internet and quite frankly, it’s embarrassing that anyone over the age of 12 leaves comments like your last few. If you don’t respect my work then don’t read it. If you disagree with it then prove me wrong. But don’t ever do this.
That last post there is what we call an “old fashioned schooling.”
That guy should gag after that one from the beatdown.
You know telling the student to leave in exactly that manner would probably be the best thing that ever happened to the class. You’d certainly have everyone’s attention while making perfectly clear your expectations. The world could use some more thought-out accountability. “You can succeed, and here you’re expected to.”
I’ve been working on something for awhile Cullen which I hope to have to you soon. I haven’t forgotten about your question on the current account nor MMT basics. I’m not always the quickest puzzle builder.
Cullen,
This recent piece by the Levy Institute and the article in today’s WSJ indicate the crisis and meltdown that would result from the breaking of the buck for and freeze up of money market funds. This was my argument with you in the Hussman article last week that TARP was necessary to prevent the default on all the bank repos and other short term instuments widely held in most money market funds.A marketdown to 75 cents and and an inability to access those money market funds hurts mainstreet and would have been a disaster.
Here we are, european banks have to recapitalise. They look at requity prices wersus their book value (no comments) and it hurt them so much to raise equity at those prices that they all plan deleveraging…on funding activities.
As does austerity do when you want to make your debt to gdp better (it doesn’t work) due to negative feedback effetcs, ingredients for sell off and depressed prices are there on this side of the market too.
Not that i am against deleveraging…it has to be done..so be it…but i am amused that they are not thinking about fallacy of composition/negative feeback effects which will make their deleveraging less useful than they thougth
Bot measure should go hand in hand…more capital, stop high leverage by raising cpaital AND deleveraging..but those ceos do not want their free leveraged call option to end up since they still have to free puts options sold by govt….
Cullen, thanks once again, for bringing articles like this to our attention.
Wray is such an example of how economists should think and write. I have never taken a course or read a textbook in economics, but I understood virtually every word, and the article was short and succinct, not an ordeal to wade through. (‘Plain Jane’ – give it a shot.)
I can quibble with a few points. I think the ‘Greenspan put’ may bear more responsibility. It sounds like many pension and other fund managers, far from being greedy, were just trying to maintain the 5-8% ‘safe’ returns they had always been led to count on. Also the long listing of parties to the ‘financial fraud’ suggests an underlying societal ethic of laxity (although top executives at G-S, BoA, Citi etc. have earned some demonization.)
A true cultural shift may be necessary to generate the political will for the kinds of eminently clear and sensible reforms Wray recommends. (On this basis I sympathize with the ‘Occupy’ folks, as well as any true grass-roots ‘Tea Partyers’.)
Any thoughts on the Government as Employer of Last Resort?
ELR just needs to become the norm and with time it will evolve into something fairly robust and efficient. It would be hard to get it just right from the get go, but after several iterations it should work splendidly. People were afraid of Social Security too, at some point.
Hi Peter,
In 1934 FDR promised the American people that the Soc Sec Card and # would never be used as a national identity card. I’m old enough to still have that in little red letters at the bottom of my card. Well we all know how that promise turned out. Lying politicians have been moving us in that direction ever since 1934. When Block Buster asked for my card that was the last straw for me.
They have been moving us towards a cashless society as well. How do you think it will be when problems propagate through the system at the speed of light. We have got to stop living in fear of one world govt politicians and make them afraid of us. vote out all incumbents. The republicans said they got it last time. Obviously, they did not.
Sorry, Old Man, the fact that BlockBuster or anybody else asked for your SS number is supposed to be some criticism of the SS program? Or am I totally missing the point and relevance of your comment?
The fact that SS# became the de facto (or even de jure?) identity number is neither here nor there for the purposes of the discussion of the merits of neither SS itself nor the ELR program, as far as I can tell.
No, just a little SS history and a criticizm of politicians in general on the subject of trust. They give with one hand and take with the other. A lot of people are amazed to see the little red letters on my SS card. I don’t carry it, but it says something like: “Not to be used for identification”, but because people have such short memories in this country they managed to remove those little red letters from later cards and we now have identity fraud. But of course the politicians have succeeded to a degree in doing to Soc Sec what corps have done to pension plans, and maybe it is efficient to put that money to use, but what is the downside to that? Are we experiencing that now? I’m not adept enough to say, but I do wonder where retirees would be now if the republicans had succeeded in getting a 100% market retirement plan going.
