The Great Debate©: Who Saw it Coming? (Part 2)

by L. Randall Wray, New Economic Perspectives

Editor’s note: This is a continuation of the discussion posted earlier, The Great Debate©:  Who Saw It Coming? A focal point of that discussion was Hyman Minsky who formulated theories about instability in economic systems.  This essay adds to the debate and comes from one who studied for his PhD under MinskyEconintersect has added bold emphasis in the following article.

Earlier this week I noted, tongue-firmly-in-cheek, that we’re all MMTers now, following Paul McCulley’s recommendation that we just declare victory. And be nice about it.

Well here is a strange post from Brad DeLong:

He proclaims that essentially anyone who is anyone is a Minskian. And apparently always was. That is why mainstream economists like “Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers” ought to be trusted.

They got it right and will get it right again!

I am following Paul McCulley’s advice and so must be nice. And I do like a lot of what Brad DeLong and Paul Krugman write—oh, maybe 90% of it.  Alone among this bunch, however, only Rajan (so far as I know) saw the crisis coming.  (And he was castigated for throwing cold water all over Ben Bernanke’s Great Moderation.)  Indeed it would be very hard to find any single individual more responsible for fueling the hurricane of financial excess that led to the crisis than Mr. Summers. Next to Alan Greenspan, there probably has never been any economist in a position of responsibility who is more culpable for chronic bad decision-making.

And as I’ve said many times, the much celebrated book by Reinhart and Rogoff really should win an award as the worst empirical study ever undertaken. Clueless about Crisis should have been the title.

OK, they’re all Minskians now. Welcome aboard. No need to engage in the Monty Pythonesque “Judean People’s Liberation Front versus the People’s Liberation Front of Judea” bickering that Brad accuses Steve Keen of (

Let’s play nice.

Still, I find Brad’s post strange, as he raises a number of issues that he finds puzzling. I find it puzzling that he finds them puzzling. Anyone who follows Minsky would/should have no trouble explaining these apparent paradoxes. To paraphrase Brad (again, a bit of tongue-in-cheek; you can go to his post to get the details):

Boy, I cannot figure out how interest rates are so low. I missed the whole 20 years episode in Japan. Why on earth aren’t the US and Japan punished with high rates as if they were Greece? It really is a puzzle. And why can’t central banks just target nominal GDP growth–let us say a China-like 10 or 12 % per year–and thereby get us out of the mess? What, are they stupid or something? Fly the helicopters!

Answer:  Japan and the US are not Greece. They are sovereign currency issuers that cannot be forced into involuntary default. There is thus near-zero default risk (a bet against Treasuries is a bet that Congress will collectively go insane and refuse to pay interest on government bonds; it is a fool’s bet because even Republicans are not that foolish).

The interest rate on sovereign debt is a policy variable, not something determined in markets. The BOJ and the FED want near-zero rates, so Japan and the US have near-zero rates. They will have near-zero rates as long as their respective central banks want them.

This ain’t news. Go back to the debates around interest rate determination leading up to the Treasury-Fed Accord of 1951. I’m sure Brad is familiar with these discussions. The interest rate was seen as a policy variable, and the Fed and Treasury were bickering about where to set it.  (I’ll post something on this later as I’m working through an excellent paper by a colleague right now.) They finally resolved that more-or-less in the Fed’s favor:  it gets to determine the rate target.  Until the Fed, Treasury and/or Congress decide to do that differently.

The Treasury can have any rate that the Fed agrees on. And that goes for all maturities so long as the Fed agrees to fix the rates across the yield curve on Treasuries. (Setting rates on other “private” instruments is a different matter—although in principle, the Fed can fix rates there too if it will operate in those private instruments.)

OK, final matter. Target nominal GDP growth. Yes we could do that although it is a hard thing to hit. And if we are going to try it, we’ve got to use the right tool.

If we adopted the Chinese version of capitalism, with strong central control and used our banks as a branch of fiscal policy then we could have some chance of hitting GDP targets. Order the banks to finance construction on a scale never seen before in the US, and tell them to do it without regard to profitability—Uncle Sam will absorb all losses.

But, as I doubt that Brad and the other “Minskians” are advocating that, nominal GDP targeting is a pipe dream. It will be no more successful than was Chairman Bernanke’s “Great Moderation”.  We cannot target nominal GDP growth with monetary policy (interest rate setting).  It must be done using fiscal policy. We can disguise that (as the Chinese do) but it is fiscal policy that will ramp up spending. Interest rates are impotent, particularly now.

Helicopter drops are not a part of monetary policy—they are fiscal “transfers”, from Uncle Sam to the lucky souls who find bags of cash in their backyards. Drop enough bags and we’ll get spending up.  But there is inevitably a lot of slop between lip and cup.

Personally, I think it would be a bad policy.  And so did Minsky.  It would generate the Mother of all financial crashes.

It was the Summers-Clinton strategy, run mostly through the “shadow” financial system, to create serial financial bubbles. Minsky called it Money Manager Capitalism, disguised as Bernanke’s Great Moderation.

Related Article

The Great Debate©:  Who Saw It Coming? by John Lounsbury (covering the work of Dirk Bezemer, Brad DeLong and Steve Keen)

Analysis and Opinion articles about MMT (Modern Monetary Theory)

About the Author

wraylr-formalL. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City, a Senior Research Associate at the Center for Full Employment and Price Stability, as well as a visiting Senior Scholar at the Jerome Levy Economics Institute of Bard College. He is a past president of the Association for Institutionalist Thought (AFIT) and has served on the board of directors of the Association for Evolutionary Economics (AFEE). A student of Hyman P. Minsky while at Washington University in St. Louis where he earned his Ph.D. in economics (1988), Wray received his B.A. in Social Sciences (1976) from the University of the Pacific, Stockton, and his M.A. in economics (1985) from Washington University in St. Louis. Professor Wray has focused on monetary theory and policy, macroeconomics, and employment policy. He is currently writing on modern money, the monetary theory of production, social security, and rising incarceration rates (Penal Keynesianism). He is developing policies to promote true full employment, focusing on Hyman P. Minsky’s “employer of last resort” proposal as a way to bring low-skilled, prime-age males back into the labor force.
Longer bio and partial list of publications are here.

One reply on “The Great Debate©: Who Saw it Coming? (Part 2)”

  1. great post. without a discussion of trade-off’s it’s all moot is it not? The purpose of the low rates is to give the Government some “breathing space” to get it’s finances under control. When added to massive countercyclical fiscal policy “so far so good” as tax receipts are coming on strong this year. The trade off with all this government of course is a simple lack of growth over-all in the economy. “You can’t have it all.” The US economy has an awful lot however…and the extraordinary productive capacity and capacity to innovate “keep on keeping on.” Truly amazing. I think the biggest deal going forward now is “ObamaCare” and how that plan continues to be effected. This is rearranging 20 plus percent of the US economy and how this fascinating bill plays out will in my opinion absolutely determine both the depth and breadth of the recovery going forward. Failure to “run a tight ship” on this program could doom the US economy to sluggish growth for decades to come. Success in this area however and i think the US could equally have significant uptrend growth that provides the health security any modern economy needs (but ours lacks) while still “besting the competition” such that US business can focus on what they do best…make things.

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