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> It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. Agreed.

> It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. Agreed. > The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. > There is the Keynesian argument that the Fed needs to mamage aggregate demand That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. > Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead. The funny part about statements like this is that the money supply that matters for the real economy is managed by commercial banks anyway. And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). That institution happens to be the Fed in the US. You can argue about the more political, monetary policy side of things, but having that firewall is really, really critical. Totally agree on the "doing something useful instead" part, though :)

rsync 9y ago
"What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson." I don't know that they have learned that lesson .. My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. I personally think that banks are in the same position Apple is in with their x00 Billion dollars hoarded overseas ... they are terrified that the system could come flying apart at any moment and are therefore sitting on cash or reserve assets to protect against this.
- gozur88 9y ago
  >My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. As the Austrian school economists pointed out during the crisis, you can print money, but you can't print borrowers - the banks need qualified borrowers to lend to, and in the middle of a financial crisis there aren't as many. Of course the fed can't allow cascading bank failures, but once the banking system is out of danger pouring in more money won't do much.
wallace_f 9y ago
There is a lot here to discuss and only so much time and space. >That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. You are right to say that Keynesians and Keynes himself emphasized fiscal policy, but afaik the traditional monetarist view is actually not to engage in discretionary monetary policy at all. Managing AD was Keynes' whole big deal in his General Theory. Before him the groupthink in academic economics was all circled around labor supply and labor price being out of equillibrium with the market. Then Friedman came along to establish monerarism. He wanted monetary policy along the lines of a k percent rule, and not to try to manage AD (discretionary MP). So no, it's not monerarist, it is in dact Keynesian. >And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). Economists take this as gospel, but I have never seen evidence of this. I have seen evidence it is not true. I'm with Friedman, fractional reserve banking doesn't create value, just inflation and risk. >Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. We really disagree here. I even think your comment is strangely tautological, don't you think? You said there is no one who thinks the Fed is trying a game of pulling on some levers and creating more value in the economy, but then you went on to describe the Keynesian argument for how the Fed pulls some levers to magically create value (by stimulating AD). The argument for QE and fiscal policy is the same Keynesian one: by creating easy money, they basically create more AD, which puts to work unemployed, unused resources. So Keynesians argue, those unused resources are now put to work. But what work are they doing? Is it useful work? Are banks just going to hoard cash, and why flood so much easy money into the banks, anyways? I think it's really more simple than that. The Fed is just Wall St's nice insurance policy, and economists are just clever priests who justify the actions of the ruling plutocratic class.
- nhaehnle 9y ago
  > >And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). > Economists take this as gospel, but I have never seen evidence of this. I have seen evidence it is not true. I'm with Friedman, fractional reserve banking doesn't create value, just inflation and risk. Well, the point was about whether a central bank acting as lender of last resort makes sense or not. Fractional reserve banking existed before central banks, and if you have fractional reserve banking, then a lender of last resort is a must. There's plenty of evidence for that (in the form of regular bank runs before central banks, and practically zero bank runs afterwards). As to whether fractional reserve banking itself should be permitted or not, that's admittedly less clear. Though I'd say that there's a big advantage to having the kind of flexibility in the money supply that comes with letting credit shrink and grow in a decentralized fashion as demanded by the economy. I find it ironic that Friedman, who is associated with some of the worst and most ideological central planning-bashing, turns out to be an advocate of central planning when it comes to monetary policy! Seems inconsistent if you ask me... > You said there is no one who thinks the Fed is trying a game of pulling on some levers and creating more value in the economy, but then you went on to describe the Keynesian argument for how the Fed pulls some levers to magically create value (by stimulating AD). What we disagree about here is mostly whether there's magic involved. My point is that a large part of the underlying theory is sound (though not all of it), and your claim of voodoo is greatly exaggerated. The question of whether the work being done is useful is an important one. That's why I've always been against (or at least skeptical of) QE, actually, though I think that fiscal policies that often come up in the same discussions could be quite useful. For example, you could just transfer a fixed amount of money every citizen ("helicopter money") to boost the economy, and scale it down if/when inflation exceeds your target. That way, the usefulness of the additional work would be guaranteed, by virtue of being work that the people decide should be done.