To me ELR looks like the course control mechanism in a car. It maintains optimal speed (optimal aggregate demand) regardless of the terrain. Even more – it even helps you find the optimal speed (optimal aggregate demand).
Cullen, I am 83 years old, and remember at 10-11 years old, my father telling me about the CCC and his younger brothers positive expriences, plus his own role in the WPA. Despite the harsh right wing critics, the men (I don’t know if women were included)felt they were doing worthwhile work, and learned new skills. Everyone, it seemed to my father, felt better not being on the ‘dole’.
I am skeptical of the response of a society that KNOWS it can always obtain work from a govt willing to hand it out… Cullen Roche
Some people love government work but most hate it.
But as for ELR, abolish the government enforced/backed counterfeiting cartel and bailout the entire population from all debt and employment will take care of itself and without danger of a another boom.
There’s a lot of unpacking to be done on the “counterfeiting” meme. I strongly suspect that dragged out into the light of day and carefully examined, it would melt away quickly.
I strongly suspect that dragged out into the light of day and carefully examined, it would melt away quickly. geerussell
Go for it.
But here’s a simple example:
Let’s say two people, let’s call them Mrs. Black and Mr. White go to a bank and ask for a loan. Mr. White is deemed “credit-worthy” and gets a signature loan. Mrs. Black is not considered “credit-worthy” and is denied. Question? Where does the purchasing power for Mr.White’s loan come from? Does it not come from all money holders in the population including poor Mrs. Black?
Thus the so-called “credit-worthy” are allowed to steal purchasing power from everyone else. Proud of yourselves?
Mr. White’s “purchasing power”, or credit, comes from nowhere and when the loan is repaid returns to the formless void which generated it. Your loan is not my tax.
Mr. White’s “purchasing power”, or credit, comes from nowhere and when the loan is repaid returns to the formless void which generated it. Ben Wolf
Wrong. Mr. White’s loan inflates the money supply (decreases purchasing power per unit of currency) when it is made and deflates the money supply when it is repaid and then overshoots as the interest is paid (Actually, the interest is paid off first but the result is the same).
There btw, is the “business-cycle” in a nut-shell.
So Mrs. Black’s purchasing power is stolen during the boom and her job is threatened during the bust.
Some money system we got – crooked and unstable.
That purchasing power is a claim against Mr. White’s future earnings. Time-shifting isn’t counterfeiting.
Time-shifting isn’t counterfeiting. geerussell
Yes it is when done in a government enforced monopoly money supply. It is borrowing purchasing power without permission and with no escape for the victim. The so-called “credit-worthy” are allowed to steal purchasing from the “non-credit-worthy” and from those who choose not to borrow.
Those who can’t/don’t borrow also don’t incur liabilities against their future earnings or interest costs to bear. Victims? No.
Credit isn’t a free lunch. Nor is it intrinsically bad. It becomes a threat when it’s leveraged against mythical capital and unanchored from sound underwriting. In that event we get where we are now and both borrowers and non-borrowers are “victims”.
Also, there’s nothing sinister about interest. It’s just the cost of the service provided.
Interest costs are no more an “overshoot” than the cost of any other new goods, services or productive capacity added to the economy.
Also, there’s nothing sinister about interest. It’s just the cost of the service provided. geerussell
The service provided is a government enforced monopoly money supply so the interest is a form of extortion. Without that government enforced money monopoly, people might choose non-usury-based forms of money.
But even honest usury is problematical since the debt, according to Karl Denninger, normally compounds faster than the real economy.
Before the GFC, I was pushing an idea for a program of 2 years of universal service in return for full (including naturalized) citizenship rights (federal voting, employment/office holding, educational aid – conscientious objectors would be assigned without question to CCC/AmeriCorps/Vista type service; otherwise military gets first pick – probably making it a prerequisite for a top political career). Individuals choose when (though most would likely choose after HS; one could commit to serving as teacher, health care provider etc afterward, to receive aid for training).
