4 ms·

I am sympathetic to the Austrian critique, but there's a big problem with refusing to print any money and just letting the debt pyramid collapse. M0, the actua

I am sympathetic to the Austrian critique, but there's a big problem with refusing to print any money and just letting the debt pyramid collapse. M0, the actual amount of green dollar bills in the world, is at $750 billion. MZM ( Money Zero Maturity, all the money in bank accounts and money market funds) is at $8.5 trillion. If the Fed refuses to use the printing press - ie it refused to print money or give loans to bail out the FDIC, and refused to bail out the money market funds - there will be a giant bank run as everyone with dollars in a money market fund rushes to redeem the holdings with actual green dollar bills. We're not talking about a couple big Wall St. banks going out of business. We're talking about every startup that has VC funding in a money market fund losing everything. We're talking about every mortgage in the world defaulting. Every bank account will vanish. Of course, this won't happen, but only because Bernanke has guaranteed the assets of money market funds and the FDIC by promising to print money. Now, I think it is awful that MZM grew to be 10X the size of M0. The Austrians are right to condemn the fractional reserve policies that caused MZM to get so big. But the only thing the Fed can do now is to print money to make the two match, and then make sure it never happens again.

sridharvembu 18y ago
The Austrians are right to condemn the fractional reserve policies that caused MZM to get so big. But the only thing the Fed can do now is to printing money to make the two match, and then make sure it never happens again. To even have that discussion, there has to be acknowledgment from academia & the Fed that their policies led to this. Right now, the intellectual climate is far, far from any such acknowledgment. In fact, the Nobel for Krugman signals exactly the opposite. It has conferred on him a degree of economic credibility (and perceived infallibility) that, frankly, he does not deserve - that was the point of my post. Without that Nobel prize, he was easy to ignore as just-another-commentator. Not now. Yet another Keynes quote seems appropriate, why this debate is important: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
- bokonist 18y ago
  I don't expect much intellectual truth and reconciliation from academia. What will actually happen is the Fed will continue to informally create money ( via guaranteeing debt MZM rather than actually printing greenbacks) to get through the crisis, and we'll either end up with prolonged stagnation or a return to "the great inflation". As non-optimum as this is, I'd rather have Bernanke at the helm, than say Ron Paul. The Austrians don't realize that you can't just let MZM collapse and have everything turn out hunky dory after a bit of pain.

sridharvembu 18y ago

The Austrians are right to condemn the fractional reserve policies that caused MZM to get so big. But the only thing the Fed can do now is to printing money to make the two match, and then make sure it never happens again. To even have that discussion, there has to be acknowledgment from academia & the Fed that their policies led to this. Right now, the intellectual climate is far, far from any such acknowledgment. In fact, the Nobel for Krugman signals exactly the opposite. It has conferred on him a degree of economic credibility (and perceived infallibility) that, frankly, he does not deserve - that was the point of my post. Without that Nobel prize, he was easy to ignore as just-another-commentator. Not now. Yet another Keynes quote seems appropriate, why this debate is important: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

bokonist 18y ago
I don't expect much intellectual truth and reconciliation from academia. What will actually happen is the Fed will continue to informally create money ( via guaranteeing debt MZM rather than actually printing greenbacks) to get through the crisis, and we'll either end up with prolonged stagnation or a return to "the great inflation". As non-optimum as this is, I'd rather have Bernanke at the helm, than say Ron Paul. The Austrians don't realize that you can't just let MZM collapse and have everything turn out hunky dory after a bit of pain.