rsync 9y ago

"What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson." I don't know that they have learned that lesson .. My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. I personally think that banks are in the same position Apple is in with their x00 Billion dollars hoarded overseas ... they are terrified that the system could come flying apart at any moment and are therefore sitting on cash or reserve assets to protect against this.

gozur88 9y ago
>My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. As the Austrian school economists pointed out during the crisis, you can print money, but you can't print borrowers - the banks need qualified borrowers to lend to, and in the middle of a financial crisis there aren't as many. Of course the fed can't allow cascading bank failures, but once the banking system is out of danger pouring in more money won't do much.

wallace_f 9y ago

There is a lot here to discuss and only so much time and space. >That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. You are right to say that Keynesians and Keynes himself emphasized fiscal policy, but afaik the traditional monetarist view is actually not to engage in discretionary monetary policy at all. Managing AD was Keynes' whole big deal in his General Theory. Before him the groupthink in academic economics was all circled around labor supply and labor price being out of equillibrium with the market. Then Friedman came along to establish monerarism. He wanted monetary policy along the lines of a k percent rule, and not to try to manage AD (discretionary MP). So no, it's not monerarist, it is in dact Keynesian. >And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). Economists take this as gospel, but I have never seen evidence of this. I have seen evidence it is not true. I'm with Friedman, fractional reserve banking doesn't create value, just inflation and risk. >Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. We really disagree here. I even think your comment is strangely tautological, don't you think? You said there is no one who thinks the Fed is trying a game of pulling on some levers and creating more value in the economy, but then you went on to describe the Keynesian argument for how the Fed pulls some levers to magically create value (by stimulating AD). The argument for QE and fiscal policy is the same Keynesian one: by creating easy money, they basically create more AD, which puts to work unemployed, unused resources. So Keynesians argue, those unused resources are now put to work. But what work are they doing? Is it useful work? Are banks just going to hoard cash, and why flood so much easy money into the banks, anyways? I think it's really more simple than that. The Fed is just Wall St's nice insurance policy, and economists are just clever priests who justify the actions of the ruling plutocratic class.

nhaehnle 9y ago
> >And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). > Economists take this as gospel, but I have never seen evidence of this. I have seen evidence it is not true. I'm with Friedman, fractional reserve banking doesn't create value, just inflation and risk. Well, the point was about whether a central bank acting as lender of last resort makes sense or not. Fractional reserve banking existed before central banks, and if you have fractional reserve banking, then a lender of last resort is a must. There's plenty of evidence for that (in the form of regular bank runs before central banks, and practically zero bank runs afterwards). As to whether fractional reserve banking itself should be permitted or not, that's admittedly less clear. Though I'd say that there's a big advantage to having the kind of flexibility in the money supply that comes with letting credit shrink and grow in a decentralized fashion as demanded by the economy. I find it ironic that Friedman, who is associated with some of the worst and most ideological central planning-bashing, turns out to be an advocate of central planning when it comes to monetary policy! Seems inconsistent if you ask me... > You said there is no one who thinks the Fed is trying a game of pulling on some levers and creating more value in the economy, but then you went on to describe the Keynesian argument for how the Fed pulls some levers to magically create value (by stimulating AD). What we disagree about here is mostly whether there's magic involved. My point is that a large part of the underlying theory is sound (though not all of it), and your claim of voodoo is greatly exaggerated. The question of whether the work being done is useful is an important one. That's why I've always been against (or at least skeptical of) QE, actually, though I think that fiscal policies that often come up in the same discussions could be quite useful. For example, you could just transfer a fixed amount of money every citizen ("helicopter money") to boost the economy, and scale it down if/when inflation exceeds your target. That way, the usefulness of the additional work would be guaranteed, by virtue of being work that the people decide should be done.