During times of high unemployment, would likely kick in as semi-automatic stabilizer. Would also help keep us out of ‘wars of choice’, help unite the different parts of our society; help especially less affluent young people get a start. Throw in universal health coverage and a $10/hr minimum wage, indexed to CPI, daycare assisted by those in service; and a single mom makes it without welfare. (Minimum wage would also incentivize corporations to invest in technology, training to justify paying that rate. Likewise to create $5/hr jobs, folks in Michoacan would jump at rather than leaving their kids with the grandparents to come up here for work.)
Might be a way to approach government as ELR.
Terrific idea – I first came across it in Robert Heinlein’s outstanding 1959 sci-fi philosophy novel, Starship Troopers. I would love to see the long-term effects of requiring every voter first to have made a significant sacrifice for the common good.
ELR advocates do not understand that the minimum wage PLUS “benefits” they advocate will offer a better deal than most entry level private sector work and thus drive huge numbers of people into ELR programs from the private job market. For example, Medicaid in New York offers comprehensive health insurance coverages and benefits with virtually no co-pay that would cost $25000/yr in the private insurance market if you could buy health coverage that comprehensive in the private market, which you can’t. Hospitalization, major medical, eyeglass, orthodonture, durable medical equipment etc. etc. By the time you add SNAP, heating allowances, housing allowances, etc. into the benefit mix, the welfare “wage” is much more generous than ELR advocates (or the general public) realize. This inherent imbalance dooms ELR programs to failure before they start, because if ELR workers get Medicaid (as they surely would) they will have better health insurance coverage than most private sector workers, and if they also receive other benefits such as SNAP (which they surely would) the deal becomes too good for millions of currently employed to resist; they will get themselves fired from their current entry level-type job to enter ELR.
JWG — Medicaid in New York is quite a nice plan. How come it isn’t already pulling people out of entry level work? In Alabama, Medicaid is not even close to that. Among other problems, the reimbursement rate is so low that very few doctors will accept Medicaid in the first place. That means most people still end up in the emergency rooms for non-emergency care.
Each state must offer federally mandated Medicaid benefits; then each state can add optional benefits under its “state plan”. New York offers virtually all optional coverages, and thus is mind-bogglingly generous and expensive. However, the blue states are where the population is, and they have generous optional coverages. Alabama and similar poorer red states will be more conservative, but still struggle mightily with cost because of the federal mandate.
The answer to your question, “why aren’t Medicaid and transfer payments drawing people out of the entry level work force in New York?” thae answer is: your premise is mistaken; these benefits are drawing persons out of the entry level workforce, esepcially single mothers. Just take a look at New York’s public assistance cost burden and enrollment, and the average age of the beneficiary (ex-nursing home patients), and you will see the effects on labor force participation. Average family health insurance premiums ar $15,000 per year in the group market, as per the WSJ. The current value of health insurance makes it a prize that entry level jobs cannot offer; it is too expensive now and will continue to double every twelve years or so. Medicaid coverage is a very valuable prize that shapes labor force participation.
Poor people are neither unintelligent nor unmotivated. Navigating the social welfare system in the USA takes knowledge and persistence. They are following the money, just as I would do in their shoes, and just as we in the work force all do. Cultural norms that keep people in the entry level work force, despite a better economic deal being available under combined federal and state transfer payment programs, and benefit programs such as Medicaid, Section 8 etc., are breaking down in the West and in the USA.
ELR will never work until these realities change. MMTers should not be naive on these issues. Understanding social welfare and transfer payment influences on national production and labor force participation are just as important as understanding how the banking system works.
JWG — I think you misunderstand me. I would think the benefit levels ARE decreasing labor force participation, particularly at the entry level. I was a welfare caseworker in the late 70′s and had clients whose grandmothers had started the case file in the 1910′s and 20′s. I had many clients who wanted to work, but could not afford to lose their medical coverage as soon as they made $3,000.
Perhaps if cash payments were dependent on work and you allowed the medical and possibly food-stamp benefits to remain, you would get them into the work force. I think that may actually be the necessary ingredient. Unless you are disabled or have a very young child, if you want government support, especially cash, you will have to do some kind of productive work in exchange.
One other point. I have always understood a Job Guarantee to be a replacement for ALL transfer payments to anyone able to work, including unemployment and welfare.
ELR doesn’t sound all that crazy to me– when I graduated high school my folks didn’t have any money for me to go to college, felt it was very stupid to go into debt to educate a daughter (who was probably just going to have babies anyway.)
