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We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theo

We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world. For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible? Can you find some physics book that explain something that the engineers say it's not true? My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative. (1). https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...

nabla9 8y ago
I'm well aware of that paper. Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking. Banks don’t create demand out of thin air by providing loans. While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
- RobertoG 8y ago
  >>Banks don’t create demand out of thin air by providing loans. This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says. See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed. >>While banks can create loans "out of thin air" [..] they are limited by their reserves. My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details. Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves. If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.
- hn0 8y ago
  Richard Werner did empirical tests of the theory you describe, and found it to be false: https://www.sciencedirect.com/science/article/pii/S1057521915001477 https://www.sciencedirect.com/science/article/pii/S105752191... And https://www.sciencedirect.com/science/article/pii/S1057521914001070 https://www.sciencedirect.com/science/article/pii/S105752191... Economists at the Bank of England re-ran these tests in an attempt to disprove the above theory and found themselves reaffirming it: https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters# https://www.bankofengland.co.uk/working-paper/2015/banks-are... It has since been reaffirmed by other central banks, including the Bundesbank https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentlichungen/Monatsberichtsaufsaetze/2017/2017_04_geldschoepfungsprozess.pdf https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...
notahacker 8y ago
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...)
- hn0 8y ago
  > 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...
- RobertoG 8y ago
  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.

nabla9 8y ago

I'm well aware of that paper. Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking. Banks don’t create demand out of thin air by providing loans. While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.

RobertoG 8y ago
>>Banks don’t create demand out of thin air by providing loans. This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says. See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed. >>While banks can create loans "out of thin air" [..] they are limited by their reserves. My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details. Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves. If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.
hn0 8y ago
Richard Werner did empirical tests of the theory you describe, and found it to be false: https://www.sciencedirect.com/science/article/pii/S1057521915001477 https://www.sciencedirect.com/science/article/pii/S105752191... And https://www.sciencedirect.com/science/article/pii/S1057521914001070 https://www.sciencedirect.com/science/article/pii/S105752191... Economists at the Bank of England re-ran these tests in an attempt to disprove the above theory and found themselves reaffirming it: https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters# https://www.bankofengland.co.uk/working-paper/2015/banks-are... It has since been reaffirmed by other central banks, including the Bundesbank https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentlichungen/Monatsberichtsaufsaetze/2017/2017_04_geldschoepfungsprozess.pdf https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...

notahacker 8y ago

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...)

hn0 8y ago
> 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...
RobertoG 8y ago
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.