[notahacker]

Posts like this support nabla9's point. Contrary to the straw men MMT economists like to draw in their blogs, the majority of modern macroeconomists neither disagree with the Bank of England's explanation of how commercial bank loan funds work, nor is it particularly pertinent to their theories. The money multiplier is not some foundational macroeconomic article of faith, it's a pedagogical tool to illustrate how leverage can expand the money supply beyond the monetary base to first year undergrads (which also happens to be a historically correct explanation of why the private banking sector ended up with de facto money creation privileges)

On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.

I think a lot of engineers would have issues with more arcane theoretical stuff like string theory too (and most physicists would have issue with engineers abstracting away certain details because the approximations they work with are good enough...)

[RobertoG]

It seems to me that if the "the majority of modern macroeconomists neither disagree with the Bank of England's explanation" and it's only a pedagogical tool or an historical explanation, they would do well in saying so. Specially to their first year undergrads and in their textbooks.

I have been following this debate for a while and it's only now that we heard "well, of course, we knew it all the time".

>>because central banks fundamentally disagree with MMTers

Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.

An engineer using Newtonian physics is very aware that is a simplification. Here the situation is the opposite, the physics (the economists) are simplifying away what the engineer (the BOE people) see in the reality, so their theories work.

[notahacker]

The Bank of England article you linked to was mainstream trained economists who devise mainstream economic models in their day job explaining how the money creation process works and why it makes certain classes of model more suitable than others for measuring economic shocks. And the role of credit creation has been part of the loanable funds literature the paper is critical of since "fiat money" was a purely theoretical idea. Ultimately if you overlook the evidence of a link you actually posted yourself in favour of preferring to believe the bad faith characterisation of "what mainstream economists really believe" on blogs written by self-styled dissidents, it says more about you than the economists...

> Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.

Central banks being unable to lend to governments or purchase government debt directly is a total non-factor in them consistently declining to match government debt emission dollar for dollar with government bond purchases on the secondary market (no MMT economist would disagree either). They are free to complement fiscal expansions with monetary expansions (at least over periods longer than changeable monthly base interest rate targets) as MMT would prefer, or take the opposite approach, which they sometimes do. If central banks thought MMT was fundamentally right, we wouldn't have seen them ever pull money out of the system to push up interest rates...

[RobertoG]

>"[..] it says more about you than the economists..."

I think I will be cavalier about that comment.

>"[..] what mainstream economists really believe [..]"

This is something that always puzzle me in this kind of discussion, maybe you can help me with that. What mainstream economists really believe?

I mean, here (1) is a review of what text-books say about money creation. In my opinion (and it seems yours too) this is not the same that we see in practice.

So, my question would be, do mainstream economist believe different things that what they write in the textbooks?

(1)- https://ac.els-cdn.com/S1057521915001477/1-s2.0-S10575219150...

[notahacker]

Undergraduate physics textbooks provide introductory examples using simple friction-free Newtonian classical mechanics. It's just there isn't a school of dissident physicists citing undergraduate textbooks to argue that the mainstream physics profession consists of stupid ignoramuses who don't believe in friction.

And the reality of money creation is pretty fuzzy too and depends a lot on what you define as "money supply" and the "banking sector" (funnily enough, even pretty basic physics has a degree of this problem too, which is why you get concepts of waves and particles that both fit some of the facts, though you don't get anyone inside or outside the mainstream very strongly committed to arguing against wave-particle duality...).

Ultimately private banks both intermediate between deposits and savers and create credit borrowed from central banks. They're only permitted to do the latter because their role in doing the former makes the government unwilling to let them fail. The "credit creation" emphasisers are right to emphasise that the limits on individual bank credit creation are soft because the "bank capital" they are permitted to borrow against is not a fixed variable, the intermediation emphasisers are right to note that when the commercial banking system borrows more money, the central bank tends to pull money out of the rest of the economy in the very short term, and propose raising interest rates in the slightly less short term, and so the banking system is only really able to expand the money supply when the central bank is comfortable with it doing so.

More generally, it's possible to entirely agree with Werner and MMT on banks' present role being far better described as primarily one of credit creation and entirely disagree with their respective alternative preferred policy approaches to central banking (or vice versa for that matter). What mainstream economists are primarily concerned with is the principle that raising interest rates for a variety of reasons (including but not limited to its effect on demand for bank credit) somewhat reduces inflation (and demand) and lowering them somewhat increases demand (and inflation) which is pretty much the most theoretically and empirically sound conclusion ever reached in macroeconomics (despite a few edge cases where it might not be true).

[RobertoG]

So, if I understand what you are telling me, when, for instance, Krugman, write his text book and his New York Times columns, he is just writing a simplification.

Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.

Fair enough, but you have to recognize that, then, it's not so strange, and hardly their fault, that MMT economists end writing "straw men" posts (as you said before).

[dragonwriter]

> So, if I understand what you are telling me, when, for instance, Krugman, write his text book and his New York Times columns, he is just writing a simplification.

Any time an expert is writing for a non-expert audience, they are usually writing a simplification tailored for the audience and the purpose of the writing.

> Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.

Or because the general idea of a multiplier effect works either way, and his columns are unlikely to depend on the mechanics of the simplified computation of the multiplier as an estimator of the maximum level of the multiplier effect under the simplifying assumptions that apply to that calculation.

If you have a specific problematic column in mind, we could have a less abstract discussion about the problem you have with it.

[AnimalMuppet]

One would expect that MMT economists might understand what mainstream economists think, and understand it at a somewhat deeper level than that of an NYT column. One would therefore expect that they could avoid strawmen, because they could argue against the mainstream economists' real position.

[dragonwriter]

> they would do well in saying so.

IME, the simplifying assumptions are often explicit, so they do.

[hn0]

> On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.

I’m not sure what MMT books you’ve been reading...

[dragonwriter]

> The money multiplier is not some foundational macroeconomic article of faith, it's a pedagogical tool to illustrate how leverage can expand the money supply beyond the monetary base to first year undergrads

Particularly, it's a tool for estimating a limit of an effect in a particular idealized policy circumstance and with other simplifying assumptions.

The simplifications don't represent real world conditions, so the computation is of little real-world relevance though the effect is.

Much of a first-year physics text will be simplifications that apply in idealized conditions that are broadly similar, IME.