4 ms·

Here is what I now believe: MMT doesn't really matter that much. How base money is produced doesn't really matter that much. A metal standard, fiat via govern

Here is what I now believe: MMT doesn't really matter that much. How base money is produced doesn't really matter that much. A metal standard, fiat via government coercion, rocks at the bottom of the ocean, wampum, whatever. As long as it isn't insane and chaotic, it will probably work. What matters is no longer allowing the banking system to engage in fraud by introducing multiple claims on the same currency unit in the same time period, which is to say that currency deposits must be duration matched with loans. No more borrowing short and lending long. Of course, practically, MMT will be used to justify more government boondoggles, wars, and bail outs of the rich, rather than something that might actually be effective, like a citizens dividend, but that's politics, not economics.

pjc50 11y ago
currency deposits must be duration matched with loans Why? This is the essence of banking and has been for centuries. Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?
- carsongross 11y ago
  It is the essence of banking, and that's the problem. The greatest trick the devil ever pulled... Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled. If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run. I will admit that this is my own economic theory and that I am used to the crazy looks from people.
  - zeveb 11y ago
    > Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Think about that: you deposit your money in the bank; the bank lends it to me; I pay the car dealer — which means that money is no longer in your bank! What is in the bank is an IOU from me for that money, and of course that IOU itself has some value and could itself be sold/lent to someone else for some other purchase. There's no fraud, no double-counting, but it all makes perfect sense.
    - carsongross 11y ago
      Are we arguing? The money is no longer in the bank, but I can't demand it for five years, which is great, because the bank will get the loan paid back, with interest, in four. And yes, I would expect a secondary market to develop for deposit receipts as people misjudge their time/money needs. What am I to think about? Duration mismatch is the problem, eliminate it and you eliminate bank runs and, more importantly, lying. The fraud is when the bank, through slight of hand, tells more than one person they can have a given monetary unit at a given point in time. That's the double counting. But perhaps I'm misunderstanding you.
      - snowwrestler 11y ago
        Bank runs are a solved problem. We solved them with deposit insurance, not by locking people's deposits up for years.
        carsongross 11y ago
        Yes, I'm sure working for a bank pays well.
kaonashi 11y ago
Interestingly, Minsky had a large influence on the MMT economists, and you're essentially paraphrasing his financial instability hypothesis http://www.levyinstitute.org/pubs/wp74.pdf http://www.levyinstitute.org/pubs/wp74.pdf
mindslight 11y ago
What you're describing isn't crazy, it's how any other entity besides a bank must operate. If a friend asks to borrow $50, I have to open up my wallet and give him $50 from it (or deny the loan). I can't keep the $50 in my wallet, promise to not spend it, and print out a shiny new $50 bill to give him! Banks were given this privilege because they were highly regulated, essentially just extensions of the Federal Reserve itself. Of course over time they argued this was unfair and chipped away at the regulation, while still retaining the privileges. Given how much is at stake, I don't see anything changing until it all falls apart. Easy creation of money directly supports the Federal Reserve's mission of overstimulating the economy through artificially forcing inflation. The proceeds aren't just skimmed by a countable corrupt cabal, they're funding the entirety of several industries!
- snowwrestler 11y ago
  No, this is how banks have worked for hundreds of years. Regulations and (especially) insurance have now made this much safer.
  - mindslight 11y ago
    A few hundred years is really not that long to prove a social system. Previously banks created their own currencies - this system allows them to create the currency. The "safety" is the elimination of direct feedback, which allows problems to accumulate and creates a "too big to fail" situation. A lack of bank runs is fantastic, but when the run finally occurs on USD it will not be pretty.
    - snowwrestler 11y ago
      "Too big to fail" has nothing to do with fractional reserve banking. All banks work the same way, but the vast majority are not too big to fail. And, many of the too big to fail financial institutions are not banks. Banks in total provide about 20% of the total credit in the U.S. Even if they were perfectly risk-free, you'd still have the other 80% to worry about. If you're worried about fractional reserve banking, you're worrying about the wrong thing IMO.

pjc50 11y ago

currency deposits must be duration matched with loans Why? This is the essence of banking and has been for centuries. Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?

carsongross 11y ago
It is the essence of banking, and that's the problem. The greatest trick the devil ever pulled... Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled. If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run. I will admit that this is my own economic theory and that I am used to the crazy looks from people.
- zeveb 11y ago
  > Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Think about that: you deposit your money in the bank; the bank lends it to me; I pay the car dealer — which means that money is no longer in your bank! What is in the bank is an IOU from me for that money, and of course that IOU itself has some value and could itself be sold/lent to someone else for some other purchase. There's no fraud, no double-counting, but it all makes perfect sense.
  - carsongross 11y ago
    Are we arguing? The money is no longer in the bank, but I can't demand it for five years, which is great, because the bank will get the loan paid back, with interest, in four. And yes, I would expect a secondary market to develop for deposit receipts as people misjudge their time/money needs. What am I to think about? Duration mismatch is the problem, eliminate it and you eliminate bank runs and, more importantly, lying. The fraud is when the bank, through slight of hand, tells more than one person they can have a given monetary unit at a given point in time. That's the double counting. But perhaps I'm misunderstanding you.
    - snowwrestler 11y ago
      Bank runs are a solved problem. We solved them with deposit insurance, not by locking people's deposits up for years.
      - carsongross 11y ago
        Yes, I'm sure working for a bank pays well.

kaonashi 11y ago

Interestingly, Minsky had a large influence on the MMT economists, and you're essentially paraphrasing his financial instability hypothesis http://www.levyinstitute.org/pubs/wp74.pdf http://www.levyinstitute.org/pubs/wp74.pdf

mindslight 11y ago

What you're describing isn't crazy, it's how any other entity besides a bank must operate. If a friend asks to borrow $50, I have to open up my wallet and give him $50 from it (or deny the loan). I can't keep the $50 in my wallet, promise to not spend it, and print out a shiny new $50 bill to give him! Banks were given this privilege because they were highly regulated, essentially just extensions of the Federal Reserve itself. Of course over time they argued this was unfair and chipped away at the regulation, while still retaining the privileges. Given how much is at stake, I don't see anything changing until it all falls apart. Easy creation of money directly supports the Federal Reserve's mission of overstimulating the economy through artificially forcing inflation. The proceeds aren't just skimmed by a countable corrupt cabal, they're funding the entirety of several industries!

snowwrestler 11y ago
No, this is how banks have worked for hundreds of years. Regulations and (especially) insurance have now made this much safer.
- mindslight 11y ago
  A few hundred years is really not that long to prove a social system. Previously banks created their own currencies - this system allows them to create the currency. The "safety" is the elimination of direct feedback, which allows problems to accumulate and creates a "too big to fail" situation. A lack of bank runs is fantastic, but when the run finally occurs on USD it will not be pretty.
  - snowwrestler 11y ago
    "Too big to fail" has nothing to do with fractional reserve banking. All banks work the same way, but the vast majority are not too big to fail. And, many of the too big to fail financial institutions are not banks. Banks in total provide about 20% of the total credit in the U.S. Even if they were perfectly risk-free, you'd still have the other 80% to worry about. If you're worried about fractional reserve banking, you're worrying about the wrong thing IMO.