There weren’t really any jobs to be had either, so off I went into the bosom of the U.S. Army. The US Government is already an employer of last resort for a lot of young people out there… and yes, if I were seventeen and had to do it all over again, I would.
Anyway, great article, thanks for thinking of me, Colin S. Toe. Yes, it was very readable! Three cheers for Randall Wray!
@PJ: I saw this comment earlier today and spent most of the day thinking about it. Frankly, not sure how to respond. I went to an affordable state university (late 80s/early 90s) and was somehow able to muddle through. And in my off-time I shoplifted Ho-Hos from the campus 7-11, and when caught, I was able to convince everyone I was somehow framed for the Twinkies that were found in my other pocket. Worked every time.
I’m not proud of this (even though it makes for some funny stories) and wouldn’t recommend my strategy for anyone seeking a college education. But I would have been terrified to have joined the Army. And I am beyond humbled. It is my hope we can change the ELR to something other than the military, at least for others like me.
And there is absolutely nothing “plain” about you. Can you please change your moniker to G.I. Jane? Pretty please?
(Salutes).
Shouldn’t be too much of a stretch from shoplifting to claiming ‘CO’ status; just don’t plan on running for President later, and sending someone else or their kids off to war.
merouleau — Just look at the experience in Israel. They have universal service for all citizens, male or female. They allow conscientious objection, but don’t have very many. It seems to have a lot of good long-term benefits.
Particularly today, it seems to me, in this country, there are a lot of young people who do not evidence much discipline. Like me, they might benefit greatly from a couple of years of learning good discipline. Just a thought.
I like Israel’s approach, but I like even better the idea of making national service optional. I think a pool of voters who have *willingly* sacrificed to serve may be even better than a pool who have simply complied successfully with a national requirement. Either approach would be better than our current practice – today the American electorate is conditioned to believe that the benefits of citizenship do not require individual effort to sustain. I think our crumbling national infrastructure and other problems reflect the high ratio of takers to makers among the electorate.
I too read that book. I also attended a small private school with the sons of McGeorge Bundy, a graduate, among others, during the Vietnam war. He and McNamara knew by mid ’67 that the war was hopeless. Had they gone public then, half the losses might have been spared. But they could not ‘betray’ their classmates/colleagues still trying to ‘win’ it. Unlike in earlier wars, only a few Groton graduates served; one, giving up his 2-S deferment to Dartmouth, enlisted, and was killed.
For its egalitarianism and probable spreading of military service and potential risk across the social spectrum, the idea should appeal to those on the left; the non-coercive aspect, to libertarians; and the patriotic service, to those on the right.
We’ve shared the same concerns here. There is some benefit to some unemployment in that it keeps employees accountable. If you fear not having a job, this will motivate you to perform your duties at least well enough to stay employed. This does have a value to society and to employers.
Nevertheless you’d probably agree it is possible for someone to devise a method of accountability within the context of full employment. For example, if you are a bad employee, perhaps then only the less desirable to down right undesirable jobs will be available to you. In addition, the wages for those jobs will be low, relegating one to being poor and suffering the struggles which come with it. I’m not sure this is feasible so much as being theoretically possible. An interesting thought if nothing else.
I think we see policy very similarly Robert…Always appreciate your insights.
See? THIS is why we need to be on different time zones. I was just about to TEAR this place up. And who shows up? Isn’t this the weekend? You know, when the mice will play?
If this were like Facebook chat and we saw [Collen Roche has just signed on], we’d all scurry away. You realize this, yes?
I am just now beginning to drink, thanks for the buzz kill. NOW I have to find some other site to vomit on. Hope you’re happy.
“…US money market mutual fund holdings of eurobank assets (i.e., $3 trillion of extremely short-term liabilities that are like deposits but not insured)…”
this i didnt know. can anyone supply backup/source?
I think most smart economists or traders know that graph, and the gap that big needs time to fill. It can be filled quickly with massive default and acute pain, or slowly and the pain lasts for a decade. That’s why we have “extend and pretend”. Ray Dalio mentioned a couple times about that as well as others.
What’s interesting is that earlier this year Federal Appeals Court ruled in Slattery v. United Stated that FDIC obligations are also direct obligations of Tsy (so a stiffed creditor can either sue FDIC in District Court or sue Tsy in the Court of Federal Claims). All this business about the FDIC running out of money or requiring an emergency loan from Tsy is bunk. Tsy is already 100% on the hook. What’s interesting about the Slatterly ruling is how broad it is… so broad, I think they inadvertently put the Federal Reserve System’s books on Tsy’s lap as well.
On this en banc review, we hold that (1) when a government agency is asserted to have breached an express or implied contract that it entered on behalf of the United States, there is Tucker Act jurisdiction [requiring Tsy to pay] of the cause unless such jurisdiction was explicitly withheld or withdrawn by statute, and (2) the jurisdictional foundation of the Tucker Act is not limited by the appropriation status of the agency’s funds or the source of funds by which any judgment may be paid.
http://www.leagle.com/xmlResult.aspx?page=27&xmldoc=In%20FCO%2020110128157.xml&docbase=CSLWAR3-2007-CURR&SizeDisp=7
This actually makes things very simple for the next crash. FDIC obligations are, as of the Slattery decision, must-pay obligations under the Government’s 14th Amendment duty to pay its debt and, of course, no other law can override the Constitution. Tsy can simply direct (with an almost automatic court order, if necessary) the Federal Reserve to loan the FDIC any amount of money it requires to satisfy Govt’s 14th Amendment obligation.
It actually wouldn’t cost Tsy anything. $10 trillion credit (say) on FDIC side of ledger equals $10 trillion debit on Fed side. Since Tsy is on the hook for both agencies (by my reading of the Slattery decision), its net cost is 0.
Putting aside the typical small pricing premium the FED might pay on executing an Open Market Operation any other obligation the FED is paying is probably really a covert fiscal operation which should be the domain of the Treasury anyhow.
…leave it to the lawyers to force the transactions into the light!
Those who can’t/don’t borrow also don’t incur liabilities against their future earnings or interest costs to bear. Victims? No. geerussell
It is morally irrelevant that the borrowers have to share the benefit of first access to new money with the banks; the non-borrowers are still victims.
Credit isn’t a free lunch. geerussell
Yes it is. Those with first access to new money have an advantage over later recipients since they are allowed to buy before prices rise.
Nor is it intrinsically bad. geerussell
That depends. If one extends credit in his own goods and services that is morally legitimate. However, extending credit in other people’s goods and services, which is what banks do, is not.
It becomes a threat when it’s leveraged against mythical capital and unanchored from sound underwriting. In that event we get where we are now and both borrowers and non-borrowers are “victims”. geerussell
Central banking has been in existence for over 300 years. If it was a sound practice we would not still be having major problems with it.
” If one extends credit in his own goods and services that is morally legitimate. However, extending credit in other people’s goods and services, which is what banks do, is not.”
I imagine the following two scenarios based on my naive understanding of credit and MMT, with the caveat that I could be completely crazy and off base for thinking this.
Well-regulated credit allows for people’s goods and services to transact at the level of present demand as the goods and services on offer increase (population growth, digging new copper out of the ground, making a popular new ipad, etc). The new net financial assets needed to fund those transactions are provided in the short term by credit and the overhang of private sector deficit (interest on credit) accommodated in the medium-long term with new state money (government spending). Credit in this scenario functions as a transmission mechanism for state money to smoothly accommodate private sector growth.
Banish credit and we still get growth in population and the desire to transact new real goods and services but a lag in new net financial assets to accommodate them. The means to forecast the assets needed and the means to target them exactly where they are needed are going to face a wide margin of deflationary underprovision or inflationary overshooting. Without the transmission mechanism of credit, the primary signal for the private sector to tell the government “I’m growing and need new net financial assets” is deflation.
“Central banking has been in existence for over 300 years. If it was a sound practice we would not still be having major problems with it.”
If the last 300 years are the standard, the economic trajectory has been pretty tremendous compared to the years that came before. Not exactly a scathing indictment of central banking.
Banish credit and we still get growth in population and the desire to transact new real goods and services but a lag in new net financial assets to accommodate them. geerussell
Not necessarily. Common stock is an ethical private money form that can expand as needed to meet increased demand. And I would not necessarily ban credit creation permanently (though a bailout of the entire population might require a temporary ban to prevent serious price inflation) but certainly all government privilege for the banks should be eliminated. It is absurd that in a supposedly free market that a government enforced money monopoly exists.
If the last 300 years are the standard, the economic trajectory has been pretty tremendous compared to the years that came before. Not exactly a scathing indictment of central banking. geerussell
Asset-backed money is a brilliant invention but if we don’t implement it ethically we won’t make another 300 years, I’d bet. The Great Depression was a major cause of WW II. Think we’ll survive WW III? Yet, this may be Great Depression II.
“Common stock is an ethical private money form that can expand as needed to meet increased demand”
In the aggregate, how can common stock fund expansion when it’s purchased with financial assets from the same sector? It has to net to zero.
Common stock can function as money itself. It can be bought with labor, for example. New labor = new common stock. Or assets such as machine tools can new buy common stock. And the common stock company that spends the stock can accept it back for goods and services it produces with the labor and machine tools.
I don’t know if corporations would spend their precious common stock as money but without the government backed banking system to borrow from they might. In any case, some, the so-called “credit-worthy”, should not be allowed to steal purchasing power from everyone else.
Also, we either believe in the free market or we don’t. And there is nothing free market about a government backed/enforced money cartel.
” In any case, some, the so-called “credit-worthy”, should not be allowed to steal purchasing power from everyone else.”
In order for credit to reduce purchasing power credit would have to be inflationary.
As I understand MMT, the exact opposite is the case. Private credit is horizontal money. These transactions can’t create new net financial assets and thus can’t be inflationary. Taken to excess however they can drive the private sector into deficit (and government into surplus) and become deflationary.
This notion seems to match pretty well with current conditions. A private credit binge followed by a recessionary hangover.
In order for credit to reduce purchasing power credit would have to be inflationary. geerussell
What do you think the housing bubble was but inflation in house prices?
These transactions can’t create new net financial assets and thus can’t be inflationary. geerussell
Why not? Because the loans are eventually repaid? But what about when the horizontal money is extant?
“Why not? Because the loans are eventually repaid? But what about when the horizontal money is extant?”
Yes, precisely this. A credit event has a duration. You can’t measure its full impact with a snapshot of at the start “new money, shopping spree!” and ignore the full life cycle “loan payments, bummer.”
The true measure of credit is its life cycle from loan to repayment and over that life cycle no new net financial assets are created.
“What do you think the housing bubble was but inflation in house prices?”
The housing bubble was excess credit pushing the private sector into deficit. A deficit which has landed us in the current stagnant/deflationary balance sheet recession. Over its life cycle that credit excess didn’t produce inflation, it produced a bubble and a bust.
Over its life cycle that credit excess didn’t produce inflation, it produced a bubble and a bust. geerussell
That is morally irrelevant. Ten years of price inflation is not balanced morally by ten years of price deflation. Furthermore, during the deflation, the victims of the previous price inflation are also in danger of losing their jobs.
The current money system is a non-starter morally.
Cullen,
Sometimes, I feel like you guys don’t read your own material. Between you building an algorithm that’s almost never wrong and then refusing to listen to it and now this from Wray somebody has to speak up. Nowhere in the great piece that brought me to this site is household debt and bank synergy mentioned sorry for the run-on sentences but I am only capable of speaking, I am an awful writer.
Its as if you guys are making the same mistakes that the other economic lines of thought have made. Chapter 1 is great. Economics is fairly simple. And then you go on and try to get more in-depth and in this man’s opinion which is worth the cost of this comment its a giant mistake.
Since sticking to chapter 1 many zeros have been accumulating in my accounts without much risk. I have you guys to thank for this. Now, you guys are trying to tell me to stop listening to your previous selves. What gives?
P.S- I’m definitely afraid of this information going mainstream before I buy my islands.
I only ignored the algo this one time. And yes, it has turned out to be a huge mistake. Oh well. I felt as though I was betting on a political move, which it was. I should have known they’d back the banks…..
Cullen,
You are the teacher and I have a great deal of respect for you and what you’ve done for me and countless others. Anything I say in disagreement is said with great trepidation. That being said, doesn’t the size of the deficits render all those points mute? Does it matter what they do with 8 or 9% deficits? The numbnuts in charge can’t get together to cut or spend more? Isn’t this a dream scenario for those of us interested in equities markets appreciating?
We have these large deficits which our legislators are powerless in the current environment to wreck. Then we also have so much credit in the system that the fed can’t meddle too much either. It is a perfect storm in this man’s opinion.
Easily diagnosed if I stick to chapter 1 because I don’t have the brains/knowledge to dissect any further.
Love your work